MacroScan (Printable Version)

It was an avoidable diversion. 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. Opposition to the move resulted in the virtual suspension of an already stalled parliament. Finally, the audacious attempt of the UPA II to push through these controversial proposals had to be finally revoked till a "consensus" is found. Since a proposal that did not even enjoy a parliamentary majority is unlikely to be accepted by consensus, this is nothing but a rollback.

The Manmohan Singh government had clearly not bargained for this defeat. Experience with the nuclear deal under UPA I had perhaps convinced it that in the event of a vote in a discussion on the policy, it could somehow find a majority. It was only when its own allies in government expressed their dissent and threatened to abstain or vote against the measure that the retreat was seen as inevitable.

Thus, this is not a defeat of just this policy. It is also amounts to the censure of the political practice in which a government that is losing credibility seeks to use an executive decision to override something the Parliament will not allow. Sections in the government may believe that this policy and the framework to which it belongs are good for the country. But they also must be familiar with the arguments being advanced by those who are critical of the policy. It is those arguments they sought to dismiss when pushing ahead with the FDI agenda.

Consider those arguments. They begin with the view that once the doors to foreign investment in the retail sector are opened, giant international retailers such as Wal-Mart, Carrefour and Metro would use the opportunity to get a share of the large Indian market. This is based on evidence on the pace of penetration of organised retail (led by transnational firms) into developing countries, including those in Asia. An analysis by researchers from Michigan State University and the International Food Policy Research Institute on developments in Asia during 2001 to 2009 found that while domestic conglomerates have played a role in the rapid growth of organised retail in China, Indonesia, Malaysia and Thailand, the presence of foreign firms has grown substantially. Moreover, evidence from the developed countries shows that such growth is followed by a process of consolidation in which a few global retail chains tend to be the winners.

The names of some of these retail chains are now well known. 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 Wal-Mart of USA. Wal-Mart'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 debate on FDI in retail revolves around the consequences that the growing presence and rising market share of these global giants would have. 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.

Structurally this interaction between a few powerful intermediaries and a large number of producers and consumers provides the basis for an increase in trade margins at the expense of prices paid to producers or charged to consumers. The giant "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.

There are three issues of particular concern that arise. The first is the impact that the transformation in retail would have on small producers, especially in the farm sector. Though large, organised retail outlets tend to attract consumers by offering a diverse range of products at a single location, there is a tendency to standardise each of the products on offer. This involves closer interaction with the supplier and changes in farming practices, often leading to rising costs for the producer and necessitating increased access to working capital. To the extent that this results in the subordination of the producer to the buyer or the buyer's agents, transactions are no more arms length in nature. The danger is that the prices paid to and returns earned by small suppliers would be depressed because a few buyers dominate the trade. Moreover, dependence on a few buyers could mean that when the market is lean the producer is forced to bear a disproportionate share of the burden through measures such as delay in payments. Given the precarious viability of crop production even at present, such changes could severely damage livelihoods.

It is of course true that agriculture is not a homogenous sector, with farmers of different types and sizes engaged in production. The larger farmers with accumulated surpluses or easier access to official credit may benefit from the transformation in retail. It is the experience of farmers such as these that are often reported when the case is made that farmers favour FDI-led large retail. But they are by no means the majority, and not all of them are likely to experience an improvement once the transformation occurs. Moreover, since global chains are allowed to and are equipped to source supplies from anywhere in the world, these large farmers just as the smaller farmers would be subject to competition from the cheapest global sources. They could be shut off from access to consumer unless they accept a significant reduction in prices. Adverse effects on employment and earnings are therefore a real possibility.

The second concern is that even when farmers' earnings are under pressure, consumers may not benefit from the promised reduction in prices resulting from cost economies and the benefits of scale accruing to large intermediaries. Lower prices for consumers may be the initial fallout when existing intermediaries are being competed out to provide the space for the large retailers. But, 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.

Finally, within the supply chain itself, a range of pre-existing operators would be displaced, varying from street vendors and kirana stores to medium and large wholesale dealers. The latter would be rendered irrelevant by the ability of large conglomerates to directly contract with and procure 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. As an "employer of last resort", it serves as a poor substitute for the missing social security programme.

The government denies that the entry of large retail led by transnational firms would affect employment adversely. Since it is difficult to argue that a form of retail trade that relies on scale, technology and capital intensity to reduce costs would generate more direct employment than the less organised trade that it displaces, the focus is on indirect employment. Adequate new jobs would be created elsewhere in the supply chain, it is argued, even if not in the supermarkets themselves. This is an area where estimates are speculative at best and are therefore not persuasive. So the fall-back argument is that the Indian version of the policy has been designed to counter any adverse consequences for employment. But this is not convincing either. 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 Wal-Mart, Carrefour, Tesco and Metro) nor the locations in which such competition is most likely to be faced. On the other hand, 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.

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 are sufficient grounds to be wary of the impact that FDI would have in a sector that is the employer of last resort in a country where even high GDP growth is not delivering jobs. If the government was still insisting on pushing ahead with the measure there must be significant collateral benefits. Those benefits are, however, not clearly identified. As of now the retail chain works well, with different segments catering to different demands in terms of the desired combination of price and minimum quality. There are no noticeable shortages, and a large and diverse country is well serviced. So the government has taken recourse to specious arguments. Nobody buys the argument, for example, that FDI in retail is a remedy for the relentless inflation the country faces. Dealing with that inflation requires addressing cost-push factors and getting government (not FDI) to plug the gaps that the private sector will not fill. A 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 among the areas that need the government's attention.

The government's misplaced obsession with this policy is therefore difficult to understand. Some have read the sudden announcement as a symbolic declaration of the commitment to neoliberal reform of a government paralysed by charges of abetting corruption and shielding black money and by failures ranging from persisting inflation to faltering industrial growth. Others have attributed it to a desire to please international investors and governments like the US that have lobbied for such measures. The US government officially welcomed the policy when it was announced. That lends credence to this interpretation. Fortunately, even if true, this limited and skewed agenda of those designing UPA II's economic policy has not enough takers even in the political establishment. Not because all of them are gains FDI in retail. It is because they are not foolish enough to lose sight of the many elections to come. Political democracy has delivered on this occasion.

* This article was originally published in the Frontline, Volume 28 - Issue 26 :: Dec. 17-30, 2011.



Themes > Current Issues	26.12.2011


Retail Rollback*

C.P. Chandrasekhar

It was an avoidable diversion. 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. Opposition to the move resulted in the virtual suspension of an already stalled parliament. Finally, the audacious attempt of the UPA II to push through these controversial proposals had to be finally revoked till a "consensus" is found. Since a proposal that did not even enjoy a parliamentary majority is unlikely to be accepted by consensus, this is nothing but a rollback. The Manmohan Singh government had clearly not bargained for this defeat. Experience with the nuclear deal under UPA I had perhaps convinced it that in the event of a vote in a discussion on the policy, it could somehow find a majority. It was only when its own allies in government expressed their dissent and threatened to abstain or vote against the measure that the retreat was seen as inevitable. Thus, this is not a defeat of just this policy. It is also amounts to the censure of the political practice in which a government that is losing credibility seeks to use an executive decision to override something the Parliament will not allow. Sections in the government may believe that this policy and the framework to which it belongs are good for the country. But they also must be familiar with the arguments being advanced by those who are critical of the policy. It is those arguments they sought to dismiss when pushing ahead with the FDI agenda. Consider those arguments. They begin with the view that once the doors to foreign investment in the retail sector are opened, giant international retailers such as Wal-Mart, Carrefour and Metro would use the opportunity to get a share of the large Indian market. This is based on evidence on the pace of penetration of organised retail (led by transnational firms) into developing countries, including those in Asia. An analysis by researchers from Michigan State University and the International Food Policy Research Institute on developments in Asia during 2001 to 2009 found that while domestic conglomerates have played a role in the rapid growth of organised retail in China, Indonesia, Malaysia and Thailand, the presence of foreign firms has grown substantially. Moreover, evidence from the developed countries shows that such growth is followed by a process of consolidation in which a few global retail chains tend to be the winners. The names of some of these retail chains are now well known. 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 Wal-Mart of USA. Wal-Mart'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 debate on FDI in retail revolves around the consequences that the growing presence and rising market share of these global giants would have. 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. Structurally this interaction between a few powerful intermediaries and a large number of producers and consumers provides the basis for an increase in trade margins at the expense of prices paid to producers or charged to consumers. The giant "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. There are three issues of particular concern that arise. The first is the impact that the transformation in retail would have on small producers, especially in the farm sector. Though large, organised retail outlets tend to attract consumers by offering a diverse range of products at a single location, there is a tendency to standardise each of the products on offer. This involves closer interaction with the supplier and changes in farming practices, often leading to rising costs for the producer and necessitating increased access to working capital. To the extent that this results in the subordination of the producer to the buyer or the buyer's agents, transactions are no more arms length in nature. The danger is that the prices paid to and returns earned by small suppliers would be depressed because a few buyers dominate the trade. Moreover, dependence on a few buyers could mean that when the market is lean the producer is forced to bear a disproportionate share of the burden through measures such as delay in payments. Given the precarious viability of crop production even at present, such changes could severely damage livelihoods. It is of course true that agriculture is not a homogenous sector, with farmers of different types and sizes engaged in production. The larger farmers with accumulated surpluses or easier access to official credit may benefit from the transformation in retail. It is the experience of farmers such as these that are often reported when the case is made that farmers favour FDI-led large retail. But they are by no means the majority, and not all of them are likely to experience an improvement once the transformation occurs. Moreover, since global chains are allowed to and are equipped to source supplies from anywhere in the world, these large farmers just as the smaller farmers would be subject to competition from the cheapest global sources. They could be shut off from access to consumer unless they accept a significant reduction in prices. Adverse effects on employment and earnings are therefore a real possibility. The second concern is that even when farmers' earnings are under pressure, consumers may not benefit from the promised reduction in prices resulting from cost economies and the benefits of scale accruing to large intermediaries. Lower prices for consumers may be the initial fallout when existing intermediaries are being competed out to provide the space for the large retailers. But, 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. Finally, within the supply chain itself, a range of pre-existing operators would be displaced, varying from street vendors and kirana stores to medium and large wholesale dealers. The latter would be rendered irrelevant by the ability of large conglomerates to directly contract with and procure 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. As an "employer of last resort", it serves as a poor substitute for the missing social security programme. The government denies that the entry of large retail led by transnational firms would affect employment adversely. Since it is difficult to argue that a form of retail trade that relies on scale, technology and capital intensity to reduce costs would generate more direct employment than the less organised trade that it displaces, the focus is on indirect employment. Adequate new jobs would be created elsewhere in the supply chain, it is argued, even if not in the supermarkets themselves. This is an area where estimates are speculative at best and are therefore not persuasive. So the fall-back argument is that the Indian version of the policy has been designed to counter any adverse consequences for employment. But this is not convincing either. 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 Wal-Mart, Carrefour, Tesco and Metro) nor the locations in which such competition is most likely to be faced. On the other hand, 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. 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 are sufficient grounds to be wary of the impact that FDI would have in a sector that is the employer of last resort in a country where even high GDP growth is not delivering jobs. If the government was still insisting on pushing ahead with the measure there must be significant collateral benefits. Those benefits are, however, not clearly identified. As of now the retail chain works well, with different segments catering to different demands in terms of the desired combination of price and minimum quality. There are no noticeable shortages, and a large and diverse country is well serviced. So the government has taken recourse to specious arguments. Nobody buys the argument, for example, that FDI in retail is a remedy for the relentless inflation the country faces. Dealing with that inflation requires addressing cost-push factors and getting government (not FDI) to plug the gaps that the private sector will not fill. A 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 among the areas that need the government's attention. The government's misplaced obsession with this policy is therefore difficult to understand. Some have read the sudden announcement as a symbolic declaration of the commitment to neoliberal reform of a government paralysed by charges of abetting corruption and shielding black money and by failures ranging from persisting inflation to faltering industrial growth. Others have attributed it to a desire to please international investors and governments like the US that have lobbied for such measures. The US government officially welcomed the policy when it was announced. That lends credence to this interpretation. Fortunately, even if true, this limited and skewed agenda of those designing UPA II's economic policy has not enough takers even in the political establishment. Not because all of them are gains FDI in retail. It is because they are not foolish enough to lose sight of the many elections to come. Political democracy has delivered on this occasion. * This article was originally published in the Frontline, Volume 28 - Issue 26 :: Dec. 17-30, 2011.



© MACROSCAN 2011