In the early 1990s, the Indian television was in its infancy and the advertisements on it were of mostly Indian brands. Who can forget ads like “Roshan karta Bajaj” or “I love you Rasna”. But in the last two decades, Indian consumer has moved on. When the great Indian market opened, foreign
brands stormed in. Brands like Sony and McDonalds replaced the good old Onida and Nirulas. Of course Nirulas still exists, but it could have been the largest food chain in India if not for the entry of McDonalds.
But our local “kirana” store wasn’t in denial. It changed according to times and started selling the aspirations of consumers. One can find all brands and range, which Bharti-Walmart boasts of, in a local store. Moreover, the local store always sells below the MRP (Maximum Retail Price). Big
Bazaar, EasyDay, etc. always sell at the MRP and make huge profits. Hence, it isnot immediately apparent how the unorganized retail sector can be blamed for thehigh levels of inflation.
Retailers mainly sell manufactured goods, the prices of which are decided by manufacturers. The efficiency or size of retailers has no bearing on those prices. Even according to the government figures, the prices of manufactured goods are driving inflation. The natural response would have been to look at the manufacturing sector rather than the retail sector. But government thought
otherwise and brought the Winter Session of the parliament to a halt.
FDI in retail has been the buzz word for almost 10 days now. With a rigid opposition and a useless government, the issue is getting debated everywhere except the Parliament. But one must not take the arguments on TV debates on their face value and look what the actual research suggests. So far, the disadvantages outweigh the benefits of FDI in retail.
The biggest drawback is the loss of employment. In India, the prevalent norm is that if one is not good at studies or is not able to get a job, they just open a shop. It is the reason why retail sector is the second biggest employment provider in India, after Agriculture. With the domination of
big retailers, this option of “let’s just open a store” won’t be available anymore.
Moreover, the employment that will be generated by big retailers won’t be able to compensate for it. According to a report by Centre for Policy Alternatives, setting up of Walmart in 35 major towns of India would mean generation of some 45000 jobs at the cost of displacing nearly 8 million, already
working in the unorganized retail sector. The exact figures are subject to debate, but the margin is too big to allow it. I seriously don’t see my local vegetable monger landing a job at Tesco.
The favoured position that prices will be controlled is a myth. If giants like WalMart, Tesco, etc. enter India, they will enter with deep pockets. They are in a position to sustain losses for years, during which they will be able to eliminate all competition. Initially, the prices will be extremely low because the giants would want to create monopoly. The small-stores will not be able to compete hence will perish. Once the control comes, the same retail giants will start increasing prices at will and hence fuelling inflation.
Some might challenge this theory by saying that competition between big retailers will keep the prices in check. But whatever happened to the idea of collusion. Even if three or four big retailers decide together to increase prices, the consumer would be left with no choice. Similar situation exists in the U.K., where inflation of the country is totally dependent on four major retailers
– Asda, Tesco, Sainsburys, Morrisons. This year, Asda-Tesco price war locked the inflation down. While last year, the makers of big-selling cigarette brands as well as retailers such as Asda, Morrisons and the Co- op were found guilty of colluding on prices. They were fined £225 million. Private retailers can’t be expected to self-regulate in public interest.
Another side-effect would be the lack of ease and comfort. The end of Paan-Beedi shops would lead to two opposite results. On one hand, it would become difficult to grab that quick smoke. Cigarettes would be able available only at huge supermarkets situated at inconvenient locations. Some smokers will be deterred and hence smoking will reduce. On the other hand, supermarkets sell cigarettes only in packs not singles, which will lead to increase smoking. Of course this is not a serious argument, but the idea is that the consumer will have travel all the way to a supermarket just to buy a pack of crisps. The highly reduced number of stores will reduce the ease of buying and waste a lot of time.
So far we have been assuming a total annihilation of small-stores. Practically, it won’t actually happen. Some stores will survive the mass extinction on the back of high prices. They surely won’t be able to compete with supermarket prices so they won’t. Their ease of access will allow them autocratic prices. Consumers won’t go to a supermarket to grab a can of coke. They will simply go to the nearest store. This small-store knows it and hence can demand high prices. Overall, the
prices of commodities will go up and main idea behind FDI in retail will collapse.
Industry, including FICCI, is trying to project that there is no harm to small-stores as there will be a level playing field. This is also a myth. Big retailers work by eliminating the middle man. They buy straight from farmers, domestic and abroad, and sell directly to consumers. Their economic strength allows them to expand their pool of resources and hence buying the cheapest raw material. A
small-store owner definitely has no such resources. One can’t expect a local fruit vendor to go to Kashmir to procure Apples he wants to sell. Moreover, big retailers will hold both ends of the great trading chain. In such a state of affairs, remembering The East India Company is not totally absurd.
Then there is the case for increased remuneration for farmers. Farmer gets only about 10% of the price what the consumer pays. Most of it gets eaten up by the middle man. But FDI in retail won’t solve this. Who will pressurize Tesco to pay the farmers fair price? The bigger is question is why would Tesco pay a fair price? It might not even buy from Indian farmers but rather import it from
Bangladesh. Then there is a danger to our Agriculture sector as well.
The intentions behind FDI in retail are good but the results are not. At the moment, it only looks like that government is trying to achieve its GDP targets through foreign investments. With the outflow of funds outnumbering the inflow, government is in a state of panic. To shed the tag of “Policy Paralysis”, government is trying hard to bring in big-ticket reforms. But if the government truly
wants to develop India’s retail sector, there are better ways.
High levels of inflation mean excess of liquidity in the system. But still there is a limited availability of bank finance to retailers of India. RBI needs to look at changing such monetary policies. Government needs work on policies to enable migration of unorganised retailers to organised sector. Awareness and management programmes, similar to those in Agriculture, can be implemented to help retailers expand and improve efficiencies. Courses and curricula could be
introduced in Universities and schools for retail management.
FDI in retail can be a solution but not at this stage of the Indian economy. With the manufacturing sector freezing, government is trying to rely on domestic consumption to avoid a recession. Just
because it worked in 2008, there is no reason it will work today again. Much has changed since then. Government no longer has surplus budget for stimulus packages. Balance of payment crisis is imminent and Dr. Singh is trying to avoid it through foreign money. Also, with not many achievements in the second term, Prime Minister is wary of losing his only success- a robust GDP growth.
The voter won’t mind a 1-2% drop in GDP growth rate, as long as the government is working in the right direction. Moreover, government needs to promote and explain this direction to the masses, in detail.