FDI In Retail: Will It Boost India's Economy Or Leave Millions Jobless?

India's retail sector, which is one of the fastest-growing in the world, is under immense pressure to allow the Foreign Direct Investment (FDI). With multinational retail giants like Wal-Mart and CarreFour and foreign investors lobbying the government to throw open the retail sector, the government has made several futile attempts in the past two years to allow FDI in retail.

The strong opposition from the unorganized retail sector, which gives employment to 40 million Indians (3.3 percent of the population) has forced the government to stall its FDI decision. But now, with many supermarket chains in the organized retail sector announcing losses and demanding foreign equity flow to remain afloat, the debate to allow FDI in retail has again gained momentum, causing much worry to millions of small traders like Selvi.

FDI in retail sector

The Indian retail sector largely consists of millions of mom-and-pop stores or Kirana stores, as they are locally called. Until 2010, these family-managed shops in the unorganized retail sector accounted for 99 percent of India's retail trading, while retail chain stores of big companies accounted for the rest.

Even now, about 90 percent of Indian retail trade is controlled by the Kirana shops and consists of neighborhood stores, streetside petty shops and pavement or handcart traders. These shops trade anything from vegetables to groceries and fast-moving consumer goods (FMCGs) to electronics and garments.

The organized retail sector consists of local Indian companies like Future Group, Reliance Retail, Tata, Godrej and Raheja Group that operate through urban supermarket chains.

The Indian government in November 2011 announced opening up of the Indian retail sector for FDI, allowing both multi-brand and single brand retailers into the country. But it was forced to hold back the reforms in December due to pressure from the opposition and millions of Kirana shop owners.

But in January, the government allowed 100 percent FDI in single-brand retail -- subject to 30 percent sourcing from the domestic market.

Kirana stores vs. supermarket chains

The government is pushing for FDI in retail, arguing that it will boost economic growth while letting consumers get quality products at cheaper rates. It argues that strong competition and better choice of products will bring down inflation and generate more employment.

The government also argues that farmers will also benefit from FDI in retail as multi-brand chains will source materials directly from the farmers, paying better prices and eliminating middlemen.

For multinational companies like Wal-Mart, entry into the Indian retail sector could reap enormous profits as the country has an unexplored market with a billion population, quality raw materials at cheaper costs and huge talent pool.

Kirana shop owners feel that the move will not benefit the country or the consumers in the long run and will result in the closure of millions of Kirana shops, leading to the loss of livelihood for more than 40 million Indians who depend directly or indirectly on the sector.

The main reason for opposition is that MNC retailers with deep pockets and the ability to source raw materials directly will be able to offer products at a much discounted prices, forcing the Kirana shops out of business.

Several traders like Selvi, who are saying that their income has declined after the onslaught of organized retail supermarket chains in their locality, argue that since most of the Kirana shop owners lack infrastructure and resources to expand their business, they will not be in a position to compete with strong foreign retail chains.

Our shops are not spacious and we cannot allow customers get into the shops and pick the products they want. We also can't give discounts to the customers. The rentals are high in the cities, which prevent us from expanding the business. ... Moreover, most of us earn money for day-to-day needs and rarely make huge profits, said G. Manikandan, a retail trader at Alandur in Chennai.

The retailers argue that even the employment generation through the organized sector won't help those who are affected by the closure of the Kirana shops, as majority of the workforce in the traditional retail sector is unskilled, less educated or even uneducated and aged, compared to that in the modern organized retail sector.

K. Gopalakrishnan, 65, has been selling groceries in a small shop in Cochin in South India for the last 40 years. He has a genuine reason to worry as he is seeing a steady decline in his income in recent months. At his age, he doesn't expect any of the modern retail shop to employ him.

I have been selling groceries for the last four decades and I don't know any other work.  If I have to close my shop, then which company will employ a semi-literate person like me? he asks.

Opponents of retail FDI argue that consumers will not ultimately benefit as most of the large-scale MNCs turn into monopolies restricting choices and eliminating competition.

Most of the huge multinational corporations in retail encourage bulk purchasing by offering heavy discounts, and the traditional traders feel this will harm the consumers as they will be forced to buy more than what they need, erasing the gains from the price discounts.

Japan's example a warning

The domestic retail trading organizations also point to the impact of the FDI in retail sector in countries like Japan, where millions lost their jobs due to the large-scale closure of mom-and-pop stores in the 1980s. After the retail trade modernization in 1985, about 96,000 of the 1,036,000 mom-and-pop stores in operation in 1982 were out of business and the trend continued as the local shops found it difficult to withstand the pressure from the organized retail sector.

Trade bodies in India predict the same scenario if FDI is allowed in the retail sector.

We are not welcoming the move in India as unemployment is a burning issue here. FDI will not generate as much employment as it claims. It is clear from the examples of Wal-Mart and such big retailers. They will effectively capture the small markets with their resources and destroy the means of self-employment for the millions of people, J.R. Bengera, president of the Federation of Karnataka Chambers of Commerce and Industry, told the International Business Times.   

The government advocates FDI in retail, arguing that investment in the retail sector would bring in modernization and modern cold-storage facilities that would benefit the retail industry. But some trade experts have a different take.

These multinational retail giants may bring in investment and modernization, but it will not benefit the Indian farmers. We agree that our retail marketing and distribution system needs modernization and investment, but the FDI is not a solution for the problem. It will leave the farmers at the mercy of these corporations who control the supply of products, Bangera said.

Coexistence of modern and traditional trading

Caught between the multinational retailers and the local traders, the government is looking forward to work out a strategy to guard the traditional sector while allowing FDI. The government is considering Chinese and Japanese models where the government brought in a mechanism to ensure the coexistence of modern and traditional retail trades.

Experts believe restricting the foreign retailers to urban centers will shield the rural Kirana vendors, but traders feel it will not help as majority of the traditional vendors are concentrated in urban centers. Another suggestion is the Japanese model of making organized retailers co-opt several traditional retailers and pass modern technology to them.

Domestic retail chain Reliance Retail, which has more than 1,300 outlets across the country, has come out with a model for survival as it plans to trade with the local Kirana shops. By this business-to-business initiative, Reliance will be sourcing products and selling them to the local Kirana shops.