TOUTED AS a cure-all for India’s economic ills, Foreign Direct Investment (FDI) in multi-brand retail is at best an anodyne, and at worst, toxic. It is an attempt to lift markets by fabricating sentiment; signalling an economic turnaround without any concrete steps being taken to trim the fiscal deficit or boost manufacturing.
All standard justifications for inviting FDI in retail do not stand scrutiny. There’s no data to back claims that it will trigger a flood of capital inflow, generate millions of jobs, lift industrial production through local sourcing norms, create a storage infrastructure that will help cut down on food wastage, and eliminate rapacious middlemen who drive up basic commodity prices.
There’s plenty of evidence to the contrary. Studies have shown that Big Retail, which integrates the supply chain from field to fork, has not benefitted producers, whether farmers or small manufacturers, in terms of income. On the other hand, by monopolising distribution channels through cartelisation or predatory pricing, it has squeezed producers’ margins.
The consent of Congress President Sonia Gandhi was probably obtained through PM Manmohan Singh’s gloom and doom scenarios, presented first to the Union Cabinet and then to party office-bearers. The nosediving of the rupee, falling forex reserves and ballooning oil bill were all called into play, to help strengthen the argument for FDI in retail. What all of this has to do with ameliorating farmers’ distress — touted as the main reason for the policy shift — has never been explained.
The Indian retail market is like no other in the world, in terms of reach and fragmentation. It stretches from the smallest villages to the biggest metros, with multiple layers of retailing. No other sector is as decentralised. It is believed to employ some 4 crore people in 1.2 crore retail outlets; a far cry from Walmart’s 21 lakh employees in 422 outlets!
Accounting for 14 percent of the GDP, retail in India is a community entrepreneurship activity, running on trust, often with pooled experience and capital. In terms of growth, it has outstripped other sectors of the economy.
The contention that Big Retail will benefit farmers and consumers does not hold water. If this were true and Walmart and its ilk were messiahs for cultivators, the US farmers (who form 2 percent of the population) would not need annual farming subsidies of $20 billion. In the European Union, with a farming population of 5 percent, subsidies are in the region of $75 billion. The small Indian farmer not only does not get subsidy, but is more productive — he holds a third of the land, but produces over 40 percent of the food.
Countries have had unhappy experiences with FDI. China, Malaysia and Thailand, after opening their retail sector, did a rethink
Numerous studies have found that Big Retail poses “serious risks” for farmers in developing countries. The current system of selling the produce in the mandi on an as-is-where-is basis, would be replaced by one in which they would be at the mercy of the retailer’s quality standards and risk rejection of their produce. Better prices are unlikely, given Walmart’s policy of EDLC — Every Day Low Cost. This basically means that it would beat down sourcing prices by eliminating purchasing competition over time.
For example, a cocoa farmer in Ghana receives 3.9 percent of the cost of a bar of chocolate. But the retail mark-up is 34.5 percent. Similarly, a banana grower in South Africa gets 5 percent of the total retail cost of a banana, but the retailer gets 34 percent.
The efficient supply chain management argument is downright silly. After all, agro-processing and cold storage have been open to FDI for years, but no one has shown interest because of the infrastructure gap in terms of power and roads. National highways form only 2 percent of India’s road network, but handle 40 percent of the road traffic! Ninety-four percent of India’s roads link villages and local markets. So, unless Walmart is in the business of road construction and power generation, the scenario is unlikely to change.
Walmart’s stated objective is to sell cheaper than other retailers; how can it do so and still maximise returns to its shareholders without squeezing producers and manufacturers who supply goods for its stores? The larger a retailer’s share of the market, the more clout it enjoys. For instance, Tesco holds 30 percent of the grocery market share in the UK, giving it a tremendous hold over suppliers and consumers.
By contrast, the fragmented Indian market gives consumers a plethora of choices. The intense competition among retailers has them vying with one another to lessen the mark-up, so that the consumers get the best possible price. Big Retail typically eliminates competition so as to grab the largest chunk of the market.
As for the argument that it will create more jobs in terms of manufacturing, it might — but not enough to compensate for those lost through displacement of retail outlets. Nor does Walmart have a stellar record as an employer. A number of studies have shown that multi- and even single-brand retailers source from sweat shops. Their stringent norms, short delivery deadlines and squeezing of suppliers are conducive to ruthless exploitation of labour.
The very informality of the Indian retail sector is its strength. Workers move freely in and out of the sector; it acts as a shock absorber during the very worst economic downturn. An out-of-work factory labourer will turn newspaper hawker until he finds another job; during the off-season, a tourist guide may turn vegetable vendor. Also, Indian retailers typically provide goods on credit to poor consumers, to help them tide over bad times. This unique “social capital” would be lost if Big Retail displaces the existing system.
Several countries have had unhappy experiences with Big Retail. Japan, of course, has protected its retailing but China, Malaysia and Thailand, after opening their retail sector to FDI, did a rethink. New norms have been put in place to check the growth of malls and supermarkets because of negative impact on local economies and employment. The final argument presented is that Indian Big Retail has not had an adverse impact on the market. In fact, it is the big companies like Reliance and the Birlas who have suffered severe losses and shut down their stores. But the difference in scale and business practices needs to be factored in. Walmart can afford predatory pricing almost indefinitely; it can take the time to eliminate competition at both ends of the supply spectrum and create monopolies. It is argued that since there will be several multinationals in the fray, monopolies will be prevented. But cartelisation of Big Retail is more than likely.
“Foreign ownership is not a problem if it creates employment, adds value and contributes to development. The problem with FDI in retail is that experience shows it does none of the above. Rather than create jobs, it destroys jobs. Their utility in developed economies is due to the labour savings they achieve,” observes economist Mohan Guruswamy.
For all these reasons and more, there has been resistance to the idea of FDI in multi-brand retail. Willy-nilly pushing it through the teeth of the Opposition, the government has left it to the state governments to decide whether or not they want to open up to Big Retail. They can also decide what norms they choose to apply. For instance, one suggestion is that supermarkets be kept outside city limits, so that the local pansari store is not affected. Some countries do have zoning laws for supermarkets.
Without studying the possible impact of Big Retail entering the Indian food supply chain, not to mention an entire range of consumer durables and non-durables, state governments will have to tread with extreme caution.