FDI in Retail: Getting the Debate Back on Track
July 12, 2005
The FDI in retail debate has apparently fully traversed the realm of reason and for it seems to have degenerated into name-calling. I had intimation of this when a French diplomat who meets me from time to time asked me if I was being put up, for a price, by Indian corporate interests to stymie the entry of the big western firms like Wal-Mart and Carrefour? I can well imagine the fellows in Wal-Mart etc. or their PR consultants putting this out, for this is how we increasingly settle debates in this country. The central role of people euphemistically referred to as PR consultants is quite evident by the discernable pattern of news reports and articles in the print media. Think about this, a leading national newspaper carries a gushing story about how Wal-Mart was boosting Chinese exports and how it could do the same for us, just a day before its CEO meets the Prime Minister. Even if this is a coincidence there is quite clearly an end of billing cycle cluster in the appearance of favorable articles, which indicates that there is more than mere conviction that is fuelling the debate in a certain direction.
Having batted on the corporate side as well I have a pretty good idea how these things are managed and am also aware that PR agencies also get paid on the basis of column centimeters of favorable comment and reportage. I have also been at the receiving end. When I put up a note to a Finance Minister, in my capacity as his designated Advisor, opposing the Enron's Dabhol power project, a leading business newspaper accused me of being xenophobic among other things. It on the other hand had carried over 350 gushing articles and reports about it, including one which rather floridly described the Dabhol project as a new dawn over India! This and other publications have been quite generous in giving space to reporting favorable to FDI in retail.
In the recent days we have seen stories of the interest of big Indian companies like Reliance in investing in the retail business. The Goenka's are already players as are the Biyani's of the Pantaloons group whose Big Bazar chain seems to be the current leader in big and organized retail. The Big Bazar owner has already come out into the open opposing any FDI in retail. One doesn't have to explain why. He must now be having sleepless nights thinking about Reliance's planned foray into retail and what it entails for competitors. If the Reliance entry is also in the cards then they too would like to ensure that FDI is kept out of retail, unless of-course they are planning to do so in cahoots with one of the big western firms. This is not the Reliance way, but much water seems to have flowed under the bridge since Dhirubhai Ambani passed away and so who can tell?
The Centre for Policy Alternatives, which I head, published its report "FDI in Retail: More Bad than Good" in late 2004 and it was circulated to all the MP's. Many, including quite a few from the ruling dispensation, responded to the contents quite favorably. The argument we made was that the entry of big business in retail, particularly FDI by the likes of Wal-mart, is job displacing as the number of jobs they would create would only be a small fraction of what they would displace. Not even a single supporter of FDI in retail has dealt with this argument. They just keep harping on the convenience and cost benefit to the citizen consumers. Some others refer to the contribution FDI in retail may make to the modernization of the supply chain and food produce storage etc. There is no doubt that some benefits will accrue. What we need to analyze is whether these benefits will outweigh the social cost due to the displacement it will cause in the unorganized sector? Our study has speculated that even a 20% transfer from the unorganized sector to the organized sector would mean the displacement of 8 million livelihoods. Maybe we are way out of line here, but surely with all the resources at their disposal, the big business interests keen on getting into this business should be able to sponsor an in-depth study of this? But I suppose its easier and maybe even cheaper to get a few ministers to keep parroting the wonders that FDI in retail would do for us and have this reported widely.
The other point I had made in my articles published on these pages, is that a company such as Wal-Mart with its large procurement in China could easily ship huge volumes of Chinese consumer goods into India through their stores, displacing Indian producers. There are few who will contest the argument that Chinese and ASEAN producers of consumer goods are at the present time far more efficient and able to undercut most Indian producers in terms of quality and price. This is a challenge that must be met. But must it be at the cost of our own producers and in our home markets? Maybe we have something to learn from the Chinese in matters of export pricing and maintaining a favorable exchange regime?
A big importer with a big capacity distribution pipeline of its own has many advantages in terms of lower prices due to bulk purchasing, and shorter and efficient supply and distribution chains. This applies equally to domestic purchases. But given the present cost and quality levels prevailing, the bulk import route will prevail over the bulk domestic purchase option. Quite clearly a simultaneous import in bulk is not desirable, particularly if it will be at the cost of local production. When we consider this, it does not matter if the importer is a Wal-mart or a Reliance or a pair of Pantaloons, the damage they will inflict on the economy will be about the same. The question then is what do we need to do to benefit the national economy? Once again the protagonists of FDI in retail have largely ignored this issue.
I have always held that the expansion of organized retail business, with or without FDI, is inevitable. The question is how do we make this transition with the least amount of pain? I think two policy steps can mitigate that pain to a large extent. One is to prescribe minimum standards such as linking parking space to store size, public conveniences, air-conditioning, warehousing, power supply etc. to make the entry costs high, and with a purpose. Little purpose will be served if our crowded and dirty markets crowded with small establishments are to be replaced with other crowded and dirty markets owned by one company! Thus whether it is Wal-mart or Reliance, the entry must be prescribed in such a way that while they draw away pressure from city centers and they don't add to the chaotic suburban sprawl either.
Then we have to deal with the problem of bulk imports. A possible solution is to insist that the organized retail sector or the big business retail be foreign exchange neutral till such a period when the government determines that Indian producers can compete. That day will only come after a slew of reforms to unfetter production. For instance, the current excise duty regime and reservations policy ensures that the manufacture of a host of products as diverse as air-conditioners, toasters, ceiling fans and even articles like shoes is limited to the small scale sector when the reality is that most modern manufacturing processes are conducive to large production runs. To do otherwise will only mean condemning to death thousands of Indian manufacturers sheltering behind shortsighted policies.
Unlike the heterogeneous group of those opposed to FDI per se, a diverse group consisting of the Communists, RSS and other assorted patriots, I actually believe that FDI in manufacturing and new services is actually good for our economy. As it has been in the case of China. Thus when Ford or Hyundai set up automobile plants to manufacture of the car here they add value to our economy and create thousands of much needed jobs. This much more of a contribution than an Indian owned company such as Hindustan Motors makes when it merely assembles Mitsubishi cars here allowing the bulk of the value addition to accrue abroad. Obviously the nationality of the owners does not matter as much as the value addition that takes place here. Besides we know that the smallest cash outflow in a business is by way of dividends. Similarly a BPO business owned by overseas interests contributes to our economy by creating jobs. The problem with FDI in retail is that it seems to be job displacing at a time when we should be most concerned about job creation. Lets discuss. The debate needs to get back on track.