Inflation and the Case for FDI in Retail

As the debate opens up again for FDI in retail, it is interesting to examine the contours of the issue.

As things go,only 51% investment is allowed in single brand retail and 100% is allowed in wholesale operations.Almost no one, not even the opponents of FDI have any argument against the economic benefits of FDI. The reasons are political. The ICRIER in its report had strongly and staunchly enunciated the benefits of FDI and the fact that it has had manageable adverse impacts in emerging countries. The reasons for opposition are political and it is good fodder for the press.

But the question is can any country manage without a large organized retail and can any emerging country do it without FDI?

The Government has woken up to the fact that inflation is a monster that can be tackled only by efficiency and productivity. With the world economy likely to remain vulnerable for some time, sustaining fiscal deficits is not the answer. The Indian interest rates are also high enough to make the economy uncompetitive. A key source of inflation in India is the wastages and inefficiencies between the farm and the fork.

The story of FDI in the world economy makes for some astonishing reading. The world annual GDP is around $67 tr and the total FDI in the world is $ 16 tr.USA has cumulative FDI of $ 2.3 tr and UK and France have more than $1 tr FDI. The FDI in China is close to 800bn and even Srilanka has $250bn. India’s cumulative aggregate FDI in all sectors is barely $150 bn and we keep raising enough hue and cry to ensure that each additional billion is fiercely resisted. The single brand FDI in retail till Sept 09 is barely $48mn.

The following extract from a GOI site mentions retail along with gambling and lottery where FDI is not allowed.

The extant policy does not permit FDI in the following cases:

i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

For a 20% slice of the $450bn total retail market, we need to invest $15 to $20 bn and it is in the country’s interest to allow this for unleashing a cascading effect on the retail sector, inflation management and the economy.