ADVERSE EFFECTS OF FDI IN RETAIL

2/10/2016

FDI in Retail
Adverse Effects

Section-E Group-10
Jyotinmoy Roy

PGP/19/262

Vidish Verma

PGP/19/297

S Madhu

PGP/19/280

Jatin Bhoj

PGP/19/261

ADVERSE EFFECTS OF FDI IN RETAIL

Introduction
The first set of reforms were introduced in the
year of 1991; its been 20 years still the
countrys socio-economic health is no good.
The announcement of FDI in multi brand retail
by the UPA government asks for serious
outlook. As mentioned by Suvrata Chowdhary
the debate so far is threefold:
(a) One section which is projecting huge rise of
investment in infrastructure and thereby
increment in the employment levels.
(b) The second group is skeptical about the
opening of markets for foreign retail giants like
Walmart, Carrefour, K-Mart etc. not because
they fear that it would affect the overall
development of the economy. Rather, this
group fears competition from the big foreign
companies which have deep pockets to
procure products from the world market. Thus,
it would affect their profits by a huge margin.
(c) The third group comprises of the
unorganized retail sector which fears its
elimination from the market in the long run.

Stakeholders
To understand the situation in detail and the
adverse effects of the policy lets look into the
vegetable retail sector:
The traditional flow chart of retail vegetable
produce consists of:

FarmersAgentsWholesalersTraditional
retailersCustomers

When the foreign company comes into this

equation under FDI, it simply removes the

middle layers and acts as a bridge between

the Farmer and the Customer. But by
removing the middle men will the farmers
actually benefit. Will the company pay them
more than what they are receiving right now
still remains an unanswered question. The
companies such as nestle and Starbucks
make us think that FDI might not benefit the
farmers after all. Nestle buys cocoa from
farmers at a meagre price of 1euro/kg with
which they make nearly 40 slabs of chocolate.
Starbucks on the other hand buys coffee at
70cents/kg with which they make nearly 80
cups of coffee. The profits these companies
earn are too high compared to the price they
pay the farmers. As we go along we will see
who all gets affected by FDI such as Small
farmers, Traditional food retailers or the
common man. And we will answer if FDI will
actually help control inflation or not.
Small Farmers
Rise of Oligopsony - a state of the market in
which only a small number of buyers exists for
a product. The sheer buying power of foreign
supermarkets will lead to the reduction of
producers
bargaining
power.
These
companies
usually
follow
Primitive
Accumulation, where the Supermarkets prefer
large suppliers of farm produce (where as in
India 85% of the farmers are small or
marginal) so eventually they will be driven out
of business.

Traditional retail and Employment

Reduction in share of mom and pop shops
(14% reduction in Thailand within 4 years).
Mom and pop shops are little businesses with
a minimum number of employees. It is usually
family business with small business volumes.
Apart from that, 33-60% of the traditional fruit
and vegetable retailers reported a 15-30%
decline in footfalls, 10-30% decline in sales
and 20-30% decline in incomes across the
cities of Bangalore, Ahmedabad and
Chandigarh, the largest impact being in
Bangalore. There is been1 crore employment
claim. Like the example of Pepsi's distorted

ADVERSE EFFECTS OF FDI IN RETAIL

claim of 50000 employment generation in
Punjab in 1989.

Impact on Food Inflation

Some of the basic impacts are

Bargaining power of consumers will

decrease as they cannot bargain in a
supermarket which was common in the
traditional markets
Government have to provide subsidy so as
to keep inflation in control
Supermarkets will lead to concentration of
market power as only few big players will
be driving the whole market
As
Indian
governments
condition,
companies will buy 30% from small
industries of India, but not necessarily
from Indian MSMEs as per WTO ( TRIMS
Measures)

The example of the Latin American (Mexico,

Nicaragua,
Argentina),
African
(Kenya,
Madagascar) and Asian countries (Thailand,
Vietnam, India) shows that there is a fair
evidence which proves that the FDI driven
supermarket prices for fruits and vegetables
and other basic foods were higher than those
in traditional markets (Singh 2011).
For the low Income households the problem
will increase as they will face higher food
prices because they live at a place far from
supermarkets or because of the higher prices
in low-income areas.

the functions of the foreign players and

ensuring that they provide better prices for
farmers and also contribute in employment
generation and lower prices.
The role of states is going to play a major role.
The freedom given to states on the FDI
decision can cost us heavily as it can cause
market fragmentation and the benefits of FDI
will be undermined. The Agricultural Produce
Market Committees (APMC) Act is a good
example for the same. Even after eight years
later, still some states are left which have not
amended the Act, some of them have done it
in their own way and this has become a big
issue in agribusiness policy and practice.
Provisions for legally binding and fair
treatment of suppliers, and putting up an
independent authority to monitor and regulate
supermarkets on supplier, consumer, and
labor issues. The government need to play an
enabling role with legal provisions and
institutional mechanisms for helping farmer
cooperatives, producer companies and
producer groups in a smooth functioning of the
supermarket linkage and to avoid its ill-effects.

Suggestions

Policy Issues and Mechanisms

The biggest concert in India for farmers

regarding FDI in multi-brand retail is the
presence of institutions and effective
governance systems to regulate and monitor

Need
to
slowdown
expansion
of
supermarkets
Need to limit the buying power of
supermarkets
Example of China took over 12 years to
liberalise its FDI regime and that too in
stages
Establishment of an independent authority
like a retail commission
Producer organisations and the NGOs
need to monitor and negotiate more
equitable contracts with the supermarkets

ADVERSE EFFECTS OF FDI IN RETAIL

Refrences
1. Business Models of Vegetable Retailers In India by Paulrajan Rajkumar and Fatima Jacob
(Department of Management Studies, Anna University, Chennai, India.)
2. http://www.thehindu.com/opinion/op-ed/fdi-in-retail-what-it entail/article4372020.ece
3.

FDI in Retail: Misplaced Expectations and Half-truths by Sukhpal Singh.

4. http://www.thehindubusinessline.com/opinion/how-fdi-in-retail-will-hurtfarmers/article2747451.ece