Prof R. Vaidyanathan on retail FDI.

From

http://www.freepressjournal.in/news/85024-retail-fdi-creating-political-storms.html

 

 

 

Retail FDI- Creating political storms—Free Press Journal

·         Sep 17, 2012

·              

R. VAIDYANATHAN,

( The author is the Professor of finance at IIM- Bangalore.)

The announcement by the government about cabinet decision on 51% FDI in Multi Brand Retail and 100% in single brand has created significant debate among political parties even to the extent of affecting the stability of this Government.

Trade constitutes the largest segment of the economy with a nearly 16.7 % share in NDP in 2010- 11, that is, in the aggregate NDP of Rs 43.2 lakh crore that year trade accounted for Rs 7.2 lakh crore [at 2004- 05 constant prices] higher than the share of manufacturing  [ at 13.4%] and Agriculture [at 15.0%].  (National Accounts Statistics of the CSO, New Delhi 2011).

Trade is conducted mostly [more than 80%] by partnership / proprietorship firms with active involvement from members of family and community. More than 125 lakh kirana stores provide a source of livelihood to nearly 16 crore people. Retail trade has grown faster than the economy: it registered a compounded annual growth rate ( CAGR) of 9.2% between 2004- 05 and 2010- 11 when the Indian economy grew at 8.6%. The retail trade comprises all kinds of people and formats - from street vendors to departmental stores of various types, shapes and characteristics.

More than 80% of trade is accounted for by partnership and proprietorship forms - often called the " unorganized"

sector. The kirana shop adjacent to my home opens at 7am and closes at 10pm every day, 365 days of the year. It is very efficient, and one can order through a mobile. The owner knows the tastes and price preferences of our family, but his business is classified as " unorganized" by our experts and economists.

THE retail trade suffers from two major handicaps. One is the non- availability of credit at reasonable rates from institutions; the other is the bribe one has to pay to the government babus to leave him in peace.

Two main arguments are given for this decision. One it will improve logistics/ supply chain and enhance agricultural efficiency and the other is it will bring down prices to help consumers since middlemen are eliminated.

My vegetable vendor carries half a truck- load of vegetables on his TVS 50 at morning 5am. In India small businesses use capital more efficiently than big ones- So supply chain if at all will be more expensive. As far as consumer prices - they may come down initially but global experience suggest after " predatory pricing for some time" global companies will hike it to much higher levels since they need to increase returns.

The other argument is that the MNCs bring " funds" and " efficiency" . An MNC does not normally bring funds from outside sources as it can access them in our market by showing " comfort letters" from their parent companies.

Many financial institutions, both government and private, are ready to lend to them below the prime rate as they are " Global". That the MNC will bring funds from abroad is largely a myth.

Remember, Enron which was supposedly bringing Rs 10, 000 crore from outside. The final result is that Indian FIs are holding more than Rs 6,000 crore of worthless paper.

Has anyone studied the " aggregate cost" of these global retail chains? Most American homes have a retail store in their basement.

In the US, it is an issue of labor shortage but in India there is surplus that is part of the large self- employed group. For the economic expert goods held by household is consumption but held by mom- and- pop store is inventory.

Hence, inventory reduction has been achieved in the economy. Not much space is available in Indian houses to convert them as " retail stores". Another aspect is the fuel cost of driving long distances to the super- market and spending thousands of man- hours between aisles. Plus mobile phones are useful in placing orders from our Mata- Pita stores [also known as mom and pop stores in USA].

All petroleum services and products, rice, tobacco, salt, alcoholic beverages and fresh food traded at public markets are excluded in Japan from any " distributional aspect" by companies of other countries. Australia, Japan, South Korea do not allow trade services in petroleum, its products, rice, tobacco, salt, milk, fertilizers etc by foreign companies.

French using their Loi Royer simply restrict any development of hypermarkets to protect what they call the " centres of French towns and villages and the living of small shopkeepers". Germany has legislative constraints on outlets above 1200 sq. m.

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. We are signatory with more than 70 countries on to Bilateral Investment Promotion and Protection Agreements ( BIPAs), India has to provide national treatment to the investors. State governments therefore, may have to open up for big retail. Industries will use the legal option to force the States to comply.

The paan- chewing, dhoti- clad, English- ignorant retail trader should not be seen as an inefficient entrepreneur who needs to be bleached by globally- accepted detergents. What he needs is a level playing field, in the full sense of the term, with access to affordable credit and the abolition of inspector raj in the form of harassment by various arms of the government. Let us remember that we are still a savings based, family- oriented economy.