Welcome, Wal-Mart. India's coalition government made a surprise move last week by liberalizing the country's retail sector. Halfway into its second term, the governing United Progressive Alliance, long accused of being too passive and too wedded to the welfare state, ended years of hedging by successive governments by giving its consent to foreign direct investment in multi-brand retail in India, allowing global supermarket chains to set up shop and help spur economic growth
The move was probably, along with the National Rural Employment Guarantee Scheme (NREGA), the most significant policy decision made by an Indian central government in the last decade. And while the NREGA is redistributive, the decision to open retail trade was aimed at increasing the size of the pie, promising to revolutionize the relationship of Indians in both cities and villages to consumption and production, and to stimulate the inflow of huge amounts of much-needed capital to modernize the country's creaking supply chain. The move also signaled the government's commitment to what are called "second-stage reforms," which follow the liberalization of the Indian economy two decades ago.
It also seemed intended to address the problem of high food inflation, a consequence of a stagnant agricultural sector, an inadequate cold chain that results in large-scale waste of produce, and a gradual change in Indian diets away from cereals and toward protein-based foods as disposable income grows.
The decision also had ramifications for a massive class of sellers. India's retail trade is currently worth about $450 billion annually, but what is most striking about the consumer market isn't so much its size -- the seventh largest in the world -- but the way in which it is organized. More than 90 percent of the market is currently serviced by small, independent shopkeepers, and India has one of the highest shop densities in the world, with about one shop for every 10 people. After agriculture, retail is the main source of employment for Indians, with most of those jobs in what is called "the unorganized sector." Although small shopkeepers and big Indian retail chains have co-existed for about a decade, jointly feeding off India's massive consumer revolution, there has been very little backward integration.
But the balance may have tipped now. Sujay Mehdudia reported in The Hindu:
In a bid to remove the impression that [the governing coalition] was suffering from “decision making paralysis” and kicking off the second generation reforms, the Union Cabinet on Thursday gave its approval to allowing 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent FDI in single brand retail.
The proposal for 51 per cent FDI in retail has come with certain riders, including approval to be taken from the Foreign Investment Promotion Board (FIPB), a minimum investment of $100 million by the foreign investor, 50 per cent of the total FDI to be invested in “back-end infrastructure” and 30 per cent of the products to be procured from small scale industries.
The retail chains will be allowed only in cities with a population of more than 10 lakh [1 million] as per the 2011 census. There are 51 cities with a population of more than one million, based on the 2011 census.
The move set off a political firestorm. Parliament transacted no business for six days as parties to both the left and right of the Congress (around which the United Progressive Alliance is based) agitated for a rollback of the move. They included the main opposition party, the BJP, and some of the Congress's own allies in the government, such as the Trinamool Congress and the Dravida Munnetra Kazagham. The main fear voiced by critics of the decision was that it would destroy the livelihoods of several million small shopkeepers.
But opposition to the move was by no means universal: many prominent voices in Indian industry gave their assent, and other political parties offered support. Among the parties supporting the decision, the most prominent was the Shiromani Akali Dal of Punjab, which represents much of the state's large class of farmers. This fact was emphasized in the Business Standard by Surinder Sud, who observed:
It is indeed noteworthy that despite adverse reactions from several quarters, rural-based political parties like Punjab’s Shiromani Akali Dal and governments of agriculturally advanced states like Punjab, Haryana, Rajasthan, Maharashtra and Orissa, among others, have hailed the Centre’s move to open up the retail sector. The Confederation of Indian Farmers’ Associations (CIFA), in any case, has been demanding greater investment, including foreign investment, in rural infrastructure and retailing. [...]
This apart, the involvement of numerous intermediaries between farms and folks adds to marketing costs, escalating prices for consumers even while denying reasonable returns to growers. The producers’ share in the final price paid by consumers is often meagre, less than 30 per cent for perishable items like vegetables and fruit. That is why the present spell of high food inflation has not benefited farmers. Nor has it induced production to respond to demand and high prices the way it logically ought to have.
Much of the government's thinking behind the move, such as the justification offered by Prime Minister Manmohan Singh, seemed rooted in a study commissioned by the government in 2008, and carried out by a team of researchers from the Indian Council for Research on International Economic Relations. Called "Impact of Organized Retailing on the Unorganised Sector," the report argues that farmers receive a much larger slice of the final price of their produce when they sell to organized retailers, that often it is low-end consumers who save the most when shopping at organized retail outlets, and that unorganized retail has significant strengths that cannot be undone by big chains, such as "consumer goodwill, credit sales, amenability to bargaining, ability to sell loose items, convenient timings, and home delivery." It concludes:
In short, both unorganized and organized retail are bound not only to coexist but also achieve rapid and sustained growth in the coming years. This is clearly not a case of a zero sum game as both organized and unorganized retail will see a massive scaling up of their activities. In fact, the retail sector, left entirely in the unorganized and informal segment of the economy, could well emerge as a major bottleneck to raising productivity in both agriculture and industry.
We need investments to remove supply side constraints that give inflation its pernicious structural nature. Global retailers' entry means capital to build farm-to-fork infrastructure like integrated storage, cold chain and transport links. Technological upgrade will modernise the underdeveloped farm sector, whose productivity must match rising food needs. With unmediated access to big buyers, farmers' incomes will rise even as lower prices benefit consumers. Contrary to opposition propaganda about job loss, a boosted industry-agriculture interface will create much-needed employment. And if Indian retail behemoths couldn't wipe out kirana stores [small grocery shops] known for personalised service, why assume global players can?
This view wasn't shared by groups hostile to the liberalization of the retail trade, such as The National Association of Street Vendors. One body, called India FDI Watch, put out a booklet in several languages a few years ago that argues that India would be wrong to follow in the steps of the developed world. One section takes a "myth-and-reality" approach to the issue:
Myth: There is a consumer demand for large corporate retail chains.
Reality: The Indian consumer mentality is to “save and buy”, the opposite of “buy and repay”, which exists in the West. In fact...corporate retailers will have to spend crores of rupees on advertising in order to “create” demand and consumer spending.
Myth: India is so vast that there will be room for everyone, corporate retail chains as well as small shops.
Reality: Thousands of family run shops have gone out of business in the developed world as they were not able to compete with companies like Wal-Mart & Tesco. The retail market is not infinite, therefore the growth of corporate retail will mean the loss of local shops.
The booklet's arguments echo those made against big retail chains by the left and by a certain class of consumers in many developed countries:
Retail giants like Wal-Mart, Reliance and Tesco have become agents of destruction of employment, community and the environment. Across the world movements are going on to create local farmers markets and street markets to resist the monoculture and monopolies of supermarkets. India has the diversity and the decentralization that the people of the west are seeking. Let us not allow the destruction of our rich and robust small scale retail. Let us not vote for monopolies through our shopping. Let us protect our diversified, decentralized retail democracy.
But looking at Indian realities, particularly the indigence of farmers and the scale of wasted produce, it seems more perverse to leave things the way they are than to attempt to change them through a booster shot of investment. Nor is the move likely to be as apocalyptic as some make it out to be. Indeed, as the business analyst Alam Srinivas pointed out on BBC News, the riders placed by the government on minimum investment and minimum procurement meant that only a few big international firms would have the necessary capital to enter the Indian market, and that the transformation of the retail landscape either desired or feared by different classes of Indians might be a decade or more. Srinivas concluded the step "appears a deliberate half-measure to move in the right direction."
That seemed like a description, too, of how Indian democracy lumbers along, trying to reconcile various contradictory imperatives through the artful or resigned deployment of the half-measure.
(Chandrahas Choudhury, a novelist, is the New Delhi correspondent for the World View blog. The opinions expressed are his own.)
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