Let it be business as usual

Of late, many government secretaries and economic advisers have been giving interviews, justifying the impending move to allow foreign direct investment (FDI) in multi-brand retail. What is at stake is the Indian retail marketplace, estimated to be worth $350 billion or Rs 16 lakh crore.

This is more than 10 times the estimate loss of the 2G telecom scandal. There are, of course, major differences between the two sectors. Unlike telecom licencing, which is a one-time affair, the retail marketplace is an annual number, growing every year. Unlike telecom spectrum that is seen as valuable, the retail sector is not anyone’s property. Nearly 25 million wage earners (people whose source of income is ownership or employment in retail, supporting over 100 million lives) serve the sector, mostly from the vulnerable strata of society.

The justification for opening multi-brand retail to foreign companies is being attempted at many levels. We are told that it will give farmers better price for their products, improve supply-chain efficiency, control inflation, create jobs and lead to more competition. However, most of these reasons are not central to the business of retail; at best they are possible side effects. If we study them thoroughly, it becomes apparent that these justifications are misleading.

In reality, farmers won’t get better prices because that is not how aggressive foreign companies like Walmart, Tesco and Carrefour operate. These companies use predatory tactics and their job is to beat down the prices at which they source the products. The improvement in supply chain will be marginal because the issue of infrastructure in India relates to roads and power supply at the village and district level. Till the government fixes these inadequacies, improvements will be limited.

Foreign investment in retail will not help control inflation. With their operating mark-ups generally running many times the retail mark-ups in India, these companies will only contribute to higher prices as they gain market share over time. As for jobs, these companies will cause loss of livelihood for hundreds of thousands in the sector.

The Indian retail market is a sea of fierce competition. If big foreign companies come in, they will take out these participants over a period of time. As seen across the world, the long-term trend is towards consolidation and less competition.

Government officials often cite examples of other countries where big foreign retailers operate. But they are looking at the wrong examples. They should study the systems in Germany, Japan and South Korea. These three countries stand out because of the high level of government-directed strategy that guides private industry. The government and private industry have an overarching goal of acting in their respective country’s self interest. Remarkably, the presence of foreign retailers is very limited in these three countries. This is not an accident. India will do well to emulate them.

In India, job creation is woefully inadequate. As the second-largest provider of employment, retail in India acts as a safety valve, as it enables self-employment on a large scale. If retail is shut out as an avenue to our people, we could face serious social unrest.

The two principal beneficiaries of opening up the retail sector are big foreign retailers and Indian groups who would like to partner with them. But, unfortunately, the entire country will pay the price for such short-sighted policies.

Shekar Swamy is Group CEO,

RK Swamy Hansa and visiting faculty, Northwestern University, USA

The views expressed by the author are personal

First Published: Jul 28, 2011 23:04 IST