Misplaced hype over FDI

Published: 25th July 2012 12:32 AM  |   Last Updated: 25th July 2012 12:32 AM   |  A+A-

Thomas Friedman in his most recent article starts “I can remember bad presidential campaigns in good times and good campaigns in bad times, but it is hard to recall a worse campaign in a worse time. Mitt Romney’s campaign has been about nothing, and President Obama’s has been about Romney.” Extending this rhetorical expression, the recent Obama interview on Indian reforms or the lack of it, has only proved how even great orators falter when the election fever hits them hard. In a TV-show last weekend, the Rajya Sabha Member of Parliament Mani Shankar Aiyar shockingly shared economist Bibek Debroy’s findings that the Gini coefficient of India has almost doubled in the last 10 years. The Gini coefficient, as applied to income and wealth has risen from 0.36 to 0.65 in urban India. The Gini coefficient is a number between 0 and 1 that measures the income distribution of a country. A coefficient of 0 means that everyone has the same income and 1 means that one person has all the income and everyone else has zero income. The Indian political establishment critically hit back with strong to mild reactions to Obama’s interview. On the contrary, the Confederation of Indian Industry’s (CII) urged the government to announce confidence-building reforms like opening up multi-brand retail. It added that such measures would send out positive signals to global investors. Are we interested only in sending signals but not sensing the signals that Bibek Debroy sent through Aiyar?

The CII, the ASSOCHAM or the FICCI appear to be unconcerned about the increasing income disparities but more concerned about FDI. Are they not aware of the very little economic value addition of the highly celebrated and overly invited FDI? Are they not aware that the role of FDI in increasing India’s GDP during its prosperous years between 2000 to 2010 was marginal and the prosperity was driven by indigenous investment and consumption? Are they not aware of the Goldman Sachs Global Economic Paper No 187 (2010) that dismisses the need for FDI to support India’s infrastructure growth? Then why this hullabaloo over FDI in multi-brand retail when FDI in India is about nothing?

The UPA government must be conscious of the fact that multi-layer retailing in India is the 2nd most decentralised economic activity after agriculture and constitutes more than 95 per cent of trade leaving the remaining 5 per cent to organised trade. Contributing to 14 per cent of the country’s GDP while the share of all the BSE 500 companies is less than 10 per cent, unorganised retail is also the 2nd largest employment provider next only to agriculture. According to NSSO, 51 per cent of the total employment that is generated in India is through self-employment and retailing plays a significant role in this. The role of retail does not occupy mainstream media but is silently adding an estimated annual investment of `25,000 crore contrary to the belief that investment in retailing is not forthcoming.

While a majority of retailing is through unorganised family-owned businesses, organised retail is also expanding in a huge way. In a recent interview, Kishore Bayani of Future Group was upbeat about this expansion plans. Assuming a growth in line with GDP, indigenous creation will add more than a million retail outlets. On the supply side, there has been minimal consumer complaints regarding product availability, predatory pricing, work ethics and above all, the retail business has created an endured social safety net. The major complaint has been that of price rise and the solution to it is outside the retail industry orbit. Then why is the government trying to provide answers to a question that never exists?

The reactions to FDI in multi-brand retail have been mixed. The Ministry of Commerce & Industry hopes that this will help farmers, create jobs and benefit consumers resulting in an improved supply chain and reduced inflation. India Inc also feels its a win-win solution. Some argue that India Inc has found a new business/financial partner during these tough economic times. Political opponents vehemently argue that it will displace farmers, create huge unemployment and will leave consumers at the mercy of a powerful cartel known for its tough bargaining power.

The leading retail chain in the world is Walmart. Its annual turnover at the end of last fiscal was close to $450 billion. The others in the top 5 put together will contribute to another $350 billion. Put together, they constitute `44,00,000 crore in combined revenue while the Government of India’s estimated revenue for the fiscal 2012-’13 is `9,77,355 crore, lesser than Walmart’s annual revenue in rupees. No prizes for guessing the unflinching power that they can command over the dwarf-like Indian unorganised retailers. With such high bargaining powers, it does not need a consultant to say that small retailers will be squeezed by these big guns and the so-called big Indian retailers may find it attractive to get sold.

US Economists Stephan J Goetz and Anil Rupasingha in their study titled ‘Wal-Mart and Social Capital’, which was published by the American Journal of Agricultural Economics have found that the presence of Walmart has reduced social assets in the nearby communities. It is commonly believed that communities with high levels of social capital are relatively healthier and resilient. In fact, this was one of the main reasons for India’s resilience during the global financial crisis. Their study examined both communities in which new Walmart stores were built in the 1990s and those that already had a Walmart at the beginning of the decade and controlled other variables known to affect social capital stocks in a community, such as educational attainment. They found that communities that gained a Walmart during the decade had fewer non-profit groups and social capital-generating associations (such as churches, political organisations, and business groups). They also found that Walmart’s presence depresses civic participation. Communities that had or gained a Walmart store in the 1990s had lower voter turnout in the 2000 presidential election. Walmart harms not only local retailers, but also a wide variety of other businesses and professionals that serve local retailers, such as banks and accountants. Another factor is the decline of the downtown and other neighbourhood business districts that have long served as gathering places and helped to sustain the web of connections that knit communities together.

With this single example there seems to be a reasonable concern that FDI in multi-brand retail will not only distort the existing economic harmony in India’s unorganised retail but also will dismantle the economic spine of our country, its social capital. FDI in multi-brand retail will enrich corporate capital but impoverish India’s social capital. Result: Gini Gini high high.

S Vaidhyasubramaniam is Dean, Planning & Development, SASTRA University

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