The “Great Indian Retail Dilemma” stems from a persistent policy tension since the 1991 LPG reforms, balancing the need to attract FDI for growth and modernisation with protecting small domestic retailers from displacement by large global corporations.
FDI Policy in Retail to Protect Small Traders
- Failure of Protective Policies: For over three decades, governments have attempted to balance liberalisation with the protection of small retailers, but these efforts have not fully safeguarded them.
- Restrictions on Multi-Brand Retail: In countries such as the US and Europe, “big box” stores like Walmart operate multi-brand retail under one roof.
- To safeguard small neighbourhood retail shops (kirana stores) from large global retail chains, India imposed restrictions on Foreign Direct Investment (FDI) in multi-brand retail, limiting direct foreign participation in consumer-facing retail markets.
- Single-Brand vs. Multi-Brand FDI: India permits 100% FDI in single-brand retail (e.g., Apple, IKEA, Nike), where companies sell only their own products, while maintaining restrictions on multi-brand retail to prevent dominance across consumer categories.
- B2B Entry Route: Foreign firms were allowed to operate in the Business-to-Business (B2B) segment.
- Companies like Walmart could sell to small retailers but not directly to consumers.
Rise of Domestic Giants and Quick Commerce
- Growth of Domestic Retail Chains: Companies such as Reliance Retail (Smart Bazaar), Tata Group (Star Bazaar), and D-Mart expanded rapidly, competing directly with small retailers.
- Quick Commerce Disruption: Platforms such as Zomato and Swiggy introduced 10-minute delivery models through “dark stores,” increasing convenience and reducing footfall in local shops.
- Venture Capital Advantage: Unlike small shopkeepers, technology platforms have access to large venture capital funding, allowing them to sustain losses through deep discounts and free delivery, which small retailers cannot afford to match.
Regulatory Challenges in E-Commerce
- Marketplace vs. Inventory Model: The government mandated that foreign e-commerce giants like Amazon and Flipkart must follow a “Marketplace Model” (acting as a platform for other sellers) rather than an “Inventory Model” (selling their own goods).
- This was intended to prevent them from undercutting small businesses with their own lower-priced products.
- The Walmart Loophole: Despite the ban on foreign physical stores, companies found indirect ways to enter the market.
- For instance, Walmart now owns a majority stake in Flipkart and PhonePe, effectively capturing a large share of the Indian retail and payments market through digital channels.
- ONDC: The government introduced the Open Network for Digital Commerce (ONDC) to help small retailers sell their products online, but it has not yet become a major success.
Way Forward
- Creative Destruction: The concept of creative destruction highlights that technological progress and innovative business models cannot be permanently restrained through regulation.
- When a more efficient or superior way of doing business emerges, it ultimately prevails, overcoming regulatory barriers and reshaping markets in the process.
- Supporting over Protecting: Instead of just blocking competition, the government should support small retailers by providing access to cheap loans and technology upgrades so they can compete fairly with platforms like Swiggy and Zomato.
- Policy Shift: There should be a shift toward a “Consumer First” policy.
- Regulations should be fair for everyone, but the primary focus should be on what benefits the consumer, such as lower prices and better access to goods
Conclusion
India’s retail policy must move beyond protectionism toward competitiveness. Sustainable reform lies in empowering small retailers to compete effectively while ensuring that consumer interests remain central to policy design.
14 Feb 2026
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