FDI in Retail: V?

Single brand is no less harmful?

By Dr Ashwani Mahajan?

FDI is single brand was first allowed to the extent of 51 per cent in February 2006. FDI in multi brand retail remains prohibited till date. Indian retail sector witnessed FDI for the first time when 100 percent FDI was first permitted in cash and carry wholesale trading under the government approval route. The same was brought under automatic route in 2006. In November 2011, Union Cabinet approved 51 per cent FDI in multi brand retail and increased the limit in single brand retail to 100 per cent subject to government approval.

Following stiff resistance from political folk, traders’ associations, social organisations etc. government was forced to back track from its earlier decision to bring FDI to the extent of 51 per cent in multi brand retail. But in the noise of strong opposition to FDI in multi brand retailing, perhaps negative implications of 100 per cent FDI in single brand retailing could not be discussed in appropriate manner. Taking advantage of this government has now notified 100 percent FDI in single brand retailing.

What is meant by FDI in single brand

Let us first understand the meaning of 100 percent FDI in single brand retail. 100 per cent FDI in single brand retail would mean 100 percent ownership to multinational retail giants with a brand name. Single brand retail implies that a retail store with foreign investment can only sell one brand. Brand could be for products or services or could be single and multiple products, or could be manufacturer brands and own label brands. Examples of such brands in food chains are Pizza Hut, McDonald’s, KFC etc. Electronic brands include Phillips, Samsung, Sony, LG, Nokia etc. Volkswagen, Nissan, Toyota, BMW etc. are major automobile brands.

Harmful implications of multinational food chains

Allowing these companies to open their outlets with 100 percent ownership will have a long term implications for Indian economy in general and enterprises in this sector in particular. If we look at international experience, multinational food chains have thrown out small food outlets in UK, which has specifically affected Indians, settled in UK. There is no reason that same would not be repeated in India. We understand that millions of people in India are engaged in food outlets like Dhabas, Chinese and South Indian food apart from small khomcha vendors selling Tikki, Chat Papri,. These small food outlets face a danger of extinction due to multinational food chains.

If we try to a relate this decision of the government to allow 100 percent FDI in single brand retail with a legislation called ‘Food Safety and Standards Act 2006’ and recently notified ‘Food Safety and Standards Rules 2011’, then implication of opening up of in multinational retail chains would be more clear. Recently notified rules impose stringent conditions with regard to sale of food products would make the survival of small food outlets almost impossible. FDI policy of the government will pave way for replacement of these food outlets by multinational food chains. India is a country of small fast food outlets, which are called ‘unorganized’. Imposing stringent conditions on these small vendors, are destined to favour big companies in food chains.

Electronics and Telecom Sector would get further hit

Opening up FDI in retail sector has already affected our electronic and telecom industry adversely. A nation which is a world leader in space technology, missile technology, IT & Software sector, has been pushed backward by FDI in single brand retail. Our Indian brands could not grow because of intense competition from the foreign brands and nation’s dependence on foreign countries with regard to telecom equipments has increased manifold during this period, due to FDI in single brand retail. With more than 50 crore mobile connections in the country, there is no significant presence of Indian brands in cellular phones; foreign brands still occupy major market share in home entertainment and appliances. Despite security risks, our government has failed to restrict imports of telecom equipments from China. According to industry’s estimates if we continue to increase our telecom imports at this speed, telecom imports may exceed even our oil imports bill in near future.

Indian apparel Industry would also get adversely affected 

Thanks to the cost effectiveness, Indian brands in apparel sector have made headway in international markets in recent years. The same is likely to get reversed because of this decision of the government. The government’s notification of 100 per cent foreign direct investment (FDI) in single brand retail is paving the way for foreign brands like Reebok and Nike to have complete stake in their retail outlets in India. As of now, Indian brands rule the markets in India. They may lose markets to multinational giants, as the shops opened by them will not sell Indian brands.

International automobile brands may hit growth of Indian brands

Indian automobile sector is one of the most important drivers of our economic growth. Tata Motors, Mahindra and Mahindra, Maruti, Bajaj, Hero Honda etc. are major Indian automobile brands. Cost effeciency of Indian automobile industry has helped in making them international brands and our cars, two wheelers and utility vehicles are being exported to many developing and even developed economies. Invitation to international brands to open their wholly owned stores is likely to affect the market of our brands.

30 per cent compulsory sourcing from domestic small firms- A misnomer

Government, which is counting on benefits of FDI in single and multi brand retailing, is perhaps ignoring the adverse impact of off shoring by these multinational retail giants. Notification of the government says that foreign single brand retailers will have to procure their products from domestic small firms to the tune of 30 per cent. However, the same is not acceptable to the international trade experts. Experts believe that this decision of the government could be challenged in World Trade Organisation, where India has given a binding commitment that it will not discriminate between domestic and foreign procurement. Thus with multinational giants entering into India, this decision would not be maintainable in WTO. Therefore apprehensions of the Federation of Indian Micro, Small and Medium Enterprises (FISME) seem to true that it would affect the domestic small industries adversely. Therefore government’s argument that 100 FDI in single brand retail would benefit the economy by way of creating jobs in small industries is a misnomer.