India & the world - Articles

The news is unclear, but India's policy decision to open single-brand retailing to 51 per cent foreign direct investment (FDI) has initiated yet another sensitive debate. US ambassador David Mulford's remarks on favoring FDI in retail have polarized this debate. The Left parties and BJP vehemently oppose this policy and have criticised that "it is guided and goaded by an unseen hand to push this item with all haste."

The retail industry in India is part of the world-wide $6.3 trillion business. A McKinsey report states that India's $250 billion retail business is the eighth largest in the world and has the potential to grow at seven per cent by 2011. The Indian retail industry was last estimated to contribute a turnover of Rs 930,000 crores. With organised retail contributing a minor Rs 16,000 crores, the rest is in the hands of small retailers.

FDI in retail is often criticised for 'crowding out' domestic investment, lowering certain regulatory standards, exploiting labour standards and seeking out cheap labour. Without the necessary legislative and regulatory framework or experience to deal with these problems, will it be worth putting the cart before the horse? Let us also analyse the negative impacts of FDI in retail:

First, the employment scenario. As of 1 January 2005, there were 483.88 lakhs job seekers registered with the Employment Exchange. Due to the paucity of employment opportunities in other sectors, retailing, with its low capital and infrastructure needs, is the easiest business to enter into by the unemployed. If FDI is permitted there will be a greater market share for the labour-displacing modern retail firms and total employment in the retail sector will shrink.

Second, the issue of large-scale displacement of labour. In India, there are 35 towns with a population over one million. If, hypothetically, MNC's like Wal-Mart were to open a store in each of these cities and they matched the average Wal-Mart performance per store, it would mean a turnover of over Rs 8,033 crores with only 935 employees. Extrapolating this with the average trends in India, it would mean displacing about 4,32,000 persons. If large FDI-driven retailers were to acquire 20 per cent of the retail trade, this would imply a turnover of Rs 80,000 crores, and employment of 43,540 persons, displacing nearly eight million persons employed in the unorganized retail sector.

Third, the role and impact of the large trans-nationals on the global businesses and economies. Using their deep pockets, the multinational retailers can under-price domestic retailers and push them out of business. Also, with its huge acquisition power, it will trample upon competitors through its monopoly power. Once a monopolistic situation is created it could turn into procuring cheap and selling dear.

Fourth, it is true that it is in the consumers' best interests to obtain quality goods and services at the lowest price. However, according to Mohan Guruswamy of the Centre for Policy Alternatives, vocal assertion cannot override the responsibility of any government to provide economic security for its huge vulnerable population.

Fifth, the issue of sourcing the products from abroad gains salience. Multinationals choose to outsource the production of Fast Moving Consumer Goods (FMCG) from countries like China and Bangladesh where labour is cheap, and made cheaper since the local labour laws are not enforced. Wal-Mart and other companies take advantage of this situation, and claim their inability to reform the laws and practices of entire countries.

Finally, companies like Wal-Mart are notorious for pressuring its suppliers to supply at prices that could not possibly allow an ethical supplier to comply with basic labour laws on issues like minimum wages and maximum hours. The result of this 'low costs at any cost' approach is that workers are ultimately forced to pay the price. Even in the US, the Wal-Mart model of employment, based on low wages, low skills, low benefits and rapid job turnover, is eroding the standard of living of the middle-class.

The case for FDI in retail is often made on the basis of the need to develop modern supply chains, in terms of the development of storage and warehousing, transportation, logistic and support services, especially to meet the requirements of agriculture and food processing industries. While infrastructure and technology needs are undeniable, the belief that entry of the multinational food retailers is the only route available is unfounded.