Shubhashis Gangopadhyay: True FDI federalism

Last Updated: Sat, Dec 15, 2012 05:08 hrs

With the passing of the Bill in Parliament, foreign direct investment, or FDI, in multi-brand retail has now become a possibility. More importantly, the onus of decision making has shifted to state governments. States that want to let in multi-brand retail can go ahead and allow in anyone who wants to set up multi-brand outlets with foreign investment, while states opposed to it can continue to disallow it. It was never clear to me why regional political parties like the Dravida Munnetra Kazhagam and the Trinamool Congress (TMC) were opposed to the Bill in Parliament. After all, the decision taken in Parliament simply enables states to take their own decisions. Recall the Nationalist Congress Party's statement that while it supported the decision in Parliament, it may still work against its implementation in the one state where they are a significant force, namely, in Maharashtra.

Indeed, I had always felt that the essence of federalism is letting the states decide for themselves on economic matters that affect them directly, unless, of course, other states are negatively affected by the decisions taken in one state. So, for the TMC to oppose Parliament's majority decision (among those present or voting) it should be able to demonstrate that multi-brand retail outlets in Delhi, or Odisha, or Assam will negatively affect the people of Bengal even when Bengal itself does not allow such outlets.

First, will multi-brand retail in Assam affect small traders in Bengal? Yes, if they were sending goods to Assam or buying from Assam. Let us consider the situation in which small traders from Bengal were selling in Assam. There could be two ways Bengali traders could be negatively affected. One, Assamese retail outlets can sell at prices lower than what traders situated in Bengal were offering and, hence, reduce the demand for the latter's supplies. Two, if Assamese retail outlets buy from their suppliers at a price that is higher than what traders from Bengal were offering their suppliers, suppliers can shift from supplying to traders in Bengal to retail outlets in Assam. In both cases, Bengali traders are harmed. However, if some of the Bengali buyers were enterprising enough to go to Assam every time they wanted to buy something, then some of these losses to traders would be compensated by additional savings for Bengali buyers. And if some of the suppliers to Bengali traders were themselves situated in Bengal, they too would gain from now selling to Assamese retail outlets, who are offering, remember, a higher price.

So, if one follows the path of immediate impacts, it appears that there is one group that will lose (Bengali traders) and other groups that might gain (Bengali buyers and Bengali suppliers to traders). If the latter two groups do not exist, then retail outlets in Assam will, surely, negatively affect Bengal. So, Assam should not take a step that it deems good for itself simply because Bengali traders would be affected! I sincerely hope that this is not what the argument is. For then, it is only logical that every time Bengal leaders take a decision, they have to ask their neighbouring states, or maybe, even Kerala, for permission. Carrying this a little further to a global world inhabited by global citizens, we may need to ask China too, or Malaysia!

But one presumes that this is not what the state leaders opposing the FDI decision in Parliament are really saying. They are not talking about the immediate impacts but about the long-term effects of such moves. Multi-brand retail trade will lead to the death of traders and losses to suppliers and buyers. How? Multi-brand retail will establish monopolies and charge higher prices from buyers; they will become sole buyers from suppliers and give them a lower price. Is this position defensible?

Observe that this will happen only if multi-brand retail outlets can maintain their monopoly and monopsony positions once acquired. But that would mean that there are entry barriers to retail trade. There are two ways to counter this. First, if the barriers are because of various government policies, change them. Second, if the growth of such market power is "natural" – as in the case of what are termed natural monopolies – let the Competition Commission of India step in and prevent that. In either case, Assam cannot be asked to take heed of what Bengal fears.

In other words, regional parties' opposition to the parliamentary decision on FDI in retail is completely flawed. If they are worried about it happening in their own states, let them not allow it. Why ask the central government not to allow it in any state? Why ask for greater federalism for one's own decisions and impose centralisation when other states want to take their decisions?

Federalism gives greater responsibility to states. That is good for two reasons. First, it allows state governments, more knowledgeable about local conditions than the Centre, to take decisions that are contextually relevant. Second, it allows experimentation across states and increases the knowledge base of what works and what does not work. So states can learn from each other.

The hue and cry about FDI in retail reminds me of another issue that has been often debated but is currently dormant. This is about taxing agricultural income. How many times has the Left demanded taxes on agricultural income? And, yet, this is something that states are free to decide. And West Bengal has been under Left rule for more than 30 years and did not introduce a state tax on agricultural income. Fooling the people all the time is a dangerous game in democratic set-ups. Sooner or later, people wise up to it.

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