Tuesday, December 13, 2011

Putting FDI in retail on hold – sense or nonsense?

What prompted me to write this was reading Yaswant Sinha’s statements about FDI in retail field in an interview published recently in the Deccan Chronicle.

About fifteen or twenty years back when supermarkets came to Cochin there was considerable fear among the small retailers that their business would be affected. The magnitude of this concern spread to more areas when the big shops started selling meat, fish and vegetables too.

What really happened? One chain of supermarkets closed down, obviously due to mismanagement. Unfortunately they did not know Yaswant Sinha’s miracle therapy – send your people outside to learn best management practices in retail. (It would be useful if he can publish a list of places where such training is available to Indian retailers.) Another well-known chain also pulled down its shutters. Some others are doing well of course. Even Reliance and More have entered the scene in a big way. But it has not affected the small retailers.

Take the area where I live in Cochin. Seven years back when we moved to Chennai the place had three or four vegetable shops and a few retail outlets for other goods. We shifted back three months ago. The situation is interesting. Within a radius of less than 1km, there is a Reliance Fresh (with a notice on the front door that they need personnel), around ten vegetable shops and a number of retailers dealing in every imaginable goods from pencils to electronics. All of them seem to be doing well.

We go to Reliance occasionally. The main reason is that there is a good fish stall and a medical shop near Reliance. It also helps us to learn what the new goods on the market are. But it is the corner shop near the house that we depend on mostly. It has almost all the stuff we need for the house. That shop too has grown. Incidentally, women still bring fish home. The cold storages apparently have not affected their business

If Walmart or Morrison’s or Carrefour opens a super shop in the heart of the town not many people are likely to drive in the traffic congestion to do regular shopping there. It is true that the malls which have come up in Cochin seem to be doing well. But mostly, people stick to their local shops where they are known. The habit of buying in large quantities and stocking for a month or so is not common.

Yaswant Sinha says that foreign involvement in retail would mean cultural invasion. Well, the middleman culture would be under threat. That should benefit the farmers and the consumers. As a matter of fact, reading through the whole interview gives one the feeling that FDI is something that Sinha is not really against, though his intention was to justify his party’s stand to oppose it.

If the major international retail chains come to India, they would require people to man the new facilities. It is unlikely that they would grab staff from the existing small outlets. They would recruit according to their set standards and train the personnel. This should certainly create many new job opportunities.

Would the customers have any benefits? Let me give my wife’s and my example. After a recent cataract operation, I had to use different types of eye drops. They are cheaper in the hospital pharmacy by about 20% compared to the medical shops. The same is true about my wife’s diabetic medicines and equipments for taking sugar readings. The reason is that these hospitals buy in volumes and regularly.

Efficient and quantitative buying certainly reduces the cost for the outlet. You might have noticed ads in the media and otherwise by big shops offering commonly used goods cheaper than market prices and MRPs.  

Now, on the political angle. In fact the BJP was for FDI in retail when they were ruling. But that proposal was not pushed through for some reason. Now they are objecting to it because the UPA is trying to implement it. Purely political reason.  

BJP must realize that the party is very important to India. They would be/should be either running the government or sitting the opposition in a responsible manner. Seeing the BJP lining up with the left parties too often these days makes one worried. The Communists have opposed everything good for the country from Quit India to computers. That is why they are where they are today.

Inactivating the Parliament for political reasons – sometimes silly ones – for days at a stretch and wasting the taxpayer’s money is not right. Stay in the Parliament and bring a no confidence motion if the government is really doing something seriously wrong.

That is the true democratic process.

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Ajith said...

FDI in any sector other than things concerning national security should be a straight yes. It will reduce prices, bypass parasitic middleman and effective supply chains will be established. While other countries are competing for FDI in retail sector, here we are fighting ridiculous political battle over FDI.

Abraham Tharakan said...

Ajith, thank you for the comment. I agree with you.Please do have look at the next comment.

Abraham Tharakan said...

An email comment received from an economist
"I liked your blog-posting on the FDIs and retail shops. I fully agree with you that it is a mistake to put the decision to allow FDI on hold. It would have been a positive step forward. Much of the opposition to liberalization is due to what we call in economics 'The Political Economy of Protection'. If the currently protected sectors find that their income after liberalisation will be less than what it is with protection, they will be ready to use part of that excess current income to lobby" for the continuation of protection. The argument of potential 'predation' has been also used to justify blocking liberalisation ('the long purse argument'), but predation is a very rare phenomenon; it occurs more often in protected economies than liberalised ones; and finally, the way to prevent predation is to enforce anti-trust laws rather than to prevent liberalisation.

SME News said...

The opening up the retail sector to foreign investment will be beneficial for creating millions of jobs in India and also boost its trade relations with the US. This statement has come on the sidelines of the World Economic Forum’s annual meeting from Mr Timothy Roemer.

Mr Timothy Roemer, who resigned as US Ambassador to India last year, is now an International Advisory Council Member of leading American public affairs firm APCO Worldwide.

The five-day meeting, which had concluded yesterday, witnessed a number of global economic leaders requesting India to go ahead with economic reforms, consisting of FDI in retail. After facing strong political opposition, India had placed the decision of permitting foreign direct investment in the multi-brand retail business on hold.