Let the moolah flow

The numbers look disturbing. According to Reserve Bank of India (RBI) data, Foreign Direct Investment (FDI) fell more than 25% in the fiscal 2010-2011 to $ 19.43 Bn compared to previous year. What’s even more disturbing is that India is the lone South East Asian country to witness a decline in FDI inflows. In sharp contrast, FDI in China has soared in recent years. Institutions like the World Bank have credited FDI as a key driver of China’s macroeconomic boom.

The FDI debate has been on for a while now mainly attracting attention in the retail sector. India permits 100% FDI in cash & carry and wholesale trading (which is business-to-business) and 51% in single-brand stores (such as Gucci or Apple). On the other hand, FDI in retail trading is permitted in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation. India was expected to join this long list of countries. But the wait continues. So what stops India from joining the list? The reasons are more political in nature than economical. Reports say India has around 12 million kirana [mom-and-pop] stores who are slated to lose their livelihood altogether if 100% FDI in retail is allowed. And that my friend, is a large vote bank. Not to mention the middlemen and traders who are essential elements to the kirana stores losing their livelihood as well.

The above reasoning is plain rubbish. The kiranas would only integrate with modern retail. One has to keep in mind that about 75% of India’s population still earns less than $2 a day. So unlike in more advanced economies with high per capita income, kirana stores will continue to be a part of the Indian market given the shopping styles of consumers. The culture of shoppers to shop daily coupled with lack of storage space make the kiranastore an integral part of the Indian middle class.

India needs good FDI inflows especially in the retail sector. Besides just the money coming in, FDI would also bring with it advanced technology [supply-chain and logistics], skill enhancement, new employment and more importantly, it would make the retail sector a lot more organized than it currently is. The retail industry in India estimated at $ 400 Bn and organized retail forms a meager 5% of it.

2011 has been a rocking year for Indian politics. With scam after scam hitting the government and the nation demanding strong anti-graft laws [read my previous post], it is highly unlikely that the government would disturb the vote-bank any further. But it’s high time the government took the FDI debate more seriously and come out with attractive policies. India should take care not to lose its share of the pie.

[With inputs from knowledge @ Wharton]