FDI Deadlock! How Not to Make Policy!

Good governance depends upon good policies and good implementation. If the implementation of policy formulation itself is horribly flawed what hope might be placed on getting good governance? The current controversy over the government’s decision to allow Foreign Direct Investment (FDI) in multi-brand retail reveals the sorry performance of both the government and the opposition in their approach to formulating policy. What compulsion impelled the government to suddenly announce FDI in retail not only during a parliamentary session but on the eve of assembly polls in four states? With an eye on votes would the opposition react in any which way except to vehemently oppose the proposal with populist vehemence? Was the government compelled to act due to some hidden reason involving pecuniary advantage to somebody or some group or some nation? Did the opposition lack sufficient ammunition to flay this corrupt and tainted government to garner votes without irrevocably committing itself against a policy proposal that deserves serious consideration?

There is much to commend FDI in retail trade. There are many valid concerns about introducing it. What was required was a serious debate to consider the pros and the cons and to explore whether adequate safeguards could be devised to address genuine concerns before arriving at a final decision about this proposal. Instead the government is stubbornly clinging on to the policy without participating in a transparent discussion with stake holders. Sections of the opposition have announced resolve to burn down any foreign retail outfit that dares to enter the country. How pathetic!

Undoubtedly there are some advantages in allowing FDI in multi brand retail. The 40 percent wastage of foodstuffs due to poor storage infrastructure could be avoided. There would be new jobs in creating that infrastructure. There would be an impetus to agro industry that could substantially increase employment. There could be a surge in the manufacturing sector which is badly needed. There could be better price for farmers. There could be better quality and price for consumers. But there are serious concerns too. Small farmers could suffer. Small traders could suffer. Local corner shops could close down. There could be large scale displacement and unemployment. Foreign multinationals could gain disproportionate influence to dictate the market. Benefits need to be weighed against losses and it has to be seen whether the losses can be altogether avoided. For that a serious debate is required. For that innovative ideas are required. For that amendments to the government’s declared policy are required.

Belatedly Finance Minister Mr. Mukherjee pointed out that the cabinet had declared only an enabling policy which need not be implemented by a state opposed to it. Why are many opposition leaders therefore so violently disturbed? Let the states supporting the policy implement it and those opposing it block it. Time will tell which state progresses faster. Both the Punjab and the Gujarat chief ministers have welcomed the policy. In fact a modest pilot project for FDI in retail trade has already started in Punjab. Walmart entered into a joint venture with Bharti Enterprises for wholesale business and started the ‘Best Price’ stores. With a 51 percent stake Walmart could go really big in Punjab. Apparently the farmers in Punjab are happy with the prospect which is why Mr. Prakash Singh Badal is strongly supporting the policy on the eve of the Punjab assembly elections.

Belatedly also the government backed down and after Mrs. Sonia Gandhi’s intervention clarified that the 30 percent reserved for procurement from Small and Medium Enterprises (SME) should be only for domestic outfits. Retail chains would be debarred to procure from global SMEs. A similar safeguard could be introduced for small retailers as for small wholesalers. Government could insist upon the big retail chains reserving 30 percent of all products for sale on their counters for purchase by corner shops at wholesale prices leaving the identical profit margin at a fixed price for their retail sale. This would strengthen small retail shops instead of threatening them.

In addition the government could stipulate that a percentage of FDI should be spent towards building up infrastructure, logistics and agro processing units. It could also be stipulated that at least 50% of the jobs in the retail outlet should be reserved for the rural youth. The government could also reserve the right to procure a certain amount of food grains for replenishing the buffer. The government could establish a regulatory mechanism to prevent the retailing giants from predatory pricing or acquiring monopolistic power. The government could evolve suitable policies to protect retailers in the unorganized sector. The feasibility of these and other safeguards could be proposed and considered in a meaningful debate.

Instead the government for obscure reasons and the opposition for electoral reasons have scuttled necessary debate and adopted hardened positions on a potentially gainful policy. From being a rising economic power India is rapidly sliding downhill. The decline will not be halted unless the political class becomes sufficiently committed to the national interest as against its singular obsession with electoral and partisan advantage.  


More by :  Dr. Rajinder Puri

Top | Analysis

Views: 3383      Comments: 5

Our kiranas deserve better, including a ministry of their own
R Vaidyanathan
August 3, 0:04 IST
Trade, with a GDP share of 15.1%, only slightly less than manufacturing at 15.6%, is an important segment of the economy.

More than 125 lakh kirana stores provide a source of livelihood to 16 crore people. Retail trade has grown faster than the economy: it registered a compounded annual growth rate (CAGR) of 9.4% between 2004-05 and 2008-09 when the Indian economy grew at 8.66%.

The retail trade comprises all kinds of people and formats — from street vendors to departmental stores of various types, shapes and characteristics.

More than 80% of trade is accounted for by partnership and proprietorship forms — often called the unorganised sector. The kirana shop adjacent to my home opens at 7am and closes at 10pm every day, 365 days of the year. It is very efficient, and one can order through a mobile. The owner knows the tastes and price preferences of our family, but his business is classified as “unorganised” by our experts and national income data.

The footfall in his shop cannot be measured using western models (since there is no place for anybody to set foot inside his shop), and so he is derided and ignored. It is like clubbing housewives along with prostitutes in our census data to show them as unproductive citizens.

These are economic constructs imposed by the west on the rest and it is a form of terminological terrorism which is mouthed ad nauseam by our economists and policy planners without understanding the implications. The retail trade suffers from two major handicaps. One is the non-availability of credit at reasonable rates from institutions; the other is the bribe one has to pay to the government babus to leave him in peace.

Nagamma has been a flower vendor for more than 20 years in my suburb of Bangalore. When she needs a loan, she participates in chit funds. Sometimes, she has lost big as the chit funds were run by crooks.

As a finance professor, I thought I should do some good in the world of practical finance and advised her to open an account with a commercial bank for saving her hard earned money and perhaps get a loan later.

The branch manager — a pleasant lady — was also acquainted with the flower vendor for many years, but the core banking software solution used by the bank will not recognise the Nagammas as customers. The bank’s “know your customer (KYC)” norms require proof of address, PAN cards, proof of date of birth — everything but her dog’s surname. She has no chance of getting this kind of KYC done.

Large companies get loan rates below the prime lending rate, but my vegetable vendor gets it at 0.5% per day. They have to return 50 paise at the end of the day for every Rs100 borrowed in the morning. This will work out to be more than 180% per annum.

My retail provision stores man gets his money in an interesting way. He gets Rs45,000 (for a loan amount of Rs50,000) upfront and pays Rs500 a day for 100 days to repay his full Rs50,000. It turns out to be more than 10% for three months. More than 70% of the working capital requirements of retail trade in 2009-2010 came from non-bank sources.

The other perennial problem faced by the “unorganised” retail trade is the “organised” dacoity by minions of the state. They need to bribe the cops, bribe the municipal authorities and other local goons. The cost can be as high as Rs20 on an income of Rs200 or so per day. That is 10% of gross income. The same is true of fruit seller, the fast-food idli joint or the beauty parlour.

Instead of looking at these two important constraints imposed on the fastest-growing and most productive and efficient retail trade, our planners want to open the field up for global sharks in the name of liberalisation. For anything and everything the policy-maker wants Indians to emulate the Japanese, the French, the Germans or the South Koreans.

All petroleum services and products, rice, tobacco, salt, alcoholic beverages and fresh food traded at public markets are excluded in Japan from any “distributional aspect” by foreign companies. The French simply restrict any development of hypermarkets to protect what they call “centres of French towns and villages and the livelihoods of small shopkeepers”.

Germany has legislative constraints on outlets above 1,200 sq m. This is despite trade constituting a relatively small portion of their economy both in terms of employment and value addition compared to India.

The paan-chewing, dhoti-clad, English-ignorant retail trader should not be seen as an inefficient entrepreneur who needs to be bleached by globally-accepted detergents. What he needs is a level playing field, in the full sense of the term, with access to affordable credit and the abolition of inspector raj in the form of harassment by various arms of the government. We are still a savings-based, family-oriented economy.

The sooner we have a ministry of retail trade to protect, preserve and enhance the capabilities of our kirana stores the better for the Indian economy.

29-Nov-2011 22:58 PM

Comment Yes, a debate is healthy and very much on the cards and members of the public such as Prof. Ranganathan of IIM Bangalore must be included. Invite MNC's for the debate also.
If the govt of Gujarat under the BJP/NDA approves FDI in retail, we must know the reasons and why the BJP is not clear on the issue.
Through the WTO, there are any number of restrictions placed on countries like India by the richer nations. Why are we so keen to roll out the red carpet without reciprocity?
Most importantly, why is this corp so reviled and what can be changed if its'entry into India is inevitable?

29-Nov-2011 22:20 PM

Comment Dear Sir & seadog4227,

I share the same feeling - opposition is opposing for electoral benefits, while govt. is insisting on it for their own (rather unknown) benefits.

If that was not the case, there would be debate on real points and a modified policy might been introduced, both in parliament, within govt. agencies and in media. Sadly, NONE is doing it.

While kangress is hopeless, BJP is going in the same direction - those poor leaders don't and can't think about their own future. When they will come to power and if they will need to introduce another avatar of retail FDI, what arguments will they defend with ??

Dinesh Kumar Bohre
29-Nov-2011 14:04 PM

Comment Seadog, by all means reject the proposal. But should it not be done after debating pros and cons? Incidentally China is very strong on Walmart -- too strong for my comfort! Why did BJP support FDI in retail in 2006 and is opposing it now? Things like this confuse one and make the opposition as suspect as the government!

My Word
29-Nov-2011 10:48 AM

Comment The first detailed article I came across on the subject is here
Not setting up cold storages is not a cogent reason at all-- the GOI has failed to make it viable and Indian investor friendly.
Pune is awash with huge malls which see more footfalls than business because nothing is in the common man's reach.
What magic wand is Walmart going to wave?
Why foreign? Why not local investment?
How many Walmarts does one see in China or Thailand?
Why are we so keen to bring in foreigners?
Every media outlet is fed and supported by the Kkkangress but what debate has there been?
Just google Walmart and see the overwhelmingly negative comments that this corpn gets.

29-Nov-2011 10:19 AM

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