It was an avoidable diversion. While parliament was
in session, the cabinet met to approve hitherto prohibited
foreign direct investment in multi-brand retail, with
a cap of 51 per cent on foreign equity that ensures
majority ownership. Simultaneously the cap on foreign
equity investment in single-brand retail has been
enhanced to 100 per cent, offering sole ownership
rights to foreign investors. Opposition to the move
resulted in the virtual suspension of an already stalled
parliament. Finally, the audacious attempt of the
UPA II to push through these controversial proposals
had to be finally revoked till a "consensus"
is found. Since a proposal that did not even enjoy
a parliamentary majority is unlikely to be accepted
by consensus, this is nothing but a rollback.
The Manmohan Singh government had clearly not bargained
for this defeat. Experience with the nuclear deal
under UPA I had perhaps convinced it that in the event
of a vote in a discussion on the policy, it could
somehow find a majority. It was only when its own
allies in government expressed their dissent and threatened
to abstain or vote against the measure that the retreat
was seen as inevitable.
Thus, this is not a defeat of just this policy. It
is also amounts to the censure of the political practice
in which a government that is losing credibility seeks
to use an executive decision to override something
the Parliament will not allow. Sections in the government
may believe that this policy and the framework to
which it belongs are good for the country. But they
also must be familiar with the arguments being advanced
by those who are critical of the policy. It is those
arguments they sought to dismiss when pushing ahead
with the FDI agenda.
Consider those arguments. They begin with the view
that once the doors to foreign investment in the retail
sector are opened, giant international retailers such
as Wal-Mart, Carrefour and Metro would use the opportunity
to get a share of the large Indian market. This is
based on evidence on the pace of penetration of organised
retail (led by transnational firms) into developing
countries, including those in Asia. An analysis by
researchers from Michigan State University and the
International Food Policy Research Institute on developments
in Asia during 2001 to 2009 found that while domestic
conglomerates have played a role in the rapid growth
of organised retail in China, Indonesia, Malaysia
and Thailand, the presence of foreign firms has grown
substantially. Moreover, evidence from the developed
countries shows that such growth is followed by a
process of consolidation in which a few global retail
chains tend to be the winners.
The names of some of these retail chains are now well
known. Foreign sales have been an important source
of revenue for many of them, amounting in 2007 to
as much as 74 per cent in the case of Ahold of Netherlands,
52 per cent for Carrefour of France, 53 per cent for
Metro of Germany, 22 per cent for Tesco of UK and
20 per cent for Wal-Mart of USA. Wal-Mart's 20 per
cent too has to be seen in context: with $379 billion
of revenues in 2007 it stood way ahead of Carrefour,
which came in second with $123 billion in the global
league table for revenues.
The debate on FDI in retail revolves around the consequences
that the growing presence and rising market share
of these global giants would have. The power of these
chains has been amply illustrated in other contexts,
where they have been in operation. With deep pockets
and international sourcing capabilities, they exploit
economies in procurement, storage and distribution
to outcompete and displace domestic intermediaries
in the supply chain. This occurs not in one or a few
centres, since each retail chain tends to establish
procurement, warehousing and distribution facilities
across regions and cities. Once the smaller middlemen
are displaced, we have a few large firms and their
agents dealing with a multitude of small, medium and
relatively large producers on the one side, and a
mass of consumers on the other.
Structurally this interaction between a few powerful
intermediaries and a large number of producers and
consumers provides the basis for an increase in trade
margins at the expense of prices paid to producers
or charged to consumers. The giant "middlemen"
appropriate these higher margins. That a part of the
margin may be shared with the producer or consumer
to increase retail volumes and market shares does
not take away from the fact that the distribution
of power within the supply chain benefits the large
intermediary.
There are three issues of particular concern that
arise. The first is the impact that the transformation
in retail would have on small producers, especially
in the farm sector. Though large, organised retail
outlets tend to attract consumers by offering a diverse
range of products at a single location, there is a
tendency to standardise each of the products on offer.
This involves closer interaction with the supplier
and changes in farming practices, often leading to
rising costs for the producer and necessitating increased
access to working capital. To the extent that this
results in the subordination of the producer to the
buyer or the buyer's agents, transactions are no more
arms length in nature. The danger is that the prices
paid to and returns earned by small suppliers would
be depressed because a few buyers dominate the trade.
Moreover, dependence on a few buyers could mean that
when the market is lean the producer is forced to
bear a disproportionate share of the burden through
measures such as delay in payments. Given the precarious
viability of crop production even at present, such
changes could severely damage livelihoods.
It is of course true that agriculture is not a homogenous
sector, with farmers of different types and sizes
engaged in production. The larger farmers with accumulated
surpluses or easier access to official credit may
benefit from the transformation in retail. It is the
experience of farmers such as these that are often
reported when the case is made that farmers favour
FDI-led large retail. But they are by no means the
majority, and not all of them are likely to experience
an improvement once the transformation occurs. Moreover,
since global chains are allowed to and are equipped
to source supplies from anywhere in the world, these
large farmers just as the smaller farmers would be
subject to competition from the cheapest global sources.
They could be shut off from access to consumer unless
they accept a significant reduction in prices. Adverse
effects on employment and earnings are therefore a
real possibility.
The second concern is that even when farmers' earnings
are under pressure, consumers may not benefit from
the promised reduction in prices resulting from cost
economies and the benefits of scale accruing to large
intermediaries. Lower prices for consumers may be
the initial fallout when existing intermediaries are
being competed out to provide the space for the large
retailers. But, once the retail trade is concentrated
in a few firms, retail margins themselves could rise,
with implications for prices paid by the consumer,
especially in years when domestic supply falls short.
Finally, within the supply chain itself, a range of
pre-existing operators would be displaced, varying
from street vendors and kirana stores to medium and
large wholesale dealers. The latter would be rendered
irrelevant by the ability of large conglomerates to
directly contract with and procure from producers.
The immediate and direct effect would be a substantial
loss of employment in the small and unorganised retail
trade as well as in segments of the wholesale trade
displaced by the big retail chains.
The potential significance of this impact can be judged
from the role of the retail and wholesale trade in
generating employment in the country. According to
the National Sample Survey Office's survey of employment
and unemployment in 2009-10, the service sector category
that includes the wholesale and retail trade (besides
the much smaller repair of motor vehicles, motorcycles
and personal and household goods), provided jobs for
44 million in the total work force of 459 million.
It is no doubt true that the impact of foreign-invested
retail would be restricted to the urban areas since
entry as of now is permitted only in cities with a
population of more than one million. But this is where
the employment in trade would be the highest. Twenty-six
out of the 44 million employed in the sector are located
in urban areas. Many of these workers find themselves
in the services sector (especially in the retail trade)
because of inadequate employment opportunities in
agriculture and manufacturing. Out of 71 million jobs
in services in the urban areas, around 36 per cent
are in the retail and wholesale trade and repair services.
In sum, from an employment point of view this is a
sector that is central to livelihoods, however, precarious
some of those jobs can be. As an "employer of
last resort", it serves as a poor substitute
for the missing social security programme.
The government denies that the entry of large retail
led by transnational firms would affect employment
adversely. Since it is difficult to argue that a form
of retail trade that relies on scale, technology and
capital intensity to reduce costs would generate more
direct employment than the less organised trade that
it displaces, the focus is on indirect employment.
Adequate new jobs would be created elsewhere in the
supply chain, it is argued, even if not in the supermarkets
themselves. This is an area where estimates are speculative
at best and are therefore not persuasive. So the fall-back
argument is that the Indian version of the policy
has been designed to counter any adverse consequences
for employment. But this is not convincing either.
The attempt to temper the adverse impact on employment
by restricting entry only to cities with populations
exceeding one million is without substance. It does
not change the source of the competition (giants like
Wal-Mart, Carrefour, Tesco and Metro) nor the locations
in which such competition is most likely to be faced.
On the other hand, the requirement that the foreign
investor should bring in a minimum investment of $100
million implies that the FDI being sought is in units
that are more technology- and less labour-intensive.
Yet, the Commerce Minister's claim is that the policy
has a "unique Indian imprint" that would
make its impact here very different. This is a poor
effort to obfuscate issues. Consider one aspect of
the unique imprint: the requirement that 30 per cent
of manufactured or processed products sold should
be sourced from small and medium enterprises. This
requirement based on a process of self-certification
that is to be monitored would be difficult to implement
even in India. But it becomes meaningless because
it applies to such producers from anywhere in the
world. As a briefing paper from the Commerce Ministry
notes, in order to ensure that there is no violation
of World Trade Organisation norms, "30 per cent
sourcing is to be done from micro and small enterprises
which can be done from anywhere in the world and is
not India specific." This would be impossible
to implement and only encourage international sourcing
at the expense of domestic producers.
In sum, there are sufficient grounds to be wary of
the impact that FDI would have in a sector that is
the employer of last resort in a country where even
high GDP growth is not delivering jobs. If the government
was still insisting on pushing ahead with the measure
there must be significant collateral benefits. Those
benefits are, however, not clearly identified. As
of now the retail chain works well, with different
segments catering to different demands in terms of
the desired combination of price and minimum quality.
There are no noticeable shortages, and a large and
diverse country is well serviced. So the government
has taken recourse to specious arguments. Nobody buys
the argument, for example, that FDI in retail is a
remedy for the relentless inflation the country faces.
Dealing with that inflation requires addressing cost-push
factors and getting government (not FDI) to plug the
gaps that the private sector will not fill. A weak
segment of the supply chain is the public distribution
system created to ensure remunerative prices for farmers
and reasonable prices for consumers. That and productivity
enhancing public investment are among the areas that
need the government's attention.
The government's misplaced obsession with this policy
is therefore difficult to understand. Some have read
the sudden announcement as a symbolic declaration
of the commitment to neoliberal reform of a government
paralysed by charges of abetting corruption and shielding
black money and by failures ranging from persisting
inflation to faltering industrial growth. Others have
attributed it to a desire to please international
investors and governments like the US that have lobbied
for such measures. The US government officially welcomed
the policy when it was announced. That lends credence
to this interpretation. Fortunately, even if true,
this limited and skewed agenda of those designing
UPA II's economic policy has not enough takers even
in the political establishment. Not because all of
them are gains FDI in retail. It is because they are
not foolish enough to lose sight of the many elections
to come. Political democracy has delivered on this
occasion.
*
This article was
originally published in the Frontline, Volume 28 -
Issue 26 :: Dec. 17-30, 2011.
