FDI chaos: Let spirit of reason and conciliation prevail

The government’s tearing hurry in proceeding with opening the multi-brand retail sector to foreign direct investment is not just an exercise marked by ineptitude but also devious. The Left, which was then supporting the government, had long ago pointed that by even a conservative estimate, retail trade contributed about 11% to India’s GDP and was employing four crore people. The latest figures show this has gone up to 4.4 crore. On the basis of the fourth economic census of 1998, 38.2% of rural employment and 46.4% of urban employment were estimated to be in this sector.

So, majority FDI in multi-brand retail entities will have its impact on employment in this sector and in the economy as a whole. While the government has said this will not be so, there is very little in the form of substantial argument. The density of retail outlets in India is one of the highest. For every 11 people, there is a retail space measuring up to 500 sq ft. By comparing per employee turnover of retail trade, it is well established that this ratio for the largest retail giant of the world — Wal-Mart — is almost three times that of the Indian figure. Therefore, where is the question of additional employment generation if the Wal-Marts, Carrefours and Tescos come here?

An additional argument of the government is that the large multi-brand foreign owned retail chains will cut out middlemen. That they will procure directly from the primary producers, both in agriculture and small scale manufacturing. This is a travesty of truth. Global retail giants function as integrated middlemen between the primary producer and the consumer. An in-depth probe into the business model of global multinational retail chains will lead to disturbing conclusions. Since these global giants act as monopsonies, they tend to have a major concentration of leverage as single buyers.

Eventually, they actually emerge as oligopolies with obvious monopoly in fixing the price at which they procure from primary producers. It is here that these global players secure the margin. They also share part of this margin initially with the consumers. But that is the profit booked not in terms of immediate financial gains but access to market share. Therefore, they tend to eventually control the prices for the consumers once they secure a stranglehold.

The strength of this model is obviously premised in broad globally diverse sourcing of products. Obviously, foreign sells have been an important source of revenue for the global giants. In 2007, the percentage of revenue through foreign sales to that of the total revenue earning was 74% in the case of Ahold, Holland, 52% for Carrefour of France, 22% for Tesco of UK and 20% for Wal-Mart.

Apparently small, Wal-Mart’s 20% has to be seen in terms of the actual revenues — $379 billion, more than thrice Carrefour’s overseas sales of $123 billion. To what extent these global chains source their merchandise is apparent from the fact that 70% of what is displayed on Wal-Mart’s shelves is manufactured in China. Therefore, with the existing levels of cost efficiencies, a large part of India’s retail market would actually be substituted by foreign products.

It is obvious, therefore, that allowing foreign entry will not only affect employment in the retail sector but will also cast a major shadow of uncertainty on employment and earnings in primary production — both in agriculture and manufacturing. 
The government claims that the existing lack of supply chain infrastructure requires an appropriate response to facilitate foreign direct investment in the sector. Implicitly, it is claiming that such induction of FDI will help overcome the critical gaps in infrastructure. However, it is overlooking the consequent vulnerability. If such critical infrastructure is under the sole overall control of foreign companies — and that includes our entire retail distribution network — there is every possibility that drive for maximising corporate profit may undermine popular and national interest. Given this critical inadequacy, before allowing foreign companies sweeping control over the supply chain and distribution network, alternatives have to be made available through public investment-led infrastructure development.

With such numerous and complex issues, the government’s tearing hurry is completely misplaced. And, inevitably this has resulted in a terrible logjam holding up the normal functioning of Parliament’s winter session. Any avid student of the Constitution and parliamentary process would know that no policy announcement can be made by the government outside the floor of the House while it is in session. It does not auger well for parliamentary democracy to discuss and debate an issue of such import on which a decision has already been taken.

As the situation stands, there is every reason to believe that on this issue, a large section of the ruling coalition itself was not on board, not to speak of the opposition and the supporting parties. Therefore, on both counts, substantial as well as procedural, let the spirit of reason and conciliation prevail.