FDI in retail sector — A trade policy for trade Sulekha.com, Thursday, Dec 16, 2004

R. Vaidyanathan

The pan-chewing, dhoti-clad, English-ignorant retail trader should not be seen as `inefficient'

and `cost ineffective' who needs to be bleached by globally-accepted detergents. What they need

is a level playing field, in the full sense of the term, with access to affordable credit and the

abolition of inspector raj in the form of harassment by the various arms of the government, says

R. Vaidyanathan.

THERE is a clamour for foreign direct investment (FDI) in the retail trade, which is dominated

by Partnership and Proprietorship (P&P) firms. Unfortunately there is not much debate among

academics and other policy-makers about the far-reaching implications of arrival of global

retailers in the economy. This is one area where the level playing field argument is not only

meaningful but also significant.

Role of trade in economy

Trade constitutes the third largest segment of the economy with a 13.3 per cent share in GDP in

2002-2003, that is, in the aggregate GDP of Rs 22.5 lakh crore that year trade accounted for Rs 3

lakh crore, next only to the 15.6 per cent share of manufacturing. Agriculture constitutes nearly

23 per cent of GDP (National Accounts Statistics of the CSO, New Delhi 2004). Table 1 gives

the growth rate of different sectors from 1993-94 to 2002-03 at 1993-94 prices. The growth rate

in trade in real terms during this period was 7.88 per cent, which is significant. It is higher than

that of agriculture or manufacturing. Only Hotels and Restaurants has shown higher growth.

Also sectors such as trade, non-railway transport, hotels and restaurant, and business services

have been the engines of economic growth in the last 15 years or so.

Trade is conducted by P&P firms with active involvement from members of family and

community. The share in trade of these types of non-corporate organisations is more than 80 per

cent (National Accounts Statistics - 2004), and the that of corporate type organisations miniscule.

Employment in Trade

The employment statistics available for this sector is, to say the least, unreliable and the data are

hardly reliable for policy making. Of course the mandatory and humorous footnote as in many

Government Statistics is provided stating that the "coverage is inadequate". Table 2 provides

data on the private sector employment in various activities and it indicates that 3,35,000 persons

are employed in trade activity in 2002 in the whole country which, but for being tragic for

meaningful policy formulation, is funny. Notice that in construction, the employment in the

whole country has declined from 73,000 in 1991 to 56,000 in 2002. In a city like Bangalore

alone it will run into lakhs.

Gung-ho on going global

The `shop-till-you-drop' crowd thinks that the panacea to all our ills is to bring in global chains

into our retail markets. The argument is that the MNCs bring "funds" and

"efficiency" as also "cost effective" solutions. An MNC does not normally bring funds from

outside sources as it can access them in our market by showing "comfort letters" from their

parent companies. Many financial institutions, both government and private, are ready to lend to

them below the prime rate as they are "Global". That the MNC will bring funds from abroad is

largely a mirage. Remember, Enron which was supposedly bringing Rs 10, 000 crore from

outside. The final result is that Indian FIs are holding more than Rs 6,000 crore of worthless

paper. Now, the Reserve Bank of India is asking these banks to show it as bad debt. Enron's

Rebecca Mark claimed that millions of dollars were spent to "educate" Indians as part of that

project. We either refuse to get "educated" in the true sense or want to be more "educated" in the

`Rebeccian' sense.

The other aspect is over the "technology" or the "knowledge base" they bring with them. What

technology? Do we want to " dumb down India" as Wal-Mart has done to the US? Should we

replace the street-corner shopkeeper who can add up the prices fifty items without a calculator

with a counter girl who cannot add five numbers without the machine?

Another issue is in terms of reduced cost. Has anyone studied the "aggregate cost" of these

global retail chains? Most American homes have a retail store in their basement. The refrigerator

of every house is a retail shop. In the US, it is an issue of labour shortage but in India there is

surplus that is part of the large self-employed group. For the economic expert goods held by

household is consumption but held by mom-and-pop store is inventory. Hence, inventory

reduction has been achieved in the economy. Not much space is available in Indian houses to

convert them as "retail stores". Another aspect is the fuel cost of driving long distances to the

super-market and spending thousands of manhours between aisles.

Do we want such a model here? Should millions of small shopkeepers become unemployed to

suit some "efficient" model? Are we intrinsically against self-employed groups? Another issue is

the enthusiasm shown by real estate developers in the retail sector and it speaks volumes about

the type of interest among different groups. Unfortunately, we do not even debate these issues.

International practices

For anything and everything the expert and the policy-maker wants Indians to emulate the

Japanese, the French, the Germans or the South Koreans. All petroleum services and products,

rice, tobacco, salt, alcoholic beverages and fresh food traded at public markets are excluded in

Japan from any "distributional aspect" by companies of other countries. Australia, Japan, South

Korea do not allow trade services in petroleum, its products, rice, tobacco, salt, milk, fertilisers

etc by foreign companies. French using their Loi Royer simply restrict any development of

hypermarkets to protect what they call the "centres of French towns and villages and the living of

small shopkeepers". Germany has legislative constraints on outlets above 1200 sq.m. This is

despite trade constituting a relatively small portion of their economy both in terms of

employment and value addition compared to India.

Laws are for weak and meek

The controversy over FDI in retail trade has other dimensions. It was suggested that global giants

such as Metro can enter into wholesale and not in retail as law prevents them from doing so.

Then it was suggested by ministers that law should be amended. After all, Indian laws have been

amended thousands of times and once more to facilitate the grand entry of global malls and

hypermarkets would be nothing. Then there were reports that they will procure directly from

farmers in the agricultural marketing yards. Then it was pointed out that they could not trade in

agricultural commodities. The whole issue is a riddle packed in enigma, wrapped in a puzzle and

delivered in mystery. The transparency in some of these areas to say the least leaves much to be

desired.

India's policy at the Cancun summit that discussed trade and services was not to even "discuss"

certain areas of services such as legal, accountancy, and distribution services consisting of

wholesale trade and retail. But, in practise, FDI is being allowed in cash-and-carry wholesale

trading; under this Metro Gmbh, a German retailer, and Shoprite Checkers, a South African firm,

have been approved.

No debate, no discussion. Not that we are against globalisation or against foreign companies in

Indian trade. Only, the grouse is that the process is not transparent. It is ad hoc and haphazard,

full of discretions and improvisations on the way. But national policy formulations affecting

millions of livelihood is not like enacting amateur tamasha, or theru koothu or jatra where you

improvise as you go along.

National policy based on improvisation is a sure receipt for disaster to the affected. One gets

worried if our trade policy is available for trade. Unfortunately our system in the government

will sell it to the lowest bidder. We should not start with the premise that the pan-chewing, dhoti-

clad, English-ignorant retail trader is "inefficient" and "cost ineffective" and should be bleached

by globally-accepted detergents for cleansing. What they need is level playing field in the full

sense of the term with access to affordable credit and the abolition of inspector raj in the form of

harassment by the various arms of the government bureaucracy.

(The author is Professor of Finance and Control, Indian Institute of Management-Bangalore, and

can be contacted at vaidya@iimb.ernet.in. The views are personal and do not reflect that of his

organisation.)