Economic Highlights

New Delhi, 9 July 2010

FDI In Retail

HIT SOCIAL DYNAMICS, PENURY, JOB LOSS

By Shivaji Sarkar

A growing economy has its challenges and anxieties. The challenge it faces is the attraction and the anxiety whether it would be a boon or a bane. The proposal of opening up of the retail sector in toto --- multi-brand ---- has once again raked up the old question. More so, when an Industry Ministry discussion paper, subsequent to Commerce Minister Anand Sharma’s US visit, states: “Foreign direct investment (FDI) in retail may be an efficient means of addressing the concerns of farmers and consumers”.

A question the country has been discussing for over a decade. Gradually it opened FDI in single brand retail products and part of the wholesale trade. The multi-national giants are now on to expanding their empire in India as it assures them not only a large market but also very high profits with least regulations. They want to have the maximum benefits in an economy that is tipped to be the third largest in terms of GDP by 2050.

In recent years, the destination sectors in FDI have became more varied.  FDI inflows have shifted from infrastructure, natural resources and export- driven manufacturing to other areas such as retailing, tourism, construction and off-shore services. 

A World Bank study showed that cumulative FDI inflows to the retail sector in the 20 largest developing countries amounted to US$ 45 billion in 1998-2002 (about 7% of the total of these countries). The study showed that after liberalization; countries such as Brazil, Poland and Thailand have received significant FDI in retailing. 

The lure of FDI is potential bait. Those in favour say that it would spruce up the retail sector, make the prices competitive, standardize products and free the people of many “unscrupulous” small retailers. The organised retailing comprises 2% of the country’s business. It has grown to 40% in Brazil and 20% in China in the last 10 years with the injection of foreign money and operations of MNC chains.

India has the largest number of retail traders, 1.5 crore. This may not look organised in MNC terms but the trading community has evolved an ethos that controls and serves the consumers even in the remotest parts of the country. These are largely self-employed family units, which employ up to 10 persons. According to varied estimates about 3 to 4 crore people are employed in the sector. They cater to 98% of the retail business worth Rs 382,000 crore as per Government estimates in 2002-03.

Some experts aver the figures could be more. Most of the employed persons are not highly educated and are semi-skilled. But together they are estimated to support about 20 crore people, 1/5 of the population.

The biggest concern dogging this community is whether the large organised chains would be able to support such a large section of the population. The large chains are known to economise on their operations, mechanise and employ fewer people.

Those who argue that retailers who close their shops would be employed by the big chains is a myth. It is a pernicious idea to turn self-employed entrepreneurs into salaried employees.

A US study, Wal-Mart and Rural Poverty by Stephan J Goetz and Hema Swaminathan of Pensylvania State University’s  Agricultural Economics and Rural Sociology department, found that Wal-Mart unequivocally raised family poverty rates in US counties (districts)  during the 1990s. Another researcher E Basker, after studying the Wal-Mart effect on 1749 counties, noted, “Wal-Mart entry has a small positive effect on retail employment at the county level while reducing the number of small retail establishments in the county.”

A similar study by the Economic and Political Weekly’s Anuradha Kalhan in Mumbai found that shops and establishments close to malls or large retail chains suffered fall in sales. The small retailers also sacked their employees. Importantly, it is not the number of people retrenched but the fall in family income where a decline in sales is not matched by retrenchment and results in shrinking earnings per head. “If the downward pressures continue to intensify, some more retrenchments may occur; however, closures seem imminent”, Kalhan observes.

Thus FDI in retail is not an economic or volatile political proposition. It is likely to impact social dynamics and reduce many self –employed people to penury. The US studies also noted that initially the MNCs provide more benefits to consumers but once small retail outlets closed down they fleece more. In India, it is well-known that an FMCG company has monopolized production to sales and is earning 40% profit. Is such high profit really in the interest of the farmer and consumer?

It was also observed that the big retail houses subtly cartelize and restrict competition to themselves. Studies in UK found that as large chains grew, the number of retail outlets during 1981-99 came down from 56862 to 25800.  In Europe, during 1970-80, about four lakh retail shops closed down. Some of the fast food chains captured almost all the business in Norway 99%, Switzerland 88%, Sweden 94%; UK 64% and Portugal 57%.

The impact of limited FDI in the retail sector has produced the results of the Mumbai study. If it is allowed freely, the impact may be devastating for society and would extend to the farm sector.

The lure and need of foreign investment has to be weighed in terms of the actual benefits along-with probable damages to the society. The benefits cannot and should not be viewed in monetized terms. Many benefits do not have a direct monetary aspect. But its loss is tremendous in terms of psychological, physical, self-esteem et al. Even China is facing social upheaval as small shops are closing down in various cities.

Before taking a decision let the country not merely see the growth of organized retail but also evaluate the contribution of the unorganized retail sector to the organised growth of the country. As it takes the crucial decision, the powers-that-be might institute a study on the impact of organized retail entry in China. ---- INFA

(Copyright, India News and Feature Alliance)