Is it "Wal-martization" of Retail India?
India's affair with an open economy reached a crescendo when the government took a Cabinet decision last week to allow 51 per cent FDI (foreign direct investment) in multi-brand retail and increased the FDI in single-brand to 100 per cent. It would not be an exaggeration to say that India, on that day, got married to the free market economy.
This issue was being worked on for sometime and we got an inkling of it when minister of state for commerce and industry Jyotiraditya Scindia said in a written reply to the Rajya Sabha sometime back that "The objective will be to enhance operational efficiency of back-end infrastructure in the retail sector, reduce wastage in the agriculture sector, enhance benefit to producers...and benefit consumers through greater consumption".
As it is almost customary with any major political decision, this issue has also generated a very heated debate and is scheduled to be discussed in the parliament on Monday. It seems that the UPA government on this issue, is on one side (except Mamata Banerjee's group), and all the other political parties, on the other.
I am going to quote some statements made by a group of people from different sectors to get an idea of their views and I would also try to come up with my own analysis:
- Leading NRI entrepreneur Lord Karan Bilimoria, who is also the President of the India-UK Business Council has described the decision of the Indian government to allow 51 per cent foreign direct investment in the multi-brand retail sector as 'fantastic'
- Finance Minister Pranab Mukherjee said allowing Foreign Direct Investment (FDI) in multi-brand retail will help contain prices
- Reserve Bank of India Governor D Subbarao said FDI in multi-brand retail would help improve supply chain and also contribute to reducing inflation
- Small retail in the country will not only co-exist with big retail but it will also grow at a minimum rate of 13 per cent in the coming decades, said Anand Sharma, Union Minister for Commerce and Industry
- BJP national chief spokesperson and Rajya Sabha member Ravi Shankar Prasad said this is a disastrous move which will have great adverse impact on the country's service sector, bringing in an era of monopoly by foreign companies. The move would weaken the domestic manufacturing sector and encourage predatory pricing
- UP Chief Minister Mayawati vowed to never allow any foreign retailer to set up a shop in UP, while declaring that her party would oppose the decision in Parliament and outside
- Backing Central government's decision to allow Foreign Direct Investment (FDI) in multi-brand retail, former union minister Shashi Tharoor said that it would generate additional employment opportunities
- "In multi-brand retail, the things can be shipped at a cheaper rate from the producer to the consumer," said the central bank's deputy governor Kamalesh Chandra Chakrabarty
All these statements are a mix of semblance of political rhetoric and substance. I am for all those policies which culminates in the betterment of the country and the benefits of which permeates to all sections of the society. There is a stipulation in this decision that the overseas companies must invest at least $100 million, half of which has to be spent on developing back-end infrastructure. Most countries have understood from experience that FDI brings in more investments from abroad. In most countries, FDI is a way of contributing to additional employment.
Raj Jain, president of Wal-Mart India, said the company can help reduce prices by improving supply chain and infrastructure to cut waste. According to government estimates, about 40 percent of fruits and vegetables in the country rot before they are sold because of a lack of cold-storage facilities and poor transport infrastructure. Bharti-Walmart, the local venture, buys fresh produce directly from about 1,200 farmers in Punjab. It has been estimated that India's decision to allow overseas ownership in retail will create up to 10 million jobs and give farmers better prices and India's retail industry will get $8 billion to $10 billion in fresh investments over the next 5 to 10 years. Overseas retailers will be required to purchase at least 30 percent of goods sold in the ventures from small industries. Stores will be permitted only in 53 cities with a population of 1 million or more and the government will retain the first right to buy farm products.
The face value of this decision taken by the UPA government seems to be fine but we would not know the full effects for another couple of years. The government has to make sure that the interest of the have-nots are protected. India is not only about the cash rich 330 million middle class people, this is only 1/3 of the population, the government is also responsible for another 2/3. If a US domiciled company like Walmart make huge profits on their operations in India and if they want to bring that money back to USA, they would have to pay 35% corporate tax on their income. Instead, if they keep their money in India and re-invest, they would have to pay only 17% (corporate tax rate of India for foreign companies). This is an incentive for them to expand their operations in India which is going to be good for the country.
Even though I agree with the basic decision of the UPA government, I want to make it very clear that they are also responsible to make sure that retail India is not totally hijacked by foreign entities. We are a country in transition and we should be very careful. Since this was a major policy decision, UPA government should have called an all party meet to discuss this issue and not taken a unilateral decision. According to Business Monitor International, India's retail market is supposed to double to $785 billion by 2015 from $396 billion this year and as Narayanan Ramaswamy, executive director at KPMG India, rightly said, 'Foreign retailers must be licking their lips at this opportunity'. Let us hope that all Indians, as consumers, would have better options, both in terms of product choices and pricing and we can also prevent the wal-martization of retail India.