Magical or Menace

Nupur Pavan Bang

The Centre pins its hopes on competition forcing improvements in infrastructure.

Raghuram G Rajan, former chief economist of the IMF, and currently the Chief Economic Advisor in the ministry of finance, government of India, a proponent of Foreign Direct Investment (FDI), supported the recently announced 51 per cent FDI in retail by the Indian ruling government, calling it (FDI) the ‘safest form of financing’ because it is ‘long-term’ and brings in ‘competition’. He is also hopeful that the FDI would result in improvements in the logistical infrastructure.

The UPA government has also claimed that the FDI in retail will change the supply chain and infrastructure at the farm level and will reduce wastages.On the other hand, the opposition claims that the FDI in retail will wipe out the so-called mom-and-pop store.The infrastructure is needed. But, the so called proposition that the infrastructure land-scape will change due to FDI, it’s a misnomer.

Why is it that the large retail chains like Reliance and the Aditya Birla group have not been able to do it? They have deep pockets and the best talent in the world.

The answer lies in the bottlenecks and the systemic problems that are there in the sector. Such infrastructural projects are not financially viable.

The cost of funds are typically around 16-17 per cent for such projects. At this cost, a simple agricultural warehouse, without land, costs between `400-500 per sqft to construct. And the going rentals are `5-7 per sqft. The return is less than the cost of funds.How will investment come into this sector? And this is without land. If you don’t have land, if you include the cost of land, the costs will go up to `1200-1300sqft. Even if you take the best of rentals (10-15 sft) at the most prime locations, it is still a negative NPV project.

It is often said that food is being wasted due to lack of infrastructure. Yes, the food does rot in the Food Corporation of India’s (FCI) warehouses. Have you seen any trader’s stock rotting? No. That’s because FCI has a populist mandate.

FCI is supposed to be a trading organisation. It is supposed to buy the grains depending on the capability to sell, based on the demand from the Public Distribution System. It should have storage space, only then buy. They don’t do it and hence the grains get damaged.The mom-and-pop stores too will survive. They offer a different kind of paradigm and value proposition in comparison to the large stores.

Another allegation is that the foreign retail companies have very deep pockets and can afford to make losses for 3-5 years. By then they will wipe out the mom-and-pop stores and then they will monopolise the market. It seems baseless.While the theoretical possibility is there, the cultural and systemic nature of India makes it a very remote possibility.Well, the reality is that FDI is neither a magical wand, nor a menace. It is about giving choice to the people of this country.

Category: Business, Business News