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FDI in retail: Are SMEs' concerns valid? - Views on News from Equitymaster
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  • Nov 30, 2011

    FDI in retail: Are SMEs' concerns valid?

    Benjamin Franklin once said "Any fool can criticize, condemn and complain and most fools do." But what if the fools are right? Our Prime Minister, Dr Manmohan Singh, is very confident that small businesses in India can compete with the larger players. He affirms the new policy on Foreign Direct Investment (FDI) in the retail sector is framed after a lot of thinking and consultation. It would do well to all farmers as well as consumers. However, oppositions seem to be in no mood to buy all these arguments on their face value.

    We too have talked about FDI in retail several times in the past. We have already highlighted how the proposed new policy would help Indian economy. How this move can benefit the whole supply chain infrastructure as well as farmers and consumers. We also pointed out concerns such as extinction of kirana stores, displacement of several businesses of Small and Medium Enterprises (SMEs) and possible abuse of dominant positions by retail giants in the long run.

    Extinction of kirana stores, especially in bigger towns and cities, appears very natural due to opening of retail stores by big foreign retail giants. However, whether this move will displace SMEs businesses is not so clear. So why is the small scale industry so concerned? After all they are the one who promise better margins to the big retail players. Big retailers can never get the margin advantage if they switch to big suppliers such as Colgate and Procter and Gamble (P&G). Therefore, even the big retail giants such as Walmart, Carrefour and Tesco would need to take supplies from SMEs to keep their profitability intact. So why is there so much hue and cry over the issue of SMEs business? Where is the catch?

    It is well known fact that big retailers play on volumes. As a result, they would have go to large suppliers to meet their volume needs. Therefore it would be expected that small suppliers would gradually start losing the business. Then there are payment issues with the larger retailers. Big retailers usually look for a larger credit cycle. SME suppliers are generally not in the position to accept and adapt to such delays in payments. That would put their survival in danger. Therefore, they may not be willing to supply to the larger retailers, hence allowing the latter to look at the larger suppliers instead. But this again would lead to a loss of demand for the SME segment.

    Keeping these concerns in mind, the government has mandated that foreign retailers would have to source 30% of their goods from micro and small enterprises in India. For this purpose the government has defined micro and small enterprises as those with assets of less than Rs 50 m. However, this step does not seem to have helped ease the burning concerns of the SMEs. They appear to have valid reasons for this.

    Although, there is no concrete study on how much existing domestic big retailers source from the Indian market. However, people in the industry believe that it could be as high as 70%. In addition, the asset limit of Rs 50 m would include many big suppliers in the list as well. Hence, even the right implementation of the protection law does not ensure and secure the existing business of micro and small players. Moreover, there is a question mark on the actual implementation of this law in its true spirit. To avoid the Rs 50 m limit, big suppliers may always split their businesses and can eat away the pie of micro and small players.

    All these are definitely valid concerns. Industry experts feel that the small industry should have been consulted for better framing of the laws. They feel that there is a greater need to take all possible ramifications into consideration.

    How things would pan out in the future? Only time can answer. However, the government is expected to give concrete reasons behind the steps it is going to take. Merely showing confidence and talking about it hardly serves any purpose. The situation demands for a well balanced path to ensure the reforms in the retail sector, keeping interests of all interested parties secured.



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