At the FDI crossroads

Updated: Nov 26 2012, 07:03am hrs
India needs a fresh impetus of deregulation and capital to galvanise a stuttering economy

Tanushree Sahai

Nothing about India is predictable and it never fails to surprise. One would have thought that with the staggering and perceptible economic strides made by the country over the last two decades as a direct result of economic liberalisation and opening itself up to the rest of the world, there would exist a consensus on further economic liberalisation. However, the recent decision of the government to allow FDI in multi-brand retail has raised a virtual maelstrom. Interestingly, not all of the current cacophony can be attributed to politicsIndia is preparing for its next general elections in 2014. There are genuinely divergent views on the benefits or damage that FDI in multi-brand retail can cause to the economy.

One thing to be recognised and appreciated is that India has always been a noisy democracy with divergent philosophies and ideologies, and these have to be respected. Therefore, India has traditionally moved ahead slowly on significant economic reforms, such as in the pensions sector and FDI in multi-brand retail.

The last attempt by the government to introduce FDI in multi-brand retail met with significant opposition and the government, already weakened by severe allegations of corruption, had to backtrack on the policy. But in all that noise, one thing that managed to creep through without attracting much attention was an increase in the FDI limit in single-brand retail from the then 51% to 100%. So, some people argue, there is justice after all in the world.

The Left parties have always been ideologically opposed to infusion of large capital, especially foreign capital, in what has traditionally been perceived to be their constituencythe small mom and pop shops and traders. The familiar argument that has been repeated is the threatened extermination of the small trader, resultant loss of jobs and creation of monopolies leading to escalation in prices of food and other essentials. As it often happens, many of these arguments appear to be more emotive than supported by empirical facts.

The truth is likely to be somewhat different. Indeed, there will be job losses but the truth is that the creation of new skilled jobs and infusion of technology and efficiencies will far outweigh these losses. The jobs threatened are likely to be the ubiquitous middlemen who dont necessarily add great value, rather take advantage of the fragmented agricultural trading market to deny the farmers a fair market price.

The detractors invariably tend to veer the debate around the farmers and small shop owners. However, none of these views takes into account the other huge constituencythe consumer. The reality is that the consumer in India pays for the inefficiencies and cost of living especially by way of food inflation, which continues to be very high. The costs of an estimated 40% losses in foodgrain during storage and handling are eventually passed on to the consumer. Introduction of capital, technology and efficiencies leading to competitive prices will benefit not just the consumers but the shopkeepers too, since the efficiencies in the sector will benefit everyone.

The ingenious detractors make allegations of predatory pricing, cartelisation and monopolistic behaviour by the MNCs, and these are deviously cloaked with allegories harking back to the East India Company days and a new wave of colonialisation. Such fear-mongering ignores the Indian legal framework (including competition laws) and, of course, the depth of the Indian market. It is trite to argue that the consumer will buy goods at whatever price offered. There will always be an alternative product or price acceptable to the consumer.

As for certain oxymoronic claimslike claiming that FDI will not lead to lower prices while, in the same breath, accusing MNCs of exploiting consumers with increased priceswe can again look at 1991 for a refutation. It is clear that permitting organised capital, whether domestic or foreign, in any sector has led to competition and improvement in efficiencies of existing firms, thereby benefiting consumers. In a competitive market with, an appropriate regulatory framework and oversight, prices will only reduce.

Entrepreneurship is embedded in the Indian psyche. India has embraced the opportunities thrown up with economic liberalisation and has benefited from it. The Indian retail market, estimated at $500 billion, is large enough to allow everyone a share.

It also appears that the counter-arguments are missing the trees for the woods. The argument against FDI can equally apply to any organised capital in retail. The impact of organised capital on the sector cannot be affected by the colour of money, i.e. domestic or foreign. One should not forget that organised and large capital in retail already exists in India with the numerous Indian retail brands. Therefore, the opposition to FDI now appears to be a bit hollow.

Perhaps the detractors should look at the facts and experiences in other emerging economies. India is at a crossroads and requires a fresh impetus of deregulation and capital to galvanise a stuttering economy. The world is waiting for India to wake up once again and assume its rightful role in the comity of nations as a mature, strong and confident nationnot a nation of spineless middlemen as the left parties would like us to believe.