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The Truth vs Hype of FDI

One of the most recent problems which had shaken the UPA government is decision of allowing 51% foreign direct investment (FDI) in multi brand retail sector. The government had suffered severe criticism from all sides on this decision because of the concern about the loss of livelihoods it is likely to create. Let us analyse what actually is FDI in multi brand retail and how is it likely to impact the Indian economy. Retailing means selling of goods to the end consumer for final consumption. The Indian retail sector is divided into two groups that is organised and unorganised sector. Organised retail sector includes trading activities of licensed retailers which are registered for sales tax, income tax etc. These retailers are publicity-traded supermarkets, corporate backed hypermarkets and also privately owned large retail businesses. Some examples in India include Big Bazaar, V Mart, Shopper's Stop etc. Unorganised retailing on the other hand consists of traditional retailing formats like local kirana shops, mandi, beedi/cigarette shops, fruit and vegetable vendors and alike. The share of the organised retailing sector in Indian retail setup is extremely low which is about only 10% and rest 90% of retailing is done by the unorganised sector which mostly employs family members and lack adequate storage and logistics facilities.

Though the current level of opposition which led to the holding back of the FDI in retail policy tends to generate a very negative public opinion towards this but the true picture as not as dark as it is shown. There are many flaws associated with the present retailing set up of unorganised sector which leaves the consumer with very little choice and poor quality goods. From a study it is found that about 30-40% of the farmer's produces gets destroyed because of lack cold storage and warehouse facility. The various riders attached by the government to the opening of multi brand retail in India is likely to take care of such problems. According to these conditions the establishing retail store must invest at least 50% of its total investment in developing back end infrastructure and facilities like modern product sourcing management, logistics, supply-chain management, cold storage,packing,transportation,sorting and processing, refrigeration etc.

which will prevent post-harvest losses and will also lead to infrastructure development and employment generation in diverse sectors as according to the commerce minister around 10 million jobs will be created in three years and farmers will be able to get better prices for their products. Also the mandatory sourcing of at least 30% of their products from small and medium scale enterprises will boost small scale industries as these chains will procure the same for their foreign outlets also. Customers will be benefitted by competitive prices and variety. It will also help to control food inflation. An example can be taken from China and Thailand where similar protests took place in the beginning but after allowing FDI in multi-brand retail these countries had been actually accelerated their economic growth. In India these stores will be allowed only in the cities having a population of million plus thus only about 53 cities will be covered in initial phase. Moreover the final decision to implement the policy will be left with the state governments only allowing them to either accept it or reject it. Hence we can say that if FDI in retail is allowed it will boost the Indian economy by allowing inflow of foreign funds and investment. Also customers will get access to quality products at competitive prices.

But we must also keep in mind that may lead to large scale unemployed in unorganised retail sector. These stores may monopolize the prices. Hence opening up of the FDI retail sector should take place in a gradual phased manner so that small retailer's interests are also taken care of. A possible policy may provide these small retailers with cheap credits, subsidies and technical facilities to increase their efficiency and make them competitive. Government could make it mandatory for these stores to provide certain proportion of employment to rural youth. Appropriate legal frameworks can be implemented to prevent them from resorting to predatory pricing and monopolistic tendencies.

Hence we can say that if FDI in retail is allowed with certain preconditions it will help boost the Indian economy in the long run and will project a positive image of India regarding its liberalisation policies. It will help growth of exports and employment generation. Therefore it must be allowed and at the same time interests of small retailers be also protected.

- Vyom Bindal