Retail FDI may haunt MSMEs

Enterprises fear foreign retail chains may not make any local purchases

Micro, small and medium enterprises (MSMEs) aren't happy at the government's decision to allow more FDI into the retail segment, especially its nod to 51 per cent FDI in multi-brand retail. MSMEs, which operate on small investments and revenues, are also concerned at the Centre's flip-flop on policy decisions.

These enterprises feel the government should conduct a study on the impact of foreign-funded retail trade on Indian MSMEs, as well as on the clause of sourcing from the Indian market.

In 2011, to protect the interests of the MSME sector, the government had announced that for proposals involving more than 51 per cent FDI, 30 per cent of the value of the goods purchased should be sourced from Indian MSMEs.

It was believed the 'mandatory' 30 per cent sourcing norm would give a fillip to small-scale businesses and help SMEs achieve high sales growth, capacity addition, increased contracts/orders, better branding, technology upgrade, etc. "However, while notifying the executive order, the government changed its own position," said Praveen Khandelwal, secretary general, Confederation of All India Traders (CAIT).

For single-brand retail, the initial clause of 30 per cent 'mandatory' sourcing of manufactured and processed goods from MSMEs was later changed to 'preferably'. He added, therefore, the mandatory provision became a suggested one - now, foreign investors aren't compelled to buy anything from Indian manufacturers. Therefore, it can't be expected foreign retail chains would make local purchases; they can easily import cheap goods from other parts of the world and market these at cheaper prices.

Khandelwal said though the MSME sector hadn't engaged in vehement protests against the government's decision to raise FDI in retail, concern in the sector was rampant. He added MSMEs wouldn't meet the expectations of big retail chains, in terms of volumes, payment terms and cycles. While big retailers sought a large credit cycle, MSME suppliers weren't in a position to adapt to delayed payments cycles, owing to low revenue and the lack of investment opportunities, he said.

An official of an SME said it would be difficult for the Indian SME sector to compete against its counterparts in other countries, owing to high costs. Indian SMEs secure capital at high costs. Also, transaction costs in India are high.

Apparel exporters feel if the government doesn't have mandatory sourcing conditions in place, foreign retailers would buy garments and apparel from Bangladesh and sell those in their stores here.