FDI in retail : Clear Policy, cloudy implementation.

The panel discussion on FDI in retail was one of the highlights of the Retail Leadership Session 2013, and attracted a ‘standing room only’ audience.

From L-R: Rakesh Biyani, Joint Managing Director, Pantaloon Retail (I) Ltd.; Ramanathan Hariharan, CEO, MAX & Board Member, Landmark Retail; Raghunath Dada Patil, President, Maharashtra Shetkari Sanghatna; Sanjay Pugalia, Editor, CNBC AWAAZ; Kumar Rajagopalan, CEO, RAI; Bijou Kurien, President and Chief Executive – Lifestyle, Reliance Retail; Arpita Mukherjee, Professor, ICRIER, Delhi; Ajit Joshi, CEO & MD, Inniti Retail Limited and Shilpa Gupta, Head-Retail and FMCG, FICCI

From L-R: Rakesh Biyani, Joint Managing Director, Pantaloon Retail (I) Ltd.; Ramanathan Hariharan, CEO, MAX & Board Member, Landmark Retail; Raghunath Dada Patil, President, Maharashtra Shetkari Sanghatna; Sanjay Pugalia, Editor, CNBC AWAAZ; Kumar Rajagopalan, CEO, RAI; Bijou Kurien, President and Chief Executive – Lifestyle, Reliance Retail; Arpita Mukherjee, Professor, ICRIER, Delhi; Ajit Joshi, CEO & MD, Inniti Retail Limited and Shilpa Gupta, Head-Retail and FMCG, FICCI

Panelists included Ajit Joshi, CEO & MD, Inniti Retail Limited, Arpita Mukherjee, Professor, ICRIER, Delhi, Bijou Kurien, President and Chief Executive – Lifestyle ,Reliance Retail, Raghunath Dada Patil, President, Maharashtra Shetkari Sanghatna, Rakesh Biyani, Joint Managing Director, Pantaloon Retail (I) Ltd and Ramanathan Hariharan, CEO, MAX & Board Member, Landmark Retail.

The panel focused on the design of current policy as well as the likely shape of its implementation.

In terms of policy design the view was that – the fact that there was a policy – was a clear directional cue to the industry. In terms of its “design” the FDI policy has separate norms for single brand and multi-brand retail. This is an artificial distinction, since Retail “works” not on brand but on category.

At the same time, the decision to implement FDI has been left to the states – resulting  in a situation where not all states are willing to implement FDI (see map).As Rakesh Biyani, pointed out, what this means is that actual implementation is dependent on having a state level trade policy – which will provide clarity on the tax regime,  interpretation of the sourcing and back end (and any other) conditionalities as well as the resultant impact on job creation.So, while the media attention has been on statements emanating from the FM’s office and the PM’s office – the rollout will be about interfaces with the state government – and here there is lack of clarity.  FDI

 

This lack of clarity has meant that , while the market opportunity has been positioned to international investors as being national, the rollout is at a regional or even state level.  This disconnect is causing industry and investors to adopt a “wait-and-watch” approach as Ajit Joshi pointed out. For example – the difference in tax rates between states is creating artificial barriers – leading to the phenomenon of “inter-state smuggling”. Taxes on mobile phones range between 4 and 14.5% – which means that there is a case to sell the product in some states over the others.   “Policy focus needs to be on encouraging consumption” – he added  – “and Government needs to see modern retail as being a partner in creating greater revenue. For example, 65% of Croma’s transactions are via credit card – which means these are legitimate transactions and greater consumption will only lead to greater tax collections”.

From a supply chain perspective, there were two important insights.

The APMC (Agricultural Produce Market Committee) is a standard model for selling produce “from farm to fork” – developed by the central government. Again – the implementation is not uniform and the map enclosed above shows whether or not states have adopted the APMC.  Adopting the APMC is part of the clarity required in creating state level trade policy as well as debottlenecking the supply chain. As Bijou Kurien explained “There are currently three types of traders at the farm gate – the actual seller, the short term speculator (the Mandi Buyer) and the pure commodity speculator”. Of these – the Mandi buyer enjoys an information arbitrage because he has his “ear to the ground” in terms of local knowledge of crop yield and is able to hold the farmer to ransom, in the absence of a cold chain or other  infrastructure which can prolong the life of the produce.   The “Mandi” has outlived its utility and purpose. So FDI rollout is also about ensuring that these supply chain issues are addressed.

The second aspect is as follows:  Opening up retail has to be driven by ensuring that the customer gets a better deal. This can only happen when economies of scale can come into play, and critical infrastructure such as cold chains are created.  In every market that has been opened up, Retail sources from SMEs.  But, SME’s by their nature cannot provide capacity at the national level, which requires the retailers to develop multiple supply arrangements.  A natural process of competitive “weaning out” then takes place – and pan-national supply and capacity is created over time. In the Indian context, this natural design gets thwarted when you super-impose artificial geographic constraints based on sourcing and back end investment conditionalities at a state level.  This – as Bijou Kurien pointed –will mean that you are “de-scaling rollout” – which ultimately means that price advantages cannot reach the customer.

Bottlenecking the supply chain is not good for the farmer either. As Raghunath Dada Patil explained – the farmer today is subject to so much price volatility – that he is not able to partner to create scale. For example “ In one year Tumeric was priced at Rs. 21,000/ quintal, the very next year it was at Rs 3,000/quintal. Some level of volatility is natural and is good – for example 10 to 15% – but 700% will and does kill farmers” – he explained, using an evocative analogy “if you want to defang a Doberman, you cut off the entire tail, not half an inch at a time!”

“Anti-FDI is anti-farmer” he continued, “Because the producer is also a consumer. The requirement is that the gains from investment in terms of being able to participate in the value creation of contract farming has to trickle down to small and marginal farmers – then the debate will shift away from whether or not we need FDI to “how” we get the rollout done efficiently”.

FDI implementation can learn some important lessons from other sectors – notably the automobile sector. As Ramnathan Hariharan pointed out – in the automobile sector, the Suzuki experience is a good precedent  – of using overseas technology collaboration and capital to jump-start the Indian market, and create a large ecosystem of SME’s who feed the market.

The industry does not need capital for expansion. FDI rollout is not about needing dollars or euros to be invested in India – the gap is that local industry can learn and leapfrog from the decades of international experience available in running large retail chains.  In any case, in the food category for example, it will take at least 15 years to scale and profitability – and so any fears of capital drain via remittance of profits are outdated.

Relevance of local kiraanas – The panel was unequivocal that FDI is no threat to the local retailer. By definition the local retailer understands the local catchment much better.  Increasingly, they are adopting modern trade practices and being treated by FMCG and other manufacturers on the same footing as modern retail – so there is little question about survival anymore. The question is about how large they will grow – the panels view was that in a 10 to 15 year horizon, they will still constitute 85% of the market.

Perhaps the discussion can best be paraphrased from Aripta’s statement. “Now that there is a policy, its upto industry to explain to government the need for two  “Preferably’s” and one “Maybe”.  In other words, the eventual design of multi-brand policy should focus (as it does for single-brand) on sourcing “preferably” locally, investing “preferably” in the back-end, and, maybe, integrating with the e-channel as required.

 

 

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Retailers Association of India (RAI) is the unified voice of Indian retailers. RAI is a not for profit organization (registered under section 25 of Companies Act, 1956), works with all the stakeholders for creating the right environment for the growth of the modern retail industry in India. RAI is the body that encourages, develops, facilitates and supports retailers to become modern and adopt best practices that will delight customers. RAI has a three charter aim of Retail Development, Facilitation and Propagation.