Despite festering doubts, foreign direct investment in retailing is an enabling policy as it brings in capital and jobs which will have better training and good working conditions. So
By Vivian Fernandes
The government’s attitude to foreign direct investment (FDI) in retailing will test its commitment to cooperative federalism, which is the principle that states can have a choice in the matter and pace of reforms. The Cong-ress-ruled Karnataka and TDP-ruled Andhra Pradesh, whose chief minister, Chandra-babu Naidu is an aggressive liberalizer-turned-cautious one, and also the owner of a retail chain, should test that principle by allowing foreign retailers in.
These two were among 12 states and Union Territories that had conveyed their agreement with the Manmohan Singh government’s December 2012 policy of permitting 51 percent FDI in multi-brand retailing. The BJP-ruled states like Haryana, Rajas-than and Maharashtra are unlikely to honor the commitment of their earlier Congress governments, though former union commerce minister Anand Sharma, while piloting the policy, had said a reversal in stance would have to be validated with a commerce ministry notification. The present Delhi government is also opposed to this.
On May 12, the center issued a circular re-iterating that 51 percent FDI in retailing remains policy, though the ruling party in its 2014 manifesto had vowed to ban it if elected. Finance Minister (FM) Arun Jaitley said neither the government not the party had shifted positions—a case of snuggling with investors while cuddling its supporters.
Last August, the Rajasthan government had amended the Factories Act, the Indus-trial Disputes Act, the Apprenticeship Act and the Contract Labour Act to ease the rigors of hiring people and retrenching them, with the center’s tacit acquiescence. Union Labour Minister Narendra Singh Tomar had told a newspaper then that “our effort at the center would be to strike a balance between business and labor communities. If a state goes ahead with amendments apropos to their local, economic, political and social conditions, it is a healthy practice.”By permitting foreign retailers, Karnataka and Andhra can verify whether the center’s forbearance or solicitude extends to issues that could put it in a political fix.
FDI in retailing is an enabling policy; states are at liberty to allow or disallow foreign equity. It chimes with the Chinese practice of “crossing the river feeling stone from stone” or liberalizing gradually.
China’s reformer, Deng Xiaoping, opened up the economy or ushered in “socialism with Chinese characteristics”, by setting up four special economic zones for foreign investment in 1980. Encouraged by that experience, 14 more were established. The dismantling of collectivized agriculture, known as the Household Responsibility System, began similarly, with a commune in Anhui province in 1978, distributing land among its households driven by famine and a loss of faith in group farming. China’s flabby state-owned enterprises (SOEs) were forced to reform because of pressure from township and village enterprises (TVEs), which thrived on rural demand created by the dismantling of collectivized agriculture. The TVEs were so nimble that they threatened the existence of SOEs.
Even if all Indian states permit, foreign retailers cannot look beyond 53 cities with one million plus population. A third of their inventory by value must be sourced from small and medium enterprises. They must invest at least $100 million, half of it in back-end infrastructure within the first three years, and this does not include land and buildings. Instead of sounding vague, the FM should have emphasized these safeguards.
Such is the fear of the efficiency of American discount stores like Wal-mart that studies by Rajeev Kohli and Jagdish Bhagwati of Columbia Univer-sity and Thomas Reardon of Michigan State University—asserting the resilience of mom-and-pop stores in Indian conditions of high population density and small ticket purchases—do not convince the sceptics in any way.
Marketing maven Rama Bijapurkar said in a 2012 article that much of the fuss was overdone. Indians get into retailing because they have little education and little else to do, she said. Most Indians buy in such miniscule quantities that big organized retailers would pass them over. Very few had the kind of capital that would wait years, may be a decade, for profits to turn up. So, there was no need to worry about mass unemployment.
A 2008 study by ICRIER, a research outfit based in Delhi, for the Manmohan Singh government admitted there was an impact on sales and profits of small retailers in the vicinity or organized retailers in the initial years but this faded over time. There was a decline in employment in the north and west regions initially, but no evidence was found of overall loss of employment in small stores. Traditional retailers responded with improved business practices and technology upgrades.
The study was based on a survey of 2,020 unorganized small retailers across 10 cities. In addition, 1,319 consumers shopping at both organized and unorganized retail outlets and 197 farmers were interviewed. A “control sample” survey was done of 805 unorganized retailers who were in the neighbourhood of organized retail outlets in four metros. The international experience was also studied.
The survey found that a majority of small retailers wanted to continue in the business, remain independent, and wished their children would follow. Only 10 percent said they wanted to be franchisees. Twelve percent of kirana stores cited lack of access to bank credit as an issue; 37 percent felt the need for it.
Consumers gained from the entry of large retailers, the survey said, but well-off consumers gained more. Unorganized retailers had competitive strengths like goodwill with customers, credit sales, amenability to bargaining, selling loose, convenient timing, and of course home delivery.
Farmers benefited significantly. For example, a set of cauliflower sellers said they gained 25 percent more on average by selling to the big players. Profit realized by selling directly to organized retailers was 60 percent higher than from selling in a mandi. The difference was larger when commission agents’ charges at a mandi—usually 10 percent of sales—were taken into account.
The study made a set of recommendations. It said wet markets where fish, meat and fresh fruits and vegetables are sold, should be modernized through public-private partnerships. Wholesale cash-and-carry should be encouraged for the benefit of small retailers, who should also get access to bank credit.
Farmers should form cooperatives and producer companies to negotiate better terms with organized retailers. Small retailers should form cooperatives or associations to enhance their bargaining power with suppliers. There should be a private code of conduct for organized retailers to govern dealings with small suppliers; this would be written into law if required. And the Competition Commission of India should ensure the rules are followed.
Opponents of FDI in retailing could argue that ICRIER is a pro-market organization and that surveys rarely contradict those who sign the cheque. They will scoff at the suggestion that organized foreign retailers could upgrade the quality of Indian products so they become good enough to sit not only on their Indian shelves but also in their outlets abroad.
Examples of organized retailers investing in contract farming like food processers—Pepsico, McCain, Simplot India Foods, Nestle and the Amul milk cooperatives—and insuring farmers against price risk will be met with outright derision.
Few people know that Wal-Mart does wholesale cash-and-carry as 100 percent FDI is allowed in it. The FDI circular says: “The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales.” Organized wholesalers can sell to whoever they want if they have a trade licence or tax registration and the size of the orders can be a few hundred rupees.
Organized foreign retailers will bring patient capital. The jobs they create will be better than in unorganized retailing, with training, good working conditions and social security benefits, however skimpy they might be. Yes, kirana jobs will be lost, but if there is a policy that provides for a long period of adjustment, this is it. Let us test our notions against the touchstone of reality.
The writer is consulting editor of www.smartindianagriculture.in