Opinion Retail reform is in the doing

Regulations to achieve specific objectives can allow both domestic and foreign retailers to thrive

October 2, 2012 02:02 AM IST First published on: Oct 2, 2012 at 02:02 AM IST

Regulations to achieve specific objectives can allow both domestic and foreign retailers to thrive
Richard Cuthbertson and Malobi Mukherjee

In an attempt to improve the economy,the UPA government has initiated a number of reforms. One of the most controversial steps is the opening up of the retail sector to foreign direct investment,which,if properly implemented,has the potential to benefit farmers,manufacturers and consumers,as well as to improve the overall investment climate. The coalition government is now under considerable pressure to roll back these measures. However,research into retail market development in other emerging countries has demonstrated that carefully designed regulations can encourage good domestic and foreign retailers to thrive in a competitive and dynamic environment,giving rise to an eclectic mix of retail formats. In these countries,such as Malaysia,Brazil and Mexico,the introduction of FDI in retail has been accompanied by corresponding regulations aimed at achieving specific objectives determined by the respective governments. In India too,it is therefore important to craft and implement policies that encourage appropriate socio-economic development,not just to conciliate to opponents in the short term.

Both the Central and state governments should learn from the experience of other emerging economies and enact legislation that fits with their relevant aims. The opening up of FDI rules can realise a great range of benefits for the Indian economy and society,but the way in which this is done is crucial. Without careful implementation,there is a danger that the current legal provisions proposed by the government run the risk of creating some of the nightmare situations advanced by FDI opponents. The brief analysis that follows highlights our concerns and suggests ways to alleviate the issues arising.

First,the provisions allow FDI to be state-controlled. This is commendable in a democracy but also may lead to a widening of the gap in economic development between the states. If some states are accepting foreign investment of more than $100 million while others are turning down such investment,this may lead to greater inequalities between the states. Moreover,that investment can only be focused on the big cities with a population of more than 1 million and so risks further polarising urban and rural India,as well as exacerbating planning and environment issues in these already congested cities. With more developmental opportunities in large urban areas,tiers 1 and 2 cities,aspirants in smaller urban,semi-urban and rural areas may increasingly migrate and add to the growing strain of population in big cities. By protecting retailers and traders in rural areas,the government risks depriving these smaller communities of investment.

Limiting foreign retailers to big cities will also inflate real estate prices where there is already a paucity of available space. To prevent any of this from occurring,the state governments allowing FDI need to consider how to implement appropriate planning and zoning laws that would encourage foreign retailers to build better infrastructure connecting the urban,semi-urban and rural areas in order to be more accessible to consumers and workers from a variety of socio-economic backgrounds. Examples from the Malaysian governments regulatory intervention in encouraging foreigners to set up in semi-urban and rural areas could be a point of reference for any advisory committee.

Another provision stipulates that foreign chains have to source almost a third of their manufactured and processed goods from small- and medium-sized enterprises. However,what happens when some of these enterprises are successful and need to scale up their operations beyond the $1 million investment limit in plant and machinery? For some categories of product,this will not be an issue,but the long-term implications should be carefully considered.

Finally,the government has reserved the right to procure food produce from farmers before companies to provide for the food subsidy schemes. While the public distribution system has been a safety net for millions in the country over the years,reserving the governments right to secure foodgrains before other companies may undermine the incentive for companies to invest in the modernisation of the agricultural sector. Alongside FDI implementation,the government may wish to revisit the debate about reforming or replacing the public distribution system with cash transfers or food coupons and learn from the examples of Brazil (Bolsa Familia) and Mexico (Oportunidades) where cash transfer schemes have proved to be both more efficient and effective.

The current proposals for opening up FDI in retail may provide a humane face and lead to great economic and social benefits but the devil is in the detail. The current FDI provisions need to be implemented appropriately based on an understanding of their long-term implications and the evidence available from other countries that are already a lot further down this road.

Cuthbertson is research director at Oxford Institute of Retail Management,Said Business School,University of Oxford,UK. Mukherjee is research fellow at Oxford Institute of Retail Management