In predictable fashion, the Manmohan Singh government
chose to ignore voices of opposition and implement
its agenda of permitting foreign investment in the
retail trade. 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.
Large international retailers are bound to use the
opportunity to get a share of the large Indian market.
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 Walmart of USA. Walmart'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 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.
The relationship with producers is that of an ''oligoposony'',
with a few buyers and a large number of sellers. With
consumers it is one of an ''oligopoly'' with few sellers
and a large number of buyers. Structurally this provides
the basis for an increase in margins at the expense
of prices paid to producers or charged to consumers.
The new ''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. In the medium term, it is the dominant
position of these large players that would influence
the size and direction of margins.
Thus, on the production side, the danger is that the
prices paid to and returns earned by small suppliers,
especially in agriculture, would be depressed because
a few oligopolistic buyers dominate the retail trade.
Given the precarious viability of crop production
even at present, that shift could severely damage
livelihoods. On the other hand, 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.
Within the supply chain itself, it is to be expected
that the players displaced would not only consist
of smaller retailers, stretching from kirana stores
to street vendors, but medium and large wholesale
dealers who would be rendered irrelevant by the ability
of large conglomerates to contract with and procure
directly 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. It is a poor substitute
for the missing social security programme.
The government's claims that the entry of large retail
led by transnational firms would not make a difference
to net employment and would in fact augment it substantially
are questionable. They exaggerate the direct and indirect
employment that large retail would create and ignore
the number of jobs they would displace. 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. On the other hand, 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 Walmart, Carrefour,
Tesco and Metro) nor the locations in which such competition
is most likely to be faced.
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 is little to justify the rushed decision
to open up to FDI in retail. As of now the retail
chain works well, there are no noticeable shortages,
and a large and diverse country is well serviced.
None but the government argues that FDI in retail
is a remedy for the relentless inflation the country
faces. The 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 what need the government's attention.
Not surprisingly, the decision to permit FDI in multi-brand
retail has not been received well domestically. An
opposition, which was already engaged in highlighting
the failure of the government to rein in inflation,
corruption and the generation of black money, has
responded with anger. Parliament remains stalled and
non-functional, keeping in suspension other important
issues and bills that need to be debated. Some allies
of the Congress in the UPA have also had to express
their opposition to the move.
Whether those deciding the economic policy of the
UPA would budge and retract is yet to be seen. Given
the on-going debate on the subject, the government
must have anticipated opposition to its executive
decision. But it possibly presumed that it can hold
its position and win out at the end. The tussle is,
therefore, likely to be long and socially wasteful.
