Past weeks in India have been marked by a frenzy of political activity. First, the opposition parties boycott parliament as a result of the coalgate and are continuing to do so since more than a month.
The Trinamool Congress has withdrawn it’s support from the UPA government
Then, there are protests and a full-day nationwide bandhowing to the hike in diesel prices and LPG restriction. The newest sensation is FDI. Whether the farmer will benefit or not and whether the small retailer will be crushed or not, the politicians however are getting excellent publicity for themselves throughout this entire process.
The whole debate about FDI in multi-brand retail sector has been grossly exaggerated by both sides on the political platform. Ten years ago, the BJP had proposed this very same reform with a much more liberalized framework and the Congress had vehemently opposed it.
Dr. Manmohan Singh opposed the coming of FDI when his government was not in power
The timing and magnitude of the present reforms (four major sectors have been opened up for foreign investment on a single day) indicate towards a government which is desperate to redeem it’s reputation as ‘reformers’ among people by putting forward their policies as game-changers whereas the fact is that these reforms have very little potential to bring about any effective change in the economy and in some cases, even in the concerned sectors. On the other hand, the reaction of the opposition indicates an even more desperate opposition that wouldn’t hesitate to take reactionary positions when it comes to the prospect of fulfilling their own interests. Instead of getting caught up in the hype of FDI, one needs to take a closer look at what these policies are capable of achieving and how different it is from the hyperbolic impacts posed by both sides.
Before I start with the actual content of the post, I would like to point out that this is not an economic analysis of these policies. The purpose of this post is to delineate the contradiction between the simple elemental facts and the facts, as posed by the ones who stand to benefit from the outcome of the ongoing deadlock.
Small retailers have not been affected by FDI in China
The truth is that nobody can really predict accurately on what would actually happen given the diverse nature of India’s economic and social conditions in different regions. However, a careful evaluation of the risks and contingencies does provide us a basis for the implementation of any policy. In case of FDI in multi-brand retail, one can look at other developing countries where it has been implemented and surprisingly, there would be an equal probability of concluding in either direction. He could either conclude it will be beneficial for India based on the success achieved in countries like China and Brazil or one could conclude that it would turn out to be explosive for the country based on the fatal effect it has had on small retailers in countries like Thailand or Mexico.
Walmart has taken over almost the entire retail sector in Mexico
Looking at the present situation, the only people who are bound to benefit are the politicians who are right now getting an excellent stage for a pre-election campaign which will definitely play a major role in the 2014 general elections. Thus, every citizen should make it a point not to fall to the rhetoric of the political class and see through the situation with the Indian context in mind.
Whose money is it, anyway?
A very fundamental question that arises is when a foreign player comes to our country and sells a product, to whom exactly are we paying our money when we buy that product. To understand this let us say, for example, Walmart comes to India and sells a calculator for Rs. 50. Now, the manufacture cost in China for a calculator is, let us say Rs. 8. When it comes to India, an import duty of Rs. 2 is imposed.
Walmart has a global reputation owing to human rights’ violations in it’s factories in China
Now, if Rs. 2 per every calculator goes into salary of employees in the store, then half of the remaining amount, Rs. 19 goes to Walmart and the other Rs.19 goes to the Indian firm with which it has partnered. This means that of the Rs.50, Rs. 23 remains in India and the rest, Rs. 27 goes to U.S. and China. Now, this would have been irrelevant had Walmart brought in new technology and management practices which would have improved the quality of retail sector in India or provided an impetus to local production or significantly increased employment. Since none of these happens to be the case (I have written later in the post about why that is not the case), one wonders why such a huge amount of emphasis is being placed on the need and importance of this relatively unimportant policy.
Modernization
Many arguments have been placed in support of FDI in multi-brand retail. One of the principal arguments is that of modernization. It is being said that coming of foreign stores will be accompanied by inculcation of new technology and better and modern management practices in retail. An assertion of this kind not only unjustifiably undermines the level of sophistication and competence acquired by Indian multi-brand retailers but also strikes at the foundation of innovative thinking and originality since it assumes that ideas and innovations are subject to trade and commercialization and that there is only one single correct path of modernization and that the West holds the key to it.
Kishore Biyani and his Big Bazaar idea are slowly catching up all over the world
So, if you want to modernize, you better open your markets for our ‘prime-movers’ who will bring with them, ‘modern technology’ which you otherwise can never acquire. Over the past years, Indian retailers have successfully modernized significantly. The Future Group, for example has shown an excellent display of modern and innovative management practices and technology. It’s practices in Big Bazaar is influencing many retailers around the world, even in the West. What I am proposing here is not isolation from the rest of the world in hope of indigenous solutions to every problem. What disturbs me is the understanding that ideas can only spread through big-shot corporate agents who will ‘demonstrate’ to us the right way of doing things.
Production
The next argument is that related to production. One of the clauses of the FDI in multi-brand retail policy is that 30% of it’s products should be made in India. This clause is the only slightly comforting aspect of this policy. But here also, it does not mean that it will significantly increase production in any way. Firstly, because 30% here means that 30% share of the final value of the goods should be sourced from India. This means that if I, as a retailer buy a good from an Indian producer at a low cost, even then I will have the liberty to sell it at a high price in which case I will have a situation in which I will have fulfilled the clause and at the same time would have managed to actually avoid sharing the actual amount of production cost with the local producers. The reason why the retailers will be tempted to do this is because manufacture cost in India is relatively high (which is the primary reason for decline in our export rates).
The implementation of some of the clauses like back-end investment seem highly doubtful
However, another clause is also present which talks about 50% share of back-end investment (storage, packaging, logistics, etc.).Though the clause does give the impression that it will benefit farmers since new storage facilities would be set up and investment in packaging and logistics would stimulate local service-providers. But a major concern still pertains to the viability of it’s implementation (how will the government check investment which is spread on such a large scale) and it’s feasibility (paucity of land, bad condition of roads).
Employment
This is by far the most absurd argument that has been given in justification of this policy. The Indian retail sector is the second largest job providing sector in India and employs more than 40 million people at present. How the government aims to create 10 million jobs by allowing some 10 or 15 stores to open up and putting the second largest job providing sector on the line in the process is beyond me.
At present, retail sector is the second largest job providing sector in India
The Vice-Chairman of Planning Commission of India said that the quality of jobs is more important than their quantity on being put the question that statistically, small retailers are always pushed out when a big store up in vicinity. Mr. Ahluwalia should have then been asked that according to him, what is the probability that the uneducated youth (which is uneducated in the first place, precisely due to the government’s apathy on the issue of education) which account for 70% of the youth population and will exactly be the ones who will lose their jobs in small retail shops, ever get a job in a high end foreign retail chain?
The question of national treatment
The most disturbing aspect of this policy which can potentially reduce the entire FDI policy to insignificance and invalidity but still has eluded most of the debates around the FDI issue is the question of national treatment. A very crucial point that needs to be kept in mind is that all the clauses that have been mentioned in the policy like 30% local sourcing, 50% investment in back-end infrastructure, etc. only goes out to the stores with 51% FDI and not to all multi-brand retailers in general.
The question of national treatment poses a serious contradiction
The problem with this is that India is a party to a pact at the World Trade Organization (WTO) which says that all foreign investors operating in a country should be treated as any other national/local investor and should not be discriminated on this account in any way. Now, this is a very serious contradiction and the government and all the corporates are well aware of this. This means that if tomorrow the Indian government finds out that a store like Walmart is not adhering to the stipulations of the national FDI policy, then Walmart can take on the Indian government with the U.S. government and the WTO firmly standing for it’s defense.
Foreign investment in itself is not some sinister idea which needs to be opposed in all forms and in all times. But, the risks and impacts it could create on the local market also need to be kept in mind. A more favorable form would have been it’s advent on an experimental basis on a smaller scale in few areas and based on those results, we should have moved forward. Exactly, what impact it will create in India is largely unpredictable but as of now, the chances of a positive turnaround remain quite bleak.
Jagruk Aam Aadmi 