Both the supporters and critics of FDI in multi-brand retail have wrong notions
Alam Srinivas | September 26, 2012
On 14 September, 2012, when the cabinet decided to allow FDI in multi-brand retail, it raised a question. Why did Manmohan Singh initiate this move, opposed by most political parties, including Congress’ coalition partners, now? Some said this was his way to re-establish his image as the ‘Father of Reforms’. Others felt his ‘perform or perish’ mantra was to escape the clutches of policy paralysis. This was Singh’s reply to the criticism in the foreign media.
However, the real culprit was another foreigner – the global credit rating agency, Standard & Poor (S&P). The Damocles’ sword it hung over the government’s head was to either reform or face the prospect of being reduced to junk status. The latter would have meant a crisis like the one in 1990 when the country had to pledge its gold abroad.
In April 2012, S&P warned that there was one in three chances that India could be downgraded because of her depressed economic future. It urged the PM to take a few critical decisions like raise diesel prices, cap the subsidy on LPG, and allow FDI in retail. These were exactly the policies, among others that the government announced on September 13 and 14, 2012.
But the question remains: why now? In earlier meetings with S&P, the government said it was on the reforms path and would pass pending bills, and introduce new ones during the monsoon session. When the session turned out to be a washout, it had to take a few dramatic measures to save its face ahead of the next meeting with S&P. Buoyed by the later realisation that it will survive politically, the government boldly notified FDI in multi-brand retail, and went ahead with other reforms too.
For the PM & his A-Team, a junk status was worse than jumping headlong into a political chakravyuh. Thus, a case was built to prove that FDI in retail was the panacea for the farmers and consumers. The anti-FDI critics tried to convince us that the move will not change the ground realities, and yield little benefit to the two sections. In the process, the issue was clouded with myths perpetrated by both sides. Here is an attempt to clear the retail skies.
Myth # 1: FDI will fuel farmers’ income
About a third of the country’s perishable vegetables and fruits are wasted annually because of lack of adequate storage facilities. The entry of global retail giants like Wal-Mart, Tesco, and Carrefour, who are likely to invest $8 billion over the next 3-5 years in cold storage and transportation, will stem this rot. Moreover, the new players will eliminate the series of middlemen in the trade, who exploit the growers. The combination will boost the returns to the farmers.
There is little evidence to prove such conclusions. In India, local retail giants like Reliance, Tata, and Bharti haven’t made much difference to the farmers’ lives. Many buy their food produce from the same middlemen and mandis, whom they are supposed to destroy. In the US, as Devinder Sharma pointed out, the net income of the producers has come down from 70 percent to 4 percent in the past 100 years, as retailers like Wal-Mart replaced the old middlemen with new ones (quality controller, certification agency, processor, packaging consultant, etc).
Myth # 2: FDI will curb food inflation
In the past two years, the prices of food products, especially vegetables, have zoomed. Food inflation has consistently remained in double-digits despite past average monsoons and decent production. The FDI supporters contend that investment in back-end logistics will drastically reduce the farm-to-market time, which is the only immediate solution to lead a successful attack on the price front. Global retailers will also reduce hoarding and wastages, which may lead to additional supply.
FDI’s overall impact on the retail trade will happen over the next decade or two. Nothing will change in the short run, over the next few years. The underlying reasons for food inflation are not only supply constraints, but also other agriculture-related policies being pursued by the centre and states. The country needs other reforms, like land holdings, freedom to buy and sell agriculture products, and easier investments in the food-processing sector. Mere FDI in retail isn’t enough.
Myth # 3: Millions of small retailers will lose jobs
The Confederation of All-India Traders (CAIT) has estimated that the unorganised retail sector, which accounts for almost 96 percent of overall trade, employs 100 million shopkeepers and another 400 million people indirectly. Wal-Mart, for example, with an annual turnover of $446 billion (almost the same size as India’s retail market of $475 billion), provides direct employment to 2.2 million. FDI in retail cannot substitute for the job losses in the informal sector.
Past experience has shown that organised retail takes time to capture market share. Despite being in business for 5-10 years, large Indian retailers have a market share of 4.2 percent. FICCI predicts that by 2032, FDI will enable the big players to capture almost 17 percent of the then $900 billion market. Therefore, the small retailers and mom-and-pop stores will continue to thrive; their market share will rise from $455 billion now to $750 billion in the same two-decade period.
Myth # 4: MNCs will pursue predatory models
A major concern is that the Wal-Marts of the world will dump cheap and low-quality products in India through import from other developing nations. It will create an uneven level-playing field between the MNCs and small local retailers. In fact, this is possibly why Wal-Mart, which procures products from 15 countries, is able to undercut even online retailers like Amazon; a study by consulting firm Kantar, found Wal-Mart products were on an average 20 percent cheaper than Amazon.
While this is partially true, global retailers buy from local vendors. This is true of single-brand players, like furniture-seller IKEA, who wish to set up their own manufacturing units in India. It is because of this reason that IKEA successfully lobbied with the government to ease the clause to procure 30 percent of the goods from local small and medium size firms. The government said that while 30 percent of the products sold will be bought in India, it may not necessarily be from small firms.
Myth # 5: FDI will have a huge economic impact
Minister for Commerce & Industry, Anand Sharma, feels that foreign retailers will revolutionise the ailing manufacturing sector. As they will set up factories locally, or buy products from other vendors to cut costs, they will act as revival catalysts. IKEA has an Indian procurement network in place to feed its global supply chain. The same is true for Wal-Mart; in 2010, its chief executive of Asia operations said the company wants to export products worth “millions of dollars” from India.
Facts belie such optimism. Wal-Mart’s business model is hyped. In 2010, Nelson Fraiman, a professor in Columbia Business School, concluded that “large firms like Wal-Mart have gone to countries like Brazil and failed – the same way they’ve gone to countries like Korea and failed, the same way they’ve gone to countries like Germany and failed – mainly because of not understanding the local culture.” Wal-Mart’s much touted strategy may work in the US, but not necessarily in other countries.
Myth # 6: India will access global best practices
The entry of global retailers will introduce globally-accepted best-management practices in the agriculture sector. With its renowned internal processes and systems, it will force allied sectors – cold storage, transportation and food processing – to adopt the same. This will enable the agriculture-linked segments to modernise, and help Indian firms to become global players.
In August 2012, minister of state for commerce & industry, Jyotiraditya Scindia, told parliament that a paper by Swiss UNI Global Union on Wal-Mart’s global track record concluded that “without adequate safeguards in place, FDI in multi-brand retail will lead to widespread displacement and poor treatment of workers in retail logistics, agriculture and manufacturing.” In the past, Charles Kernaghan, director, US National Labor Committee, said that “Wal-Mart is the nastiest company we’ve dealt with.”
Myth # 7: Finally, consumers will benefit
At the end of the day it boils down to the consumer. Of course, with discounted retail prices offered by global chains all over the world, she would welcome Wal-Mart with open arms. Despite giving higher returns to farmers, the efficiencies of their logistics, and the sheer economies of scale enable MNCs to cut costs, and pass it on to the final buyers. So, why should one complain?
However, as we said earlier, the share of organised retail is expected to be only 17 percent by 2032. Therefore, the price benefits will only percolate to urban sections, largely the middle and upper classes. Even the global chains will want to set up more retail stores in the cities, which have larger population with higher spending powers. As it is, the government has stipulated that the Wal-Marts cannot enter cities with less than 1 million people, except in rare circumstances.
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