Group Discussion: Prepare for GD; FDI in retail- a boon or a bane

Foreign direct investment (FDI) refers to capital inflows from abroad that are invested to enhance the production capacity of the economy. However, FDI in retail is different from the investment in corporate, manufacturing, or infrastructure sectors. Retail can be single or multi brand and may be described as a sale to the ultimate consumer at a margin of profit. While the FDI in single-brand retailing was allowed earlier, FDI in multi-brand retailing is being allowed now; meaning a retail store with a foreign direct investment can sell multiple brands under one roof. So it is the link between the producer/manufacturer and the individual consumer. India had to open up the retail trade sector to foreign investment as she is a signatory to the World Trade Organization’s General Agreement on Trade & Services, which include wholesale and retail services.
Pros
a) Indian retail sector is highly fragmented with around 97% of its business being run by the unorganized retailers. The organized retail is in its infancy. With the entry of FDI the retail sector will become organized.

b) Foreign investment in food-based retailing would ensure adequate flow of capital into the country and its productive use, multiplying the same. It will promote the welfare of farmers by agriculture growth, and thereby increasing their income level.

c) Intermediaries, known with different names in different parts of the country, flout the business ethics. Prices lack transparency, due share of farmer is not paid to him. Regulated markets also have developed monopolistic character. Indian farmers at present realize only 1/3rd of the final price paid by the consumer as against the 2/3rd price realized by the farmers in the countries with a greater share of organized retail. FDI will assist in reducing the dominance of value chain by intermediaries.

d) FDI in retail will make the consumer happy as well. In the absence of intermediaries, the consumer will end up paying less for a better product. Besides in the unorganized sector, consumer has to argue and fight a lot in case he has to return some faulty product to the retailer. This process will be standardized.

e) It will serve as an antidote to inflation. The producer will get direct payment from the retailer and the same will be higher than what he was getting earlier due to the foul play by the intermediaries.

f) In accordance to the provisions made, any company going for 51% partnership in retail, will have to tie-up with a local partner. This will improve the income levels of all concerned and will make economy flourish with quality branded products at a lower price.

g) FDI will improve the investment in logistics of the retail chain leading to an efficient market mechanism. India is one of the biggest producers of fruits and vegetables, it does not have a strong integrated cold-chain infrastructure with only around 5400 cold storages which have total capacity of about 24 million MT. The irony is that 80% of the capacity is used only for preservation of potatoes. The perishable horticultural commodities find it difficult to link to distant markets, including overseas market. FDI will become catalyst in avoiding this distress sale and erosion & wastage in quality and quantity of the produce.

h) FDI in the retail sector will spur competition as the current scenario is of low competition and poor productivity. India will flourish in terms of quality standards and consumer expectations.

Cons

FDI is all not goodie-goodie. However, if an aspirant speaks against FDI, he should be careful to leave room for positive thoughts.

a) The unorganized retail sector is the largest source of employment after agriculture and has deep penetration in rural India. It generates more than 10% GDP of India. There is all probability that there will be a great job loss in this sector. The worst affected would be the rural youth.

b) The foreign big guns like Wal-Mart coming with huge investment may not procure material from the domestic producers and might import the same from international market. This will add to the woes of already crumbling Indian producers.

c) The present PDS (Public Distribution System) on which a large urban and rural population depends will also receive a setback and it will be difficult to procure and redistribute the material, once the dependence on FDI increases.

d) The fear is rampant on the existence of micro, small and medium enterprises with the introduction of FDI in India. They will lose their existence.

e) Foreign capital will penetrate in the country and will seek ways to multiply itself with unthinkable application for profit. In the long run, given the socio-economic structure, it may cast doom and widen the gap between the rich and the poor.

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