FDI in Retail in India
By; Dr. Neelam Tandon
PGDM II A, B and IB
The matter of FDI (foreign direct investment) in retail is best understood in terms of economics, although the FDI policy is a matter of politics. When one is talking about anything that has to do with economics, it is helpful to use a bit of common sense and to stick to the basics, as we will now proceed to do. FDI in multi-brand retail is being opposed by some, including the BJP. The question of whether FDI in retail is good or not is being hotly debated. To the extent that the debate is related to the economics of organised retail and foreign investment in it, the debate is pointless because it takes only a few minutes to get to the heart of the matter. Consider these fun facts.
* Retailing is an essential service in any large modern economy (or any economy that has hopes of being modern). Organised retail is a necessity only for developed economies because it is the bridge between the production of a large number of goods and a large number of people with specific preferences and varied choices. For poor underdeveloped economies, informal retail suffices given that very few goods are produced and people have little choice. * Organised retail is a good thing in any sufficiently large economy. It increases distribution efficiency, and increases production through increased efficiency in resource allocation. In the absence of organised retail, a good deal of labour is involved in low productivity retailing of small amounts of goods. * Organised retail requires investment, in terms of capital and human resources. This is an obvious fact but is often overlooked. Even if desired, organised retail will not happen if required human resources are missing. * Foreign investment augments domestic investments and is good for the economy. If domestic investable resources fall short of what’s necessary, it is a good idea to attract foreign investment. One large poor economy (which we need not name) did very well over the last few decades by attracting hundreds of billions of dollars in foreign investment. * India needs an efficient retail sector — again an obvious fact that is overlooked by some, perhaps because it is not in their interest to recognise this fact. * India’s domestic resources are insufficient for creating an efficient retail sector. Therefore inflow of foreign investments in retail is good for India. But what about the millions of small kirana store keepers? Some of those stores will no longer be viable. Some — not all. Some of the people currently in the unorganised retail sector will find employment in the organised retail sector. Consequently, fewer people will be needed for the same volume of retail — which is another way of saying that there will be labour efficiency gains. Increased efficiency also means higher wages in the retail sector. That is good news. But wait, there’s more. A growing economy implies that the retail sector will also grow. With sufficient growth in the economy — which follows naturally under easily obtainable conditions – employment in retailing will grow even with increased efficiency in retail. It is a mistake to consider the economy a static game. Economies are dynamic structures and it is possible to have changes that benefit some without hurting others. In other words, Pareto improvements are possible. (A Pareto improvement is one by which at least someone becomes better off without making anyone else worse off.) An example of the dynamic nature of the economy is the telecom sector. At one time, it was feared by some that increasing the efficiency of the sector will lead to unemployment among the telecom labour force. As it turned out, those fears were unfounded since the growth in the economy, and therefore growth of the sector, saw an increase in employment together with higher wages. Not just that, it also led to cost decreases which are reflected in the low prices of telecom services we all enjoy....
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