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Home > Blogs > Anthony Harrington > India's latest FDI measures run into trouble- Part 1

India's latest FDI measures run into trouble- Part 1

India's latest FDI measures run into trouble- Part 1 Anthony Harrington

It is no secret that India's retail sector is hugely fragmented, to a degree that would be unthinkable in the UK, Europe or the US, where big supermarket chains dominate the multi brand market. For those in advanced markets who argue that the dominance of the big supermarkets is a bad thing because it hurts small retailers and corner stores, the Indian model should be a salutary reminder that in judging any sector business model, you need to take the whole supply chain into account, not just the model associated with this or that big retailer.

It might be supposed that a fragmented market with a multitude of suppliers would favour farmers, who, or so the supposition goes, should be in a better position to offer their wares to competing suppliers. In reality the truth is exactly the reverse of this. India's fragmented retail market is extremely bad news for farmers, who have to sell all their produce to middle men, who take a huge profit before handing the goods on to the ultimate retailers. At the same time, the middle men do next to nothing about developing the supply chain - something that western supermarkets put a great deal of time and resource into.

However, the "big is bad" rhetoric is so entrenched in so much left wing politics that India's left leaning parties start from a position that inviting big supermarket chains to buy into the Indian retail market has to be "anti people". For this to be true, the politicians would have to restrict the meaning of the term "people" so that it refers almost exclusively to India's middle men, who will indeed be side tracked once the big supermarket chains arrive, unless they can reinvent themselves as supply chain development managers for the big brand name retailers. Be that as it may, there is no doubt that parties such as the Indian Communist Party and the BJP have said in no uncertain terms that they intend to fight the UPA Government in India over the issue.

What has stirred them up, of course, is the United Progressive Alliance (UPA) Government's decision to allow 51% Foreign Direct Investment (FDI) in multi-brand retail. Single brand retail, such as IKEA or Habitat, can be 100% owned with the proviso that overseas retailers setting up single brand stores in India have to abide by the rule that says that they must source at least 30% of the goods they sell from Indian companies. However, this last restriction is actually a softening of the earlier restriction which said that the 30% sourced had to be sourced from micro, small and medium enterprises (MSMEs).

In addition to stiff opposition from the left in India, by mid-September the UPA had also run into trouble from the West Bengal Trinamool Congress party, led by West Bengal Chief Minister, Mamata Banerjee. The Congress is the second largest party in the coalition, while several regional parties have also joined in the clamour. The general theme is that allowing top western supermarkets to come into the Indian market and compete directly against incumbent players, will destroy India's own fledgling retail sector while enriching foreigners. The BJP is also suggesting that the Indian Government is basically abdicating from the task of turning around an ailing economy and that incompetent to do the job itself, the Government is hoping that foreign supermarket chains with their superior market knowledge, will provide a real boost to the Indian economy.

This is a somewhat naive view of the relative roles of governments and major supermarkets. Only in a communist state is it the state's job to coordinate agricultural and commodity production and bring goods to market. History shows that when officials try to create and maintain a managed market in this way they create perverse incentives in every direction to fiddle the system, while generating, in practice an unholy brew of shortages and surpluses. The entry of modern western supermarkets into the Indian economy, on the other hand, is highly likely to totally reform the supply chain, to the benefit of farmers, many of whom can expect to find the supermarkets providing training and advice across a whole range of issues, from soil and production technicalities through to cutting wastage and embracing "green" concepts of packaging and distribution. The big losers are certain to be the existing layer of middle men who have been getting rich off the backs of the peasant farmers without providing much of a service to communities. However, it is by no means certain that the reforms will survive the Indian political process. In Part Two we look at the details of the reforms in the retail and aviation sectors.

Further reading on emerging market economies:

Tags: FDI , Foreign Direct Investment , India , supermarkets , United Progressive Alliance
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