Devil's Advocate: Montek Singh Ahluwalia defends FDI in retail

Last Updated: Mon, Sep 24, 2012 04:45 hrs

Montek Singh Ahluwalia, deputy chairman of the Planning Commission and one of this government's top economic policy makers, responds to criticism and concerns on the decision to allow foreign direct investment (FDI) in the multi-brand retail sector. Edited excerpts of a discussion with Karan Thapar on CNN-IBN’s Devil’s Advocate programme:

In December 2002, when the Bharatiya Janata Party was considering FDI in retail, Manmohan Singh, then the leader of the Opposition in the Rajya Sabha, told the Federation of Business Associations of Maharashtra, 'India does not require these kind of reforms; they would destroy employment'. What's happened in the last 10 years to make him reverse his position?

Thinking moves forward, perceptions change, circumstances change. I don't think there is any lack of clarity today about what the position on FDI is. Incidentally, BJP at that time was pro-reform, pro-FDI, as the Opposition was not. This is normal.

Right, there have been somersaults in positions on both sides. Let's then look at the principal criticisms of FDI in retail and begin with the fear that it would have an adverse impact on small retailers and kirana stores. An AC Nielsen report says in Thailand, in the five years after 1997 when FDI was permitted, 60 per cent of Thai-owned grocery stores shut down.
In a growing economy, if we achieve our objective of eight-plus per cent growth, retail should grow faster than that. On such a growth rate, the total size of the retail market is going to more than double in a very short time. Second, modern retail is the expanding segment. We already have modern retail and those who say small stores will be hurt should be saying, shut down all modern retail.

Yes, retail as a segment will expand but within that, the share of the small retailer or the independent retailer could shrink dramatically. In Britain, between 1981 and 1999, when international retail began to expand and take over the British market, the share of independent small retail shrank 50 per cent.
Two things. One, what's going to happen to total retail employment and, two, are you hung up on a structure in which only the small retailer survives? Small retailers' competitive efficiency depends on what's happening to real wages. I don't think modern retail can expand fast enough to raise real wages sufficiently. So, what happened in Britain or in Thailand is not a predictor of what will happen here. Second, in the next 20-30 years, do you want the small or the independent retailer to have the same share in retail as it does today? This is a structural change. It is like saying when the taxis were introduced, the share of tongas went down. True. But do you want to bring them back? No.

If there were fresh jobs for the tongawalas and then the share of tongas goes down, there will be no concern. Retail is the second biggest employer in India; it generates 44 million jobs. Business Line has published a study saying if the international retailer acquires 20 per cent of the Indian market, which they can easily do, eight million jobs will be lost. So your tongawala equivalent will not only lose his occupation; he won't find an alternative job.
If you want modernisation of the retail sector, you want an upward pressure in the quality of employment. Modern retail produces better quality jobs.

But far fewer jobs.
If labour growth is going down to one per cent and GDP is growing at eight-nine per cent, jobs will be created in many different sectors.

You have a population where the demand for jobs is increasing at 10 million a year. If your second biggest employer, retail, is shrinking in terms of the jobs it can provide, you are creating a problem on availability.
Look at studies about the quality of the jobs in retail, particularly for the employed as opposed to the self-employed. The quality of those jobs is very low. Young people with education, who are joining the labour force, are probably quite happy working in modern retail than not happy being employed in traditional retail.

I accept that the quality of jobs in traditional, unmodernised retail is poor and uninviting but the quality of jobs in modern retail is equally questionable. Let me quote from the UNI Global Union study of Walmart, the biggest of the lot, and it is just a six-month old study. It says, "The presence of a Walmart store has had a devastating impact on small businesses in the surrounding areas". And, "Researches from the United States' central bureau found the entry of and the growth of the hypermarket has a substantial negative impact on employment growth and the survival of single unit and small chain stores." Now, can you afford a similar impact in India, whether from Walmart, Tesco or Carrefour?
The circumstance are totally different. In the US, it is very easy for someone to increase their share easily by following a particular pricing policy. The consumer in the US is geared to rushing to the hypermarket, buying for a week, buying for a month.

That will not happen in India?
In India, modern retail has six per cent or so of the total share. It will be an extraordinary achievement if they double that in five to 10 years. We are the least penetrated by the modern retail of any country.

So, the consequences will be faster here than anywhere else.
This is a ridiculous fear being pushed by people who are taking opportunity to essentially hold back change. These are the same people who said you shouldn’t have malls. There is no point in picking bits and pieces, this is a Luddite approach, an effort to create fear.

One of India's most eminent economists, ( columnist) Jayati Ghosh, writing in The Guardian on September 20, says, 'One Walmart store in India will displace 1,400 small retail stores, costing 5,000 jobs.' That's the concern many share.
Jobs are being created in modern retail not only in selling physically to people but also in upgrading the supply chain. Unless you take that into account, these comparisons are meaningless.

Your point is, there will be new jobs in the back-end, too. But, if there are losses in the front-end, the jobs at the back-end won't compensate.
Let's get the rationale clear. We're running a very, very inefficient retailing system, in which the farmer gets very little and the consumer pays too much. The point is, do you want to increase efficiency? Whenever you increase efficiency, productivity goes up, which means the same thing involves fewer people but the benefits from that comes as higher income for the farmer, lower prices for the consumer. So, simply looking at what happens in one sector is like saying every taxi displaces 50 tongas. That is not a sensible argument.

Arun Jaitley in The Economic Times says 'because India has a high-cost manufacturing base, foreign retailers will source a multitude of everyday items from low-cost countries like China. That will have a damaging impact on manufacturing, with sizable losses of jobs'.
He's talking about trade impact. Tell him to go to Loknayak Bhawan (in central Delhi), where there are a hell of a lot of retailers, everyone of which is stocking Chinese goods. The notion that foreign retailers are going to be faster in importing than our own, modern or small, is false. We have a huge tendency to import; they’ll get imported whether you have FDI or don't.

Today, Indian modern retail has no compulsion to do domestic sourcing. If there is FDI, they'll be compelled to do a significant amount of domestic sourcing.

Thirty per cent from SMEs?

There's a wider concern. People say that these are, for many, substantial concerns. So, why did you not introduce FDI in retail in a calibrated and experimental way? In China, when they introduced it in 1992, they first limited it to 26 per cent, to just six cities and there was a cap on the number of stores. In India, you have gone all the way to 51 per cent and it is going to happen in 53 cities and there is no cap on the number of stores.
What do you mean by calibrated? We knew in 1992 that China had introduced FDI in retail and we calibrated to not introduce it for 20 years. So, for 20 years we allowed the rise of domestic modern retail.So, to say we have done it suddenly is visibly false.

For 20 years, we allowed a modern retail segment to get into place and it is doing a good job. I am not sure whether Arun or anybody else wants that to be shut down because of the concern of the kirana stores. We have calibrated it precisely for the political sensitivity. A state doesn’t want it, it doesn’t go there.

You have absolutely no limit on the size of the store and the number of stores that can be set up.
We don’t have to do everything the Chinese do.

But the Chinese removed those limitations as late as 2005. Clearly, the Chinese were saying we need to do it step by step and India has done it at one go.
One big thing India did was to first bring in domestic modern retail. Twenty years to compete with these guys. Second, it (FDI) is only allowed in cities above a certain level. Third, unlike China, they have been forced to build a supply chain. I call that calibrate.

Many fear that because of their size and scale, foreign retailers will successfully lead by cutting prices and, as a result, they will be able to establish market share much easier than their Indian competitor. Then, they will ramp up. Why did you not create a situation where you would have a law against predatory pricing that would have assuaged many concerns?
You want to go to the Indian consumer and say I am going to have a law that prevents a retailer from lowering its price at a time when the consumer is saying, for God’s sake, do everything that lowers prices? Predatory pricing is used when you have a proprietary sort of object. If for 10 years these guys have low prices to build market share, it’s not the case that the Indian system will not be able to compete and soon as they start raising prices, demand will diminish.

It's ridiculous to say to somebody who wants to come in from the start that you can’t charge lower prices from the next door guy.

Let's come to the areas where the impact of FDI in retail is perhaps said to be positive. First, what do you believe will be the impact on Indian farmers and the wider rural economy?
Remember, I’m not talking about just FDI in retail, I am talking about modern retail. So, all the benefits to the farmers are going to come from modernising the entire retail spectrum.

And, what are these benefits?
Let's say if you are willing to invest in a cold chain infrastructure, you will hugely reduce the losses currently being incurred on a perishable commodity. When an old-fashioned system is bearing high losses, it reflects itself in paying less to the farmer and charging more to the consumer. When those losses are reduced, there will be a rise in prices to the farmer and reduction to the consumer.

The other thing is, if we bring in a modern purchasing system, farmers will be able to upgrade their product, diversify in the direction they want, get assured offtake of their material. And, that requires not just FDI, it requires reform of the APMC (Agricultural Produce Marketing Committee) Act.

And, when farmer incomes go up, what impact will it have on the wider rural economy within which they live?
Well, it will clearly lead to greater economic activity and a rise in prosperity. One major difference in the 11 th Plan (2007-12) and the earlier one is, the rise in rural consumption is almost three times what it was prior to 2004. That’s what you need to do.

That extra farmer income will generate employment in the rural area, so there will be a lot of jobs generated elsewhere as a result of the improvement in the supply chain.

And, urban consumers? What would it be for them when FDI in retail, and modern retail as a result, begin to flourish?
First, much greater competition at the retail end.

Lower prices, better quality?
Yes. When you have modern retail, people will be much more watchful of the quality. Adulteration would be much more easily spotted because people would take samples of this stuff.

What message does the government's decision, in the teeth of the political opposition, to push FDI in retail send to the international community about India as an investment destination?
This is only one part of our message to the international community. The Prime Minister's address made it clear that this is not a solution for all problems but many things are being done to reassure the world and India that we are managing the economy well, we are determined to bring down the fiscal deficit, we want to get rid of impediments in infrastructure. What this does send is a message that the government has judged something is right, seen there is opposition, having conducted a consultation and then taken a step that balances the concern of those who don’t want it with the desire of many who do. And, that's not just because of the FDI.

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