Business Today

The inflation conundrum

The government mulls FDI in multibrand retailing to rein in inflation.

twitter-logo Manu Kaushik        Print Edition: Feb 20, 2011

The war on food inflation may just force the government to consider foreign direct investment (FDI) in multibrand retailing. Cabinet Secretary K.M. Chandrasekhar made the suggestion in a presentation to Prime Minister Manmohan Singh and his Cabinet colleagues recently.

Why FDI in multibrand retail is back on the table…
There is a view within the government that such a move will ease supply chain bottlenecks and help rein in inflation with the expansion of organised retailing in the country. It is believed that the opening up of food retail, in particular, will give a fillip to the distribution network - from farm to fork. The existing guidelines do not allow foreign investment in multibrand retail. However, multinational retailers can invest up to 51 per cent in single-brand retail and 100 per cent in cash-andcarry stores that can only sell to other retailers.

… the benefits…
It is also believed that the entry of global retailers such as Wal-Mart, Carrefour, Metro AG and Tesco will lead to a radical improvement and streamlining of the modern food retail infrastructure. There has been inadequate investment in back-end infrastructure such as retail chain logistics and cold chain. While India is the second-largest producer of fruit and vegetables - about 180 million tonnes - it has a very limited integrated cold-chain infrastructure. As a result, some 30 per cent of its fruit and vegetables and seven per cent of its foodgrain are wasted. Thus, allowing FDI in retail will not just encourage food processing and improve cold storage facilities but also minimise wastage. "Multibrand retail is favourable to farmers whose incomes are controlled by the middlemen. Strengthening the modern retail will get farmers good price and reduce the role of intermediaries," says Kishore Biyani, CEO, Future Group.

… and the concerns
FDI is permitted in the retail sector in most emerging economies such as Brazil, China, Argentina and Indonesia. In India, though, there are worries that multibrand retail may ultimately result in the large-scale exit of small family-managed outlets which provide employment to over 33 million people. Stiff political opposition, particularly from the Left parties, has prevented the government from pushing ahead with the reform.

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