Sep 15, 2012

FDI in retail: Made in the United States

India has buckled to outside pressure by allowing in the multinational retailer — the only beneficiary of this move

For U.S. President Barack Obama there could be nothing more cheering. The ‘underachiever’ now goes to the presidential polls with a lot of confidence — India’s decision to open up FDI in multi-brand retail comes as a shot in the arm for the beleaguered American economy and will obviously boost his poll prospects. 

Mr. Obama certainly knows what is good for the U.S. economy; Prime Minister Manmohan Singh also knows what is in America’s interest. Mr. Obama, for instance, wanted to stop outsourcing to protect U.S. jobs. No amount of persuasion from India changed his mind. Similarly, knowing how important FDI in retail is for him, he had pitched for a new wave of economic reforms. It was surprising to see Mr. Obama telling India what is good for us.

Aided and abetted by TIME magazine and credit rating agencies like Standard&Poor’s, Fitch and Moody’s, India finally buckled under global pressure. What is little known is that India was also under a G-20 obligation to remove all hurdles to the growth of multi-brand retail.

But is FDI in retail really good for India? Will it improve rural infrastructure, reduce wastage of agricultural produce, and enable farmers to get a better price for their crops? While a lot has been said and written about the virtues of big retail, let me make an attempt to answer some of the big claims. 

Agriculture: The Prime Minister has repeatedly projected FDI in retail as a boon for agriculture. Unfortunately, this is not true. Even in the U.S., big retail has not helped farmers — it is federal support that makes agriculture profitable. In its last Farm Bill in 2008, the U.S. made a provision of $307 billion for agriculture for the next five years.

Where is the justification for such massive support if big retail was providing farmers better prices? And let us not forget, despite these subsidies studies have shown that one farmer in Europe quits agriculture every minute.

The second argument is that big retail will squeeze out middleman and therefore provide a better price to farmers. This is again not borne by facts. In the U.S., some studies have shown that the net income of farmers has come down from 70 per cent in the early 20th century to less than four per cent in 2005.
This is because big retail actually brings in a new battery of middlemen — quality controller, standardiser, certification agency, processor, packaging consultants etc. It is these middlemen who walk away with the profits and the farmer is left to survive on the subsidy dole.

Monopolistic power enables these companies to go in for predatory pricing. Empirical studies have shown that consumer prices in supermarkets in Latin America, Africa and Asia have remained higher than the open market by 20 to 30 per cent.

And finally, the argument that multi-brand retail will provide adequate scientific storage and thereby save millions of tonnes of food grains from rotting. I don’t know where in the world big retail has provided backend grain storage facilities?

FDI is already allowed in storage, and no investment has come in. Let it also be known that even the 30-per-cent local sourcing clause for single-brand retail has already been challenged and quietly put in cold storage by the Ministry of Commerce. 

Employment: The Indian retail market is estimated to be around $400 billion with more than 12 million retailers employing 40 million people. Ironically, Wal-Mart’s turnover is also around $420 billion, but it employs only 2.1 million people. If Wal-Mart can achieve the same turnover with hardly a fraction of the workforce employed by the Indian retail sector, how do we expect big retail to create jobs? It is the Indian retail sector which is a much bigger employer, and big retail will only destroy millions of livelihoods

State government’s prerogative: Very cleverly, the Central government has allowed the State governments the final say in allowing FDI in retail. This may to some extent pacify those State governments opposed to big retail. However, the industry is upbeat and knows well that as per international trade norms, member countries have to provide national treatment. Being a signatory to Bilateral Investment promotion and Protection Agreements (BIPAs), India has to provide national treatment to the investors. Agreements with more than 70 countries have already been signed. State governments will, therefore, have to open up for big retail. Industries will use the legal option to force the States to comply.

And more importantly, let us look at how the virus of big retail spreads, even if the promise is to keep it confined to major cities. Recently, a New York Times expose showed how Wal-Mart had captured nearly 50 per cent of Mexico’s retail market in 10 years. What is important here is that as per the NYT disclosure “the Mexican subsidiary of Wal-Mart, which opened 431 stores in 2011, had paid bribes and an internal enquiry into the matter has been suppressed at corporate headquarters in Arkansas”.

In India, we are aware that Wal-Mart alone had spent Rs.52 crore in two years to lobby, as per a disclosure statement made in the U.S. It has certainly paid off. 

(Devinder Sharma is a noted food and agricultural policy analyst).

Source: Made in the United States, The Hindu, Sept 15, 2012


Ankit said...

The Cabinet Committee on Economic Affairs (CCEA) today announced its decision to liberalise the broadcast sector. As per the new guidelines, Foreign Direct Investment (FDI) of up to 74 per cent will be permitted in various services of the sector.

Anonymous said...


Thanks for wonderful updates. I am sure that thoughts and message will must go to the farms and farmers by various means. I feel a small video film need to be managed through any NGO for further making video shows to farming community across the country.


S K Gautam

sanjay mehta said...

selling everything there is to sell (PSUs), gifting mines to favorites, nuclear liabilities bill, allowing FDI... and more. i have not kept this count. maybe lord krishna will keep that count and his sudarshana chakra will strike at 100 !

Srinivasan said...

Sir, you have put it very correctly - God only bless us - we live in a country where our hearts and souls have been sold to money. And the results are obvious. Mir Jafar's treachery and our Congress government's treachery will be compared in 100 years time .... how are they different at all ? Money has changed hands obviously. There is no economic crisis in our contry, which is not self made - if we can remove the corruption in our country, we have no reason to worry about the economic crisis !

Capt. Ajit Vadakayil said...

“lobbying money” ( bribes in hundreds of crores ) have been paid by Walmart and other conglomerates long back.
Punch into google search –
In 2014, when Congress is kicked out, BAN Walmart— like how JP banned Coke in 1977.
Remember and how Coke ran with their tails between their legs, leaving their multi-million dollar infrastructure behind for Thums UP ( Parle foods laughed all the way to the bank ) to take over for a song?
---time for an encore in 2014.
The sudden FDI decision of Sonia is to deflect the KING OF ALL SCAMS — THE THORIUM MEGA SCAM
—( which means Tihar Jail incarceration for the desh drohis)..
India can give 10 billion USD to Italy zone, we can place our flag on the moon — but we are just not smart enough to run supermarkets with ozonized coolers.
Sonia Gandhi has taken a “ DIVIDE AND RULE” leaf out of our Christian white invaders . She had divided the Indians states into PANDAVAS and KAURAVAS— “for” and “against” FDI in multi-brand retail.
It worked before ! — no more, Italian madame , we Indians have woken up !!
Capt ajit vadakayil

Anonymous said...

It is one blow after another Devinder. This is news to me.

Our small town here has been devastated by a 15 year battle with Walmart which it finally won - as a commercial partner of our council. It reminds me of the long P&O alliance with the Maharastrian government, but that failed thanks to the solidarity of the local affected people who would not allow passage to the site of the proosed port in Dahanu.

Years ago here viable businesses were forced out by the threat of compulsory purchase and most left boarded up. Asda Walmart's grandiose plans look like failing. The store is being built but on a huge campus which no other retailers have applied to enter. For this we lost not only desirable retailers but three acres of park and many trees. This public land was GIVEN to the retailer by the council for housing which alone would make the enterprise commercially viable.

I will summarise and link your informative article on our Indian website.

Hope you are continuing to pace yourself.

Barbara Panvel
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indianist said...

what are the problem would face after allowing FDI in Inda?

saketvaani said...

Hi, I follow you regularly on talk shows like Money Mantra. This is my take on FDI FDI in retail; "Modern" solutions to "Old" problems?

Anonymous said...

While I'm sure you'll disagree, here's a post that shows how FDI is not only beneficial, it is also a necessity: