How FDI in retail affects the “Mango Man”

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Moneylife » Economy & Nation » Politics » How FDI in retail affects the “Mango Man”

How FDI in retail affects the “Mango Man”

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Mathew Thomas | 07/12/2012 02:29 PM |

FDI in retail is an example of deregulation, devoid of any safety net for its after-effects. Would the government consider the Parliament Committee report or treat Parliament with disdain?

Here is a simplified explanation, sans economic jargon, to help understand FDI (foreign direct investment) in retail and what it has in store for the aam aadmi—“The Mango Man”. Let us start with an analogy.When a falling stone hits the ground its energy is converted and dissipated as heat. However, if the same stone lying on the ground is heated, it does not take off. What is the relevance of the falling stone to FDI in retail?

What is FDI in retail? It means “Foreign Direct Investment” of 51%, a controlling stake is permitted to any foreign company to set up retail trade in India. Simply put, a number of foreign-owned supermarkets would sprout all over the country. At a political party rally in Delhi, the leaders extolled the virtues of FDI in retail as symbolic of the party’s reforms agenda. The phrase, “economic reform” has many different meanings depending on ideological and political leanings.

One view is that between 1875 and 1975 it meant more government and since then it means less government intervention or free run for market forces. A Wall Street view says that it means, “Change for the better as a result of correcting (economic) abuses”. “Better for whom?” and “whose abuses would the reforms correct?” Did the post 1975-reforms in USA correct the abuses by financial wizards that led to the 2007–08 meltdown? A third view holds that economic reform refers to policies directed to achieve improvements in economic efficiency. Which of these did the rally leaders have in mind when they toasted the FDI reform push?

(Read: Is FDI in retail good or bad?)

Those in favour of FDI in retail painted rosy pictures of benefits such as better prices for farmers, more jobs, better shopping experience and so forth. Those against it predicted the opposite. Few had hard facts to back their arguments. It is strange that neither the government nor the opposition referred to the report of the Parliament Committee which examined FDI in retail. The Committee seems to have done a comprehensive study, examining a number of witnesses, individuals, NGOs and trade bodies, travelling around the country, studying reports and experiences of other nations and asking questions of government departments. The Committee concluded that more people would lose jobs that the number that would find work. They said that FDI in retail would destroy large numbers of small and marginal farmers. They cautioned against the probable monopolistic behaviour, predatory pricing and attendant consequences. The Committee found that unorganized retail provides livelihoods for 40 million people, that is, for about 8% of the country’s workforce. Referring to the projection of FDI in retail creating 2 million jobs, the Committee said that this was exaggerated and that this ignores 200 million people who depended on retail trade for a living. The Committee was not only critical of FDI in retail, but also of any large corporate in retail business. The Committee drew a dismal picture of the effect of FDI in retail on the “Mango Man”.

With FDI in retail, shops like this will disappear. How sad.

ICRIER (Indian Council for Research on International Economic Relations) carried out two studies, one in 2008 and the other in 2011. The 2011 study predicts a great shopping experience for consumers. ICRIER surveyed 300 consumers, in high and middle income groups. Evidently, the government relied on the ICRIER recommendations, rather than on the Parliament Committee report. Does the reliance on a private organisation’s recommendations in opposition to Parliament, have anything to do with the chairperson of ICRIER bearing the same surname as the Deputy Chairperson of the Planning Commission?

ICRIER’s sample of 300, from high and middle income brackets, for a population of 1.2 billion with over 40% poor, for recommending foreign investment, is questionable. In reply to a RTI (Right to Information) query on whether the government had done any study on FDI in retail, the commerce ministry replied that it had not done any such study. The reply referred to the ICRIER report and not the Parliament Committee report. The Committee’s report was not discussed in Parliament. Rejecting the Parliamentary panel study and accepting a private study report, does not augur well for Parliamentary democracy. ICRIER says consumerism promotes economic growth. The earlier study (2008) surveyed 2020 unorganized small retailers out of 6 million shops. None of the studies addressed the issue “why India requires FDI in retail?” Would it lead to a net increase in foreign currency earnings, improve India’s balance of trade? Stiglitz’s views on FDI in retail are significant. He asks, “Why India needs foreign entrepreneurs in any sector, particularly the retail?” He then talks of the power of Wal-Mart to drive down prices and suggests that they will use that power to have Chinese goods displace Indian goods. Next, he draws attention to Wal-Mart’s abusive labour practices. He asks, “Why would you want to import such practices into India?” Why indeed? The foreign retail lobby reportedly spent over Rs52 crore in India. Could that be the reason why? He also talked about increasing inequality that Indian reforms are ushering in, accompanied by corruption.

(Read: FDI in retail: A trick or treat?)

It is appropriate to now look at the falling stone analogy. To see the relevance of it look at two economic philosophies prevalent today. One is the “Trickle-down” variety. Subscribers to this believe in less and less of government. The market would correct itself. De-regulation is the key. Concessions to the rich would lead to investments and economic growth. This would trickle down to the poor. The second view holds that left to itself, unregulated market economies, would become so disorderly that the human costs would be enormous. FDI in retail is integral to “Trickle-down” economics. It is part of the reforms’ cry for deregulation.

No lessons have been learned from the deregulation induced meltdown. That is why the government and proponents of FDI in retail do not bother about its effect on 6 million small shop-owners or the 50% of the farming-dependent population who would lose their livelihoods. Some of these dispossessed may find jobs in the retail supermarkets, as shop assistants or labourers. Does deregulation help them? The stone does not take off when heated because heating causes disorder. The heat energy is random, disorderly; the stone’s molecules jostle each other randomly. Hence, they cannot lead to orderly motion of the stone. The natural propensity of things is to move towards chaos. Markets are no exception. Without regulation the result is disorder. FDI in retail is an example of deregulation—thinking devoid of any safety net for its after-effects. Would the government consider the Parliament Committee report or treat Parliament with disdain?

(Read: Will FDI in retail be good for consumers?)

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