Tuesday, June 07, 2011

Beguiled by the “FDI in Retail” Bug

previous article here

For over six years, Sardar Manmohan Singh has been doggedly persisting to thrust upon the country his idea of allowing FDI in multi-product Retail. It seems to have become his consuming obsession on par with his other objectives of the Nuclear Deal, 9% GDP growth and improving relations with Pakistan.

So smitten by the FDI in Retail Bug he appears to be that he and his government have been trying to push for a policy change to facilitate entry of the global retailers who have beguiled them with fanciful assertions of wonderful benefits that they may bring to the country. Various gambits have been used by the government to deceive the people by bogus arguments, which appear to be mostly cut-and-paste jobs from presentations made by global retailers like Walmart and a handful of domestic large business groups keen to partner with the global retailers and eventually sell their stakes to the foreign partners at high valuations at the right time. The global retailers do not have any philanthropic objectives. What they want is to simply gain a foothold at an early stage in potentially the second largest market in the world for their own profits and increase the value of their businesses by vaguely promising the moon (and other planets) to an obliging government eager to swallow whatever is dished out by them.

Despite objections, the government earlier allowed FDI in Wholesale Cash-and-Carry and later in Single Brand Retail. It has thereafter not bothered to take a review of the actual impact of these policy relaxations simply because little or no benefits have accrued, which was only to be expected. (See the lofty- but unrealized- benefits of FDI in single-brand retail
here) But the relaxation is a fait accompli and cannot be reversed. On multi-product retail, it has just been ignoring the stiff resistance and strident protests and sound objections of the majority of domestic retail trade, political parties (mainly the Left Parties) and others and has even glossed over a Parliamentary Committee Report not supporting FDI in multi-product Retail.

In July 2010, to try and push Manmohan Singh’s agenda before the arrival of US President Obama in India, the DIPP released a “Discussion Paper” seeking views from the public, a completely insincere and mock exercise with carefully devised manipulative questions with exactly half a question actually asking whether FDI in Retail should be permitted! (see previous article here). The government would have been keen to announce a relaxation at the time of US President Obama’s visit. But unlike Bush, Obama’s priority was to create more jobs IN USA itself and not to get Walmart in India. And so, poor Manmohan Singh was forced to miss the opportunity to please him on that score. Unfortunately too, 109 respondents to the Discussion Paper objected and only 69 supported a relaxation. (
here) DIPP at that time in March 2011 chose NOT to make any recommendation, for the reason that opponents to FDI in Retail outnumbered supporters – something they might not have expected.

The Disingenuous Last push
Not ready to give up, Manmohan Singh set up an Inter-Ministerial Group (IMG) in January 2011 under the Chief Economic Advisor, Dr. Kaushik Basu, “to review the inflation situation and suggest corrective measures.” The IMG was entrusted with the task of studying and proposing policies pertaining to (a) food article inflation and (b) macro-economic demand management.

The IMG met three times. In the first meeting (
here), some “important” (read mundane) initial decisions were taken about how information from various sectors of the Indian economy would be collated and systems developed for early warning systems. Issues like link between futures market and price rise, market margins, agricultural productivity issues and the role of State Governments and District administration in price management were also touched upon. In the second meeting (here) there was discussion on the need to revise APMC Act and encourage competition among traders and also to promote efficiency in retailing. Hoping to get support for FDI in Retail, the IMG also invited a private retailer involved in organized retail to make a presentation. Significantly, almost all the points made by that retailer related to better post harvest management and one aspect of APMC but he did not think that cold chains (one principal excuse to justify FDI in Retail) would have a great impact. Only in the final third meeting on 6th May, 2011 (here), where even the RBI Governor made a presentation, various macro-economic issues of real significance were discussed. The IMG Chairman himself emphasized that there was concern that the very nature of global inflation may be changing. (Nothing to do with the structure of retail trade at all)

Manmohan's Genie
(see previous article)

Voilà, the Genie will bust inflation
In three meetings, there was no mention of FDI in multi-product Retail except a fleeting reference once to encourage competition and promote efficiency in retailing. Yet, when the IMG actually came out with its recommendations on 27th May 2011 (here), lo and behold! Suddenly, it pulled out the rabbit from its hat – FDI in multi-product retail – Manmohan Singh’s Genie who will bust inflation which the entire government has failed to do. As it has turned out, the entire exercise seems to have been undertaken only to push one agenda -FDI in multi-product retail.

The pre-determined plan becomes manifest, seeing that the IMG decision was dovetailed to a cabinet note circulated over a week earlier in middle of May 2011 by the DIPP to the Committee of Secretaries seeking views on opening up. The plan became more evident on 18th May 2011 when the Minister of State for Commerce said: “We are committed to the issue on FDI in retail...I think over the next quarter you will see a decision and an announcement…” Even details of an OECD report conveniently appeared on 25th May, 2011 saying that liberalization of FDI in retail sector would help in easing pressures of food inflation.

The Chairman of IMG, Kaushik Basu said “It is time for India to allow foreign direct investment in multi-product retail and the IMG recommends that the government considers this at the earliest. Reform in this sector can be an effective inflation busting measure”. He grandly declared: "We are taking a clear position on FDI in multi-brand retail for the first time.” But who had asked them to take a clear position on a relatively minor side issue compared to their much wider mandate? Was the group formed to consider FDI in Retail and take a position on the same? Rather than seriously dealing with its actual mandate which included macro economic demand management and all aspects related to inflation, the entire thrust of the IMG recommendations is only to open up FDI in multi-product retail with another suggestion on the side for making changes in agricultural produce marketing laws. By implication, these two measures are all that the doctor orders as far as seen from media reports. It is unthinkable that such a high powered group expected to make macro-level suggestions on tackling inflation should come up with a pedestrian recommendation that too, based on false premises which cannot pass muster.

The unstructured and superficial approach and resultant contradiction is evident even at first glance. While claiming that FDI will reduce inflation, in the same breadth it says “However along with FDI in retail, there was need for regulator to ensure that these new corporations do not become monopolistic and charge high prices. Reduction in inflation and charging high prices will happen at the same time? In trying to make out a fictitious case for FDI, the IMG has tied itself up into knots with similar other contradictions.

Bogus assertions
The government has been making almost wild unsubstantiated assertions and presenting devious arguments to support a non-existent case for FDI in multi-product Retail. Each and every such argument has been earlier shown to be fallacious. Not only have the assertions been refuted but even the negative aspects pointed out by various trade bodies and political parties that have dealt with them over this period.

PRAJATANTRA has been consistently highlighting right from 2005, in a detailed manner, the fallacies of the arguments supporting FDI in Retail and trying to show that there is no justification for allowing FDI in Retail at all. See a series of articles referred to
Also see Reports by CPAS
here and here ,
Feedback received by DIPP on its Discussion Paper
here (PRAJATANTRA/Lokadhikar submissions at Feedback 32)
And the Parliamentary Report

Some of the arguments by IMG, including the specious one that it will reduce inflation need to be touched upon again.

For example, the IMG Chairman Basu while talking about the recommendations said: China, Malaysia and Indonesia have had “palpable” benefits by opening up multi-brand retail to FDI. Precisely what were these unspecified “palpable” benefits? What the IMG was concerned with was “INFLATION” and nothing else. Nevertheless, this argument has several fallacies. First, each country has its own structure of retail trade and requirements for retail framework which will dictate government policies for the sector. In India, we have a unique network of hundreds of thousands of small retailers which the government for its own convenience prefers to deride now as “mom and pop” stores but which provides the real backbone of the retail structure admirably serving every nook and corner of the country so far. The reference to China is not relevant, one reason being that China allowed FDI in multi-product retail at a late stage only after having first developed its own organized retail sector to a competitive level. It also happens to have a massive manufacturing base for consumer products that not only meets its own needs but has capabilities to supply the world. Examples of Indonesia and Malaysia which are not comparable in terms of economy, consumer base or the vast retail infrastructure of India are also not strictly relevant. Even if these countries have experienced a positive identifiable impact, do all countries with global retailers have the same experience without any negative impact? Walmart has presence in 14 countries, Tesco in 13 and Carrefour in 34. Have the retail sectors in all these countries been transformed BECAUSE of the advent of the global retailers? And, as the main absurd proposition of the IMG is that “inflation will be reduced” by global retailers; has this happened in all or at least a majority of countries and has any demonstrable cause and effect correlation been established in these countries? And how is it verified on a continuous basis? Has inflation in China, for example, reduced because of FDI in Retail? In fact, this assertion has been proven to be false, as can be seen from earlier articles in PRAJATANTRA.

A fantastic assertion made by Basu is that “FDI in multi-brand retail would also help in narrowing the current account deficit. Attracting more FDI would be useful as it is not volatile like FII flow” Quite incredible poppycock this! In fact, current account deficit may increase over a period, both on account of higher imports and regular outflows. It will increase outflows on imports when the global retailers take advantage of their worldwide sourcing options and compete locally in India with imports from China and other countries - something that will adversely affect even domestic manufacturers. China and other Asian suppliers will have a far easier access to the Indian market for their consumer products through these global retailers and eventually some large retailers from there will also come in. This definite fall-out has already been recognized by IMG saying that “To ensure India is not flooded with foreign goods with opening up of retail, the existing import duty and restrictions if any would continue”. This is absurd, because large quantities of Chinese goods are now being imported by smaller players at the existing duty levels. The global players will simply increase the volumes manifold because their procurement would be at lower cost. And since we are talking about FDI flow in specific sector viz. retail, how will FII flow in general be reduced or become less volatile as claimed? And was checking volatility of FII flows at all a part of the expert advice sought?

Basu also said that opening up of the sector posed no danger to small retailers. “The (retail) cake is so big and it will continue to grow.” Well, if the cake is big and growing, should not the benefit of the cake be shared amongst the domestic players and the wealth generated remain within the country? Just because consumption will grow, does not mean that FDI can be gifted a share in the pie especially as there is no real value-added by the FDI in Retail at the consumer-end. There is nothing that they do which cannot be done by domestic entrepreneurs. The Retail end does not depend upon any rocket science as the government would like us to believe. And there is no dearth of domestic capital for the right project that FDI has to be relied upon. What will happen with FDI is that for relatively small initial investment, the global retailers will suck out of the country by means of dividend repayments, fictitious service charges etc. and appreciation of their equity, many times more than their paltry investment, for all time to come - a continuous drain completely disproportionate to any illusive “benefits”.

The final bogus argument used by IMG, which was also not a point to be addressed by them is that FDI would increase exports. How? A business set up to meet Indian consumer needs will increase exports? For their global sourcing, these retailers already have their specialized sourcing offices in whichever countries they need to source from and a domestic retail operation would have little influence on their global sourcing which would depend upon the most competitive source anywhere in the world.

All these arguments are presented by IMG acting only as apologists for FDI in Retail and not for addressing the larger mandate.

Many other mendacious arguments like employment generation etc. will be bandied about again in the Government’s Goebellian ways, all of which have been refuted. The Government has quite deceptively been trying to equate organized retail with FDI in retail to project some of these benefits. Organized retail from domestic entrepreneurs has been increasing and will continue to increase as a logical evolution and development of the retail sector which should be left to be decided by market forces. Some benefits may also accrue long term from organized retail. But that is not to say that Organized Retail means and is equated to FDI.

Reduction in Inflation? –Lies and Deceit
It is a preposterous lie to suggest that inflation will be reduced due to FDI in Retail as it relies on deliberate obfuscation. Inflation is the overall general upward movement of prices in an economy. It relates to the rate of inflation, that is, the variation in price levels from one period to another. (e.g.
here) This is the basis of the Inflation Index – e.g. WPI - and it is the continuous high rate of inflation that was to be addressed by IMG.

The real reasons for the back-breaking inflation of food articles have to do with fiscal and monetary management, working of MSP mechanism, demand-supply management, failure to augment storage infrastructure, forward trading, inflation in input and transportation costs and such macro issues. In India in the last few years, a major factor for sudden price spurts has been the deliberate and manipulative mismanagement of demand, supply, export, import, MSP and storage for government procurement from high levels of government, which allowed speculators, hoarders and vested interests to fuel inflation and make billions at the cost of the aam admi. These manipulations have been no less than the other massive scams seen in recent years. Yet, the Prime Minister has failed to address even this known issue.

All these issues are squarely in government domain. So for a committee of the best experts within the government to make a facile suggestion of allowing FDI in multi-product retail as the best solution to reduce inflation creates a grave doubt about the capabilities of those in charge of economic governance! This question is extremely pertinent as the Government headed by an economist of world-acclaim, supported by an all-knowing Padma Vibhushan Deputy Chairman of the Planning Commission, a senior Minister with years of experience in charge of Finance Ministry and scores of pseudo-experts have miserably failed to pinpoint or find solutions to tackle the causes of the unacceptable inflation, moving like babes in the woods. Worse, from PM down to bureaucrats all have been deceiving the public month after month that the worst of inflation was over, it had peaked out and prices would start stabilizing or going down without having a clue as to the whys and wherefores.

Where is the role of FDI in multi-product retail in actually “reducing inflation” i.e. rate of inflation or WPI as a whole or even for food sector from period A to period B and so on? How can it influence the basic determinants (see above)? What magic will it do that prices will start reducing progressively? Will they just keep reducing their own prices regardless of their input costs not going down? Are there any logical calculations to show this amazing feat and its mechanism at least on paper? What exactly is the principle? Is it only based on the theory of competition? If so, do we need to import even competition?

While arguing that FDI will reduce inflation, IMG again contradicts itself saying “it can have a sharp desirable effect in the short-run of bringing inflation down in food articles”. There, the cat is out of the bag. So, is this so-called “reduction in inflation” from FDI going to be for the short-run? And how soon can this happen – say next month or one, two, three years after a global retailer arrives? And how long will that remain? And for such doubtful short-run impact, we allow them a permanent foothold? Does the Government so firmly believe in the complete gullibility of the country that it is trying to play this deception and fraud by lulling the people’s worries with such false assurances?

Basu presents another disingenuous obfuscation: “the main cause of Inflation is the yawning gap between farm-gate and retail prices of agri-products and this gap will be reduced considerably as in other countries by opening up organized retail, thereby helping in controlling inflation.” Is this the MAIN cause of inflation, really? (Which other countries? substantiate with evidence) Indeed, a large gap between farm-gate and consumer price which remains constant could not be a cause for the “INFLATION” which is the result of variables for the specified period. Secondly, see how cleverly, FDI is confused and equated with organized retail? Again, there is nothing to substantiate the hypothesis that the “yawning gap” between farm gate and retail prices will be reduced merely and ONLY by FDI, because even that gap is the result of various factors over which the retailer has no control. For a proper understanding, the “yawning gap” must be broken down into various cost components and systematically analyzed to see to what extent and by what means the gap can be reduced and where does the Retailer fit in towards achieving this. IMG itself suggests changes in APMC Act “to reduce the price gap between farm gate and consumer prices”. Is it not what they claim that FDI will do? Another contradiction! Furthermore, there is evidence that in some countries the farmer realization has, in fact, been reduced to the gain of the global retailer.

Another fake argument by IMG is that retail continued to be primitive and there was evidence that there are large losses that occur as products pass through the supply chain from farm to the retail customer. “Because of dated technology and managerial methods used to move products from one part to another, there is value erosion that occurs all the way. This, in turn, raised the price that consumers have to pay” All this is supposed to be cured only by FDI in Retail. The argument that supply-chain improvement and outdated technology needs FDI in Retail to address is false. In today’s liberalized environment, the Indian entrepreneur has no difficulty in sourcing the best in terms of technology and managerial know-how from anywhere in the world to improve the supply chain. Each component of the supply chain is a distinct activity and no global retailer is going to get involved in the entire supply chain except perhaps to meet his own needs in a handful of products. To suggest that FDI in Retail can transform the supply chain which feeds the entire domestic needs is laughable. Are supply chain considerations not relevant for small traders? From where would they get their requirements? Each operation from farm level to warehousing to transport to cold chains (where relevant) has to be tackled, independently of the retail shop, at the macro level on a massive scale for any real “transformation of supply chain”, not just one or two global players catering to their own needs. The cold-chain issue is pertinent only for fruit and vegetables, poultry, fish and meat, and milk products for many of which facilities exist already but the demand for frozen raw produce is still not growing in a big way, the preference being still for fresh products. And if even the government with all its capabilities to incentivize entrepreneurs has failed for such a long time to do anything to transform the supply chains why then do the ministries of food processing and agriculture exist and how will FDI in Retail do it?

Even being completely charitable to the false assertion that FDI at the Retail end will bring down inflation or even the price-gap between farm gate and consumer price, where in the country and for how many products will this happen? The scourge of inflation and high prices is spread over the length and breadth of the country and felt by 1.2 billion people. IF, by the Government’s own proposal, the global retailers come in a few cities, any favorable impact (doubtful) would be localized in the area where they operate. How can their existence make any difference to countrywide price levels and even in their area, in how many products from the basket of hundreds of food articles? Would it make a difference to the overall WPI and headline inflation with which the IMG was really concerned? Is the IMG suggesting that these factors of supply chain and retail structure deficiencies which are a given, have been the causes of high rate of inflation? Did we have such high inflation over all these years? If the same conditions have persisted over the years, how could the inflation increase due to these constant factors? How the problem of inflation would be addressed by FDI at the Retail end, even assuming that only FDI can set right these deficiencies across the total spectrum? And most importantly: do these “experts” conclude conversely that inflation would not be controlled or reduced unless FDI is allowed – which is the main recommendation? Should such nonsense ever be considered? Is there any estimate or even guesstimate, howsoever wild as to by what points would the inflation be “reduced” by the FDI Genie? Is such an effect verifiable at all? And who is accountable if that estimate is proved wrong? Let the Government present a White Paper (or Green Paper) with proofs, evidences and calculations to substantiate whatever it says will happen. It will not. It does not have a record of transparency.

Point to Ponder - why the desperation?
It is not for the domestic stake-holders to prove harm, to object to FDI in retail. It is for the government to convince the stake-holders with demonstrable and provable arguments. This the government has failed to do in spite of many assertions of mythical benefits but expects the stake-holders to take its word or prove otherwise. Argument that FDI will be allowed with A or B restriction or condition holds no water when the proposition itself is fundamentally unsound. Even so, the "restrictions" themselves are devised to actually suit what the global retailers want. Manmohan Singh might have given a commitment to outsiders just as in the case of the Nuke deal, to open up FDI in Retail as retailers like Walmart have apparently been made privy to the policy change in advance.

The question that needs an answer is: Is this change in policy, having no major significance in the larger context so crucial to Manmohan Singh only because of his personal commitment or a desire to earn praise as a champion of free trade, that the government is hell-bent on riding roughshod over so many objections? Or, as the experience of the last few scam-filled years shows, there is more to it than meets the eye with the whiff of some quid pro quo? Has someone in a position to influence government decisions taken a lesson from what Jahangir did while granting permission to the East India Company to set foot in India? Read on:

see full letter here

The present government or the person heading it has absolutely no credibility left that would convince us that their decisions are based purely on objectivity.