A calibrated shift

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Modernisation of retail trade must eventually happen, but it needs to be done at a slower pacePrem Shankar Jha

Prem Shankar Jha

Money matters The Indian retail sector employs 40 million people and has an annual turnover of $450 billion
Photo: Getty Images

WHY DID the Cabinet’s admittedly sudden decision on 24 November to lift the ban on FDI in multi-brand retail set off a storm of protest in the country? Most analysts believe that the causes were politically motivated. After all, wasn’t the BJP itself talking of lifting the ban in 2003? But the Manmohan Singh government’s credibility is at an all-time low. It has no answer to the food inflation that is making life a misery for the poor; its savage increases in interest rates over the past 20 months have not only made no dent on inflation but almost killed industrial growth. Its foot-dragging response to the demands of civil society for a strong Lokpal Bill, and its insensitivity to the underlying issues of corruption and lack of accountability have alienated the middle class.

Against this background, the sudden announcement of a decision with far-reaching but ill-understood consequences brought public distrust to a new pitch. For the BJP and the Left, the opportunity was too good to miss. It was therefore inevitable that they would attack the decision. When some of the UPA allies expressed their reservations and more than half of the state governments firmly refused to implement the Cabinet’s decision, an adjournment motion began to loom before the government — one it was not at all sure it would be able to defeat. Retreat therefore became inevitable.

But would lifting the ban have necessarily been a bad thing? Opinion on this is heavily divided. Union Commerce Minister Anand Sharma defended the move with an assertion that FDI in retail will create 10 million jobs in three years, four million on the shop floor and another five-six million in production, procurement and processing.

While Opposition leaders such as Arun Jaitley and Sitaram Yechury have warned of a wholesale loss of employment in the retail sector, a spate of recent articles, including one by Reliance Industries Chairman Mukesh Ambani, have claimed that farmers will receive more for their produce, while consumers pay less, and that 30-40 percent of the fruit and vegetable crop, which currently goes waste, would miraculously be saved.

In a reasoned defence of FDI in retail on television, Planning Commission Deputy Chairman Montek Singh Ahluwalia pointed out that the modernisation of retail trade was as inevitable as the modernisation of agriculture or industry, and that putting up artificial barriers, such as blocking FDI in this sector when it was allowed in every other, would slow down growth and prolong inefficiency.

His logic is irrefutable. What is more, organised retail, while still relatively new in India, has been growing rapidly. Allowing FDI will increase the speed of its growth and raise its efficiency. But is faster growth always a good thing? Correspondingly, is slowing down change — even unavoidable and potentially beneficial change — necessarily a bad thing?

Organised retail, whether Indian or foreign, can only raise efficiency by reducing employment

The question is not frivolous, for it goes to the heart of the debate on the pros and cons of opening up the retail trade sector to FDI. It was first asked 70 years ago by Karl Polanyi, one of the greatest economic historians of the 20th century.

Writing about the social consequences of the first enclosure movement in British agriculture, which turned farmland into sheep pasturage to provide wool, and threw lakhs off the land, Polanyi said: “Nineteenth century historians were unanimous in condemning Tudor and early Stuart policy (of using the crown’s prerogative to prevent enclosures) as demagogic, if not outright reactionary… But why should the ultimate victory of a trend be taken as proof of the ineffectiveness of the efforts to slow down its progress? It is certain that the development of the woollen industry (led) to the establishment of the cotton industry — that vehicle of the Industrial Revolution. Yet, but for the consistently maintained policy of the Tudor and early Stuart statesmen, the rate of that progress might have been ruinous… for upon this rate mainly depended whether the dispossessed could adjust themselves to changed conditions without fatally damaging their substance, human and economic, physical and moral…”

Polanyi’s profound insight has singular relevance for the choices the government faces today. The modernisation of retail trade must eventually happen, but it needs to happen at a pace that allows those who are thrown out of work to find alternative — preferably better paying and more secure — employment. This is a responsibility that the government cannot ignore, and most certainly cannot leave to the market.

The Tudors and early Stuarts fought to prevent, and succeeded in slowing down, the enclosure movement because they understood and feared the destructive power of the market. In 1649, King Charles I lost his head because of the policies he and his predecessors had espoused. But they saved England and allowed it to rise to the pinnacle of power.

Let no one harbour any doubts about the threat that an immediate rush of FDI into retail holds for India. Organised retail, whether Indian or foreign, can raise efficiency in retail trade only by reducing employment. One has only to compare the labour-to-turnover ratio in Indian retail today with what it is in Wal-Mart, to see how huge the potential loss in employment actually is.

The Indian retail sector employs 40 million people and has a turnover of $450 billion. The turnover per employee is a little over $11,000 per year. After adjusting for differences in the purchasing power of the rupee versus the dollar, this is probably equivalent to $14,000 per employee. By contrast, the turnover per employee in Wal-Mart is $275,000 worldwide, and $165,500 in its stores outside the United States. If organised retail were to take over the whole of the retail trade in India instantaneously and attain the efficiency of Wal-Mart abroad, it could throw 10 out of every 12 present-day employees, i.e. up to 32 million people, out of work.

However, this is a theoretical outer limit of possible job loss. The actual loss will depend upon a host of other factors. To begin with, as long as foreign retailers stick to the 53 cities that have more than a million inhabitants, only half of the total trade will be affected. This brings the number of jobs that will be endangered down to 16 million, and possible job loss to around 14 million.

Second, given the present urban congestion, the lack of mechanised transport and the capacity of the kirana and neighbourhood stores to fight back even if organised retailers like Wal-Mart and Carrefour open neighbourhood stores, it is doubtful if the share of organised retail will rise beyond 60 percent — about the present share in Europe — in the foreseeable future. Organised retail already accounts for around 15 percent of retail sales in the million-plus cities. So it is in the additional 45 percent that the jobs will be endangered. This brings the tally of endangered jobs down to around below eight million.

WILL THIS loss be permanent or temporary? The answer will depend upon the economic growth rate and therefore the retail sector, and the speed of penetration by organised retailers. These are the variables that hold the answer to the question that is roiling the country today. If the economy continues to grow at 7 percent per annum, and a higher rate of urban growth pushes up the share of GDP generated in the urban areas, the volume of urban retail trade will more than double in 10 years. Simple arithmetic shows that even if the share of organised retail rises to 60 percent over this period, the turnover of the neighbourhood stores will actually rise, possibly by more than 20 percent. Thus employment in traditional retail will rise and not fall.

However, if the speed of penetration is twice as high and organised retail takes over 60 percent of the total trade in five instead of 10 years, then one in three jobs in the traditional sector — somewhat over five million — will be lost. By the same token, if the economic growth slows down, or the country goes into recession, traditional retail will be the first to suffer. Only a small proportion of those who lose their jobs will get absorbed into the organised retail sector. What is more, this model holds true only for a closed economy. If the entry of FDI not only speeds up penetration but replaces some indigenous with imported consumer goods, then even in the best of circumstances the gain in employment in retail will be offset by losses in manufacturing and agriculture. These are the dangers that an avalanche of FDI in retail poses.

Prem Shankar Jha is Senior Journalist.
premjha@airtelmail.in

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