Win some, lose some
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Win some, lose some

The government's move to introduce majority FDI in retail is ill-timed, writes Sebastian Morris.

india Updated: Nov 30, 2011 21:20 IST
Sebastian Morris,fdi in retail,columns

The government’s decision to introduce majority ownership in multi-brand retailing must be seen in the present situation of declining foreign direct investment (FDI) and negative foreign institutional investments (FII). Hopefully, retailing investments by global firms will revive FDI and FII. This will pull along FDI and portfolio investments in general. In the long run, foreign firms with access to cheap capital abroad will do the job that should have been done long ago: provide competition to the stranglehold of agriculture produce market committees (APMC) — thereby resulting in the high retail prices of agricultural products to be passed on to the farmer.

Unfortunately for the government, the move is ill-timed, as growth has plummeted and the global economic environment is hardly benign. Thanks to the Reserve Bank of India’s (RBI) punishing rate increases and its credit squeeze in the face of a primarily supply side inflation, growth has come down. It can hardly revive without a fiscal kick, since investments have nearly collapsed.

Will the move hurt Indian business? The move is less important than the central bank’s monetary conservatism over the last decade. Generally, exchange and interest rate policies have been such that the ‘fisher-open’ condition in India has been positive by a few hundred basis points over much of the time, with a few sharp turn towards negative, as is the situation today. Keeping them at near zero would have ensured a level playing field for Indian businesses.

But in the face of such distortions, many worthy Indian businesses are increasingly changing their headquarters to London and New York, even if their operations continue to be in India. A premature pull-back of the fiscal stimulus and the RBI’s coming heavily on rate increases has slowed investments since the 2008-09 global recession. If the domestic interest rates had been low, the move would have benefited Indian business. But today the stocks of retail businesses rise in the hope of takeovers.

Will the move hurt small retailers in India? Most certainly, but only in the long run. For about a decade, the negative impact will be masked by net job additions and a slow attenuation of small retail, as they continue to compete through self-exploitation — low productivity and lack of scale being compensated by low wages and slow erosion of capital of the small retailers.

Will the move lead to increased sourcing from small and medium enterprises (SME) in India? The current provision, as clarified by the ministry is not WTO compatible, as it will amount to a trade-related investment measure, which can’t be challenged by source countries. More importantly, large retail, both domestic and foreign, has great potential to up the exports from India through original equipment manufacturer (OEM) contracts and vendor development, as they learn and understand manufacturing in India and can interact with producers.

But this potential can be realised only under export-oriented macro-policies. The ideal opportunity to do so was missed in the high growth period between 2004 and 2008. So one would agree with the Opposition that the 30% sourcing from SMEs would benefit Chinese and East Asian manufacturing more than Indian ones.

Will the measure help agriculturalists? Not really, unless it’s linked to the abolition of the monopoly of APMCs by either dismantling them or handing their control to true farmers’ cooperatives.

Will consumers gain? This is one area where some positive gains will be visible despite the reform measures and macro-economic correction. This is because foreign retailers can be expected to operate at larger scales and pass on some of the value creation to consumers in the form of better shopping experience and better quality of goods.

But even here the gains are likely to be smaller than what’s possible, as they, too, would be constrained to find large parcels of land that are well connected with major cities and towns. The disjunction between transport planning and housing in Indian cities could deny advantage to large retail (as has been the experience so far) and continue to sustain petty retail in spaces outside their natural comparative advantage.

( Sebastian Morris is professor, Indian Institute of Management, Ahmedabad )

The views expressed by the author are personal

First Published: Nov 30, 2011 21:18 IST