Success of FDI decision will depend on implementation

The Union government’s decision of September 14 conditionally permitting FDI in multi-brand retail trading generated a lively debate. Careful scrutiny does not justify the claim that retail FDI in itself is a game changer transforming our large and diverse economy. Nor does it substantiate the apocalyptic visions some critics harbour.

We need to examine dispassionately three issues to arrive at a balanced conclusion: the direct benefits and risks; the impact on investment and growth; and the impact on current account deficit.

First, let us examine the direct impact. Clearly, there are potential benefits as well as risks. Indian farm sector is in a long-term crisis. The share of agriculture in GDP is declining every year, and it now stands at about 15%. But the proportion of population dependent directly on agriculture is declining much more slowly, and now stands above 50%. A simple arithmetic tells us that the per capita income of the 50% Bharat is only 18% of the rest of the population. Against such a backdrop, there is no substitute to rural wealth creation and value addition.

There is an uncommonly long, inefficient market chain between the farmer and consumer right now. As a result, many studies show that the farmer typically realizes 35% of the consumer price in most agri-products. In case of perishables, the farmer’s share could be as low as 12-20%. High volatility of prices is very common because of poor transport, storage and other back-end infrastructure.  30-35% of the horticultural produce is estimated to be going waste in India. On a total production of about 200 million metric tonnes (MT) of fruits and vegetables, our cold storage is only about 23.6 million MT, 80% of which used only for potatoes!
Clearly, we need to do three things: compress the market chain and reduce the ‘distance’ between the farmer and the consumer; build a modern, integrated logistical chain involving grading, transport and storage; and add value to perishable commodities to reduce volatility and create wealth and jobs. All these things need investment, infrastructure, technology, management practices and deep pockets.

It really does not matter who invests in this critical sector. As Deng Xiaoping famously said, “It does not matter whether the cat is white or black, as long as it catches mice!” A compressed market chain, reliable logistics and infrastructure and value addition that organised retail industry brings will improve farmer’s price realisation, and reduce consumer price. If markets are improved, greater investment will flow into agriculture.

But we need to ensure that there is fair and effective competition, and monopolies are firmly checked.

The big concern is the large employment in retail sector. This sector now employs an estimated 30 million people in India (about 7-8% of working population). Most of these are low-end jobs with meager incomes. Of these, about 10% are in large cities where FDI in retail chains is permitted. Probably about 3 million people are eking not a precarious livelihood in big cities of one million plus population. Evidence shows that about 1.7% of the small retailers are closing down annually on account of competition from large chains wherever such chains are established. This translates into loss of about 51,000 livelihoods in big cities, if all cities have organised retail chains. It is estimated that about 1.5 million direct jobs will be created by organised retail at the front-end over the next five years. In logistics, infrastructure, and value addition probably an equal number of new jobs will be created. Most of the small traders can be absorbed in the direct and indirect employment. The policy must provide for such safeguards. Transition mechanisms should include up-gradation of small retailers, franchisee models, cooperatives and institutional development similar to NDDB.

Retail trade is growing at 13.3% CAGR (2006-10). It is estimated that modern retail will be growing at 25% or more per annum, while small retailers will still grow at 10% or more. Therefore small retailers will have a share of about 75% (as seen in South-East Asia) in a much larger market, and will co-exist with organised retail chains.

Then there is the issue of investments and growth rate in the country. Our savings rate, which stood at about 23% of GDP in 2002 has risen to 37% in 2008, and has now declined to about 32%, in 2011. FDI in any form will stimulate growth in a capital-scarce country.

Finally, our current account deficit is roughly about $78.2b, or 4.4% of GDP. This level of deficit is unsustainable. FII investment may increase with capital market revival, but it is hot money which can disappear at the first sign of trouble in India or elsewhere. We need stable, long-term investments in the form of FDI, which will in-turn bring technology, growth, jobs and incomes.

On balance, if retail FDI is handled well, it will be a win-win situation for us. But for a large and diverse economy like India, there cannot be instant fixes and panaceas. We need to leverage our strengths systematically and boost growth and employment.

The author is the founder and president of Lok Satta Party – new politics for the new generation