FDI in retail threatens the livelihood of millions – Gautam Sen

Dr. Gautam Sen“The existing retail network of India embodies an entire way of life and social culture, with its fragmented structure and the dependence of a myriad of families on it. It harbours and articulates distinctive local histories and personal relationships between buyers and sellers. These traits are not immutable and may not survive historic market forces.” – Dr. Gautam Sen 

Manmohan SinghNothing foreign retailers do in India can help the dysfunctional UPA’s electoral prospects in 2014. The electoral time-line, of eighteen months at most, cannot fit the most optimistic projection of any dramatic impact FDI in retail could have on the wider Indian economy. Manmohan Singh and his floundering ministerial colleagues are, therefore, either bedazzled by the notion that FDI in retail will eventually have significant positive economic consequences, or they capitulated to US demands for market access. A third reason could be that India’s carpetbagger politicos, having read the writing on the wall, are engaged in more malfeasance to arrange handsome pensions for comfortable enforced retirements in 2014. This treasonous UPA coup on behalf of Wal-Mart and Tesco has also been facilitated by brandishing the CBI (an organisation any new government ought to instantly disband) at the irredeemable political twins of Uttar Pradesh politics although it seems nothing sufficiently compromising was found in Mamata’s closet to wield against her. But this sordid triumph may be short-lived in the quagmire of India’s ground-level politics. The repudiation by Indians of this disgraceful chicanery will be the final ignominy for a government without a vestige of self-respect or decency, leave aside concern for the nation and its people. 

Koodankulam Nuclear Power PlantsThe idea that Manmohan Singh and his boss have decided FDI in retail is an answer to the abysmal economic predicament into which they themselves recklessly have thrust India is not credible. These supposed sentiments do not fit the incompetent looter’s profile, which is the reputation the entire UPA will depart with, en masse, in 2014. A regime lacking imagination or political will has latched on to retail and FDI, blithely ignoring the multiplicity of complex supply-side problems that constrain the Indian agricultural sector in particular. Thus, one might conclude the UPA has succumbed to American pressure to allow majority-owned FDI in retail. When push comes to shove, the US authorities engage in every kind of skulduggery to get their way, as the Koondakoolam nuclear power plant debacle is demonstrating daily. And a weak, thoroughly discredited UPA regime is susceptible to other kinds of foreign blackmail. Information on the criminal activities of its most senior personnel, including concealment of loot abroad, can be leaked to the media. 

MediaThe implication insinuated by India’s purchased media that Wal-Mart and Tesco wish to invest massively in India to helpfully transform it is laughable. A financially bankrupt Indian media has been silenced by the simultaneous policy promulgation allowing a 51 per cent FDI stake in it, making it froth at the mouth with greed. Indian retail constitutes 22 per cent of GDP, is the second largest employer after agriculture, and is growing rapidly despite all the statist misgovernance that could conceivably be inflicted on it. Its current estimated worth is $450 billion and expected to reach US$ 850 billion by 2020, a quarter of it in the organized segment, which is poised for extremely profitable take off. These projections do not presumably factor in the impact on the share of the organised sector in total retail should majority-owned FDI enter it. The share of the organized sector is likely to end up becoming significantly larger as a result of the very fact of foreign entry into Indian retail, reinforcing the resolve of foreign investors to muscle in. 

Bharti Retail - Wal*MartForeign retailers wish to enter India because vast profits beckon. Organised Indian retail is expected to grow at 7 per cent over the next decade, not something they would have ever attempted to risk initiating at high cost. But they clearly wish to take advantage now because huge profits can be scooped up from it. Indian retail has already been identified as one of the most attractive investment prospects by international rating agencies. As a result, foreign retailers are also eyeing its mouth-watering promise, at a time when their own national markets have reached saturation point, with virtually no additional growth feasible except through increased market share. It might be inferred that existing joint ventures, like Bharti Retail-Wal-Mart and Tesco-Tata, are merely a prelude to potential policy changes that will allow 100 per cent foreign ownership, of which the 51 per cent provision is a harbinger. The foreign retailer will be the major source of additional capital and the increase in their ownership stake irresistible. The banks funding foreign retail investment in India are also flush with funds, having resumed their unprecedented historic plunder of global wealth, pre-empting 30 per cent of all US profits as rent though contributing less than 10 per cent valued added to GDP. 

Wal*MartThe operation of retail majors in advanced economies demonstrates their huge market power, which enables them to extract unusually large rents through oligopolistic pricing and manipulation of government policy in their own favour. They undoubtedly enjoy the advantages of economies of scale by virtue of operational size, but also bully suppliers relentlessly over prices of products they purchase. Indeed they routinely dictate purchase prices to even powerful producers of well-known brands. The same producers of branded goods do not sell at a similar price to less powerful, local retailers who thus suffer an unfair competitive disadvantage. And lower prices for supplies do not necessarily benefit consumers and evidence suggests that own brand products of retail giants, competing against branded goods, do not mean lower prices for consumers and instead enhance profitability. There is also the issue of increasing returns to scale that seems to create monopolies or quasi monopolies in the retail sector that wield irresistible market power, allowing them to collect significant rents from the hapless consumer. 

Tesco SupermarketThe expansion of multi-product retail in India, with or without foreign participation, will surely administer a potent shock to the supply side of Indian agriculture. It could turn out to be equivalent to an enhanced second green revolution for productivity. The range, variety, quality and quantity of food products provided will encounter a massive challenge to adjust their entire supply chain. But Indian retail does not need to be foreign-dominated and joint ventures are a shortcut that will lead to the repatriation of significant profits indefinitely. Indian companies should take the time to build their own retail chains. They might consider hiring staff internationally and forming relationships with less prominent foreign partners, even if this means more effort and takes longer to acquire the expertise they need. Their expertise can grow with the Indian market, which would be of modest size initially. As a corollary, forming relationships with the very largest global players may be unnecessary at the outset. There is great temptation for most Indian retailers to engage in joint ventures for fear that competitors would gain a first mover advantage by collaborating with major foreign partners before them. Only government policy can ensure that such economic relationships inimical to the national interest are deterred. However, if foreign retailers cannot now be halted from entering India, though that is not yet the dilemma, legislation should compel the creation of separate corporate legal entities, quoted on the Indian stock market, for their Indian-owned operations. 

FDI ProtestsThe political economy of the market power of FDI in retail is an issue that Manmohan Singh and his cronies deviously disdain to foreground. Once foreign retailers and the banks financing them enter India, they will be impossible to dislodge. They will simply buy policy-making since it is clear that pretty much anything can be purchased in India today from its infinitely corruptible politicians, the greatest danger to the welfare and survival of the nation. Their economic policy advisers, intellectually and morally bankrupt medieval school-men, are performing their designated task of providing obscure rationales for the politically-inspired looting that now constitutes contemporary economic life across the world. Not so long ago, their professional luminaries were, much like the witch-burning medieval clergy, arrogantly announcing the end of depressions, downturns, even the business cycle, and flaunting the most corrupt of accolades, the Nobel Prize, awarded for doing so. 

Protests against FDIThe existing retail network of India embodies an entire way of life and social culture, with its fragmented structure and the dependence of a myriad of families on it. It harbours and articulates distinctive local histories and personal relationships between buyers and sellers. These traits are not immutable and may not survive historic market forces, but one needs to question how policy and implicit public subsidies put them at a disadvantage in relation to new dominant players. The latter enjoy easier access to cheaper credit and public infrastructure fashioned to suit their specific needs. In the end, the desirability of a level playing field in which wider public infrastructure services are available to smaller players as well cannot be dismissed out of hand. If the big and small Indian retailer is to co-exist (though the former may assume an ascendant position), is it too much to ask that they are not ruthless corporate predators from the West, quick to unloose savage national political and military clout to get their way? Is this not what Western oil majors are doing at this very moment in the Middle East? They are destroying established State systems, with spurious propaganda about human rights, to which they have never subscribed, and replacing them with sub-state satrapies with which they negotiate lopsided oil contracts with alacrity. – News Insight, 19 Sept. 2012

» Dr Gautam Sen taught international political economy at the London School of Economics and Political Science for more than two decades. 

4 Responses

  1. First, trust India. I do. I dont have any worries over FDI. You have again raised some excellent points esp with regard to the farmer, but dont seem to trust India. Please trust our India.

    Impact of Organised Retail:

    -The higher strata of society will be tapped by the LFRs
    There might be an initial slack in monthly sales turnover from kirana stores in the short term, especially in the vicinity of LFRs, but over the long term this will be compensated by alterations in stocking patterns, population growth, service improvements, cost advantages of the kirana setup
    -Organised retail – LFRs -are already in India in the form of the Indian chains. This is a normal development of the market – consolidation, experimentation with formats etc are normal features in a growing, developing market. The influx of Large Format Retail stores had already begun in the form of departmental stores and the local superstores. These were small shopkeepers who grew big by virtue of their business acumen. Hence, whether FDI comes in or not, Large Format Retail stores will continue to increase in number. It is only a question of a matter of time…
    -Each format is facing its own competitive environment, and that includes both opportunities as well as dangers
    -The Kirana Format is in no danger of extinction given its range of services, width of distribution
    -Discernible shift in purchasing patterns for certain classes of products with cosmetics and related products increasingly being sought from Modern Retail, and groceries holding their own in Kirana

    The real problem is the nature of the Indian market. That does not mean that Organised Retail is doomed; far from it. But the growth will be slow and painful. You will have to build it up brick-by-brick. The expectations of rapid growth are frankly wildly overstated in this category. It will be a growing category; but the local realities of tastes, preferences, infrastructural constraints etc mean that the pace of growth will be muted.

    The other major factors in the equation are
    1) Increased Consumer Spending
    2) Increased Prices
    3) Increasing Households and Population
    4) Increase in Per Capita Income
    These factors are growing the overall market: which is creating space for all the players!

    India has 14 shops per 1000 people – 1.5 Crore retail outlets, and it would be being optimistic in the extreme to expect a handful of Organised Retailers to kill of the unorganised sector. Yes, the Organised Retail Sector is Growing rapidly – the figures are 36% y-o-y, but the main drivers of business as on date are different. In the Food and Grocery segment, the three identified differentiators are conspicuous by their absence.

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  2. http://newindianexpress.com/opinion/article666721.ece

    Reform at nations cost. Gurumurthy on FDI in retail.

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  3. There is a valid argument in favor of FDI in retail. That is that we should be self-confident enough to face any competition. That is the path India followed till just a few centuries back and it was the largest economy in the world when the British sneaked in and took over to loot us and made India one of the poorest countries in the world.

    Another valid argument is that this will improve the quality of domestically produced goods so that we can again be able to compete with the best in the world. A good example to support this argument is the automobile industry. Just about 20 years back the quality of our automobiles was the most shoddy in the world, and now the cars produced in India are exported to many countries.

    Let us have confidence in the enterprise and innovative quality of our business and trading class. They will come out on top when faced with competition.

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