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Others Guest Column: FDI in retail – Scorched earth policy

Guest Column: FDI in retail – Scorched earth policy

Author | Shekar Swamy | Monday, Oct 01,2012 7:52 PM

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Guest Column: FDI in retail – Scorched earth policy

Talk about a contentious issue! Seldom have we seen the country so divided, as we are witnessing now on the issue of allowing FDI in multi-brand retail. Aligned on one side is a relatively small but vocal group comprising multinational and Indian corporates and a section of the English speaking, western-looking lot; lined up on the other side are the millions of traders, retailers, farmers and small producers who form the widest base of our country. There is a raging debate on this subject. Unfortunately, a great deal of the noise seems designed more to obfuscate than to offer clarity.

What is going on?

The core of the issue
There are an extraordinary number of people who are participants in the bazaars of the country – producers and traders of all hues – as providers of goods. This is how they make a living. Suddenly, they are being told that they are inefficient and not doing their job well. They are being asked to accommodate among their midst the largest and most predatory multinational trading companies of the world. They are being told that these companies will come in with big money, and this will be good for India.

Multinational corporates are being aided by the government to muscle their way to displace Indian small businesses in a big way. The key word is displacement. What we are witnessing is state-assisted ‘land grab’ by multinationals in the name of FDI. Those who are serving the market are expected to quietly go away, as their livelihood gets taken away. The argument is that there are too many middlemen between producer and consumer. The state’s answer is to introduce the biggest middlemen in the world it can find, which is what the multinational retailers are.

The government has cast its vote in favour of Big Capital, and against the mass of the Indian people. This is nothing but a green signal to transfer wealth from the masses of market participants to a few privileged multinational corporates. This is how the seeds of income inequality are sown by state policy.

In its desire to cater to the whimsical foreign capital, the government has betrayed the people. That is why we have an extraordinary political spectacle – the Left sharing the dias with the BJP, DMK and AIADMK agreeing, the Left and TMC on the same side, the SP and BSP speaking in one voice on this issue, and the UPA allies deserting the government and ducking for cover. This issue is far from settled.

No one trusts the policy
Forget about a consensus on this. The majority is opposed, and the government has no mandate to introduce this measure. Therefore, the government has done what it usually does under such circumstances – introduce rules and regulations supposedly designed to protect people’s interests and address the objections. Hence, the restriction to cities with million-plus population, ‘states can decide’, reservation for small and medium industry, etc.

Everyone knows that none of these restrictions will hold. Indeed, the amendments have already commenced. The language in the notification for the sourcing reservation for small and medium industry in single brand retail has already been changed from ‘mandatory’ to ‘preferably’. This is meaningless. The notification permits multinational retailers to open in the largest city in states that have indicated willingness for retail FDI but do not have cities with population of over one million. How can one trust a policy that comes with a slew of accommodating exceptions at the same time?

Fallacy of co-existence
The Planning Commission has argued that multinational retailers and small local retailers will co-exist. They even give a number. They say that only 20 per cent of retail will be taken over by multinationals. So what is the excitement about? This is an incredible argument. Every percentage point in market share taken over by multinational retail represents the loss of four lakh retail jobs. A loss of 20 per cent of the market means eight million jobs lost. Only a small fraction of this will be replaced with new employment, since the big retailers do not create that many jobs contrary to claims.

Where is the question of co-existence with multinational retailers under these circumstances? Indian retail needs to keep all the market it can cater to, to provide livelihood for the millions of small-capital entrepreneurs (including farmers) and their employees, both on the production side and the retailing end. Glib arguments that the displaced will find alternative sources of living simply don’t wash.

The ‘wastage’ argument
Thanks to large scale PR, suddenly the people of India are being told that post-harvest loss of fruits and vegetables is as high as 40 per cent. The only way to reduce this is through FDI in retail and the accompanying supply-chain infrastructure. This argument falls apart under scrutiny.

The 40 per cent number comes from a McKinsey study done in 1997. What the study did not do was provide a global comparison. A recent study released by the Natural Resources Defense Council (an international non-profit organisation) shows that the post-harvest loss of fruits and vegetables in the US, Canada, Australia and New Zealand is 34 per cent. They lose 20 per cent of their fruits and vegetables on the farm (production losses), three per cent in handling and storage, one per cent in processing and packaging, and 12 per cent in distribution and retail.
Many agro experts and dealers in agricultural commodities have stated that the post-harvest loss numbers cited by the proponents of FDI are hugely exaggerated. What is the government’s own group saying on this issue? The report of the Working Group on Agricultural Marketing Infrastructure for XII Five Year Plan 2012-17 has dealt with this issue. Its estimate of the post-harvest loss is given in the following table. For fruits and vegetables, post-harvest loss ranges from a low of 5.8 per cent to a high of 18 per cent depending on the item, far lower than the international comparison from countries with the biggest retailers.

 

Western retail is riddled with problems
The system of big corporate retail in the West is a major problem from the point of view of farmers, producers, small retailers and consumers…in effect for the entire society. It works only for corporates who control the market.

The evidence is overwhelming. Take the UK as an example (and there are plenty of similar examples). It is a system of oligopoly (few sellers) on the consumer side and monopsony (few buyers) on the supply side. Just three retailers (Tesco, Sainsburys and ASDA) control two-third of the market. Prices paid to farmers have been hammered down over the years, and the farmers survive only due to the largesse of state subsidies. Ninety per cent of small retailers have shut down in the past five decades. Barely 4,000 independent green grocers survive in that country of 60 million people. Multitudes of small producers have suffered because they have been blocked out by the big retailers and do not have access to the market. Consumers pay high prices due to high mark-ups enjoyed by retailers.

The most bitter adversaries get together to fight a common enemy. Indian politics has come together in a remarkable alignment on this issue. There is a good chance that India could still avoid and escape this scorched earth retail system.

The author is Group CEO, RK Swamy Hansa and Visiting Faculty, Northwestern University, USA

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