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Much ado about nothing

The decision of the Modi government to ban entry of foreign firms into Indias retail sector may be as ill thought as the previous governments decision to allow multi brand firms into the sector but with strings attached.

The basis for the decision is that foreign firms would put the kirana shops out of business, they would reduce the price farmers receive for their produce and they would engage in predatory dumping. None of these arguments is convincing.

The retail sales market is segmented between the high-income groups and the low-income groups. The latter can neither afford nor prefer the sort of products the supermarket chains provide. They cannot afford the refrigerators to store the frozen victuals the supermarkets sell; nor can they afford to commute to the supermarkets that would be mostly located in the suburbs.   

The impact of foreign owned firms on the price of goods sold by the farmers may go either way.  Foreign owned firms (FoF) have to compete with existing middlemen for the produce of the farmers.  Small farmers with little knowledge of marketing and supply chains are unlikely to either learn about available alternatives or switch to the foreign firms as soon as they are allowed to operate. Foreign owned firms may increase the price they pay farmers.  This favourable outcome depends very much on the ability of those firms to establish their presence and communicate with owners of small farms.

Predatory dumping unlikely...

The opponents to the entry of foreign owned firms into the retail trade fear that they may engage in predatory dumping: This again is unlikely as the market for foreign owned firms would be confined to a small proportion of the total market for food products. The argument that entry of foreign firms into retailing would be akin to the operation of the East India Company makes little sense in this day and age. “Surely multinationals today do not feel obliged to invade the countries where they do business.”(Tirthankar Roy-2012).

Case in favour is exageration

Whilst the case of the opponents to the entry of FDI in retailing appears to lack credibility, the case in favour of it seems to be exaggeration. One of the arguments in favour of FDI in India’s retail trade sector is that FoF can provide technology and know-how for creating warehouses and refrigeration facilities for India’s farmers in  addition to transportation facilities.  No doubt that improved warehousing, refrigeration and transportation facilities would limit the huge waste and spoilage of food, estimated to be around 30 per cent of the food produced in the country. It is incredulous that our economy cannot do this in-house. Big business firms in India such as the Tatas, Reliance and Birlas are into food retailing but not extensively.  Indian firms investing abroad report that it is much easier for them to operate abroad unencumbered by red tape, complex bureaucracy and corruption that are all a way of life at home.


PepsiCo experiment...

The issue of significance though is the likely contribution of foreign retailers to the growth of productivity. Is it likely that the foreign retail firms will not only provide the technology for distribution but also for the production of agricultural products? It is doubtful if they will do so, simply because distribution and not production is the ownership advantage they possess. In any case, they can hardly be expected to invest the sort of money required to increase productivity in Indian agriculture. This is the province of the government and agriculture research institutions. Admittedly contract farming arrangements such as the ones in place between PepsiCo and potato growers in various states of India do provide farmers not only a guaranteed price for their produce but also technology and know-how. But companies such as PepsiCo, Unilever and Cargill are in the business of food manufacturing and sales and are not just retail traders of products. Measures to promote the productivity of agriculture should precede reforms of the system of distribution, putting the cart before the horse won’t do.

Putting various restrictions on the operations of the foreign firms in the retail sector would do more harm than good. The foreign firms may do no more than create a few jobs for the educated urban unemployed and allow policy makers the satisfaction of having acted in the face of stagnant growth.


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