Wednesday, October 3, 2012

Success of FDI decision will depend on implementation

The Union government’s decision of September 14 conditionally permitting FDI in multi-brand retail trading generated a lively debate. Careful scrutiny does not justify the claim that retail FDI in itself is a game changer transforming our large and diverse economy. Nor does it substantiate the apocalyptic visions some critics harbour.

We need to examine dispassionately three issues to arrive at a balanced conclusion: the direct benefits and risks; the impact on investment and growth; and the impact on current account deficit.

First, let us examine the direct impact. Clearly, there are potential benefits as well as risks. Indian farm sector is in a long-term crisis. The share of agriculture in GDP is declining every year, and it now stands at about 15%. But the proportion of population dependent directly on agriculture is declining much more slowly, and now stands above 50%. A simple arithmetic tells us that the per capita income of the 50% Bharat is only 18% of the rest of the population. Against such a backdrop, there is no substitute to rural wealth creation and value addition.

There is an uncommonly long, inefficient market chain between the farmer and consumer right now. As a result, many studies show that the farmer typically realizes 35% of the consumer price in most agri-products. In case of perishables, the farmer’s share could be as low as 12-20%. High volatility of prices is very common because of poor transport, storage and other back-end infrastructure.30-35% of the horticultural produce is estimated to be going waste in India. On a total production of about 200 million metric tonnes (MT) of fruits and vegetables, our cold storage is only about 23.6 million MT, 80% of which used only for potatoes!
Clearly, we need to do three things: compress the market chain and reduce the ‘distance’ between the farmer and the consumer; build a modern, integrated logistical chain involving grading, transport and storage; and add value to perishable commodities to reduce volatility and create wealth and jobs. All these things need investment, infrastructure, technology, management practices and deep pockets.

It really does not matter who invests in this critical sector. As Deng Xiaoping famously said, “It does not matter whether the cat is white or black, as long as it catches mice!” A compressed market chain, reliable logistics and infrastructure and value addition that organised retail industry brings will improve farmer’s price realisation, and reduce consumer price. If markets are improved, greater investment will flow into agriculture.

But we need to ensure that there is fair and effective competition, and monopolies are firmly checked.

The big concern is the large employment in retail sector. This sector now employs an estimated 30 million people in India (about 7-8% of working population). Most of these are low-end jobs with meager incomes. Of these, about 10% are in large cities where FDI in retail chains is permitted. Probably about 3 million people are eking not a precarious livelihood in big cities of one million plus population. Evidence shows that about 1.7% of the small retailers are closing down annually on account of competition from large chains wherever such chains are established. This translates into loss of about 51,000 livelihoods in big cities, if all cities have organised retail chains. It is estimated that about 1.5 million direct jobs will be created by organised retail at the front-end over the next five years. In logistics, infrastructure, and value addition probably an equal number of new jobs will be created. Most of the small traders can be absorbed in the direct and indirect employment. The policy must provide for such safeguards. Transition mechanisms should include up-gradation of small retailers, franchisee models, cooperatives and institutional development similar to NDDB.

Retail trade is growing at 13.3% CAGR (2006-10). It is estimated that modern retail will be growing at 25% or more per annum, while small retailers will still grow at 10% or more. Therefore small retailers will have a share of about 75% (as seen in South-East Asia) in a much larger market, and will co-exist with organised retail chains.

Then there is the issue of investments and growth rate in the country. Our savings rate, which stood at about 23% of GDP in 2002 has risen to 37% in 2008, and has now declined to about 32%, in 2011. FDI in any form will stimulate growth in a capital-scarce country.

Finally, our current account deficit is roughly about $78.2b, or 4.4% of GDP. This level of deficit is unsustainable. FII investment may increase with capital market revival, but it is hot money which can disappear at the first sign of trouble in India or elsewhere. We need stable, long-term investments in the form of FDI, which will in-turn bring technology, growth, jobs and incomes.

On balance, if retail FDI is handled well, it will be a win-win situation for us. But for a large and diverse economy like India, there cannot be instant fixes and panaceas. We need to leverage our strengths systematically and boost growth and employment.

By Dr.Jayaprakash Narayan - The author is the founder and president of Lok Satta Party – new politics for the new generation

Courtesy: DNA India


  1. We have been exposed to much strident partisan opinions from either side of the FDI divide. What we hear is mainly noise. While the central government is selling FDI as a panacea for all economic evils, the opposition's criticism seems even more vacuous and opportunistic. Thanks for the balanced, cogent views, which I have just shared on facebook.

    But a big question remains. Success of the FDI decision will depend on implementation, which means we have to depend on the same politicians who have done so much damage to our economy.

  2. Santanu, I must confess that I'm no expert in the nitty gritty of this topic that has polarised us and our beloved politicians.
    However, I'll tell you what has been happening in my neighbourhood in the suburb of Chennai where I live.
    In an approximate radius of a kilometre, we have the retail outlets of well known giants like Reliance, More and Fresh.And the so called 'Mom and Dad' shops. Have these small establishments been forced to close shop with the coming of the big players? Hardly! In an amazing example of 'live and let live',everyone is thriving. As for us, the end users,today we need not step out of our suburb for shopping!
    It's sad that self centred, corrupt, ignorant politicians and the people have chosen to adopt a myopic perspective of the FDI............

  3. Definitely a balanced view. One point in the previous comment (anonymous) which crossed my mind too, is that already there are big retailers in India like the Reliance, the future group (big bazar)etc. Nobody raised a hue and cry when these people opened shop. The effect positive or negative is the same whether the big retail is opened by Walmart or Reliance. But the advantage with Walmart coming in is, it brings in much needed foreign investment into India. The opposition is all sheer politicking.

  4. One has to analyze the impact both qualitatively as well as quantitatively, not just a first hand or second hand information.

    Several questions put against FDI in retail are:
    1) What is the need for foreign player in this field? don't we have enough local players or sufficient rupees [please note] or required expertise to improve our retail market segment?

    2) Are the local players competent enough to survive and compete with foreign players? Are there chances of local players getting completely marginalized and vanishing in the near future?

    3) Impact on local manufacturers [including farmers and handicrafts]; for the government had to bargain [again, please note] that at least [perhaps not exceeding] 30 percentage of the total sales
    be from local manufacturers-- which means more than 70% of their sales would be of foreign origin; which also means that at least 30% of the urban India would not be consuming what rural/industrial India produces!
    USA could sustain such catastrophic change by diverting their attention to other fields of research and investment, are we competent enough to do so when most of our industry is either nascent or already on the decline?

    4) Once organized buyer [retailer] gains strength, the buyer would impose diktats on what and how to be grown/manufactured to the farmers/factories.
    It may have positive and negative implications to the overall agricultural and industrial environment of the nation -- did we analyze those implications?
    What if such powerful [filthy rich] foreign [need not be] players dictate terms to farmers to cultivate genetically modified crops?

    5) when any trade negotiation takes place, there shall be a 'give' and a 'take'-- what are we taking back while giving in license to these foreign players?
    it could be more VISAS or much liberal off-shoring policies, opening up immigration for other services sector like construction works, carpentry, farming, etc

    6) PM showed a devil on the head as if it was in 1991 when we had less than a billion dollar Forex reserves while at the moment Forex reserves had been quite stable
    [that itself is another concern which i'll talk about sometime later] for the last three years at roughly around 300 billion dollars.
    At that time, in 1991, the foreign banks like IMF and world bank imposed 'globalization' on us when liberalization would have been more than sufficient.
    As a result, it took more than 10 years for local industry to pickup and compete, that too in selected fields. What measures are we taking to provide a level playing field for all players
    and to avoid monopolistic encroachments over local players as it happened to Thumsup by Coca-cola as just one example.

    On the other hand, most common arguments favourable to FDI in retail are:
    1) the local players are very dishonest and cheat the consumers quite often; with the advent of such large players, we get more accountable vendor and much cheaper prices [does anyone know quality-price statistics in this front?]
    2) the local employ little educated folks and extracts more work from those fellows, giving much less; these foreign retailers would recruit more educated folks in large numbers and offer better salaries
    [sadly this argument does not bother about those half-educated folks who would lose their existing work and cannot accommodate in the new and changed sphere of so called 'malls']
    3) these foreign retailing outlets bring more variety of goods at much cheaper prices than local vendors and hence the consumer gets benefited

    Clearly, the above difference in the perspective very much resembles the increasing gap in the rich-poor divide; the interests of these sections of the society are diverging to a great extent
    and ready to blast anytime soon unless we work hard to bring up the lower income sections to at least middle or above middle class [by class i just mean money, no pompous definitions]

    1. It is with utter shame that I take pains to remind folks that we have already become
      a dumping dustbin by importing everything under the sky from 'paste' to 'processor', 'bolt' to 'bulldozer', 'fertilizers' to 'pesticides', and what not!

      One more issue I would like to address in this comment, although not related to FDI in general, is the fact the governments of late
      started covering their current [please note] account deficit by selling off long standing assets like offloading PSU shares,
      or entirely selling off so called loss making units, or giving such licenses [may be 2G, 3G, coal blocks, FDI in retail, FDI in insurance, avaiation, etc]
      and adding up the amount earned thus in to current [please, note it again] account. How come a money earned by selling off ancestral properties [be it shares, companies, licenses, etc]
      be put in current account? Certainly that money is not earned in this year [there was actually an equivalent depreciation in the assets] and hence cannot be spent for this or subsequent years as an earning.
      Such money earned can only be liquid asset and still be a stable asset which may be used for purchasing new stable assets but can never be consumed as current earnings.
      No person does that, no company does that; but alas, the Indian Government is doing it for the last one or two decades.