Wednesday, October 12, 2005

FDI in Retail - Fooling the People

previous post

Rolling out the Red Carpet...

It is clear that the ghost of FDI in Retail has so seized the Government that no one seems to be capable of exorcising the ghost. (see previous article)

The enfeebled BJP and its other partners in the NDA have so far not found it necessary to unambiguously and forcefully articulate their position on this major issue of Trade Policy. Indeed, they seem to lack the will to function as a responsible Opposition beyond making perfunctory noises over issues of no great consequence. It is also clear that the Government is all set to ignore or steamroller objections from the domestic business community.

The only real objections that have received the Government’s ears have been from the Left parties. It remains to be seen, however, whether the Left would continue to advance its valid objections to resist the Government’s intentions or let the Government have its way due to political expediency. The Left parties have already succeeded in putting on hold the Government’s decision on disinvestment in BHEL, which is being seen as a major victory by them. They are also at loggerheads with the Government over its unexpected stand on the Iran issue where it obviously succumbed to pressures from our ‘could-be’ mentors, the USA. Sandwiched between these two major issues, FDI in Retail is an issue where the Left may well decide to give up its valid stand. It would be sad if that happens.

As far as objections within the various components of the UPA in Government are concerned, NCP has itself become a votary of FDI in Retail with the Ministry headed by Sharad Pawar actually mooting an extreme proposal to allow 74% FDI. RJD of Lalu Yadav is hardly capable of taking any principled stand on issues of Trade Policy. The other parties in UPA are likely to meekly accept the proposal without any serious objection.

The real reasons for persisting with this issue are not hard to seek. They are:

  1. Tremendous pressure being brought to bear on the Government by USA Government and the private interests like Walmart and the informal assurances that already seem to have been extracted by them from the Indian Government.
  2. Lobbying of the right kind with the powers-that-be, both within the Government and the key UPA parties, that can influence the Government’s decision.
  3. Miserable and abject failure to attract adequate FDI in other areas where it is really needed.

In pushing this proposal, the Government is all set to fool the people, by projecting that it is going to allow FDI in Retail only based on ‘tough’ conditions. The Government’s intent to hoodwink the people becomes clear when these ‘restrictive’ clauses are examined.

Minimum Capitalisation of US $ 5 mn.
As any one who is familiar with the Indian Retail scene would realize, this is not a restriction at all because any major Retailer that expects to enter the Indian Retail market in an organized way, would actually have to spend much more just to set up an economic operation in the Metro cities.

Permission to operate only in ‘just’ six metros.
Those in the Government who have thought of this ‘brilliant’ restriction must really have very low opinion of the intelligence of our people. As every one familiar with the Indian scene knows, the major action in Retail is taking place precisely in these metros. The Business Plan of any foreign Retailer entering the Indian market would naturally involve initial operations only in the metros where the maximum opportunities lie. Setting up shop in non-metros would be farthest from any foreign Retailer’s plans in the initial stages, without first achieving success in the metros. Putting this condition is actually favouring, not restricting the foreign Retailer.

Restrictions on number of outlets to 15 in each of the metros.
This is purely a restriction on ‘paper’, as it is naïve to think that a foreign Retailer would suddenly want to or be able to set up 16 or more outlets in a metro.

Minimum space of 5,000 sq. metres.
This is another instance of a laughable condition as a Retailer of the level of Walmart or Carrefour would certainly have a minimum space of that size in any case. At the same time, the dramatic impact of such large spaces being taken by foreign retailers on the prices of retail space in the metros could make it well neigh impossible for others to buy even small retail spaces. Already in parts of some metros, the prices are touching the astronomical level of Rs. 50,000 per sq.ft. even without the presence of foreign retailers.

Reserving minimum 50% space for food items.
This is just what the doctor ordered. This condition, which is made out to be a restrictive condition would actually be music to the ears of the foreign Retailer. As pointed out in one of the earlier articles, food and grocery are the mainstay of a major retailer and the customers coming to buy articles of daily necessities as food actually help generate business for the other products that a major retailer sells.

The FDI limit would be limited to 49% or 74% initially.
This limitation, so goes the argument, would enable the Indian JV partners to “imbibe the best management and procurement practices followed by international retail giants.” There is plenty of empirical evidence to suggest that the Indian JV partners would be bought out, sooner rather than later and as soon as feasible, by the multinational partners by adopting a host of tactics. Till the time that the Indian partners do remain, they will be merely name-sake partners having position on the Boards but no say in the business management.

In pushing this proposal, once again the now familiar arguments about helping the farmers are also raised. As has been pointed out in earlier articles, this would turn out to be wishful thinking. In any case, if farmers are indeed going to be helped by organized retail, they would as well be helped by the domestic retail players of whom there is no dearth. Once again, also the bogey that ‘mom and pop’ stores would not be harmed, has been raised. These arguments have already been dealt with in earlier articles.

The note prepared for the Cabinet supposedly cites that the Planning Commission, Finance Ministry and Commerce Ministry, all have endorsed the idea. Incidentally, it does seem that the Planning Commission may be getting too much involved with micro management of the economic development process, by specifically suggesting FDI in Retail. As far as the three conditions for the Left supporting FDI are concerned, viz. augmenting technology, generating employment and increasing productivity, FDI in Retail cannot be shown to satisfy these conditions except by convoluted and stretched reasoning at which this Government seems to be quite adept.

The Government also seems to be unable at this stage to quantify the level of FDI in Retail that would flow into the country. The reason is simply that the level of FDI in Retail would be too low to make any worthwhile impact, a point that was admitted at one time by the Finance Ministry. If the Government is convinced that significant FDI will flow in, let it make public its quantification and the calculations on which such estimation is based.

It is futile at this stage to once again highlight the real issues, which the Government prefers to obfuscate and gloss over. These have been discussed extensively in earlier articles. It is only hoped that wiser counsel, especially from the Left, will prevail and this unnecessary decision pushed back for a few years to allow the domestic retailer a reasonable time to meet the competition from international giants at least from a minimum level of strength, as was done by China. Heavens are certainly not going to fall, nor is the country's economic development likely to be jeopardised just because the Retail sector is not opened for FDI immediately.

next post


At October 16, 2005, Anonymous Nariman Dastoor, Pune said...

The talk of needing foreign investment for retail is bunkum. So many Indian groups are involved in retail. Even Reliance group has announced a massive investment in retail just recently.

So, WHY is the Government doing this??

At October 16, 2005, Anonymous Anonymous said...

Obviously, SOMEONE is benefitting!!

At October 16, 2005, Anonymous Krish said...

A good analysis indeed of the FDI investment scenario...but, its sad that, only one side of the picture had been presented..Let me give u the other side of the story...
Why should everything be seen in a narrow context of Foreigners looting Indian Money?...Why is the customer left in lurch?..As a customer, I would have many a times been put at discomfort because of non availability of a particular item- rather worse, expired/damaged stock etc...with all these being in unorganised sector, I cant even take the legal course of action...
Think of the improvements in productivity/ infrastructure development, employment generation that this will lead to. Please put up the other side of the story too- how much ever strong ur cause may be!

At October 17, 2005, Anonymous l.a. said...

The comments of reader krish are appreciated and his point of view has to be respected.

If the issue is deeply examined and also the experience of other countries taken, the improvements in productivity, employment generation, infrastructure etc. are not directly related to FDI in Retail being allowed freely although those who are interested in seeing FDI in Retail would like to present it to be so. To achieve this, the emphasis has to be rather on FDI in other critical areas which will directly help achieve all these improvements. This is what China has done admirably and is now a role model for many developing countries. This is not to say that we should blindly follow China. At the same time, FDI in Retail is hardly the medicine for accelerating our development at this stage, as can be seen from earlier discussions especially the article on the China Story.

As to the customer being left in the lurch, the situation is changing very fast already in favour of the customer, with a lot of organised retailers coming in and also the small retailers beginning to see the need to change.

At October 17, 2005, Anonymous Sivarama from Bangalore said...

The possible impact on retail space prices is rightly highlighted. Let our own entrepreneurs have the opportunity to develop their full potential. In a few years, they will be capable of meeting the new challenges from the multinationals. Its not fair to allow MNC retailers so soon.

At October 17, 2005, Anonymous A Retailer, Mumbai said...

The Government is apparently trying to play divide and rule amongst the organised and unorganised retailers to gather support for its proposal.

At October 17, 2005, Anonymous pandian said...

To put the the minimum space requirement of 5,000 sq.mtrs. in perspective, even Big Bazaar, one of the existing retailers has 3 stores in Mumbai/Thane, 1 in Bangalore, 1 in Ahmedabad and 1 in Ghaziabad larger than this size!!

At October 17, 2005, Anonymous N. Dastoor said...

I think many Indians are so enamoured by the prospect of having foreign companies that they have lost pride in the country's own entrepreneurs and would not like to encourage them. How will the country ever become a real force in the world if we have to perpetually rely on foreigners? This simple fact should be understood by those in authority and the people at large as well. Whether the foreigners loot us or not is a moot point.

At October 17, 2005, Anonymous Anonymous said...

As one who has seen the raw deal not only the customer but the people in general got earlier, the customer is much better off today than previously. The small retailers who cannot improve will anyhow fall by the wayside. For that to happen, one doesn't need foreign retailers.

At October 18, 2005, Anonymous Anonymous said...

FDI in retail is a good thing and it should have happened sooner, not only will it help bring prices down and improve the quality of goods available to the people it is going to have a significant impact on the economy because it will help increase employment, more taxes to the govt, help push the consumer products, real estate, construction industry. I dont see any negative impact of FDI into retail.
The left's demand to stop investment is bogus just like other silly demands they have to slow progress in India keep them underdeveloped and poor so that they can continue to thrive on poor for votes.
I am yet to see the left make a demand for any kind of development far they have opposed every thing.

At October 18, 2005, Anonymous sivarama said...

some comments above supporting fdi in retail seem to overlook the basic arguments against the same. it is all very well to make sweeping statements against left parties because they do have their share of dogmas. but in this instance, if one looks at the overall perspective, not just going by uninformed views, they are right in opposing it.

all the supposed benefits cited above by a reader above, in reality flow from economic growth in general, not specifically resulting from FDI in retail. For retail growth, foreign investment in the sector is not absolutely essential. It is simply not true that without foreign investment, retail will not grow. Look around you, Indian retail is growing on its own steam.

At October 26, 2005, Anonymous Anonymous said...

It is apparent that also the Left parties have been 'tackled' by the Walmart lobbyists.


Post a Comment