Taming price rise: Govt panel for FDI in multi-product retail

NEW DELHI: An inter-ministerial group (IMG) on inflation has recommended allowing foreign direct investment in multi-product retail as one of the two steps to tame rising prices and cut down the margin between farm gate and retail prices.

This is the first formal recommendation by a government panel to allow FDI in the tightly policed and sensitive retail sector.

"It is time for India to allow foreign direct investment in multi-product retail and the IMG recommends that the government considers this at the earliest. Reform in this sector can be an effective inflation busting measure," Basu told reporters. The proposals will be sent to Prime Minister Manmohan Singh and finance minister Pranab Mukherjee.

Basu said he was hopeful that the government will consider the proposal soon.

The move, which comes shortly after the end of key state elections, will now be discussed by the government and then sent to the cabinet for approval. But analysts say it is expected to face stiff opposition from political parties and traders.

The government allows 51% FDI in single brand retail and 100% in the wholesale cash-and-carry segment but has shied away from opening up the multi-product segment to foreign participation fearing opposition from small shop owners and political parties.

Stubbornly high inflation has forced the government to focus on revamping the supply chain particularly distribution of food grains, fruits and vegetables.

But the IMG cautioned that entry of FDI in this sector should be properly regulated and steps should be against these new corporations becoming monopolistic and charging high prices.

The government has taken a series of steps to ease the pain of high food prices while the Reserve Bank of India has raised interest rates nine times since March 2010 to calm inflation which currently stands at 8.66%, much above the comfort level of policymakers.

Several foreign retail giants such as Wal-Mart and Carrefour are present in the wholesale trading segment and other top retailers have been eyeing an entry into India's multi-product retail sector for the past several years. Some estimates say that the country's retail sector could be nearly $260 billion by 2020.

"Modern retail is capable of bringing down prices by as much as 20% on various products if the distribution system is revamped. What is needed at this point is a new supply chain system which will directly source from farmers and therefore help lower costs along with minimizing damages done to goods," said Kishore Biyani, promoter of the Future Group, which runs stores like Big Bazaar and Food Bazaar.

"Only new retail can meet the demand of the growing needs of the Indian consumer," he said.

The IMG also recommended revamping the Agricultural Produce Marketing Committee (APMC) Act to enable farmers to bring their products to retail outlets and also allow retailers to directly purchase from the farmers without facing blockade by incumbent traders. It said the APMC system has abetted monopolistic behaviour and reduced the choices available to small farmers.

Spiralling prices forced the government to set up the IMG in early February and the group was entrusted with the task of recommending policies to calm food inflation and demand management.

In India, the share of organized retail in the total retail trade is just over 4% compared with 66% in Japan, 20% in China and 55% in Malaysia. The IMG says China allowed FDI in multi-product retail since 2004 and the benefits have been palpable.

"One way of playing an enabling role is to allow FDI in multi-product retail. This is a way to get new technology to come into the country and expand organized retail. While this policy alone may not achieve all the results, it can be an important step in serving the interests of both consumers and farmers in the long run," the IMG said.