Retail reform is in the doing

Regulations to achieve specific objectives can allow both domestic and foreign retailers to thrive
Richard Cuthbertson and Malobi Mukherjee

In an attempt to improve the economy, the UPA government has initiated a number of reforms. One of the most controversial steps is the opening up of the retail sector to foreign direct investment, which, if properly implemented, has the potential to benefit farmers, manufacturers and consumers, as well as to improve the overall investment climate. The coalition government is now under considerable pressure to roll back these measures. However, research into retail market development in other emerging countries has demonstrated that carefully designed regulations can encourage good domestic and foreign retailers to thrive in a competitive and dynamic environment, giving rise to an eclectic mix of retail formats. In these countries, such as Malaysia, Brazil and Mexico, the introduction of FDI in retail has been accompanied by corresponding regulations aimed at achieving specific objectives determined by the respective governments. In India too, it is therefore important to craft and implement policies that encourage appropriate socio-economic development, not just to conciliate to opponents in the short term.

Both the Central and state governments should learn from the experience of other emerging economies and enact legislation that fits with their relevant aims. The opening up of FDI rules can realise a great range of benefits for the Indian economy and society, but the way in which this is done is crucial. Without careful implementation, there is a danger that the current legal provisions proposed by the government run the risk of creating some of the nightmare situations advanced by FDI opponents. The brief analysis that follows highlights our concerns and suggests ways to alleviate the issues arising.

First, the provisions allow FDI to be state-controlled. This is commendable in a democracy but also may lead to a widening of the gap in economic development between the states. If some states are accepting foreign investment of more than $100 million while others are turning down such investment, this may lead to greater inequalities between the states. Moreover, that investment can only be focused on the big cities with a population of more than 1 million and so risks further polarising urban and rural India, as well as exacerbating planning and environment issues in these already congested cities. With more developmental opportunities in large urban areas, tiers 1 and 2 cities, aspirants in smaller urban, semi-urban and rural areas may increasingly migrate and add to the growing strain of population in big cities. By protecting retailers and traders in rural areas, the government risks depriving these smaller communities of investment.

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