FDI: Retail gains, wholesale loss – Virendra Parekh

Executive Icon“What our markets need is not foreign capital so much as more competition for the benefit of producers and consumers. If the entry of foreign retailers promotes it, they should not be stopped. But foreigners cannot address our self-made problems. To promote competition, scrap APMC Act, lift all restrictions on sale, purchase, storage, movement and prices of agricultural goods across the country and allow farmers to sell their produce directly to consumers or whoever pays better. Streamline local taxes and transport permits to make the whole of India a seamless common market in a real physical sense.” – Virendra Parekh

Sushma SwarajOften the real drama is staged behind the scene, real news is hidden behind the headlines and real politics is played away from debates in Parliament. The discussion in both the Houses of Parliament on the motion opposing FDI in retail exemplified all these. It was more posturing than exchange of views. Both the main parties, the Congress and the BJP, are on record saying the opposite of what they are saying now. The BJP, which is opposed to FDI now, was all set to permit it when it was in power. The Congress, which valiantly staked the prestige of the UPA government on this issue, opposed it then. MPs from the Samajwadi Party and Bahujan Samaj Party, who vehemently condemned FDI during the disKamal Nathcussion, saw to it that the government sailed through. The DMK supported the government but made no attempt to hide its bitterness. In sum, a motion which had the backing of a majority of the Members, fell through because of political jugglery. Congress gained, but democracy lost.

Congress MPs should ask one question of their leaders: If FDI in retail is in India’s interests, why are Americans lobbying so hard for it? They did something similar for the nuclear deal, and handed us a lemon while pretending to be doing India a big favour. Why should Wal-Mart spend millions (Rs. 125 crore at last count) on gaining a foothold in India? It is in business, not philanthropy, isn’t it?

BJP MPs should ask Arun Jaitely: if the time for FDI in retail is not yet ripe now, how come you found it ripe in 2004?

And we the common people should ask ourselves: how has a government totally impervious to massive corruption, unbearable inflation and jihadi terrorism, suddenly developed courage to stake its survival on an issue like this?

A striking fact is that there is little sympathy for the Indian trading community outside its members. This is not surprising. For decades, the trading class has been in cahoots with manufacturers and has plundered consumers with both hands. Over the decades, it had been three-dimensional loot — high and ever rising prices, shoddy quality, and often, cheating on weight and purity. It was only after liberalization in 1991 that Indians learnt that the producer could care for their tastes, that the seller could be solicitous, that they can demand quality as a matter of right, that prices can come down just as they go up.

Indian kirana shopEven today, India’s distribution system must be regarded as one of the most inefficient in the world, especially for food and other essential commodities. The price that a consumer pays is several times higher than what the farmer gets. There is a lot of wastage. Any rise in wholesale prices is quickly passed on to the retail consumer, but any fall in the same takes a long time and much diminution before reaching him, if at all. So when the trading community says its survival is under threat, consumers show little sympathy.

Can foreign retailers solve problems afflicting India’s distribution system? The Government says they will. By eliminating middlemen and intermediaries, large retailers will be able to pay better prices to the farmers and other producers while offering lower prices to the consumers. As large buyers, they will be able to insist on quality.

This is an appealing scenario. But there is no guarantee that it will materialize. The foreign retailer may find it more profitable to import a large part of their wares rather than procure it locally. Indian growers and other producers would be exposed to foreign competition.

Coming to agriculture, experience of other countries shows that Supermarkets do not always remove middlemen; often they replace one set of middlemen with a new battery of quality controller, certification agencies, packaging industry, processors, wholesalers etc. swamping on the farmer like vultures.

Then again, quality control is a like a double-edged sword in the hands of a monopsonistic buyer. The farmer could be forced to use hybrid seeds, chemical fertilizers and pesticides as specified by the retailer to ensure uniform quality. Even after adopting all these expensive methods, the farmer would be at the mercy of the retailer while selling his produce. It would be a road to serfdom paved with good intentions. This would apply to non-farmer suppliers, too.

Tesco SupermarketFor farmers as well as non-farmer suppliers, the sheer size and buying power of foreign supermarkets tends to depress producer prices. There have been a large number of supermarket malpractices across the globe which include: delayed payments; lowering prices at the last minute when supplier has no alternative; changing quantity/quality standards without notice; payment and discounts from suppliers for promotion or opening of new stores; rebate from producers as a percentage of their supermarket sales; charging high interest on credit, imposing tough conditions and penalties for failure to supply, delisting suppliers from their list without good reason.

Millions of new jobs will be created, we are told. Let us get it straight. Part of efficiency of organized retail stores stems from the fact that it needs less labour to handle a given volume of products. That is the experience all over the world.

Even if permitted, foreign retailers are unlikely to rush in anytime soon. Taken aback by the fierce political opposition, leading retailers are waiting for the storm to subside before making their next move. They are also working out implications of the various conditions and the possibility of several state governments keeping them out by denying necessary state level licences. Many foreigners have by now realised that, though lucrative, India is a difficult market. Customers’ tastes are diverse across the country and catering to the bewildering variety of tastes and demands is a tough job. Moreover, the Indian housewife does not like to make all her purchases at once.

Commercial rents are exorbitantly high, especially in big cities where the retailers are allowed to set up shops, and may go further up once they start moving in. And as rickshaw fares are not likely to fall any time soon, the friendly neighbourhood kirana store, extending facilities of monthly credit and home delivery, is unlikely to lose its appeal soon. For all the scary scenarios, the mom-and-pop stores and your familiar grocer will not disappear in the foreseeable future.

Aditya Birla More StoresWhat our markets need is not foreign capital so much as more competition for the benefit of producers and consumers. If the entry of foreign retailers promotes it, they should not be stopped. But foreigners cannot address our self-made problems. To promote competition, scrap APMC Act, lift all restrictions on sale, purchase, storage, movement and prices of agricultural goods across the country and allow farmers to sell their produce directly to consumers or whoever pays better. Streamline local taxes and transport permits to make the whole of India a seamless common market in a real physical sense. Millions of consumers and thousands of kiranas will then compete with big organized retailers (desi or bidesi) to prevent concentration of buying power and exploitation of farmers and other producers.

If you ban, simultaneously, futures trading in commodities (and permit delivery-based forward contracts) that will take care of inflation, too. Our problems are of our own making. So are their solutions. – Vijayvaani, 20 December 2012

» Virendra Parekh  is Executive Editor of Corporate India, and lives in Mumbai