By Yogi Aggarwal
The US is pushing India to allow foreign direct investment (FDI) in retail at the highest level. Last month, President Barack Obama told PTI: “In too many sectors, such as retail, India limits or prohibits the foreign investment that is necessary to create jobs in both our countries.” And some weeks before this, US Secretary of State Hillary Clinton flew down to Kolkata to persuade Mamata Banerjee to drop her opposition to FDI in retail.
Such lobbying by the top American leadership can only be for a company that carries unprecedented clout: Wal-Mart, the world’ largest company and retail chain with annual sales of $405 billion, and employing 1.3 million people in the US and 2.1 million worldwide.
The pressure on the Indian government is such that the Congress party has forgotten its own struggle against British Raj, the ideas that still motivate the political class in the country. It is at its wits end trying to justify a policy that no one really believes in but feels compelled to push through.
The clearest argument against opening up retail is that the suffering caused by the loss of livelihoods in small retail stores would far outweigh any possible gains to the economy. Not only that, Wal-Mart could also benefit the Chinese manufacturing sector more while forcing our own factories to close down.
Retail is the second largest employer in the country after agriculture and some 40 million families depend on business from small kirana stores, rediwallas, or hawkers who sell knickknacks on the roadside. With very few jobs being created in manufacturing, the small and tiny retailer is a thinly disguised form of unemployment or underemployment. For many who aren’t able to get a decent job, it is the only option — a way out of hunger and despair.
The government’s decision to bat for big retail mainly relies on a study-cum-survey ordered by the Prime Minister’s Office (PMO) and conducted by the Indian Council for Research on International Economic Relations (ICRIER) on the impact of big brands and retailers. Their report, Impact of Organised Retailing on the Unorganised Sector, submitted in 2008, was the basis on which the government proposed opening up retail for foreign investors. Surprisingly, this survey wasn’t widely disseminated among even members of parliament.
The ICRIER study says: “The growth of organised retail will enhance the employment potential of the Indian economy…. it will drive the growth of a number of activities in the economy which in turn will open up employment opportunities to several people,” including “food-processing, textiles and apparel, construction, packing, IT, transport, cold chain, and other infrastructure.” The government maintains that 10 million new jobs will be created over the next three years after the retail giants come in.
This is highly contestable. There is already a growing organised retail sector in India with large conglomerates such as Reliance, Tatas, Bharti, and the Aditya Birla group running thousands of stores, apart from Pantaloons, Spencers and Shoppers Stop. According to management consultancy AT Kearney, these Indian retailers account for around 7 percent of India’s retail business and are growing much faster than the small sector. While the growth of Indian companies in retail is to be welcomed, bringing with it many of the changes needed in supply chain management, the giant multinationals are another matter.
The Indian retail market generates close to $409 billion annually, about the same as Wal-Mart’s revenues of $405 billion. But this is the difference: in India 40 million people are employed, 20 times the 2.1 million people employed by Wal-Mart, or 10 times the four million employed by the top five global retail giants. A study on FDI in India’s Retail Sector, by the Centre of Policy Initiatives, says that if large FDI retailers like Wal-Mart, Metro, Carrefour and Tesco “were to take 20 percent of the retail trade, as Hindustan Unilever anticipates, this would mean employment of just 43,540 persons, displacing nearly eight million.”
While adding jobs in related sectors, the supermarket expansion leads to massive employment loss in the currently inefficient value chain of mandis, buyers, wholesalers, distributors and transporters. Like the East India Company in the 19th century, Wal-Mart could buy cheap and sell dear to make huge profits by controlling both ends of the value chain. Also misleading are contentions that its efficiencies would give farmers higher prices at a lower cost to consumers.
In a recent article in Mint, Himanshu of the JNU writes: “One of the studies commissioned by the US Congress in 2008 was on the linkage between farm gate and retail prices. The average value of farm share (the share of total retail price received by farmers) declined from 41 percent in the 1950s to around 35 percent in the 1970s, and then declined sharply after the 1980s to only 18.5 percent in 2006…. For the record, an Indian farmer gets anywhere between 60 percent and 70 percent of the retail price for rice and wheat. The percentage varies, but it is upwards of 50 percent for most of food items, including eggs and poultry.”
Equally damaging would be the effect on manufacturing. The company is notorious for driving down costs in the manufacturing sector. According to a report by the American Federation of Labor, in 1995 just 6 percent of Wal-Mart goods were imported, but “today 60 percent of its total merchandise is imported from more than 6,000 suppliers in 63 countries, with China at the top of Wal-Mart’s supplier list.”
Wal-Mart imports $30 billion worth of manufactured goods, mainly electronics, FMCG products and toys, from China. Unless Indian manufacturing is made competitive with that of China, the advent of the retail giant could mean the closure of many Indian manufacturing plants as well.
Already India has a huge trade deficit of $28 billion with China. With Wal-Mart’s entry into the country, there would be a flood of low-priced Chinese imports through its outlets, further distorting the trade balance, impacting factories and manufacturing jobs. The US- based Economic Policy Institute estimates that “Wal-Mart’s increased trade deficit with China eliminated 133,000 manufacturing jobs, 68 percent of all jobs lost. On average, 77 US jobs were eliminated for each one of Wal-Mart’s 4,022 US stores in 2006,” as its size gives it power to drive down manufacturing costs. India would not fare much better.
Unless manufacturing is reformed to make it competitive with the best in the world (read: China) the retail giants cannot be expected to play the role of catalysts. In a newspaper article last December, senior BJP leader Arun Jaitley wrote that “the time for allowing FDI in the retail sector in India has still not come… India needs manufacturing sector reforms in the first instance, so as to enable us to develop into a low-cost manufacturing economy … In the absence of these reforms, international retailers will be selling the products of low-cost economies, leading to an adverse setback to our already challenged manufacturing sector.”