Home > Archives (2006 on) > 2010 > FDI in Retail Trade: Hurting People Where it Hurts them Most

Mainstream, Vol. XLVIII, No 33, August 7, 2010

FDI in Retail Trade: Hurting People Where it Hurts them Most

Monday 9 August 2010, by Kamal Nayan Kabra

The discussion paper of the government on FDI in retail trade in India shows that the most important single factor cited in support of permitting FDI in retail trade is the assumed prospect of attracting large and much needed investment in back-end services for value chains and other facilities to reduce post-harvest losses to the farm sector such as cold storages and thus add to total availability of farm goods. Assuming that these investments do take place (by no means a certainty) who would be the major beneficiary of these expected investments and thus of FDI in retail? The sense of uncertainty of front-end retailing bringing with it the back-end investments is implicit in the government’s own suggestion to make a certain proportion of the FDI inflows for such facilities mandatory!

But the case for FDI in retail has been argued in the government document as if these companies would deal exclusively in foodgrains, fruits and vegetables. As a mater of fact these farm sector products are unlikely to take more than 10 to 20 per cent of the space and in value terms would be an even smaller part of their turnover. What would happen to the small domesic producers of either non-branded products or brands that are little known compared to the ones produced and marketed by the big local and foreign companies and the imported goods sourced by these big global retailers on the basis of their global strategic decisions? These products are hardly dependent on these back-end facilities. But before long the domestic producers, especially the small and medium ones, would have to down their shutters as the highly advertised, glamourised elitist goods, the high-end goods as the official paper calls them, would adore the shop shelves of the foreign companies. Given the small relative size of the farm goods in the total turnover of the companies vis-a-vis the non-farm goods, the case for FDI in retail can hardly be argued on the basis of some tall and vacuous promises for the farm sector products.

Coming to the assumption that FDI would come with what is called latest technology and management, let us ask: how would one ensure that they bring with their direct investment additional investment in setting up cold value chains and other back-end services as also so-called modern technology and management and share these with the organised retail sector’s domestic players? What is the meaning of and need for modern technology and management for the family-run small trading firms that have carried on this trade without any disruption and at fairly competitive prices, these days often below the MRP printed on the products?. As of now, thousands of Indians are getting education and training in the world’s best management institutes and are hired by the companies the world over. Where is the need for knocking at the door of others for the purpose?

The trade technology is, after all, soft technology, and is embedded in managment personnel. Domestic organised retail companies are largely similar to the MNCs in retail except for the fact of nation of origin. Hence it is pertinent to ask: what have the Indian companies in retail done to produce the so-called desirable changes for the farmers, consumers or the micro and small enterprises to give confidence that FDI would carry forward the process? A little less than Rs 9 thousand crores have already been invested in these trading enterprises. What are the results, especially if one were to take note of the working capital these companies have borrowed from the banks? Did they help moderate the inflationary spiral we have been suffering for the past few months? The record shows nothing of the kind. So much so that, according to the government’s paper, even the effectiveness of the local big capital retail is dependent on the entry of the MNCs in retail. When the big Indian companies were permitted to enter retail, lots of hopes were invested in them to take steps to reduce wastage and improve the returns to the farmers and other producers by reducing the chain of intermediaries and help reduce the difference between the consumers’ rupee and the farmers share in it. Is there any evidence and is there any accountability to ensure that these promises are kept?

In view of the non-rewarding experience with the recently begun domestic of organised retailing, it is pertinent to ask: who are going to be the main beneficiaries of the entry of the MNCs in this field? Actually the official paper speaks of the danger posed by the big and well-entrenched global retail leaders in the form of unfair competition to India’s teeming millions of small traders and street peddlers. However, apart from token and ineffective measures such as reserving some jobs for the rural youth, it would be illogical and against the experience so far to expect that the total number of jobs would increase as a result of the entry of the MNCs. The official paper raises the issue of unfair competition but without suggesting remedial measures to protect the small men for whom trading is the survival sector. Surely a good part of the trade turnover is going to be captured by the MNCs and, as the national accounts data show, this is a huge market, obviously the existing traders are going to be the net losers, For long it has been observed that the main process of GDP growth fails to generate net additional jobs owing to its job-loss character. Thus the FDI case shows no possibilities of preventing the ouster over time of the traditional trades people from their hereditary occupation. Trade is also something that comes handy when nothing else is available to give them a source of living.

Thus of all the maketisation, deregulation and opening up measures initiated since early 1990s, FDI in retail is going to be the most hurtful, directly hurtful to millions of poor and small means Indians without any compensatory positive gain either in the short run or over a longer time span. FDI in retail would be nothing but simply a Displacement Investment, on par with the compulsory and practically without any real compensation Acquisition of the Land of the Tribals and Other Rural People for Various Projects that has been going on for decades and has displaced people numbering many times more than the total jobs created in the entire organised sector so far. The proposed FDI in retail would be a dead loss causing investment for the national economy in general and the poor and middle strata in particular. As it is, import liberalisation has already pushed India firmly on the road of de-industrialisation: india’s imported manufactured goods exceeded her domestic production of manufactured goods by a much as 38 per cent in 2007-08. With procurement from the cheapest sources and from those who can supply all the stores run by these companies, local procurement and procurement from the micro and small enterprises would remain just a historical memory. All these mean many times fewer employment opportunities than the number of shops giving much reduced earnings or simply forced to close down, as the backwash effects of the procurement policies of the mega FDI stores trel far and wide. The high growth enthusiasts never bother about job-loss and this is yet another instance of the same mindset.

The real purpose of the proposed entry of the MNCs in selling the daily necessities is to actually bail out the mega global retailers who have been losing ground in their home countries lately and more so in recent times owing to the global slowdown. It is a clear case that shows how the globalisation fundamentalist orthodoxy ruling the Indian policy scene is caring for the global capital than the Indian masses. Actually the discussion paper reads more like a brief for FDI and a desperate attempt to cover up its manifest weaknesses.

THE paper is honest enough to say in so many words that the real intended beneficiaries of this move are going to be the big Indian corporate players who have entered retail. The paper goes on to quote the CMIE data that show that the organised retail companies have done very badly for their own financial health. It is yet another instance of how the tiny private corporate sector, controlled, managed by less than one percent of our population controls something like 23 per cent of the country’s GDP is the primary concern of the public policies in India now. It is this sector that calls the shots in policy matters, of course with the blessings and support from the MNCs. The apex bodies of these interests commissioned so-called studies to plead for FDI in retail and these have been quoted approvingly in the present discussion paper. That the government is not able to tell a study from a lobby instrument and exercise is not a matter of surprise as the two interests and perspectives are perfectly matching each other in the current heightened phase of crony capitalism ruling he policy formulation in India.

Thus the truth comes out even in the official brief for FDI in retail. On the issue of who would benefit the most by FDI in retail, it says quite clearly:
Investment in organised retail by domestic players will be ineffectively deployed if FDI is delayed.

This statment can also mean that the small unorganised retail has so far more or less withstood the onslaught by the big retail majors. Hence the big companies could not capture as much of the small ones’ market as to make the former thrive. Hence they want a bigger blow against the small competitors so that the locals and the aliens can jointly monopolise the retail trade segment.

Thus on its own explicit statement the case that the government is making for FDI in retail trade is mainly for increasing the effective deployment of the investment by big business in retail trade. No scope or space for the millions who would be displaced by the billions of rupees that would pour in through the retail MNCs and cause displacement of around four crore persons in a matter of a few years. How unequal competition would deal some deadly blows can be seen from an indirect admission in the paper that these big companies would draw huge credits from our banks for their working capital needs and thus crowd out the small traders. It is not just the trade volume that would be lost by the small traders but even the bank credit for them would dry up or at least get reduced. More troublesome would be the rentals and prices of commercial real estate on account of the competition unleashed by the mega MNCs. Given our chronic excess demand for power, even power supply for the smaller entities would become scarce and costlier as the bulk of the supply would get diverted to these fully air-conditioned profusely lighted and electronic means run departmental stores by the FDI companies. With this new powerful group of clients, the banks, real estate companies, power supply companies and so on would have little incentive to meet the legitimate business needs of the small traders. A market economy policy framework wedded to competition would move in the reverse direction by propping up and supporting oligopolistic tendencies.

THE same story would repeat itself insofar as the power needs of the farmers, tiny industries and small traders and so on are concerned. It has been shown by the experience of countries a such as Thailand that the power consumed by just one mega air conditioned departmental store with all kinds of refrigeration and other electronic devices, like san registers, electronic surveillance devices and so on exceed the power consumption of an entire rural district. With our persistent power shortage and rationing that prevents investment in cold storage by small and medium enterprises and the farmers have to miss precious irrigation schedules demanded by their standing crops, the country would be hosting power-guzzler mega stores for the sake of modernisation and satisfying the consumerist urges of the elites! This is not to mention the traffic congestion and long travel time needed for shopping in the malls and hyper stores in central locations by the MNCs. How the policy process is blinded by the spurious considerations touted by the lobbyists is so pathetically visible in the way the policy pundits are poised to walk into the FDI trap.

Thus the government’s position is that the FDI would provide the backward linkages in the form of so many services and facilities and thus help the domestic big organised players (who are already clamouring for the grant of industry status to trade) make effective use of their investments in retail trade. Even if these investments in supporting services are made by the MNCs in retail why should they share these facilities with their competitor Indian organised retail companies is not at all clear? Would the behaviour to strengthen their competitors not be a totally business-unlike behaviour? This kind of stipulation is nothing but self-delusion, or something else that is hidden from the public view. Let us not forget, though the discussion paper seems to have, that FDI in retail in India would have the protection of WTO under TRIMs that mandates national treatment to FDI by the host country. In any case India with over 36 per cent of the GDP as her rate of investment and extensive financial intermediation services does not have to look for FDI unless the real purpose is to get foreign exchange in order to finance the inordinately large and growing current account deficit that is leading to export of Indian jobs to the rich countries, as the US Secretary of State thanked India for buying US goods that created 96 thousand jobs for their citizens in the last fiscal. Real philanthropy indeed! We have resources to spare for investments for all kinds of non-essential, low-priority, even negative social value activities and production, not only by the private sector but even out of the public exchequer. A list of such investments, especially on account of their total disregard of any fair and just sense of social priorities and values, would be practically co-terminus with many, if not most, of the recent projects that account for the bulk of our investment.

One may just refer to some fancy extravagant and inessential or perverse priority projects such as so-called world class hotels, airports, shopping malls, IPL kind of commercialisation of spectator sports, a string of overbridges cris-crossing the metropolitan cities, highways at the cost of ruining the Gangetic plains, super deluxe residential buildings, plants for producing luxury automobiles in a country in which the buses and trains are always overcrowded and meet fatal accidents on this account every day. A simple back-of-the-envelop calculation would show that the amounts set aside for such purposes would dwarf the funds needed for all the facilities that are needed in our villages and Mandi towns for safe and hygienic storage and transport of the farm produce and for preventing post-harvest losses. We have air-conditioned passenger rail coaches but not enough air-conditioned wagons for moving the perishable farm and fisheries products. Why is it that after all the liberalisation and support, the private investment by our well-endowed corporate sector is not forthcoming for such purposes. It is indeed a matter of serious concern that, as the paper says, the number of cold storages for such purposes is under one thousand only and the consequent losses go to a trillion rupees. We can permit futures trade, including in farm products that attracts a total annual turnover exceeding the total GDP for one year. The point is simple: it is not the dearth of investment resources. After all, the huge stocks and flows of black wealth and incomes are floating in the economy. The question is that of their proper socially desirable investment. In any case, what is the role of the growing food processing industry if it cannot pump in resources for the marketing infrastructure for their own raw materials? The plain point is: the resources are available in the country but are perversely deployed. Thus the million rupee issue of concern is their allocation according to the social and national priorities rather than to satisfy the whims and fancies of the tiny elite sections, both Indian and foreign, who are treated more equal than the rest.

THE entry of the MNCs with their mega departmental stores with all the modern amenities and paraphernalia that attracts the middle and high income groups for the shopping pleasure would deal a double blow to the traditional street-corner shopkeeper and the door-step hawkers: One, the unequal competition of the international stores with their own brand image and so-called shopping pleasure would lead in course of time to displacement of millions of traders. Or in the absence of alternative means of livelihood would force them to stay on but with reduced income. Second, the effectiveness that FDI in retail would impart to the domestic players in organised retailing by making them access the facilities set up by the big brother—the MNC retailer operating in India would make huge demands on urban space, commercial real estate, power supply, urban transport facilities and the consumes rupee that a hitherto highly competitive activity would also become oligopolistic and the consumer would be hit hard by its predatory practices. Actually when inequalities reach a high point they give rise to further tendencies to exacerbate their own intensification. Organised retail and that too by the international giants is a part of the same dynamics of skewedness feeding on existing skewedness.

Actually the big point of traditional retailing is the personal bond between the shopper and the shopkeeper who acts as a friend, philosopher and guide to the former. Its value cannot be appreciated in the framework of the market-centric worldview of the globalisers and deregu-lators who treat the market decisions as the epitome of rationality. But in the midst of the advertisement-based disinformation, where the bigger the advertisement budget the better the product, the value of the friendly dealer, who pushes the local products from the micro, small enterprises, cannot be gauged in monetary terms. The big chains of the MNCs would procure huge quantities from he cheapest source in the world. With freedom to import, the local producers and specially the micro and small enterprises would find it difficult to find channels for reaching their products tothe market. Apart from hurting the small producers and employment, the MNCs buying from the big companies and their affiliates would unleash a tsunami of imports into India’s consumer goods markets. As it is, our use of imported manufactured goods exceeds the use of domestically produced manufactured goods by nearly 38 per cent; the import spree by cost-cutting FDI retailers would give a further push to de-industrialisation and export of job opportunites. Thus even organised manufacturing may come to grief. As it is, the official paper has noted but without appreciating its significnace that the share of unorganised manufacturing has come down from over 34 per cent in 1999-2000 to about 30 per cent in 2007-08. This process is likely to get accentuated as a result of FDI inflows into our decentralised retail sector. It is true that the entry of retailing MNCs would not lead to the instant closure of small shops. After all, they have nothing else to fall back upon; but the process would spread from the areas in the neighbourhood of the mega foreign stores to the rest of the areas and the main effect would not be as much outright ouster as further push to their impoverishment or ineffective employment. The suppliers of commercial real estate would benefit and the rentals for commercial space in the cities and towns where the MNCs stores are set up would become so prohibitive for the small men trying to find a means of living in retail trade. Thus the sector that has so far been the easiest to enter too would move out of reach for those who need to enter it the most owing to prohibitive rents and the daunting competition by the big companies. This then is going to become the real face of inclusive growth: exclude the people with small means from eking out a living even from the simplest activity that makes a rather limited demand for investment resources.

Actually honesty demands that an independent evaluation is organised to review the performance of the cash-and-carry stores set up by the big MNCs, the experience of single-band stores set up by the foreign companies and also of the performance and impact of organised retailing by the big corporate houses who, instead of offering competition to the foreign majors, are keen to hurt the smallest businesses. Also the experience of contract farming and direct contractual relations between the elephantine companies and pygmy farmers, supposed to provide access to large markets to the small producers, needs to be reviewed as reports indicate that these contracts have become a one-way street to the advantage of these huge companies vis-a-vis the defenceless, poor farmers.

Let us conclude by asking one basic question. There are a large number of problems flagged at the official level as having extremely high prioriy and the need for action is universally agreed upon. The question of replacing the colonial land acquisition law, the question of land reforms, the question of central law for protecting farm labour, the question of universal social and health security and so on. None of these actions are controversial or need a special study. In some cases even new studies have been carried out. The whole gamut of the key recommendations of the National Commission for Enterprises in the Unorganised Sector are awaiting action. None of these and similar myriad policies have been taken up for time-bound action by setting artificially low dead-lines for national debates. Why is the question of FDI in retail so urgent and critical? What are the forces working for their quick imple-mentation during the stewardship of the present economic policy team as if it were their mission? The whole exercise appears to be so pre-set that the suspicions/ misgivings seem genuine and the prospects for a pro-people decision uncertain and remote. One wishes to be proved wrong. One wonders whether the friendly multitude of small retailers in every street and on our pavements all around are also facing the fate that became the lot of the tongawallas in Delhi: an unsung and unlamented departure from the scene and into the archival records. One wishes that those who are enamoured of the power of executive fiat realise that the small traders are not like the hapless tongawallas of Delhi. These kind of moves are unlikely to be cake-walks. Such Tughlaqesque policies are sure to add fuel to the fire of social unrest and turmoil raging practically all over the country.

A prominent economist, Dr Kabra is a former Professor (now retired), Indian Institute of Public Administration, New Delhi.

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