DELHI -- The year begins with a question mark on the future of foreign direct investment in India's 500 billion dollar retail sector. For now, global retail companies like Wal-Mart, Carrefour and Tesco are being kept at bay.
Is holding off foreign players casting a shadow over India's economy--the third largest in Asia, or is it protecting millions of small traders from being swallowed up by international supermarkets? And what does it say about Prime Minister Manmohan Singh's ability to push through his reforms? Or will politics prevail over policy? These questions will preoccupy 2012.
Presently, multi-brand foreign companies can access wholesale outlets but only single-brand companies like Christian Dior or H&M can sell to people. Recently, the Indian government approved 51 percent foreign ownership in the multi-brand retail sector and 100 percent ownership for single-brand foreign companies.
The policy is meant to inject fresh momentum into the economy after its sluggish performance in 2011. But the government backtracked on its multi-brand proposal after a furious onslaught from it political opposition as well as its allies.
Much of the objection is similar to what "faceless" corporations have had in the U.S. particularly the demise of mom-and-pop stores--called kirana stores here. Others contend that it's a mistake to prejudge the impact of Wal-Mart in a developing country of 1.2 billion people. Only 10 percent of its retail sector is currently organized. The organized sector, operating through a growing network of malls in cities, is largely driven by the middle class that constitutes about 5 percent of the population. Unlike U.S. and Europe where small traders vanished, the experience in China and Indonesia have shown that foreign and domestic as well as big and small retailers can co-exist.
Anand Panagariya, a leading Indian economist, recalled that similar anxiety had been expressed about allowing FDI in the manufacturing industry. "But the Indian industry came out stronger," he said. He pointed out that international supermarkets, operating in China, had only captured a slice of the market. The economist also noted that if there really was a threat -- it had already been posed by the expanding domestic supermarkets.
Academics, however, are deeply divided. Critics of the scheme insist that foreign companies will eventually create a monopoly by setting low prices. They fear that Indian farmers, like American farmers, will suffer losses on their produce as the monopoly grows. Jayati Ghosh, another top economist, warned that the double dose of domestic supermarkets and foreign companies could lead to big business controlling 40 percent of the market in the coming decade or so.
Sunil Bajaj, a small trader in Delhi, said that he had already lost customers to supermarkets. "In the last five years business has decreased by about 30 to 40 per cent," he said. "We cannot compete with bigger retail stores, because they sell goods at the wholesale prices." He previously had three helpers in his shop but now he can barely afford to keep one. (Whether small traders pay their help minimum wages and do they use child labor in the unregulated market is a different story).
The government is expected push for opening the market by March after crucial state elections are dealt with. Prime Minister Singh, the economist who led India's liberalization, has backed FDI for its potential of securing better incomes for farmers, job creation and reducing waste. Currently, a vast amount of agricultural produce is lost due to bad storage and transportation facilities, which causes inflation. Farmers are also swindled by exploitative middlemen who dictate the prices in the supply chain from farm to consumer.
Despite the political roadblocks (and challenges of electricity cuts, high real estate prices and bad roads), large corporations cannot afford to give up investing in India. The percentage of the middle class could grow to about 40 percent of the population by in the next two decades and create the world's fifth largest consumer market, according to this McKinsey report. Along with other U.S. multinationals, Wal-Mart is reportedly lobbying American lawmakers to access the Indian market.
The entry of Wal-Mart, the world's largest retailer, is expected to bring cutting-edge technologies and best practices to boost agricultural productivity and improve storage facilities. The American company plans to partner with 1 million Indian farmers for 50 percent of its fresh produce. It has also set a 2015 target for increasing farmer incomes by 20 percent and reducing food waste by 5 percent.
Rebuffing these as "sweetener deals," Ghosh said that there are plenty of domestic polices that could help farmers. The waste problem, according to her, could be resolved by giving storage facilities to farmer cooperatives instead of individuals. "Why do we have to rely on multinational companies (MNCs) to do our job for us," she said. The economist said that lawsuits popping up all over Asia indicated that MNCs cannot be trusted.
The entry of international supermarkets is also expected to save a buck for the customer and spruce up the general shopping experience. Mamta Matharu, a 53-year-old housewife, said that shopping at the supermarket brought down the cost by a few hundred rupees. "All the products are displayed in the supermarkets like Big Bazaar so it is easier to compare the contents, price and quantity of various brands," she said. "The quantity available is in bulk and there is more variety so it is convenient to shop."
But for Sangeeta Das, a 36-year-old museum curator, her local store still comes in handy. "Big discounts are on products that they (supermarkets) want to promote, while the difference of cost on essential food items may be very little," she said. "Also the savings are bigger if one buys in bulk, which may not always suit small families."
The concept of customer service hardly exists in Indian stores--kirana or a supermarket. For instance, returning of goods --even bad goods--can be difficult. Both Sangeeta and Mamta said that it was still easier to return stuff at the neighborhood shops than the supermarkets.
The happiness of customers also depends on their personal dynamics with the storeowner. In India's class and caste-ridden society, the shopping experience of a memsahib can be quite different from the domestic help.
(Credit- wn.com/Google images)
This post was originally published on Smartplanet.com