The UPA government inherited a 8.5% growth rate in the GDP. It will leave behind a 4.5% + growth rate. For revival of the economy and expansion of economic activities, investment is required. Investment has to be both domestic and foreign.

Foreign direct investment is an additionality of resource. In sectors such as infrastructure where domestic resource is inadequate, FDI can play important role. The FDI, however, has to be carefully permitted considering the requirement of each sector. While the BJP will encourage FDI in certain sectors, it is presently opposed to opening out of multi brand retail. Unorganized retail is a largest employer after agriculture.

There are four crore small retail establishments in India which support almost 1/6th of India’s population. Multi brand retail by major international groups will displace mass retail jobs. It will hurt our manufacturing establishments since organized international retail sources products internationally. India can ill-afford foreign owned stores selling Chinese goods. The elimination of small retail establishments will also reduce consumer choices. Nowhere in the world have international retailer enriched farmers or producers. The benefits of elimination of middlemen will go entirely to the multi brand retailers.

In a town like Amritsar which is heavily dependent on trading, a few multi brand retail establishments can cause havoc to the trading community. I challenge the Congress Party for a debate on the impact that multi brand retailer will have on the trading community of Amritsar.

My interaction with the hotel industry

I had structured interaction with all the hotel owners of Amritsar. The subject was expansion of tourism in Amritsar. I made the following suggestions to the hotel owners:-

Amritsar will always be a tourist hub. It has to upgrade the railway station, complete the road and highway development programme, and have more directly connected international flights. The monuments in and around the city need to be preserved. Additional tourism spots such as a visit to the Khalsa College, creation of food street, reasonable taxation on hotels, increasing the number of hotels and rooms available will also help the city in a big way.

The tourism infrastructure and creation of other attractions such as amusement parks can ensure that a standard tourist visiting the Golden Temple stays in Amritsar for two nights instead of one. The tourism traffic to the city itself will be doubled. This alone will help the hoteliers, traders, transport providers, restaurants, Dhabas and all tourism attraction points. Amritsar needs to think out of the box.

Job Structure in India

To decide whether a particular measure will help the Indian economy or otherwise has to be judged in the context of the job structure in India. Fifty One percent (51%) of all employable Indians are self-employed, the largest being in agriculture. Four crores Indians are employed in retail trade. It is retail trade which impacts twenty crore Indians in terms of population. Only 18 percent of Indians have a structured employment and 30 percent are either unemployed or under-employed. International Retailers reduce employment, they never add to it.

Impact on the manufacturing sector

The contribution of agriculture in India to the GDP has come down to about 16 percent. About 60 percent Indians are employed in the agriculture sector. Thus there is huge underemployment in the agriculture sector. In the normal course, as the Indian economy grows, it leads to large job shift from agriculture to manufacturing. Bulk of the jobs are created in the manufacturing sector.

India needs to transfer a large part of its working population from agriculture to manufacturing. For this, we need a robust broad-based manufacturing which grows at a much faster rate. For manufacturing to grow, we have to transform ourselves in to a low-cost economy, where cheaper and good quality products are available. Nobody consciously buys costly goods. This is precisely the reason, why the pendulum has swung in favour of low-cost manufacturing economies.

We need manufacturing sector reforms, cheaper loans, low cost utilities and power availability, proper infrastructure and trade facilitation. We need to have a taxation regime, which is globally comparable. It is only then that we can compete with the low-cost manufacturing economies. The first adverse impact of allowing FDI in multi-brand retail will be loss in manufacturing jobs. India’s manufacturing growth has to shoot up to a 12 -14 percent growth rate as was witnessed in China. Without taking adequate manufacturing sector reforms, allowing FDI in retail will hit India’s manufacturing sector. Structured international retail sources internationally.

In the USA, when structured retail replaced unorganized retail, more than 40 percent jobs in manufacturing sector were lost in the past 30 years. In 1979, the US employed 19.5 million Americans in manufacturing. Despite being the most powerful economy in 2009, this figure has come down to 11.8 million – loss of 7.7 million jobs. Stores such as Walmart, Carrefour and Tesco which have shown interest in entering India would source most of their products from outside India. Once, our manufacturing sector suffers, the writing on the wall would be two-fold.

Firstly, we will have retail stores owned by the Europeans and Americans selling Chinese products. India would be a nation of sales boys and sales girls. Secondly, with India’s manufacturing suffering, the danger of India being a nation of traders would stare us in the face.

China’s Experience

Votaries of multi-brand retail have argued that the experience of such retail has been successful in China. The comparison is misconceived. Most of what the stores will sell in China and elsewhere will be Chinese goods. The Chinese manufacturing sector has gained immensely from these international chains. Can China conceivably argue that my own products should not be sold in the stores set up by these big international chains. This would not be the case in India.

Displacement of Retail Jobs

The introduction of FDI in multi-brand retail will lead to a mass scale loss and displacement of retail jobs. There is no additionality of markets being created. It would be same market, which would now be divided between organized structured retail and the unorganized retail. The closure of small shops would lead to mass scale displacement of retail shops. In any case, the Muliti Brand stores of international chains operate on a low employment principle. The Walmart has an international operation of $ 422 billon. This is equivalent to Rs. 21 lakh 10 thousand crores. The Walmart, for this massive operation, employs only 15 lakh people internationally. The Indian retail sector constitutes 12 percent of our GDP. This size is half of the Walmart’s international operation i.e. 10 lakh 38 thousand crores. For a high population country like India, we employ Four Crore people in retail thus feeding four crores families, or 20 crore individuals. Why has Walmart not been allowed to open a store in Manhattan? Even the Newyorkers realize that this would lead to closure of stores in Manhattan.

Will entry of FDI in retail help the farmers?

It has been argued that the entry of structured international retail will eliminate middle men and help the farmers. If that were to happen, one would at least see a silver lining in the government’s proposal. Regrettably, it is not true. There are three illustrations which would establish the inaccuracy of this argument.

A. If elimination of middle men had helped the farmers, the famers in the USA and the European Union countries would be the most prosperous ones. Factually, it is not so. If the EU and the US did not subsidize their farmers to the tune of USD 400 Billion, i.e over Rs.5000 crores per day their farmers would be in distress.

B. The only agro-product where there are no middlemen in India is Sugar. Sugarcane grown in cane growing area has to be compulsorily purchased by the sugarcane mills. It is lifted from the farm gate to the factory gate. There is no middle-man. Sugar is the only product for which state advised price mechanism is implemented so that farmers get sustenance. But at any given point of time, the sugar cane farmers have thousands of crores of unpaid amounts with the sugar mill owners. C. Studies have been conducted globally as to how much the elimination of middleman has benefitted the farmer where international retail has come into action. In India, where milk and milk products are retailed by cooperatives, 70 percent of every rupee goes to the milk producers and 30 percent to the retailers. In the USA, where milk products are sold through established retail chains, the figure is in the reverse. Thirty Percent of every dollar and pound spent on milk goes to the producer and 70 percent to the retailer. The lesson of the story is that when middlemen are eliminated, retailers are benefitted and not per se the producers(farmers).

Ill-advised Trade Regime

It is a fundamental principle of international trade that concessions are not made for free. The grantor nation always charges for what it concedes. There is no place for unilateralism in international trade. Unilateral concessions are not accounted for. The EU and the US have been long pressing India for opening FDI in retail. India has chosen to make unilateral concession, without asking for corresponding concessions from the West. What the Government has done makes for a bad Trade Policy.

Can a decision for FDI in retail be left to the states.

FDI is a central subject. It is not a subject on the state list. Therefore, the central government, while formulating a policy on the FDI, can ordinarily not say that the decision to implement FDI in retail belongs to a state. That apart, India has bilateral arrangements of investment treaties with at least 82 countries. Each of these agreements has the following clause- “ Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment of disposal by such investors, treatment which shall not be less favourable that that accorded either to investments to its own investors or to investors of any third State” (Article 4: National Treatment and Most-Favoured-nation Treatment- BIPA).

The essence of these bilateral treaties is that when you allow investors from a foreign state to make investments in India, that investor cannot be given a treatment less favourable than what is allowed to a domestic investor. Investment treaties operate on the principle of national treatment. You cannot tell an investor that your investment would be permitted in some parts of India. It is eyewash, which is being created, when you suggest that we are leaving the investment decision and its implementation to the states. There are deliberate loopholes created for a future litigation for the enforceability of “National Treatment”.

Nature of the Consumer Market

Fragmented markets are always in consumers’ interest. Consolidated markets create monopolies and hurt consumer interests. Consumers have to be provided with plurality of choice. Large international chains operate with deep pockets. Their capacity to suffer losses in the initial years is immense. Once they control the major share in the market, they hurt both the suppliers and the consumers. In the UK, the Tesco, Sainsbury and ALDI control more than 60 percent of the market. Thailand allowed FDI in retail merely 10 years ago.

Today, they control 40 percent of the consumer market. The suppliers are compelled to sell to them at prices dictated by the chains. Similarly, the consumer’s choices are also restricted as the consumers have no alternatives left. India is a state where structured retail and unorganized retail are co-existing. In the last few years, organized retails have come up not only in the metros but also in Tier-II and Tier-III cities. Such a co-existence clearly shows that the domestic retail sector is evolving in the organized sector and there is no compelling reason why FDI in retail ought to have been permitted.

The back-end argument.

It has been contended that the back end infrastructure would be created, the moment the FDI in retail is permitted. Creation of infrastructure is essentially the responsibility of Public-Private Partnership in India.

The back-end infrastructure, in the present context, comprises cold chains, highways, transportation facilities and power. Are these international chains going to generate more power in India? Are they going to create a road infrastructure in India? The answer is unequivocally no. Transportation network in India already exists in plenty. As the strength of the economy increases, there will be a further improvement.

Creation of cold chain is not rocket science, that Indians cannot do it. We are spending a lot of our national resources in the social sector, which is not leading to any asset creation. If these resources are linked to creation of assets such as cold chains, you need to mortgage your entire food security and food supply chain in order to enable some of these sources to create cold chains in India.

Somersault by the government

On December 7, 2011 the Commerce Minister informed the Rajya Sabha that unless there is consultation and consensus the government’s decision to introduce FDI in multi-brand retail would remain suspended. The Minister further said that states have to be consulted, since decision making has been left to the states. There has been no consultation procedure followed by the government since December 7, 2011 and this decision has been forced on the nation.

The Prime Minister Dr. Manmohan Singh, in his capacity as the Leader of Opposition, had assured the trade and industry that FDI in multi-brand retail would not be allowed. The present Parliamentary Affairs Minister Shri Kamal Nath, categorically told the BBC, during his tenure as the Commerce Minister that India is not prepared to permit any FDI in retail trade. Another Congress Leader went to the extent of terming the decision as anti-national.

The Parliamentary Standing Committee’s recommendations

The Parliamentary Standing Committee on Commerce and Industry has categorically advised the Government not to introduce FDI in multi-brand retail. It was of the opinion that unorganized sector acted as unorganized safety valve by giving employment to so many Indians because the government cannot provide jobs to millions and millions of Indians.

Loopholes in the Government’s arguments

The government’s argument that FDI in retail will lead to the elimination of middleman is fallacious . In the relation between the producer and the consumer, the Retailer is the biggest middleman, who corners the maximum profit. He operates on the principle of buying at the least prices and selling at the highest prices.

Walmart’s business policy is EDLC- Every Day Low Cost. They abuse their dominance; they beat down purchase price and then increase the consumer price. Their strategy is to suffer initial losses, because of their deep pockets, and indulge in predatory pricing to eliminate competition. And once you are in monopoly, then the market is yours for exploitation.

The Exagerated Argument of Food Wastage

FDI in retail has also been sought to be justified on the ground that lack of proper infrastructure at the back end results in wastage of almost 40% of the total agricultural produce. A parliament committee had directed ICAR to report on the wastage and it commissioned a study by CIPHET i.e Central Institute of Post Harvest Engineering and Technology, Punjab which arrived in 2010 at a figure of 6 to 18% for wastage of fruits and 6 to 12.5% for wastage of vegetables. The figures arrived at by CIPHET are as under: Cereals : 3.9-6 Pulses : 4.3-6.1 Oil Seeds ; 6 Fruits and Vegetables : 5.8-18 Milk: 0.8 Fisheries : 2.9 Meat : 2.3 Poultry : 3.7 This study by CIPHET has been quoted by the Minister of State for Food Processing Harish Rawat in replying in Lok Sabha in February 2011. On May 8, 2012, Minister of Food Processing Industries Shri Sharad Pawar informed the Parliament that cumulative wastage in fruits and vegetables is estimated between 5.8% to 18%. The CIPHET report has been relied on by the Planning Commission in its Working Group on Agricultural Infrastructure. But contrary to these findings, the DIPP study paper on FDI in retail released on 6th July 2010 stated that “ as per some industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains are wasted.”

The identity of the industry sources is not known. It is clear that the Government has deliberately quoted higher figures of wastage to mislead the public in to believing that FDI in retail would actually benefit the farmer.

Experience of other countries

Brazil, like India, had an expanding retail store Pao De Acucar. In the 1990s, FDI was allowed in retail.

Today, this domestic store has merged with Carrefour. Carrefour has 27 percent of the national market share, and 69 percent in Sao Paulo region. Structured international retail controls 86 percent for the Swedish market, 79 percent of Belgian market, 78 percent in Australia, 75 percent in Germany, 70 percent in Mexico, 69 percent in Canada, 60 percent in the UK, 65 percent in France and 40 percent in Thailand. India is the last big bastion which followed the bottom up trade rather than the top down trade model. This created jobs and provided multiple opportunities and plurality of choice to consumers. Today, the UPA has surrendered this last big bastion.

The Danger

FDI in multi-brand retail will lead to a small number of sellers exercising control of the markets and dominating the market. The abuse of dominance will be evident. The bigger they grow, the fewer would be the number of sellers in the market till they manage to become a Oligopsony . In the UK, the farmers have an option to sell only to four purchasers. In the US, it is five chains which buy the farm products. An isolated example, like one of Pepsi, which is frequently touted is the ‘fallacy of composition’. What is true of a small size may be true as an isolated illustration and is normally not true of the whole. Mexico had a dual impact of North American Free Trade Agreement (NAFTA) and opening FDI in retail. It has to suffer 50 percent of its stores closed down.

(Author is leader of opposition in Rajya Sabha)

(Disclaimer: The views expressed by the author in this article are his own and do not reflect the views of Mediabharti.com- Editor)