The UPA government’s decision to allow FDI in the retail sector has spawned heated debates all over the country and rekindled fears of the East India Company. Ashok Malik dissects the pros and cons of the policy that Manmohan Singh & Co believe is needed to boost the ailing Indian economy
DOES INDIA have too much of a history for its own good? In the past week, as the ‘FDI in retail’ debate intensified and the UPA government found itself battling yet another challenge, as is usual these days the most overstated and pungent commentary came in the social media.
A particularly enthusiastic participant on Twitter compared the Manmohan Singh government’s decision to allow majority-owned foreign retail — 100 percent in case of single-brand retail such as Marks & Spencer and 51 percent in case of multi-brand retail such as Wal-Mart — to the Mughal emperor handing over the diwani (right to tax collection) of Bengal, Bihar and Orissa to the East India Company in 1765, after the Battle of Buxar.
For sheer hyperbole, for absolute overstated nonsense, there were few better comparisons. Yet what was astonishing — or perhaps it need not have been astonishing at all — was that the spectre of foreign-owned retail stores seemed to haunt the entire political class in almost exactly the same manner.
From the BJP to the CPM, from the Biju Janata Dal to the BSP, and even within the ruling Congress, the idea of foreigners coming to India and doing business, and allegedly taking away Indian jobs and rupee profits was all-consuming. Twenty years after economic reforms began, 17 years after India became a member of the World Trade Organisation, a decade of robust economic growth and globalisation notwithstanding, the ghost of the East India Company refuses to quit India.
To be fair, the issue was not just one of political grandstanding and in some cases plain hypocrisy. If the BJP was at sixes and sevens explaining its opposition to FDI in multi-brand retail when it had advocated just such a policy while in power in 2004, the government was facing criticism from the Congress and its allies for remarkably clumsy timing and the prime minister’s continued inability to read political tea leaves.
Drowned in all this was a reasoned debate on what FDI in retail could or could not mean. Would it really impoverish Dalits and OBCs, as Uma Bharti and Mayawati both claimed? Would it cripple Indian farmers, as M Venkaiah Naidu of the BJP and D Raja of the CPI both insisted — or would it help farmers as Agriculture Minister Sharad Pawar and the Akali Dal, among others, saw it? What would it mean for consumers, manufacturers and agricultural intermediaries? Would small kirana stores — tearful obituaries of which were already being written on Facebook (“I’ll miss them so much”) — really going to vanish in a few years?
Finally, there was that one overwhelming and compelling question: in a world more inter-connected and an economy more globalised than ever in history, why is it so easy to scare Indians by raising the bogey of the foreigner? Indira Gandhi spent a decade in the 1970s railing against the foreign hand. Just who embodies this creature? Who is the Big Bad Foreigner: Clive’s disciple, Macaulay’s grandchild, son of a CIA agent, now working at a Wal-Mart store near you? When even supposedly right-wing MPs start recommending conspiracy- theory books on how Wal-Mart is destroying America, one does wonder.
EVERY ECONOMIC initiative is a mixed blessing. Even if it expands the cake, there will still be some losers. If the reforms of 1991 and the industrial delicensing norms of the period had not happened, Indians would still be driving Ambassadors and probably paying Rs 12 lakh to Rs 15 lakh for each such car. As such, the opening up of the Indian automobile sector — to foreign-owned car manufacturers, for instance — had some clear losers: Hindustan Motors, Premier Padmini and so on.
The point is: was it worth it? Did the overall car market expand? Did the number of car and automobile component manufacturers, dealers and repair shops go up? Were more jobs created and were more people able to buy better cars? In the end, economic policy has to be assessed as per this touchstone.
Organised retail in India — and especially foreign-owned and globally-linked retail, with its deep pockets and transcontinental supply lines — will have an impact on small, unorganised retail, on farmers, on agricultural intermediaries and, finally, on consumers. Even among consumers, depending on what you want to buy and what quality and price you have set your mind on, your experience can vary.
The effect of big retail on small stores is never instantaneous. In Britain, corner shops co-existed with big retail stores for decades, cutting prices and becoming increasingly specialised to compete and continue to attract a loyal customer constituency.
In 2008, the Indian Council for Research on International Economic Relations (ICRIER) published a paper titled ‘Impact of Organised Retailing on the Unorganised Sector’. This paper was used by the Ministry of Commerce and Industry to trigger wider discussions and eventually build a case for the further liberalisation of retail in the final week of November 2011.
ICRIER described its study as the “largest ever survey of all segments of the economy that could be affected by the entry of large corporates in the retail business”: “The findings are based on a survey of 2,020 unorganised small retailers across 10 major cities; 1,318 consumers shopping at both organised and unorganised retail outlets; 100 intermediaries; and 197 farmers. In addition, a ‘control sample’ survey was done of 805 unorganised retailers who are not in the vicinity of organised retail outlets in the four metro cities. Detailed interviews were also carried out for 12 large manufacturers, 20 small manufacturers and six established modern retailers.”
For better or worse, this remains the only major study of the entry of large, organised retail in India of the social and economic impact on the unorganised sector. The findings of ICRIER influenced the government substantially.
The 2008 paper was cited in the July 2010 ‘Discussion Paper on Foreign Direct Investment in Multi-Brand Retail Trading’, released by the Department of Industrial Policy and Promotion, Ministry of Commerce and Industry. This discussion paper, in turn, defined the contours of the enhanced FDI in retail policy of the past week.
The ICRIER document had some bald assessments. “Given the relatively weak financial state of unorganised retailers, and the physical space constraints on their expansion prospects,” it said, “this sector alone will not be able to meet the growing demand for retail. Hence, organised retail, which now constitutes a small 4 percent of the total retail sector is likely to grow at a much faster pace of 45-50 percent per annum… This represents a positive sum game in which both unorganised and organised retail not only co-exist but also grow substantially in size.”
As per surveys conducted by the ICRIER researchers:
• “Unorganised retailers in the vicinity of organised retailers experienced a decline in their volume of business and profit in the initial years after the entry of large organised retailers”
• “The adverse impact on sales and profit weakens over time”
• “There was no evidence of a decline in overall employment in the unorganised sector as a result of the entry of organised retailers”
The rate of closure of small retail stores “on account of competition from organised retail” was found to be 1.7 percent per annum. Further, there was optimism in the small retail community: “There is competitive response from traditional retailers through improved business practices and technology upgradation. A majority of unorganised retailers is keen to stay in the business and compete, while also wanting the next generation to continue likewise.”
Today, D Raja of the CPI says, “Retail trade gives employment to 40 million people and the livelihood of 200 million people depends on it. This (FDI in retail) would jeopardise employment of our people.” The ICRIER report would suggest otherwise.
In an economy more globalised than ever in history, why is it so easy to scare Indians by raising the bogey of the foreigner?
While ICRIER did find “some adverse impact on turnover and profit of intermediaries dealing in products such as fruit, vegetables, and apparel”, farmers were big gainers: “Farmers benefit significantly from the option of direct sales to organised retailers. Average price realisation for cauliflower farmers selling directly to organised retail is about 25 percent higher than their proceeds from sale to regulated government mandi. Profit realisation for farmers selling directly to organised retailers is about 60 percent higher than that received from selling in the mandi. The difference is even larger when the amount charged by the commission agent (usually 10 percent of sale price) in the mandi is taken into account.”
The biggest gainers from the entry of organised retail, the ICRIER report said, were consumers. Overall consumer spending had increased and prices for select commodities dropped.
ADMITTEDLY THE ICRIER study had only assessed the entry of organised but Indian-owned retail on the Indian bazaar. The entry of foreign-owned retail is quite another matter, it would appear. In a sense, it will intensify and harden trends already seen.
At one level, the advantages to Indian agriculture are easy enough to foresee. As one economist, who did not wish to be named, puts it, “India’s IT industry grew out of the idea of taking advantage of wage arbitrage. Why not Indian agriculture too?” Simply, this means that Indian wages are lower than western wages, whether in a call centre or a wheat field. As such, why can’t India become a food producer for and source to global supply chains? Why can’t Indian mangoes and potatoes retail at Wal-Mart stores in other countries?
In this scenario, the arrival of foreign retail — with its continuous urge to drive down prices, squeeze margins and buy and sell at the cheapest possible rate — could benefit Indian farmers. The proposal that foreign retail chains set up back-end cold-chain networks and not allow Indians fruits and vegetables to waste away and perish also seems alluring.
However, as the experience of cash-and-carry foreign retail chains — which are like wholesale markets, allowed to sell only to small retailers or businessmen and not to consumers directly — has shown, this is a mixed opportunity. “We can build cold chains,” says a consultant to one such cash-and-carry chain, already operational in India, “but the principal problem is power. There is an electricity scarcity in India.” Wal- Mart cannot build power plants.
Another business analyst, who wanted to remain anonymous, cites the example of Karnataka, which saw a tomato crop glut a few years ago. “Farmers had to sell their crop at 50 paise a kg,” he says. The European cash-and-carry company that bought large quantities of these tomatoes found storage and processing facilities in India inadequate and flew the stock abroad. It probably came back as tomato sauce.
Was this theft of Indian food or was it representative of an inability of India to build quality infrastructure to take care of its precious farm produce?
It would make sense to expect that foreign retail chains, with long-term horizons and expansive war chests, would invest in this infrastructure. Yet this alone won’t be enough. Agricultural trade and movement of produce between states — sometimes even within states — is notoriously complex in India. Since the government (or governments) can’t build this cold chain, can’t ensure power, can’t simplify internal agricultural trade, are the Wal-Marts and Tescos of the world expected to enter India and lobby and persuade the state governments to help in this regard?
Why can’t India become a food producer for the world? Why can’t our potatoes retail at Wal- Mart stores in other countries?
The BJP makes this argument when it says that building cold storages is not rocket science and can easily be done by Indian companies or the Indian State. Yet the fact is if it has not been done, if infrastructure gaps remain, if internal trade in agricultural commodities remains so un-reformed, it does speak poorly of the political class and its inability to arrive at a consensus on even basic and needed economic policy. Does pressure (or “persuasion”) by an external player then become the easy and only way out? This troubling question is at the heart of the retail debate.
THE RETAIL controversy has been frontloaded with the agriculture question. The real fears are those of the intermediaries. Farmers are likely to be more supportive of organised, even foreign-owned retail, than intermediaries. With its big-farmer base and its experience of the Bharti-Wal-Mart collaboration, Punjab’s Akali Dal government is welcoming of FDI in retail than, say, an intermediary in a mandi.
If the NDA finds itself at odds with its Akali constituents, there is a precedent to turn to. A few years ago, West Bengal saw a similar battle within the then ruling Left Front. Reliance, then making an ambitious foray into retail, sought to buy large quantities of potatoes and enter into multi-year agreements with farmers in Arambagh (Hooghly district). The local CPM leadership, which mobilised potato farmers, was ecstatic.
The proposal was thwarted by the Forward Bloc, a small partner of the CPM, which controlled the Agricultural Marketing Department and its oversight ministry, issued licences to an entire network of agricultural intermediaries and saw them as supporters, voters, and financiers.
The BJP argues building cold storages isn’t rocket science and can be done by Indians. Yet, the fact is it hasn’t been done
WAL-MART, Target and Carrefour don’t sell only food items. They make their money and ensure footfalls by selling everything from clothing and linen to toys and cycles. In a sense, the coming of foreign retail — much like the opening of organised imports from China and the ASEAN countries — could hurt Indian manufacture.
Arun Jaitley, Leader of the Opposition in the Rajya Sabha, said as much in a newspaper article: “The first consequence will be an adverse impact on domestic manufacturing. Domestic retailers source domestically. International retailers operate on the principle of buying internationally at the cheapest cost. Majority items to be sold by international retailers are going to be sourced from cheaper manufacturing economies like China. Clothes, shoes, toiletries and other items of daily use are not likely to bear Indian signature. The fall in manufacturing sector jobs is likely.”
Frankly, this is happening even without incremental FDI in retail. Taking advantage of the India-Thailand Free Trade Agreement (FTA, a three-letter word that may soon match the notoriety of FDI for the autarkic), some car manufacturers are now sourcing components from factories in Thailand. In the process, they are not adding to jobs in India and not giving orders to Indian component manufacturers. Their contention is lower wages and better infrastructure (power and transport) makes its cost-effective to import these items. Indeed, following the recent floods in Bangkok, supply of some of these components slowed down and delayed car delivery schedules in India.
What should India do in this case? Should it fine these car companies and renege on the FTA with Thailand? Alternatively should it get down to improving its infrastructure and making India a more attractive manufacturing destination? If Indian manufacturers can’t compete — whether for reasons of efficiency, regulation, capital, interest rates or complacency — should big retail be kept out to protect them? Why not force them to compete and facilitate this process? It is the obvious question the Indian right should be asking but is not.
NOT THAT the Congress is beyond questioning itself. After years of minimal economic urgency and reformist policy — and a wasted opportunity following the mandate of 2009 — the UPA government woke up to FDI in retail rather suddenly. Sources say Prime Minister Manmohan Singh and Finance Minister Pranab Mukherjee were worried by the negative impression in business circles and the falling stock market and economic indices. That aside, courtesy the lengthening current account deficit, there were also anxieties about India’s foreign exchange cushion. The retail decision was a quick-fix measure.
The coming of foreign retail, much like the opening of organised imports from China, could hurt local manufacturers
Unfortunately, it came in the middle of a parliamentary session. Opposition hostility was only to be expected — a parliamentary session gives the Opposition, any Opposition, the perfect stage for political theatre. The UPA government leadership’s failure to anticipate this has left even Congress MPs flummoxed.
In the Cabinet meeting that took the decision on FDI in retail, dissenters were shouted down. Rural Development Minister Jairam Ramesh, for example, was apparently snubbed when he recommended the decision be postponed till after the UP elections. He was sarcastically asked how much electoral experience he had. Ramesh is a Rajya Sabha member.
In UP itself, Congress MPs are protesting about the FDI in retail announcement. Perhaps some of them see it as the perfect excuse to explain an expected poor performance. Others, less cynical, wonder if their party’s government really had to hand over an issue to regional parties in UP, and allow them to once more raise the foreigner bogey in small-town India. It’s so easy, isn’t it — as Indira Gandhi discovered to her delight in the 1970s, as her successors discover to their discomfort in 2011.
Ashok Malik is Contributing Editor, Tehelka.