The retail sector, which is the fourth largest contributor to GDP has attracted lot of attention It is being termed as one of the sunrise sectors in the Indian economy. Should FDI be allowed in Indian retail? This topic is fast becoming a rage among the academicians and researchers all over the world.
A closer look at the Indian at the Indian retail landscape will reveal that it is primarily made up of two sharply contrasting segments big chain outlets and small traditional stores. Surveys have confirmed that Indian retail sector comprises mostly of local kirana shops that have low labour productivity when compared with retail sectors in other countries. This is largely attributed to the low skilled and inefficient supply chain processes. Big chain outlets besides driving high labour productivity, being more organized also create more jobs and promote employment generation in this sector. The greater fear that SME businesses in India have is that there may not be a level playing field for them when aggressive global players arrive on Indian shores who will focus on capturing market share by lowering the cost of goods thus impacting the profit margins. But government goodwill for SME businesses far outweighs this downside as we look at it today. The investment climate with its complex tax structure and the legal framework penalizes large stores that operate across different states while SME businesses have it relatively easy. Hence although cost of goods is lower for large chains, the profit margins of small retailers are higher.
An important challenging aspect is establishing global quality standards. Globalization is bringing new challenges to retail-quality-control. With the globalization of production, and supply and retailer chains, ensuring the safety and quality of products is vital. Take for example recent health concerns arising from bird flu etc. To be able to participate fully in global markets, exporting countries will have to acquire the capability to conform to globally accepted standards in terms of quality, safety, health and environment.
Once FDI is allowed in Indian retail, the better buying experience, product choice, quality, strict adherence to labelling laws etc. are all important to get the support of Indian consumers. The huge Indian consumer market should not be turned into dumping ground for sub-standard products. Hence stringent quality standards have to emerge.
While I advocate the entry of FDI in retail, the challenge of how new foreign business houses can sell the social and economic benefits to people of India is humongous. If not rolled out carefully there is a good chance that industry may find itself blindsided by its short-sightedness.
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