Parliament is debating the issue of the Cabinet decision on multi-brand foreign direct investment (FDI) in the retail market in cities with a population of one million persons and above. Direct investment in economic reckoning is labelled as good investment because it is stable investment and better than the fly-by-night kind — portfolio investment which is liberally allowed in our stock markets. The FDI is considered good investment because it goes, if not wholly, at least partly into the creation and development of infrastructure and cannot be taken out easily. The investor gains and suffers with the economy of the host country and has, therefore, interest in the growth of the economy.
Portfolio investment, on the other hand, can cause serious problems at the time of slump in the stock market. The volatile behaviour of investors can make the stock market go spinning in downslide, specially if the country does not have enough foreign exchange reserves to protect itself against the flying-out capital. Thus, the first aspect of FDI that needs to be appreciated is that it is a stable investment which endures with the economy in its thick and thin phases. Now we are faced with the question of this investment in the retail market and that too in multi-brand retail and with 51 per cent share-holding.
It is little realised that apart from the demand and supply gap, which may be there or not, the retail market, dominated by small shops and vendors, is the major culprit in giving vent to escalating inflation in the country and it needs to be disciplined through the creation of effective competitive alternatives. Corporate food stores and multi-brand stores for other products can be the only alternative in a free economy. When farmers were hardly able to get 60 paisa per kg of muskmelon in the wholesale market recently, the vendors in Ludhiana did not lower their retail price below Rs 10 per kg. Here it is a more than 17 times margin which cannot be justified by any standard. Today, in several wholesale markets of Punjab, potato is being sold by farmers at less than even Re 1 per kg. Yet the vendor sells it at Rs 10 per kg. In a Reliance store the price is Rs 5 per kg.
Just another example from the NCR — cauliflower in corporate stores sells at Rs 5.80 per kg and in the unorganised market the price is between Rs 8 and Rs 9 per kg depending upon quality. Comparative figures are Rs 6 and Rs 15 per kg for spinach, Rs 18 and Rs 25 for carrot, Rs 120 and Rs 150 for apple, and Rs 28 and Rs 40 per kg for mosambi in corporate stores and the unorganised market respectively. In fact, the unorganised market is a misnomer. It is so highly organised, in spite of a large number of vendors, that they are united to charge almost the same price for the same quality of the product. Prices may differ somewhat due to the quality differences. Even the vendors sell the products door to door at the same price.
Is it not an irony of fate for producers that after investment and the tiring effort for four to six months for vegetables and for a full year for fruits, with all the production risks suffered, they should hardly receive 10 per cent and the maximum 20 per cent of the consumer price! The retailer with no risk and only with a small place advantage with least investment should appropriate 80 to 90 per cent of what the consumer is forced to pay! Here the middleman does not do any processing to convert the produce into a new product. He sells the same raw produce and fleeces both the producer and the consumer with impunity because he has monopoly through a virtual cartel of small shopkeepers and street vendors in the absence of effective competitive alternatives.
The retailer in the country is such a bad conductor of the pulses of demand and supply that the benefit of high prices is not allowed to flow to the producer and that of low prices to the consumer. Breaking this unwholesome nexus will be possible only through the reduction of profit margins on the strength of a high volume of business by corporate stores in place of high margins on low volumes charged by vendors and small shopkeepers. What is true in the case of vegetables is equally true for other commodities, including food and non-food items.
Thus, the corporate sector must be freely allowed to enter the retail market in the interest of producers as wells as consumers. Second, since the retail market is extensive and requires billions of dollars to provide quality services to consumers, it is essential that the necessary infrastructure must be developed to reach small producers and consumers to provide a sustainable connect. Also, modern technology and infrastructure for an efficient conduct and performance of the market are a must to efficiently operate in the domestic and international markets.
Our corporates alone are not as yet in the financial and knowledge position to operate single-handed. Collaborative retail market projects can be of tremendous value for us to improve our retail market conduct to fulfil the aspirations of the consumers in the emerging economy of the country. The government in this respect has played its role very diligently and within safe margins. The mandatory provision of investment in infrastructure, including cold stores and warehouses as well as cold chains, etc, will improve not only the retail sector but also wholesale markets on a stable basis. Further, the condition of more than 30 per cent purchase of commodities from small producers is the right decision and a good safeguard. As markets develop, this provision of 30 per cent will automatically increase as producers get accustomed to and trained in quality production as demanded by corporate stores.
As to the fate of small shop owners and vendors, they have their niche markets where customers are used to do bargaining and are treated on a personal level. Nowhere in the world have small shop owners and vendors gone out of business in the presence of corporate openings so far. It is a misplaced fear. The only change that has occurred so far is that an element of price discipline has entered into their approach, which needs to be increased significantly through the creation of an alternative competitive market on an extensive scale.
One wonders why the government is restricting the spread of corporate retail and foreign direct investment to the cities having one million and more population only! It is unfortunate that opposition parties in our system of democracy are attuned to opposing any move by the government, howsoever good it might be for the public. Opposition for the sake of opposition is not good for any stakeholder. But who listens to logic in a vote-bank-oriented polity!
