Saturday, February 04, 2006

FDI in Retail - The Final Act in the Charade

All previous articles
Preceding article

The Union Cabinet has just allowed FDI in Retail. Although initially restricted, further opening up is learnt to be under consideration already. The decision is symptomatic of the way in which the Government mishandles major issues. The matter was mishandled because instead of presenting a sensible proposition in the first instance for a transparent debate, it has been working to thrust upon the country a Wal-Mart-centric model and tying itself in knots, trying to justify an unconvincing proposal for nearly a year.

Having ignored legitimate objections raised by many, Mr. Kamal Nath showed the temerity of twisting and trivializing the issues that have been raised, by saying:

“They (foreign retailers) are already here through franchises and have shops in hotels. They are fine inside the hotels but the moment they come out there is a hue and cry.”

Is THIS the sum total of the Government’s understanding of the points raised by those advocating caution on opening FDI in Retail? Or, is it just his way of insulting the intelligence of those who raised relevant issues, by virtually making light of them?

-Lokadhikar

[This article is inevitably somewhat long in order
that some of the apparent flaws in Government’s
arguments are highlighted. But it is by no means
exhaustive.]





Mr. Manmohan Singh


Supporting Cast in order of appearance (more or less)





The previous article discussed the Government’s failure to make any worthwhile headway on FDI in a macro perspective.

This article highlights some points specifically relevant for FDI in the Retail Sector.

As part of the final act of the charade of having a “public debate” and a show of trying to “study various models”, the Group of Ministers set up to study FDI in Retail finally gave its recommendations and the Union Cabinet approved FDI in Retail, albeit partially, on January 24, 2006.

FDI in Retail seems to have become an end in itself, not a means to an end.

Throughout the period of the debate, all manner of arguments, at times misleading or based on misinformation have been used to project that somehow the country just cannot do without FDI in Retail. FDI in Retail is made out to be an absolutely critical element in our development policy and an imperative.

The Prime Minister has made it a prestige issue and he expects that allowing FDI in Retail would be proof of his Government’s ability to govern. Such proof could not be provided at the time of his U.S. visit, due to stiff resistance expressed publicly by the Left Parties. This time round, the Left’s opposition has worn thin as visualized earlier and the Government does not seem to think much of objections by others. Therefore, at the time of the U.S. President’s visit to India, the Government would finally be able to say that it has permitted FDI in Retail.

The Government has gone through considerable effort to present different arguments at different times, much like contortion acrobatics to prove the desirability of FDI in Retail. Perhaps, the decision was taken first and the logic developed later on to justify the proposal.

Some of the stated or implicit arguments (most of them coming from the ‘dream merchants’) to justify FDI are given below, along with comments, although most of them have also been dealt with in earlier articles:


  • Distorting the larger issue involved, Mr. Kamal Nath stated recently that on final count, the whole discussion on FDI in retail centred round one major issue, that of big retailers displacing the small retailers. "It makes no difference whether the investment is domestic or foreign. The debate now is big versus small and not FDI versus small `kirana' stores.” and that “small shopkeepers’ interests could well be impacted by …large domestic houses”. (Nov.05)

This is not correct. To some, this argument would appear like favouring the global players vis-à-vis the domestic ‘large’ retailers. The question is not simply ‘big versus small’. In a market that is set free, domestic retailers, both large and small, will have to find their relative strengths to co-exist. This may be unavoidable. Nevertheless, even for domestic players, the Government will still not be able to totally overlook the interests of the small retailers and will have to take measures to provide some protection. But when the Government wants to invite transnational retailers into the country, at least one of who alone has sales worth nearly 140% of the TOTAL RETAIL MARKET of India; it is a completely different matter. It involves the Government IMPOSING competition from global players with massive financial, managerial and technological resources on an under-prepared domestic sector, ensuring an unequal battle. There would be no level playing field as far as the domestic players are concerned. Such a proposal certainly calls for a much more serious approach and thinking on the part of the Government. In the absence of evidence of such thinking, it is bound to cause great concern and fear not only amongst the small retailers (dismissive terms: mom and pop or kirana store) but even the so-called ‘large’ domestic retailers who have no wherewithal to withstand the force of the multinational behemoths.

The Retail sector is just trying to find its bearings in the changed scenario of exploding consumption and consumer expectations and the domestic retailers need a window of opportunity to adjust, to make an effort to service the market and grow into larger enterprises that can some day have some chance to withstand TNC retailers. This is their right. If any changes in the Retail structure are needed, the market should do it of its own. The Government ought to fulfill its role and responsibility as an ENABLER, focus on removing internal distortions and create conditions for local players to grow. Instead, the Government is trying in effect, to consign them forever into an insignificant role in their own country, which they have served well all along. Actually, the growing market will provide an opportunity and a real challenge not only to entrepreneurs but also management, systems and IT professionals and other business and technical experts to develop solutions unique to the Indian situation to build a strong base. It may also enable the country's 'elite' management schools, who are compelled to set their sights beyond the country's shores having run out of challenges at home, to prove their mettle by contributing to the management of retail development. Once the Government has accepted virtually free market economy, it ought to allow market forces and consumer pull to develop the retail sector rather than intervene to deliberately encourage large over small and that too, huge global retailers in the early stages of retail development. THAT is one of the larger issues. It makes little difference whether one or a hundred global players’ stores are allowed.

It might be of interest to know the relative sizes of some of the global retailers who are straining at the leash to come to India:

WALMART as of April 2005 had 5,311 units with sales of US $ 285 bn. and profits of US $ 10.2 bn.

CARREFOUR had 6878 units and Group sales of US $ 65.5 bn.(Stg.37 bn.) as of end Sept. 2005. Its hypermarkets, with floor area of 5000 to 20,000 sq.mtrs. store on an average 80,000 items.

TESCO had 2350 stores and had sales as of Feb. 2005 of US $ 60.2 bn. (Stg. 34 bn.) Tesco came to China in 2004 and has 31 stores there with area of 2.6m sq.ft. and 15 more planned. In Thailand, it has 107 stores and 83 more planned.

The above details are just to show the potential power of competition that the Government wants to invite for domestic retailers who have provided the backbone of the Retail Structure against heavy odds and a restrictive policy over the years and virtually throw them to the wolves. The government’s casual approach is evident from what a government official had to say: “If big local retail malls are not hurting the neighbourhood kirana stores, there is no reason to assume that foreign retail chains will hurt them.” In the end, the country could well become a battleground for global players wanting to gain dominance over each other with ‘also-ran’ domestic players as onlookers.

In a survey of world’s 200 biggest retailers, the retailer at No. 200 had annual retail sales of US$ 2.4 bn. With the government’s preference for global players, perhaps, no Indian retailer would ever make it in this list. (Deloitte, 2004 global powers of retailing)


  • Organized Retail forms only 2% of the total Retail market is another justification for FDI in Retail.

What does that prove, if anything? Has the Government made any specific studies keeping in view the existing Indian retail structure that unorganized retail should not exist or its growth should be restricted? Even if there is full justification for increasing organized retail, what are the available format options and which formats are more suited to the Indian situation and why? Even if organized retail is more desirable, free market principles do not call for active government intervention to achieve this. If at all such intervention were necessary, logic suggests that rather the domestic players should be encouraged and enabled to enter the field. It does not follow that organized retail equates to FDI in retail by global players. This is just another way in which the issues are deliberately mixed up to push for FDI.

The issue of retail formats is extremely important as it impacts several critical issues such as land use and urban planning, transport economics, traffic, employee and customer convenience. It is not clear whether the Government has ever done any systematic study as to the type of format that is relevant and useful specifically for the country e.g., whether a big box retail concept is preferable as against e.g. mall concept or bazaar or souk concept.


  • China is allowing FDI in Retail freely, so what is wrong if India does it

As already pointed out in an earlier article, China has opened its Retail sector fully only last year in view of its WTO commitments. But much ahead of this, China has built up a SOLID MANUFACTURING BASE with significant participation of FDI. This globally competitive manufacturing base is used by the global retailers not only to source for their worldwide stores but also makes it logical for them to procure over 90% of its requirements for their Chinese outlets locally. Even on the Retail side, because of the head start that China had, it has a significant domestic retailer base and some of its retailers are large enough to give the global retailers a run for their money. For example, the Bailian Group, the largest in China has nearly 5000 stores and with sales revenues of US$ 8.16 bn. (Yuan 67.6 billion) in 2004. see here

Even there, the share of global retailers is expected to grow at the cost of domestic retailers.

However, in spite of the liberalization, the Chinese Government is believed to be trying to ultimately have a dozen or so big local players strong enough to compete with multinationals at home and expand overseas. "China's market should be mainly dominated by Chinese retailers," says Huang Guoxiong, a professor of economics at People's University in Beijing. "It is not possible to allow foreign retailers to take the dominant position." see here . “China will work to boost the competitiveness of 15 to 20 selected large scale retailers…to fend of global competition.” (See page15). “Obviously the China authorities have no intention of lying down and letting foreign retailers have a free ride,". Incidentally, Bailian aims to be amongst the top 500 companies in the world by 2010 with annual sales of US$ 14.5 bn.

As to the argument, that Indian market is large enough to accommodate foreign retailers as well as domestic players, it should be remembered that the China Retail market was US $ 756 bn. in 2005 against the Indian market size of US $ 210 bn. When China with such a large existing retail market is trying to create a domestic counter-balancing force, the Indian Government feels confident of opening Retail with a market a third in size of China’s.

_________________________________________

The Chinese Retail market grew from sales of 155860 m.yuan in 1978 to 4584200 m.yuan in 2003, a growth of over 2900%, much before FDI in Retail was fully allowed by them last year!
Would the policy makers in the Government have us believe that Indian Retail cannot grow from the present relatively low level without FDI?

____________________________________

The Chinese Retail market achieved a growth of over 2900% between 1978 and 2003(see above). This was achieved with an insignifcant level of FDI in retail during this period. In contrast, as far as India is concerned, an impression is created that external help is essential to grow from the present low level of retail market. To put it in reverse, what is meant is that retail market WILL NOT grow as much as warranted, without support from FDI, the growth in GDP and consumer buying power notwithstanding. In reality, the impact of the Government decision would be only to give the global retailers the opportunity to preempt a large share of the growth in retail in the early stages at a minimal cost before the domestic players have half a chance and that too without a clearly demonstrable significant contribution.

A public policy decision cannot have the effect of weakening the weak.


  • Retail is an important part of the economy. Organised retail (new synonym: FDI based Retail) will lead to all round benefits. Facts (what “facts”?) suggest modern trade including FDI will have a net positive impact on the economy.

That retail trade is an important part of the economy does not need to be stated. Obviously, it is, because all the consumer products manufactured or imported have to be sold by retail, because it is the final link in the chain facing the consumer and also because of the large number of people engaged directly in the retail trade.

But enthusiasts of FDI in retail do not shy away from making exaggerated claims about its supposed benefits. And in trying to make out a case, the distinction between 'retail', 'organised retail' and FDI based Retail is often consciously obliterated and these terms are used interchangeably by advocates of FDI. According to a fantastic claim in one study, “development of organised retailing in India would benefit as much as 72 per cent of the population.” (And why are the remaining 28% left out, pray? It would make for a stronger argument to say that 100% will benefit)

According to a study, millions of jobs will be generated in India through development of organized retail. More importantly, it is said that organized retail will give a tremendous boost to growth of volumes and will be a driving force of the economy which would be translated to more manufacturing, more jobs in industry etc. leading to a multiplier effect.

It needs to be understood, however, that the basic drivers of consumer spending and thus retail, are employment and income growth (which again depend upon GDP growth). and not vice versa. It should be clear that the growth of the retail sector will be dictated by the growth in disposable incomes of consumers – as happens when individual consumers move up into higher income brackets (growing middle class) -, their propensity to spend and their savings habits. It is also possible that the customers may spend more than their current levels either by impacting savings or from future incomes (credit purchases/credit cards). By and large, the retail growth should keep pace with GDP growth.

It would be a gross exaggeration to suggest that FDI in Retail, or even organized retail can push up consumption leading to all round growth to any significant extent. Of course, in principle, lower prices of merchandise that the large retailers can offer would leave more in the hands of consumers in the aggregate but at the individual level, the amount may not be significant. Even so, there could be some positive impact. The large retailers could also broaden the product range by causing suppliers to develop new products based on systematic analysis of consumer preferences over a period, and this could also be beneficial.

Other ways in which the organized retail can spur consumption is by resorting to large-scale imports of new products, or by clever merchandising and promotions that would lead more and more customers to make impulse buying. However, the moot point is whether the country can afford resource-depleting consumerism by encouraging such induced consumption. The country’s growing and huge population coupled with even normal GDP growth will require massive resources to meet the demand for even normal consumption. In the light of this, the policy makers need to give deeper attention to the implications of increased consumerism, which may incidentally also affect savings. It cannot be denied that to an extent the trend towards such consumerism is already visible in the urban areas, but the issue is whether the country needs to invite global retailers to accelerate the trend.

Overall, the claims of retail being the engine of growth leading to all sorts of huge gains needs to be viewed with caution. The large crowds of customers typically seen at large retailer stores may just indicate their convergence to one location simply because of the large variety of products offered instead of the customers being distributed over several smaller shops in the area. Such euphoric sights of shoppers descending on large retail stores need not lead to the conclusion that the stores are massively contributing to the retail growth. All this said, retail development WILL take place as the economy grows and it would be easy to attribute the growth in consumption to organized retail.

Please see some relevant reports in this regard:

Economist William Fruth Report “a vibrant, dynamic retail sector is not the cause of a strong local economy, but the result of it.”

Similar view in the Report “Big Box retail and Austin – an independent review” oct. 2004

“It is important to recognize that retail activity is generally the result, rather than the cause, of economic growth in a city or region. Retail is basically dependent upon the condition of the local economy, especially core regional export industries. Retail activity cannot grow more rapidly than disposable income within a given regional economy. To the extent that new or expanding retail establishments grow faster than local purchasing power, there is competition and some crowding out. Some new activity displaces sales at existing establishments retail big box expansion can crowd out sales from local merchants or other national chains already in place. The job, sales and tax gains from a given big box project cannot be viewed as net gains to a community.”

Consumers’ income and spending patterns governs the amount of retail sales generated in any particular trade area, not the presence of a particular retailer or group of retailers.” (Research for Big box retail/superstore ordinance)

Broad impact of FDI:

A study specific to FDI in food retail in Brazil and Mexico Reports:

In Brazil: “There is no evidence that FDI played a role in sector output growth since the growth has been roughly on par with GDP growth.” Sector productivity increased by 2.0 and 1.6 % yearly in formal and informal sectors respectively and FDI had a key role in this. Sector employment decreased and suppliers made some small productivity improvements through operational improvements (e.g. forecasting technology). (Page 32) As regards impact on prices, the Report says that the role of FDI in Brazil is not clear. (Page 37). International retailers increased the product selection; however, it is not clear whether this happened at a rate higher than natural market progression. (Page 38)

In Mexico: Sector productivity declined marginally during the focus period, however, Wal-mart’s productivity increased by 2% annually and that of other retailers declined. Sector output, measured as real value added grew at a rate comparable to population growth and GDP growth. (Page 55) but in future, there may be some positive impact. Employment grew between 4 –10% depending upon the employer with the highest in Wal-mart and the lowest in traditional sector. However, “it is unlikely that this employment growth is sustainable..” “Experiences in other countries indicate that employment is likely to decline as a result of increased competition and international company entry.” As regards supplier spillovers, Wal-Mart’s increasing market share has initiated structural changes that are likely to increase productivity in the food processing industry and its distribution channels.” (Page 57). However, it bears noting that Wal-Mart has been present in the Mexican market since 1991. (Page 53) As regards prices, consumers have benefited due to Wal-Mart’s aggressive pricing. (Page 61) However, Wal-Mart has increased net margins by improving operational efficiency with a stable gross margin, prima facie implying that the price reductions have come at the cost of suppliers.

These findings are illustrative and say a lot about the difference between the great expectations from FDI in Retail and the real gains.



  • There will be large scale employment generation

It is useful to refer to an earlier related article to have a better appreciation of the fallacy of this argument.

Fanciful figures of large employment generation are floated by some studies without providing any concrete basis or clear link between FDI in Retail and employment generation, but the Government is generally sold on this idea. For example, according to one study that makes fantastic claims, based on various reports envisaged on the levels of investment, an additional eight million jobs will be generated in India through direct and indirect employment through the development of organised retail.

(Also see earlier section) The Left parties have effectively demolished the employment generation argument in their note. Earlier, even the Planning Commission had concluded that …it would not immediately be relevant in the context of generation of employment opportunities in the 10th plan period. (2002 Planning Commission).

In 2005, the Government view had changed as Mr. Kamal Nath said, “Besides, the employment potential, especially for low-end skilled workers, would be substantial once retail chains with big volumes step into the market.”

Another imaginative argument: “This will also provide quality employment, as there is a lot of disguised unemployment in the unorganised retail sector, such as more than one family member sitting in a small kirana shop” ET220405

A World Bank document prepared to hard-sell FDI in Retail to India says: “Employment in retail sector has grown in all developing countries where modern formats have grown.” (Exhibit.35) Even if employment grew, it does not follow that the growth was the result of modern format. The logic for such a conclusion is obscure and in reality, the growth may more likely be linked to general economic growth in those economies.

A Wal-Mart-specific Report, Job Creation or Destruction finds that:

Wal-Mart entry increases retail employment by 100 jobs in the year of entry. Half of this gain disappears over the next five years as other retail establishments exit and contract, leaving a long-run statistically significant net gain of 50 jobs. Wholesale employment declines by approximately 20 jobs due to Wal-Mart’s vertical integration…within five years of Wal-Mart's arrival, the counties had lost an average of four small retail businesses, one midsized store, and one large store.

The above is in the context of U.S. As in the India the employment for a given level of activity is generally much higher than in advanced economies, it is not unreasonable to assume that the net gain of 30 could easily be wiped out.

According to an October 2005 Report with specific reference to Wal-Mart,

“In the retail sector, on average, Wal-Mart stores reduce employment by two to four percent. Looking at total employment, some of the evidence, but not all of it, points to employment increases on the order of two percent…And in the South (Southern U.S.), where Wal-Mart stores are most prevalent and have been open the longest, the evidence indicates that Wal-Mart reduces retail employment, total employment, and total payrolls per person.”

Another Report dated June 2005 says:

“Large chain retailers ..generate greater sales per employee than their smaller and/or locally owned counterparts. This means that for whatever level of consumer demand chain retailers located on Cape Cod may capture, there will be fewer jobs than those provided by smaller establishments capturing that same demand. In a number of documented cases the net effect of this displacement is fewer jobs, decreased household income and taxes within the affected community or region within a few years following the initial boost in jobs and retail sales provided by the new chain retailer.”

Yet another Report, by Mckinsey, which can be much more relevant as it specifically relates to the impact of FDI in Retail Food sector in Brazil and Mexico, says:

As far as sector employment impact is concerned, it finds “minimal employment growth from FDI Greenfield expansion” in Brazil (page 45) and “Despite growing sector employment to date in all segments, this is unlikely to be sustainable as productivity improvements take effect and can turn to decline as modern format store increases” (page 67). Further, experiences in other countries indicate that employment is likely to decline as a result of increased competition and international company entry. (Page 57)


  • There will be no displacement of existing retailers.

This is a grossly inaccurate assertion, on the face of it. By all logic and common sense, with the entry of large global retailers with massive competitive capabilities, many small retailers can be expected to be affected and displaced. One senior Minister has said: “We are not looking to replace the vegetable seller who carts his stuff from house to house’
Indeed? Who is the government looking to replace then?

One of the thoughtless arguments says that most of the small retailers are in the rural areas and, therefore, a majority of small retailers will not be affected. Well, what about those who will certainly be affected? While on the one hand the government has been claiming that there will be no displacement of small retailers, its announced intentions indicate otherwise. For example it has been said (Economic Times, Oct. 11, 2005) that the government will allow foreign retailers in six major cities. Further the foreign retailers would be mandated to have stores with AT LEAST 5,000 sq. meters (about 54,000 sq.ft.) of which AT LEAST 27,000 sq. ft. will be reserved for food items. These 'minimum' requirements, far from being an inhibiting factor, are just tailor-made for the Wal-Marts of the world. The policy would allow 15 outlets in each of the cities (presumably to each retailer). This exhibits a clear intent and knowledge on the part of the government about the harm it would bring to the small retailers as a result of its policy. It also demonstrates its insincereity in making assertions about claims of no displacement. Further, it also shows its sincerity of purpose in pursuing the opening up of FDI in Retail, regardless.

The fact remains that the changes in the composition of retail sector will bring about wide-spread changes in the employment pattern right across the entire supply chain, from manufacturing to wholesalers to intermediaries to retailers.

Even confining to the retail sector, there are several studies, which provide evidence of such displacement.

“The transformation of the retailing sector has raised some concerns in many developing countries in respect of its impact on traditional retailers and the social consequences, including unemployment, as mentioned in WTO submissions by Thailand and China on assessment of trade in services. Also, major concerns regarding competition issues have been raised with respect to large chains entering their markets and increasing concentration of the industry. An adequate regulatory and investment framework is a precondition for achieving better outcomes in terms of efficiency and tangible benefits for consumers as well as providing solutions for anticompetitive behaviour and addressing social concerns. (UNCTAD)
The Thailand example page 10, box3 (UNCTAD) and see also Concentration in UK food retailing

“There has been extremely rapid transformation of the food retail sector in developing regions in the past 5-10 years. For example, on average over countries, the share of supermarkets (short for all large-format retail) rose from roughly 15% in 1990 (a mere niche) to 55% in 2002 in Latin America. One sees a similarly spectacular rise of supermarkets in Southeast and East Asia, parts of Southern and Eastern Africa, Central Europe, and the incipience of such a transformation very recently in South Asia and Eastern Europe. This consolidation of the retail sector with the emergence of supermarkets has been accompanied by a further consolidation and multi-nationalization of the supermarket sector itself.” Reardon

The supermarket sector in these regions is increasingly and overwhelmingly multi-nationalized (foreign-owned) and consolidated. The multi-nationalization of the sector is illustrated in Latin America where global multinationals constitute roughly 70-80% of the top five chains in most countries. This element of “FDI-driven” differentiates supermarket diffusion.

Losers in the retail sector: reduction in central markets, “wet” markets, and rapid disappearance of “mom and pop” stores

“There has been rapid consolidation and multi nationalization of the supermarket sector in Latin America mainly over the past 8 years. Competition for growing markets and increased FDI in the sector, mainly from the leaders Wal-Mart, Carrefour, and Ahold (which are also the top supermarkets in the world), has driven the process. Between 50 and 60 percent of the supermarket sector in Mexico, Brazil, and Argentina (about two-thirds of the Latin American economy) is controlled by four or five firms, three or four of which are multinationals.” (Trade reforms and food security)

“Supermarkets have also had a negative impact on small businesses in developing countries. In Brazil for example 61,000 small businesses and producers were de-listed between the year 1996 and 2000 as larger producers increased their production for the supermarket sector. In view of this, the industrialised countries should take a closer look at the effects of multinational food retailing companies on developing country economies, which are in fact more important than the World Trade Organisation (WTO) negotiations.” Reardon

Also see, Reardon

The implications of all this are clear: the global players gain at the cost of the domestic retailers, mainly small, as they are the ones who meet the daily needs of the customers for their food, grocery and produce. It is futile to argue that the supermarkets only cater to the rich because one of the advantages proposed is that they reduce the prices and thus reach the masses.

What it would mean for India is that hundreds of thousands of small retailers may suffer and likewise, will all the links in the existing supply chain. A government that at one time set great store by generation of self-employment is now resorting to actions that might deprive the self-employed of their livelihood. For industrial and government workers, the existing laws provide a great degree of protection whereas for the self-employed small retailers, there is no fallback. It demonstrates a cavalier approach, to say the least. Rather than closing eyes to reality, government should have been thinking of creating requisite safety nets and putting suitable legislative safeguards in place to minimize their distress considering the likely growth of domestic large retailers, even if FDI is not introduced. For this, even the States would have to be involved but who are either out of the consultation loop or unaware of the implications of what the Government is planning to do. However, there is no indication that any thought has been given to these serious issues.


  • Significant backward linkages will lead to huge benefits

This is a much-trumpeted benefit of FDI in Retail. Backward linkage simply means ‘the purchases of one sector from its suppliers’ or ‘the use by one firm or industry of produced inputs from its suppliers’. It is only a truism to say that there will be backward linkages if a retailer buys merchandise locally. This can hardly be called a benefit.

The benefit really would have to come from ‘spillover effects’, which refers to technological or other productivity gains flowing to the supply chain (vertical spillovers). Not all backward linkages automatically lead to spillovers. There will be benefit of such spillovers provided the global retailer passes on knowledge, provides help and information to suppliers that lead the suppliers to achieve beneficial changes. It is possible that a foreign investor who buys intermediate goods from a supplier for his own manufacture may supply limited knowledge to the supplier to improve the product to meet his own needs. But for a retailer procuring thousands of products, it is unreasonable to assume that any significant spillovers will occur, not the least because as a retailer, he may not have the knowledge for any manufacturing improvements, nor the time to spend on providing help to hundreds of suppliers. At the very best, a retailer can only provide details of his own requirements of higher quality, packaging and delivery needs to the supplier. He may also provide IT inputs to link the suppliers to his own logistics and inventory systems, which can hardly be termed as spillovers. For this limited purpose, of course, the retailer may need to pursue with a supplier till his requirements are met. However, the effort and cost of supply chain improvements would obviously have to be incurred by the suppliers. It should be noted also that technology for other downstream activities such as cold-chain, logistics etc. is quite diffuse and available commercially and to suggest that retailers will provide their own technology for these links in the chain is misleading. Several studies have been done on the spillovers from foreign investments. These largely relate to FDI in manufacturing and the evidence of any large scale spillover occurring is not unequivocal. There are hardly any studies explicitly analyzing relationships between linkages and spillovers. One report does suggest with qualifications some backward linkage spillover but it does not relate to FDI in Retail.

On the other hand, despite extravagant claims of beneficial spillovers, evidence specifically related to FDI in Retail is scarce. But one study specific to FDI in Food Retail provides a very interesting detailed analysis of economic and distributional impacts in host country.
The study found no significant impact on employment or sector output as a result of FDI.

See also observations in this report: “…FDI does not automatically lead to positive externalities. It is important to realise that MNEs are not in the business of economic development, and rarely interested in the explicit transfer of knowledge…they prefer to use technologies that are suited (first and foremost) to their own needs, and the purposes for which they have made the investment. MNEs do not make available their proprietary assets at the whims of governments..” (Page 16)

Also :“..attracting FDI into a country does not necessarily imply that local firms will benefit from the diffusion of the superior technology introduced by the MNEs’ affiliates.” cepr study CENTER FOR ECONOMIC POLICY RESEARCH

By and large, it would be logical to assume that the investing firms use their superior knowledge and their ability to efficiently utilise their multinational network of affiliates to generate economic rent for themselves. These assets are not generally easily spilled over to domestic firms.

Finally, the negative side of the ‘spillovers’ to suppliers includes increased supplier concentration, meaning that a large retailer would eventually deal with only a few suppliers


  • Our endeavour is to get better technology into India

This is another oft-repeated supposed benefit. It is not clear as to the area in which the Government expects better technology to come through FDI in Retail. If the reference is to technology of retail management, the argument is obviously misplaced. Firstly, if a global retailer brings any technology or skills for retail management, it is obviously not for disseminating to other retailers in the country. The knowledge, technology and skills would logically be for the retailer to run his own business in order to maximize operating efficiencies and reduce internal costs for the purpose of retaining competitiveness and increasing profits. It would be naïve to think that somehow, these benefits will land on other retailers’ doorsteps. Such ‘horizontal spillovers’ of FDI occur when local entities benefit from the presence of foreign companies in the same sector. Typically, they would occur through demonstration effects or mobility of employees from foreign entity to competing domestic entity. However, the global players would zealously guard their knowledge and make it difficult for individual employees to diffuse knowledge to others, either by paying them high remunerations and restricting their mobility or by other means. Further, the knowledge would be tailored to their own business and system environment and cannot be deployed usefully by other competitors. E.g., The benefits that Wal-Mart has are those typical of their type and size of operations. They cannot be easily replicated in a general sense, as any investments it makes will be to improve its own margins.

Evidence of horizontal spillovers is weak or even negative.

Secondly, it needs to be highlighted that there is a clear distinction between advanced technology for manufacturing and modern systems of retail management. In the case of manufacturing, the key technology is mainly related to the manufacture of specific products and is often of a proprietary nature. The holding of proprietary technology could, therefore, be a justification for FDI in manufacturing sector.However, as far as retail management is concerned, technology and knolwedge for all aspects of this sector, including merchandising, store management, inventory management, supply chain management, logistics, customer relation management, retail-specific financial systems and MIS etc. are generally diffuse and are freely available commercially in the form of systems, software or even consultancy from reputed international service providers. Any real 'proprietary' knowledge a global retailer will be used for running his own operations, as stated earlier.Therefore, modernisation of retail, if it has to happen in a wide-spread manner, will have to be based on the efforts of individual retailers themselves, the global players are hardly going to hold their hands.

Therefore, it is futile to suggest that FDI is necessary to bring modern retail management technology into the country.


  • We are keen to see that retail leads to modernization of our agriculture. Farmers will get a better price for their product.

This is another “major” benefit that the Government claims, will be available if FDI in Retail is allowed. The government feels that opening up the retail sector will lead to significant benefits for farmers in the form of strong logistics. A significant portion of fruits and vegetables grown in the country are now wasted due to want of proper processing and cold chain facilities. Once large retailers come in, officials feel, investment will flow into cold chain facilities and processing capabilities. This will help retailers to source directly from farms, bypassing the mandis, and part of the savings will flow to farmers.

The food processing ministry has been pushing for FDI in the food processing industry and has also made proposals for allowing FDI in cold chain, warehousing and other areas related to that ministry. As things stand, FDI up to 74 percent is allowed with automatic approval for cold storage facilities. FDI is limited to 51 percent with automatic approval for most products with some exceptions. Higher FDI is allowed on case-to-case basis on prior approval basis. However, 100 percent FDI is allowed with automatic approval to NRI or OCBs. In so far as the proposals relate to food processing sector, they are largely in the nature of increase in the FDI share of total investments and may have their own justification - even for wine making, for example.

But what is cleverly being done is that FDI in Retail is being mixed up with FDI in food processing, in order to justify the case for FDI in Retail. Thus, it is claimed that FDI in retail will result in efficiency in supply chain that the foreign retailers can bring and the huge opportunity in farm exports. Even bigger claims: India can attain huge savings by merely improving the supply chain. Some 20-40% of all fruits and vegetables grown in the country go waste due to poor transportation, storage and handling infrastructure. see here

"Further, with the investments in upgrading technology and practices in the entire value chain, including production, packaging, grading storage and logistics, the current levels of wastage ranging between 24 per cent and 40 per cent are expected to come down."

These are misleading assertions. The supply chain is independent of retail and it is hardly possible for the retailer to achieve all these benefits in the supply chain. It may be true that 20-40% of the perishables go waste due to poor transportation and handling infrastructure. But these are all sectors different from the retail sector. It is not as if global players are going to get involved in these sectors to change the face of these sectors. At best, they may establish limited facilities for their own purposes. By and large, however, the initiatives and investments will have to come from others, including government as far as basic infrastructure is concerned.

The wastage of large volumes of perishables has been known for decades and yet, nothing has happened to change the scene. Surely, it would be ridiculous to imply that this state of affairs has subsisted because FDI in Retail was not allowed. One of the reasons for the wastage would also be the wrong selection of produce for farming, especially as regards vegetables i.e. why keep growing what cannot be sold. The other reasons are large distances from potential markets and transportation difficulties. FDI in retail will have hardly any bearing on such basic problems. Even the availability of adequate storage or cold chains need long term to create and, of course, depend upon the demand volumes. The demand volumes are now larger because consumption is increasing, not because a retailer consumes the products. It might be of interest to know that even after such a massive retail development, in China, cold storage capacity is believed to be only 20-30 percent of growing cargo demand, and spoilage losses of up to 33 percent of perishable freight are common.


Food retailers face the challenge of a fragmented cold chain infrastructure that is not keeping pace with rising demand." (2005 Global Retail Development Index, atkearney)


The development of these services does not simply depend upon organised retail but other larger issues. If at all, the impetus and facilitation for augmenting them would come from processed food manufacturers and restaurants.


Further, in case of large buying for retail, or even for exports, the issue of grading of the produce becomes paramount. To achieve this entails resolution of a number of issues and again, investments, which are beyond a retailer’s concern.


In sum, for improving the supply chain, each link including the farmers will have to invest heavily and the role of the retailer in achieving this would not be significant as is made out to be. The entire effort to physically bring about the changes is to be done by others, not the retailer. Without having any concrete plans for financing as well as achieving this, government is once again demonstrating its tendency of putting the cart before the horse. The government further feels that the investments in modernization will come only if entrepreneurs are assured of volumes, which would supposedly come from global retailers. This is not true. Volumes will develop over a period with a large number of retailers, even if small. A global retailer would hardly be able to order huge volumes overnight without building up the base first.


As everyone knows, Indian agriculture faces problems of a more fundamental nature and these basic issues need to be tackled before real improvements take place. How and to what extent the global retailer will manage to ‘modernize’ the country’s agriculture is anyone’s wild guess!

Another assertion that is made is: For every rupee that an Indian consumer spends, the farmer gets only 20-22 paise, as against 70-80 paise in developed markets. If large retailers, whether domestic or foreign, directly source through farmers, realisations will go up for the farmers, consumers will have to pay less and the retailers will get higher margins. If the claim that in developed markets the farmer gets 70-80% of the retail price sounds exaggerated, the assertion that by direct sourcing of products the retailer, the farmer and the consumer - all - will realise more value/margin also appears somewhat imaginary.

The EU experience is typified by Finland: Farmers in Finland… have been receiving an increasingly lower proportion of the retail price of food. The concentration of the retail sector, with fewer outlets and the growth of the large supermarket chains, has been particularly rapid in Finland. The Finnish food sector is not alone in witnessing a growth in retail margins. This phenomenon appears to be happening across other EU markets where falling farm gate prices don't always lead to the fall in retail prices, which increases retail margins.

In a report, which, inter alia, shows the typical cost structure of Kenyan vegetables exported to UK, the farmer's share is shown to be 14.1% of the final price whereas as much as 45.5% is attributable to the supermarket.

As regards exports, it has been further asserted that the global giants like Wal-Mart can substantially improve the fortunes of India's farm sector by directly linking it with the global supply chain. “Remember, China's agriculture exports to the US nearly trebled from $3.86bn in 1999 to $9.96bn last year. India, on the other hand has made only a marginal progress, with its farm exports to America rising from $3.19bn in 1999 to just $4.28bn.” These bare figures have no meaning without proper analysis, including the contributions of the both the suppliers as well as buyers, to this result. To buy from India, a global player like Wal-Mart need not necessarily have a retail outlet in India. Its procurement centre can very well perform this task, as many other U.S. importers would be doing while importing from China.


As regards the impact of supplying to large retailers, one report observes: “producers supplying these chains may be able to prosper through investing in relationship marketing, product quality and brand reputation. But the high requirements for entering buyer-driven chains mean that the higher land and labour efficiency of smallholder production is no longer a comparative advantage; the connection between agriculture and poverty alleviation is thereby weakened. From a macro perspective, there is declining residual value to be shared with rural actors in the chain – the primary producers and workers. An associated risk is a polarisation between agribusiness and small-scale farming systems. Agriculture will not deliver the expected development benefits when agri-food markets do not function competitively.” (Concentration in Food supply and retail chains –UK Dept. For International Development, Aug.2004)


  • The consumption is growing in India and consumers, especially the growing middle class, are demanding new products

The implication in this argument is that increased consumption can be met ONLY IF FDI in Retail is allowed, with no reasoning offered! This is clearly another bogey, which is hard to chew let alone swallow. In a free market economy, surely there will be domestic retailers, old or new, organized or unorganized, who will find ways to meet the demand. Lest it be forgotten that to meet the growing consumption, the primary requirement is manufacturing. Retail is not a freestanding service activity but has to be backed by physical goods. Retail exists because of and on the back of manufacturing. Surely, it cannot be the case that the global retailers selling thousands of products will establish manufacturing facilities in India. It should also be remembered that the Levers and P&Gs of the world have managed to supply their products in distant nooks and corners of the country over the decades to earn and repatriate hefty profits, based on the existing retailer network. The manufacturers WILL find a way to reach their customers and the existing network and upcoming new domestic entrepreneurs will find ways to met the demand. More importantly, if there are deficiencies, in a free market economy, the market forces lead to corrections. In the face of other burning priorities, this is not an area that should cause government intervention.

More importantly, new products will have to be provided by manufacturers, retailers will only place them on their shelves.


  • The consumer will benefit from lower prices

This is one benefit over which there is no dispute. The large retailers would be in a position to significantly lower their procurement costs and the gains from the same can flow, in principle, from the supplier to the consumer through the retailer. The beneficial effect in the hands of the consumer is that it leaves a greater amount in hands, which can be spent on buying other products or services or for saving. But this benefit is not specific only to global players being allowed entry.

The benefit flows from the general market principle of greater competition leading to lowering of price and benefits of scale. When spoken in the context of a company like Wal-Mart, whose slogan is ‘every day low prices’, this principle applies with all the more force, leading to sustained and significant competitive pressures on other retailers. The low prices that Wal-Mart can offer will largely come from the pressure on the prices they pay to local suppliers or due to imports. Some lowering of prices could also come from their logistics and operating efficiencies, but generally speaking, their internal efficiencies would be reflected in their profits rather than the prices on the shelf. While the all round reductions in prices will certainly benefit the consumer, the pressures on suppliers and other retailers will likely lead to significant impact on their profitability and cash-flows. In the Indian context, it can be expected that any corrective actions to remain competitive that the manufacturer-suppliers and other retailers have to take, will require considerable time and costs. The key question would then be whether they would be able to remain in business in the face of the onslaught of price pressures during this lag. The changes in supply chain whereby second tier intermediaries may be eliminated may also put them out of business.

It is interesting to appreciate how a retail monolith like Wal-Mart, achieves lower prices from suppliers:

“Savings are achieved by extracting more favourable terms from suppliers: either through demanding lower merchandise prices or greater provision of services, such as special packaging or third-party food safety certification, or demanding payment of fees. Savings are also achieved through paying great attention to managing and evaluating shelf space, and to distribution logistics. Distribution is considered as important as retailing in driving costs out of the system. Savings can be made firstly by eliminating the role of the traditional wholesaler through direct supply from primary producers and manufacturers to regional distribution centers (RDCs), and then on to superstores…” – Concentration in food supply.DFID, UK Govt.

“Further squeezing of suppliers can also be foreseen in the highly competitive retail market. Wal-Mart has been repeatedly accused of demanding prices that eliminate the profit margins of their suppliers and putting them out of business. They have also been accused of retaliating against suppliers that don’t bend to their will. For instance, Danone yogurt was pulled from Wal-mart after they participated with a competitor in a weekend promotion. Wal-mart insisted they receive the same discount, but on a permanent basis. When Danone refused because they would have been unable to make a profit, Wal-mart discontinued their product for months. Small suppliers will be most vulnerable to pressure from Wal-mart, as they do not have the resources to survive their products being discontinued. As competitors try to compete with Wal-mart, they will also try to squeeze greater and greater bargains out of producers.” (Spring 2004) For a detailed analysis of what is happening to a Wal-Mart driven retail sector read this article.

Also not unimportant are the impacts on competition by global players resorting to below-cost selling. “We conclude that the practice of persistent below-cost selling when conducted by Asda, Morrison, Safeway, Sainsbury and Tesco, i.e. those parties with market power, operates against the public interest.” UK Competition Commission


  • Consumers will get a great shopping experience, a better variety and choice, so goes an argument.

Is it the Government’s responsibility at all to see that the consumers get “a great shopping experience” or is it to see that tens of millions in the country get two square meals a day and means of livelihood? It is perverse and hypocritical to even suggest this benefit. For that matter, is it its responsibility to provide a larger variety and choice and encourage item proliferation? As regards variety and choice, in many relatively larger retail stores in the metros, in some product categories, the Indian customers are already facing a bewildering variety and choice. In large global retailer outlets, the number of items (SKU or stock keeping units) ranges from 20,000 to higher than 100,000.

Writing in an article “Battle of the Food Chain” in The Guardian, Tim Lang wrote:

“The needs of consumers appear to play little part in the development of new products. The next time you go into a supermarket, take a stroll before you buy. Look at the thousands of products and ask: who really demanded these? In the US, over 13,000 new food items are launched each year to add to the estimated 300,000. In Europe, of the 10,000 new products launched annually, 90% will fail before the year is out.”

Assuming that customers will be offered a larger variety by the large retailer (by virtue of the bigger shop size and consequently, shelf space), where will the variety come from if there are no manufacturers for the products?

This is what is meant by putting the cart before the horse that is not yet born.

In the absence of domestic manufacture, the retail trade may well resort to imports. Indeed, imports of consumer products have been increasing since a few years. But the domestic players as yet hardly have the resources to undertake large scale and systematic imports. The global players, who already have existing procurements from countries such as China on a massive scale, can certainly use their extensive knowledge of sources and sheer buying power to import products from all over the world to fill up their shelves and sell at prices that no fringe importer-retailer can match, ever. Wal-Mart, for example would have bought goods worth US $ 22 bn. in 2005 from 20,000 suppliers in China for its worldwide stores and this level is growing.

Overall, it sources products from more than 70 countries in the world.

With large imports by the global retailers in India in an organized way at low, low prices coupled with planned reductions in import duties, it is entirely possible that existing Indian manufacturers or farm producers of such products may find themselves in distress. The government would hardly be able to dictate which products can or cannot be imported by the global retailer whose philosophy, quite justifiably, is to buy at the lowest cost.


  • FDI in Retail will increase the procurement of the global chains for their other markets.

This bogus argument has already been dealt with in an earlier article.

The stimulus to procurement for global markets from one country or the other is provided by pure business considerations and serious global retailers procure from whichever country it makes business sense for them to do so. The main factors, as everyone understands, are price, quality, quantity and reliability. THIS is the area - in manufacturing - where India needs inputs first. This is where China has scored. Wal-Mart procures goods worth US$ 22 bn. from China through a procurement office. In fact, the mandate of the Global Procurement Center is to develop supply chains from global sources, including India.

Although some facilitation may occur due to a global retailer’s presence in the local market, the effects may not be significant to warrant the opening up of the Retail sector on just such hypothesis. It can be hardly argued that if not allowed to set up shop, they will not procure from the country even where it makes sense.

Another so-called related benefit is that: “All the global players source 95 per cent of merchandise locally wherever they are present. Hence, the same would be applied to India, and the local industries are bound to benefit.” This is a preposterous proposition.

It would, of course, be logical for a retailer to buy in the first instance from the country of location and it is absurd to present this as a benefit. The purchases by the retailers for the domestic market are ultimately destined for the domestic consumer and not for the retailer’s own consumption. To the extent that the global retailer takes a share of the market from other retailers, he would just be replacing another retailer as a buyer. So, where is the benefit? On the other hand, as explained earlier, the global retailer may well import more merchandise than a typical domestic retailer would.


  • Government revenues will increase due to less tax evasion see

The argument, often dished out to Governments in emerging markets, suggests that the entry of foreign entities would reduce tax evasion, the implication being that the Indian retailers especially the small retailers are tax evaders and that, on the other hand, foreign entities will bring more revenue to the Government because they will not evade taxes. Therefore, the larger the share of the global retailers, the better it would be. Simple, is it not? By this token, the logical option for the Government would be to see that the entire unorganized sector in the country is replaced by large scale and organized, preferably global, players in every business area. This argument, though, is sweet music to weak governments, even if insulting to a country’s honest retailers as well as the tax administration, and is readily lapped up by eager Finance Ministers not capable of evolving proper systems of tax levy, administration and enforcement. An incidental but important point that is overlooked by the proponents of this argument is that global retailers would repatriate billions of dollars in earnings for as long as they survive in the country (and ultimately, huge equity appreciation), with relatively low level inputs.


  • Significant inflow of Funds by way of FDI

At one time (December 2004), the Finance Ministry felt that FDI in Retail would prove to be a “ gold mine”. The realization has later dawned that the inflow might not be so large after all.

In actual fact, as the experience of other countries shows, the actual investment is not expected to result in a significant inflow in the overall scheme of things. E.g. taking the case of Wal-Mart’s entry into Mexico, there was no significant inflow to Mexico operations except for the initial acquisition of a local retailer Cifra. Wal-Mart’s subsequent growth was financed by cash flow from domestic operations. (see)


  • Investor confidence will increase if FDI in Retail is allowed.

Another bogey floated by those who have an interest in Retail sector being opened. Has China succeeded in attracting billions of dollars since 1990s BECAUSE it allowed FDI in Retail? Will manufacturers looking to establish a plant in India either for market-seeking or efficiency-seeking reasons or looking to invest in a project would not do so unless FDI in Retail is allowed? Conversely, just because FDI in Retail is allowed, would they feel more confident if other factors are not fully conducive for their own business? A long-term investment is based on long term overall considerations with particular reference to the investor’s own business and not whether FDI in Retail is allowed or not and China provides ample evidence of this.


  • A fear-based argument is that if FDI in Retail is not allowed at this stage, the country might miss the boat.

This argument, even if only by implication, is weak. Global retailers are faced with saturated markets in their home countries and are always looking for lucrative markets in other countries. India with its massive population and growing consumer base is a market any serious global player will get into, whenever an opportunity presents itself. As the President of Wal-Mart’s international arm said during his visit last year, India was a market “to which we will just keep coming back because of its unbelievable potential”.

This is so, in general, as regards all market-seeking FDI.

Where the country has lost out, is in attracting efficiency-seeking FDI. China has already secured massive investments in this area and the country will really miss the boat unless it identifies new opportunities in this area and grabs them. Also urgent is FDI in infrastructure and other manufacturing, processing and services areas of market-seeking investments.


  • Foreign Retail is already allowed through franchises, so why not FDI?

This is a non-serious argument and the non-serious response to that is : If there is no difference between franchising and FDI, why is it necessary to allow FDI as fanchising is already permitted? On a serious note, for a large number of internationally sold branded products, franchising is indeed the preferred route for the brand owners. Not many brand owners may be keen to make long-term significant investments or create their own establishments in various countries. Rather, the franchise solution has been developed just to provide a win-win solution for both, the franchiser and the franchisee. Brand owners who are really serious about the huge Indian market would not be averse to franchising arrangements, which would give them both earnings and sufficient control over the way the product is marketed. The announced opening of FDI in high-end high-value single product brands would do precious little towards furthering the larger economic interests of the country.

The other corollary argument that retailers (assuming that inviting foreign retailers is a nationally accepted development objective) will not come unless FDI is allowed is also not true. May be some will not, others will. Carrefour is established in 9 countries including Japan only through its partners and franchisees. In these countries, it has in all 40 hypermarkets, 108 supermarkets and 56 convenience stores. A foreign retailer really keen to establish in a market, may well adopt this mode of entry under the existing policy, to be ready to invest in future when conditions are right.


  • FDI in Retail will be confined to metros or tier II cities or there will be conditions on floor area. It may be confined to food and grocery.

In fact, these are the most lucrative areas where naturally the global players would like to set foot and their entry would restrict the opportunities available to domestic retailers. The global retailers with their huge resources would not only be able to preempt prime retail space, their entry would also generally raise the already exorbitant market prices for shopping space in these areas to prohibitive levels effectively blocking entry of new small or medium retailers. For example, Wal-Mart was looking at stores with space ranging from 60,000 sq ft to 200,000 sq ft. and would like to offer a wide assortment of general merchandise and a full-line supermarket. (Menzer, 13.5.05 Economic Times)

Even in the domestic context, the abject failure of the Government to evolve a sensible and coherent urban development strategy and policy has played havoc with metros, large cities and newly developing urban areas. There are Delhis and Ulhasnagars mushrooming everywhere and urban development is left to the forces of anarchy. This state of affairs has implications also for development of retail market (even without FDI) that is the Government’s swan song, for the prime requirement for success of organized retail is: location and large space.

The Planning Commission, which is giving so much focus and attention to opening FDI in Retail, is blissfully oblivious of the priority and urgency of urban development policies. It seems to have forgotten that it had constituted a National Task Force on Urban Perspective and Policy in 1995, which is still groping in the dark and has not yet given its recommendations after over ten years, allowing the Union Ministry of Urban Development to put its feet on the desk and relax.

Lack of urban planning has also prevented proper retail growth. Had this been in place, the domestic sector would have already grown in a systematic way before now.

China, on the other hand, seems to be ahead in this respect too. As early as 2003, their provincial governments were told to map out a development plan for retail networks in large and mid-sized cities, including municipalities and provincial capacities, as other wise the random establishment of large retail stores could lead to over-competition, repeated construction and a waste of social resources.” An official cautioned “without a development layout, numerous large-scale shopping centers and malls could be concentrated in certain districts of a city, which not only harms the development of retail business but also causes a waste of resources.” By that time, 10 cities including Beijing and Shanghai had already completed such network planning.

The India Government, however, believes that putting the cart before the horse is the right policy.

The option suggested by some of allowing global players in tier II cities also does not seem right as the costs are generally lower there than in metros and their entry in Tier II will allow them to get entrenched at a lower cost, preempt opportunities and create a sound platform. The other options floated by the government of having limits on the number of stores or shop area are also just smoke screens and even contradict the basic arguments of major benefits. The supposed major benefits could hardly be realized by one or two stores. Allowing FDI in Food and Grocery retail is virtually giving the global players what they want. This is the area that they want the most because the customers who come to their stores to buy their daily needs are the customers who will be drawn to their other product lines. Incidentally, this is the area where Wal-Mart, the world's biggest retailer is the strongest.

  • FDI is being opened partially just to test the waters. Heavens are not going to fall if it is opened.

This would again rather benefit the global players, by giving them the opportunity to get a foot in the door and a finger in the pie in the early stages, gain invaluable market experience and entrench themselves at an absolutely minimal cost. It would give them a great opportunity to preempt scarce premium real estate, which is the prime requirement for retail stores. The government cannot be unaware that once a global retailer sets up shop, little can be done to stop the retailer from expanding if the company is subject to Indian laws, which would ensure equality between domestic and FDI based retailers.

Therefore, allowing FDI in Retail as a policy decision would imply commitment, not simply testing of waters. This is all the more reason to take time to consider the matter carefully. Heavens are not going to fall if FDI in Retail does not come here and now.


  • But the CLINCHING ARGUMENT, the strongest yet for allowing FDI in Retail, was recently made by one of the Union Ministers (presumably a Senior Minister), thus:

"Where would you go if you want to buy a reputed electric drill,'' one of the Ministers had asked.

Well, you really got us there Mr. Minister! You have finally made out the government’s case. And those who may want to buy a reputed electric drill will also be beholden to you. Who knows, some day that drill bought from a global retailer may be useful for drilling a hole in the head too. Thank you, Mr. Minister.


  • Trivia: Wal-Mart’s chief of international arm, naively suggested this benefit to India, that would be typically used to justify Wal-Mart’s presence in a small community town in the USA: “Our experience in other countries show that small businesses like laundry outlets, coffee parlours and restaurants located around Wal-Mart stores flourish because they attract traffic from the store."

Obviously, when we are discussing the issues at a macro level for the country, this remark does not deserve any notice, especially the Minister mentioned above having already made out a convincing case.

A few other relevant points:


  • Views of Indian business interests

Indian business and industry associations, other than those representing the new service industries such as NASSCOM sometimes do not appear to be quite effective in representing their points of view in a logical and cogent manner on issues of relevance to them. This may be partly due to the varied interests of its members which lead them to take differing positions. As is often the case, different business associations representing varied interests have expressed mixed-up, confusing and contradictory opinions about opening FDI in Retail. While some have supported FDI in Retail, the arguments and reasoning advanced by them relate more to simply modern formal stores rather than specifically to FDI. This shows their confusion in that the two are treated as synonymous. Some other retailers out of sheer bravado have even talked of ‘taking on’ the Wal-Mart’s and Carrefours of the world in a confused representation. see example

Some individual retailers may have their reasons for their confidence but they reflect an inadequate comprehension of what the power of global players is and what it does to competition. Such views certainly cannot be representative of the Indian retail sector, the entire existing supply chains and the varied product segments. Particularly, those components of the retail structure that are most likely to be adversely affected comprise of small retailers, traders, intermediaries, produce growers, even small vendors and suchlike. All of these do not have the wherewithal to fully grasp the long term implications of the government’s intentions, or have proper opportunity for a meaningful participation in the policy making process. They cannot also engage high-flying PR firms to lobby for them. Therefore, the real views of the vast majority of those affected remain understated except to the extent that political parties take up their cause. This is all the more reason for the Government to study the issues more deeply rather than merely saying that ‘they will not be displaced’.


  • It would be interesting for the people of the country to understand how the global retailers work to get privileges to suit their interests.

Examples: A document prepared by an agency for the World Bank says:

“Many countries (e.g. India, The UAE, The Philippines) still prevent foreigners to own land. These restrictions discourage FDI in Retail because modern large-scale retailers typically rely on reselling the land around their large-scale stores which would have had appreciated significantly as a result of increased customer traffic.”

In another document, the strict laws on Food Adulteration appear to be a hindrance to FDI in food processing.

“Illustratively, the outdated Food Price Order (FPO) and Prevention of Food Adulteration Act are a major hurdle for FDI in food processing. The latter makes even a technical or minor violation subject to criminal liability.” Further, “The Essential Commodities Act adds to the difficulty of entering the food processing industry by making the procurement, storage and transport of agricultural produce subject to many vagaries..”

Further, infrastructure, labour laws, land ceiling laws, transportation, removal of restrictions on movement of agricultural products and a host of other prerequisites are mentioned as necessary for FDI in Retail to realize the full benefits. It bears reminding that these are the same prerequisites that the domestic industries and businesses have been demanding over the years but which have not been met. If they could be met, there is no reason why the entire domestic sector cannot deliver the goods.

Wal-Mart’s John Menzer had said: “there is talk (that FDI in Retail) could be limited to brands or even certain regions...we can’t utilize our global leverage if that happens.”

“Utilising global leverage”, is obviously meant to strengthen their own competitive position, not to bestow any benefit to the consumers.

This is just to provide an insight into the types of concessions and privileges the would-be-sons-in-law of the country expect (and will, in all likelihood, manage to get) in return for getting the opportunity to enter the country and to make their billions for all time to come.


  • A number of studies have been made in USA on Wal-Mart in particular, and in USA and other parts of the world on the impact of Supermarkets and Big Box Retailers. For example, see:

Impact of big box stores on small retailers

As an illustration of impact of stores like Wal-Mart on suppliers, please see.

Control of food retailing by small number of multinationals

Also, references in an earlier article

also here : 1 2 3 4 5

Several of the studies present results that are sufficient to point to a strong need for careful study and analysis. The issue is so important for countries and cities alike that significant research studies are still continuing in this area. In particular, there is considerable research interest focusing on Wal-Mart, a modern day wonder that is admired all over the world but whose sheer power leads to great concerns even within USA. In this scenario, it becomes imperative to undertake an objective analysis of opening FDI in Retail BEFORE COMMITTING TO A CERTAIN POLICY INITIATIVE. There is need to make detailed Economic Impact Analyses with specific reference to the Indian situation. Information on any Impact Studies made by the Government is not readily available.


  • In 2005 rankings, India has emerged as the most attractive retail market in the world ahead of China. India is regarded as the last great frontier. It gives the country a great power and leverage. Instead of leveraging this position for substantial and concrete gains, the Government is keen to offer a share of this lucrative market on a platter to global retailers for ambiguous future gains at the same time relegating the indigenous entrepreneurs to a secondary position.

Is this in national interest?


  • Even a former Director Mr. Paul Etgart of TESCO, a global retailer warned Indian retail businesses “not to be fooled by partnership offers by global retail giants because they want 100 per cent control and, eventually, ownership”. With just two per cent of retail in the organised sector with 12 million outlets, and set to go to six per cent of the organised retail market in the next five years, Mr Etgart said India could develop its own retail sector. “Urge your government to retain your strict FDI regulations. Global retail giants are very smart and clever to tackle local cultural and political obstacles. India must beware”, he warned. (At India Images Fashion 2005)

  • As part of an apparently well thought out strategy, those who themselves lobby to secure entry into this lucrative market actually attack the domestic interests who are likely to be affected and thus have all the right to object. Examples of such inspired calumnious attacks: “There is a whole litany of untruths… We discovered that there is a body of Indian business houses that have formed a very effective lobby against modern retail.” “Foreign retailers, which have become increasingly exasperated with the government’s failure to announce a clear policy for the sector, said the call for further national debate was another thinly disguised delaying tactic that pandered to vested interests.” “Finally, attached to each market distortion there is inevitably a strong vested interest which will lobby hard for the status quo.” “India’s big business houses, either active in the sector or planning to enter it, have captured the policymaking process and exaggerated the threat to jobs from foreign direct investment”. Mercifully, so far the Left Parties have not been accused of being hand in glove with the local big business lobbies! Even if businesses in India were lobbying for their own interest, there is no gainsaying that they have every right to do so in their own country. They have a clear locus standi. The same cannot be said of the global players, who seem to have actually influenced the policy-making process by feeding fanciful hype on benefits of FDI. The ‘deep pockets’ lobbying seems to be succeeding admirably in turning an apparently weak case into an Aladdin’s Lamp in the Government’s eyes.

Not for nothing have players like Walmart engaged high profile PR firms for lobbying and have somehow got even the U.S.Ambassador to speak out against those who are justified in raising objections. The actions being taken by some of the prospective entrants in committing resources to their Indian project, suggests that they are privy to the impending government decision well before it is announced to the Indian public.

The Government’s approach on FDI in Retail has been influenced by external lobbying and prodding by countries, international financial institutions and business interests. It stands to reason that the lobbying would have covered all power centers that may be in a position to influence policy-making. In the lobbying efforts where economic interests of major countries or economic blocks are involved, even the agencies of the World Bank are also too glad to oblige by providing guidance not only on how to deal with domestic objections (see Exhibit 35), but also detailed road map and checklist on selling the decision to the domestic stakeholders.

Interestingly, the final point in the checklist reads: Are the stakeholders effectively “managed”- e.g. informed, involved, compensated and/or confronted?

It seems that those in the government who have to make the sales pitch have been getting good counsel.


It is a sign of changing times that ‘the foreign hand’ that was at one time in the past seen everywhere, doing everything possible to harm the country’s interests, is now apparently thought of as a benevolent hand that is going to guide the country’s destiny. In the present Government’s time, the country should not be too surprised to see the influence of the heavy Hand not only in economic but also in other areas.

Mr. Kamal Nath, during his visit to Hongkong two months back to attend a WTO meeting, made a profound statement that indicated the government's good understanding of the way in which global trade negotiations were maneuvered. He said: "India and the developing world would not settle for any deal that demanded specific concessions from them in return for declarations of good intentions...". Shortly thereafter, in the matter of FDI for Retail, the government of which he is a part, proceeded to do exactly what he said would not be done: It took the first step towards opening the doors to FDI, and is all set to open them fully, based on lofty declarations of the global retailers, their lobbyists and all and sundry jumping on the bandwagon about the wonderful things FDI in Retail will do for India.

The country's economic growth has been gathering momentum since the last over five years and it is continuing on the growth path. The retail sector has also been gathering steam. For example, according to a recent Report, even without allowing FDI, organised retail in food and beverages is bound to see exponential growth, primarily because of changes in consumer demand, supply-chain dynamics and marketing interventions. Likewise, other parts of the retail sector are also logically expected to grow. This growth, although made possible due to higher GDP growth and disposable incomes, will then enable the government to claim that it would not have been possible but for its initiatives on FDI in Retail.

FDI per se, though useful, needs to be allowed only where clearly warranted and essential. Let it be said once again, that it is advisable for the government to focus on securing FDI in areas where it will lead to demonstrable concrete benefits and subserve the long term economic interests of the country.

(For a little historical perspective on foreigners being granted trading concessions, see here and here and decide if there is some relevance of the past in the present context).


21 Comments:

At February 08, 2006, Anonymous Anonymous said...

Dear Prajatantra
I believe you have jumped the gun. the current policy will not allow retail chains like Carrer Four or Wall-Mart. But only single brands like Starbucks. Anyways I do not have mercy for so called pop-and-mom stores. These are not run by pop and mom but usually owner sits in chair with golden rope hanging around him. He pays no income tax nor VAT ( as usually he claims his sales are below VAT requirements). He mixes different qualities and cheats in weights. The labour he employs is informal and salary is less that what is required under law. May be this is what The National Interest of India is.

The entry of Wall-Mart in China has not caused the upheveal, which is predicted in India. I would love to see Wall-Mart in India, as I can buy cheaply and save my hard earned honest money. May be this is a selfish but as My "Guru" Adam Smith said "self inerest is the engine of the economy".

 
At February 08, 2006, Anonymous Somesh Dutta said...

Very well presented, particularly highlighting the way govt. is exaggerating the benefits and trying to get Wal-mart.

I don't agree with previous reader. He is having misplaced ideas about evil of small stores and goodness of stores like Wal-mart and obviously adequately informed about China.
There are of course people who are totally enamored about American lifestyles.

 
At February 09, 2006, Anonymous Sujata.B., Bangalore said...

This FDI relaxation is due to USA persuasion. This govt. is always willing to take advice from outside, particularly USA.

 
At February 09, 2006, Anonymous Anonymous2 said...

As regards comments above by Anonymous, Adam Smith has said so many other things too which we do not follow in India. Anyhow, world has come a long way from Adam Smith and now it is the cut-throat world of economic hegemony from which India has to protect itself.

 
At February 09, 2006, Blogger Shalini said...

I think its quite backward and even socialistic to think that large retailers like Wal-Mart and Carrefour should not be allowed to enter India. It is inevitable because it is the most efficent way to do business. Smaller, niche stores that are efficent and offer a specific value to customers will not go out of business. Anyway, Big Bazaar currently has more impact on these stores than any international retailer, so why be against only large foreign retailers and not Indian ones.

 
At February 10, 2006, Blogger Nandu said...

Interesting article. I must be honest, there are several contentious points in this, which I would like to respond to in detail. Would you mind if I mailed you some comments on your observations?

Thanks,

 
At February 10, 2006, Anonymous Anonymous 2 said...

I think it is quite naive for people to think that there is no difference between and Indian store like Big Bazaar and a foreign store like Wal-Mart. We're not part of america, you kmow.Things are not so simple.The objection is not simply large or small. It looks like government has succeeded in confusing the public about the matter.

There are basic issues which have to be addressed and off-the-cuff remarks have no meaning.

 
At February 10, 2006, Blogger Lok-adhikar said...

To reader Nandu,
Sure. yw

 
At February 10, 2006, Blogger Amit Kulkarni said...

Nandu,

I hope you can also post your arguments here, in a public forum, where it can be debated, hopefully in a open-minded positive way.

Lok-adhikar,
Regarding "The consumer will benefit from lower prices" and chains like Wal-Mart. I beg to disagree with this benefit.

The consumer actually never benefits, ***IF*** they save some money on some products, and splurge it on others, due to a insane variety of choice goods. Wal-Mart benefits, because they have made more sales and more profits. Good for Wal-Mart, bad for 'dumb' consumers, and ugly for the rest (due to resultant environmental destruction), because it encourages frivolous spending.

It also encourages dumping, deterioration of quality, monoculture, overproduction, and extremely efficient destruction of jobs.

Modern businesses have forgetten the lessons learned from the Great Depression. Too much efficiency leads to overproduction which leads to deflation... Couple this with no income or jobs for the majority of the population, and you have a unfortunate recipe for social unrest.

 
At February 10, 2006, Anonymous sujata b. said...

amit is absolutely right, the benefit of lower prices is illusory. But the government is using this as it strongest argument. As if the government ever cares consumers.

 
At February 10, 2006, Anonymous Parminder, Ludhiana said...

As regards lower prices, Lokadhikar is right about the mechanism and amit is right about the impact. The lower prices anyhow are not coming from the retailers' pockets as stated in the article.

 
At February 16, 2006, Blogger Shalini said...

Do read this article if you feel that the unorganized sector only has to worry about "foreign" retailers. Large Indian retailers who are growing exponentially pose a greater threat to mom and pop stores than Wal-Mart. http://economictimes.indiatimes.com/articleshow/1415374.cms

 
At February 17, 2006, Anonymous Anonymous 2 said...

Shalini has rightly pointed out to the article in Economic Times concerning large Indian retailers. But this point is already covered in the very first point by the writer of the above article.

She should also read the following article:

http://economictimes.indiatimes.com/articleshow/1415307.cms

This shows how large retailers squeeze suppliers. If and when Wal-Mart enters, the impact will be seen clearly on the suppliers because they are masters in squeezing suppliers.
This point is exhaustively covered by the above article under the para on consumers getting better prices.

Reference should also be made to another excellent comment by Amit (see above) at:
http://forestlaw.blogspot.com/2006/02/philosophy-lower-prices-and-wal-mart.html

On such important policy issues, it is better to make comments based on real information rather than for the mere joy of seeing an american brand in India, which in itself,does not mean anything.

And when the decision is likely to impact millions of people, an individual's preference for buying from Wal-Mart or other fancy foreign retailer is secondary.

 
At February 17, 2006, Anonymous Sujata B. said...

If small stores have to worry about competition from large Indian retailers does not mean at all that they should also worry about competition from some of the largest global retailers. It is strange logic that just because they face competition from local retailers, they should be made to suffer from presence of outsiders too. Remember Wal-Mart's sales are 40% higher than India's TOTAL retail market! There are many many more like Tesco, Carrefour, Metro and 50 others who will come. Even the so-called large retailers will have to worry about them not only the small stores.

Grow up, guys! Don't get carried away thinking that India is like America.

 
At February 17, 2006, Anonymous chander said...

see interesting article here too:

http://india-awake.blogspot.com/2006/02/retail-fdi-selling-india-short.html

 
At February 17, 2006, Anonymous shetty, mumbai said...

The article referred to by Chander above exposes the duplicity of the Left parties. They also believe in fooling Indian public.

 
At February 21, 2006, Anonymous Anonymous II said...

For the full year ended January 31, Bentonville-based Wal-Mart said net sales rose 9.5 percent to $312.4 billion and net income rose 9.4 percent to a record $11.2 billion, or $2.68 per share.

 
At February 25, 2006, Blogger BangaloreGuy said...

This has to be THE longest post on the blogosphere, ever.

 
At February 25, 2006, Anonymous Lalwani said...

Sadly, even if long and lucid, it is not going to make any impact on those in the government and others who are brain-washed by propoganda about the magic lamp of fdi in retail.

 
At February 26, 2006, Anonymous Swati Khosla said...

Hope any of the above is taken seriously by anyone from the government who chances to read it.


Keep it up! Do not worry if it seems long. Government has fed so much misinformation, it is necessary to set the record straight.

 
At March 09, 2006, Anonymous sujata.b. said...

Hope all these detailed arguments exposing the hollowness of the government's arguments reaches the decision makers so they do not fall prey to the lobbyists and temptations.

 

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