The “FDI in Retail” Conundrum

As I stated in my earlier post on “Solving the Fuel Price-Subsidy Conundrum“, right-wingers conceptually like free competition and reforms, so why is there so much reservation about FDI in Multi-brand retail? Once again, let’s try and take a dispassionate look at the issues, bereft of dogmas, but from a clear perspective of India’s selfish interest!

Lets accept the premise that “every reform” (that is any action that is couched in the narrative of a reform) is not necessarily a reform. There are reforms and then there are reforms. All votaries of liberal economics have been shouting from the rooftops for the government to reform insurance, banking, labour, agriculture, etc. The government has either been stubbornly refusing or just blaming the Opposition (as if the Opposition is the party in power). Then we have this “lollypop” pulled out of a hat (FDI in Multi-brand retail) and it is positioned as a panacea for all ills plaguing the Indian economy (with liberal dollops of support and cacophony from crony-capitalists and the media). Is Multi-brand Retail the panacea it is made out to be?

Let us also accept that there are no panaceas in this world – there is no silver bullet solution to any problem! The nuclear deal was also positioned as a panacea for India’s power problems (and we have seen that in the last 4 years, the progress on this issue has been a “Sibalesque” Zero! Now we are being told that FDI in retail will solve all of India’s problems on inflation, farmers’ suicides, etc., etc., etc.

As usual, I have three problems with this hurried quick-fix approach towards as crucial a subject as Multi-brand retail. Let us look at them one by one.

1. Back-end benefits

We are told that with the entry of big global multi-brand retailers, all our supply chain problems will be magically solved. Farmers will get remunerative prices. Logistical issue will get sorted out (like roads, etc.). Cold-chain infrastructure will get created (electricity will magically appear all over the country). I could really go on. The problem I have is that all the above benefits, if they will actually come about through FDI, can well be created by these very same “global players” through the 100% FDI in Cash-and-Carry route, which is allowed! Please demonstrate to us that we will get these benefits, as I am a sceptic!

The truth is, and the government also knows this, that solving the backend issues in our supply chain is a very difficult task. The reason why these problems are not getting solved has nothing to do with money (foreign or domestic), but governance. At the very least, the government needs to do the following:

1. Build roads linking our villages to the consumption centres (which are largely urban)
   
2. Make good quality power available (on a 24-hour basis) for cold chain infrastructure to be viable
   
3. Scrap the APMC act so that farmers can sell their produce to whomever they choose, at the best possible price (including Gujarat and Bihar, only six states have done so as yet)
   
4. Amend the warehousing act, the essential commodities act, the various food laws, and yes provide tax incentives for creation of supply chain infrastructure.
   
5. Increase irrigation (investment in this sector in the last 50 years has been pathetic)
   
6. Protect agricultural land (by declaring it as no-development zones) for our food security.
   

Phew! Now that’s a lot right!

Are Indian industrialists total idiots that they have not invested in this so far, and Wal-Mart (and others, but Wal-Mart is a good global punching bag and a representative entity), is the only one with brains who will come and invest over here and set this right?

The government at best is being disingenuous and at worst being fraudulent, if it tells us that we need FDI in multi-brand retail for all of this to be set right.

The question which I have not been able to get anyone to answer is why will these “heaven-sent” saintly corporations not invest in the backend where we allow them directly, but do so only when we allow them access to front-end retail? More than 75% of the value addition in the consumer supply-chain (on an average) is in the back-end and not the final retail level. Why is this volume of business not profitable enough for them?

The truth is Indian front-end retailers have tried to set their back-end right, and despite some progress, have not really been able to do so. The reason they’ve not succeeded is that the government has not done its part. If the government will do its part only when Wal-Mart comes into the country, then I suspect their credibility and motives.

We do not need FDI in front-end retail to set right the problems in our back-end supply chain!

2.Price that we will pay

There is this big song-and-dance being made about the number of jobs that Multi-brand retail will create in India. The best estimates that I have heard are maybe 10 million jobs (both direct and indirect). Most of these will be low-paying jobs for youngsters (with say an average of around 15,000 per month).

Study after study after study has shown that entry of Multi-brand retail has a deleterious effect on the small “mom-and-pop” stores (kiranas as we call them here); loss of business in the immediate term and business-closure in the medium to long term. This is neither a secret, nor is it an under-researched area. This same story has played itself out in the US, Europe, Mexico, Thailand, and others. The ICRIER report on the likely impact of multi-brand retail in India, acknowledges this impact, but disingenuously suggests that we should go ahead with this nevertheless.

Although estimates vary, at the very least, the “unorganized” retail sector in India has around 3 million “business-owners” (not employees mind-you), and they in turn employ around 20 million people directly and indirectly). Around 50% of these could be in direct risk over a period of say 10 years, due to the impact of the entry of the Wal-Marts of the world! Firstly, are we willing to spare a thought for the 11.5 million people we want to sign a death warrant for, before we do so! Secondly, do we have any idea about what will we do with these people if they are all out of jobs and to be found on the streets of India?

I remember that during the Nandigram agitation, someone had said (unfortunately I don’t remember who) that “take the farmer away from the land, before you take the land away from the farmer”! The same premise should apply for the retail sector. Please have a plan for how and where you want to absorb this army of people, before you start celebrating (like most of corporate India is), that Wal-Mart is coming!

So someone insensitively argued the other day that should we keep an “army of swordsmen” in these days of the machine gun? Fair point. But are these “kirana” stores an outdated concept? No, not at all. The success of the “7-Eleven” type of convenience stores would seem to imply that there is value in the “local neighbourhood” store. What you seem to be against is these independent businesses, and would prefer that the entire chain be controlled by corporate monoliths. This is the worst form of crony-capitalism than any rational economic decision. These independent businesses anyway have a tough time as their bargaining power against the large suppliers is minimal, so yes, some of them cheat and black-market also. If we encourage the cash-and-carry model aggressively, they will get the benefit of a more efficient supply chain, and frankly then also be able to compete on an equal footing with the big retailers. This decision of not allowing them to remain as part of the economy is frankly murder!

Blind support to this policy, is akin to supporting a culling of this sector of the economy, which is both wrong and immoral!

 3.What are we getting in return?

Even if for arguments sake, I accept that I am willing to pay the price (of eliminating these 12 million people – as above), can someone please explain to me what are we getting in return, as a country? “Give-and-take” for mutual benefit is an accepted principle in global economics and trade, which I completely accept. Whenever a country goes on its journey of liberalization, there are certain sectors which are kept for the very end of that journey for opening up to foreign participation – in my view, retail, defense, nuclear power are some of these sectors. We are jumping the gun on retail, like we stupidly did for the nuclear sector also. Why? What benefit have we got in return? Have the Doha talks moved forward? Have we had progress in free labour movement? Has the West opened up its agri and dairy market for competition? Have they reduced their subsidies in this sector?

If we are willing to pay a price at the altar of globalization, then have we made others do the same? If not, then hold on. There is no hurry.

The best estimates say that we can expect investments upto USD 3 billion, in Retail through FDI. For a trillion dollar economy, is this amount enough to justify a “murder” of 12 million people, and for what?

My final arguments against this step of the government may sound a bit paranoid, but try as I might I am unable to ignore these factors.

The basic problem is that this government has totally lost credibility. I am not convinced that they have the best interest of the country at heart, when they take any decision. Can one just ignore the fact that around a year back, the CEO of Wal-Mart visited and met Sonia Gandhi and Manmohan Singh, and the next day Anand Sharma started talking about FDI in retail and asked DIPP to come up with a policy document? Is it just a coincidence that a senior Wal-Mart person visited India again just before this policy was announced a few days back? Is it also just a coincidence that China is aggressively lobbying in the US, for the US to get India to open up multi-brand retail? 80% of Wal-Mart’s supplies come from China and they know that they will be the biggest beneficiaries of this step. They cannot get access to the vast Indian market directly, and hence this is the back-door entry that Wal-Mart could facilitate for them! With the kind of deep-pockets Wal-Mart has, they could do predatory pricing in the market to kill off all competition as well as Indian suppliers, become monopolists, and open it up for Chinese suppliers. I want a 70% local sourcing (as per value addition) clause for any retailer who comes to India!

I once again repeat that I am a reformist at heart and would love to support liberalization and open competition in all sectors, but it has to be done for our benefit as a country and not outsiders. I can’t ignore the fact that in the last 8 years, the only two times the Prime Minister has gone out on a limb and risked his government as well as his reputation, has been for the interest of foreigners and not Indians – the nuclear deal and now FDI in Multi-brand retail. I don’t trust this PM / government to take decisions in India’s interest!

One final point, I am not against a perpetual ban on the FDI in retail. I want the government to address the issues in the supply chain first, aggressively encourage cash-and-carry stores that give the benefit of a modern supply chain to the kiranas, make it easy for the small Indian manufacturers to compete, and then throw the market open to Wal-Mart. I am convinced that done correctly and in the right sequence, not only would Wal-Mart be able to help India, but we would be able to give them a run for their money!

That is a fair business proposition!

Till then, I do not want FDI in Multi-brand retail. Thanks but no thanks!

(Image Courtesy-India Tv News)