India Needs FDI In Retail

India Needs FDI In Retail by Sauvik Chakraverti 

25 Oct 2005, 0000 hrs IST, 

Foreign direct investment (FDI) in retailing is opposed by many. Under the A B Vajpayee regime, it was disallowed because a vocal lobby of Hindu traders spread the fear that it would spell doom to small shopkeepers. 

Today, even West Bengal chief minister Buddhadeb Bhattacharjee, otherwise "market-savvy", and not very Hindu, opposes FDI in retailing. Perhaps a little economic analysis of retailing, especially in poor countries, will clear the air. 

To start with, let us take an astonishing statistic (and this is an industry statistic, and not the handiwork of any government bureau): 70 per cent of shampoo sold in India comes in little sachets. This reveals a lot about the nature of the market, especially in developing countries, and is something that Lord Peter Bauer noted a long time ago. 

The distributional chain, of which retailing occupies the final position, is engaged in "the breaking down of bulk": Goods leave the factory gates in containers (bulk) while the final customer departs with just a little sachet from the retailer. 

Now, as Lord Bauer observed, this process of "breaking down bulk" is inordinately long in developing countries because most people buy their needs on a daily basis, being unable to invest in buying a month's groceries at one shot. 

Lord Bauer, who pioneered the study of what we now call the "informal sector", noted how in India people often buy loose cigarettes. In Africa, he found, even matchsticks are sold loose. 

He reported on the armies of small traders that cater to the needs of the poor so well, and he marvelled at how statisticians never mention, in their reports, how millions and millions of small traders exist in rural areas: They over-report "agriculture". 
Retail supermarkets, the world over, shrink the distributional chain. They buy in bulk and sell cheaper than small retailers, thereby passing off significant economic gains to the consumer. 

They make the distributional chain economically efficient. But there are strong reasons to believe that in India, they will not be able to mine what C K Prahalad called "the gold at the bottom of the pyramid". 

While big-time retailing will definitely succeed in India, and bring with it great benefits to middle and upper-class consumers (and associated spin-offs like real estate development), the armies of small traders who "break down bulk" even further to cater to the numberless masses will continue to thrive. 

Supermarkets will typically cater to car-owners who buy up a month's supplies at a time. They will buy big bottles of shampoo, cartons of cigarettes, and big sacks of rice. The small traders will sell products in little sachets, loose cigarettes, half-a-kilo of rice, and so on. Their numbers will flourish and grow. 

Even in rich nations, small traders manage to compete very effectively withsupermarket chains. In London, almost every "corner shop" is owned by an Indian. We are the shopkeepers to "a nation of shopkeepers"! It does not behove a nation of such splendid shopkeepers to fear foreign supermarkets. 

The upshot of it all, of course, is that for the nation to progress, efficiency gains in distribution are a must. Inordinately long distributional chains make trade slow, expensive and cumbersome. 

As India progresses, it is vital that this chain sees shrinkage. What could very well work in the interests of both the small traders as well as their poor customers are wholesale supermarkets, like Bangalore's Metro Cash & Carry, which caters to small traders and has therefore located its sprawling stores outside the main city. 

Such wholesale supermarkets will enable small traders to increase their margins and also pass on some of their gains to the final customers. 

The distributional chain will shrink, but not at the cost of the small traders. Rather, it is the inefficient wholesalers and sub-wholesalers who will see a loss of business. Wholesale supermarkets will be able to mine "the gold at the bottom of the pyramid": but their product mix will vary immensely from retail supermarkets. 

In either case, in all our cities today, wholesale markets are invariably in parts of the "old city": Congested and inaccessible. The real estate development that will accompany FDI in retail as well as wholesale trade will make it possible for a redrawing of city maps, with all these supermarkets sprouting all around the periphery. 

This process of rebuilding the civic architecture around which urban commerce works will give us a golden opportunity to get things right for once as far as city trade and traffic management is concerned. 

We can learn lessons from Seoul, where wholesale supermarkets stay open all night, enabling small traders to come in from the surrounds after the evening rush and depart with their wares before the morning rush hour. 

If at all the government is genuinely concerned about "small traders", then it should implement policies that make them invulnerable to the hafta brigade that milks them of their surpluses. Like every other Indian, they too need the state off their backs. 
The writer is an economist.