FDI in retail- more 'boldness' warranted
This week''s announcement to allow FDI in multi-brand retail has been greeted with opposition and some guarded optimism. The idea of allowing global majors like Wal-Mart, Tesco, Carrefour into retail has been on the back burner for several years owing to lack of political support. With stubborn high inflation and a perception of policy paralysis, concerns were being raised about the ability of UPA-2 making any progress. This is a good move towards allaying those fears.
Some of the opposition to FDI in retail stems from fears that it could lead to job losses among small traders. Traditional mom and pop(kirana) stores would be affected most. However, these jobs are protected at an unsustainable cost. Several studies have shown that up to 40% of India''s fruits and vegetables are lost because of inadequate storage and transportation facilities. Besides,many of these stores still operate under the tax radar. It is not uncommon for store cashiers to ask customers if the bill should be prepared with or without Value added tax(VAT).
Yet, optimism surrounding the change may be premature. Most parts of India suffer from deficiencies in the transport network and electricity supplies. Acquisition of land for industrial development is very tricky. Even if a company such as Wal-mart overcomes these hurdles, there are threats by unruly elements to derail businesses that do not fit their ideology.
For the know-how and technology of modern retail industry to produce results, several areas of India''s moribund business environment need drastic improvement. A clear law for acquisition of land needs to be put in place so that new projects get off the ground at a reasonable time frame. Reform of police and judiciary is needed to ensure credible rule of law. Agriculture sector needs more investments and modernization to raise productivity.
Without reliable physical infrastructure of global standards, retail operations will remain uncompetitive. Potential savings gained by streamlining the supply side are lost in covering for inadequacies of the underlying system
By opening up FDI in multi-brand retail, UPA-2 has taken a bold new step in moving India''s economy forward. They should sustain this momentum by making operating conditions more transparent and efficient with additional reforms. A severe political backlash is bound to erupt. Someday,their grandchildren will be grateful to them for showing courage to do the right thing.