FDI in Retail – Contrived Justifications

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The fact that an official of Wal-Mart, the largest retailer in the World, succeeded in having a Meeting with the Prime Minister of the country, also seen in the context of a flurry of carefully orchestrated utterings of those in authority and the media coverage, indicates that the Government has MADE UP ITS MIND.

While the Government is going through the motions of consultations and debate, the decision seems to be a fait accompli, and it would not be surprising if the Wal-Mart official was already given enough indication of the mind of the Government. The following excerpt from Cnn.Money news item is interesting:

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June 6, 2005: 1:27 PM EDT

By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Has Wal-Mart tapped India, the second most-populous and fourth largest retail market in the world, to some day become the jewel of its corporate crown?

Maybe, or at least that's the impression John Menzer gave last week when the president and CEO of Wal-Mart's international operations dedicated a substantial portion of his presentation to analysts talking exclusively about his recent trip to India -- charts and photos included.
… …
"But it appears that a number of factors may change that," Menzer said. Citing his talks with leading Indian government officials, including Prime Minister Manmohan Singh, he said the government was considering opening up foreign direct investment (FDI) to retailers.

At the same time, if the FDI regulations aren't lifted any time soon, Menzer said Wal-Mart is no longer prepared to wait but is prepared to make its foray into India with an Indian joint-venture partner to "take advantage of this market while it's still developing."

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More revealing are the following comments attributed to him in the same report:

“In our six government meetings, we created a very positive image [of Wal-Mart] in what we think is a very important future market," Menzer said. "We've energized the FDI lobby and preempted the anti-FDI lobby in India. I believe we've told our story."

(That is the modern day Sir Thomas Roe for you!)

News items about the interest of other majors like Carrefour and Tesco have also started floating in the media.

Even if the Government’s decision – awaiting only a formal nod from the Cabinet – is made known to the Beneficiaries first and the Sufferers - the country’s retailers and the general public - later, the matter is too important to be treated as a ‘done deal’ as yet. Even if the Government seems to think that the people of the country have no privilege to be informed of the decision before others are informed, they are the ultimate stakeholders.

Even as the Government seems to be unmindful of the voices of dissent in the country, it is worthwhile at this juncture to dwell upon some of the issues connected with FDI in Retail sector, review the flip-flops on the side of the Government and take a perspective of various voices of caution in this matter.

At the outset, it has to be said that granting trading concessions and opening up the retail sector is not merely a question of securing more Foreign Direct Investments and Investments in Retail Trade being one of the ways in which FDI could flow. Although the Government would like to confine its emphasis on the FDI aspect, the fact is that there are much wider issues involved with deeper implications. The policy change in the garb of FDI is in reality a significant shift and deepening of liberalization and is primarily to do with trade policy than finance. The Finance Minister deftly ducked the hot potato by declaring in one of his recent speeches that it was primarily a Trade issue, saying, “FDI in Retail was first mooted by the Commerce and Industry Minister”. Apart from the fact that the entry of such large retailers, especially in the food and grocery sectors, will lead to profound changes in the Retail Trade Structure, it will also greatly accelerate the forces of Consumerism. In the last few years, there has been a shift towards increased consumer spending because of a wider choice of goods in the market and increased incomes, easy access to plastic money and other direct borrowing. This trend is likely to continue. However, the entry of the large Global Retailers who consciously try to lead customers to spend more and more with their aggressive marketing would significantly accelerate this trend. Allowing Foreign Direct Investment in this specific sector pre-supposes, therefore, that the Government has consciously accepted the policy of encouraging rampant consumerism that is inevitable with the entry of the global players and their methods of increasing consumption. This is a serious question involving fundamental philosophy of our economic development. It implies pushing up and accelerating consumption to much higher levels than the overall economic growth, as a means to develop our economy.

For a country with such a large population, people can possibly realize sustainable development by adopting thrift as a strategy and avoid the heavy depletion of resources resulting from high consumption rates achieved by aggressive promotion and credit card economy. Is high consumption society an approved objective of the state policy? The impact of such a philosophy would be far-reaching indeed and the people of this country ought to be taken into confidence before the same is adopted, even by implication.

The second macro level issue is the role and impact of the large trans-nationals on the businesses and economies of countries around the globe, an issue that continues to be intensively studied and intensely debated all over the world. Countries around the world, at various times and in different situations, have experienced the ill-effects of the activities of the Global Corporations working to serve their own narrow interests and greed for profits and sales growth and the way in which they trample upon the competitors and work against the interests of the consumers as well. Allowing Global players in Retail trading will have Policy Impacts, Economic Impacts, Environmental Impacts, Impacts on the entire Retail Trade, Impacts on the Public as consumers and employees, Social Impacts as a concomitant, and last but not the least and very important, Impacts on Farmers. Even in the USA, the great champion of private enterprise and free trade, realization is dawning upon the public as well as thinkers, on the negative effect of market concentration due to the strengthening of the large Global entities, especially in the Retail Trade that caters to Basic Consumption (food and grocery) and affects agriculture.

The Indian economy has opened up only of late and the country just does not have enough exposure to or experience of the cut-throat world of Global Competition. The Government cannot claim to know enough about the devious and many ways in which Global Corporations work to achieve their own ends. Without a full grasp of the issues that may be faced and the confidence of dealing with such issues as they arise, it would be foolhardy to simply open up all the way and Retail Trade is the core area where great caution needs to be applied. The Government, in its enthusiasm to prove its liberal approach to the world, is completely turning the opening up of the Retail sector on its head. It is proposing to actually begin first with the Food and Grocery sector. If at all FDI in retail is found to be desired objective, the beginning should be with high value branded products rather than basic products.

There is plenty of literature in the public domain and empirical evidence that demonstrates the various undesirable aspects of Food Retailing with reference to large players and it is doubtful if the Government has had a chance to study the subject and all its ramifications in as much depth as is required before taking such a major decision. A lot has been said elsewhere in the world about the great influence the Global players involved in food manufacturing and marketing eventually wield over the market and the economy. Following is just one excerpt:

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During the 1980-2000 era market concentration in food manufacturing and retailing accelerated to high levels (Rogers, 2000). Curiously vertical integration between the two stages declined dramatically, especially for food retailers. This polarization or specialization, however, was accompanied by a rise in retailer-controlled brands produced under contract in a tightly coordinated fashion by manufacturers. In Europe control of the supply chain is clearly lodged at the retail level (Bell 2000). Given the lack of commercial TV advertising, and consequently weak, more fragmented brands in each county, retail brands and channel control has always tended to be stronger in Europe.

In the U.S. supermarket retailers during this period rapidly moved towards superstores and even larger combination food-drug emporiums, and super centers - full scale supermarkets combined with a discount mass merchandise operation that sells everything from lawn and garden to car repair, to home fixtures and clothing. The top six supermarket retailers (Kroger, Safeway, Albertsons, Royal Ahold, WalMart and Del Haize) now control over 50% of supermarket sales, up from 32% as recent as 1992 (Cotterill 2000). This increase in buyer concentration and increased focus on retail labels has clearly shifted control of supply channels towards retailers.

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(Dynamic explanations of Industry Structure and Performance, Cotterill.R.)

Read further:

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Multinational agro-food companies spend millions of dollars on marketing and public relations. Beyond increasing their sales of individual products and services, they also want to be seen as generous global citizens who can continually improve the menu of food choices for wealthier consumers, while at the same time solving the problem of hunger in poor countries through new technologies and free trade agreements.

But behind such benign and carefully-crafted slogans as "supermarket to the world" lies a more complex reality. From seed and fertilizer firms to processing and food-manufacturing companies to large-scale retailers, corporations understand that the larger their market share, the greater their ability to influence the world in which they operate.

The trend toward consolidation at every stage along the food production chain has dramatically impacted the global economy and distribution of income and wealth. Corporate spending on lobbying and campaign finance ensures that food companies and their trade associations will have far more influence on trade and regulatory policy than most voters realize.

Corporate political influence has direct consequences for the public, as industry groups shape nutrition guidelines, food safety regulations, and rules for labeling and content disclosure. Meanwhile, farmers, processing and retail workers are all squeezed by the monopoly power of food conglomerates so large that they can set farm workers’ and others' wages and farmgate prices substantially below levels that would ensure a decent standard of living.

Unfortunately, the food companies' inflated profit margins also come at the expense of the environment: pesticide residues, soil erosion, air and water pollution, loss of biodiversity and inhumane treatment of animals are all exacerbated by the industrial approach to agriculture favored by the major food companies.

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more:

“There are many obstacles in the way to global consolidation and the mode of market entry strategy retailers adopt is very much dependent on institutional constraints, such as governmental regulation of retail and service activity and restrictions on land. This has led retailers, such as Wal-Mart, Carrefour, Marks & Spencer and Ahold, to turn to their governments to push for the deregulatory agenda. Wal-Mart is, for example, a key adviser to the US government on trade policy”.

The USA, the biggest businessman in the world, continues on its path to establish its dominance in the economic world. (“The Politics of United States Free Trade Agreements”). On a different scale, similar efforts are being made under the auspices of WTO, binding the developing countries in knots, which cannot be cut.

To get a better appreciation of the various aspects of the macro level issues involved, various references given in a previous article may be perused.

In its enthusiasm to ‘move forward’, the Government is willy-nilly opening the country’s doors to turn it into a battleground for dominance by the Global players and that too, without having the necessary legislative and regulatory framework or experience to deal with problems.

While the macro level considerations are of fundamental importance in deciding on granting trading concessions to outsiders in the country, the other micro level issues also need to be dealt with at this stage. It is, therefore, useful to consider how the Government is going about trying to build up to a situation that is conducive to announcing its decision.

Just a little more than a year ago, the Commerce Minister in the previous Government advocated waiting for a reasonable period of time before allowing FDI in retail. In the period that has followed, the new Government seems to have moved with alacrity to push through FDI in Retail. Initially talking about 26% FDI in Retail, it has already started preparing the groundwork for moving up to 49%. Although the official line maintains that various options are still being studied, it would not be surprising if before long, the talk of 100% FDI starts floating.

The pace of the discussion was really accelerated by the Minister of Commerce & Industry speaking at a Seminar on 23^rd February 2005 in New Delhi.

He began by a brilliant opening statement to put the minds of the listeners at ease: “ If any of you have come here to hear from me whether or not the Government is about to announce FDI in the retail sector, you are going to be disappointed. The nature of the retail sector in India is too complex for a hasty decision to be taken in this regard.” He also ended up with another such statement: “The government has an open mind and would like to do what is best for the country.” In between these two statements, however, he went on to read out a script, which, while ostensibly projecting arguments pro and contra, left little doubt as to which way the Government’s mind was working – towards allowing FDI in retail.

Various arguments, contrived at best in today’s situation, are being bandied about to prove the desirability of FDI in retail. For example:

China has opened up the Retail market fully:

It is true that China has opened up the Retail market to outsiders fully. But one should not forget that this has been done only some months ago and after China has had a head start in terms of economic development. It has managed to secure huge amounts of FDI to the tune of over US $ 500 bn. in FDI since 1979 and has been the biggest recipient of FDI amongst the developing countries since it opening up in the late 1970s. For a long time, most of the FDI flows have gone into the infrastructure and manufacturing sectors, areas where the Investments in India – whether domestic or FDI – are nowhere near what is needed. In all these years, China has had a chance, due to the increased economic activity, to have a reasonable domestic organized retail sector. The opening up has also been accelerated following its entry into WTO. It is not possible to compare what China is doing on a selective basis to justify pre-determined decisions.

In China, the organized retail is 20% whereas in India it is only 2%:

This again is a fallacious argument. As stated earlier, China has had a head start over India and not only because of huge FDI, but also because of its massive exports (leaving India far behind), the people’s incomes and consumption have been surging. The argument further assumes that Organized Retail is per se, preferable. Even if this assumption is accepted, the question is not whether it is desirable or not. The question is, whether FDI is the right means to increase the share of Organized Retail and whether the local entrepreneurs cannot achieve the same objective. It is interesting to note that China already has several large Retail Groups like Wumart, Suogo, Lianhua and Hualian (the last two having merged recently into Shanghai Bailian Group).

Restaurants and Dhabawalas co-exist, and organised retail and mom and pop stores can also co-exist:

This argument shows the confusion that the protagonists(lobbysits) seem to be creating. No one doubts that organized retail can and will co-exist with the small shops. No one even says that there is no place for Organized Retail. The debate is about the entry of FDI in Retail, which is sought to be equated with Organized Retail.

Potential spin-offs on large scale job creation, increased economic activity:

This is a generalized argument, which can be used to justify any large economic endeavor. On this basis, FDI in any sector where a significant activity is taking place on an incremental basis can be justified. Using the words ‘potential spin-offs’ lends sufficient vagueness to this oft-repeated argument and what actually happens may not be what was held out to be. This is not to say that there are no positive effects on job creation and increased economic activity. However, this is bound to happen as the economy grows and consumption levels rise. The same result will ensue even if the demand is met by the domestic players.

International experience has demonstrated that the only way that farmers can get better prices for their products is through improvement of the value added food chain:

This is true in a general sense and value addition in agriculture products is a desired objective. However, to link it specifically to FDI in retail is not strictly appropriate. As the country has seen in the last few years, there is a demand from the customers for value added food products and the retailers and manufacturers are responding to the same. The need for FDI, however, in this situation is more for improving the processed foods Manufacturing sector. The other aspect not mentioned while advancing this argument is that International Experience has equally shown that the consolidation of food retail business is leading to lower and lower prices for the farmers. Therefore, rather than the farmers getting more, they may actually end up remaining in an exploitative situation. It is reiterated that there is no dispute, in principle, with the argument that “it is only when food processing and packaging takes off in a big way that we can hope to give the agriculturist his due”. For this to happen, large investments need to take place in the manufacturing and infrastructure area and the ‘taking off of processing and packaging sector’ is not a result which depends upon FDI in Retail being allowed. This is clear from the fact that China, the country oft cited, already has a large processing and packaging sector driven by local and export demand without a large contribution of FDI in Retail. Yes, mass marketing in the shape of Organised retail will certainly help but not necessarily a foreign entity. Indeed, there are many foreign entities who have been operating in India for a long time, many of whom dealing with consumer products with extraordinary marketing networks. Yet, they are not known to have contributed towards achieving the objective of mass marketing of processed foods except in a marginal sense.

FDI in Retail will increase purchases from the entities for their global needs:

This again is a misconceived argument. If Wal-mart, for example, sources products worth nearly $ 1.5 bn. from India for its world-wide stores, it does so for pure commercial reasons. There is no reason to believe that just because they are allowed to operate, will they significantly increase their sourcing for other areas. They would do so only if it makes business sense as separate transactions.

The foreign entities will participate only in incremental activity, they must not substitute ongoing activity or replace or displace what we have:

This is again a misleading argument. The Retail market is projected to grow 50% in the next five years, it would definitely mean that the foreign entities would participate in this activity. In actual fact, once they are in, they are participants in the entire Retail Market volume whether existing or incremental.There is no way to ensure and assure that they create their own economic activity distinct from the general market growth. It can only mean that they would take away a share from the domestic players. Protagonists of the FDI in Retail often refer to the unorganised retail operations, the shops, rather disparagingly and dismissively as ‘mom and pop’ stores. They should, however, do well to remember that these are the very shops who have amidst great hardships, served the Indian Public well over the years and plan to continue doing so. Often, with the primitive infrastructure and logistics that the country had to suffer because of wrong policies, these ‘mom and pop’ stores have managed to keep the consumer supplied with their daily needs, something which the Global players would certainly not want or be able to do in similar circumstances. That there is ‘no empirical evidence of any adverse impact of the growth of organized retailing on small retailers’ is only an argument proposed by those who are keen to enter the Indian market. Phrases like ‘there is (or there is not) empirical evidence’ ‘our studies have shown’ , ‘our experience has shown’ etc. are normally used when there is no hard data or there is equally strong opposing data with regard to a proposition.

FDI in Retail may not pose a threat to domestic industry, the reason being that FDI in retail would initially be concentrating on the high income consumers. (Planning Commission):

That the public is sought to be confused is apparent from the fact that exactly the opposite argument is also used to justify the global players’ entry. Viz. The large organised retailers can offer cheaper prices due to their mass purchases and, therefore, enable the poor customers to buy their products.

It may be mentioned that it is true that the mass purchases lead to better prices, but it should be evident that the benefit of the lower prices is moving only from one sector viz. the Indian manufacturer to another viz. the consumer. The benefit to the customer is certainly not at the cost of the Global player’s profits but at the cost of the supplier.

Reduced Tax Evasion

A Bharatiya Bank that jumped onto the bandwagon to extol the virtues of FDI in retail asserted in a presentation under "Benefits to the Government' that it would result in increased tax revenue and reduced tax evasion. It is unfortunate that the Indian Bank - with a 'firang' approach? - chose to implicitly state that the domestic players, or at least, the unorganised sector would be indulging in tax evasion and, therefore, the entry of the 'honest' foreign entities would be preferable. This argument shows the extent to which the protagonists have gone to convince the Government of the need to allow FDI in Retail.

Government could also think of putting geographical restrictions on the large (foreign) retailers:

A fantastic proposition! Is the Government, for example, proposing that they should only establish their business in rural areas? Or is it proposing that they cannot go to rural areas? The latter would, of course, reveal the extent of our comprehension of business realities. Would the Government really mandate them to remain only in the large urban markets, which is where the cream is? Would it like to put fetters on them from entering the rural areas and thus enable them to happily claim that they are prevented from serving the tough markets, something which they would not be keen to do anyway?

The foreign entities will bring technologies and management skills:

In reality, the only technologies and skills they bring will be for serving their own business needs and would be related to their own Retail operation. As far as technologies on the supply side are concerned, these would, in any case, have to be acquired from the respective providers of such technology, independently of the global retailer who sets up shop.

Vague talk about the Retailer bringing in high-end technology etc. need not be given too much weightage in the context of the Supply side.

Conditionalities may be attached to the permissions:

This is the classic bureaucratic way of getting around the objections. The Government may place certain conditionalities in return for allowing the foreign entity. However, as ‘experience has shown’ most of these conditionalities would have no meaning or importance once the entity sets up shop. Once the business is established there is no way that the conditions – which would prescribe actions subsequent to the establishment of the business – can be enforced. The cases of conditionalities of exports etc. placed on companies like Pepsi are well-known. In the end, such conditions remain only on paper, placed to hood-wink and by-pass objectors.

The entry of Global players (read Walmart) would only help small players to grow faster:

The meaning of this can only be provided by the originator, the CEO of Walmart’s international operations.

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