FDI in Retail part of liberalisation

Looking at the issue dispassionately, there is not much merit in the blind opposition to FDI in multi-brand retail. Fears that multi-national distribution companies would flout labour laws and exploit Indian workforce are out of place. The proposed Retail Trade Authority will take care of it. It is impossible now for any corporate to exploit anybody for long if they want to do continued business. Indian regulatory surveillance and judiciary are pretty strong, argues Jaya Raj, espousing the cause of FDI in multi-brand retail

   Recently there has been an upheaval against the government’s move to further liberalize the Indian retail trade in line with the World Trade Organisation (WTO) obligations. The Opposition parties and some sections of the ruling United Progressive Alliance (UPA) that jointly opposed the trade reform step stalled Parliament proceedings for days together. They wanted the government to roll back the clearance being given to foreign companies to invest and trade in multi brand retail in India.

Pranab Mukherjee

   Buckling under the political pressure finally, the Finance Minister, Mr Pranab Mukherjee, on December 7 announced at an all-party meeting that the decision to permit international players in multibrand retail trade would be kept in abeyance for “further consultations”. He admitted that the hold-back decision was forced by the fear of the coalition government’s collapse that would result in fresh Parliamentary elections.

   The saving grace, however, at the end of the stand-off is that the government could convince the 'naysayers' that ‘free trade’ was what India bargained for while joining the WTO. At that time India was also in the forefront of other developing countries declaring that ‘trade is better than aid (from developed countries) for national development and poverty eradication’. That is probably why the opposition did not persist with its demand for a full “roll back”.

   Most opposition parties privately admit that they were compelled to oppose trade liberalization because of the ‘vote bank considerations’ with the Uttar Pradesh elections due early 2012 and next Parliamentary elections about two years away. The MPs know well that if India did not allow foreign companies in trade sector, they would block our IT companies going to their countries for business operations. India often mounts pressure on the USA and Europe to allow more entry visas for our IT professionals to work in their countries. India is also campaigning at WTO to open other services sectors.

   A CPI-M member of parliament who recently visited the Marxist ruled China privately acknowledged the positive sides of trade liberalization. He was all praise for the great shopping experience in the Wal-Mart departmental store in Beijing and witnessed continued flourishing of several ‘husband and wife manned’ small shops in the China’s suburbs.

   For an average Indian, the stand-off between the government and opponents of foreign firms in retail is intriguing. For he/she finds that almost all well known foreign brands, like Nike shoes, Mark and Spencer garments and LaCoste sports items, Kentucky Chicken and Dominos Pizza are available in the Shopping Mals and prominent market places around. This is because they have managed to enter the lucrative Indian market through the side doors of the Indian restrictions.

   Since the inception of liberalization in India in 1990s, several substantive reforms have come up in the financial sector, trade, manufacturing and foreign exchange control. India now provides an investment climate that is fairly attractive and investor friendly. That is why so much FDI funds pour into Indian bourses. Partial removal of the restrictions on foreign firms trading in Indian retail trade, as contemplated in the Cabinet decision of November 24, was part of that continuing trade reforms.

   The MPs who protested in Parliament said they were worried about millions of small traders losing their traditional income earning avenue. They were also apprehensive about Indian farmers getting squeezed if the foreign departmental stores manage monopoly over the market. That is a little farfetched.

   For instance, China permitted FDI in retail 30 years back and allowed American and European companies to set up shops in all major towns. As the foreign firms did brisk business in China, the traditional shop keepers did not get wiped out. Many of them have updated their business profile in the competition and are flourishing as the Indian CPI-M MP found. The foreign firms too have realized that they cannot compete with the local shops in the latter’s business stocking core areas.

   People in India will remember how some of the ruling Congress party members and other political parties had opposed Prime Minister Rajiv Gandhi’s decision to allow the American Pepsi Company into tomato cultivation in Punjab. As a result, Punjab became an important tomato and other farm commodities producing and processing centre. More new international players came in with buy back offers. Still there is no chance of Pepsi squeezing the Punjab farmers.

   Fears that the multi-national distribution companies like Wal-Mart would flout labour laws and exploit Indian workforce are out of place. The proposed Retail Trade Authority will take care of it. It is impossible now for any corporate to exploit anybody for long if they want to do continued business. Indian regulatory surveillance and judiciary are pretty strong.

   Economists acknowledge the need for permitting foreign capital and players to help modernize the Indian retail sector. The concept that ‘India is a poor country’ and the neo-socialistic policies pursued by successive governments had prevented wealth creation, resulting in consumerism stagnation.

For instance, China permitted FDI in retail 30 years back and allowed American and European companies to set up shops in all major towns. As the foreign firms did brisk business in China, the traditional shop keepers did not get wiped out. Many of them have updated their business profile in the competition and are flourishing as the Indian CPIM MP found. The foreign firms too have realized that they cannot compete with the local shops in the latter’s business stocking core areas.

   Restrictions on manufacturing sector, imports, international travel and restrictive trade policies too aided the adherence to ‘status quo’ and resistance to change the national mind set. Apart from the usual ‘vote bank’ considerations, these factors too accounted for the resistance of our MPs to allow FDI in retail.

   The law makers should reflect that it is the protective environment and neglect of the infrastructure area that did great harm to development in the past. The unwanted number of ‘kirana shops’ managed to survive because of the lack of choices before the consumers. Official policies in the past helped flourishing of a multi-tier middlemen and commission agents in the retail trade.

   Today the Indian consumers need both the kirana stores and shopping malls. Economic liberalization being followed by India for the last two decades has brought in new income fetching employment opportunities. The number of those labeled as ‘poor’ is decreasing. Incomes and consumption levels are projected to increase. So is the government’s revenue earnings and welfare spending.

   Accordingly, the Indian consumer tastes and lifestyle concept too have undergone transformation giving a big boost to consumer retailing. In the absence of adequate shopping malls and departmental stores, many middle class families in India regularly go for shopping vacations to Dubai, London, Singapore, Sri Lanka or Hong Kong. Even Shanghai, Macao and Canton in China are important shopping destinations for Indian families. That is a big revenue loss for the Indian exchequer.

   Retailing in India is already a US Dollar 320 billion industry growing at a 5 per cent compound annual growth rate (CAGR) and contributing 39 per cent to GDP. This important sector was overlooked by the Indian corporate sector because of the restrictions on doing organized retail.

   Liberalisation is a crucial requirement as important players like the Tatas, Birlas, Reliance, R P Goenka and Pantaoon have recently made their entry into the nascent market. This business needs capital infusion, technological expertise and development of supply chain to flourish. Bank finances are unavailable to the retail trade sector as it is not yet declared an ‘industry’. Given the necessary policy support, the newly emerging Indian retail companies can enter the lucrative transnational retail business like the IT and pharmaceutical businesses have done.