After several of deliberations with all possible stakeholders, the government of India had decided to open the gates for foreign direct investment (FDI) in multi-brand retail. Events however, took a dramatic turn recently with the newly elected Delhi government overturning the national policy decision by disallowing FDI in supermarkets in the state.

Without speculating on the political decision making process and rationale, here are five key reasons why FDI in multi-brand retail makes sense in the context of India:

• India needs jobs and supermarket can help create them: Rapid rural to urban migration is a reality in India and this reality is set to grow starker in future. According to India’s Urban Demographic Transition published by Ministry of Urban Development and National Institute of Urban Affairs, 50% of India’s population will live in urban areas by 2039 and the rate of urbanization itself will become more pronounced at 50% compared to the present 31%. By 2031, there will be 87 metropolitan cities housing 255 million people compared to 53 such cities today where 160 million people live. Data points like these clearly indicate that India will need to step up the gear on job creation to effectively manage this phenomenon. And supermarkets can help in doing just that
• Supermarkets create an efficient distribution system reducing time to market
• Food wastage, an outfall of the inefficiencies in the current storage and distribution system in India, will be greatly reduced
• By directly sourcing from farmers, margins of middlemen will be eliminated leading to farmers realising better prices for their produce, potentially reducing instances of farmer suicides and lowering food inflation
• Last but not the least, direct bulk purchase from farmers enables supermarkets to lower end consumer prices

From the government’s perspective, it is undeniably important to monitor whether these promised benefits of allowing FDI in multi-brand retail materialize or not. It is also important for the government to simultaneously focus on creating and strengthening social security nets for farmers. However, frequent policy changes like the one witnessed recently is unwarranted and sends out wrong signals about the image of the country as a whole. FDI entails long term investment commitments and events like these enhance political risk perception of the country and dampen investor sentiments – consequences India can ill-afford in the context of the country’s socioeconomic aspirations.