Retail FDI: Supply chain renovation or Exclusive Growth?

What was sighted as a deep rooted fear in the minds of the
millions in the informal sector of the economy has turned into a reality as the
government of India today declared to liberalize its FDI policy even further,
inviting FDIs into the retail chain sector. This move, which has been touted to
redefine supply chain of our country, is an open invite for the retail sector
giants like Walmart, Carrefour, TESCO etc. into the one of the potentially enriched
markets of South Asia.

Now the government’s claim that this multi-million dollar
infusion would create a potential for around 10million jobs is understandable
but what perturbs me is the consequences that the dominant informal sector
would face in the wake of such an event?  What would become of the main goal of the 11th
5-Year Plan whose chief concern was inclusivity in growth? Yes, India would
benefit tremendously from the pact but how would the dividends be spread
equally amongst the population?  These
questions are quintessential and deserve utmost implication before the plan is

To look at the policy at a glance, here is how it’s sorted
to run. The government, after much debate, decides to open the supermarket
sector, inviting up to 51% and up to 100% in the single brand sector, in the
form of FDIs. Steep call. There are terms and conditions applied though. They
are allowed to invest in cities which have a population of over 1 million, i.e.
53 cities in India.  An investment of 100million dollars is needed to enter into

the sector out of which 50% needs to be set aside for back end infrastructure.

Also, as a smart move, it has been made mandatory for the cos to source 30%

of their input requirements from the small and medium enterprises (SMEs) of the

state. It has been predicted that this move would increase the size of the Indian

market exponentially from $28 billion (currently) to about $260 billion in less than

10years. Also with the increase in jobs in the sector by around 10million, it is stated that the
consumers would be saving out on around 5-10% on expenditures.

Now if we carefully analyze the consequences, it might not
seem to depict the squalor with which it has originally been painted.
Inequality in India has been on a rise since decades. Gini coefficient
indicates that income inequality in India has increased from 0.209 in 1980-81
to about 0.257 in 2005-06 both at an overall level as well in almost all of the
states both for urban and rural areas.  A heavy investment in the supermarket sector would with immediate effect wipe out all the marginal producers in the informal sector. There is no denying this
happening.  Furthermore, it would be unfair to compare size of the informal sector in states like UP and Bihar to states like Maharashtra and Delhi. How much would a 30% raw material deal from
the various cos get them and how does it stack up against the sale that they
would be losing due to these cos? The scales would tilt drastically against
these workers in the informal sector indeed. Yes this does seem like a smart
maneuver to fund infrastructural developments, which I feel is lacking on
several counts, but what would this come to when the next recession hits? We
all know the concepts of business cycles so the probability of a recession in
the foreseeable future is not obsolete. Too much dependence on foreign
investments, especially in core sectors like infrastructure, would lead to dire
consequences because as we all know, recessions lead to a shortage in liquidity
as funds keep flowing back to the home countries to fund their bailout and
expansionary plans. Coming down to the revolutionized supply chain argument,
yes, one is very familiar with the concepts of Henry Ford and we all know that
specialized mass production does cut down on costs. This would indeed lead to a
fall in prices of consumer goods. Prices and demand for good are inversely
related so a fall in price would lead to an increased consumption which would
lead to an increased aggregate demand, elementary macroeconomics, we get that.
All of it sounds all too well in theory trust me. But let’s give it a whole new
perspective. With an increase in inequality, the wealth would be even more
skewed towards a smaller percentage of the population. A fall in relative
income reduces aggregate demand. Y=AD. Now with a majority of the population
losing income (since the informal sector houses maximum employment), the fall
in AD would soon override the rise in AD due to a fall in consumer prices.
State governments would have to undertake a reduction in tax rates (remember
you can’t hold all the states at the same level?) and this would keep on piling
up on our budget deficits which already is causing a lot of concern.

So, in the end would this be a good measure for the economy
as a whole? I think not. The government in order to cover up for their own
inability to maintain a strong supply chain and adequate infrastructure for a
country well-endowed with natural resources has suggested this policy
undertaking. Otherwise it’s very hard to explain a trade deficit for a country
like India when most of the countries in South Asia are facing heavy trade
surpluses. I would suggest that the state governments reject this policy claim
and the central government starts building on the supply side of the economy
rather than the demand side because that seems to be the roots of the major
problems of India like inflation, depreciating currency and a lot more. And as
seen clearly, continuous monetary tightening by the RBI has failed to show
decisive results.

Parikshit Redevil