FDI in Retail - The China Story

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One of the justifications forcefully advanced by the lobbyists for allowing FDI in Retail is that it would lead to enhanced sourcing of products from India by the FDI partners to meet their Global requirements. The Government and external agencies that are advocating FDI in Retail, readily accept this reasoning to reinforce their arguments.

It may be of interest to note that China, the great success story in recent times, did not get FDI in this sector to any worthwhile degree. In the years in which China received huge FDI inflows, Retail sector received relatively miniscule amounts because FDI in this sector was not freely allowed. And yet, this period saw China becoming a Global Force as a supplier without the benefit of FDI in Retail. It is only since December 2004 that China has liberalized FDI in Retail to meet the obligations for entry into the WTO, three years before it is required to do so, but after its domestic retail sector has had an opportunity to develop to a reasonable level.

FDI in China by Sector, 1999
Sector	Number of Projects	Amount Contracted ($ million)	Amount Utilized ($ million)
Farming, Forestry, Livestock Farming, Fishing	762	1,471.70	710.15
Mining	130	322.21	557.14
Manufacturing	12,042	25,331.80	22,603.34
Textiles	535	1,198.52	1,370.89
Chemicals	867	1,758.74	1,919.28
Pharmaceuticals	198	692.62	684.41
Ordinary Machinery	485	904.47	976.69
Special Equipment	500	743.33	509.95
Electronic and Telecommunications Equipment	922	3,942.71	3,145.72
Power, Gas, and Water Production and Supply	116	1,635.19	3,702.74
Construction	247	1,096.19	916.58
Geological Prospecting and Water Conservancy	10	53.97	4.52
Transportation, Storage, and Post and Telecommunications Services	205	1,114.01	1,551.14
Wholesale, Retail, and Food-relatedServices	825	1,204.13	965.13
Finance and Insurance	3	37.08	97.67
Real Estate	669	4,177.85	5,588.31
Social Services (including Hotels)	1,474	3,016.80	2,550.66
Healthcare, Sports, and Social Welfare	28	67.27	147.69
Education, Culture, and the Arts	29	60.72	60.72
Scientific Research Services	62	133.72	110.13
Others	316	1,488.52	752.68
Total	16,918	41,223.02	40,318.71
NOTE: Totals may not add up because of rounding.
Sources: PRC National Bureau of Statistics, China Monthly Statistics, China Statistical Yearbook, 2000; Ministry of Foreign Trade and Economic Cooperation

Foreign Direct Investment Actually Utilized by Sector
	(USD 10 000)
Sector	2000	2002	2003
National Total	4071481	5274286	5350467
Farming, Forestry, Animal Husbandry and Fishery	67594	102764	100084
Mining and Quarrying	58328	58106	33635
Manufacturing	2584417	3679998	3693570
Electric Power, Gas and Water Production and Supply	224212	137508	129538
Construction	90542	70877	61176
Geological Prospecting and Water Conservancy	481	696	1777
Transport, Storage, Post and Telecommunication	101188	91346	86737
Services
Wholesale & Retail Trade and Catering Services	85781	93264	111604
Banking and Insurance	7629	10665	23199
Real Estate Management	465751	566277	523560
Social Services	218544	294345	316095
Health Care, Sports and Social Welfare	10588	12807	12737
Education, Culture and Arts, Radio, Film and Television	5446	3779	5782
Scientific Research and Polytechnic Services	5703	19752	25871
Other Sectors	145277	132102	225102

The above details show the hollowness of the claims of benefits from flow of FDI in Retail, by way of large increases in procurement by the FDI partners. Only the gullible can buy the proposition that incremental procurement by FDI partners, helped by their presence in the host country can make a material difference in the overall sense.

On the other hand, these details indicate that China’s success could be attributable more to the fact that it has attracted FDI in sectors where it counts the most and leads to a permanent advantage to the country. Unfortunately, the Indian Government, while paying lip service to secure FDI in infrastructure, manufacturing and other priority areas, is obsessed with FDI in Retail as a high priority. The talk of emulating China or Shanghai sounds nice but China had set its priorities right and it meant business. That has made the big difference.

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FDI in Retail - A One Point Agenda

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Finally, it should be abundantly clear to all but the utterly naïve, that the concerned Departments of the Government are working at a feverish pace just to push one Agenda:

Allow FDI (read Wal-Mart) in Retail

They have so far tried to put forth all manner of arguments to support the proposal. In earlier articles, the hollowness of all such arguments has been dealt with. The Government doggedly keeps on developing new ideas on making the proposal palatable enough to gulp it down the throats of the Indian Entrepreneurs, Farmers and Consumers alike. However, try as they might, it is just not possible to justify the proposal as it does not serve the interests of any of the stakeholders, except the Wal-Marts, at this point of time.

It is for this reason that each of the arguments - some new and some old - which have appeared in news reports during the last few days, must be placed in perspective even at the cost of repetition.

Once again, the Minister for Commerce is reported to have remarked that 98% of the Retail outlets are small and only 2% in the organized sector. What does that mean as far as justifying FDI is concerned? Nothing. It only means that there is scope for growth in the organized sector. Indeed, Organized Retail is growing in the Cities at a fast pace but that growth is being achieved by the indigenous entrepreneurs who lack nothing to grow further. The country certainly is not dependent upon Foreign Investors for this sector to grow, as already discussed in an earlier article.

Once again, it has been grandly declared that the Mom and Pop Stores would not be touched. What does that mean? What about the other Retail operations that are not ‘Mom and Pop’ format but are still very much part of the Retail Backbone of the country – the Co-operative Stores, the new breed of Organized Retailers and others? Would they not have to yield their share to the Global Retailers?

The Government was said to be looking for a model that would not displace or replace the present domestic retail. How can this be ensured? Moreover, does not the present domestic retail have a right to exploit the future potential?

The Minister also showed great concern for the farmers:”Our ultimate concern for any decision is that the benefits should finally reach the agriculture sector”. In reality, what the farmers may gain solely due to the presence of Global Retailers and not otherwise, is at best rather nebulous and that too at some point in the future, as shown in earlier articles. On the other hand, the claims of farmers gaining from the presence of Global players could well turn out to be bogus if experience in two illustrative processed food products, Instant Coffee and Potato Chips, is any indication. In both these instances (and many more could be found), the beneficiary is neither the farmer nor the customer. The farmer ends up selling cheaply because of the large quantities bought and the customer ends up paying a high price for the Brand tag. The only one that gains phenominally is the Global entity and that too with virtually no technological inputs. If at all it is the case that farmers would tend to gain from the growth of Organized Retail, they can equally benefit from the growth of indigenously owned, not necessarily foreign-owned, Organized Retail.

Again, out of abounding concern for the ‘Mom and Pop’ stores, Government is also said to be thinking of imposing a minimum limit of 10,000 sq.ft. of floor space and limit the number of stores to one per million. In the same breath, it is clarified that all these restrictions would be only for the short term.

It is also likely to mandate that at least 500-600 sq.ft. of the floor space should be reserved for Foods and Processed Foods alone. Would the Government have us believe that this is a ‘restrictive’ condition for the Global Retailer? Every one involved in Large Retail knows that it is actually the Food and Grocery Department that attracts customers to a store and this increases the sales of the other product lines.

Incidentally, in nearly all the dialogues, discussions and media reports coming from the Government side, the term ‘Mom-and Pop stores’ is repeatedly used. Interestingly, this term is peculiar to the U.S.A. Of course, this is not to suggest that the Government’s script is in any way influenced by others. It may be just a coincidence that it has coined the same expression to describe the small retailers.

Looking to the changing face of Global Economics, the country will have to be prepared for FDI even in Retail sector at some stage in the future. But for the present, the field should be left open to the indigenous entrepreneur and FDI should not be permitted, whether 49% or even 1% to allow the Global Retailers to entrench themselves in this initial Retail expansion phase. After five years, it would not matter even if the sector were made free for entry but provided tangible gains could be demonstrated.

Update: 24/07/05

A news item suggests that the DIPP would soon be preparing a note based on recommendations by the Ministry of Consumer Affairs. The Ministry has once again raised the bogey of helping agriculture. Curiously, the Ministry of Consumer Affairs is said to be relying on a Report presented by ICRIER, thus giving it a facade of objectivity.

Partly as a justification for liberalising FDI, the ICRIER study has supposedly pointed out that the present ban on FDI in Retail has not acted as an entry barrier as the foreign retailers were entering through manufacturing, sourcing etc. To say the least, this is an extremely strange piece of reasoning by a responsible organisation. The existing Government policy allows FDI in certain areas in a certain manner and if a foreign entity choses to enter the country under the existing dispensations, let that be so! If FDI is already entering in this manner, there is hardly a reason to liberalise. In fact, ICRIER has gone to the extreme by suggesting no restrictions of any kind on FDI in Retail. Placing some restrictions in the eventual Policy would enable the Government to claim that there was application of mind and the Report was not followed in toto.

The other point raised by many about India taking unilateral obligations, has been answered by the Government officials claiming that even if India was to autonomously liberalise the retail sector, it would not undertake bindings in the sector at the WTO. Is this mature reasoning from a responsible Government? Once FDI is allowed, would it matter whether or not the country takes a formal binding under WTO ? Could those who have already entered the country be asked to go back at some stage? It also begs the question as to what would the country be getting from the global community in return for this gracious unilateral gesture.

It is very difficult indeed to swallow what the Government is trying to cook up.

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The Prime Minister in U.K. - Much Obliged

The Indian Political Leaders seem to be developing a penchant for suddenly discovering points to praise those who, as history has recognized, have been responsible for many of the miseries that have befallen India, that is Bharat. In doing so, they are turning Indian history, as we know it, on it head and creating confusion in the minds of the generation that has come of age post-independence.

First, it was L. K. Advani who, by quoting from a speech of Jinnah, created such a strong reaction that it is now costing him his status and position in his own party.

The Prime Minister did not lose much time in following suit. His Address in Oxford eulogizing the British for so much good they did to the country, has rightly culminated in a controversy. Nehru it was, who always had a soft corner for the British. No one would have, however, expected Manmohan Singh, believed to be a levelheaded person to say the things he did say to praise the British.

Perhaps, the learned Prime Minister was overwhelmed by the Honorary Degree awarded by Oxford University coupled with nostalgia of his time in the U.K. What the newspapers have reported of the Address is only part of what he said. If the entire content is read, some parts of it indeed sound like a panegyric for British Rule in India.

It is surprising that persons like Somnath Chatterjee find nothing wrong in praising the British. No one can deny the ill effects of the British Rule in India, which left the country impoverished, and its people completely subjugated. Those who made the great sacrifices during the freedom struggle and those who have witnessed the same have a right to be shocked at the praise showered by no less than the Prime Minister of the country. If the British have left a legacy, which is considered ‘beneficial consequences’, let us not forget that a large part of their administrative systems were put in place precisely to tighten and retain their control over the country. These were by no means established with any philanthropic notions. The Empire was ruthless in ensuring absolute control over the peoples they ruled. If any benefits have flowed, they are only incidental and the country has already paid a heavy price for such ‘benefits’ over the long period of their rule. It is also wrong to assume even by implication that had the British not left behind these systems and infrastructure, the country would be still languishing in the Middle Ages. On the other hand, if one were to stretch the debate to the other absurd extreme, it could be said that had they not been forced by the Freedom Struggle to leave, they would have been continuing with the exploitation much longer with the help of the same systems.

All this said, the main issue is not whether the British did some good or were always evil. The issue is that there is absolutely no need now to keep living in the past and make references to the good or bad that happened in the colonial past. In particular, there was no need for the Head of the Country to shower encomium or show a sense of being obligated by the British. It is just as well that he omitted a part of his written speech referring to the British Empire as “an act of adventure, enterprise and creativity”. Indeed, the other two speeches given by the Prime Minister in UK rightly dwelt more upon the present and the future.

It does seem that in the Oxford speech, he got carried away either by his speechwriter – a Sudheendra Kulkarni of PMO - or by his own sentiments. But that can scarcely be an excuse.