FDI in Multi- brand Retail Trading: MSE Sector Need Level Playing Field By V.

N Prasad1 & Perumal Koshy2 Introduction India being a signatory to World Trade Organisation (WTO)s General Agreement on Trade in Services (GATS), which include wholesale and retailing services also, has no option but to open up the retail trade sector to foreign investment/participation. The process of allowing foreign direct investment (FDI) in trade sector has, in fact, began a long ago when the Country permitted 100 percent FDI in cash-and-carry wholesale trade in 1997 and nine years later, 51 per cent FDI in single brand retail segment. Recently, the Department of Industrial Policy and Promotion (DIPP) has brought out a Discussion Paper to solicit suggestions, opinions to form a consensus on the subject of FDI in Multi-brand retail trading. A number of issues, ranging from livelihood concerns, likely disturbance in existing supply chain scenario, impact on Indias micro and small enterprise (MSE) manufacturing sector as well as retail trading enterprises - the major economic enterprise-establishment constituent of the Indian economy - are involved in this. Retail MSEs: Economic and Political Force Some 25.1 million people are employed in the retail trade enterprise sector, 41.8 per cent of total non-agricultural establishments falls under the category of retail trade category. The high employment in the segment is also reflected in the NSSO 64th round data quoted by the Discussion Paper when it observed that More than 2/3rd of the total employment, in the broad category of trade, hotels and restaurants, is in the retail sector. Contribution of trade sector in general to gross GDP is placed at 15 per cent, out of which 8 per cent comes from retail

V. N Prasad , formerly Economic Advisor with World Association for Small and Medium Enterprises( WASME) and is currently associated with Global SME News an e-magazine and can be reached at < vnpj@yahoo.com > Perumal Koshy, formerly Economist with World Association for Small and Medium Enterprises ( WASME) and is currently associated with Global SME News, an e-magazine, and can be reached at < caushie@gmail.com >
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trade sector. However, these figures need not truly and fully reflect the size of the sector and its contribution, given the limitations in collecting data and information. The retail industry can be divided into (i) organized large, (ii) unorganized and (iii) informal sector enterprises. The first category retailers comprise traders who possess legal permissions or licenses to undertake the activity, are registered with sales tax/VAT etc. Such enterprises are super markets, hypermarkets, retail chains, and also the privately-owned large retail businesses. Their presence on scene, though of a recent origin, is gradually gaining in importance, and slowly eating in to the business of second category of retailers. By unorganized retail trade enterprises, we mean all those local kirana & general shops, family managed Own Account trade enterprises (Mom-Pop shops), registered under the Shops and Establishment Act (s), administered by the local authorities. Their number is very large and this category of enterprises dominate Indian scenario with a whopping 98 per cent estimated share in the total establishments. At this juncture, they, apparently, are providing tough competition to large retail outlets.i The third category of retailers includes small shops such as tiny grocery and vegetable shops run from a room of a house, paan/beedi kiosks (often selling a variety of items, like small toothpaste tubes, tooth brushes, soaps, pouches of shampoo, etc), way-side vendors, and hand carts operating without any licences. This is not any past-time activity for owners, but is an economic necessity. The Government in all probability could face severe resistance from the second and third category of retail trading enterprises as a large number of workers -either paid and/or unpaid -- would likely to be affected. Such a perceived impact on a huge chunk of our population could make it a political issue. Already Bharatiya Janta Party advised against taking any hasty step. MSEs Concerns need to be addressed This article is an attempt to address some of the issues that might come up if FDI in multi-brand retailing is permitted and to suggest possible measures that the government may consider prior to initiating this step in order to safeguard the interests of Indian MSEs, retail small and micro enterprises and also the informal sector enterprises. We do recognise that large, domestic or FDI-funded, cant

evict altogether MSE retailers from the scene, but there would be some causalities, depriving of that may or even more persons of economic activity and thus income. The DIPP Discussion Paper contains several interesting proposals and suggestions, such as reservation of jobs for rural youth; sourcing a certain percentage of products from SMEs; stipulation of a certain percentage of FDI towards building up of back-end infrastructure, logistics or agro processing, resulting in better price realisation for farmers and creation of new job opportunities; and limiting their siting in towns with certain size of population. Though the Discussion Paper heavily focuses on perceived benefits to agricultural sector and rural areas, it also believes that the new policy would benefit Indian MSEs, if a certain percentage (say 50 per cent) of their products is sourced directly by these new stores, as well as would help them overshadow some of the crippling disabilities of Indian MSEs in the context of globalization, its failure to reach out to the global market, marketing, branding and technology upgradation. Some Inputs for Policy Framework Our observations are limited to concerns, and possible solutions to issues that arise vis-a-vis SME sector. We would like to highlight some of them that the government may address and measures that might help Indian MSE sector, both trading as well as manufacturing enterprises. We shall start with the small retail enterprises. Firstly, they are currently not treated on par with micro, small and medium enterprises (MSMEs).ii In fact, no official definition of small and micro trading enterprises is available in the Country. MSME Act 2006 also did not address this issue. They, undoubtedly, need recognition as MSEs in view of their sizeable contribution to economic and social aspects. Absorbing some 25 million persons is no small contribution! Bringing retail sector under the purview of MSMEs would enable them to access benefits, schemes, bank-finance at better rates & terms. Further, this would strengthen retail MSEs and help them emerge strong to face the challenges that the big retail chains throw upon them.

Secondly, there is no fair estimate about the size of the unorganized retail sector in the country, implying that vast majority may face a hidden suffering. In order to address their concerns, special measures, such as: (a) facilities to strengthen their businesses in the event of strong competition from malls; special packages of rehabilitating them into better locations, in case of a need, and extending subsidized loans for those in the unorganized sector can be considered. Thirdly, the Government can consider introducing MSE identity card, based on registration with authorities overseeing the implementation of Shops and Establishment Act and on electricity bill for others in order to ensure that above benefits reach the targeted group. In addition, this would enable building a better data-base to formulate the future programmes. Fourthly, authorities can stipulate a spatial distance of say two kilometres between two large retailers to provide some space to small players to operate while permitting FDI in multi-brand retail trade. Such an approach would also eliminate competition between and among corporate or large retailers and eventual casualty of one, as well as provide operational space and scope for small players to live along (See the end- note on Hyderabad). Fifthly, authorities could restrict FDI funded-retail outlets from selling massconsumption items such as low and middle-end cosmetics, toiletries, grocery, food and vegetables and small packages of several food-based, cosmetic, toiletries, etc. Such an approach would help small enterprises retain a market for themselves and possibly prevent their customers to shift their sourcing of such products from large stores. Lastly, the government could consider putting in place a mechanism to shield micro and small retail enterprises from competitive practices adopted by large stores to woo customers. These practices presently include offering gifts, discounts and other offers, which can be termed as unfair in view of the formers fragile position. The proposed mechanism could be such as providing access to low-cost credit and subsidising their promotional/operational expenses through NGOs and retail traders association. What is needed here is a firm decision and a will to do. Are not their cousins in manufacturing segment enjoying fiscal and monetary benefits?

Including the provision of procuring a certain percentage of goods by FDI-funded retail outlets from manufacturing MSEs in the discussion paper is indeed a welcoming measure, if implemented. However, some issues in this regard needs to be sorted out: How can the government make sure that large number manufacturing MSEs that are not registered with the MSME ministry (over 90 percent of the total about 14 million) and those who are in the unorganised sector can also benefit? How can the government ensure that proposed procurement of a percentage of products from MSME sector will not be cornered by medium-sized and relatively larger among small enterprises? How could the government make certain this will not lead to monopolization and that new foreign retail stores would not get filled up with domestic-made foreign goods by establishing subsidiaries (already FDI to the extent 24 per cent is permitted in SMEs) and farm products from retail chains owned highly-mechanized farms? We are already witnessing fruits from Australia, U.S etc being making their mark in our minds with their advanced branding and marketing strategies. The argument that Indian farmers would benefit heavily is not quite convincing at this point. Import of fruits or vegetables by these retail chains as well distribution of their own domestic farm products would be the most probable eventuality. Further, how to make certain that the procurement policy of retailers can be effectively & successfully implemented foolproof? Private labelled goods: The trend of big retail chains eventually entering into selling products in their own brand name, by replacing existing brands from the shelves is a trend that is being observed. This is happening in the Indian context as well. For most of the branded products, alternative and cheap Carrefour or Wal-Mart or Lulu brands are available, some of them produced & processed internally and the rest sourced from private label manufacturing units in several countries. With the eventual collapse of supply chain network, these retail chains may potentially enter more actively into manufacturing as some of them -- Wal-Mart, Walgreens, Carrefour, Lulu are already doing.

In the Indian context, retail groups getting into non-trade manufacturing activity is something that needs to be restricted, as it may likely impact local brands and question their survival. In this context, the government may consider restricting retailers engaging in selling private labelled goods as well as processing, packaging & re-packaging within the premises. Also, must seriously consider not permitting their subsidiaries or other partnership ventures in the manufacturing or related activities. Strengthening MSEs To nullify possible impact on manufacturing MSEs, the government must plan and take measures well in advance to strengthen domestic industry and strengthen policies, programs and schemes to help them reach out to the global market, technology adoption etc. in addition to helpful procurement policy. These could include (a) building up technological capacities of SMEs so that they turn out quality products, (b) bringing unregistered enterprises in to mainstream by evolving a system to enable them access the benefits of various policies and programmes, and stipulating that the foreign-funded retail outlets source a prescribed percentage of their inventory/procurement from micro and small enterprises out of the proposed policy, and finally establishing an effective Regulatory Authority. If necessary, a separate legislation, as hinted in the Discussion Paper, could be considered in the interest of very large MSE sector. It is important to approach the issue very cautiously. Millions of vendors in the informal sector are involved in Indias retail trading sector. The discussion paper says, Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 per cent of which is due to avoidable wastage. It is, thus, the suggestion of building up of back end infrastructure, which is a good thing. This will then be sold through hyper markets. There are millions of people involved in the supply chain that help reach vegetable and fruits to the end-customers, beginning with farmers/ producers to the vendors who sell them. There is a need to build capacity of those in this chain. Just for instance, waste at vendors end can be reduced substantially by facilitating a technology adoption by millions of vegetable & fruit vendors, i.e., by way of providing carts with battery-operated refrigeration facility (refrigerated

carts/ insulated ice boxes as being practiced by ice-cream vendors), financed through banks. To conclude, it can be said that in the context of free trade regime, and India too being part of that global market, opening up of retail sector is imminent. We are now part of the global market. Indian traders and business communities might survive the competition. However, there would be causalities initially, particularly among MSE retailers. The Governments role is to bring down the causality rate during the transition phase to the minimum. The challenge before the government, therefore, is to maintain symmetry between safeguarding the interests of MSEs, both retail trading and manufacturing, and respecting WTO agreements. It is important to plan the details carefully in consultation with all the stake holders. While planning the details, the Government must also take into account factors that can create a level playing field for MSEs and leave a space for competition to remain, as the time passes. All stakeholders involved must get benefited.

Notes
In the middle-class dominated Vanasthalipuram, Hyderabad, there were dozen such retail outlets in an area of about 15 square kms. until some two years back. The breakup was: Aditya Birlas More, 4; Spencers, 1; Reliance Fresh, 2; Heritages Fresh, 2; Magna, 2 (one of these was Cash and Carry type) and Subiksha, 1. Of these, five are no longer in business now (one each of Reliance, Heritage Fresh, Spencers and Subhiksha and both the Magna stores). ii Retail and whole sale trade establishments, general merchandize stores are not recognized as Small Scale Service Business Enterprises (SSSBEs). Also, they do not come under the purview of MSME ministry.< http://business.gov.in/Industry_services/illustrative.php>
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References
DIPP. (2010). DISCUSSION PAPER ON FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL TRADING. New Delhi: Department of Industrial Policy and Investment Promotion .

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