You are on page 1of 13

ARE WE A NATION OF SHOPKEEPERS?

By Jully Acharya

Heavens are not going to fall with the entry of Foreign Direct Investment (FDI) into the organised retail sector in India. It would rather benefit a larger community of consumers and farmers who have been exploited by middlemen for generations. Maybe people have a problem with the word foreign because Indians have suffered enough under foreign rule and naturally we desist anything foreign. But in hindsight, FDI in retail will bring in much more advantages than disadvantages. The union government had on November 24 allowed up to 51 per cent FDI in multi-brand retail trading and enhanced the FDI limit to 100 per cent in single-brand retail evoking large-scale protest from the BJP, the Left parties, half a dozen regional parties and other vested interests. India may not require the estimated $10-billion FDI at the cost of providing market access to foreign retail giants, but there is a pressing need to get rid of intermediaries or the so-called market forces which have been thriving for no good reason. In the current dispensation, there is a complex chain of procurement involving several middlemen who only make profit and are known to be tax evaders. FDI in retail is expected to bring in changes in the APMC Act that would lead to direct procurement of horticultural produce like fruits and vegetables from farmers to enable them get higher price. Currently the Indian farmer realises only one-third of the total price paid by the final consumer as against two-third with higher degree of retail. It means if you and I are paying Rs 90 for a kg of dal, then the farmer only gets Rs 30 and the rest is eaten away by layers of intermediaries who actually deserve no sympathy. In case of direct procurement he gets Rs 60. According to a 2007 World Bank Study a horticulture farmer in India receives only 12 to 15 per

cent price of what is paid at the retail outlet. In other words, if a kg of ladies finger is sold at Rs 50 in the market, the farmer who painstakingly grows it by taking utmost risk only gets Rs 6 to Rs 7.50 while the salaried-class income tax-payers pay the full amount to the retailer. FDI DEADLOCK! How not to make policy! By Rajinder Puri Good governance depends upon good policies and good implementation. If the implementation of policy formulation itself is horribly flawed what hope might be placed on getting good governance? The current controversy over the governments decision to allow Foreign Direct Investment (FDI) in multi-brand retail reveals the sorry performance of both the government and the opposition in their approach to formulating policy. What compulsion impelled the government to suddenly announce FDI in retail not only during a parliamentary session but on the eve of assembly polls in four states? With an eye on votes would the opposition react in any which way except to vehemently oppose the proposal with populist vehemence? Was the government compelled to act due to some hidden reason involving pecuniary advantage to somebody or some group or some nation? Did the opposition lack sufficient ammunition to flay this corrupt and tainted government to garner votes without irrevocably committing itself against a policy proposal that deserves serious consideration? There is much to commend FDI in retail trade. There are many valid concerns about introducing it. What was required was a serious debate to consider the pros and the cons and to explore whether adequate safeguards could be devised to address genuine concerns before arriving at a final decision about this proposal. Instead the government is stubbornly clinging on to the policy without participating in a transparent discussion with stake holders. Sections of the opposition have announced resolve to burn down any foreign retail outfit that dares to enter the country. How pathetic! Undoubtedly there are some advantages in allowing FDI in multi brand retail. The 40 percent wastage of foodstuffs due to poor storage infrastructure could be avoided. There would be new jobs in creating that infrastructure. There would be an impetus to agro industry that could substantially increase employment. There could be a surge in the manufacturing sector which is badly needed. There could be better price for farmers. There could be better quality and price for consumers. But there are serious concerns too. Small farmers could suffer. Small traders could suffer. Local corner shops could close down. There could be large scale displacement and unemployment. Foreign multinationals could gain disproportionate influence to dictate the market. Benefits need to be weighed against losses and it has to be seen whether the losses can be altogether avoided. For that a serious debate is required. For that innovative ideas are required. For that amendments to the governments declared policy are required. Belatedly Finance Minister Mr. Mukherjee pointed out that the cabinet had declared only an enabling policy which need not be implemented by a state opposed to it. Why are many opposition leaders therefore so violently disturbed? Let the states supporting the policy implement it and those opposing it block it. Time will tell which state progresses faster. Both the Punjab and the Gujarat chief ministers have welcomed the policy. In fact a modest pilot project for FDI in retail trade has already started in Punjab. Wal-Mart entered into a joint venture with Bharti Enterprises for wholesale business and started the Best Price stores. With a 51 percent

stake Wal-Mart could go really big in Punjab. Apparently the farmers in Punjab are happy with the prospect which is why Mr. Prakash Singh Badal is strongly supporting the policy on the eve of the Punjab assembly elections. Belatedly also the government backed down and clarified after Mrs. Sonia Gandhis suggestion that the 30 percent reserved for procurement from Small and Medium Enterprises (SME) should be only for domestic outfits. Retail chains would be debarred to procure from global SMEs. A similar safeguard could be introduced for small retailers as for small wholesalers. Government could insist upon the big retail chains reserving 30 percent of all products for sale on their counters for purchase by corner shops at wholesale prices leaving the identical profit margin at a fixed price for their retail sale. This would strengthen small retail shops instead of threatening them. In addition the government could stipulate that that a percentage of FDI should be spent towards building up infrastructure, logistics and agro processing units. It could also be stipulated that at least 50 per cent of the jobs in the retail outlet should be reserved for the rural youth. The government could also reserve the right to procure a certain amount of food grains for replenishing the buffer. The governments could establish a regulatory mechanism to prevent the retailing giants from predatory pricing or acquiring monopolistic power. The government could evolve suitable policies to protect retailers in the unorganized sector. The feasibility of these and other safeguards could be proposed and considered in a meaningful debate. Instead the government for obscure reasons and the opposition for electoral reasons have scuttled necessary debate and adopted hardened positions on a potentially gainful policy. From being a rising economic power India is rapidly sliding downhill. The decline will not be halted unless the political class becomes sufficiently committed to the national interest as against its singular obsession with electoral and partisan advantage.

Commerce and Industry Minister Anand Sharma while justifying the cabinets decision said that there had been an urgent need to curb post-harvest losses and for this an efficient cold chain and retail logistics network was required. Foreign retail giants with considerable experience, management expertise and with deep pockets can make it possible, he said. Though India produces 200 million (one million is 10 lakh) metric tonnes of fruits and vegetables, the worlds second largest, it has a very limited integrated cold-chain infrastructure. Out of its 5386 stand-alone cold stores, 80 percent caters to potato traders only. The governments view is that lack of adequate storage facilities causes heavy losses to farmers. Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs 1 trillion (Rs 100,000 crore) per annum of which 57 per cent is due to avoidable wastage. As per some industry estimates, 35 to 40 per cent of fruits and vegetables and nearly 10 per cent of food grains in India are wasted. Though 100 per cent FDI is permitted in cold chain, the absence of FDI in front-end retail has impacted investment flows into this sector. The governments retail FDI policy mandates a minimum investment of $ 100 million (Rs 502 crore) with at least half the amount to be invested in back-end infrastructure like cold chains, refrigeration system, transportation network, packing, sorting and processing. HURTING DOMESTIC INTERESTS By Arun Jaitley The United States of America and the European Union have been seeking that India permit

Foreign Direct Investment in its retail trade. India has obviously resisted the demand till date. Their object is that large international chain must control the food supply chain and the distribution of other items of daily utility in one of the worlds largest markets, which accounts for over one-sixth of worlds population. In any trade negotiations, you seek counter-concession for concessions you grant. Increasingly, both the USA and the European Union have become more protectionists. Without extracting any concession back, we have taken a unilateral decision, gifting to their retailers the right to control the distribution network in India. It is good to be a reformist. Traditionally, a lot of us find ourselves on the side of reforms but every change is not a reform. Changes which may end up hurting domestic interests are really counter-reforms. The time for allowing FDI in retail sector in India has still not come. In recent years, both small and organised retails have grown. A significant investment is being made year-after-year. The pace at which domestic retail is growing is modest and it is able to coexist with small retail. However, at this stage, if international retail majors are permitted the consequences will be adverse. The first consequence will be an adverse impact on domestic manufacturing. Domestic retailers source domestically. International retailers operate on the principle of buying internationally at the cheapest cost. Majority items to be sold by international retailers are going to be sourced from cheaper manufacturing economies like China. Clothes, shoes, toiletries and other items of daily use are not likely to bear Indian signature. The fall in manufacturing sector jobs is likely. India needs manufacturing sector reforms in the first instance, so as to enable us develop into low-cost manufacturing economy. For this, we need to improve infrastructure, low-cost utilities, competitive interest rates and trade facilitation. Once these reforms bring down the cost of our manufacturing goods, we can expect international retailers to source domestically. In the absence of these reforms, international retailers will be selling the products of low-cost economies, leading to an adverse setback to our already challenged manufacturing sector. The character of the Indian economy is service-sector oriented. The latest NSSO survey shows a loss in employment. Self-employment continues to be the largest single source of bread earning. Agriculture and retail are the largest job providers in India. Is international retail going to give additional jobs, or is it only going to displace existing jobs? If purchasing power increases with the expansion of Indian economy, it will reflect in the co-existence of structured organised domestic retail and small retail. International retailers with deeper pockets will displace existing jobs in the retail sector, rather than creating additional jobs. A fragmented market is always in consumer interest. A consolidated market restricts the consumer choices. Thus, if the number of establishments is reduced and consumer options are eliminated, structured retail is hardly likely to serve consumer interests. It can even lead to international retailers with deeper pockets to first sell at low prices, eliminate competition and then exploit the consumers. The consequences of predatory pricing can always be felt. The Chinese example is thoroughly misconceived. The international retailers like Walmart source their products from China, which they also sell in China and a large number of other countries. China gains hugely because its products are sold all over the world. It can hardly argue

that you must source the products from China but not sell in China. Much is being made out of the backend infrastructure like cold chains will develop only when international retailers enter India. Cold chain is neither a rocket science nor a proprietary technology. It seems bizarre that in order to set up a chain of cold storages it can be suggested that food distribution chain of India be handed over to corporations controlled by foreign entities. The farm-gate to the factory-gate argument is based on the logic that once middle-men are eliminated, the farmer will get more and the products will become cheaper. The only agricultural product in the domestic market, which currently follows the farm-gate to factory-gate principle, is sugarcane. If only the market forces operate without the help of a state-advised price, the cane growers would have been put to starvation. If the farmer does prosper on account of international retailers then why it is that the farmers in the USA and the EU have to be subsidised to an extent of $1 billion each day. FDI in retail cannot be introduced merely as a knee-jerk response because the government is suspected to have abandoned economic reforms. We are not opposed either to the concept of FDI or giving an additional thrust to the reform programme. Changes which hurt the Indian economy can hardly be termed as reforms.

This is expected to considerably reduce the postharvest losses and bring higher prices to farmers. The opening-up of multibrand Retail will also have a salutary impact on food inflation as it would contribute to savings to the food which perishes on account of inadequate infrastructure,Sharma said. Huge investments in the retail sector will see gainful employment opportunities in agroprocessing, sorting, marketing, logistic management and the front-end retail business, he added. Government estimates suggest employment of one person per 350-400 sq.ft of retail space and about 1.5 million (15 lakh) jobs will be created in the front-end alone in the next five years. Assuming that 10 per cent extra people are required for the back-

end, 1.7 million (17 lakh) direct employment would be generated by the organised retail sector in five years. Millions of indirect employment would be created in the supply chain. FDI-funded retail sales locations would be set up only in cities with a population of more than 10 lakh and as per this criteria only 53 cities qualify for FDI in multi-brand retail out of which a maximum of 25 cities may have such stores as several chief ministers have vowed not to allow retail FDI in their states. India has nearly 8,000 towns and cities and the fear of opposition parties and traders bodies is unfounded that organised retail would eat away the small retailer or kiranas known as pop and mom stores in America. UPA IN THE DOCK As it pushes its pro-American agenda By Renu Mittal Yet again Dr Manmohan Singh has put the entire Congress and UPA in the dock and on the defensive as he once again pushes his pro-American and pro-reform agenda. The question being asked in the Congress and the Government is whether he has once again pushed the party to the brink and whether FDI in retail is gathering enough momentum to put the government at risk. After the Indo-US civil nuclear deal which nearly brought down the UPA government, Dr Singhs latest project is to allow Foreign Direct Investment in multi-brand retail, an exercise which would put at risk the livelihood of crores of small, marginal and middle level shopkeepers and traders, without the government providing any alternative structure or plan for them to fall back on. The cat was brought out of the bag after the issue was cleared in the core committee and then brought to the cabinet where Dr Singh and his band of pro-reform and pro-American ministers backed him, ignoring the opposition from within the Congress and from the allies. After the comprehensive manner in which Sonia Gandhi has marginalised and virtually dumped the Congress Working Committee (CWC) except to pass obituary references, there is no platform where even senior party leaders are consulted or even informed on what is on the policy plate of the Congress-led UPA Government. A group of leaders who have no connect with the grassroots and are not even in touch with their own party MPs to get feedback on various issues. Due to her illness Sonia Gandhi did not address any general body meeting of the Congress Parliamentary Party (CPP) in the monsoon session of Parliament and there was only one CPP meeting in the budget session of Parliament. Recently a meeting of Congress MPs was called but it was adressed by Pranab Mukherjee and the agenda was black money and inflation.

The decision to bring in FDI in retail has come just before crucial assembly elections in Uttar Pradesh where Rahul Gandhi has been working to revive the moribund Congress, in Punjab and Uttarakhand where the party is hoping to win the elections and make a comeback. MPs from these states are upset over the timing of the decision. Congress MP from UP, Sanjay Singh has come out in the open opposing the decision on FDI in retail saying it will hit the poor people of a backward state like UP. He said that MPs were neither informed nor consulted. He has asked the Prime Minister to reconsider the decision. An ex-MP of the Congress who is known to belong to the pro-American lobby is also deeply upset. He said that as Congressmen they do not have the guts to speak out but privately he called it an anti-national decision saying it will have far reaching consequences for the people and was not in the interest of either the Congress or the nation. A number of MPs and leaders are questioning the role of Sonia Gandhi in agreeing to allow the FDI in retail. So far she has been pro-active in taking decisions which may benefit the poor and marginalized sections even though the Prime Minister and the pro-reforms lobby has been opposing some of her initiatives. But how and why she has allowed this, remains a matter which is being discussed in detail within the party. In her first public speech made after her surgery abroad, the Congress president did not refer to the issue of FDI in retail but merely focused on corruption and asked political parties to help pass the Lokpal bill. There are apprehensions that the FDI in retail may turn out to be a more serious issue for the Congress and the government than is currently being estimated. It is being compared to the Shah Bano case where an inner rebellion within the Congress led to the first dent in the huge popularity of the Rajiv Gandhi government. In the current scenario, the popularity of the UPA government is at an all time low. Faced with charges of corruption, indecision, lack of direction and a lack of focus, the Congress-led UPA is perceived as a government which is at war with itself, its allies and of course the opposition. At the time of the nuclear deal when the left pulled the plug on UPA I, Dr Manmohan Singh could fall back on Samajwadi Party and Amar Singh to fill up the numbers. But today both the SP and the BSP are aligned against the Congress because of the coming UP elections. The partys two allies the Trinamool Congress and the DMK which provide the magical numbers to add up to a majority are against FDI in retail and the Kerala unit of the Congress has been the first to come out in the open and say they will not support FDI in retail. Parliament has continued to stay paralysed from the first day itself and not a single bit of business has been enacted. In a meeting of leaders of political parties called recently, Pranab Mukherjee made it clear there is no question of going back to the cabinet with the decision. He said it after the prime minister told the core committee the night before that he will not agree to either a rollback or even a dilution of what has been cleared by the cabinet.

BJP leader Sushma Swaraj said that the government could either roll back the decision or agree to an adjournment motion in the House, which is their condition to let the House function. Another senior BJP leader has privately offered the option that the government can roll back the FDI in retail from 51 to 26 per cent but this is not the consolidated view of the BJP but merely a section of it, which is perceived to be pro-reforms. While sources admitted that neither the government nor the Congress party was expecting such a strong reaction to the decision, a meeting of the Congress core committee was held recently which took stock of the logjam in Parliament and discussed various options open before the government. One of the options discussed was to refer the matter to an Empowered Group of Ministers (EGOM) and later bring it back when the timing was better suited to the government. This was done when Mamta Banerjee had opposed the manufacturing policy. The matter was referred to an EGOM headed by Sharad Pawar and within a short period the policy was activated. Sources say another option which was discussed was to make some changes, which may satisfy the opposition but it is learnt that the Prime Minister is not agreeable to any dilution of the policy and wants it carried intact. Commerce Minister Anand Sharma, at the prompting of Sonia Gandhi has written to leaders of political parties explaining the policy and making it clear that 30 per cent of the items sourced by the chains should be from the small scale sector. Earlier it was anywhere in the world but now they say it should be from within India. He has also clarified that it is up to the state governments to accept or reject the decision to bring in multi-brand chains and they can take their own decisions in their own way. But sources in the Commerce Ministry say that it is not possible to put a condition which says that 30 per cent must be sourced from small and medium enterprises in India and that it is nothing but an eyewash at the end of the day. The Congress virtually stands isolated in Parliament over FDI in retail though from outside, Indian industry is also pushing the cause, asking political parties not to paralyse Parliament. The question is that in the face of the strident opposition by political parties, is Pranab Mukherjee going to bring something extra to the table to convince them to let Parliament run? And the second question which is being asked by everyone including Congress MPs and leaders is why the Prime Minister brought this policy to the cabinet in the middle of the Parliament session and why the government could not wait for another month? What was the urgency which dictated this decision and which were the forces which dictated that the decision be taken so quickly?

leaders privately admit that the party leadership has lost touch with the sentiments at the grassroots level and this is particularly true of the PMO, which is pushing decisions on reforms without realising that the Congress-led government is already in trouble over various issues like corruption, pressure to bring the Lokpal bill, etc and at this point it can ill afford a confrontation on any issue which is seen neither to be emergent nor urgent. Lok Sabha MPs who have to face the people and elections are upset at the manner in which Rajya Sabha MPs and ministers who do not have to face elections are calling the shots and pushing decisions at the cost of the party.

In the current regime, 100 per cent FDI is allowed for wholesale cash-&-carry formats from which small retailers are source products at cheap prices for sale to customers. The provision for 30 per cent sourcing from micro and small enterprises would benefit local firms. Though the cabinet has passed the policy and it would be up to the state government to allow such a policy to be implemented in their states. The FDI policy is only an enabling framework and it would be the prerogative of the states to adopt it. Competition Commission of India is available to deal with any anticompetitive practices including predatory pricing, as feared by the some. Under the current regime of 51 per cent FDI in single-brand retail, foreign direct investment of only US$ 44.45 million have been received in the last five years which is barely 0.03 per cent of total FDI inflows to the country. While traders have come to the streets pressing for a rollback of this policy,

industry associations have welcomed the governments move. CII strongly supports the introduction of FDI in multibrand retail recognising that it would benefit the consumers, producers (farmers) and small and medium enterprises and generate significant employment, said B Muthuraman, president, Confederation of Indian Industry (CII). India with an 8 to 9 per cent growth in GDP is a consumer-driven economy and modern retail has to step up to be able to meet up consumer aspirations not only in metro cities and towns but across the Indian subcontinent, Muthuraman said 51 per cent FDI A VICIOUS CIRCLE? By Pinky Anand The upheavals in the Parliament in the last few days clearly show the fallacy of the UPA governments latest scam. As if there was any dearth of scandalsnow it is the new project of 51 per cent foreign direct investment in retail. As I often say, we cannot blindfoldedly adopt foreign policies, transport them and seek to implement them in India, with complete disregard to our own indigenous considerations. We are a country built on a large multitude of people and any policy adopted by the government cannot ignore the plight of people whose lives and livelihood are dependent on small neighbourhood businesses. We are a country where local markets and bazaars fulfil the needs of the community. The lopsided capitalist policies of the West have failed them leading to a turmoil and the MNCs of the West are looking for greener pastures and Indias large 100-billion markets is enticing them to conquer and command. The country is on the verge of being trapped in multinationals vicious cycle. The UPA government under the leadership of Mr Manmohan Singh has consistently endeavoured to protect the interest of capitalist multinational companies; that too at the cost of the common people. In the era of Nehru and Indira Gandhi, India was having a mixed economy having colour of both socialist and capitalist. However, during Rajiv Gandhis regime, the capitalist lobby in the country successfully managed to divert the Indian economy on the track of distorted capitalism. During the regime of Mr Narasimha Raos government, Mr. Manmohan Singh as Finance Minister of the country opened the entire country for the capitalist lobby and gave them a free run. Mr Manmohan Singh remained the nodal person for the capitalist lobby in the country during UPA I & II regime. As Prime Minister also, he remained most vocal and instrumental in protecting their interest. Mr Manmohan Singhs latest venture to pave the way for multinational companies in the Indian retail market will have a disastrous and cascading effect on the livelihood of more than crores of people in the country. India is having a population of more than hundred billion and a large cross section consists of

poor people. To meet their livelihood and day-to-day needs, over two crore people are engaged in retail business directly and indirectly. In case FDI is allowed to intrude in Indian retail markets, it will become a monster for all the tiny and small businessmen who are fulfilling the demands of Indian people by establishing neighbourhood shops and small businesses. Multinational companies with their immense financial strength will slowly and surely start ruling the entire domestic retail market and eventually monopolise the entire market. Capitalist mode of economy has inherent issues as it does not take into account the principle of maximum benefit to maximum number of people. Even otherwise the ideal laissez faire is distorted by artificial demands and monopolistic practices. USA, which is the ideal laboratory for capitalist form of market is facing a crisis with unemployment and falling markets. In todays time, USA economy is struggling hard to survive on its own because of massive job crisis and inflating budgetary deficits. Mr Manmohan Singh Cabinets decision to allow 51 per cent FDI in retail will eventually eliminate the small shopkeepers and businessmen who have been into the retail business for last several generations. Though on the face of it, impact of 51 per cent FDI in multi-brand retail may not appear disastrous for the small businessmen at this juncture. With the passage of time, however, multinational companies would certainly make their reach to remote villages and huts in the country. With their financial strength, MNCs are likely to flood markets with cheaper even substandard products in the initial instance. As consumers always go for competitive price, they will opt to buy goods from these multinationals imperilling the entire business of small businessmen. After eliminating small businessmen from the market race, these multinational companies would re-determine prices of good as per their own whims and fancies. Eventually the consumer would have no option except to approach the multinational company for purchasing their goods at exorbitant prices. It is a well settled principle that in the capitalist form of market, the demand is artificially made to raise the prices of goods and later on profit margin is enhanced under the garb of ample demand. Such cosmetic demand eventually affects the common people as they remain deprived from the best competitive prices for their goods. Predatory pricing and exploitative policies are well known market tools. In case 51 per cent FDI is allowed in multi-brand retail market, it will lead to unprecedented diaspora for small businessmen traders across the country. Though the impact of 51 per cent FDI may not sound too gross at this point of time, however with the passage of time it will destroy and eliminate small businessmen and traders. It will also frustrate the tiny entrepreneurship witnessed at village and small town levels. Outcome of all these would certainly create huge job loss for more than two crore people who are directly and indirectly associated with the small retail business across the country. In future, the consumers at large would also find themselves caught in the vicious web of capitalist-driven retail market and have no option except to pay more money to purchase their daily needs and requirement. This is not the way for us.

The FDI-powered multibranded retail stores or hyper markets are expected to offer discounts from maximum retail price and this could attract urban consumer in large numbers. This in turn will affect the businesses of local kirana stores and according to analysts they may be reduced to catering to impulse buyers and emergency items. This is what causing the heart burn. However, past experience indicates that the kirana will safely co-exist with modern retail outlets as the entry of large corporate houses into organised retailing has not impacted their growth in fact it has made them more competitive. The experience of several Asian countries like China, Thailand, Indonesia and Vietnam has been very good with 100 per cent FDI in retail. And India should not be an exception. FDI may be allowed in retail but it is up to the consumers to accept the format or reject it. Large-scale rejection would anyway force them to shut shop and pack up.