DELHI, India, September 19, 2012 - At last economics trumps politics.
The government that was long accused of policy paralysis and inaction suddenly sprung into action with a string of long awaited reforms. With rating agencies threatening to downgrade the country’s credit rating to junk, the government was running out of time to fix the ailing economy and stem the declining growth rate.
“I believe that these steps will help strengthen our growth process and generate employment in these difficult times,” Prime Minister Manmohan Singh said via Twitter.
The new policy will now permit stores like WalMart, Tesco, Carrefour and IKEA to enter the Indian market and sell directly to the consumers for the first time. Industry experts say this could transform the $450 billion retail market and bring down the prices for the consumer. The government did wear a life jacket before making a foray into the usual political no go zones like FDI in retail. It has attached several conditions to blunt the opposition and protect the interest of local industry.
The retail giants would be allowed to operate only in the Indian states that will allow FDI in retail. In other words, the entry of foreign retailers would be subject to the approval of the respective state governments. Their footprint would be limited to cities with a population of a million or more (India has more than 40 of them), it also eased the sourcing norms for single brand retail and requires them to buy at least 30% of the goods from the India Industry.
The Department of Industrial Policy and Promotion also laid out that “at least 50% of total FDI brought in shall be invested in ‘backend infrastructure’ within three years of the induction of FDI, where ‘back-end infrastructure’ will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of backend infrastructure”.
Whether the benefits of opening the floodgates of the retail space to international giants will be beneficial for the lay man has to stand the test of time particularly in the Indian context. Apart from the recent decline in the growth rate, the country has been reeling under severe food inflation since last few years. Prices of staples such as pulses and vegetables are up 17% and 49% respectively. The rise is surprising as
Experts attribute the rise in prices to supply side constraints like inadequate infrastructure, lack of cold chain storage facilities for farm produce, middlemen who gulp the major share of farmers profits etc. The government has ambitiously declared the new policy as a step forward in releasing these supply bottlenecks. It hopes, the global chains will offer better prices to farmers by cutting out middle men, while also pumping investment into cold storage facilities.
It is estimated that as much as 40 percent of farm produce rots before it gets to consumers, and massive stockpiles of grain and other essential perishable food items spoil before they are distributed. A criminal waste in the country where 29 % of its population still lives below poverty line.
Indians still use the archaic “Mandi system” which shoots up the price of the produce, as it encourages middlemen to encash all the profits whereas the gap is less in modern retail as it buys directly from the farmers eliminating the chain of middlemen and is more efficient which results in reduction of any wastage.
While urban Indians may soon go shopping at the supermarkets, the government is still shopping for consensus as two of its major allies have refused to accept the decision. The Trinamool congress party has given a 72 hour deadline to the government for rollback of FDI in retail and the hike in diesel prices.
The Indian political landscape has become an arena of perpetual conflict — the government proposes and the opposition disposes. The opposition, along with other political parties who oppose the decision, have called for a nationwide strike this week to force the government to revert on its decision. The opposition alleges that the impending policy change will destroy the livelihoods of millions of local “Kirana” shops (the local mom and pop stores), and wipe them out from the retail space.However, it should also be noted that these Kirana stores have successfully coexisted with the already present Indian retail giants like the Future group’s Big Bazaar and Reliance Retail.
While the long term effects of FDI in retail will depend on how well the government can regulate the foreign players to act in interest of the local community, in the short term it remains to be seen if the political acrobatics of a coalition will force the government to rethink on extending a Welcome to Walmart!
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