Sukumar Mukhopadhyay: FDI in Retail Trade is not a Reform

This subject has become one of the most controversial in the recent times.  Battle lines have been drawn on political grounds and even the stability of the present government has come to be dependent on this issue.  Here I am writing on the economic issues only.  

            The Government    is supporting FDI in retail on various grounds such as, that it will boost to the economy, provide large scale employment to youth, lead to lowering of consumer prices, better prices to the farmers, reduction in wastage in farm produce, improvements in technology, creation of infrastructure and better supply chain management.   The opposite view is mainly based on the adverse impact on Indian consumers and employment in small scale and tiny sectors.  I propose to discuss all these issues under separate headings. 


             The move to bring FDI in multi-brand retail trade is being called a reform by the Government.  To this I have got some theoretical points to make.  Reform is a term too often used but the actual meaning or the definition is uncertain.  It does not mean taking steps which are good.  Because good is the most vague concept.  I have thought of a definition of reform which is the following:  Reform is taking action towards what is contemporaneously thought as better.  The concept of FDI in retail is not contemporaneously thought as better since the opinion is divided even on economic grounds almost by a proportion of fifty-fifty. During the last Dassera (24th October), a Ravana called FDI was burnt by the Retailers Association in Delhi.   Articles written by experts and surveys conducted are very widely different.  It is, therefore, not a reform but an economic policy which is claimed to improve the economy but being hotly refuted by others.  

Size of the retail market in India: 

            A report by ICRIER (Indian Council of Research in International Economic Relations) on impact of retail FDI policy on Indian Consumer and the Way Forward completed on August 2011 has used certain estimates of the size of the market.  In 2010 Indian retail market was valued at $435 billion of which the share of modern retail was 7 per cent.  The sector is expected to grow to$535 by 2013 with the share of modern retail at 10 per cent.  In 2007 India was ranked twelfth largest consumer market and is expected to be fifth largest consumer market by 2025.   Some other writers have quoted estimate that the size of the retail trade in India is $500 billion.  These estimates are not far from each other.  


            The estimates of people employed in retail directly or indirectly varies from 4 crore to much less.  There is no firm number but 4 crore can be quite probable.  The argument of the Government is that fresh employment of people will be created in the supply chain management of the retail giants like Walmart.  And this employment will be of more substantial nature since it will involve handling more technically and technologically advanced jobs like in cold storage or developing infrastructure in supply chain management.  The opposite argument is that while some employment will be created in the big retail chains, a far greater number of employments will be lost on two counts.  First Walmart is known to employ far less number of workers compared to the retail trade in India.  The largest multi-brand retailer in the world is Walmart.  Its global sales were over $400 billion in 2009 and it employs 2.1 million people (figure used by Dr. Arun Kumar, Chairperson and Professor of Economics, JNU in the Mainstream on 22.9.2012).  Walmart will, therefore, employ 20 times less number of people compared to the present rate of employment in retail in India.  This calculation is on the basis of the above figures and, therefore, only gives a rough idea.  But this is confirmed by those who have visited Walmart shops abroad and find helpers in such shops scarce.  Even if they employ more people in India, the number will be far less.  This necessarily has to be so, since they will have to cut cost to cover not only their working cost but fixed cost also which is quite heavy.  Secondly, Walmart-like shops will replace the middlemen in a big way.  The traders and the middle men have been described as “vested interests” by those who have written in favour of FDI on behalf of the Government.  This is unfortunate that it has not been appreciated that the middle men are also doing a job of carrying goods from field or from factories to retail consumers for which they deserve their wages.  And in any case they do not deserve to lose their employment.  Any large scale loss of jobs of middle men will completely upset the employment situation of these self employed people.  A few of them, may be, about 5 to 10 per cent of them, will be absorbed in big retail.  But over all there will be a huge suffering in terms of unemployment of existing middle men who cannot by any means called “vested interests”. 


            The MNCs in retail which dominate the Western world have hardly helped in reducing unemployment.  Walmart is growing but wherever it has gone the employment has declined.  This will happen also in India because Walmart does not employ the poor and the ill educated, who somehow can manage as middle men for procurement of goods from the farms to the market.  It will only employ few educated labourers. 

Ousting Indian Traders by lower prices and other methods 

            The fear of the Indian Traders is that the local Kirana shops will be ousted by the big Walmart type of shops.  This can be discussed under two heads, agricultural and industrial.  So far as agricultural products are concerned the situation is that while the prices continue to be low in markets in villages or small towns and in the periphery of cities where vegetables are brought by head loads or cart loads, the prices in Walmarts-like-shops are unlikely to be lower than that.   Even if the Walmarts-like-shops get bulk supplies, there is a cost for transport and storage and wastage.  Here the issue about wastage of vegetable is relevant.   It has been claimed by those in favour of FDI that 30 to 40 percent of farm produce are wasted.  This has been contradicted by analysts.  Sunil Jain writing in Financial Express on 5.10.12 has described this estimate of wastage as a fat exaggeration.  I also agree with this completely.  I would even say that this exaggeration is not without motive.  So far as rice, ata and cereals are concerned they are not kept in cold storage.  Many vegetables such as potatoes and cauliflowers are already kept in cold storage and are available throughout the year.  There is no known estimate of shortage in cold storages.  There may not be much shortage at all as there is no public cry about it. 

            So far as industrial (manufactured) goods are concerned, the question of investment in infrastructure such as cold storage does not arise at all.  Manufactured goods constitute more than 80% of the total sale.  The possibility is very clear that Walmarts-like-shops will make bulk purchases of manufactured goods and will therefore reduce the prices.  They will also be able to introduce different brands from different countries.  In respect of durable consumer products, multi brands, electronic and information technology products, Walmarts-like-shops will more probably oust the Indian traders 

Chinese products can be brought in very large quantities by Walmarts-like-shops since they are allowed to import 70% of their requirements.  That will considerably weaken and oust the small scale in India.  China reduces wages for labour and makes them work in substandard condition to keep the cost low. 

            The ICRIER Report says (pages 14 & 15) “that as consumer shopping needs and preferences vary by occasion, there is opportunity for both traditional and modern formats to co-exist and grow.  The fear that modern retail will wipe out the traditional sector may be unfounded”.    The report says that if the policy decision is to give Indian Consumer access to more foreign brands, then import duties on them should be lower.  This is a preposterous suggestion.  However, it is possible that the Kirana shops and the big retail shops will co-exist.  The question is how much of the Kirana shops will lose in the long run.  In respect of fruits and vegetables, the Kirana shops will survive.  But in respect of manufactured goods, once people realize that the Walmarts-like-shops are charging lower price, they will flock to the later.  This, however, depends on the nearness of the Walmarts-like-shops and parking facility.  Because of the difficulty of driving down to the Walmarts-like-shops and the problem of parking there, the Kirana shops will continue to have a large amount of clientele though their total sales would certainly suffer since the market share of the Walmarts-like-shops will rise in course of time.  


            The proponents of FDI in retail, resort to the argument that there would be backward linkages with the setting up of infrastructure which is now lacking and there would be technological up-gradation in handling of the whole supply chain management.  To this argument, the answer is, as also pointed out by Dr Arun Kumar, Professor JNU, that Indian Marketing Organisation such as Amul has also created infrastructure.  There are already cold storage chains, which have been developed by people who allowed them to be used by various agriculturists on rent.  He has pointed out also that when Pepsi Cola came in 1988, it promised revolution in tomato and potato farming in India, but after four years it had invested only Rs.80 crores and was buying from 80 farmers only.  When Coca-cola was allowed to enter India without any conditionality, Pepsi also demanded that the conditions imposed on them to the removed. The lesson is that the promises made to gain entry are hardly implemented.  

            Walmart and others are not going to build new rural infrastructure as a part of backward investment.  Cost effectiveness will require that they will build access road and cold chains nearer their outlets/stores.  Building of rural infrastructure by them is most unlikely.    


            The issue is if the farmers will benefit.  The protagonists of FDI in retail argue that currently small farmers get not more than 20% of the retail price at which the goods are finally sold in the market.  This argument is not convincing.   Part of it is totally incorrect because all farm produce sold in village markets, small town markets and markets adjacent to cities are sold by the farmers themselves who bring their produce by head load, cart loads, rickshaws, three wheeler vans etc. The present outlets such as Big Bazar etc which sells vegetables are costlier than in open shops and vendors on the streets.  There is no way in which these organized shops selling vegetables will give cheaper products to the public.  And the price paid to the farmers also would be the same, more or less, when the retail price is no cheaper in the big outlets compared to the small shops and vendors on the streets. And in any case, even when the Walmart comes the situation will not change because they will be monopsonistic or semi-monopsonistic buyers.  


            It has been pointed out by some economists that the reason why the government is pushing ahead with its policy of bringing foreign capital in retail trade, in spite of wide spread protest, is that the Indian big business in retail has been tying up with MNCs through various means like private equity, foreign institutional investments, etc.  The black funds of the Indian big business and politicians (some of whom are big business men) are made to round trip into India.  Thus the Indian political class and the big business are interested in the entry of FDI so that they can bring their funds back.  To them the threat of MNCs is secondary.  Genuine Indian big businesses will not be able to survive the competition because FDI will come via tax havens like Mauritius and be exempted from taxes.  With these remarks, Dr Arun Kumar observed that the ruling class while overlooking the larger interest of the Indian people, which expose a growing divide between politics and economics in India. 

            The conclusion of the ICRIER’s report that FDI in retail will not wipe out the traditional sector has some truth but some of its conclusions are atrociously wrong.  It recommends lower rate of customs duty for importing foreign brands.   The report also relies on the fact that liberalization has benefitted India earlier in domestic industry such as automobile.  It should have taken into consideration that FDI in manufacture is surely welcome but not in retail trade which gives huge employment to uneducated and ill educated class of people.  Comparison of automobile industry with retail trade is also atrocious.  The whole conclusion of ICRIER report is based on a very small number of people namely 300, in high and middle income group across eleven cities.  Their questionnaire itself was framed on theoretical concept such as consumer behaviour and brand preference.  The sample should have been bigger and also should have included lower middle class and the stake holders such as owners of Kirana shops, middle men and agriculturists.  By not doing that the whole conclusion is a completely unreliable theoretical exercise in futility.   

            Business Standard has pointed out editorially on 25.9.2012 that the actual notification for the approval of FDI has already watered down certain strict requirements to be complied with by FDI in retail.  One such is the amendment of the previous requirements that single branded retailer in which foreign share holders have a majority must source 30% of the stock from small scale and medium enterprise in India.  “Mandatory” in the original notification has now been made ‘preferably’.  Naturally this renders the whole clause meaningless. Moreover the 30% requirement will be reviewed by auditors over a five year time horizon.    It is not hard to see how easy this requirement could be evaded.  The business standard has commented that “it looks like the Government is naming conditions to make the change saleable which it does not intend to enforce”.  

            By agreeing that the FDI in retail will be permitted to operate only when the State agrees is a very wrong policy of fragmenting the whole country into willing and unwilling zones depending on the political situation.  This is a Central subject and the will of the Centre should prevail.  This will also ruin the prospect of a genuine and unitary common market. 

            The aggressive tactics of Walmart through corruption and bribery to expand their reach are not unknown. A story by David Bastow on April 21, 2012 edition of the New York Times alleged that Walmart De Mexico bribed officials to acquire zoning approvals, concessions in environmental assessment and fees and the concurrence of local leaders.  Many such instances have been described in a revealing article by Jha and Gaiha, of Australian National University, in Economic Times of 4th October 2012.