India, Bangladesh, Ethiopia, Congo and Myanmar are the only five countries in the world’s 25 largest countries by population, which still do not permit foreign direct investment (FDI) in (multi-brand) retail trade. In the top 25 nations by GDP (PPP), India is the only one. Does India really want to be in this “elite” group? Even Ethiopia is negotiating with Walmart and Tesco to allow them to open stores in the country.
Our “friendly” neighbour Pakistan permits foreign investment in retail trade. In a 2011 report, Deloitte included Pakistan as amongst 10 hidden heroes – the next generation of retail markets. Carrefour operates two hypermarkets in Pakistan and is planning to open seven more. Germany’s Metro operates 10 hypermarkets.
Local Pakistani retailers have been largely welcoming of foreign investment in the country’s retail sector, seeing foreign retailers as helping improve the quality of the overall market. The foreign chains have affected Pakistani consumer behaviour and the principal beneficiary appears to be local retail chains. People from the middle and lower income groups used to think that supermarkets were meant for the richer classes. Now they know better and prefer to shop with local supermarkets.
The recent noises from the corridors of power in New Delhi seem to suggest that Prime Minister Dr. Manmohan Singh wants multi-brand foreign retailers to come in state by state, as the UPA government is not able to get majority consensus on this issue, with allies such as Mamta Bannerjee still opposing the move.
This is not too different from the way China opened up its retail sector. Initially, China also only allowed foreign retailers to open in select metropolises, such as Beijing, Shanghai and Shenzhen, and, moreover, only in certain districts within those cities. Through these “invisible barriers”, China succeeded in giving local retailers protection, while, at the same time, the local Chinese learnt from the more efficient business models of foreign companies.
Even though the world’s largest retailer Walmart has opened around 340 stores in China in 16 years, it still remains smaller in revenue terms, when compared with local retailers such as Suning, Shanghai Bailian Group, Gome and Dashang.
Allowing foreign retailers to set up shops does not guarantee their success. The exits of Best Buy from China, Walmart from Germany and Carrefour from Korea demonstrate the incapability of multi-national retailers to fight local competition due to lack of understanding of local consumer tastes, preferences and culture.
Opening up Indian retail to FDI (even if it is restricted to one million plus cities with a combined population of 142 million in 2015) will help in the addition of 330 million square feet of new retail space. This will create a minimum of 4.58 million new jobs.
This new retail space will generate annual revenues of Rs.7.92 trillion and taxable profits of Rs.238 billion. This translates to Rs.1092 billion in GST collections (@ 16% GST), Rs.73.5 billion in corporate income tax and Rs.82.5 billion in personal income tax collections. This is an increase of more than 7.6% in the tax collection of the centre and states.
Even if only half of this new retail space is created by foreign chains, it translates to investments of Rs.1617 billion ($29 billion) @ Rs.7000 per square foot for infrastructure and Rs.2800 per square foot for inventories.
New organised sector retailers will have annual sales of Rs.61.5 billion of farm produce (including unprocessed meat, fish & seafood). At an average annual yield of Rs.30,000 per farmer/fisherman (in 2015), it means better selling prices for 2.05 million farmers/fishermen.
Some politicians have said that prices will go up. Is this possible? Before the telecom sector was opened up, the cost of a long-distance (STD) call was Rs.20 per minute, which translates to Rs.60 at today’s value of the Rupee. And we had to wait for up to three days to get a call connected. What is the cost of the same call today? Just 50 paise per minute – less than 1%. Freeing up of markets and increased competition leads to a reduction in prices and not an increase – no matter what form of economics one follows.
So why are we allowing politicians (with the ulterior motives of protecting tax-avoiding traders) to mislead the aam aadmi? India urgently needs a more important law than the Lokpal Bill – we need a Prevention of Misleading of Public by Politicians Act.