Manmohan Singh’s Genie- FDI in Retail

The Government is once again trying to resurrect its six year old proposal of allowing full fledged FDI in Retail which, Manmohan Singh and his team believe, is the magic genie that will solve problems that they are unable to solve themselves. The proposal is part of his Government’s unfinished agenda to submit the country to the full force of globalization in the so-called “enlightened national interest”. The disingenuous way in which the Government has been pushing this unconvincing case becomes evident by examining the course of events and its lame arguments advanced from time to time.

....and may be help with the naxal problem

Chronicle of the “FDI in Retail” Agenda

Considering the potential long term implications upon the entire structure of the retail trade which has been meeting the needs of 1.15 billion people, any Government believing in transparency would have taken the stakeholders in confidence in the first instance. At the outset, it should have published a Green Paper on the proposal with detailed analysis of pros and cons including details of evidences and data to support the claims of overwhelming benefits to the country that cannot be otherwise obtained but for FDI in Retail. Instead, it has been tossing around contrived justifications in an unstructured manner without any hard evidence to substantiate them, ignoring objections.

Within six months of the Manmohan Singh led Government assuming office, the Government made it known in November 2004 that it favored FDI in Retail. ( see here) It also got ICRIER to prepare a tailor-made “Study on FDI in Retail Sector- India 2005” obviously talking favorably of the benefits of FDI in Retail as the Government wanted. On cue, major global retailers like Walmart (USA), Carrefour (France) and Tesco (UK) began vigorous lobbying with pressures being brought also from their Governments. A gullible Government readily lapped up the stories of wonderfully-wonderful benefits as narrated by these retailers whose only interest was and is to secure a foothold in potentially the third or fourth largest market in the world for free. Members of Manmohan Singh’s Team became their virtual lobbyists pleading the case for FDI in Retail according to a given script, feeding to the public the arguments provided by the global retailers and other spin-doctors in a cut-and-paste manner.

Immediately after his visit to the USA primarily to discuss the Nuclear deal in July 2005 Manmohan Singh, presumably on prodding by the Bush administration and the Walmart lobby, got involved himself to persuade all concerned about the benefits. (see) In his address to the Joint Session of US Congress, he had said: We have to assuage the doubts and calm the fears that often arise when people face the impact of change. Many of the fears we have to address are exaggerated, but they must be addressed. – a comment alluding equally to the Nuke deal as also trade related measures like Retail trade liberalization. Due to stiff resistance from the Left Parties and the retail trade, he couldn’t deliver the policy change when Bush visited India in March 2006. However, to prove a point, a month before the visit, the Government allowed FDI in Single-brand Retailing, a measure which does not bring any tangible benefits, worthwhile or otherwise, for the country.

Considering the significance of the issue, the Department-related Parliamentary Standing Committee on Commerce took up in April 2007 an in-depth study Foreign as well as Domestic Investment in Retail Sector. In the meantime, in 2008 ICRIER also came out with another study on the Impact of Organized Retailing on the unorganized sector. The Parliamentary Committee comprising of members from all parties discussed the issues threadbare after considering the views of all concerned, including the ICRIER Reports. It tabled its Report in June 2009 which concluded that FDI in Retail should NOT be permitted. (see)

A few months later, in November 2009, Commerce Minister Anand Sharma said that there would be NO review of policy on FDI in Retail, just after the meeting of the Chairman of Walmart with him as well as the Prime Minister. (here) The denial was obviously only to make a show that the Government was standing firm against pressure from global retailers. Within just six months after the denial, ignoring the Parliamentary Report, the DIPP, Ministry of Commerce published on 6th July 2010 a so-called Discussion Paper on FDI in multi-brand retail inviting comments from the stakeholders and the public, SIX YEARS after the proposal was initiated. So, had anything changed? Yes, Manmohan Singh visited the US in late November 2009 and there is the impending visit of US President to India in November 2010. The Government is now desperate `to allow FDI in multi brand retail that will please the global players and, hopefully, earn a pat on the back from the US President for Manmohan Singh for being a champion of globalization.

That the DIPP Discussion Paper is merely a part of the charade and a formality is evident from the way in which leading questions have been cleverly drafted to elicit desired responses, a methodology routinely adopted by researchers to obtain answers that support the objective. From the dozen questions posed in the Paper, only half a question asks “Should FDI in multi brand retailing be permitted?” The entire remaining section is devoted to questions on the basis that FDI is going to be permitted. Another indication of the decision already having been taken was provided by the DIPP Secretary indicating that the issue was only related to decision as to the cap or the extent of FDI to be allowed.

There is no doubt that the decision to allow FDI in multi-brand retail has not only been taken but may be also known to retailers like Walmart and their Indian partners who are already talking of an aggressive store opening plan. (here) A similar statement has been made by Carrefour already. (here) The public would, of course, be the last to know, in line with the artful ways in which this Government works. The Government’s time table is already set. It would not wish to make the announcement while the Parliament is in session. But soon thereafter and well before Obama arrives in India in November 2010, the notification would be issued unless, of course, there is a strong resistance this time too from the political parties and other stakeholders.

If the case for FDI in Retail was indeed strong, the Government would not have been so opaque and furtive and would have satisfactorily met all objections long before now. Instead, it has adopted a devious approach and stratagem of going through a mock public debate at such a late stage based on mendacious justifications, for a decision already taken.

Liberally Global

Specious justifications

Almost all the tall claims of chimerical benefits from FDI in Retail advanced by the Government so far have been dealt with exhaustively in this and earlier articles in PRAJATANTRA to show that they are misrepresentative or downright bogus. Nevertheless, some relevant points need to be highlighted here.

• India’s Foreign Exchange Reserves stand at $ 284 billion as on 30th July 2010. What is needed now is foreign investment in targeted high priority areas e.g. infrastructure, high technology manufacturing etc. and not in just any area. FDI in Retail is certainly not an absolute priority in the larger context. On the other hand, FDI is not flowing into areas of real priority to the extent expected despite a liberalized policy.
• FDI in Retail should not be seen as a policy in isolation but a part of the larger global trade policy. Firstly, FDI in Retail trade is essentially market-seeking and rent-seeking FDI as opposed to resource-seeking or efficiency-seeking FDI. Pushed by saturated markets at home and pulled by growing markets and profits in countries such as India, the sole objective of global retailers is to expand their markets and profit opportunities. If at all foreign countries are allowed to participate in the enormous potential of one of the largest markets in the world by establishing just a retail base, there must be a sound basis and a matching quid pro quo. With no significant real benefits in relation to the country’s development objectives, allowing FDI in this sector is only to give a free access for free to foreign entities (by implication, countries) to our growing market. Therefore, it is a major bargaining tool which cannot be given away on a platter by a unilateral action. Secondly, a misleading argument has been advanced that even if the retail sector were to be unilaterally liberalized, no bindings would be undertaken in the WTO. This is not so. The change once introduced will be irreversible in its impacts internally and also once FDI is allowed, it would be hardly possible to retract the steps and effectively, it would bind the country. (please also see). If indeed its argument is valid, then the liberalization done earlier for wholesale cash-and-carry and single brand retailing need to be rescinded forthwith. In wholesale cash-and-carry trade allowed since many years, FDI to the extent of $1.7 bn. or just 1.54% of the total FDI has been received. FDI in single brand retail was permitted in January 2006. So far, till March 2010 the FDI received is $ 194 million or a measly 0.21% of the total. To date, there is no demonstrable beneficial fall-out which it was claimed could only accrue with liberalization. Therefore, the policy in both these areas needs to be cancelled immediately as it was unilateral according to the argument and has not yielded benefits.
• Examples of various countries which have supposedly benefited from FDI in Retail have been cited by the Government. Each country has a different situation with regard to overall economic development, characteristics of manufacturing and retail sectors and business environment. It is irrelevant to cite examples of Chile, Mexico, Russia etc. with completely different economic and market structure and stage of development than India. There is enough material available to suggest in fact that the benefits claimed have not been realized even by countries which are listed. For example, experience in Mexico suggests that presence of global players does not always result in low prices. If at all the experience in some hand-picked countries may have been good, there may be other countries where the opposite results would have occurred. The example of China given in the paper is also completely misleading. Since many years it has become a manufacturing hub for mass-produced consumer products with a global market. China liberalized FDI in Retail primarily to comply with WTO when it had already developed a huge organized retail base of its own backed by a competitive manufacturing base. It is a $ 824 billion retail market and the largest domestic retailer Balian Group has sales of $ 14.4 billion – India is simply not comparable. Besides, the Government’s claim that FDI in Retail will achieve everything is straightaway demolished with the Chinese example because by no means can it be said that the growth of China’s consumption or development of retail sector or the back-end infrastructure or manufacturing base had anything to do with FDI in Retail being allowed there. It was the success of its overall policies that made this growth possible.
• A justification advanced for FDI in Retail is that our consumption is growing. Well certainly, in a growing economy consumption is expected to grow. This should benefit the domestic entrepreneurs. Is growing consumption a valid reason for allowing global players to have a share in the pie?
• It has also been suggested that somehow organized retail is always superior to our present retail structure. A deliberate confusion is then being created to equate FDI in Retail with Organized (large) Retail. Even if organized retail is assumed to be beneficial, this sector can and should develop with domestic resources in line with the needs of the consumers. It is simply dishonest to suggest that Organized Retail and global retailers are synonymous.
• The government claim that the existing retail network of small retailers will not be greatly affected by the entry of global players is patently false. Even with the domestic organized retailers, small retailers will certainly suffer. Going by government’s own avowed objective, it wants to invite global retailers to compete with our own indigenous businesses and bring down prices. (see) In the light of this, such futile assertions of small retailers not being affected are meant only to fool the country. Consider that Walmart had sales of $ 405 billion in fiscal year 2010. Putting it differently, just this company singly has the bargaining muscle power while sourcing products, equal to 158% of the country’s total retail market estimated at Rs. 12,00,000 crores or $ 257 billion. Another company Carrefour had sales of $ 125 billion, nearly 50% of our total retail market. Only the naïve can believe that this bargaining power will not be used to squeeze suppliers or will not drive out smaller retailers with predatory prices. The dangers posed to our manufacturing sector do not appear to have even occurred to the Government. As global players, these firms procure from the cheapest sources world-wide. At present already hundreds of Chinese products are being imported albeit in relatively small quantities by local importers and sold in the retail at incredibly low prices. Even perishables like fruit are now being imported by local importers and they compete with our own produce. When more and more such products are imported into the country by the global players with their massive bargaining powers at still lower prices, it may well threaten even the manufacturers not only of consumer products but also consumer durables and farmers. The global retailers are only interested in leveraging their strengths and maximizing profits and will obtain their wares from the cheapest sources. Ironically, allowing global retailers also implies welcoming Chinese and other global suppliers of consumer products for whom the opportunity will be a godsend in getting a smooth entry point. They will be saved the hard work, time, uncertainty and risks of entering into the country on their own. The government seems to be oblivious of this implication.
• The small and medium retailers would be affected in more ways than one. The global retailers would naturally invade the markets with the most potential i.e. the first and second tier cities, where real estate and retail store space are scarce. Even with expected augmentation, the cost of retail space will remain exorbitantly high for small retailers. Large organized domestic retailers are already competing with the small retailers for space and with the invasion of global retailers on the scene, retail space costs would further go up. It would become impossible for new small retailers to acquire retail space. In a short period of time, even the existing retailers would not find it worthwhile to continue to bear the high cost of their space and would be forced to shut shop. One ministry is brazenly suggesting that small retailers should become franchisees of the global retailers!
• The claim that more jobs will be created is worthy of being trashed straightaway. When the economy is growing and wherever there is economic activity naturally jobs are created. Jobs will be created not just because FDI in retail is allowed. On the other hand, global retailers are likely to generate less employment for every million rupees in sales revenue than say, a small store. (see here)
• The main palliative proposed by Government to placate the objectors is to place various restrictions on the global retailers, such as confining them to the larger cities, having minimum space requirements etc. Ironically, these are the precise restrictions they would not mind but even welcome, because they exactly fit into their plans. These retailers would naturally like to enter in the large urban markets with large retail space and not some small cities. Is any more proof necessary to show that the government is actually trying to help the global players in the name of protecting the domestic players? Other conditions proposed relate to setting up back end facilities such as cold chain etc. Again, the retailers are here to make profits for themselves not to do the job of others. If at all they set up any activity other than the front-end, they will do it only for their own requirements. It must be noted that once a foreign company operates as an Indian entity, there is no way to impose any discriminatory conditions on them. Even if that is possible, the conditions cannot be enforced and if they fail to fulfill them, in practical terms, they cannot be asked to pack up and go. The Government would not be so naïve as to think otherwise.
• All the benefits which have been listed are in the end unverifiable as they cannot be directly correlated with the presence of FDI. Once the global retailers are in they are in and no one is going to verify whether the benefits they held out actually accrued or not and if not, nothing can be done about it.
• Three of the benefits which the Government has suggested deserve particular mention as they show bankruptcy of thought as also an implicit admission of the failure of the policies of the Government.
  The first is that with the entry of foreign retailers, government will be able to check tax evasion by local retailers. This is a completely anti-national argument and also denotes a brazen admission by the government of its failure in the discharge of its normal responsibilities to enforce its tax laws.
  The second is that the entire back end supply chain infrastructure will suddenly develop and there will be large scale food processing, reduction of wastage, creation of warehousing and logistics facilities etc. and FDI will be an “efficient" means of addressing massive supply bottlenecks. Quite extraordinary and incredible assertion this! The retailers are primarily interested in their front-end operations unless the back-end operation is essential for its own purposes, as can be seen from a statement by the MD of Bharti Walmart recently that their primary interest (logically) is in front-end “in order to be able to monetize and see the final benefits of the supply we need to be able to serve our customers” (here) But that apart, this claim by the government is an admission that all its policies including liberalization of FDI in back-end activities, incentives for food processing etc. have failed and the Minister for Food Procesing S.K. Sahay is only good for releasing full page advertisements of his ministry showing pictures of his party boss at public expense.
  A third assertion, the most bizarre, particularly coming from the Prime Minister no less, shows to what extent the Government is pushing the case for FDI in Retail. Speaking at a Conference of Chief Ministers recently, the Prime Minister batted for opening of the retail sector (meaning FDI) to check price rise! ( see here) What his Agriculture Minister has failed to do for such a long time, the PM thinks the global retailers will do. Such a wild assertion indicates that the government is probably unaware of what the real determinants of retail prices are, to expect that these retailers will be able to reduce the price levels in this vast country by just having shops in some urban areas. This is simply another proof that the Government has completely failed and is looking to external help and that too of multinationals to do what the government is supposed to do! This one single assertion by Manmohan Singh is enough for people to lose respect for his knowledge, understanding and ability to govern.
  With these three arguments the government effectively implies that the Ministries and Ministers of Finance, Agriculture and Food Processing have lost their raison d’etre.

It is clear that the stage has not yet come for FDI in multi brand retail to be allowed under whatever conditions as to shareholding or any operating restrictions. The Government is simply putting the cart before the horse and trying to push “incompatible opening” using the expression in a study. Incompatible opening refers to “excessive” market liberalization not in tune with other changes in domestic structures – production as well as market related.

It is too tempting not to make a comparison with the past when Emperor Jehangir allowed East India Co. to set foot in India (see) or with the outsourcing of defense to the British by certain princely states.

Who says we must always learn from history?