ANOTHER WAY TO PROTECT & ATTRACT

SINCE 1991, when a new generation of economic reforms were initiated, Indian policymakers in successive governments have tried to strike a balance between attracting foreign direct investment (FDI) and protecting domestic businesses, especially small firms in many sectors.

- PROSENJIT DATTA

Unsurprisingly, this approach has not worked particularly well, though that has not prevented the government from persisting with this approach.The retail industry is a good sector to understand why this approach typically fails. In the initial reform years, the government worried about what would happen to small neighbourhood retailers, especially grocers, if big-box formats of the kind that were popular in the US, Europe and Southeast Asian countries were to be allowed a free rein in the country.

Therefore, policymakers grudgingly allowed global single-brand retail players to enter the country—calculating that they posed the least threat to small Indian shopkeepers. Big multi-brand players such as Walmart or Carrefour were not allowed to sell directly to customers. Big-box retailers could only come in via the cash-and-carry route, where they sold to smaller shops. The reasoning was that this would be a win-win situation with FDI in retail coming in, while small grocers benefited by buying from the cash-and-carry giants and selling to consumers.

As it turned out, the final outcome has not been quite what the policymakers thought would happen. Domestic companies ushered in big-box retail though the global companies were kept off. Not every homegrown player succeeded. Some expanded quickly but eventually went bust. They were replaced quickly by others. Today, Reliance and the Tata Group are big players in big-box physical retail in several multi-brand formats. Others have also built a significant presence—Radhakishan Damani’s DMart in the groceries space is a good example. There are many others jostling for a slice of the pie.