Whats Right with FDI?

Most of the ignorant arguments which are being put forth in opposition to FDI in Multi Brand Retail are laughable and devoid of any factual data. Walmart is being portrayed as some job eating firm which will either displace or take away the livelihood of 44 million side shop keepers operating in India and forming the basis of an industry which is valued at close to $400 billion. First of all, we need to be clear about certain things pertaining to this perceived American monster named Walmart. Walmart along with its other subsidiaries (well over 50) happens to have about 8900 stores in 15 different countries, employs 2.2 million people and has revenue of approximately 447 billion dollars. It’s stupid to think that a company of such size (although huge but tiny in front of the gigantic unorganized retail sector in India) can decimate the Indian economy when it’ll not even operate in more than 50 cities since the policy paper on FDI in Retail states that foreign stores can be opened only in cities with a population of over 1 million. A brief overview of the census provides us with 53 such cities and that keeps nearly 3500 cities and over 6,00,000 villages of India totally insulated from the invasion of any foreign outlets and thus the ‘projected’ job losses. For arguments sake let us assume that even if Walmart was to establish 10% of its total business in India then too it won’t offer more than 2.2 lakh jobs. From where does the question of strangulating 4.4 crore jobs arrive now ?

Some people (including the grand old patriarch of the Bhartiya Janata Party) cite the example of Thailand to highlight the ill effects of FDI in retail where 60% of domestic shops had to be shut down since they could not compete with the foreign players but what they don’t tell us is that Thailand’s economy is not even 1/5th of the Indian Economy as its GDP stands somewhere around 345 billion dollars and the country has an unemployment percentage of less than a percent, to be precise, 0.7% while we happen to have a GDP of 1.6 trillion dollars with an unemployment percentage of over 9% and so it’s completely unfair and absurd to make a comparison between the two nations. However, for our better understanding of FDI in retail we should look at our neighbouring China with whom we share more commonalities. A decade after FDI in retail was introduced in China, the number of jobs grew from 28 million to 54 million, that’s nearly 100% and guess what ? Even after being in the Chinese market since the past 12 years, Walmart has not been able to extract even a penny as profit. This is indicative of the fact that Walmart isn’t eyeing short term gains and is in China for the longer run. 29 developing economies have had FDI in the retail sector for more than a decade now and each experience has happened to be fruitful and prosperous. A study conducted by the CII with the BCG tried to foresee the impact of FDI in retail on the Indian Economy and it concluded that by 2020, business would increase from 26 billion dollars today to 260 billion dollars, direct employment would increase by 4 million people and tertiary employment would go up by 6 million people.

The policy paper on FDI in Retail makes 50% investments in back-ends (cold storages and warehouses) a necessity and this will not only reduce wastage but also create more jobs in rural areas. Farmers would get better remunerative prices for their produce as middlemen would get eliminated. These middlemen are the ones who deprive farmers of genuine profits since the farmers get only Rs 5 of the tomatoes which are sold to us for Rs 20, rest are pocketed by the middlemen. Another big apprehension is that of predatory pricing. Foreign outlets would initially offer items at really cheap rates, eliminate all competition, monopolize the market and would then all of a sudden start increasing prices thereby causing inflation. The best response to this argument was provided by Thomas Di Lorenzo in his research paper titled ‘The Myth of Predatory Pricing’. He described predatory pricing as a ‘conspiracy theory’ and stated that ‘no economist stands by it since it exists only in theory not in practice’ and that ‘there is not even a single example of a business enterprise raising its prices after wiping out competition.’ However, there are numerous ways in which unfair trading practices igniting a price war can be avoided. Germany is a brilliant example of this. In the year 2000, German competition regulators asked Walmart to increase its prices when it initiated a price war with two domestic supermarket chains by selling products at a cost lesser than its wholesale price.

Making unorganized retail more organized will also boost the prospects of the state exchequer as the government will have a big resource pool to extract from. This will ease the burden of taxation on the petroleum industry and effectively distribute the tax burden. The money collected could go into strengthening social security schemes and subsidizing food, education and health. The entry of foreign players into the Indian market would also give a boost to the real estate business and property rates will thrive. The pros of FDI in retail are so many and so serious that they cannot be set aside. Those who are opposing it need to have a broader vision and get over their protectionism after all this is the age of economic liberalism.    

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