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Debate continues over Foreign Direct Investment in India's retail sector

A joint study by CII and Amarth Consulting reveals, supply chain issues are costing India $ 65 billion annually. The report cites product proliferation, complex taxation laws, a lack of supply chain infrastructure and visibility as key challenges for the Indian retail industry. The real alarm is obviously the impact of this on food inflation.

Earlier this year, it has been estimated that around 18 million metric tonnes of food grains are lying in the open across India due to lack of adequate storage facilities. By some estimates, 25-30 per cent of fruits and vegetables produced in India go waste because the country has ignored the importance of cold chain infrastructure.

The government is planning to invest in cold chain infrastructure along with Fresh & Healthy Enterprises (fully owned by Container Corporation of India). But industry experts assert that the challenge towards building world-class supply chains cannot be met by Indian players alone. Shubhranshu Pani, Managing Director – Retail Services, Jones Lang LaSalle India, says, "FDI is necessary because the front end and back end of hypermarkets and Cash and Carry formats is capital intensive. As a country, India does not have the required depth of resources and funding. Very few Indian entrepreneurs have evolved beyond the small format kirana store to create formats that are ready for modern retail." Also, there is evidence that these giant chains will bring down the role of intermediaries in a big way with direct procurement processes.

It is also expected that margins of producers and suppliers will come down drastically. These issues would certainly crop up in the short term, as suppliers and producers will lament the prospect of job losses. But in the long run, this would make the entire ecosystem more efficient. The government thought liberalising the back end was the solution. But critically, an ICRA report released last year on FDI in retail comments, "Though FDI is permitted in cold chains to the extent of 100 per cent through the automatic route, in the absence of FDI in front-end retail, investment flows into this sector have been insignificant." This shows that MNCs are reluctant to invest in the back end if they are not allowed entry in the front end.

On the other hand, nothing stops the giant Indian retail companies, some of them amongst the largest in Asia and with ambitions to grow even bigger, to develop on what seems logical lines. There may well be more to it than what seems obvious to the unlearned eye.

Is infrastructure or the perceived lack thereof the problem or is there another market linked lacuna? The debate continues...

by S. C.
26 august 2012, World News > Asia