Friday, August 5, 2011

FDI in retail

FDI in retail is back in the news. There are reports that the government will allow FDI in multi-brand retail from April 2012. This is a topic which has seen much controversy. Economists have been discussing the issue for years. Strangely enough, this issue also sees the BJP and the Left on the same page. An issue on which the left and the right stand together must be a special one and that certainly is the case.

Before I go into my view on the subject, some background is in order. India permits 100% FDI (Foreign Direct Investment) in certain sectors, like cash and carry, wholesale trading and 51% FDI in single brand retail (high end stores like GUCCI come into this category). FDI in retail has for long been seen as the answer to India’s inflation problem. The Economic Survey 2010-11 noted that “"Permitting FDI in retail in a phased manner beginning with metros and incentivizing the existing retail shops to modernize could help address the concerns of farmers and consumers. FDI in retail may also help bring in technical know-how to set up efficient supply chains which could act as models of development." Numerous companies involved in the sector welcome a move to have FDI in retail. So why the controversy?

India has a number of kirana shops, wholesale shops which form the backbone of the present retail industry in the country. These are generally small businesses (called mom and pop stores in the US) which might not be able to compete if the big companies enter the retail sector. There is a political angle as well: the retail sector contributes 13% of GDP and employs a huge mass of people. Can any government afford to alienate this vote bank, especially in the era of coalition politics with little scope for political ideology?

Before I go into the political angle, it is important to list the reasons why so many people see FDI in retail as a good thing. The Indian food sector is an absolute mess, with around 40% of the food being produced going waste. Thus we have the unsavoury scenes of rats eating grain when millions of our people go to bed hungry. Storage and distribution facilities are non-existent. The Food Corporation of India is unable to store the grain that is produced and leaves stacks of grain in the open, only to be destroyed by rain. Global retailers, with the technical expertise, will help us fix our supply chain and storage problems. Critical food produce will not be wasted and the poor in this country will have access to food, a basic duty of the state.

In addition to this, another benefit of having a smooth transit of produce from farms to shop floors is the elimination of middlemen. Any person with a rudimentary knowledge of Indian agriculture understands how middlemen play havoc with both the farmer and the consumer. FDI in retail will ensure contract farming, which will mean that the farmers will sell their produce directly to the retail chains. They will get the market price for their produce (which can easily be ascertained in today’s internet age) and the consumers will not have to pay through the nose for basic foodgrain.

Another advantage is that global retailers setting up operations in India will have to employ a huge mass of people. This could help address our huge unemployment numbers. It is well known that the present economic model is unsustainable: the over-dependence on services is not feasible in the long term. India needs a seismic change and FDI in retail could help contribute in a small manner to that change. Sure, at some point we will have to look towards more labour intensive sectors like manufacturing, but this can surely be an option in the short term. Furthermore, credit, the bane of every business in India (apart from corruption and red tape) will not be an issue with global retailers coming in.

But what of the wholesale traders, the kirana shops which are dead against this move? Is their survival so important that we ignore all the benefits that FDI in retail will provide? Well, no. The argument that traders need protection from the big retail chains is an argument that belongs to an age gone by. It is evident that even the biggest retailer will not be able to cater to every part of India. This is where wholesale traders come in. They can certainly help the big retailers offer their services in the rural areas of the country. As we have seen, prices will come down as a result of global retailers getting involved. These traders can come to the party, as it were, and see to it that the rural areas do not get left behind. India is looking forward, not looking back. Everybody must change with the times, and so must wholesale traders, who for long have enjoyed at the expense of the farmer and the consumer. Traders must look for innovative ways to stay competitive and there are many sectors where players have changed to remain relevant. There is no reason why retailers cannot adopt the same outlook.

Finally, we come to the political argument. Like I mentioned, on this issue, the left and the right find each other on the same platform. While such a scenario would certainly be desirable if these parties are working for the good of the country, that is not the case here. Narrow political considerations are at play. It is a downright disgrace that our politicians put their interests before that of the nation. The left’s opposition is not unexpected, what with the comrades refusing to come out of their 19th century dogma, but the BJP’s opposition is surprising. Even more ridiculous is the reasons cited for opposition. The argument that FDI in retail will not bring inflation down defies common sense. Yashwant Sinha, probably the worst Finance Minister this country has had the misfortune of suffering, makes a ridiculous parallel between FDI in India and FDI in Mexico. If one were to make arguments based on how liberal policies did not work in a particular country, we’d have to be back to the bad old days of socialism and perpetual bondage. On second thought, it is not surprising that the BJP, which came to power on the back of lies on our heritage, culture and history, chooses to extend its habit of dishonesty and immoral conduct to economic policy.

Competition is a good thing. There is no better example for this than the telecom sector. The government has an obligation to provide every citizen of this country three square meals a day. Foodgrains rotting outside warehouses, rats and dogs eating grain while millions go to bed hungry, and the middle class having to pay exorbitant prices for foodgrains is a disaster for any elected government. The government has to choice between succumbing to the pressure of an oligarchy and leading us all to ruin and fulfilling its obligation to the Indian people. One hopes that the government makes the right choice.

1 comment:

Manikanta said...

awesome buddy...