The big bull in the India shop

One-stop shop A customer at Best Price, which is jointly owned by Wal-Mart
Photo: Reuters

FOR THE Congress, Prime Minister Manmohan Singh’s insistence on FDI in retail has been a politically expensive decision, creating fissures in the UPA, uniting and energising the Opposition and allowing the BJP to find common ground with once and future allies like the BJD, TMC and AIADMK (the only plus for the Congress being the SAD-BJP differences).

Round the corner Big Retail is likely to put kirana shops out of business in India
Photo: Shailendra Pandey

In economic terms, the fallout may prove not just expensive but unaffordable, say the anti-FDI campaigners. The Standing Committee of Parliament, back in 2009, raised fears of millions of small retailers being displaced, small farmers and manufacturers being exploited, narrowing of consumer choices and escalating social tensions. Global experience with Big Retail indicates those fears may be valid.

The landscape of the Indian retail sector is unique: highly fragmented, dominated by small enterprises, with many intermediaries. It provides employment to some 40 million people and comprises around 12 million retail outlets. The wholesale trade is controlled by thousands of small, local-level commission agents and distributors working on tiny margins (in percentage terms).

The most distinctive feature of the retail sector is its social aspect; the entire system — from manufacturing to retailing — is community-centric and family- driven, a collective enterprise operating on trust within a defined area. Vendors typically enjoy a personal relationship with consumers, way beyond monetary transactions. Traditional retail is employment-intensive and low cost, the reverse of Big Retail. It includes corner shops, convenience stores, pavement vendors, proprietor- run general stores and kirana shops.

Most important of all, it is highly elastic, absorbing small traders and retailers who freely move in and out of the sector. Jobless labourers and idle farmers may turn delivery boy or entrepreneur or hawker until they find regular employment. In addition, there are many small producers who sell their goods directly to the consumer. In effect, the multi-tiered retail sector is a shock absorber.

Commerce Minister Anand Sharma, in his letter to party leaders, has sought to allay fears that the advent of Wal-Mart, Carrefour and others would displace traditional retail and create unemployment. According to him, studies have shown that traditional and organised retail can and do co-exist in developing economies.

Wal-Mart has famously put mom-and-pop stores out of business all over the US. The destruction of local retail trade in Thailand and Brazil by multinational chains (necessitating policy interventions by government) is well documented. Predatory pricing is Wal- Mart’s standard operating procedure, against which there is no defence. So it’s difficult to accept Sharma’s “informed studies”, says food policy analyst Devinder Sharma.

Costs in India are well managed by resource-conscious retailers, unlike the vertically integrated behemoths of western markets

 In a 2005 study, economist Mohan Guruswamy and others observed: “Opening the retailing sector to FDI means dislocating millions from their occupation and pushing a lot of families under the poverty line… the western concept of efficiency is maximising output while minimising the workers involved — which will only increase social tensions.”THE GOVERNMENT harps on the fact that the retail giants will only be permitted to set up shops in 53 cities. In all likelihood, this is the thin end of the wedge. These cities represent the first phase of the rollout plan. When that has been accomplished, a minor policy change will be effected to allow further penetration.The second big question is whether Big Retail will benefit producers. Thus far, the reverse appears to be true, with global supply chains stretching all the way from Bangladesh to Bond Street.The balance of power in negotiating with producers lies with the companies. The reason why they prefer low-cost locations, like India, is that profits can be maximised by exercising absolute control over their supply base and keeping down prices.Oxfam’s 2005 report on Big Retail, ‘Trading away our rights’, describes how risks and costs are passed down the supply chain to the producers. Destruction of traditional retail results in a situation where there are many small manufacturers and suppliers and very few buyers. So they get to determine price, quality, delivery schedules and labour conditions. Even the World Bank recognised this danger: “Competition among suppliers may drive prices down, and the benefits of local firms’ productivity improvements will accrue to the multinational.”The Oxfam report says: “Buyers employed by many retailers and brands are given strong incentives to cut the prices they pay. Others demand ‘open-book costing’ that requires suppliers and producers to reveal their production and delivery costs so that retailers can cut out low-value steps, and capture the saving in lower prices. Some boost their profits by charging suppliers for product promotions, for store displays, for discounts on poorly selling goods, for discounts on well-selling goods, and even for simply being listed as a supplier.”The reason most touted for FDI in retail is the benefit to farmers. Anand Sharma says it will “transform the rural economy and unlock supply chain efficiencies in agri-business… it will unfold immense employment opportunities for rural youth and make them stakeholders in the entire agri-business chain from farm to fork”.Basically, his contention is that India’s post-harvest losses are high and investment in storage infrastructure will solve the problem. Also, Big Retail will eliminate middlemen and pay farmers high prices for their produce. Both of these will be ensured by insisting that retail chains invest $50 million each in cold chains and source 30 percent of their goods from local producers.Let’s first consider the question of infrastructure. The investment required for cold stores and refrigerated transport is not high — most domestic organised retailers can afford it. The tricky part about ensuring “supply chain efficiencies” in agri-business is securing uninterrupted power supply and good roads. Will Wal-Mart invest in power plants and rural roads?

As for farmers, remunerative prices for farm produce and getting rid of middlemen sounds good. But just how much is the farmers’ share in the total price of the product? Studies show that in the case of apples exported from South Africa to UK supermarkets, it is 9 percent of the price. The retailer’s share is 42 percent!

And what exactly is a remunerative price? Farmers are unable to make ends meet because the minimum support price (MSP) in most cases barely covers their input costs. To make a difference, Wal-Mart & Co would have to pay well above the MSP. And this premium would have to be maintained. But global experience shows that premiums are withdrawn once all other buyers — in this case, the ahratiyas or traditional middlemen — have been eliminated. The farmers become a captive supply base, subject to exploitation. This system is described in food policy expert Raj Patel’s Stuffed & Starved. Incidentally, ahratiyaas are also an informal source of credit for farmers.

JOB CREATION is another justification for FDI. This refers to indirect employment in manufacturing and other sectors, as global giant Wal-Mart employs barely five lakh people worldwide. Only a handful of people can hope for direct employment and the bulk of manufacturing — 70 percent — will be located abroad, probably China. So where the promised 10 million jobs come from — especially considering that at least as many people will be displaced from their current occupations, remains a mystery.

Controlling inflation and benefiting the consumer are also cited as reasons for green-lighting FDI. The Inter-Ministerial Group (IMG) on inflation, had recommended FDI in multi-brand retail.

Economic adviser Kaushik Basu observed: “We are taking a clear position on FDI in multi-brand retail… there is a need to… reduce the price gap between farm gate and consumer prices.” It is not clear how FDI is going to accomplish that, especially if retailers plan on paying better prices to farmers.

The fact is that in a fragmented market, the consumer has many more options than in an integrated one. Besides, Patel pointed out in a lecture on the supermarket system, Big Retail manipulates consumers and encourages wasteful expenditure.

The real danger is that once FDI-backed players come in, the market is consolidated in the hands of a few who then dictate terms to all, observes Devinder Sharma. Today, channel costs in India are efficiently managed by our resource-conscious retailers, unlike the vertically integrated behemoths of the West.

According to B Murlidhar Rao, BJP secretary and former convenor of the Swadeshi Jagran Manch, “The Indian retail market, estimated at $400 billion-$450 billion, is a precious economic asset. It must be protected and used to promote Indian entrepreneurship and leveraged in future negotiations as India emerges as a global player. Why put it up for sale?”

Increasingly, it looks as if FDI in retail is prompted not so much by internal needs as external pressures. In population terms, two-thirds of India stands against it. Only Congress-ruled states and Punjab will be accessible to Big Retail — and not without a fight.


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