'Ample room for traditional and modern retail'
G. SRINIVASAN
Interview with Montek Singh Ahluwalia.
Volume 28 - Issue 26 :: Dec. 17-30, 2011
INDIA'S NATIONAL MAGAZINE
from the publishers of THE HINDU
http://www.frontlineonnet.com/stories/20111230282601000.htm
COVER STORY
'Ample room for traditional and modern retail'
G. SRINIVASAN
| Interview with Montek Singh Ahluwalia. |
The Deputy Chairman of the Planning Commission, Montek Singh Ahluwalia: "FDI in retail will enable Indian retailers to bring in foreign equity to support their efforts."
THE drama over opening up the retail trade to foreign direct investment (FDI) has all the trappings of a cliff-hanger. Planning Commission Deputy Chairman Montek Singh Ahluwalia said: "When things get politicised they can generate unnecessary controversy, and in a parliamentary system, the government has to deal with such controversies. In the Approach to the Twelfth Plan we have categorically stated that modernisation of distribution structure is extremely important."
In an interview to Frontline, Ahluwalia, known for his clarity of thought and articulation, pointed out that China allowed FDI some 20 years ago, and so "to say that India can't open up 20 years after China did suggests a total lack of confidence in our ability". Excerpts:
Now that FDI in retail seems a still-born baby, what does it hold for India's reform process in general and in attracting FDI in other segments in particular?
It is unfortunate that the controversy on FDI in retail has led the government to suspend implementation until a broader consensus is achieved. But I would say that this particular outcome should not be read as predicting the outcome on reforms in general and indeed even FDI for other sectors. There is no outcry against FDI in general. We have caps in some sectors and there is resistance to removing those caps. I hope the issue will be debated thoroughly in Parliament.
What is the need and rationale for opening up retail when the splintered opposition saw in it an opportunity to embarrass the government?
The need for FDI in retail has been talked about for quite some time. It is already there in single brand; the multi-brand retail has now been opened up. The opposition parties, when they were in power, had actually proposed opening up multi-brand retail, but now they have changed their mind. It is understandable if those who had reservations earlier were to drop them now but the other way around does look like opportunistic politics. Those opposed to FDI in retail should consider the following:
First, what we are doing now is entirely in line with what every other developing country has already done. China opened up multi-brand retail 20 years ago. To say that India can't open up 20 years after China did suggests a total lack of confidence in our ability, as there is something peculiar about us that we cannot manage while others are able to manage. I don't accept this.
Second, we must separate the broader issue of modernisation of retail from the introduction of FDI in modern retail. Those who worry about the negative effect on the kirana stores are really arguing against all modern retail, including domestic modern retail. If we follow these critics, we should stop domestic modern retail as well. This will be a huge mistake. Many studies have shown that marketing of perishable agricultural produce needs a modern distribution system.
The present system is highly inefficient, with multiple chains of intermediaries, with no integrated logistic infrastructure like refrigeration and transport facilities. There is huge wastage, and the losers are the farmers, who get a lower price, and the consumers, who have to pay more. The only way to take care of the problem is to modernise the entire chain from the farmer to the consumer. This will be hugely beneficial to the farmers and to the consumers. As you know, farmers' organisations have supported the entry of FDI in retail.
Third, once we accept the need for domestic modern retail, we have to ask whether we should open it up to FDI also. There are very good reasons for doing so.
FDI in retail will enable Indian retailers to bring in foreign equity to support their efforts. Retailers who do not want to give up their domestic retail brand identification will be able to mobilise extra capital to invest while retaining a majority. The 51 per cent provision will also ensure that some of the world's leading retailers, who otherwise would not have been interested, would come in as well. This will help stimulate a lot of investment in the back-end infrastructure, which is part of the policy. Domestic modern retail does not have this obligation, but FDI in retail does.
Since modern retailers retail a wide variety of goods, it will provide a platform where high-end consumer goods can be sold along with cheaper, domestically produced goods. Once they find that the quality of domestic products has improved – and I am confident that it will – they will be able to market those products not just in India but also through their marketing chains abroad. Other countries have benefited from channelling their products through international chains, with a domestic presence.
You mean to say that kirana stores do not have to worry?
I recognise that there is nervousness among many kirana stores. Any change involves some uncertainty, which is understandable, but this uncertainty is being deliberately fanned into extreme nervousness for political reasons. Several kirana stores have already shown that they can hold their own. Of course, they too will need access to capital and credit to modernise, and that is what we should focus on.
Kirana stores have special advantages, and all over the world, modern retail and small stores have flourished together. Of course, as employment opportunities expand in the economy and wages rise, the structure of retail operations will change in favour of more modern retail, and traditional retail stores may see a declining 'relative' share.
But that is not a process we should be worrying about now. For the foreseeable future, there is ample room for both formats to expand.
Will modern domestic retail be hurt?
Not at all, in my view. Modern Indian business has competed successfully with foreign products in innumerable fields and is gaining footprints abroad. They will do it in retail also. In fact our aim should be to have Indian retail chain operating in other countries of this region in the next 10 years. They will be able to do it more easily if they are competing with companies like Walmart at home.
Why is the government keen on FDI in retail when related reforms such as rollout of goods and services tax (GST) or amendments to the Agriculture Produce Market Committees (APMC) Act have not been put in place?
Bringing in GST is certainly very important and it is one of the major initiatives the government is pursuing. But it is wrong to say that if you don't have GST you should not open up retail. GST requires an amendment to the Constitution, for which a consensus is required. I hope we will get there soon.
As for APMC modernisation, I agree it is very necessary. This is relevant not just for FDI-based retail but for modern agricultural marketing in general. Several States have taken steps [in this direction]. Some have done more, and some less. Bihar has completely abolished the APMC. Others have liberalised agricultural marketing, but subject to certain conditions. The Planning Commission has been strongly advocating that APMC restrictions should be liberalised much more. But if you keep waiting for everything, you make no progress at all.
Will the absence of a regulator for the retail segment hit consumers by way of predatory pricing by the multinational companies?
The argument about predatory pricing is greatly overdone. Predatory pricing refers to a situation where new entrants come in and initially lower the prices for the consumers, with the intention of creating a monopoly and raising prices later. However, just because someone lowers retail prices, we shouldn't start accusing them of [adopting] predatory pricing. They may be lowering prices because of greater efficiencies, which we should welcome. The important point to remember is that we are not giving a monopoly to one retailer. If Walmart tries to follow these strategies, other retailers, including both FDI-based and modern domestic retail players, will surely compete. And kirana stores will also compete fiercely. I think the argument about predatory pricing applied to retail is just nonsense, with no reasonable basis. Those peddling the argument know it is nonsense.
Will not opening up retail to FDI push up India's imports of both agricultural and non-agricultural goods at a time when the rupee has depreciated and import is becoming dear, threatening to endanger current account sustainability?
Not at all. Imports are determined by import policy, and where foreign goods are allowed they will be imported by domestic large retailers and also by kirana stores even if we don't have FDI. In fact, in the case of foreign investors we are forcing them to take some SME [small and medium enterprise] products. There are no such restrictions for domestic large retail and kirana stores. Just go to Lok Nayak Bhavan in Delhi and see how many imported products are stocked by kirana stores.
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