Vajiram And Ravi Interview Guide 2013

The Interview Guide 2013 is published recently. There are nearly 70 issues of current relevance of National and International importance, till January, 2013, covered in the Book. It is expected that the book will help the Civil Services Interivew Aspirants.
Follow is one of the topics in the Book.

‘Walmartisation’ of Indian Retail Sector

What is FDI Policy in India?

The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.

What is retail business?

In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.

What is the current policy of FDI in single brand retail sector?

Foreign direct investment (FDI),  up to 51%, in the Single Brand Retail Trading (SBRT) sector, is permitted, under the Government/FIPB route, subject to the following conditions:

a)      Products to be sold should be of a ‘Single Brand’ only.

b)      Products should be sold under the same brand internationally i.e.

c)      Single Brand’ product-retailing would cover only products which are branded during manufacturing.

d)      The foreign investor should be the owner of the brand

 FDI in SBRT was first permitted vide Press Note 3 (2006), dated 10.2.2006.

A standing committee under the chairmanship of Mr Murli Manohar Joshi has been set up. What were the vital issues before it in respect of FDI in Multi Brand Retail Trade, MBRT?

The Standing Committee identified certain key issues while nalyzing the impact of FDI in the retail sector. These are:

a)      Modern retail would displace a large number of jobs.

b)      Global retail chains would adopt predatory pricing tactics to wipe out domestic competition (small retailers).

c)      Once global retail chains are established, they would be in a position to dictate prices for both buying wholesale, and selling retail products.

d)      Retailing itself cannot boost GDP. The growth in manufacturing sector needs to be increased.

What are the recommendations of standing committee of parliament on the issue of FDI in multi brand retail?

Over 200 million people in total are dependant on the retail sector.  There exists no built-in policy to relocate or re-employ those dislocated by corporate retail. 

Recommendations

a)      Built-in policy to re-employ those dislocated by corporate retail or shopping.

b)      A regulatory framework to prevent displacement of small retailers through unfair practices.

c)      Traditional system of the small trader must be protected by improving institutional credit for expansion and modernization.

d)      A National Commission may be set up to study the problems of the retail sector, and two laws to look after the interests of small retailers, and to regulate anti-competitive practices of corporate retailers respectively, should be enacted.

e)      Study of the economic and traffic impact of any large retail store must be made by an independent institution before allowing it to open.

Multi Brand Retail

·         Govt has approved for 51% FDI in Multi brand retail. At least 50% of total FDI brought in shall be invested in `back-end infrastructure`,  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.  

·         At least 30% of the procurement of manufactured/ processed products shall be sourced from `small industries` 

·         Retail sales locations may be set up only in cities with a population of more than 10 lakh as per 2011 Census only 53 cities qualify for FDI in multi-brand retail out of nearly 8000 towns and cities

What do you mean by FDI in Multi Brand Retail? 

FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store. 

What are Government’s concerns for partially allowing FDI in Retail Sector?

These include: 

·         It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector.

·         Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there. 

·         Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.  

Is there any need to worry?

·         India has a federal structure of government. The FDI policy is an enabling framework and it remains the prerogative of the states to adopt it. On ground implementation of policy will clearly be within the parameters of state laws and regulations. 

·         A strong legal framework in the form of Competition Commission is available to deal with any anti competitive practices including predatory pricing. 

·         The policy rollout will cover only cities with a population of more than 1 million(As per 2011 census, there are only 53 such cities whereas there are 7935 towns and cities in India) 

 So it appears, that there are less concerns with the opening up MBRT. But the concerns of employment, retail kiranas, farmers etc. have been raised by the opponents of FDI in MBRT, which also cant be neglected.

Arguments against FDI in MBRT?

·         The MNCs, which will swamp the market, will initially offer goods at a competitive price with a view to gaining a foothold in the growing market. However, once they establish themselves in a commanding position by wiping out their immediate competition, they will hike the retail prices. They will not even bother to maintain the quality of the goods. A case in point is the retail prices quoted by foreign soft-drink companies when they made a foray into the country. They raised the cost steeply after decimating indigenous manufacturers and spreading their network to every nook and cranny. Huge investments and advertising blitzkrieg seems to be their business motto.

·         In fact, promising high prices to farmers amounts to leading them to an illusory world. Once these supermarkets establish their monopoly, they will start calling the shots and coercing the farming community to sell its produce at the rates fixed by them. They will not hesitate to force the farmers to switch to contract farming and change the cropping pattern to suit their requirements. Our farmers have already been put to hardship owing to the high cost of seeds fixed by companies such as Monsanto.

·         Price inflation spirals haunt the nation not because of middlemen in the traditional retail market but because of speculative trading online. The government should take immediate steps to ban online trading. Our flawed exim policy is another major reason for the rise in the prices of essential articles.

They oppose the same on various grounds, like

1)      The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs,

2)      The unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector;

3)      The global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers;

4)      It would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere.

Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. 

What does the people pro-FDI say about the issue?

·         There is lack of investment in the logistics of retail chain creating inefficiencies in the food supply chain. Though India is the second largest producer of fruits and vegetables (about 200 million MT), it has a very limited integrated cold-chain infrastructure, of which 80% is used only for potatoes.

·         Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular.  Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum.

·         As per some industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains in India are wasted. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route.  In the absence of FDI in front-end retail, investment flows into this sector have been insignificant.

·         Leveraging foreign investment in supply chain infrastructure will create significant change.

Indian farmer realizes only 1/3^rd of the total price paid by the final consumer as against 2/3^rd with higher degree of retail.  A World Bank Study of 2007 demonstrates that the average price a farmer receives for horticulture produce is barely 12 to 15% of what is paid at the retail outlet.

Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill development, Tourism Development, Greater Sourcing From India, up-gradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to government through greater GDP, tax income and employment generation.

SWOT Analysis of Retail Sector:

1.      Strengths:

·         Major contribution to GDP: the retail sector in India is hovering around 33-35% of GDP as compared to around 20% in USA.

·         High Growth Rate: the retail sector in India enjoys an extremely high growth rate of approximately 46%.

·         High Potential: since the organised portion of retail sector is only 2-3%, thereby creating lot of potential for future players.

·         High Employment Generator: the retail sector employs 7% of work force in India, which is rite now limited to unorganised sector only. Once the reforms get implemented this percentage is likely to increase substantially.

2.      Weaknesses (limitation):

·         Lack of Competitors: AT Kearney‘s study on global retailing trends found that India is least competitive as well as least saturated markets of the world.

·         Highly Unorganised: The unorganised portion of retail sector is only 97% as compared to US, which is only 20%.

·         Low Productivity: Mckinsey study claims retail productivity in India is very low as compared to its international peers.

·         Shortage of Talented Professionals: the retail trade business in India is not considered as reputed profession and is mostly carried out by the family members (self-employment and captive business). Such people are not academically and professionally qualified.

·         No Industry‘ status, hence creating financial issues for retailers: the retail sector in India does not enjoy industry status in India, thereby making difficult for retailers to raise funds.

3.      Opportunities (benefits):

·         There will be more organization in the sector: Organized retail will need more workers. According to findings of KPMG , in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post reforms and innovative competition in retail sector in that country.

·         Healthy Competition will be boosted and there will be a check on the prices (inflation):Retail giants such as Walmart, Carrefour, Tesco, Target and other global retail companies already have operations in other countries for over 30 years. Until now, they have not at all become monopolies rather they have managed to keep a check on the food inflation through their healthy competitive practices.

·         Create transparency in the system:  the intermediaries operating as per mandi norms do not have transparency in their pricing. According to some of the reports, an average Indian farmer realises only one-third of the price, which the final consumer pays.

·         Intermediaries and mandi system will be evicted, hence directly benefiting the farmers and producers: the prices of commodities will automatically be checked. For example, according to Business Standard, Walmart has introduced ―Direct Farm Project‖ at Haider Nagar in Punjab, where 110 farmers have been connected with Bharti Walmart for sourcing fresh vegetables directly.

·         Quality Control and Control over Leakage and Wastage: due to organisation of the sector, 40% of the production does not reach the ultimate consumer. According to the news in Times of India, 42% of the children below the age group of 5 are malnourished and Prime Minister Dr.Manmohan Singh has termed it as ―national shame‖. Food often gets rot in farm, in transit and in state-run warehouses. Cost conscious and highly competitive retailers will try to avoid these wastages and losses and it will be their endeavour to make quality products available at lowest prices, hence making food available to weakest and poorest segment of Indian society. Heavy flow of capital will help in building up the infrastructure for the growing population: India is already operating in budgetary deficit. Neither the government of India nor domestic investors are capable of satisfying the growing needs (school, hospitals, transport etc.) of the ever growing Indian population. Hence foreign capital inflow will enable us to create a heavy capital base.

·         There will be sustainable development and many other economic issues will be focussed upon: many Indian small shop owners employ workers, who are not under any contract and also under aged workers giving rise to child-labour. It also boosts corruption and black money. 

4.      Threats:

·         Current Independent Stores will be compelled to close: This will lead to massive job loss as most of the operations in big stores like Walmart are highly automated requiring less work force.

·         Big players can knock-out competition: they can afford to lower prices in initial stages, become monopoly and then raise prise later.

·         India does not need foreign retailers: as they can satisfy the whole domestic demand.

·         Remember East India Company it entered India as trader and then took over politically.

·         The government hasn‘t been able to build consensus.

What is the current Status

·         Govt has notified the decision regarding multinational retailers can invest upto 51% to open stores in 10 states and UTs which till January, 2013 have agreed to implement the decision.  These are, Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand, Daman & Diu and Dadra and Nagar Haveli. The rest of State Governments and UTs are free to take their own decisions.

·         Minimum amount to be brought in by the foreign investor would be USD 100 million and outlets may be set up only in cities with a population of more than 10 lakh.

·         Companies with FDI in multi-brand retail will not be allowed online trading.

·         At least 50 per cent of FDI should be invested in 'back-end infrastructure' within three years of the first tranche.

·         FDI will also not be allowed in lottery business, chit funds, manufacturing of cigars and cigarettes and transport (other than Mass Rapid Transport Systems).

·         At least 30 per cent of the value of procurement of manufactured and processed products should be sourced from 'small industries' which have a total investment in plant and machinery not exceeding USD 1 million

·         At present Walmart has a 50:50 cash and carry joint venture with Bharti Group, while Carrefour runs wholesale stores. Tesco, on the other hand has a tie-up with the Tata group and supports the Indian firm in the running of Star Bazaar chain of retail outlets.

·         The DIPP also operationalised Cabinet decisions to relax the sourcing norms for foreign retailers investing beyond 51 per cent in single-brand retail.