Implications of foreign direct investment in India’s retail sector

Vol 26, No 4; Article by Murali Patibandla; December 2014

Supply chain is the backbone of retail business. Adoption of an efficient supply chain between producers and consumers by modern large retailers could reduce average transaction and information costs of market exchange; generate surplus for stakeholders such as producers, farmers, and consumers; expand output; and could thereby contribute to economic growth and net employment gains. This paper develops a simple theory of supply chain and economic growth. At present, India's supply chain especially in the agricultural sector is highly inefficient and fragmented resulting in large scale wastage which causes high food inflation. Foreign players can introduce a highly advanced supply chain and develop local producers and generate externalities. This paper shows the implications of adaptation of the Wal-Mart model of retailing on India's retail business. Wal-Mart's basic strategy has always been to realize high turnover with thin margins. It has been able to achieve this by adopting highly advanced supply chain both nationally and internationally. It procures goods directly from producers by eliminating middlemen. It helps the producers to keep costs down by transferring technology and by formulating long term relational contracts. If Wal-Mart is allowed into India, it has to invest heavily in developing the supply chain given the poor infrastructure conditions of India, and this would take time. If Wal-Mart is successful in adapting advanced supply chain in India, it will benefit farmers, manufacturers, consumers and even Mom and Pop stores through generation of externalities.