It was an avoidable diversion. While parliament was
in session, the cabinet met to approve hitherto prohibited foreign direct
investment in multi-brand retail, with a cap of 51 per cent on foreign
equity that ensures majority ownership. Simultaneously the cap on foreign
equity investment in single-brand retail has been enhanced to 100 per
cent, offering sole ownership rights to foreign investors. Opposition
to the move resulted in the virtual suspension of an already stalled
parliament. Finally, the audacious attempt of the UPA II to push through
these controversial proposals had to be finally revoked till a ''consensus''
is found. Since a proposal that did not even enjoy a parliamentary majority
is unlikely to be accepted by consensus, this is nothing but a rollback.
The Manmohan Singh government had clearly not bargained for this defeat.
Experience with the nuclear deal under UPA I had perhaps convinced it
that in the event of a vote in a discussion on the policy, it could
somehow find a majority. It was only when its own allies in government
expressed their dissent and threatened to abstain or vote against the
measure that the retreat was seen as inevitable.
Thus, this is not a defeat of just this policy. It is also amounts to
the censure of the political practice in which a government that is
losing credibility seeks to use an executive decision to override something
the Parliament will not allow. Sections in the government may believe
that this policy and the framework to which it belongs are good for
the country. But they also must be familiar with the arguments being
advanced by those who are critical of the policy. It is those arguments
they sought to dismiss when pushing ahead with the FDI agenda.
Consider those arguments. They begin with the view that once the doors
to foreign investment in the retail sector are opened, giant international
retailers such as Wal-Mart, Carrefour and Metro would use the opportunity
to get a share of the large Indian market. This is based on evidence
on the pace of penetration of organised retail (led by transnational
firms) into developing countries, including those in Asia. An analysis
by researchers from Michigan State University and the International
Food Policy Research Institute on developments in Asia during 2001 to
2009 found that while domestic conglomerates have played a role in the
rapid growth of organised retail in China, Indonesia, Malaysia and Thailand,
the presence of foreign firms has grown substantially. Moreover, evidence
from the developed countries shows that such growth is followed by a
process of consolidation in which a few global retail chains tend to
be the winners.
The names of some of these retail chains are now well known. Foreign
sales have been an important source of revenue for many of them, amounting
in 2007 to as much as 74 per cent in the case of Ahold of Netherlands,
52 per cent for Carrefour of France, 53 per cent for Metro of Germany,
22 per cent for Tesco of UK and 20 per cent for Wal-Mart of USA. Wal-Mart's
20 per cent too has to be seen in context: with $379 billion of revenues
in 2007 it stood way ahead of Carrefour, which came in second with $123
billion in the global league table for revenues.
The debate on FDI in retail revolves around the consequences that the
growing presence and rising market share of these global giants would
have. The power of these chains has been amply illustrated in other
contexts, where they have been in operation. With deep pockets and international
sourcing capabilities, they exploit economies in procurement, storage
and distribution to outcompete and displace domestic intermediaries
in the supply chain. This occurs not in one or a few centres, since
each retail chain tends to establish procurement, warehousing and distribution
facilities across regions and cities. Once the smaller middlemen are
displaced, we have a few large firms and their agents dealing with a
multitude of small, medium and relatively large producers on the one
side, and a mass of consumers on the other.
Structurally this interaction between a few powerful intermediaries
and a large number of producers and consumers provides the basis for
an increase in trade margins at the expense of prices paid to producers
or charged to consumers. The giant ''middlemen'' appropriate these higher
margins. That a part of the margin may be shared with the producer or
consumer to increase retail volumes and market shares does not take
away from the fact that the distribution of power within the supply
chain benefits the large intermediary.
There are three issues of particular concern that arise. The first is
the impact that the transformation in retail would have on small producers,
especially in the farm sector. Though large, organised retail outlets
tend to attract consumers by offering a diverse range of products at
a single location, there is a tendency to standardise each of the products
on offer. This involves closer interaction with the supplier and changes
in farming practices, often leading to rising costs for the producer
and necessitating increased access to working capital. To the extent
that this results in the subordination of the producer to the buyer
or the buyer's agents, transactions are no more arms length in nature.
The danger is that the prices paid to and returns earned by small suppliers
would be depressed because a few buyers dominate the trade. Moreover,
dependence on a few buyers could mean that when the market is lean the
producer is forced to bear a disproportionate share of the burden through
measures such as delay in payments. Given the precarious viability of
crop production even at present, such changes could severely damage
livelihoods.
It is of course true that agriculture is not a homogenous sector, with
farmers of different types and sizes engaged in production. The larger
farmers with accumulated surpluses or easier access to official credit
may benefit from the transformation in retail. It is the experience
of farmers such as these that are often reported when the case is made
that farmers favour FDI-led large retail. But they are by no means the
majority, and not all of them are likely to experience an improvement
once the transformation occurs. Moreover, since global chains are allowed
to and are equipped to source supplies from anywhere in the world, these
large farmers just as the smaller farmers would be subject to competition
from the cheapest global sources. They could be shut off from access
to consumer unless they accept a significant reduction in prices. Adverse
effects on employment and earnings are therefore a real possibility.
The second concern is that even when farmers' earnings are under pressure,
consumers may not benefit from the promised reduction in prices resulting
from cost economies and the benefits of scale accruing to large intermediaries.
Lower prices for consumers may be the initial fallout when existing
intermediaries are being competed out to provide the space for the large
retailers. But, once the retail trade is concentrated in a few firms,
retail margins themselves could rise, with implications for prices paid
by the consumer, especially in years when domestic supply falls short.
Finally, within the supply chain itself, a range of pre-existing operators
would be displaced, varying from street vendors and kirana stores to
medium and large wholesale dealers. The latter would be rendered irrelevant
by the ability of large conglomerates to directly contract with and
procure from producers. The immediate and direct effect would be a substantial
loss of employment in the small and unorganised retail trade as well
as in segments of the wholesale trade displaced by the big retail chains.
The potential significance of this impact can be judged from the role
of the retail and wholesale trade in generating employment in the country.
According to the National Sample Survey Office's survey of employment
and unemployment in 2009-10, the service sector category that includes
the wholesale and retail trade (besides the much smaller repair of motor
vehicles, motorcycles and personal and household goods), provided jobs
for 44 million in the total work force of 459 million. It is no doubt
true that the impact of foreign-invested retail would be restricted
to the urban areas since entry as of now is permitted only in cities
with a population of more than one million. But this is where the employment
in trade would be the highest. Twenty-six out of the 44 million employed
in the sector are located in urban areas. Many of these workers find
themselves in the services sector (especially in the retail trade) because
of inadequate employment opportunities in agriculture and manufacturing.
Out of 71 million jobs in services in the urban areas, around 36 per
cent are in the retail and wholesale trade and repair services. In sum,
from an employment point of view this is a sector that is central to
livelihoods, however, precarious some of those jobs can be. As an ''employer
of last resort'', it serves as a poor substitute for the missing social
security programme.
The government denies that the entry of large retail led by transnational
firms would affect employment adversely. Since it is difficult to argue
that a form of retail trade that relies on scale, technology and capital
intensity to reduce costs would generate more direct employment than
the less organised trade that it displaces, the focus is on indirect
employment. Adequate new jobs would be created elsewhere in the supply
chain, it is argued, even if not in the supermarkets themselves. This
is an area where estimates are speculative at best and are therefore
not persuasive. So the fall-back argument is that the Indian version
of the policy has been designed to counter any adverse consequences
for employment. But this is not convincing either. The attempt to temper
the adverse impact on employment by restricting entry only to cities
with populations exceeding one million is without substance. It does
not change the source of the competition (giants like Wal-Mart, Carrefour,
Tesco and Metro) nor the locations in which such competition is most
likely to be faced. On the other hand, the requirement that the foreign
investor should bring in a minimum investment of $100 million implies
that the FDI being sought is in units that are more technology- and
less labour-intensive.
Yet, the Commerce Minister's claim is that the policy has a ''unique
Indian imprint'' that would make its impact here very different. This
is a poor effort to obfuscate issues. Consider one aspect of the unique
imprint: the requirement that 30 per cent of manufactured or processed
products sold should be sourced from small and medium enterprises. This
requirement based on a process of self-certification that is to be monitored
would be difficult to implement even in India. But it becomes meaningless
because it applies to such producers from anywhere in the world. As
a briefing paper from the Commerce Ministry notes, in order to ensure
that there is no violation of World Trade Organisation norms, ''30 per
cent sourcing is to be done from micro and small enterprises which can
be done from anywhere in the world and is not India specific.'' This
would be impossible to implement and only encourage international sourcing
at the expense of domestic producers.
In sum, there are sufficient grounds to be wary of the impact that FDI
would have in a sector that is the employer of last resort in a country
where even high GDP growth is not delivering jobs. If the government
was still insisting on pushing ahead with the measure there must be
significant collateral benefits. Those benefits are, however, not clearly
identified. As of now the retail chain works well, with different segments
catering to different demands in terms of the desired combination of
price and minimum quality. There are no noticeable shortages, and a
large and diverse country is well serviced. So the government has taken
recourse to specious arguments. Nobody buys the argument, for example,
that FDI in retail is a remedy for the relentless inflation the country
faces. Dealing with that inflation requires addressing cost-push factors
and getting government (not FDI) to plug the gaps that the private sector
will not fill. A weak segment of the supply chain is the public distribution
system created to ensure remunerative prices for farmers and reasonable
prices for consumers. That and productivity enhancing public investment
are among the areas that need the government's attention.
The government's misplaced obsession with this policy is therefore difficult
to understand. Some have read the sudden announcement as a symbolic
declaration of the commitment to neoliberal reform of a government paralysed
by charges of abetting corruption and shielding black money and by failures
ranging from persisting inflation to faltering industrial growth. Others
have attributed it to a desire to please international investors and
governments like the US that have lobbied for such measures. The US
government officially welcomed the policy when it was announced. That
lends credence to this interpretation. Fortunately, even if true, this
limited and skewed agenda of those designing UPA II's economic policy
has not enough takers even in the political establishment. Not because
all of them are gains FDI in retail. It is because they are not foolish
enough to lose sight of the many elections to come. Political democracy
has delivered on this occasion.