It seems the Government has finally decided to completely do away with the policy change regarding FDIs in the Retail sector and there have been a wide range of mixed reactions coming in from every direction.
I remember having first read about such a proposal in The Economic Times around 3 months back and it did seem promising. The article elaborated on how FDIs would be beneficial for the "Indian economy".
3 months to that day, there is much talk about whether or not FDIs in the retail sector should be looked upon as an opportunity to benefit or as a grave threat to the domestic retail sector.
Most of the articles I read covered the issue either in black or in white. However, it is important that we understand such issues are best understood in the grey. Before I begin an amateur assessment of the issue, let us first quickly recapitulate what status quo permits.
a) FDI in Multi Brand Retail Trading (MBRT) is NOT allowed.
b) FDI in Single Brand Retail Trading (SBRT) is allowed.
The Government has sighted a increase in foreign investment in the supply side infrastructure as its principle rationale in adopting this change in policy. The principle arguments for the move includes removal of a certain "middleman" between the farmers and the retailers who are responsible for a lot of inefficiency in the food supply chain. Lack of Infrastructure is noted in figures like how India's cold storage capacity is 23.6 million MT whereas its annual production is 200 million MTs - principally causing huge losses to farmers as their produce literally, is left rotting.
In the absence of FDIs in the retail sector, any development in building infrastructure capacity has be low and insignificant. The government wishes to raise a minimum of $100Million from such a change in policy. Talking of numbers, another lucrative figure is the supposed creation of $1.7Million jobs over the next 5 years. In status quo, due to the presence of so many intermediate players between retailers and the farmers, the latter get only 1/3rd of the prices at which the products are sold. Apparently, in countries which allow 100% FDIs in the Retail sector, the professionalism ensures a stricter, more efficient supply side chain which ensures farmers receive as much as half the price at which the products are sold.
However, in spite of the obvious gap in status quo and the need of change, there has been rampant criticism of the move. Professor Sukanta Choudhury of Jadavpur University wrote a very justified article in The Telegraph yesterday and his points do really make a lot of sense. He speaks how this policy change is misleading and is not going to help - but only worsen the present situation of the retail market and associated employment. Professor Choudhury's principle argument is hinged on a sympathetic view towards the small shopkeeper down the street - The kinara store. The incredibly humongous number of such retailers shall be threatened with extinction if big players of international reputation like Walmart is allowed inside with exploitative market power.
The Professor makes more points which seem to make the proposal's idea look just too naive to have even been conceived in the first place. He talks about the common economic jargon - competition begets monopoly. My small understanding of economics leads me to believe that this point is largely based on the fact that retail "chains" have huge initial capital investments due to infrastructure development. Fair, enough. He builds on the argument of the local retailer's extinction to point out how any creation of jobs by adopting such a policy is at the cost of a greater number of jobs that are linked unofficially to the existing network of retailing existing in India.
He speculates how the Government's idea of removing the "middleman" is at the cost of creating and legalizing another set of middlemen - the foreign brands - who, in due course of time, might even lead on to deciding land use patterns in India (Since such retailers will be directly dealing with farmers and might coerce them to grow upmarket crops only).
These points, more or less, very well summarize the overall dissatisfaction that several commentators have made over the proposal.
However, what every single one of these commentators have missed out on, is the proposal itself. The first two lines of the proposal - upto 51% FDIs in MBRT and 100% in SBRT - is just a prologue to the story which unfolds. Here's a link everyone should go through : PBI, GoI
As you might have noticed, the proposal has made several riders, sighted several examples and has made it more than convincing that it is quite feasible. Lets first discuss the MBRTs.
In such cases, the proposal strictly prohibits branding of food commodities like fruits, vegetables, grains, pulses, fishery, meat products, etc from being branded. This shall ensure the absence of any Brand-Image when it comes to daily utility goods. An important rider in the expansion of FDIs in MBRTs is that at least 50% of such investments "shall be in developing back end infrastructure". This is ideal since India primarily faces huge inefficiencies in this exact section of the supply side of the Retail sector - processing, manufacturing, etc.
Examples of China and Thailand show how such measures have shown positive results. Other economies close to India's, South Africa and Brazil also have such liberal policies in as far as the retail sector is concerned!
Another important, probably the most important rider, is that for SBRTs, for procurement of holdings more than 51% (allowed in status quo) at least 30% of manufactured products should be from Small scale industries indigenous based in India. For those who feel the proposal is inconsiderate towards the local industries, there is hardly any need for more to prove the fallacy in your thoughts.
The last absolutely important point I shall ask you to read is how this proposed policy shall be applicable only in 53 cities across the city (which qualify with population more than 10 lakh) out of the 8000 prominent towns and cities.
Now, let me tackle the point on extinction of local retailers. In the short run, it is quite obvious that such local players already have an existing network of supply chains. As long as these international players don't establish their own infrastructure, such retailers, as well as retain chains like the Future Group in India, will stay in an advantageous position. So, the extinction point is non-applicable in the short run.
Lets talk about the long run now. The retail sector in India is tending towards perfectly competitive. This is because there are just so many retail shops. The idea of a kinara shop comes from the fact that there is a retail shop in India, round the corner. Its easy to understand how, with two retail shops right next to each other, no one will try to sell the 'same' product at a different price. Thus, there exists equilibrium prices for every commodity. Retail chains like Big Bazaar already exist in India, and over the years NO retail shop has had to close because of people abandoning them for Big Bazaar.
The reason? Simple consumer psychology. Big Bazaar does give considerable discount for items when you buy them together. You won't see someone going inside the big supermarket outlets for, lets say, one loaf of bread. This is where the kinara shop comes in. Even if tomorrow, we have a Walmart next to a Big Bazaar, understand that their supply side economics wont be very different and consumer psychology is not going to go through a radical metamorphosis overnight.The retail shops round the corner has always thrived on such dispersed small pockets of sales. And they have, and will definitely not, run into losses. This also nullifies the argument on how the projected increase in employment is misleading. It is definitely not.
The point on "Competition begetting monopoly" is also wrong because unlike a natural monopoly where competition does beget monopoly, with the expansion of the industry (by increased capital investment) does not reduce a single firm's profits since the relevant demand is not in the region of economies of scale, but hugely more.
Also, if I may add, this proposal strongly asserts that only the government shall be procuring agricultural output instead of the corporates. This will ensure events like Reliance Fresh's pull out from UP a few years back don't repeat.
So that's about a refutation to all major issues that have cropped up against the proposal. I certainly don't see a reason for the bureaucracy to not discuss the issue more and maybe try and arrive at solution.
(PS. I am open to accepting that my logic might be at fault since my economic knowledge is barely 5 months old. But, I'd definitely like positive criticism so I can better my arguments).
I remember having first read about such a proposal in The Economic Times around 3 months back and it did seem promising. The article elaborated on how FDIs would be beneficial for the "Indian economy".
3 months to that day, there is much talk about whether or not FDIs in the retail sector should be looked upon as an opportunity to benefit or as a grave threat to the domestic retail sector.
Most of the articles I read covered the issue either in black or in white. However, it is important that we understand such issues are best understood in the grey. Before I begin an amateur assessment of the issue, let us first quickly recapitulate what status quo permits.
a) FDI in Multi Brand Retail Trading (MBRT) is NOT allowed.
b) FDI in Single Brand Retail Trading (SBRT) is allowed.
The Government has sighted a increase in foreign investment in the supply side infrastructure as its principle rationale in adopting this change in policy. The principle arguments for the move includes removal of a certain "middleman" between the farmers and the retailers who are responsible for a lot of inefficiency in the food supply chain. Lack of Infrastructure is noted in figures like how India's cold storage capacity is 23.6 million MT whereas its annual production is 200 million MTs - principally causing huge losses to farmers as their produce literally, is left rotting.
In the absence of FDIs in the retail sector, any development in building infrastructure capacity has be low and insignificant. The government wishes to raise a minimum of $100Million from such a change in policy. Talking of numbers, another lucrative figure is the supposed creation of $1.7Million jobs over the next 5 years. In status quo, due to the presence of so many intermediate players between retailers and the farmers, the latter get only 1/3rd of the prices at which the products are sold. Apparently, in countries which allow 100% FDIs in the Retail sector, the professionalism ensures a stricter, more efficient supply side chain which ensures farmers receive as much as half the price at which the products are sold.
However, in spite of the obvious gap in status quo and the need of change, there has been rampant criticism of the move. Professor Sukanta Choudhury of Jadavpur University wrote a very justified article in The Telegraph yesterday and his points do really make a lot of sense. He speaks how this policy change is misleading and is not going to help - but only worsen the present situation of the retail market and associated employment. Professor Choudhury's principle argument is hinged on a sympathetic view towards the small shopkeeper down the street - The kinara store. The incredibly humongous number of such retailers shall be threatened with extinction if big players of international reputation like Walmart is allowed inside with exploitative market power.
The Professor makes more points which seem to make the proposal's idea look just too naive to have even been conceived in the first place. He talks about the common economic jargon - competition begets monopoly. My small understanding of economics leads me to believe that this point is largely based on the fact that retail "chains" have huge initial capital investments due to infrastructure development. Fair, enough. He builds on the argument of the local retailer's extinction to point out how any creation of jobs by adopting such a policy is at the cost of a greater number of jobs that are linked unofficially to the existing network of retailing existing in India.
He speculates how the Government's idea of removing the "middleman" is at the cost of creating and legalizing another set of middlemen - the foreign brands - who, in due course of time, might even lead on to deciding land use patterns in India (Since such retailers will be directly dealing with farmers and might coerce them to grow upmarket crops only).
These points, more or less, very well summarize the overall dissatisfaction that several commentators have made over the proposal.
However, what every single one of these commentators have missed out on, is the proposal itself. The first two lines of the proposal - upto 51% FDIs in MBRT and 100% in SBRT - is just a prologue to the story which unfolds. Here's a link everyone should go through : PBI, GoIAs you might have noticed, the proposal has made several riders, sighted several examples and has made it more than convincing that it is quite feasible. Lets first discuss the MBRTs.
In such cases, the proposal strictly prohibits branding of food commodities like fruits, vegetables, grains, pulses, fishery, meat products, etc from being branded. This shall ensure the absence of any Brand-Image when it comes to daily utility goods. An important rider in the expansion of FDIs in MBRTs is that at least 50% of such investments "shall be in developing back end infrastructure". This is ideal since India primarily faces huge inefficiencies in this exact section of the supply side of the Retail sector - processing, manufacturing, etc.
Examples of China and Thailand show how such measures have shown positive results. Other economies close to India's, South Africa and Brazil also have such liberal policies in as far as the retail sector is concerned!
Another important, probably the most important rider, is that for SBRTs, for procurement of holdings more than 51% (allowed in status quo) at least 30% of manufactured products should be from Small scale industries indigenous based in India. For those who feel the proposal is inconsiderate towards the local industries, there is hardly any need for more to prove the fallacy in your thoughts.
The last absolutely important point I shall ask you to read is how this proposed policy shall be applicable only in 53 cities across the city (which qualify with population more than 10 lakh) out of the 8000 prominent towns and cities.
Now, let me tackle the point on extinction of local retailers. In the short run, it is quite obvious that such local players already have an existing network of supply chains. As long as these international players don't establish their own infrastructure, such retailers, as well as retain chains like the Future Group in India, will stay in an advantageous position. So, the extinction point is non-applicable in the short run.
Lets talk about the long run now. The retail sector in India is tending towards perfectly competitive. This is because there are just so many retail shops. The idea of a kinara shop comes from the fact that there is a retail shop in India, round the corner. Its easy to understand how, with two retail shops right next to each other, no one will try to sell the 'same' product at a different price. Thus, there exists equilibrium prices for every commodity. Retail chains like Big Bazaar already exist in India, and over the years NO retail shop has had to close because of people abandoning them for Big Bazaar.
The reason? Simple consumer psychology. Big Bazaar does give considerable discount for items when you buy them together. You won't see someone going inside the big supermarket outlets for, lets say, one loaf of bread. This is where the kinara shop comes in. Even if tomorrow, we have a Walmart next to a Big Bazaar, understand that their supply side economics wont be very different and consumer psychology is not going to go through a radical metamorphosis overnight.The retail shops round the corner has always thrived on such dispersed small pockets of sales. And they have, and will definitely not, run into losses. This also nullifies the argument on how the projected increase in employment is misleading. It is definitely not.
The point on "Competition begetting monopoly" is also wrong because unlike a natural monopoly where competition does beget monopoly, with the expansion of the industry (by increased capital investment) does not reduce a single firm's profits since the relevant demand is not in the region of economies of scale, but hugely more.
Also, if I may add, this proposal strongly asserts that only the government shall be procuring agricultural output instead of the corporates. This will ensure events like Reliance Fresh's pull out from UP a few years back don't repeat.
So that's about a refutation to all major issues that have cropped up against the proposal. I certainly don't see a reason for the bureaucracy to not discuss the issue more and maybe try and arrive at solution.
(PS. I am open to accepting that my logic might be at fault since my economic knowledge is barely 5 months old. But, I'd definitely like positive criticism so I can better my arguments).
I'm no economist myself.....
ReplyDeleteI have no doubt that 'the parar mudir dokan' will thrive, but my worries are elsewhere.
If foreign chains offer more competitive prices to farmers, fishermen etc. It's only natural that they will prefer selling it to these chains. They won't out-compete your corner-shop, but wouldn't they outdo your vegetable/fish market? In the long run, wouldn't that actually lead to an increase of prices? Also won't buyers be indirectly coerced into buying from these stores?
I can't deny that FDI in retail has its advantages, but I don't think it's perfectly flawless either.
Another issue I'd like you to address is regarding selectivity. As of today, Punjab, Haryana, U.P. etc. are the leaders in terms of productivity. Naturally, foreign retail chains will give preference to produce from these states and as a result Bengal, Assam and Orissa might actually suffer.
There was this situation during the Green Revolution when Bengal's rice could not compete with Punjab's wheat which was being sold at very low prices. In fact, people started saying 'Gom khao, ba kom khao'. Wouldn't this lead to a similar situation?
I have some more issues that I'd like you to address, but could you start of with these?
The problem with the first part is that, the Government still remains the first procurer of the agro production. So, it is premature to conclude these foreign players will suddenly seize control of Indian farmers. The retail sector will never achieve a monopoly because there are too many players in the market. Thus, any single firm wont be able to set prices according to their whims and fancies. Moreover, if a firm increases its size (Increase capital investment in the form of more infrastructure - that is, it spreads out) it's average costs will reduce to a point (basic economics) which will reduce the price at which they sell their products.
ReplyDeleteWhen KFC and McDonalds entered India, note how they didn't drive Haldirams or Bikanerwala out. Instead, the latter went global!
I'm with you on the fact that there are negatives. But shouldn't we try to weight them out before completely doing away with FDIs all over?
I like that question on selectivity. But again, I don't understand how retailers get to "give preference to productivity from a region". Simply because, in status quo, Ornaized retail does exist. And I still had rice for lunch!
This is a simplistic thing to say, but quite profound, honestly.
ReplyDeleteEvery change, even technological change, leads to losers and winners. What we as a society have to look at is whether the losers can be compensated for their losses. Whether they are actually compensated is a matter of Governance.
In this case, the kirana owners will be no better, will they? They will most certainly lose out. The idea is to think of how to compensate them so as to make them better off overall.
I'll explain again, I'm not saying Bangalis or Asomiyas will be forced to eat wheat, what I'm saying is that the retailers may choose to buy rice directly from farmers in Punjab, U.P. or the South as it may prove to be more profitable to them. Agriculture in the East is less developed than it is in other parts of India, it is only fair to suppose that to maximise profits, they(i.e. retail giants) will choose to buy from states that are already better off instead of developing agriculture in the East, which will be very expensive. Remember, in the East, size of land per capita is considerably less than in the North or South, maximising production out of this will involve many steps and will probably take 20 years or so from now(if not more).
ReplyDeleteAs far as I can see, FDI in retail will be of little benefit to the farmers in this part of the country.
So your point is, it will be more profitable for retailers to buy grains from these "agriculturally better off" states ahead of states like Bengal and Assam, right?
ReplyDeleteOne small problem with that. One, maximizing profits is equivalent to minimizing costs. And if you are completely ignoring capital investments in terms of transportation infrastructure then well, your hypothesis shall prevail. However, you can't really do that in reality, can you? How can you suggest retailers will be making more money by transporting grains from Punjab to Bengal. Because the way I see it, Bengal has huge intrusive agro-demand - a market which retailers will definitely not want to ignore, as such.
Secondly, retailers are not expected to develop agricultural equipment or technology at all. This is a fundamentally mistaken proposition. Their proceeds are going to go into development of supply chains, making them more efficient. The government is still the primary, and sole, stakeholder of agro-produce in every part of the country.
And just so you know, Bengal is not all that agriculturally backward state. Yes, farmers in Punjab are medially higher earning and hence can afford better machinery, but Bengal is fertile too. Which allows for more than one harvest - sometimes three - in several parts of the state.
The previous commenter has a point.
ReplyDeleteBengal certainly has potential, no one doubts that......Before Independence, we were the Numero Uno in both agriculture and industry. However, in the current scenario, the East is quite some distance behind the North and the South. I cannot give you hard statistics, but the usual packaged rice that you get in supermarkets in Kolkata comes from Punjab and Andhra Pradesh. Some of the loose rice too comes from Andhra or Punjab. We are the largest rice producing state, but why is it that rice is never exported out of India or even out of Bengal? You are saying that these companies can bring in better storage and transport mechanisms, wouldn't that actually promote rice being imported into Bengal rather than out of it? As you said agricultural reforms are still the Governments responsibility, suppose these reforms don't come soon enough, don't you think such a scenario is plausible? Even without FDI, Rui carp from Andhra Pradesh dominates the markets of Kolkata because it's cheaper, couldn't this extend to other areas as well? I believe we should first go for agricultural reforms and only then should we go for FDI in retail.
From what I gather, this is similar to the 'Liberalisation vs. Protectionism' debate. However has liberalisation been a bed of roses? These days there is widespread rejection of socialist principles, but are socialist principles really that bad? Same goes for Populism. The so-called intellects in Delhi love to criticise states like Bengal over 'Populist Politics' calling it an impediment to development, but isn't 'populism' the way forward in a democracy?
ReplyDelete