With the government having allowed 51% foreign direct investment (FDI) in multi-brand retail, the economy has opened up to global players in retail. One name in particular has hit the headlines — Walmart. The American retailing giant is the third largest public corporation in the world according to the Fortune Global 500 list for 2012, and it has become the poster boy for anti-FDI
protests and increasing opposition rhetoric.
Economists are divided on the effect that Walmart and other retail chains will have on the domestic economy. The prime minister claims this step will increase prices paid to farmers, reduce prices for customers, reduce agricultural wastage and create thousands of jobs. Montek Singh Ahluwalia, Deputy Chairman of the Planning Commission, said the measure is not a threat to small retailers and it will create efficiency in supply chain infrastructure. Wastage will fall, leading to lower prices of primary commodities. In India, 30% of fruits and vegetables, and 5-7% of grains are wasted between harvest and consumption.
But professor of economics at Jawaharlal Nehru University, Jayati Ghosh, disagrees. She argues that one Walmart will replace 1400 small retailers at the cost of 5000 jobs. "It is hard to believe that a capital intensive supply chain will lead to higher productivity. It should have been improved by public investment, not FDI. His (Ahluwalia's) argument doesn't withstand scrutiny." Although Ghosh concedes there will be benefits in the initial years, "when companies establish dominance, they will drive out competitors. The government is barking up the wrong tree if they think this will revive growth."
However, global retailers have not been allowed unrestricted entry. The government has set conditions — minimum investment of $100 million; 50% investment in supply chain infrastructure; 30% procurement from micro, small and medium enterprises; operations in cities with one million-plus population; and government has the first right to purchase agricultural produce.
Economist Bibek Debroy of the Centre for Policy Research, therefore, has a more measured view. "Given these restrictions, the effect will neither be disastrous nor miraculous," he says. Debroy further argues that the issues plaguing agriculture, storage and distribution have not changed. "Domestic players have been struggling because of these problems, and the likes of Walmart will face the same." He also adds that the objective of disintermediation is desirable. But Ghosh says the policy will simply reduce the middle man to one company, reducing competition and creating a monopoly.
Big business has hailed FDI as a driver for organised retail but small retailers are seen as the perennial victims. India's retail market is one of the fastest growing in the world expected to grow at 15 to 20% over the next five years, according to global consultancy firm AT Kearney's Global Retail Development Index. The report ranked India fifth with China (3rd) being the only Asian country with a better rating. While the share of retail in GDP is 14%, organised retail only accounts for around 6% of this total while 94% comprises of small businesses or kirana stores. Moreover, the industry employs 8% of the population.
Debashish Mukherjee, partner at AT Kearney in the consumer goods and retail segment, welcomes FDI. He believes the "calibrations made by the government will ensure the best interests of multiple stakeholders." He argues that even if organised retail grows at 25%, unorganised retail will not suffer since its share is larger. He also does not believe predatory pricing will be a problem, and says that suppliers will not allow big companies to dictate the terms of business.
A promising aspect of FDI seems to be that prices for consumers will fall. "The government often makes such lofty promises but we never see them tangibly delivered," says Bejon Misra, an international consumer expert. "How can they ensure lower prices and quality products for consumers?" He asserts that he is not against FDI in retail but is opposed to policies being imposed without proper mechanisms. "The country's laws are too weak to ensure just returns. A fast-track redressal system for consumers should be the first priority," he says.
A point of contention, oft-stated by the Left, has been Walmart's treatment of its employees. Walmart is infamous for its opposition to unions. CPI(M) politburo member SR Ramachandran Pillai says, "Walmart's anti-labour attitude will be harmful. They are known for paying low wages for long hours of work." He also says it will adversely affect producers and consumers, and eventually Walmart will decide prices of primary and industrial products. He warns, "We will fight it, both inside and outside parliament. The government has no right to implement this and we will stop them."
While both sides have compelling arguments, for the time being the UPA seems committed to their slew of economic measures. It remains to be seen whether this policy will be a bane or a boon. But as AT Kearney's Mukherjee puts it, "FDI is the first step towards growth but further changes are required. The transformation won't happen overnight."
Keeping out the big box retailers
In a queue snaked around a Manhattan block, people waited patiently to hear the New York City council’s verdict on Walmart. The council was holding a hearing to decide if the big box retailer should be allowed into the city.
That was in February, 2011. A year-and-a-half later, Ann Romney, wife of Republican presidential nominee Mitt Romney, gushed at a late night show: We love Costco.
Costco is a rival of Walmart’s wholesale chain Sam’s Club competing for the same consumers who drive away SUVs full of groceries. Founded in 1962, Walmart operates 10,000 retail units under 69 banners in 27 countries. It employs 2.2 million people with sales of $444 billion in 2012.
Goods at Walmart move in bulk. The seller can cut costs sourcing in bulk and buyers cut their bills buying cheaper supplies. But smaller retailers — mom-and-pop stores, kiranas — cannot match them and get squeezed out. The chain’s expansion in Iowa in 2005 shut down 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety stores, 158 women’s stores and 116 pharmacies. A Chicago study showed businesses closest to Walmart were most vulnerable: 40% of those in “immediate proximity” would close in two years. But, by a process called “creative destruction” new businesses spring up to replace them, showed a 2008 West Virginia study.
Even Washington DC is trying to keep out Walmart. Residents from around the proposed site are opposing it saying they have enough supermarkets. India, however, is another story. It needs big box retailers to build a distribution network to support a vibrant manufacturing sector.
"This is really about creating a pull from the farm to the retail sector," said FICCI president R V Kanoria. He sees many smaller related businesses queuing up to enter India with niche technologies — cooling, logistics, etc.
Tuck business school’s Vijay Govindarajan said that global competition in distribution is important for India to grow as a manufacturing power house. But, he said, Walmart might want to change its business model for India. Indian customers do not have the resources needed to buy in bulk. Also, Indians don’t go shopping in SUVs. Most use public transport. How much can they carry home? Certainly not months of supplies.
— Yashwant Raj, Washington
Interview Raj jain, MD and CEO, Bharti Walmart
'We'll show the benefits of organised retail'
Many states are not in a mood to allow retail FDI. How will this affect your business plan?
We will start with those who have agreed and show the advantages that organised retail brings in employment, farming practices and helping small and medium traders and manufacturers. Once that happens, people on the fence will move to the other direction.
What about the fear that small traders and retailers will be wiped out?
In emerging markets where FDI has been allowed, organised retail can't grow beyond a point. The average share of modern retail in China is 25%. Back home, where it is open to large Indian corporations, only 25 to 27% of trade is through modern retail. Also, market research shows that an average family does three kinds of shopping — daily, weekly and monthly. In monthly shopping, people usually buy groceries in bulk, from larger stores for better deals. Weekly and daily purchases are top-up purchases and the key driver here is convenience.This is largely driven by door-to-door delivery. No modern retail can do that.
Walmart has often been accused of indulging in predatory pricing which kills small manufacturers over time. What do you have to say?
No, not at all. This is not true. In fact, it is quite the opposite and the manufacturer that does well with Walmart is the small manufacturer.
The Punjab story
Amritsar was the first place chosen by the Bharti Walmart joint venture to open their Best Price Modern Wholesale store in the country. Since its inception in May 2009 it has been doing brisk business with an estimated 50,000 registered customers. Their customers come from nearby villages, and from adjacent districts of Tarn Taran and Gurdaspur as well.
The store deals in around 6000 items under one roof and has 2000 employees, mostly youngsters. Sartaj Singh who joined as a security guard says, "I am happy with my job and the working hours do not bother me as my village is nearby."
The pay for these young boys ranges from Rs. 4000 to Rs. 8000 a month. In addition, 75-100 youngsters are involved as promoters hired by private agencies. Even farmers seem happy selling their produce to the foreign giant. Bhupinder Singh Randhawa, a farmer from Bundala, says, "I dealt with Walmart two years ago. They gave a rate which was better than the market rate. Even when the market rate went down, they continued to buy at the rate they fixed."
In Punjab, Walmart has introduced 'Direct Farm Project' in Haider Nagar, where more than 100 farmers have been associated with Bharti-Walmart for supplying vegetables directly. Dr. Manjit S Kang, Former Vice Chancellor, Punjab Agricultural University, Ludhiana says, "FDI in retail is a win-win situation for the farmers. The fear of 'big fish' gobbling up 'small fish' are unfounded. In the USA, Walmart has not eliminated small retailers (convenience stores), such as 7-Eleven, Circle K, Cracker Barrel, etc. The latter continue to co-exist, even though they charge more for convenience. In China, 100% FDI has been allowed since 1992 and has the second largest retail sector in the world today."
Traders and union leaders see the advent of FDI in retail in a different light. Citing examples of FDI failure in countries like Thailand, Rattan Singh Randhawa, Kisan Union Leader, says, "Farmers were the ultimate losers there. These big companies at the onset may offer good prices but in the long run they’ll force farmers to sell at prices they fix."
Amritsar Lal Jain, president, Punjab Beopar Mandal feels the same about the reform. "If FDI comes in, it should be in infrastructure. In the agri sector it is welcome but it should be in agro processing industry that’ll help the farmers," says Jain.
In Punjab, Bharti Kisan Union (BKU) has expressed its support for FDI. Various other farmers' associations (All India Vegetable Growers Association, Bharat Krishak Samaj, Consortium of Indian Farmers Associations) support the retail reforms because they feel the current retail system exploits the farmers.
The company is also running the Bharti Walmart Training Centre at Mata Gujri Polytechnic campus in the city. It was the first such centre which was setup in the country and they have a special two month crash training programme for those who have not studied beyond class 12. They are taught how to operate
computers and given knowledge of spoken English. During the training they are sent to certain stores in the city. A number of them have landed jobs with local branded stores.
Harkirat Singh and Anshu Seth
FDI: A local perspective
Maj. Manmohan Singh, farmer
One of the most successful farmers of Amritsar, Singh is also an 'arhtiya' (commission agent) for government purchase agencies. "Whenever big companies come in, the rates of farm products rise and farmers benefit. This happened with basmati and I saw it first hand. The apple lobby in Himachal were happy when a company came in to buy apples directly from the farmers and they got good rates," says Singh.
Being an arhtiya, Singh knows about the cuts imposed on farmers.
"Even government agencies are not sincere, often telling farmers that due to high moisture in their grain they will not buy it at the minimum support price. Underhanded deals also take place to clear the grain for sale," he adds.
He agrees the FDI will let big companies to take over the market which will in turn help farmers get better prices for their produce.
Singh gave an example of basmati variety. In 2010, the rate was around Rs. 3000 per quintal. Last year, the private traders did not allow the price to rise, forcing farmers to sell between Rs. 1500 - Rs. 1700 per quintal. The traders stored and later sold it at higher price.
Vikram Sarkaria, farmer
A young farmer who is into cultivation of capsicum and bell peppers Sarkaria is sceptical about the government's move.
"I am not sure whether FDI will help farmers. The experience of some of my colleagues with Hyper City was not very good as they were not paid the promised prices for their products and there were also cases of delayed payments."
FDI may benefit large or medium scale farmers but not smaller ones who will continue with the wheat-paddy cycle as assured prices in the form of MSP is a safer option.
Balbir Singh, local resident
Singh, a government school teacher feels the options given by big multi-brand retail stores is by far the best thing that has come to their town.
"FDI will give us a wide range of quality products to choose from. The local 'kiryana' (sic) merchants have had their day. They too should improve the quality of their products," says Singh.
He feels that the entry of giants like Reliance and Easy Day has made the local small retailers more competitive while drastically improving their quality of service.