Wednesday, July 27, 2005

FDI in Retail - The China Story

previous post


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.

next post

7 Comments:

At July 31, 2005, Anonymous shruti said...

Give up talk of becoming China! There are too many vested intersts here.

 
At August 03, 2005, Anonymous Anonymous said...

Reproduced below news item in Busines Standard just a little over a year ago:

Quote
Big FDI push to skip retail

BS Bureau in New Delhi | June 22, 2004 09:01 IST

The government is set to increase the foreign investment limit in the telecom sector to 74 per cent from 49 per cent now and allow foreign direct investment in airlines, though opening up retail trading has fallen off its radar screen.

Finance Minister P Chidambaram is expected to discuss raising the FDI limit in the telecom sector with Commerce and Industry Minister Kamal Nath and Communications Minister Dayanidhi Maran shortly.

Retail: But the government is in no hurry to open retail trading for FDI. Finance ministry sources said SINCE THE OPENING UP OF THE SECTOR WAS UNLIKELY TO LEAD TO A FLOOD OF FDI INTO THE COUNTRY, it had been kept on the backburner.
Unquote
This shows the working of the double-faced Government when the same finance ministry officials now claim that FDI in Retail could prove to be a goldmine!!!

 
At September 06, 2005, Blogger Ashish Hanwadikar said...

So now, those who want freedom (freedom to source capital from outside the country) need to explain how it will be beneficial. And I always thought those who restrict somebody else's freedom need to explain if it is worth it!

Do we live in a free country?

Ashish

 
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At October 29, 2005, Anonymous Shounak, Calcutta said...

It is quite difficult at all levels to adopt the Chinese Model. China, which has a by far state controlled/run economy, has not allowed its Private Sector to grow/spread its wings. On the other hand, we have a flourishing Private Sector, which in the next 5 years going to completely take over the economy. It will be a total chaos if the so called Chinese Model is followed in India.

 

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