Home > Archives (2006 on) > 2011 > FDI in Retail Trade — A Decision Most Foul and a Case of Self-goal

Mainstream, VOL XLIX, No 51, December 10, 2011

FDI in Retail Trade — A Decision Most Foul and a Case of Self-goal

Monday 12 December 2011, by Kamal Nayan Kabra

At long last the cat is out of the bag. By moving heaven and earth over a period of nearly four years and camouflaging the decision by various conditions, more cosmetic than real, to mollify the expected and legitimate opposition to it, the Union Government has decided to welcome 51 per cent foreign direct investment (FDI) in over fifty million plus cities (provided the State governments agree).

It has been also decided that for anyone to set up shops in India, a minimum investment of $ 100 million is mandatory, along with the further rider that at least 51 per cent of the investment has to be in what is called back-end, infrastructure services and facilities required by the rural sector for marketing its produce. Such back-end investment has to exclude investments in land, rentals and front-end stores. Ostensibly this condition of 51 per cent investment in farm and related marketing infrastructure is politically the most potent as it seeks to win over the farmers (as it seems to have done in the form of the support by the Punjab Government to this otherwise widely opposed decision).

Another condition attached to the permission is that the stores have to procure at least 30 per cent of the merchandise from small scale industries with specified character and features of the small sector enterprises. Its political overtones too are evident as the small industries are numerically a large group and their small size and other features make them easy early victims by way of loss of market owing to the entry of big MNCs.

The point is that the big companies require products to be supplied in bulk and of a highly standardised character, often with the tag of an established brand. One wonders how this condition can be met from the point of view of both the buyers and sellers. The former needs huge quantities of regular supply which is not amenable to small scale units, the supposed suppliers to the mega stores, being small they are unable to reap the economies of both scale and scope. Obviously there are ways of meeting this condition in form by the small units set up by the big companies and showing them as separate small entities.

HOWEVER from the point of the MNC trading firms there are ways and means provided in the decision to be seen as complying with the condition. It has been provided that there would be no inspector raj: it is for the companies to self-certify compliance with the conditions. Another lacuna seems to be that no time-frame has been provided, particularly whether the rural back-end facilities are to be created prior to setting up shops, along with it or afterwards and the time-span for the purpose. Similarly this condition does not exclude, for instance, a chain of small enterprises set up and run by a big MNC making sure that the supplies or even such units from abroad are also included in this condition., whether in their own name or, more likely, in the name of some proxy.

The most critical condition from the point of the potential investors is that they do not have to submit themselves to any external scrutiny for meeting these conditions and self-certification would suffice. This is in keeping with the neo-liberal practice and ethos of leaving the markets alone for self-regulation (a variety of regulations that has been described is no regulation at all, especially when all that is required is self-certification).

What has been happening to self-regulation under self-certification, particularly in matters of taxation, insider-trading, money-laundering, export incentives and so on, is a well-known story. In any case the non-realisation of the social objectives from the private corporate decisions is writ large on the Indian social scene characterised by the worsening of multiform social exclusion, particularly during the last two decades, as evidenced in various reports and assessments and comparative rankings given by some international agencies. The point is that these conditions are either window-dressing or, as we see below, such as would serve the interests of the trading giants entering the Indian retail markets.

A more basic point why we mention these conditions and their essentially spurious nature right at the outset is to underline the political compulsions that some worthies thought they have cleverly woven into the main decision to let the big MNCs access the huge Indian middle class urban buyers with regular and rising incomes as the processes of concentration and accumulation pick up speed under the neo-liberal mimetic development. After all, the total value of the personal disposal income at current prices in India in the year 2008-09 was Rs 44.88 lakh crores and this increased in 2009-10 to Rs 51.22 lakh cases thereby showing the huge size of the Indian retail market.

Thus, it seems that these are meant to mask the real character and effects of the decision to let in big foreign capital in an essentially small capital and unorganised sector activity. This is understandable from the point of big capital with growing entry into the speculative financial sector. The mounting inequalities, leading to an open confrontation between the One Per Cent and the Ninetynine Per Cent in the West, are suggestive of the urge of the trading giants to move to the still emerging economies with high growth rates which easily translate into or are the other name of growing effective demand for the goods of the kind demanded by the rising middle-income urban groups.

In any case given the ascendency of crony capitalism it can easily be surmised that in India the laws remain decorative provisions on paper for mass consumption. It has been virtually impossible to enforce detailed conditions even during the heydays of regulated statist develop-ment policies. Hence now with the leadership of the growth process in the hands of the corporate powers, one may specify many conditions and forget about them. When the corporates are punished for criminal offences the liberalisers start worrying about the adverse effects on investment!

The companies intending to enter India would therefore have to find Indian partners and make, whenever they like and in whatever form they like, the Indian partner carry out back-end investments, mainly in the rural sector connected with farming and allied activities.

Initially the Tenth Plan Mid-term Review pleaded for the modernisation of India’s retail trade sector by opening it up to FDI. After the inevitable strong opposition encountered by the proposal, the government and its leaders, various agencies and congenital supporters of big foreign capital have been trying hard to sell it. One may recall that the Finance Minister of the UPA-1 Government told his American hosts that it is a matter of time only and the permission would be theirs for the entry of the MNCs into India’s vast retail market, ostensibly to modernise it. A US ambassador to India, Mumford, lent public support to the entry of FDI in retail. Actually all the VIPs who came to India during the period are reported to have been urging the GOI to take the plunge and let in the MNCs in retail.

Expectedly and owing to the uncalled for nature and most disastrous consequences that would flow from it for the Indian economy in general and the poor and informal sector in particular (though the organised big wholesale Indian companies too are in for a rude shock), the decision took such a long time to come on the crest of more intense lobbying than possibly for any other policy measure. One is not sure whether the Enron kind of attempts to educate the Indians about the virtues of this policy was undertaken or not.

IT might be noted that the only major interests that are going to benefit from this are para-doxically those of the big organised retail and the builders of commercial complexes. Most of the organised retailing giants were either faring badly or not doing too well. Their rates of return were poor even in the face of an inflationary economy allowing them abnormal trading margins. With 51 per cent FDI, the global giants would seek Indian partners and who else but the already entrenched companies would be the natural choice, permitting them huge windfalls by selling or taking stakes at fancy prices and by means of sweetheart deals? If the Indian corporate sector and their mouthpieces are coming out in full-throated support of the move that has justifiably evoked vociferous opposition of almost the entire public sphere, cutting across the Right and Left divide, and from within the Congress party that has become unfamiliar with the culture of dissent for a long time, the roots lie in the hard-cash calculus by the corporate bosses.

And it may also be noted that the big trading MNCs, who were forced to wait for long for this much-awaited decision, have been more than rewarded not only by the permission but also owing to the timing and so-called conditions attached to what is made to appear as a highly calibrated decision to take on board the national interest. With the rupee at an all-time low in the world markets, the incoming capital has made a substantial financial gain in the process of converting their dollars or euros into the Indian rupee. Then the condition of the minimum level of investment allows them to make a big entry and get scope for further expansion, that is, increase their inherent advantage of reaping the economies of both scale and scope vis-a-vis their Indian counterparts.

Actually the whole debate on the entry of FDI in retail has been ignoring the most critical issue from the point of the Indian people and their prospects of joining the mainstream development processes by overcoming their deep-seated social exclusion. It is as clear as daylight that with the stipulation of an enormous amount of capital as the minimum inflow of capital with which these companies are required to launch them-selves, they would be able to expand greatly their working capital base by getting huge credit limits from the Indian banks. The commercial orientation of the banks would make them prefer the large and solvent foreign borrowers to the Indian petty traders. Thus a squeeze on the credit available to the Indian small businesses is something that would further queer the pitch for the small businesses.

The debate on this question has primarily been along the terms and on the terrain specified by FDI in trade lobbies and their so-called academic counterparts. A number of the latter carried out some so-called studies to endorse the proposed entry of big trade MNCs into India. One absolutely non-controvertible feature of the MNCs that would enter the Indian trade space with the capital base of a minimum of $ 100 million is that these entities are incomparably larger than and have the capability to draw upon huge funds in relation to their Indian counterparts. Their existing and potential competitors can never even dream of mobilising capital of amounts remotely close to $ 100 million. It is a classic case of the giants pitted against the pygmies. It is well known that retail trade in India is overcrowded as it is an easy entry activity and a good standby for the people waiting for a job. And there are millions who find themselves in such an unenviable position or predicament. The entry of big-ticket companies in the arena, that has virtually been the preserve of the small aam aadmi, will lead to the latter being displaced by competition from the biggest entities the world has seen in trade so far. What thousands of traders and lakhs of street vendors do in terms of turnover would be done by a single entity. The poor displaced petty traders, with no alternative employment, would still cling on to the traditional occupation but their turnovers and returns would dwindle.

The expansion of the market with increasing population too may give the depressed traders some space, particularly for the sake of old-time ties. But none of these can compensate for the big diversion that would be towards the modern mega stores Thus it is not so much employment as such but the quality of the livelihood source and the returns available from it that would face a severe crunch The big ones would spirit way the returns and incomes that are dispersed among lakhs of small traders. If this is not the other name of growing inequalities, shrinking work and income opportunities, then what else is? Who does not know that what Indians suffer from is not the open unemployment one finds in the economies in which the markets and cash nexus are predominant, though often with some amount of state supported social security? In our case the trading activity, the family and kinship ties and the willingness to make downward adjustments in the living conditions provide the answer to such problems thrust on the people by the redoubled commitment to the market forces and corporate capital, both desi and foreign.

THUS we see that the advocates and perpetrators of this great policy twist, the worst one so far, are totally ignoring the most serious issue facing the people of India: growing inequality fostered by the public policies of the neo-liberal policy regime. It is these already extremely worrying inequalities that would go up still further as a result of the incursion of foreign capital in the aam adami’s occupation-sphere. With the faulty and tendentious understanding of the ruling economic orthodoxy that refuses to recognise the close interconnection between poverty, inequality, unemployment and environmental degradation, the problem of inequalities does not matter beyond some sham measures of token inclusion to enable these persons to survive for voting them back to power and supply cheap labour and storm-troopers for their political campaigns who would provide the crowds that wait to shake hands with these twice-borns. But it seems from the radar of the neo-liberal crorepati politicians and bureaucrats the question of inequalities has simply disappeared.

One might conclude by drawing attention to some fallacies that the Walmart enthusiasts and dollar patriots peddle in support of their disastrous move. One can forget about any net additoin to employment. It is a case weaker than even the one that was advanced for the setting up of SEZs. The official data on employment in the organised sector, as given in the Economic Survey of the government, continues to show an absolute decline over these years. There are many possible ways of providing infrastructure for rural marketing in a decentralised manner and without involving big capital entities, say, under the control and management of the Panchayats. The Indian corportes are investing abroad in a big way. Lately an equivalent of nearly 30 per cent of the FDI inflows in India has been invested abroad by the Indian companies. Why not retain and attract this investment for such high priority purposes? After all, for obtaining socially responsible behaviour from the companies a tax write-off of nearly six lakh crore rupees per annum (the single biggest item of the Union Budget) is given to them. Similarly it is ridiculous to expect that with these external high salary executives’ companies themselves acting as intermediaries procuring foodgrains and other farm produce after the public procurement quotas are fulfilled, these commodities would be any cheaper. With high returns to farmers, with increasing high-quality employment, with huge costly shopping facilities, with swanky air-conditioned shopfloors and attractive salespersons, procuring from the small units at fair prices without exploiting the advantage of their oligopolistic position in the market and ensuring the quality of the products, the mega stores would need a magical band to offer the customers low prices to contain inflation. Can anything be more naive?

The MNC lobbies were already there in India intensifying their campaign for their Operation India. Partly their bidding has already been done by allowing FDI in wholesale trade in all commodities in the form of “cash-and-carry” stores permitted to the FDI. There have been reports of how these facilities are offered even to retail shoppers. What has been left out of consideration is the ground level practice that enables the retailers to carry on their business by depending on trade credit by the big, wholesale traders and distributors. To the extent the Indian wholesale trade is exposed to the heat generated by the entry of the foreign companies, the retailers would be deprived of the ease of entry with a small capital base as the stocks are maintained on the basis of trade credit from the wholesale traders who are openly admitted as the fall guys becoming the victims of the new moves to attract FDI in trade. The experts sitting in the decision-making bodies know more about the business practices and the needs and compulsions of the MNC traders than the ground reality of the way trade is organised and functions in India.

ACTUALLY the most glaring example of this ignorance of the trading practices and needs of the Indian economy is seen in the specious pleas made for the modernisation of retail trade. Whatever is meant by the modernisation of trade and why it is such a great priority has remained unexplained. In any case such psuedo-modernisation measures increase the capital and energy-intensity of trade and by a high degree of spatial centralisation put pressure on the already sky-high commercial real estate, congested roads and lanes of the million-plus cities. It is something that is simply out of sync with the needs and possibilities of the Indian cities and markets. Who would meet the energy and electricity needs of these mega stores in the face of the already tight and scarcity-ridden power supply scene? It has been pointed out that the total electricity consumption of a big modern FDI retail outlet may well exceed the total power supply required by all the farmers in an average-size taluk or block. The strain on our already overstrained and overstretched infrastructure would surely exceed the quantitative value of the foreign exchange inflows.

The major interests going to benefit from this are paradoxically those of the big organised retail and builders of commercial complexes.. If the Indian corporate sector and its mouthpieces are coming out in full-throated support of the move that has evoked, and justifiably, vociferous opposition of almost the entire public sphere, cutting across the Right and Left divide, it has its roots in the hard cash calculus. and its callous self-seeking pursuit of greed.

The great retail trade globalisation debate has within it many colours and complexities. But one thing is clear: in the Indian conditions it surely amounts to a self-goal. It is indeed faulty on every single count, including in terms of the constitutional propriety of not involving the State governments in the final decision-making process on a subject belonging to the concurrent list. It needs to be also pointed out that this does display an amazingly stubborn adherence and a total commitment to carry out an agenda whose source and inspiration no longer remain shrouded in mystery. I think the ruling groups continue to have great faith in their capability to manage to win elections whether they work for the people or the corporate houses who come handy to arrange for the requisite money, muscle-power or mafias and, of course, the media—so vital for winning elections.

The author is a Professor, Malcolm S. Adiseshiah Chair, Economic Development and Decentralised Planning, Institute of Social Sciences, New Delhi.

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