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No panacea for economic ills

chandigarh Updated: Sep 26, 2012 12:58 IST

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Foreign direct investment (FDI) in retail is being touted as the ultimate policy measure to reduce inflation, generate employment and create a prosperous nation. Is it so? That’s the million-dollar question!

There are six companies — Walmart, Sainsbury’s, Tesco, Aldi, Carrefour and Metro — which may enter the retail market in Punjab if the state government allows it. These companies will do bulk buying from the source, eliminating the middleman, and compete with the small trader, shopkeeper and rehriwala. Will the small trader be able to compete with retail stores? The global experience suggests otherwise.

Such an overwhelming concentration of market power will mean only one thing: small traders and MSMEs (micro, small and medium enterprises) will be wiped out. The trading class is a large sector of self-employed workers in the Indian labour pool. A sudden rupture of this pool in the name of structural change, and that too a highly selective one, has the potential to generate massive social unrest.

There’s another argument that FDI in retail will benefit farmers since the produce will be carried directly from the farm to the factory, hence fetching more income for farmers. The milling of sugar tells another story. If the sugarcane had gone directly to the factory from the farm and not been controlled by the government by framing a policy, farmers would have been ruined.

WTO clauses

If 51% FDI is allowed in Punjab, the management and control will go to foreigners; World Trade Organisation (WTO) clauses will become operational; neither the Centre nor the Punjab government can impose conditions to stop monopolisation, pricing and procurement of products (whether these are to be purchased within or outside India).

If they purchase wheat, rice or foodstuffs from outside India and sell these within the country (say, in Punjab), the Centre or the state government cannot stop them from doing so. Due to the WTO clauses, the procurement policy cannot be applicable to foreign firms and will be challenged by the latter as no embargo can be levied on them, as per WTO clauses. Thus, interests of farmers in Punjab will be harmed.

The retail chain stores will sell cheap goods, mostly from China, where there are no labour laws and a hire-and-fire policy is prevalent. Can we afford to compete with these stores? Our costs will be uncompetitive, our manufacturers will be ruined.

Initially, prices of goods will be cheaper, but later, these will vary according to the store policy. The consumer would have no option but to purchase goods from retail stores.
Certainly, FDI in retail is not a panacea to ensure economic prosperity in Punjab. If it were so, it would have been allowed in New York, where Walmart was not permitted to open its store.

Increase shelf life

The goal of economic prosperity in Punjab can be achieved by optimising the strengths and plugging the weaknesses of its economy. Ours is an agrarian state. The agricultural produce is perishable. Attempts should be made to increase its shelf life.

Every year, Punjab contributes 60% of the foodgrains to the national pool. The procurement of wheat and paddy for 2011-12 was 109.6 and 130 lakh metric tonnes, respectively. The covered capacity of foodgrain storage is 106 lakh metric tonnes; the rest is stored in the open. There is a need to strengthen the supply chain management (storage capacity) by encouraging Indian entrepreneurs through foreign technology. There is no need for a sea change in the structure but to plug the gaps in the existing one to strengthen the state’s economy.

The decision of the “economist Prime Minister” to introduce FDI in retail is not a silver-bullet reform that will revive the country’s economy. It is only meant to deflect the attention of the aam aadmi from the scam-tainted record of the UPA (United Progressive Alliance) government.

The Akali-BJP government should focus on reforms for good governance, initiated during the previous regime, and ensure that fruits of these reforms reach the people.

Joseph Stalin ran buses to Siberia for exiles. FDI in retail offers a similar bus for traders and MSMEs. It makes sense to avoid such buses.