Merits and Demerits of Retail FDIPublished on: December 12, 2011 - 23:26

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Opinion

BY SANTOSH R KENKRE

PRESENTLY, there is a major countrywide debate raging about FDI in retail sector. First question to your

mind will be: will really mega stores like Wall Mart, the most recognizable face of FDI in retail, come to

Goa?

It is unlikely to come for next five years, unless new government which will be elected early next year,

warms up to the proposal. But, can anyone say with certainty that it will not come to Goa within 10

years? Let us therefore, try to know about the mega stores phenomenon.

Mega stores like Wall Mart are massive retail outlets, each dealing in about one lakh -- I repeat one lakh

-- different items. They buy goods in mind-boggling quantities, directly from producers, and then, with

extreme mechanisation and automation, store, process, transport them and later sell them to consumers

at lowest possible prices.

Impact on Shopkeepers

But how can it affect the shopkeepers -- retail and wholesale? I give an example: let us say presently, a

producer of goods (farmer or factory owner) sells his goods to a wholeseller at `60. Next, the wholeseller

and the retailer add `40 as their margin and sell these to the consumer at `100.

What mega stores will do is pay the producer the price of `60, add their margin of `30 and sell the goods

to the consumer for a cheaper price of `90, thus benefiting the consumer by `10. It can afford to sell

cheap due to its scale of operations, cheap worldwide sourcing, extreme automation, efficient processes

like storage and transport, no intermediary traders etc. However, in the process, the wholeseller and

retailer can be eliminated or seriously affected.

It may be noted here that, mega stores can alternatively squeeze the  producer and buy at `50 from him

in the above example, or if the said producer is a farmer, mega stores can pay him an increased price of

`70 for a better quality farm product.

Advantages and Disadvantages

Talking about the advantages, firstly, the producers, chiefly the farmer and later the consumers will

benefit as shown in the earlier example. Consumers will get top quality goods of wide variety at cheap

prices. Further, mega stores give inputs, share technology with farmers, who can thus increase their

productivity. Wastage, spoilages will be reduced since mega stores have massive cold storages, efficient

systems for processing, sorting, packing, transporting etc. Due to increased productivity and less

wastage, availability of goods will increase in the market by which, inflation can be contained.

Government tax revenue will increase since the ‘cash economy’ will be converted into ‘accounted

economy’. Also, many white collar jobs will be created, which I cannot quantify.

However, as we have seen in the earlier example, wholesellers and retailers can be seriously affected.

Due to extreme mechanisation and automation, many jobs will be affected including those of clerks,

coolies, service providers, small transporters etc. Further, Indian industrial jobs and industry can be

affected since mega stores will source its goods from anywhere in the world. Inefficient industries in India

can get killed.

Wall Mart buys in huge quantities hence it may not buy from small producers, leaving them dry. Wall

Mart can virtually “demand” lesser prices from industry and other suppliers, including farmers at times,

because of its money power. Government’s proposed condition of minimum 30 per cent purchases by

mega stores from Indian industry is likely to be ‘shot down’ by the WTO!

Mega stores can virtually become monopolistic and thereby kill competition from traders, with cheaper

selling prices. Mega stores remains open 365 days a year, it has lots of selling gimmicks like ‘super card’

etc, by which it can pull customers away from kirana shops.

In general, I estimate that each trader, and service providers to them, can be affected to the extent of

anywhere between 10 per cent to 70 per cent! And there are four  to five  crore traders in India, who face

this situation today.

Benefits for Goan Consumers

Talking about Goa, there are not many farmers in Goa, hence, the beneficiaries of mega stores in Goa

will be chiefly the Goan consumers. However, the Goan industry will have to severely compete with at

least the best in the country, otherwise the mega stores will not buy their produce.  Instead, mega stores

may buy such goods and produce, cheaper from Pune, Bangalore, Japan or Shanghai. However, the most

affected will be wholesellers and retailers of Goa if mega stores set up their business in Goa, which

hopefully, it will not, in this decade.

Even if mega stores do not come to Goa, another fear lingers. Goa is surrounded by three mega cities,

Mumbai, Pune and Bangalore, which could have mega stores.   Mega stores in these three cities can

affect the operations of many suppliers and manufacturers within 1,000 km of these cities, positively or

even negatively. These mega stores can choose to buy from an efficient industry by which it can benefit,

but if it chooses to buy from good competitors of an inefficient industry, it can get killed in the long run.

Another fear is that lots of Goan consumers can visit these cities once in a while and make heavy

purchases, thereby affecting Goan shops.

The million dollar question for the Goa government  or Goan society is, should we allow such mega stores

to set up their shop in Goa, by which, out of 10 Goans, say three  Goans (traders and partly industry) get

seriously affected but the rest seven  Goans consumers benefit marginally.

Within a few months, Goans will vote for a new government, so take your call and vote.