With deep pockets and international sourcing capabilities, global
retail chains will outcompete domestic players, displace jobs, and
undermine livelihoods.
In predictable fashion, the Manmohan Singh government chose to ignore
voices of opposition and implement its agenda of permitting foreign
investment in the retail trade. While Parliament was in session, the
Cabinet met to approve the hitherto prohibited foreign direct investment
in multi-brand retail, with a cap of 51 per cent on foreign equity that
ensures majority ownership. Simultaneously, the cap on foreign equity
investment in single-brand retail has been enhanced to 100 per cent,
offering sole ownership rights to foreign investors.
Large international retailers are bound to use the opportunity to get a
share of the large Indian market. Foreign sales have been an important
source of revenue for many of them amounting in 2007 to as much as 74
per cent in the case of Ahold of Netherlands, 52 per cent for Carrefour
of France, 53 per cent for Metro of Germany, 22 per cent for Tesco of
the United Kingdom and 20 per cent for Walmart of the United States.
Walmart's 20 per cent too has to be seen in context: with $379 billion
of revenues in 2007, it stood way ahead of Carrefour, which came in
second with $123 billion in the global league table for revenues.
Power of the chains
The power of these chains has been amply illustrated in other contexts,
where they have been in operation. With deep pockets and international
sourcing capabilities, they exploit economies in procurement, storage
and distribution to outcompete and displace domestic intermediaries in
the supply chain. This occurs not in one or a few centres, since each
retail chain tends to establish procurement, warehousing and
distribution facilities across regions and cities. Once the smaller
middlemen are displaced, we have a few large firms and their agents
dealing with a multitude of small, medium and relatively large producers
on the one side, and a mass of consumers, on the other.
The relationship with producers is that of an “oligopsony,” with a few
buyers and a large number of sellers. With consumers, it is one of an
“oligopoly” with few sellers and a large number of buyers. Structurally,
this provides the basis for an increase in margins at the expense of
prices paid to producers or charged to consumers. The new “middlemen”
appropriate these higher margins. That a part of the margin may be
shared with the producer or consumer to increase retail volumes and
market shares does not take away from the fact that the distribution of
power within the supply chain benefits the large intermediary. In the
medium term, it is the dominant position of these large players that
would influence the size and direction of margins.
Thus, on the production side, the danger is that the prices paid to and
returns earned by small suppliers, especially in agriculture, would be
depressed because a few oligopolistic buyers dominate the retail trade.
Given the precarious viability of crop production even at present, that
shift could severely damage livelihoods. On the other hand, once the
retail trade is concentrated in a few firms, retail margins themselves
could rise, with implications for prices paid by the consumer,
especially in years when domestic supply falls short.
Within the supply chain itself, it is to be expected that the players
displaced would consist of not only smaller retailers, stretching from kirana
stores to street vendors, but also medium and large wholesale dealers
who would be rendered irrelevant by the ability of large conglomerates
to contract with and procure directly from producers. The immediate and
direct effect would be a substantial loss of employment in the small and
unorganised retail trade as well as in segments of the wholesale trade
displaced by the big retail chains.
The potential significance of this impact can be judged from the role of
the retail and wholesale trade in generating employment in the country.
According to the National Sample Survey Office's survey of employment
and unemployment in 2009-10, the service sector category that includes
the wholesale and retail trade (besides the much smaller repair of motor
vehicles, motorcycles and personal and household goods) provided jobs
for 44 million in the total workforce of 459 million.
It is no doubt true that the impact of foreign-invested retail would be
restricted to the urban areas since entry as of now is permitted only in
cities with a population of more than one million. But this is where
the employment in trade would be the highest. Twenty-six million out of
the 44 million employed in the sector are located in urban areas. Many
of these workers find themselves in the services sector (especially in
the retail trade) because of inadequate employment opportunities in
agriculture and manufacturing. Out of 71 million jobs in services in the
urban areas, around 36 per cent are in the retail and wholesale trade
and repair services. In sum, from an employment point of view this is a
sector that is central to livelihoods, however precarious some of those
jobs can be. It is a poor substitute for the missing social security
programme.
Questionable claims
The government's claims that the entry of large retail led by
transnational firms would not make a difference to net employment and
would, in fact, augment it substantially are questionable. They
exaggerate the direct and indirect employment that large retail would
create and ignore the number of jobs they would displace. The
requirement that the foreign investor should bring in a minimum
investment of $100 million implies that the FDI being sought is in units
that are more technology- and less labour-intensive. On the other hand,
the attempt to temper the adverse impact on employment by restricting
entry to cities with populations exceeding one million is without
substance. It does not change the source of the competition (giants like
Walmart, Carrefour, Tesco and Metro) nor the locations in which such
competition is most likely to be faced.
Yet, the Commerce Minister's claim is that the policy has a “unique
Indian imprint” that would make its impact here very different. This is a
poor effort to obfuscate issues. Consider one aspect of the unique
imprint: the requirement that 30 per cent of manufactured or processed
products sold should be sourced from small and medium enterprises. This
requirement based on a process of self-certification that is to be
monitored would be difficult to implement even in India. But it becomes
meaningless because it applies to such producers from anywhere in the
world. As a briefing paper from the Commerce Ministry notes, in order to
ensure that there is no violation of World Trade Organisation norms,
“30 per cent sourcing is to be done from micro and small enterprises
which can be done from anywhere in the world and is not India specific.”
This would be impossible to implement and will only encourage
international sourcing at the expense of domestic producers.
Rushed decision
In sum, there is little to justify the rushed decision to open up to FDI
in retail. As of now the retail chain works well, there are no
noticeable shortages, and a large and diverse country is well serviced.
None but the government argues that FDI in retail is a remedy for the
relentless inflation the country faces. The weak segment of the supply
chain is the public distribution system created to ensure remunerative
prices for farmers and reasonable prices for consumers. That and
productivity enhancing public investment are what need the government's
attention.
Not surprisingly, the decision to permit FDI in multi-brand retail has
not been received well domestically. An Opposition, which was already
engaged in highlighting the failure of the government to rein in
inflation, corruption and the generation of black money, has responded
with anger. Parliament remains stalled and non-functional, keeping in
suspension other important issues and bills that need to be debated.
Some allies of the Congress in the UPA have also had to express their
opposition to the move.
Whether those deciding the economic policy of the UPA would budge and
retract is yet to be seen. Given the on-going debate on the subject, the
government must have anticipated opposition to its executive decision.
But it possibly presumed that it can hold its position and win out at
the end. The tussle is, therefore, likely to be long and socially
wasteful.
-C.P. Chandrasekhar
(C.P. Chandrasekhar is Professor of Economics at Jawaharlal Nehru University, New Delhi.)
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