FDI- Fast(en) Developing India?

Shruti Mohil

 

The decision of government taken, on 24^th November, to introduce multi-brand retail segment to foreign chains such as Wal-Mart, Carrefour and others in a move to attract overseas investment brought along onslaught of activities. While the cabinet ministry, DMK, Trinamool Congress was slugging it out in the parliament, the traders took to the streets (December 1 nationwide bandh) and the business tycoons voice support for the decision, the common man was left wondering which side to pick.

 

The Backdrop:

 After debating the issue for over a decade, the government decided to allow foreign retailers to hold 51% stake in the multi-brand retail sector and also raised the cap on the single-brand segment to 100%. This decision is applicable to only 53 cities having a population of 1 million. The investment needed for entering the sector has been put at $100 million, 50% of which should be set aside for building back-end infrastructure such as cold chains and warehousing. Further, to garner more political support, the government has made it mandatory for foreign retailers to source 30% of their requirement from small and medium enterprises. But the final of whether or not to allow FDI remains with the various States.

The Standoff:

The government was facing a backlash because of its decision to allow 100% FDI in multi-brand retail. The traders’ association planned to go on a nationwide bandh on Dec 1 and opposition parties along with Congress allies like DMK and Trinamool Congress opposed the move. Tamil Nadu chief minister J Jayalalithaa raised the red flag against FDI in multi-brand retail. The BJP ruled states, Uttar Pradesh chief minister Mayawati, West Bengal CM Mamata Banerjee and Bihar CM Nitish Kumar made public their stand against the latest liberalization move from the UPA although Gujarat chief minister Narendra Modi welcomed this decision.

That leaves foreign retailers to tap Congress-ruled states like Maharashtra, Rajasthan, Haryana and Andhra Pradesh apart from Punjab, where BJP ally Shiromani Akali Dal has supported the move, and Orissa. 

“We are against allowing FDI in retail sector.Retail sector provides a lot of jobs.Opening it to FDI would spoil all this”.
 T R Baalu | DMK

The Positive Side

·         At least 10 million jobs will be created in the next three years in the retail sector. Big retail chains are actually going to hire a lot of people. So, in the short run, there will be a spurt in jobs. Eventually, there's likely to be a redistribution of jobs with some drying up (like that of middlemen) and some new ones sprouting up.

·         FDI in retail will help farmers secure remunerative prices by eliminating exploitative middlemen.

·         Foreign retail majors will ensure supply chain efficiencies. The FDI will have a beneficial impact on food inflation from efficiencies in supply chain. This is also because food, which perishes due to inadequate infrastructure, will not be wasted.

·          A strong legal framework in the form of the Competition Commission is available to deal with any anti-competitive practices, including predatory pricing.

·         There has been impressive growth in retail and wholesale trade after China approved 100% FDI in retail. Thailand has experienced tremendous growth in the agro-processing industry. In Indonesia, even after several years of emergence of supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers.

·         The farmer stands to probably gain the most. Lack of storage facilities causes heavy losses to farmers in terms of wastage, particularly when it comes to fruits and vegetables. As pointed out by Deepak Parekh, “Nowhere in the world is there a four times difference between what the farmer gets and what the retailer pays”. So by the removal of the middlemen, the farmers would eventually benefit.

·         Ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market.

The Downside

·         Some people believe that the entry of foreign players now will most definitely disrupt the current balance of the economy, will render millions of small retailers jobless by closing the small slit of opportunity available to them. The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods.

·         Countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets.

·         The opposition argues that this move will lead to large-scale job losses. International experience shows supermarkets invariably displace small retailers. Small retail has virtually been wiped out in developed countries like the US and in Europe.

·         Global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in essentials, including food supplies, being controlled by foreign organizations.

·         Fragmented markets give larger options to consumers. Consolidated markets make the consumer captive. Allowing foreign players with deep pockets leads to consolidation. International retail does not create additional markets, it merely displaces existing markets.

"This will curb inflation and the common man can get daily essential commodities at lesser rates."

 Manmohan Singh | PM

Even as Prime Minister Manmohan Singh defended the decision to let in foreign retail giants, Trinamool and DMK asked for the measure to be reversed at an all-party meeting called to discuss ways to resolve the deadlock in Parliament over the issue. 

Due to lack of support and bowing to pressure from allies and wary of a defeat in Parliament, the government on Saturday agreed not to operationalize the controversial decision of the Union cabinet to allow 51% FDI in multi-brand retail sector. 

Finance minister Pranab Mukherjee gave a commitment to West Bengal chief minister Mamata Banerjee not to go ahead with the decision until a consensus emerged on the issue.

So in this particular instance, politics took over economics. While the short term prospects of that mean a more stable working condition for the government, the long term impact of that on the elections in the form of votes from the general public should be a thing that the government should give a serious thought to.