FDI in Retail Sector: Who’s benefiting?

2 Mar

On 7 December 2012the Union Government of India allowed 51% FDI in multi-brand retail in India; with certain conditions.The Union government managed to get this approval of multi-brand retail in the parliament despite heavy uproar from the opposition. It is now up to the states to decide if it will allow foreign supermarkets like Wal-Mart, Tesco and Carrefour to open.Government of India (GOI), many state governments and certain sections of media have claimed that FDI in retail sector as necessary and crucial move for the growth ofIndian economy.It is claiming that FDI in retail sector will generate approximately 10 million new skilled or unskilled jobs which self-organised sector cannot. Further, wastage of farm products will reduce and shelf life of these products will increase due to new technology and investment in backend in infrastructure. Supermarkets are likely to improve storage, preservation and transport facilities in food industry.  There will also be a strong impetus for growth of medium and small enterprises as modern retailers are likely to allot contract of production of their brand products to medium and small enterprises.

UPA-II government was alleged to have used many unfair practices including arm twisting of regional parties to get the required support in the Parliament. The fact that Wal-Mart alone had spent 52 crore rupee, as per a disclosure statement made in US,  in two years to lobbyistsis well known. The issue is vital as it is affecting Indian retail sector in significant manner. There are conflicting views about possible benefits and loss it will cause to Indian economy. As per one view it will significantly improve agriculture, generate employment opportunities and contain food inflation.On the other hand many researchers and activists highlightits considerable adverse impact in the form of employment loss in domestic retail sector and no noteworthy improvement in containment of food inflation and improvement in agriculture.It is these conflicting views that this article proposes to examine.This is essential as strong empirical evidences as well as historical records across the globes show destructive nature of FDI in retail sector for domestic economy. In the following section I will examine three majorclaims made by the government and the extent to which it is valid.

Impact on small farmers

Firstly, it issuggested that the initiative will reducethe wastage in farm products. Wastage in major vegetables like potatoes and onions is not more than 10% and it is between 10% to 12% in cabbages and cauliflowers. And this 10% – 20% loss is result of poor post-harvest techniques and some of it is inevitable as shown by domestic supermarkets. Hence, even if supermarket’s modern technology is utilized it is unlikely to make any dramatic difference as this wastage is hard to reduce and occur due perishable nature of product and in the farm itself.

Second is the argument regarding improving backend infrastructure. Domestic supermarkets and Global supermarkets’ experience show that these big players procure from “contact” farmers than “contract” farmers without any commitment to buy regularly. Thus, there are no significant backend investment and improving efficiency of supply chain other than setting up small collection centres in procurement regions. The focus is on capturing market and not on making supply chain improvements and operational efficiency (Singh and Singh cited by Sukhapal Singh, p.14). Because of sheer size and buying power of foreign supermarkets, producer’s price may decrease as seen in UK, supermarket chain Tesco paid its supplier 4% below the average price paid by retailers.

Third is the assertion that FDI will fetch a higher price for small and marginal farmers. Carrefour, a global supermarket chain was fined by South Korea for forcing suppliers over 10 months to cut prices to save $ 1.751 billion won in 2005 and by Indonesia for not sourcing goods from listed suppliers who then went bankrupt and this was considered to  be an unfair competition practice. Large numbers of supermarkets indulge in malpractices across the globe. These include payment to be on supplier list, threat of delisting supplier if price is not low enough, payment and discounts from suppliers to open new stores or promotion of them, delayed payments and lowering prices at last minute when supplier has no alternative other than selling products to supermarket at low price and so forth. In India as small and marginal farmers constitute 85% of agrarian sector and do not have any kind of organizational support or government regulations these stores will further deteriorate their conditions. Prices of agricultural products are depends upon production risk and structural factors like irrigation, technology, subsidies, monsoon, availability of credit and not only on market risk. In US, big retail has not helped farmers; it is federal support that makes agriculture profitable. However, in contrast, in India government is withdrawing in a big way from agriculture hence one cannot hope that retail sector will solve this structural and productive problems. Further, big retailers actually bring new battery of middlemen like quality controller, standardiser, processor etc. It is these middlemen who will walk away with the profits and farmers will be left high and dry. This picture is seen clearly in US and elsewhere. Studies have also shown that supermarkets prefer large suppliers of farm products and eventually prices are more about the relative bargaining power of the buyers and the suppliers. The sheer size and huge buying capacity with political influence of big retailers is almost invincible in front of small subsistence, crisis ridden and unorganised Indian farmers with no support either from government or very little from civil society media and middle class in India.

Impact on Traditional Retail sector and employment generation.

First, it is being claimed that 10 million jobs will be created. However there are serious problems with this claim. It is not clear where these jobs will be created as farmers supplying to those supermarkets are already doing some work and are not unemployed.

Second, the supermarket expansion leads to a phenomenon called “retail Darwinism” in which only the fittest survive. (Bijoor  cited by Sukhapal Singh p. 14). It has been noted in many countries that due to the expansion of the supermarket there is a significant loss in employment. For example, as compared to 18 jobs created by a street vendor, 10 by traditional retailer and eight by a shop vendor in Vietnam, a supermarket like Big C needed just four persons to handle the same volume of produce (Wiggerathal cited by Sukhapal Singh, p. 14.). In India, 33%-60% of the traditional fruit and vegetable retailer reported a 13% to 30% decline in footfalls, 10% – 30% decline in sales and 20%- 30% decline in incomes across the cities of Bangalore, Ahmadabad and Chandigarh; the largest impact being in Bangalore. Therefore it is important to include potential employment loss in the traditional retail sector when calculating the employment benefits from modern retail. For example, the Indian retail market is estimated to be around $ 400 billion with more than 12 million retailers employing 40 million people. On the other hand, Wal-Mart with $ 20 billion turnover employs only 2.1 million people as it depends heavily on modern technology and computers which reduce workers intake. So it is very unlikely that FDI in retail sector will create 10 million jobs and not even closer to traditional retail market in India.

Impact on food inflation

The evidence from Latin America, Africa and Asia show that the supermarket prices for fruits and vegetables and other basic foods were higher than those in traditional markets (Singh 2011cited by Sukhapal Singh p. 14). In China, food inflation has been an issue and some local governments have offered a subsidy to lessen its effect on consumers. Even if supermarkets lower the prices, poor people suffer location disadvantage as they stay far from cities and travel expenses are likely to increase food prices indirectly. Further, supermarket expansion cannot change supply side of picture. Food grains, oil seeds, cereals has to be made available to supermarket by indigenous farmers, supermarket cannot create them. For this supply, government spending in social sector, agriculture and strong statutory protection of farmers from malpractices of middlemen, moneylenders and rich farmers are essential. Supermarkets are not even part of solution for containment of food inflation in India. More crucially, surveys after surveys show that majority of Indian population do not have enough purchasing power to buy food and supermarket expansion is no solution for it at all.

Hence, I am not in support of FDI in retail sector. Considering the experience of expansion of supermarkets across globe there is every reason to slow it down by mechanism like restricting it to cities, business licences, trading restrictions, need to limit buying power of supermarket by strengthening competition laws and the establishment of an independent authority to supervise and them and to support local retailers. The interest of small producers and traditional food retailers has to be secured as they cater to a large population of India and invest back in Indian economy. The claimed necessity of FDI in retail sector for economic growth is a shaky one. Economies are slowing down due to structural problems and reducing government spending in economy. Export oriented, free market economy without any regulations by government, subsidies for industrial production, tax concessions to industries by government, no protection for workers, no conservation of natural resources, with social sector spending cuts and withdrawal of government, crony capitalism are the main reasons for economic slow-down. And this problem cannot be address by FDI in retail which has its own repercussions.

By:      Vikrant  Halkandar

References:

  1. Kumar, Rajiv,Going for Broke with FDI in Retail: Critical and Necessary Move”, The Hindu, September 15, 2012, p.15.
  2. Sharma, Devinder, “Going for broke with FDI in retail: Made in United States”, The Hindu, September 15, 2012,p.15.
  3. Singh, Sukhpal, “FDI in Retail: Misplaced Expectations and Half Truths”, Economic and Political Weekly, Vol. XLVI, No. 51, December 17, 2011, pp. 13-16.

3 Responses to “FDI in Retail Sector: Who’s benefiting?”

  1. jankipandya March 11, 2013 at 4:42 am #

    This is going to be a disaster for Indian farmers and small scale industries. The kind of changes that it will introduce in the Indian market will enslave farmers and introduce new kind of colonialism in the form of apitalism in India. Having a chat with one of the Economic analysis. R. Swaminathan who writes for governance now. He said we should not worry so much because Indians have always survived using strategies which will help them cope up with the changes. I dont know how to justify that or to oppose that but I am sure we all should stand against this because in a agricultural economy like ours FDI in retail is going to hurt us

    • Rishikesh Tiwari March 19, 2013 at 2:15 pm #

      Appreciate your Efforts and Nice Article…..

      and yes Janki Indians are known for this…..

      It is said that Need is the mother Of Invention and the face if applicable 100 % for Others but 200 % applicable fir Indians, for example Indian Asked for Missile Technology Help to Other Countries but when they Refused to Help in the Issue and nw India is come up with its InterBalestic Missile…..

      Same for SuperComputer, Automic Energy and Many More……

  2. lista de email March 21, 2013 at 3:58 pm #

    i would like to read your newer posts, so i will bookmark you. hope to see your updates. lista de email lista de email lista de email lista de email lista de email

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