FDI Demystified - Part 2

 
 
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February 2013

The Indian government recently won an important and long-running debate that will have a lasting effect on the country's retail industry. They earned the required number of votes from both houses of parliament to make way for greater levels of foreign direct investment (FDI) in retail. And though the deal has been done, it continues to be a contentious issue thanks to the many political agendas that influence policy-making in India.

In the first of this two-part series, we looked at the policy's framework and discussed the need for FDI in Indian retail. Now we'll focus on how this new policy is likely to impact several key stakeholders: the farmers, the consumers, and the governmentt.


Farmers


Today, the farming community in India sells their product to middlemen instead of directly to retailers. And it's no secret that these middlemen are the biggest beneficiaries within the food supply chain. In many regions, they have formed collusions, making it difficult for farmers to negotiate better prices, and forcing them to settle for much less than they deserve.

FDI in retail will provide farmers with more buyer choices, giving them the bargaining power they need to obtain better prices. As a result, the agricultural community will have more disposable income, which given the size of this demographic group, will positively impact the economy and help the retail sector thrive. This backward integration will also keep inflation under check, allowing retailers to sell at competitive prices and benefiting customers in the process.

Consumers

Consumers in India can be broadly classified into two categories. First there is the growing middle class which in the past has been burdened with ever-increasing inflation. Then there are the consumers who have constant exposure to global lifestyles via worldwide media, and aspire to experience the same in India.

For the former set, value and savings continue to be key expectations in retail, and FDI will answer this with more product choice and better value. For aspiration-driven consumers, FDI will deliver greater access to global and private label brands that would otherwise be out of reach. Both groups will benefit from the lower prices brought by foreign investment, and this will act as the catalyst for a shift toward a consumption-driven economy.

Government

Opening up the retail market to FDI is only the job half-done. Now that the policy is the place, the Indian government must play an active role in facilitating inclusive growth throughout the retail sector. There have been several instances in other industries where the move to allow FDI created very little change. Consider, for example, the case of back-end and cold storage development; despite that foreign direct investment has been permitted for the past ten years, there has been no significant progress in this area.

The Indian government must to take steps to make production of agricultural and small-scale industry products cost-efficient, thereby allowing suppliers to gain higher margins. Infrastructure development will also be crucial to reduce wastage of perishable food products. And finally, the government must help create a level playing field for retailers by strengthening the Competition Commission of India - the body of government responsible for promoting and sustaining healthy competition, protecting consumers' interests, and ensuring freedom of trade in Indian markets.

With the new opportunities presented by foreign direct investment, the potential for economic uplift is great. But all parties involved will have to work together to ensure that this growth is healthy and holistic. It's an exciting time for Indian retail, and we're glad to be a part of it. As the effects of FDI begin to take shape throughout India, we'll keep you informed and up to date on its ebbs and flows. Stay tuned!