"Decision not taken leads to expectation, a god decision reverted leads to frustration."
That's the case with recent FDI fiasco in India. Several govt. came and faded away in years after the economic liberalization of 1991. But, industry has just waited for policies to keep pace with the competition globalization poses. Reforms started in 1991 with an appreciable speed but, once Indian economy caught speed the process of economic reforms slowed down. Thus, policies have no kept pace with changing needs of economy. A no. of policy changes are on hold like reform in the companies act, land acquisition act, labor reforms, mining sector reforms, agricultural reforms etc. FDI in retail was one such reform that has been much awaited not only for its anticipated impact on multi-billion dollar retail industry of India but, also for the positive impact it is expected to have on the most neglected yet most influential sector of Indian economy i.e. agriculture (OK influence of agriculture on Indian economy is debatable but, that can be done later).
Going forward with its agenda of economic reforms the UPA govt. allowed 51% FDI in multi brand retailing and 100% FDI in single brand retailing in late November 2011. However, opposition parties headed by BJP and even the members of the coalition govt. showed dissatisfaction with the decision citing the plight it will bring for millions of retailers in the country. Parliament's winter session which started last week could not be conducted due to constant hindrance by opposition and even supporting parties and as a result of lack of consensus the govt. had to put the decision on hold to focus on other issues and get parliament back into functioning mode.
The decision of FDI in retail had a no. of motives.
First, it would attract foreign capital to Indian economy which faces capital deficiency, thus helping in creation of productive assets.
Second, it would bring in foreign exchange at a time when Rupee is depreciating. Thus, arresting some slide in value of Rupee.
Third, the inflow of foreign exchange would increase RBI's Forex reserves thus, adding to its fire power to fight recession 2.0.
Fourth, the forex inflow would also help in financing the current account deficit which in this fiscal is expected to grow beyond the comfort level of 3% of GDP. Since FDI inflows are sticky unlike FIIs they pose less danger of volatility and add to the domestic capital creation process.
Fifth, the decision of FDI in retail would have signaled the determination of govt. towards economic reforms. Thus, boosting investor confidence which at present seems at all time low.
Sixth, FDI with itself brings improved technology which otherwise is costlier to acquire. Thus, FDI in retail would have helped in redesigning the whole supply chain in a more efficient and productive manner.
Seventh, presence of large retailers procuring directly from farms would have helped in improving conditions on Indian farmers and also in elimination of middlemen who eat up all the benefits farmers should get from their produce.
Eighth, India has been lagging in attracting FDI. This, step of govt. would have sent positive signals to investors thus, increasing FDI inflow in other sectors too.
Ninth, once the big retailers started procuring from Indian farmers and SMEs they would have developed a supply chain and keeping in mind the low labor cost in India I'm pretty sure they would have found Indian firms cost effective to procure for their global supply too. Thus, boosting Indian manufacturing.
Of course, their are cons of the decision too. Like, the competition India's small retailers would not be able to stand i.e. fear of loss of millions of jobs which may lead to net job creation equal to zero. However, big retailers require lot of experience to adjust in Indian market and compete with small retailers who have the magic of personal touch. They will take years to gain that experience and till then India will be able to create no. of alternative job opportunities to compensate for lost jobs. So, benefits of FDI in retail far out weight its harms.
However, govt.'s step to hold the decision of FDI in retail has given bad signals across the industry and globally. This, adds to investors fear of political instability and policy inaction India faces. It will further gloom investment scenario. Holding on this decision like all other policies was still better but, reverting back a taken decision shows absolute inefficiency and lack of hold of govt. which is not a good signal. I just hope govt. in present session of parliament comes up with some policies which can nullify the negative impact the FDI suspension has created on market mood.
P.S. ( People reading it plz. post ur views on the topic if something seems missing as it will add to my knowledge and improve my writing)
The decision of FDI in retail had a no. of motives.
First, it would attract foreign capital to Indian economy which faces capital deficiency, thus helping in creation of productive assets.
Second, it would bring in foreign exchange at a time when Rupee is depreciating. Thus, arresting some slide in value of Rupee.
Third, the inflow of foreign exchange would increase RBI's Forex reserves thus, adding to its fire power to fight recession 2.0.
Fourth, the forex inflow would also help in financing the current account deficit which in this fiscal is expected to grow beyond the comfort level of 3% of GDP. Since FDI inflows are sticky unlike FIIs they pose less danger of volatility and add to the domestic capital creation process.
Fifth, the decision of FDI in retail would have signaled the determination of govt. towards economic reforms. Thus, boosting investor confidence which at present seems at all time low.
Sixth, FDI with itself brings improved technology which otherwise is costlier to acquire. Thus, FDI in retail would have helped in redesigning the whole supply chain in a more efficient and productive manner.
Seventh, presence of large retailers procuring directly from farms would have helped in improving conditions on Indian farmers and also in elimination of middlemen who eat up all the benefits farmers should get from their produce.
Eighth, India has been lagging in attracting FDI. This, step of govt. would have sent positive signals to investors thus, increasing FDI inflow in other sectors too.
Ninth, once the big retailers started procuring from Indian farmers and SMEs they would have developed a supply chain and keeping in mind the low labor cost in India I'm pretty sure they would have found Indian firms cost effective to procure for their global supply too. Thus, boosting Indian manufacturing.
Of course, their are cons of the decision too. Like, the competition India's small retailers would not be able to stand i.e. fear of loss of millions of jobs which may lead to net job creation equal to zero. However, big retailers require lot of experience to adjust in Indian market and compete with small retailers who have the magic of personal touch. They will take years to gain that experience and till then India will be able to create no. of alternative job opportunities to compensate for lost jobs. So, benefits of FDI in retail far out weight its harms.
However, govt.'s step to hold the decision of FDI in retail has given bad signals across the industry and globally. This, adds to investors fear of political instability and policy inaction India faces. It will further gloom investment scenario. Holding on this decision like all other policies was still better but, reverting back a taken decision shows absolute inefficiency and lack of hold of govt. which is not a good signal. I just hope govt. in present session of parliament comes up with some policies which can nullify the negative impact the FDI suspension has created on market mood.
P.S. ( People reading it plz. post ur views on the topic if something seems missing as it will add to my knowledge and improve my writing)
AWESOME Akanksha !!!
ReplyDeleteAdding on to that , If we closely check the draft , the multi brand retail players were allowed to open stores only at cities which have more than a million population. This alone saves around 80% of the kiranas. Also in those big cities ,Kiranas would still remain a hot favorite for the people who prefer accessibility , longer credit intervals .
The main reason why I see Opposition parties opposing this because , the main source of donations ( irony intended ) to these parties come from the middle class people and also these mass constitute the highest vote bank for them . How could they leave them??
Regarding the inflow of FDI , My personal view is that it would have attracted around $2.5 to 3 billion in the horizon of 5 to 6 years . Hence, I dont see any big thing happening in the short term .
Another point is that , if we look into the strategy of multi brand retail store , a unique point is almost 80 percent of these would be stationed outside around 5 to 6 kms away from the city and the indian consumer psyche is always to see value for money . Hence the kiranas would still do good in the presence of these stores . Infact they would get a boos t to their back end logistics . There would be some multi brand stores which would pose a serious threat like 7eleven which generally position their stores inside the city .