FDI in retail: "Modern" solutions to "old" problems?

The government of India is patting its back as by the passing of the much awaited "FDI in multi-brand retail", some experts believe that the reforms are back on track. In this blog, I don’t intend to discuss the criticality of the reform rather my focus will be on the efficacy of this reform. With the issue increasingly being politicized across the nation, let’s try to see whether this reform really aims at solving issues esp. inflation, which a common man faces. Will the benefits percolate to aam aadmi or will, once again, the crème-de-la-crème in the metros only share the spoils?

Let me first enumerate the major aspects of the FDI in retail. The government of India earlier this week, approved FDI in retail thereby throwing  open its $450 billion retail market to global supermarket giants  like Wal-Mart, Carrefour, Tesco etc. Some major points are:

• The Cabinet cleared 51 per cent foreign direct investment (FDI) in multi-brand retail and also cleared 100 per cent FDI in single-brand retail
• The minimum investment would be $100 million and half of this would be invested in rural infrastructure and refrigerated transport and storage
• The new rule would only apply in cities with more than one million people and 30 percent of products will be procured from small and medium enterprises (SMEs)

According to internal estimates by the FMCG firm, Hindustan Unilever (HUL), “modern retail" (e.g. Big Bazaar) accounted for 10% of the Indian retail landscape in 2010 against 5% in 2007. In major cities like Hyderabad, Gurgaon, Bangalore and Chennai, its share is as high as 30% of the total retail pie.

So, will the reform really provide solutions to the supply chain bottlenecks that have become a hallmark of India? Before we try to find the answers to these questions, let’s first see what those in favour have to say in support of this reform.

It would lead to heavy investment in the supply chain infrastructure as mandated in the reform (at least 50% to be infused into the backend infrastructure) thereby cutting down losses due to inefficiency in supply chain (the wastage of fruits and vegetables are estimated at 1 lakh crore annually in India). Also, the large retailers will directly source from the farmers thereby limiting the role of middlemen thus providing consumers “better products at lesser prices”.

My answer to the above assumptions is that it would be too much to expect from “FDI in retail”, if we consider it as a major step towards tackling inflation (which is the single biggest “aam aadmi” issue that the reform promises to address). I am focusing on food-items as they constitute more than half of the retail consumption in India. The reasons are:

• More than 70 per cent of the Indian population resides in villages. To make matters worse, the rural population is a dis-aggregated lot so they won’t be a profitable lot for these modern retailers, who rely on high volumes, even in distant future so this section doesn't stand to benefit a great deal from this reform.
• Coming to the issue of back-end infrastructure being set up by these retailers, the focus of the Wal-Marts and the Tescos will be on the 50 odd cities with at least one million populations each, so the infrastructure being set up would at best extend to satellite towns and the adjoining rural areas to these cities. So, if we expect to see rotting grains finding safe heavens in the godowns of Carrefour, it’s not going to happen. Thus the government can’t abdicate its responsibility of setting up its own infrastructure.
• The focus of the large retailers aren't just volumes, rather they also focus on enhancing the value of your purchases. So, we may have more options (read costlier varieties of fruits, vegetables etc.) available to the customers at these supermarkets which could even displace the cheaper alternatives at the shelves. After all upselling is commonplace in retailing.
• As far as enhancing the production of food materials, through better farming methods being adopted at farms contracted by these retailers is concerned, in my opinion this shouldn't be our immediate concern yet. We can instead focus first on providing basic facilities like  irrigation, credit, know-how etc. beyond the 2.5 “green revolution” states of Punjab, Haryana and Western UP and then by setting up storage facilities so unavailability doesn't lead to inflation.     

So, while modern retail may help “modern” India (read metro-based) satisfy its urge for “more” and “better” options, it may still fall short of providing “modern” solutions to “old” and pervasive issues of inflation.