FDI in retail positive in long term

Coalgated Union government couldn’t have timed the announcement of its crucial reformative moves more accurately than this. On Thursday evening the first salvo — rationalisation of LPG subsidy and then the second salvo on Friday — steps allowing foreign direct investment (FDI) in retail, aviation, broadcasting and power exchange — have hit the ‘poll-tickled’ parties, and hard.

While all political parties spent the Thursday evening busy analysing, opposing and demonstrating their anger over the diesel price hike and LPG subsidy move, on Friday evening they were busy debating whether FDI in retail is good for small traders, agriculture and so on.

As designed, this will give some breather to the paralysed policy makers. Moreover, it will also send positive signals to investors across the globe. Despite higher than expected inflation numbers, the stock and currency market cheered fuel price move. It is believed, present stock price is reflection of future cash flows.

On Monday, the market will also cheer the ambitious FDI move, as it promises brighter future – better shopping experience, better airlines to travel and better content for entertainment avenues every evening.

In the din, let’s try to figure out the music in simple words — to understand whether FDI will really usher in better shopping and flying experience to us.

Retail in India is $450 billion industry — 90% controlled by unorganised small and medium traders. For a country with size and plural cultural, ethnic and linguistic population fragmentation of retail business will always be present.

Initial reactions from independent experts are positive. “The step is in the right direction as it is an indication that government is willing to take policy decision which keeps alive India as an investment destination,” said Deven Choksey, chairman and managing director of stock broking firm KR Choksey.

Another market pundit terms it as a positive long term step. “It will give boost to retail and civil aviation in the long term. Too expect too many things in retail or civil aviation sector in immediate future would not be realistic,” says Dr Dharmakirti Joshi, principal economist of Crisil.

He further says that to expect FDI in retail will change fortunes in agriculture, is not true. “It is wrong to believe that agriculture suffers problems only from post harvest or produce pricing. It has its own structural issues like irrigation, fertilisers, soil fertility and so many things. However, better infrastructure for post harvest will definitely help them,” he adds.

“It will help in the long run,” states chief economist of Care Ratings, Madan Sabnavis, adding that it will ensure much-needed capital inflows in these two sectors and improve infrastructure. “However, nothing will immediately take shape,” he warns.
Retail and civil aviation has its structural issues in India.

Quite a few domestic retail players (Shubikhsa, Vishal Retail) have shut down their shops. A few had to change formats they operate in — aviation giants like Kingfisher, Deccan and Sahara are the perfect examples of challenges ahead of a player.

While many retail players like Future group, Bharti Enterprises and others have also welcomed the step, there some who aren’t too gung-ho about the moves.

Along with state government, the dairy sector of Gujarat is opposing the move. The share of farmers in consumer’s purchase will drastically fall, believes managing director of Gujarat Co-operative Milk Marketing Federation (GCMMF), RS Sodhi.

“Like in Europe, from where the international retail chains belong to, the dairy farmers merely gets 35% to 40% of the total spend by consumer. The mediator eats the bigger chunk. Because of smaller share, every couple months, we get the news of dairy farmers in Europe going on strike. They have fight for rise in their income. We are afraid of replica of the picture of dairy farmers in India,” said Sodhi.

He further added that FDI seems difficult in Gujarat as state government is unlikely to allow foreign retail chains in the state.

Interestingly, in a political economy like India all economics has political fallout and everything politically right is economically wrong. Already politicians from Gandhinagar to Kolkata have condemned it.

In November 2011 government had to backtrack from its decision in implementing the Cabinet decision after stiff resistance from state governments and its allies in power. The opposition still exists, traders, political parties and state governments terms FDI in multi brand retail as anti farmers and anti small trader. But this time government has bite the bullet this time and decided to implement it.

The feeling in retail sectors is simple. Like Value Added Tax (VAT), once a few states implement it the others will see the benefits and definitely consider it as well.