Dr Bharat Jhunjhunwala
More than four months have passed since the UPA Government risked its survival and opened the country for FDI in retail. Major global retailers like Wal Mart, Tesco and Carrefour have not made any moves to set up shop in India. The ostensible reason is that they are seeking more clarity on certain provisions in the policy. The approved policy requires that one-third of the goods will have to be procured by the Retailers from small and medium enterprises within the country. While this is one reason, I think there are deeper issues. In particular the success of organized retail in India is not certain in view of the tough competition provided by the traditional unorganized sectors.
I do not think the kirana stores will wholly go out of business with entry of FDI. Impact of FDI will be limited because these mega stores will be accessible only to the upper classes. It is not possible for the lower middle class and poor to pay higher price or to travel long distances to reach the store. The poor have ample time to check the quality in many stores before striking a bargain. The street market shops are very efficient. One can see the street vendors sorting apples in various categories such as old and new, spotted and clean, large and small. Such sorting adds value to the goods. Organized retailers cannot do such sorting. My personal experience is that mega stores are not able to supply fresh vegetables as the street market. Therefore, I am confident that no disaster will strike by opening FDI in retail. Indeed, it is possible that FDI will act as a catalyst. Domestic organized retailers will face the heat. They may establish global supply chains and become MNCs few years down the line just as Tata Motors has bought Jaguar and become a MNC after foreign auto makers were given entry into India. Big Bazaar may open shops in the United States. This may also lead to generation of some jobs in the country. However, such job creation will be small in relation to our large population. Therefore, I do think there will be a decline in the conditions of the ordinary worker because of various negative impacts.
A number of studies in countries like Thailand, Russia, United States, Argentina, Chile, Hong Kong and Brazil have shown that small shops shrink with the coming of organized retail. This will lead to an increase in unemployment.
It is surprising that the media is largely supporting FDI in Retail. The reason is that both the media and FDI in Retail cater to the needs of the upper middle class. FDI will enable the upper middle class families to buy a variety of Indian and foreign goods under one roof. This class has money but no time to visit many stores on the street and check the quality of goods. This same class is dominant driver of the media. This class has the purchasing power which attracts advertisements. Therefore, media is pandering to this class and creating hype in favour of FDI. The poor man begins to think that FDI in Retail is the correct policy.
More surprising is the decision of UPA to push this policy. The political fortunes of the UPA are sinking. Why should they risk another backlash from the common man by opening FDI in Retail? Reason is that UPA strategists have assessed that losses from opening FDI will occur in the long run; while the gains will be immediate. We have to keep in mind the basic objective of the Ministers in the Government, which is to get reelected. They need money to buy votes for this purpose for example for implementing the cash transfer scheme. This is difficult at present because the financial condition of the Union Government is weak. Expenditures are rising both due to populist schemes and leakages. On the other hand revenues are lagging due to the economic slowdown. It is becoming difficult for the Government to raise monies for these purposes by taking loans because interest rates are high. Moreover, higher fiscal deficit and borrowing will lead to International Rating Agencies like Fitch downgrading India. That will affect foreign capital flows adversely. This will lead to less liquidity in the market and to a further increase in interest rates. That will further increase the interest burden on a government.
The Government has pushed FDI in Retail to overcome these problems. Inflow of capital will make up for some of this loss. The growth rate may consequently increase. That would lead to more revenues and help the Ministers in getting reelected.
MNC retail companies will bring foreign capital and establish mega stores. This will lead to increased demand for labour, construction material and land. The economy may look up in the short run till the job-eating impacts of FDI are manifest. Inflow of foreign capital will increase liquidity in the money market and lead to lower interest rates. Other MNCs will also be buoyed and a torrent of foreign capital may be unleashed. This inflow will cut the negative sentiment, increase investment and the overall growth rate and tax revenues. This will enable the government to continue with leakages and also spend on populist schemes.
The opposition says that there will be no need to attract foreign capital flows if we stop the leakages from the system. It is also not necessary to dole out monies in populist schemes to secure people’s welfare. Protecting their jobs from FDI will secure their welfare better. These arguments have weight but they do not help the Government meet its objectives. Stopping of leakages will directly harm the ruling elite of Ministers and high bureaucracy. Obstructing FDI will anger the upper middle class which has decisive say in the line taken by the media. It will also not be possible to buy votes of the poor through populist schemes. Remember that the Congress won the last elections on the back of MNREGA and loan waiver-schemes that are essentially unproductive and in the nature of doles.
The economy will continue to grow with- or without FDI. There will only be a change in focus. The focus of growth with FDI will be corrupt state machinery and the upper middle class. The focus of growth without FDI will be lower middle class and poor. It is a matter of some solace that major Retailers have developed cold feet on entering India. The statement by Rajnath Singh that NDA Government will reverse the policy has not helped. MNCs would prefer to wait and watch the results of the coming general elections before taking a decision. Thus far it is good. Let us hope that this anti-people policy is not implemented in the end.
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