New Delhi: Now that American retail giant Walmart has agreed to acquire a majority stake in India’s biggest online retailer Flipkart, perhaps it is time for the government to take a long, hard look at its convoluted policy on foreign direct investment (FDI) in the retail sector. Walmart wants to become 77% owner of Flipkart by agreeing to pay $16 billion, essentially turning India’s e-commerce market into a two horseplay with Amazon the only other serious contender with deep pockets.
It is interesting to see that what Walmart will achieve through this acquisition is not just a vice-like grip over India’s e-commerce but also a place in the online food and grocery retail.
Worldwide, Walmart has a formidable presence in the food and grocery retail segment through its physical stores. When it wanted to do the same in India a decade back, a misplaced protectionist policy by the government dashed all of Walmart’s hopes. So essentially, Walmart has stuck out its tongue at the government with the Flipkart buy since it can now operate in the food and grocery retail through the online route. It till cannot operate independent physical stores though.
Let us explain this in simple terms. As of now, the FDI policy does not allow foreign entities to hold more than 51% stake in multi-brand B2C (business to consumer or directly selling to consumer) in physical stores. So Walmart cannot operate a physical store selling potatoes and daal directly to the Indian consumer unless it does so with an Indian partner. But since Flipkart operates under the ‘marketplace’ model, Walmart can acquire Flipkart and then sell potatoes and daal through the online route.
The existing FDI policy allows 100% FDI in single-brand retail without prior government approval but with some sourcing restrictions; 51% FDI in multi-brand retail; 100% FDI in B2B (selling to businesses only) retail; 100% FDI in e-commerce marketplace model and zero in an e-commerce inventory based model. The need of the hour is removal of all caps.
Anyway, it would be sensible for the Indian government to take the Walmart-Flipkart deal as an eye opener and amend the silly FDI rules. What is the need to keep a distinction between different retail formats – brick and mortar, online, multi brand, single brand, wholesale? The fact that Indian businesses have far more value in the eyes of global investors than in the eyes of Indian moneybags is evident. Why else would large business houses which operate in India ignore the potential that Walmart saw in Flipkart and allow an American company to gobble up India’s largest e-commerce player without so much as a competing bid? The only other company which was seriously competing with Walmart to get Flipkart was another foreign entity – Amazon.
So if only global (and not Indian) investors see value in the Indian retail ecosystem, it follows that the government should encourage FDI in the retail sector to boost investments. According to what Walmart told analysts after announcing the Flipkart deal, Flipkart may report operating losses of $1.2 billion in 2019-20.
This suggests a continued need for investment by Walmart and it is obvious that the US giant is looking at Flipkart as a long term growth opportunity in one of the world’s fastest growing retail markets. Since such potential escaped Indian acquirers and India will need to attract more FDI to expand the retail sector, it is obvious that convoluted restrictions based on the format of the retail trade are quite pointless. The government should open up retail in all its formats, if not immediately then slowly. That is the only viable way of getting more and more investment in the retail sector, which will obviously also lead to job creation and deeper backward linkages.
One would be forgiven for asking what will happen to our mom-and-pop stores, those neighbourhood grocers and the thelawalas selling veggies? How will these small enterprises compete with the might of the global retail giants? Let us look at some stats first.
Remember, the penetration of organised retail in food and groceries is just 3%. This means 97% of retail trade in this category continues to happen through our neighbourhood mom-and-pop stores. Then, though food and groceries is the biggest among all organised retail categories accounting for over two-thirds of all organised retail, it is still insignificant when we look at the overall retail trade pie in India.
The mom-and-pop stores have little reason to worry, just yet. There have been no reports of large scale disruption of business of these local stores because of the arrival of Amazon or because Flipkart managed to offer the best deals on electronics. Specific to food and groceries, online retailers like BigBasket, Grofers etc continue to operate alongside the thelawalas and local stores selling daal, chawal. Anyway, even if there were to be credible threat to local stores selling groceries, electronics, clothes etc why would it only come from foreign owned companies – why not from the BigBaskets, Flipkarts, Snapdeals, Cromas?
Some of the mom-and-pop stores (not just in groceries) are already transitioning to suppliers to the bigger retail chains, as sourcing and delivery linkages deepen. So instead of crying wolf at the arrival of Walmart or Amazon or other global majors, the smaller traders need to find out growth opportunities in the changing landscape while the government should be re-examining its FDI caps.
(The author is a senior journalist. Views are personal)
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