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Thursday 8 December 2011

FDI in retail: Wholesale opposition

FDI in retail: Wholesale opposition
Virendra Parekh
7 December 2011
Fierce political opposition has forced the government to suspend its controversial decision to permit 51 per cent foreign stake in multi-brand retail. This will no doubt be hailed as a major victory by its opponents and a great setback for the government and its reform agenda by its supporters. While this may be true in a limited sense, the real issue of the rigid and imperfect nature of India’s trade system has to be addressed sooner or later. It does not help that the issue has been highly politicized and much of the debate is just posturing, producing more sound than light.
To make it meaningful, Congress MPs should ask one question of their leaders: If FDI in retail is in India’s interests, why are Americans lobbying so hard for it? They did something similar for the nuclear deal, and handed us a lemon, while pretending to be doing India a big favour.
BJP MPs should ask Arun Jaitley: if the time for FDI in retail is not yet ripe now, how come you found it ripe in 2004?
And we the common people should ask ourselves: how has a government justly notorious for waffling and vacillating on every issue of national importance suddenly developed courage not only to take such a controversial decision on the eve of assembly elections, but also to try to stick to its guns in the face of widespread opposition? Then again, if it is okay for Tatas, Birlas, Ambani, Biyani and Goenka to be in organized retail and plan massive expansions, what is the rationale for keeping foreigners out?
A striking fact is that there is little sympathy for the Indian trading community outside its members. This is not surprising. For decades, the trading class together with manufacturers has plundered consumers with both hands. Over the years, it has been a three-dimensional loot - high and ever rising prices, shoddy quality and, often, cheating on weight and purity. It was only after liberalization in 1991 that Indians learnt that the producer could care for their tastes, that the seller could be solicitous, that they can demand quality as a matter of right, that prices can come down as well as go up.
Even today, India’s distribution system must be regarded as one of the most inefficient in the world, especially for food and other essential commodities. The price that a consumer pays is four to five times higher than what the farmer gets. There is much wastage. Any rise in wholesale prices is immediately passed on to the retail consumer, but any fall in the same takes a long time and much diminution before reaching him, if at all. So when the trading community says it is facing a threat to its survival, consumers have little sympathy for it.
Can foreign retailers solve problems afflicting our distribution system? The Government says they will. By eliminating middlemen and intermediaries, large retailers will be able to pay better prices to farmers and other producers while offering lower prices to consumers. As large buyers, they will be able to insist on quality. The opponents say the elimination of intermediaries, middlemen and small traders will render millions of people jobless. It will be a social, political and economic disaster to hand over such a vital sector to foreigners. They draw a scary picture of large multinationals capturing the huge Indian markets with cheap imports and predatory pricing, and eventually squeezing both local producers and consumers with their tremendous marketing power.
For a reality check, consider the following. Till 1950, a farmer in America used to receive about 70 per cent of every dollar spent on food. In 2005, it had come down to not more than 3 to 4 cents. If the middlemen have been squeezed out, as is being made out, farmer's income should have increased. Instead, it went down owing to a new battery of middlemen (the quality controller, certification agencies, packaging industry, processors, wholesalers etc.) swamping on him like vultures. Supermarkets do not always remove middlemen; often they replace one set of middlemen with another.
As it happens, supermarkets buy only ‘A' grade produce, and that too at market (mandi) prices. They buy only a part of the produce offered by the farmer, who ends up going to the mandi for disposing off the rest. The chains procure from known farmers without any commitment to buy regularly, as they do not want to share the risk of the growers.
For farmers as well as non-farmer suppliers, the sheer size and buying power of foreign supermarkets tends to depress producer prices. There have been a large number of supermarket malpractices across the globe which include: delayed payments; lowering prices at the last minute when supplier has no alternative; changing quantity/quality standards without notice; payment and discounts from suppliers for promotion or opening of new stores; rebate from producers as a percentage of their supermarket sales; charging high interest on credit, imposing tough conditions and penalties for failure to supply, delisting suppliers from their list without good reason.
Millions of new jobs will be created, we are told. Let us get it straight. Part of efficiency of organized retail stores stems from the fact that it needs less labour to handle a given volume of products. That is the experience all over the world.
In Vietnam, for instance, compared with 1.8 jobs created by a street vendor, 8 by a shop vendor and 10 by a traditional retailer, a supermarket such as Big C needed just four persons for the volume of produce handled. Germany’s Metro Cash & Carry employed 1.2 workers per tonne of tomatoes sold in Vietnam, compared with 2.9 persons employed by a traditional wholesale channel for the quantity sold. Metro has 8 stores in India and plans to increase the number to 50 in the next five years.
The government also claims (and perhaps) expects that the presence of big retail chains and competition will have an impact on inflation, particularly in food items. This is doubtful. Supermarkets would lead to concentration of market power, with upstream suppliers facing buyer power in terms of lower prices and consumers (buyers) facing higher prices due to lower competition, besides traditional retailers suffering a decline in their business. Lower procurement prices by procuring directly from farmers need not lead to lower consumer prices in supermarket chains.
To soften the blow, the government has placed conditions on the foreign retailers with 51 per cent shareholding: opening shops only in cities with a population of 1 million or more, minimum investment of $100 million, at least 50 per cent investment in creation of back-end infrastructure and 30 per cent sourcing from small and medium enterprises. The last two conditions, thrown in more as sops to the opponents of the proposal, are difficult to monitor and may remain only on paper until they are quietly removed at a later convenient date.  
But even if permitted, foreign retailers are unlikely to rush in anytime soon. Taken aback by the fierce political opposition, leading retailers are waiting for the storm to subside before making their next move. They are also working out implications of the various conditions and the possibility of several state governments keeping them out by denying necessary state level licences. Many foreigners have by now realised that, though lucrative, India is a difficult market. Customers’ tastes are diverse across the country and catering to the bewildering variety of tastes and demands is a tough job. Moreover, the Indian housewife does not like to make all her purchases at once.
Commercial rents are exorbitantly high, especially in big cities where the retailers are allowed to set up shops, and may go further up once they start moving in. And as rickshaw fares are not likely to fall any time soon, the friendly neighbourhood kirana store, extending facilities of monthly credit and home delivery, is unlikely to lose its appeal soon. For all the scary scenarios, the mom-and-pop stores and your amiable grocer will not disappear in foreseeable future.
What our markets need is not foreign capital so much as more competition for the benefit of producers and consumers. If the entry of foreign retailers promotes it, they should not be stopped. But foreigners cannot address our self-made problems. To promote competition, scrap the APMC Act, lift all restrictions on sale, purchase, storage, movement and prices of agricultural goods across the country and allow farmers to sell their produce directly to consumers or whoever pays better. Streamline local taxes and transport permits to make the whole of India a seamless common market in a real physical sense.
Millions of consumers and thousands of kiranas will then compete with big organized retailers (desi or bidesi) to prevent concentration of buying power and exploitation of farmers and other producers. If you ban, simultaneously, futures trading in commodities (and permit delivery-based forward contracts) that will take care of inflation, too. Indigenous action can achieve whatever is sought to be achieved by FDI in retail.
All this was known all along. That brings us to the timing of the move. Whichever way one looks at it, it is hard to understand the tearing hurry on the part of the government to pitch for it and thereby stack the odds against itself. The government is already neck-deep in turbulent waters over inflation, black money, corruption, infrastructural deficiencies and governance. One thought it would at least pretend to be spending all its energies on solving pressing problems rather than raise a fresh storm by going in for a highly unpopular decision.
Was it one more act of blundering by a government that has lost all touch with ground realities? Or was it a cynical masterstroke to overshadow all other issues with a ‘bold reform initiative’ that will please its masters abroad? Take your pick.
The author is Executive Editor, Corporate India, and lives in Mumbai

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