Parliamentary Standing Committee on Commerce unanimously opposed FDI in Retail Sector

Source: Organiser - Weekly Date: 12/10/2011 4:33:20 PM





Parliamentary Standing Committee on Commerce unanimously opposed FDI in Retail Sector

Following are the observations and recommendations of the Parliamentary Standing Committee constituted under the chairmanship of Dr Murli Manohar Joshi on Foreign and Domestic Investment in retail sector. The report was presented to Chairman of Rajya Sabha on May 13, 2009 and it was tabled in the Rajya Sabha on June 5, 2009.

The Committee was informed that present policy on FDI in Trading Sector is that no FDI is permitted in the retail trading, except for single brand product retailing where FDI up to 51 per cent is permitted, with prior Government approval.

FDI up to 100 per cent is permitted under the automatic route in wholesale/cash and carry trading, including business-to-business sales, and export trading. FDI up to 100 per cent is permitted with prior Government approval in trading of items sourced from small scale sector and test marketing. FDI up to 51 per cent, with prior Government approval, is allowed in retail trade of single brand products, subject to the following conditions:

(i) FDI up to 51 per cent would be allowed, with prior Government approval, for retail trade of ‘Single Brand Products’;

(ii) Products to be sold should be of a ‘Single Brand’ only.

(iii) Products should be sold under the same brand internationally.

(iv) ‘Single Brand’ product-retailing would cover only products which are branded during manufacturing.

The Committee is of the view that the provision of single brand is not strictly adhered to and shops in malls are selling other branded items, alongwith the brand for which they have got permission. Corporate retailers practice product bundling, whereby products of single or different brands are sold as combinations and bargains in the malls. This also adversely effects small shopkeepers and restricts over-all competition. The Committee is also of the view that allowing cash and carry wholesale in India is nothing but allowing backdoor entry of foreign companies into retailing, as they are selling goods for personal consumption also, whereas they were allowed for only business purposes.

The Committee feels that opening up of FDI in retail trade by allowing single brand foreign firms in India will result in unemployment due to slide-down of indigenous retail traders. Consumers’ welfare would be side-lined, as the big retail giants, by adopting a predatory pricing policy, would fix lower price initially, tempting the consumers. After wiping out the competition from local retailers, they would be in a monopolistic position and would be able to dictate the retail prices. Local manufacturers, in particular the small scale industrial sector, would be gradually wiped out. The entry of few big organised companies, may result in distortions in the economy and the gap between ‘haves’ and ‘have nots’ in the country.

Procurement centres constituted by big corporates for making direct bulk purchases would initially pay attractive prices to the farmers, and cause gradual extinction of mandis and regulated market yards. Then on the strength of their monopolistic position, farmers would be forced to sell their produce at rock bottom prices. Farmers would be unduly affected due to the non-remunerative prices.

The Committee, therefore, recommend that a blanket ban should be imposed on domestic corporate heavy weights and foreign retailers from entering into retail trade in grocery, fruits and vegetables, and restrictions should be entered for opening large malls by them for selling other consumer products. Reservation policy, similar to that adopted by Government on certain products being manufactured exclusively by SSI units, should be adopted for indigenous small and medium retailers, and financial assistance schemes should be planted for providing assistance to them for undertaking expansion and modernisation.

Government should stop issuing further licenses for “cash and carry”, either to the transnational retailers or to a combination of transnational retailers and the Indian partner, as it is mere a camouflage for doing retail trade through back door.

Another issue which merits attention is unemployment created by corporate retail. At present, unorganised retail provides employment to more than 40 million people, which accounts for 8 per cent of the total employment. Many of them are not well educated. Projection of corporate retail to create two million jobs is highly exaggerated, ignoring the 200 million people, depending on the retail sector likely to be rendered jobless. Once displaced, there is no in-built policy to relocate or re-employ the dislocated persons.

The Committee feels that in a country with huge numbers of people and high level of poverty, the existing model of retailing is most appropriate in terms of economic viability. Unorganised retail is a self-organised industry, having low capital input and high levels of decentralisation. The Committee, therefore, recommend that the Government should ensure that some inbuilt policy must be established to relocate or re-employ the people who are dislocated due to opening up of big malls in the vicinity of their shops.
The entry of big domestic and foreign retailers will not merely destroy the economic foundation of the small retail supply chain, but will have social underpinning, in view of the fact that the small retailer is mostly illiterate or semi-literate and would not be able to find gainful employment elsewhere. The Committee, therefore, recommend that in view of the adverse effects of corporate retail (foreign as well as domestic) on the small retailer, there is a compelling need to prepare a legal and regulatory framework and enforcement mechanism for the same, that would ensure that the large retailers are not able to displace the small retailers, by unfair means.
The traditional system of small retailer should be protected. In order to help them improve their efficiencies, they should be entitled to better deal in terms of institutional credit. Credit should be provided at lower rates of interest to small retailers by public sector banks, for expansion and modernisation of traditional retailers. A proactive programme of assisting small retailers, to upgrade themselves, should also be undertaken.
The Government may consider to establish a National Commission, to study the problems of the retail sector, and to evolve policies that will enable it to cope with FDI. Cooperatives and cooperative marketing should be encouraged to strengthen the unorganised retailers. Akin to MSME (Micro, Small and Medium Enterprises Development Act, 2006) Act, an Act to promote small and medium retailer should also be formulated. Further there was a need to enact a law against predatory pricing and anti-competitive actions.
The Committee was informed that efforts were being made by Central and State Governments to provide to big industrial companies loans at lower rates of interest from banks, but so far no such arrangement had been made for small retailers. Besides, when any big industrial house sets up some industry, State Governments provide the land at lowest rates, and five to 50 per cent of the total cost is borne by Centre and State Governments as subsidy, but there is no such arrangement by the Government for small traders. If these big industrial families, having capital of thousand of crores are permitted to enter the retail trade, the traditional retail traders, having nominal capital, would not be able to compete with them and will ultimately have to close their shops. The Committee, therefore, recommend that the Government should ensure that a level playing field for the small retailers should be made, before opening up of the sector to big foreign and domestic investment. Before any permission for opening any new retail store is given, it should study and analyse the economic and traffic impacts of the store, may be, by a University or economic or environmental institute of repute. The expenditure of the same should be borne by these companies and not by the Government and any proposed store, which has the potential to eliminate the local community from retail sector, or can increase the traffic by more than five per cent, should not be allowed to open.
The big retail uses large land space, without having any proper parking facilities. It consumes more power for its lighting, air conditioning, etc. For refrigeration of vegetables and fruits, and for air conditioning the retail outlets, approximately 20,000 megawatt of additional electricity is estimated to be needed. The giant retailers have their own standards of buying farm produce. It is alleged that they promote usage of excessive insecticides and pesticides, to meet the demands of these retailers. These retails sell the farm produce throughout the year, by preserving the same in cold storages, without adhering to food safety norms, making the produce.
The Committee, therefore, recommend that there is a need for setting up of a Retail Regulatory Authority, to look into the problems and act as a whistle-blower, in case of anti competitive behaviour and abuse of dominance. Urban planning, zoning laws and environmental laws in urban areas should be used to limit the multiplication of malls and corporate retailers, by creating transparent criteria for licences, that are linked to the density of population and the stage of existing competition in retail in the zone. The regulatory mechanism should be strengthened and be made more democratic, by including the representatives of farmers also.
The Committee felt that the entry of FDI in book publishing would directly affect the domestic industry, not only in respect of price, but also in the context of the published material, which could be detrimental to the national interests. The Department should ensure that the foreign publishers, in the garb of promoting their literature, do not impact the taste and aesthetic values of Indian readers.
The Committee was informed during the course of deliberations with the stake holders that agricultural land was being diverted for building shopping malls. The Committee feel that diverting the agricultural land may not merely lead to reduction in production or income to farmers, it may affect the social and cultural life of the farmers, agricultural labourers and others, connected with the agricultural activities. The Committee, therefore, recommend that the Government should come out with adequate safeguards to prevent diversion of agricultural land for setting up of malls, etc.
The need of the hour was to put into place strict regulations on the entry of big malls, viz. size of a mall, location of a mall from kirana shops, parking facilities, adherence to environmental norms, labour laws, etc., to ensure that cartelisation does not take place. It may also be ensured that these big organised retail brings latest technologies, which could be absorbed here, at the same time ensuring large scale unemployment, particularly in the unorganised retail sector, does not take place. A National Shopping Mall Regulation Act could also be enacted to regulate the entire retail sector, both in fiscal and social aspects.
On the issue of formulation of a National Trade Policy to protect medium and big markets of India on a large scale, the Department of Consumer Affairs informed that presently there is no National Trade Policy. As per 8th Schedule of the Constitution, Trade and Commerce fall within the jurisdiction of respective states. The scope and functions of Central Government are confined to inter- State trade and commerce. Formulation of National Trade Policy would require wider consultation with states and other concerned authorities. The Committee, therefore, recommend the Government should formulate a model central law after due consultation with the State Governments and concerned stake holders.