Should India open foreign direct investment in multi-brand retail : a case study using the Wal-Mart effect

Abstract

As India grows, driven by its success in information technology and services, there is another revolution waiting to happen in the Retail sector dependent on whether the Government of India can unshackle the various inefficiencies that are keeping this industry constrained. Retail in India is estimated at nearly US$ 400 billion and is growing at a CAGR of 9 percent (AT Kearney GRDI 2010). 96 percent of this sector remains un-organized and constitutes a workforce that have taken to self-employment for daily subsistence due to an overcrowded agriculture sector and lack of employment opportunities for lesser skilled workers in the manufacturing or services sectors. Food and groceries form nearly 60 percent of India's retailing followed by, among others, clothing and footwear at a distant 9 percent of retail. Despite the size of this market, retail and its food supply chain remains unorganized and inefficient. A lack of investment, technology and process control in the agriculture supply chain leads to tremendous waste accounting for nearly 25-30% of fruits and 10% of grains produced. Also, the related and supporting industries for food processing, cold chains and crafts remain nascent. In a grim reflection on the situation, a politician in India recently remarked that Indian consumers buy shoes in air-conditioned stores but food on the streets. Despite this scathing but accurate comment, the debate on whether to organize retail remains unresolved. This debate is further complicated by intellectual and political debate on the impact of Foreign Direct Investment (FDI), by large international retailers like Wal-Mart, on the fate of small retailers. Interestingly, both these questions have been on the table of policy makers in India for more than 15 years and the Government has so far only allowed some FDI in 'single-brand' retailing and 'wholesale trading' of retail goods. While the incumbent Congress party led Government has voiced many reasons to organize retail and allow FDI in multi-brand retailing, public opinion in response to a discussion paper released by the Department of Industrial Policy and Promotion (DIPP) - Ministry of Commerce & Industry - has been negative. In my quest to decipher whether India should organize and allow FDI in multi-brand retail, I have analyzed all the opinions received by the DIPP. I posit that the data is skewed and not sufficient to form the basis of a policy decision. I have also conducted an extensive literature review on the impact of Wal-Mart on small retailers to understand the potential impact it can have on India. Despite the concerns, I conclude that this change can be managed to India's advantage and that opening of the retail sector to FDI is an imperative, not an option.