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.    

Advertisements

NCTC’s Tryst with the Principle of Decentralization of Power

Last week the Union Cabinet sanctioned a very bold program which was precisely a picture perfect example of the Union Government superbly practicing all that it had been preaching since quite a while. Post 26/11, the then Home Minister was made to resign and P Chidambaram vacated the Finance Ministry to take over the reins of the Home Ministry. P Chidambaram envisaged an effective National Counter Terrorism Centre to tackle terrorism in India. He emphasized that the creation of such an institution, wholly devoted to the cause of countering terrorism, was necessary to sabotage terror plots against the nation.

Chidambaram launched a blitz of institutions to strengthen the anti-terrorism armoury of the country but Chidambaram’s idea of tackling terrorism in India was in contradiction to the principle of decentralization of power which has been a fundamental policy being actively carried forward by the incumbent government. Chidambaram wanted the National Counter Terrorism Centre (NCTC) to act like a parent body and advocated in the favour of bringing agencies like the NSG, NIA, NATGRID etc under the umbrella of the NCTC to give buoyance to the proposed institution. The Union Cabinet gave a go-ahead to the setting up of the NCTC but it refused to entertain Chidambaram’s plea to subsume institutions like the NIA and NSG under the ambit of the NCTC. What does this signify? It shows the zeal with which the government is committed to ensuring the propagation of decentralization of power.

The Government refused to accept the draft Jan-Lokpal Bill because it was a similar sort of a proposal where the demand was to circumscribe institutions like the CVC and the CBI under the Lokpal, the placement of the citizen’s charter under the ambit of the Lokpal, bestowing the Lokpal with suo-moto power and giving it powers of preliminary inquiry, investigation, prosecution and other departmental powers. The Government courageously struck down the proposal since the proposal aimed at loading a single institution with all possible powers. Chidambaram’s vision for NCTC sounded a bit similar but the government passed a different version of it.

What we need to realize is that no matter which issue is to be dealt with, be it corruption or terrorism, it has to be dealt by a medley of institutions working in active coordination and consonance with one another, not by a single omnipresent body. The Government is deeply committed to address all such burning issues but at the same time it is the Government’s responsibility to hold up the spirit of decentralization of power. Just because the Government doesn’t clear proposals wanting to create centralized institutions and instead gives its nod to creation of institutions undertaking the task prescribed by means of sharing powers and responsibilities, it doesn’t mean that it is wilfully trying to weaken institutions and is not enough committed to address the concerns facing the nation. What we must correctly comprehend is that decentralization of duties and power is the primary step towards addressing any concern. A lot of troublesome concerns have persisted just because a single institution based in Delhi has tried to slug around with it. With the power of legislating let us create institutions and not dismantle institutions, let us strengthen the Executive and let us not weaken it.

Cabinet Clears FDI Amidst Ideological Deviations

The cabinet has given its nod to 51% FDI in multi-brand retailing and 100% in single-brand retailing. This decision has been welcomed by many industry experts but at the same time some have lambasted the authorities for the clearance.

The BJP and the Left are opposing the move. It’s a sort of an ironic position. A right wing party ie the BJP (whose ideology is based on free market and open economy) is opposing the move and a centre-left party (who is a beneficiary of the Socialist model of Nehruvian ideology which talks of a controlled economy) is promoting this to give further flare to the Indian Incorporation. I find the BJP’s stand far more ironic because on one hand they say that price rise is a concern and on the other hand they oppose FDI in retail just to save the jobs of those middlemen (apart from small scale commodity sellers) who play a very pivotal role in sending the prices up. The BJP fears for the jobs of those middlemen who might get eliminated once organized retail creeps into India.

I don’t find the Congress’s stand ironic at all even though it’s against their centre-left ideology. The current PM Dr Manmohan Singh during Narsimha Rao’s regime de-regulated the economy demolishing Nehru’s Socialistic economic model and ever since then the Congress has moved in a direction which has been very different from the one envisaged by Nehru. I personally feel that the Cabinet’s nod to this particular issue is a good one. Organized as well as unorganized retail both can easily co-exist in India. Local vendors will give tough competition to the foreign players. Foreign players shouldn’t expect to completely take over the market as the local players won’t be giving them a cakewalk. What will lie in store will be intense competition and the co-existence of both organized as well as unorganized retail will help play a role in diminishing the demand-supply imbalance.