Merits and Demerits of Retail FDI

Published on: December 12, 2011 - 23:26 More in:

Opinion

BY SANTOSH R KENKRE PRESENTLY, there is a major countrywide debate raging about FDI in retail sector. First question to your mind will be: will really mega stores like Wall Mart, the most recognizable face of FDI in retail, come to Goa? It is unlikely to come for next five years, unless new government which will be elected early next year, warms up to the proposal. But, can anyone say with certainty that it will not come to Goa within 10 years? Let us therefore, try to know about the mega stores phenomenon. Mega stores like Wall Mart are massive retail outlets, each dealing in about one lakh -- I repeat one lakh -- different items. They buy goods in mind-boggling quantities, directly from producers, and then, with extreme mechanisation and automation, store, process, transport them and later sell them to consumers at lowest possible prices. Impact on Shopkeepers But how can it affect the shopkeepers -- retail and wholesale? I give an example: let us say presently, a producer of goods (farmer or factory owner) sells his goods to a wholeseller at `60. Next, the wholeseller and the retailer add `40 as their margin and sell these to the consumer at `100. What mega stores will do is pay the producer the price of `60, add their margin of `30 and sell the goods to the consumer for a cheaper price of `90, thus benefiting the consumer by `10. It can afford to sell cheap due to its scale of operations, cheap worldwide sourcing, extreme automation, efficient processes like storage and transport, no intermediary traders etc. However, in the process, the wholeseller and retailer can be eliminated or seriously affected. It may be noted here that, mega stores can alternatively squeeze the producer and buy at `50 from him in the above example, or if the said producer is a farmer, mega stores can pay him an increased price of `70 for a better quality farm product. Advantages and Disadvantages Talking about the advantages, firstly, the producers, chiefly the farmer and later the consumers will benefit as shown in the earlier example. Consumers will get top quality goods of wide variety at cheap prices. Further, mega stores give inputs, share technology with farmers, who can thus increase their productivity. Wastage, spoilages will be reduced since mega stores have massive cold storages, efficient systems for processing, sorting, packing, transporting etc. Due to increased productivity and less wastage, availability of goods will increase in the market by which, inflation can be contained. Government tax revenue will increase since the cash economy will be converted into accounted economy. Also, many white collar jobs will be created, which I cannot quantify. However, as we have seen in the earlier example, wholesellers and retailers can be seriously affected. Due to extreme mechanisation and automation, many jobs will be affected including those of clerks, coolies, service providers, small transporters etc. Further, Indian industrial jobs and industry can be affected since mega stores will source its goods from anywhere in the world. Inefficient industries in India can get killed. Wall Mart buys in huge quantities hence it may not buy from small producers, leaving them dry. Wall Mart can virtually demand lesser prices from industry and other suppliers, including farmers at times, because of its money power. Governments propose d condition of minimum 30 per cent purchases by mega stores from Indian industry is likely to be shot down by the WTO! Mega stores can virtually become monopolistic and thereby kill competition from traders, with cheaper selling prices. Mega stores remains open 365 days a year, it has lots of selling gimmicks like super card etc, by which it can pull customers away from kirana shops. In general, I estimate that each trader, and service providers to them, can be affected to the extent of anywhere between 10 per cent to 70 per cent! And there are four to five crore traders in India, who face this situation today. Benefits for Goan Consumers Talking about Goa, there are not many farmers in Goa, hence, the beneficiaries of mega stores in Goa will be chiefly the Goan consumers. However, the Goan industry will have to severely compete with at least the best in the country, otherwise the mega stores will not buy their produce. Instead, mega stores may buy such goods and produce, cheaper from Pune, Bangalore, Japan or Shanghai. However, the most affected will be wholesellers and retailers of Goa if mega stores set up their business in Goa, which

hopefully, it will not, in this decade. Even if mega stores do not come to Goa, another fear lingers. Goa is surrounded by three mega cities, Mumbai, Pune and Bangalore, which could have mega stores. Mega stores in these three cities can affect the operations of many suppliers and manufacturers within 1,000 km of these cities, positively or even negatively. These mega stores can choose to buy from an efficient industry by which it can benefit, but if it chooses to buy from good competitors of an inefficient industry, it can get killed in the long run. Another fear is that lots of Goan consumers can visit these cities once in a while and make heavy purchases, thereby affecting Goan shops. The million dollar question for the Goa government or Goan society is, should we allow such mega stores to set up their shop in Goa, by which, out of 10 Goans, say three Goans (traders and partly industry) get seriously affected but the rest seven Goans consumers benefit marginally. Within a few months, Goans will vote for a new government, so take your call and vote.