- Posted September 14, 2012 by
Retail FDI- India’s Quigmire
The government of India has again succumbed to the pressure of US. Once again it has shown that it lacks vision and the can take decision under the pressures of outsiders that may not always be in the best interest of the country. The Indian Union Cabinet decided to operationalize 51 per cent FDI in multi-brand retail, but left it to the State Governments to allow setting up of big box stores. Apart from reviving this stalled decision, the Cabinet also cleared 74 per cent FDI in cable operations and DTH companies. Forty-nine per cent FDI has been allowed in the civil aviation sector. While the FDI is welcome, its use in retail sector has been a matter of contention. When last decided, the opposition from even the partners in government itself was so strong that the proposal had to be shelved.
This time too almost immediately a storm of protest broke with the Opposition slamming the Government for reviving the decision to allow FDI in multi-brand retail which had been put in the cold storage after similar protests last year. The BJP called it a “betrayal of the people”. The Left described it as the desperation of a “bankrupt Government”. The Trinamool Congress, an ally of the Congress in the UPA, said its representative had not attended the meeting, the party “was unaware” that FDI in multi-brand retail was on the cards and it remains “totally opposed” to it.
The Cabinet cleared a slew of decisions on FDI at a meeting on Friday evening. The meeting began with the Prime Minister telling his colleagues “the time for big bang reforms has come”.
For single-brand retail, the Cabinet decided that any firm, seeking waiver of the mandatory 30 per cent local sourcing norms, would have to set up a manufacturing facility in the country, the Minister added.
In November, 2011, the Government had approved 51 per cent FDI in multi-brand. This was, however, put on hold due to political opposition, including from UPA constituent Trinamool Congress.
The Cabinet has also approved the sale of the Government’s minority stakes in four public sector firms — Hindustan Copper, Oil India, MMTC and Nalco — to raise up to Rs 15,000 crore.
The Cabinet Committee on Economic Affairs (CCEA) has, however, not taken any decision on disinvestment of Neyveli Lignite, that was also on the agenda.
The Government has approved the proposal to sell 10 per cent stake in Oil India Ltd and another 9.59 per cent disinvestment in Hindustan Copper Ltd, sources said.
Further, the CCEA also cleared the proposal of 12.15 per cent stake sale of Nalco and 9.33 per cent in MMTC through Offer for Sale (OFS) route.
However, the 5 per cent stake sale of Neyveli Lignite was not taken up by the CCEA, sources added.
Finance Minister P Chidambaram had last month asked officials to expedite the process of disinvestment so that state-owned companies could hit stock markets in time and help the Government achieve the target of Rs 30,000 crore in the current fiscal.
Although five months have passed in the current fiscal, the government has not been able to come out with a single public issue.
Raising adequate funds from disinvestment was necessary to keep in check the fiscal deficit which is facing pressure due to rising food, fuel and fertilizer subsidy bills.
The government earlier deferred the initial public offer (IPO) of Rashtriya Ispat Nigam Ltd (RINL) due to weak stock market conditions. The Rs 2,500-crore RINL issue was originally proposed to hit the markets in July.
Due to uncertain market conditions, the government in the last fiscal could raise only Rs 14,000 crore from disinvestment against the target of Rs 40,000 crore
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 world’s largest markets, which accounts for over one-sixth of world’s 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, Government of India has taken a unilateral decision, gifting to their retailers the right to control the distribution network in India. And for exerting pressure on India, Obama himself spoke in favour of permtting FDI in retail sector ; and Hillary Clinto visited India specifically for this purpose.
It is good to be a reformist. Traditionally, a lot of Indians find themselves 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 organized 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 co-exist 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 the 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. In recent times a survey by NSSO 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 organized 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 middlemen 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 subsidized to an extent of $1 billion each day.
Foreign Direct Investment 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 program. Changes which hurt the Indian economy can hardly be termed as reforms.
Contradictions and Flaws in the Proposal
And the proposal is full of contradictions and has built in flaws.
The first is that though Central government has permitted FDI, the implementataion ahs been left to provinces. It is the individual state governments that will decide whether to allow foreign supermarket chains to enter. The Congress party-led government hopes this will take the sting out of opposition from regional parties who say the policy will destroy jobs. Tamil nadu, Gujarat and West Bengal have already opposed it. Opponents of the reform include Mamata Banerjee, the chief minister of West Bengal and the most powerful ally in Prime Minister Manmohan Singh's government.
Imagine that while in one state people can enjoy the benefit of big boxes, the residents of neighboring states are deprived of it and that will lead to social tensions.
Secondly, the big boxes shall have to source from small companies. The foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than $1 million. Supermarket chains will certify compliance themselves. There being no overseeing regulatory body, the system shall become a breeding ground of corruption. Just remember that at one time ice cream was reserved for small scale sector and the large companies had just gobbled all those companies as soon as they got permission.
The government will reserve the first right to procure food produce from farmers before companies do, in order to provide stocks for its food subsidy schemes for poor households.
Foreign retailers will have to invest a minimum of $100 million, and put at least half of their total investment into so-called 'back-end' infrastructure, such as warehousing and cold storage facilities. This requirement has to be met within three years of a retailer setting up shop. The experience of the country has been that these three years shall more probably become thirty years and even more longer periods are possible.
Foreign retailers will only be allowed to set up shop in cities with a population of more than 1 million. In states where there are no cities with such a big population, individual state governments can choose where to allow foreign chains to open.
Critics of the new retail policy, including from opposition parties and domestic traders, say opening the doors to the likes of Wal-Mart will wipe out the country's small, family-run neighbourhood stores and trigger mass unemployment.
By restricting foreign firms to cities, the government hopes the supermarkets will become accessible to the country's swelling middle class, while protecting the livelihoods of shopkeepers in smaller towns and rural areas. The government, in a bid to meet the pressure of US, conveniently forgets that even in large cities, papa-mama shops at street corners are to common.
Chief Minister Jayalalithaa flayed the Centre’s decision to allow 51 per cent FDI in multi-brand retail and called for withdrawal of the move which was “totally undemocratic and against people’s interest.”
Noting that the Centre’s decision to leave the States to decide whether they want to opt for FDI or not would create confusion, administrative problems and uncertainty and cripple the growth of the economy, Ms. Jayalalithaa said that the State government “will never allow FDI in retail trade in Tamil Nadu.”
Hitting out at the UPA government in a strongly-worded statement, Ms. Jayalalithaa said: “The UPA government has been making blunder after blunder by adopting many anti-people policies and this latest decision will only add up to one more such serious blunder committed by the Central government which seems to be totally unmindful of the interests of the common people.”
Coming in the wake of the rude shock in the form of diesel price hike, the entry of FDI in multi-brand retail would only increase the woes of people and local traders, the Chief Minister said, “This is an ill-advised move of the Government of India and I reiterate my opposition to this unfortunate and untimely decision.”
According to Ms. Jayalalithaa, the UPA government was always in the habit of diverting the attention of people from main issues by confusing them with such policies. “As I have earlier stated, FDI in retail is neither going to bring down the prices nor improve the investment climate,” she said.
There are multiple challenges exist that need to be overcome. For one, the complex regulatory system in India is the biggest hurdle. There are various acts and laws that govern retail in India – the Shop and Establishments Act (state-wise act), a dated Weights and Measurements Act, the complex tax levy system which lacks a consolidated goods and services tax. Indian organized sector retailers have gone up the learning curve on this front and have processes and systems in place to handle these effectively. Rising real estate prices, especially in the 53 cities, coupled with adequate land availability in the right catchment is another strategic factor. New entrants will also need a phasing strategy to prioritize cities for entry. The mandate on 30% local sourcing and 50% investments in back-end infrastructure requires a thorough understanding of vendor selection and vendor development business practices and culture.
All these challenges combined with the policy of 51% FDI limit ( at least for multi brand retail) strongly points to identifying and tying up with the right partners. Clearly the Indian organized retail players will be prime targets for JVs/acquisitions and the existing entrants like Wal-Mart have a head start and advantage here. However, given India Inc’s interest and support, it is not late for potential new global entrants to forge new win-win partnerships with reputed Indian corporates. Ultimately it is strategy combined with patience, localization, innovation and smart execution that will segregate the Winners from the also-rans.
FDI in multi-brand retail to harm Indian workers: Global report
FDI in multi-brand retail without adequate safeguards will lead to widespread displacement and poor treatment of Indian workers in logistics, agriculture and manufacturing, the government today cited a global report on Wal-Mart as having said.
Switzerland-based UNI Global Union has presented a paper on 'Wal-Mart's Global Track Record and the implication for FDI in multi-brand retail'. The paper dwells on the business practices of Wal-Mart in some countries and concludes that without adequate safeguards put in place, FDI in multi-brand retail will lead to widespread displacement and poor treatment of Indian workers in retail, logistics, agriculture and manufacturing.
Amul says FDI in retail will hurt farmers
While the Government claimed farmers support on FDI in retail, the country's largest dairy cooperative and food brand Amul felt such a move will hurt the interest of both producers and retailers. “FDI in retail is definitely not going to benefit the farmers,” said Mr R.S.Sodhi, Managing Director, Gujarat Co-operative Milk Marketing Federation Ltd, which owns the Amul brand.
Farmers get the least returns from the modern trade and the “so called efficiency” benefits only the large retailers as they constantly drive down the prices, Mr Sodhi said.
Citing the International Farm Comparison Network (IFCN) data, Mr Sodhi said milk producers in the US got only 38 per cent share of the consumer's dollar spent on milk, while the rest was earned by the processor and retailer. In the United Kingdom, the milk producers got only 36 per cent.
However, in India, the milk producer gets more than 70 per cent of the consumer's rupee on an average. Moreover, the milk producer affiliated to co-operatives get more than 80 per cent share of the consumer's rupee, Mr Sodhi said. In the US, the farmer's share in the consumer's price has declined from 52 per cent in 1996 to 38 per cent in 2009, while in the UK it has declined from 56 per cent in 1996 to 38 per cent in 2009. “This decline clearly demonstrates that the milk producers suffer when the share of organised retail increases,” Mr Sodhi said.
Mr Sodhi questioned whether those seeking liberal FDI policy be able to maintain the farmer's share of consumer price in India. “Will they operate at 2 per cent distributor margin and 3 per cent retail margin for milk as practiced by Amul and other milk brands,” he asked. From a manufacturers' perspective, Mr Sodhi said the organized retail trade tends to be monopolistic. The access to market to brands often comes at a heavy price to be paid by the producer, Mr Sodhi said citing Amul experience with large retailers in about 40 countries like the US, Japan, Australia and Singapore where it exports dairy products.
The terms of the trade dictated by many of these players are not even heard of in India such as short credit period, huge listing fees for products, reluctance to increase prices for as high as six months among others. The retailers will effectively kill innovation, squeeze margins and always threaten the brands with cheaper substitutes, imports or finally private label store brands.
For the Government, the share of taxes would remain the same irrespective of the format of retail, while on the contrary the foreign retailers will demand more and more concessions and liberal policies to earn better. Further, the labor prices of large retailers were not employee friendly and that the Government may have to deal with huge labor issues if liberal FDI policies are implemented in retail. If largest and most reputed Indian corporate houses like Reliance, Tata and Birla have invested in retailing in India, we do not need to look to foreign investors to invest in Indian retail.
The small retailers in India over the past decade have improved their outlets, presentation, service levels and consumer orientation significantly. The modern retail and their deep pockets due to foreign investment will destabilize the retail trade, which gainfully employees a very large section of our society.
The promised employment generation in modern retail will be at the cost of unemployed shopkeepers who form the backbone of our commerce and economy.
Bravo Manmohan for continuing your tradition of taking inane decisions that portend eclipse of India totally. I am sure Manmohan shall be remembered as Mohammad Bin Tuglak- the brightest and stupidest man to ever rule India. The unemployment as a result of this policy shall stagger all. But by then it shall be too late. Let's not forget that to reduce the number of poor people Manmohan-Montek clique had reduced the very definition of poverty thus making over 400 million people rich overnight - who still are deprived of 2 square meals and safe clean water today. Shame on Manmohan administration for being so stupid and shame on Indians for tolerating this stupidity that borders of lunacy.
Dr. Bikram Lamba, is a political and business strategist. He can be contacted at 905 848 4205. Email:email@example.com