Themes > Current Issues
01.12.2011
Retrogression in Retail
C.P. Chandrasekhar
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.
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.
© MACROSCAN 2011