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Economic Brinkmanship

The use of the WMD(Weapons of Mass Disinformation) engaged by the government to defend the entry of FDI(Foreign Direct Investment) in retail, especially the multi brand retail, is atrocious to say the least. Selected media groups are overworked these days. Paid news is passé, paid editorials is the new fad. Any voice against FDI in multi brand retail is promptly termed hostile. Even the government itself is upbraided for having imposed conditions, as they are the biggest disincentive for investors. Even as the Prime Minister, his colleagues and party are risking economic brinkmanship in this FDI business, the lobbies are not happy. They want total freedom.  They want the following conditions to be removed:

  1. Mandatory investment of US $ 100 million;
  2. 50% of it for  creating back end  infrastructure;
  3. 30% local sourcing; and
  4. Exclusion of land cost from computation of investment.

It is being pushed in the name of promotion of investment and capacity building in key areas. It is being visualized as a panacea for the economic ills of the farmers. They will get to grow what they have not done so far, like diversifying into horticulture etc and micro businesses, especially in agro-businesses. FDI will catalyse it, it is being touted. It is being said that the farmer will gain direct access to the buyer, leading to reduction in transaction costs and lower prices for the buyers and better profits for the farmers. Above all, addition of millions of new quality jobs is being projected.

Since too much is being promised, it would be necessary to analyse each and every statement, assurance and promise being made in support of FDI in retail. It is fallacious to think that somebody is hostile to FDI in multi brand retail; it is only divergence of economic assessment of the needs and priorities. For some people, it is good but for others it is not good. There is nothing intrinsically wrong with foreign retailers. But there should be an established need and benefit. Investment priorities put retail business at the bottom of the list. There is nothing for the core sectors of the economy, which are now re-named as key areas. The so called back end infrastructure is yet to be defined- may be liberal concessions are granted later as another incentive to foreign investors, as has been the practice wherever permissions are required.

Let us see the disincentives. We are talking of “investment”. From investment point of view it is a petty amount, especially when the economy is being opened for exploitation in a low priority area. Judging by the economic brinkmanship displayed by the government, the benchmark investment limit must have been kept to restrict entry of rivals. Otherwise, the Common Wealth Games cost India more than 80000 crores of rupees and 100 millions come to only 500 crores, which is a petty sum to allow foreign investors entry in retail trade.

In so far as the requirement of 50% compulsory investment in backend infrastructure development is concerned, the rules are yet to be drawn up. The government was in a hurry to announce something in the name of reforms and pushed FDI in a hurry. The notification is smoky in several respects, including this one. But without investment for reduction in the drudgery of the farmer and transaction costs and prospects of better gains for the farmer, the whole case of the government  justifying FDI in multi brand retail falls apart. There is little justification for it otherwise. How can anybody raise objections on this count?

The third objection relates to the compulsory procurement of 30% from local sources. It was devised to silence the Small Scale and Micro Enterprises, who faced an instant threat to their survival. In order to push its case for FDI in retail, the government came out with this condition. However, it is yet to be decided whether this 30% will be counted on the basis of value of transactions or products or product categories. It is also not clear whether calculations will commence from the first year itself and will be on annual basis or shall be calculated on the basis of 30% of the average value of 5 years turn over. If it is on the basis of 30% of the turnover of 5 years, it sounds the death knell of the local producers, whether in the small scale sector or the micro sector. It is needless to say that this sector (SSI+Micro) provides the maximum employment and produces larger number of goods and services consumed by the people, including the farmers. The whole opposition to FDI in multi brand retail flows from fears of disruption of this economic activity, which is a model in itself. It is low technology, low investment, low priced economic model, which suits the Indian Economic Order. Changing it will need huge investments. The government is expected to channel FDI in this segment. Instead, they are meeting the requirements of the well fed, well provided, rich classes, who are educated urbanized city living people and for whom big foreign retail stores are being incentivized to open shop in big cities with fully developed infrastructure. What looks like conditions for minimum investment of 100 million dollars and cities with population of 2 million really are not the Indian government conditions in public interest, but of the foreign investors for assured high returns on minimum investments from the very first year itself.  Had the extant policy for balanced regional development been pursued by the government, all FDI in retail should have been pumped into undeveloped, backward & rural areas with majority of farmers as high as 85%, so that development takes place in these areas too. Such foreign investment would have provided us an opportunity for a comparative study of the results achieved by domestic and foreign investment in overall growth of the economy.

Whether land counts towards investment, it is the same for calculating threshold limits for Small, Medium or Large industries in India, which has always been investment in plant and machinery only. So there is no cause for complaint.

Nobody has considered the merits of the Indian retail business, which is the most liberal open market anywhere in the world. It is free market economy in real practice. FDI will convert this into an economy controlled and monopolized by a few players. Is that the goal of votaries of liberalization and reforms in terms of modern Economics jargon? Here goods and services are produced and marketed according to the need of the consumers. Take a simple example of a contraption called Juggaad, an invention of great use for transportation of man, machine, materials, animals and produce from the inaccessible rural areas to and fro the market several kilometers away. It runs on dusty rural roads. The government, industry, investors or technologists have done nothing for the farmers but the local talent has done it. Not that they do not value high technology. They do, but the requirements of the market and its size keep both investment and scale to the bare minimum required. Can some FDI do something on similar lines? The local skilled workers are known to have developed and produced items superior to even imported ones, but information on their achievements is scattered and not kept at one place. Indians are born entrepreneurs and are known to have survived the most adverse conditions. One of the reasons of their survival is this model of free and open enterprise and market. They deliberately chose to achieve spread of enterprise and talent rather than promoting monopolies and centralization achieved through economies of scale and market presence. That is why each production centre is famous for its product with which it is associated, like Shawls from Kashmir and Gems & Jewellery from Jaipur etc. What the FDI in multi brand retail wishes to promote is the concept of one size fits all. In India, no two members in the family have the same choice of food on a single day. It is because of the variety and options available. Our present economic rulers take no count of this internal strength. Instead they want to substitute this model by the imported one, though it may not fit all.

There might be good reasons for the decision makers to go in for FDI in multi brand retail. People have a strong suspicion that the owners of black money, kept in foreign banks, will try to convert it into white money by making it look like FDI. They may be right or wrong. But one thing is certain. The liquor trade is bound to get a boost. Most politicians and bureaucrats are highly enthusiastic to enter this trade for the sheer profits. The posts in the excise department are highly valued and coveted ones; and so are supervised by the head of the government in most states and at the centre. Is the prospect of getting the choicest liquor easily once the FDI in retail is opened winning it many friends? Indeed, it seems so. The sheer variety, choice, class, taste, price and abundance makes one intoxicated (truly, more than the Lotus Eaters).Beer, wine or spirit- everything is stocked on the shelf of any foreign retail store. The investing countries have no inhibitions about consumption of these products. Their climate permits it, even encourages it. In India, Mahatma Gandhi advised prohibition. So, even when the climate demands, society does not encourage these products. Moreover, the local quality is low, prices are high and adulteration causes thousands of deaths every year in some part or the other in India. But the supplies from the foreign retail stores will be trust worthy. They have on offer more than 125 different products. They price them from US $ 1 to 100 each. More than 100 products are available in the 0-10 dollar range but high brands in the 50-100 dollars offer a limited choice of not more than 5 products. Only connoisseurs of wines, beers and spirits would know what it means to have such a wonderful choice in India, which presently offers nothing more than IMFL(Indian Made  Foreign Liquor) or local brew. There is no comparison between the two.

It will be an eye opener to have a quick survey of the size of the Indian liquor market. It has been estimated to be above 54000 crore rupees presently, which will grow to 154000 crores by the year 2015. These are the figures, reported by the Indian Express in its Nov 02, 2011 story, on the basis of an Industry Specific Analysis by The associated Chambers of Commerce And Industry of India (Assocham). The report is worth reading to understand the reasons for such growth in the industry. This study was undertaken when FDI was not allowed. At that time the foreign brands were only two in number and their contribution was minimal. One has to do only some quick back of the envelop calculations to arrive at the growth when foreign retail giants take to “developing” the market. According to this study the India consumes whiskey and beer. Even students of class XII are contributing to the growth. The upper middle class in the cities liberally contribute for this growth. As figures of country liquor are not reliably available, it can be safely assumed that its contribution will not be less than the business from others. So nobody should be surprised if the business reaches 500000 crores by 2015, with the active support of the FDI in multi brand retail.. That is an attractive figure!

The lobbies-business, political, bureaucratic and economists appears to be under the influence of the aroma of these fine drinks and figures. They are sure to create quality jobs, good business opportunities and economic betterment for some. But all cannot be served in one go. If FDI is benefiting some so let it be, they seem to suggest. In that limited sense, it is indeed Reforms. The liquor lobby in India has exercised so much influence that it has successfully trashed the national prohibition policy. It will be the biggest gainer from this FDI in multi-brand retail.

How else FDI in multi brand retail is going to benefit us, if it really does any such wonder at all, will be analysed as we go on.

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