FDI in Retail: Wholesale victory

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Sunil Jain Sunil Jain
SummaryThe vote in Parliament shows India’s open to business, as is the political class.

The debate was never about kiranas or even farmers, it was about political strength—that’s the big lesson for the UPA

Given all the talk of ‘communal forces’ during the debate on retail FDI, both inside as well as outside Parliament, it always seemed pretty much a done deal. That, when push came to shove, both the SP and the BSP and perhaps even others would abstain from the vote, to find some way to let the government push the necessary legislation through. And, in any case, as former Lok Sabha secretary general PDT Acharya points out, if the Lok Sabha votes in favour of retail FDI, it doesn’t really matter what the Rajya Sabha does—the details are confusing, those interested can watch the December 4 episode of Karan Thapar’s ‘Last Word’ (http://goo.gl/Z8nQH).

But if it was pretty much a done deal—CPI(M) leader Sitaram Yechury cited similar instances, on the same show, where the government usually managed to ram its way through—why did the BJP and others want the vote? In all likelihood to expose the SP and the BSP as opportunistic dealmakers, going along with them in the anti-FDI campaign and yet allowing the government to push retail FDI through. While it’s not certain how that will play out, if at all, during the elections, the SP/BSP pragmatism augurs well for economic reforms. It’s good news for the government that is desperately trying to drum up the global mood as well as for foreign investors who’re looking for signs to show India is once again open to business. As for the so-called opportunism of the SP and the BSP, it’s important to realise the way the retail FDI proposal was crafted; it was up to the state governments to decide if they wanted it in their states. So neither party is, at one level, being untrue to its convictions.

In any case, make no mistake, the issue was never about the kirana owner, nor was it about the farmer, the poor smelly farmer who BJP leader Sushma Swaraj said may never even be able to sell his produce inside a fancy FDI retail chain—which means she either thinks India’s cold chain is so developed, fresh produce will be imported, or that Carrefour simply won’t have a fresh produce section.

Nor was it particularly about facts. If it was, Swaraj wouldn’t have told us McDonald’s doesn’t buy Indian potatoes for its fries, or that Pepsi backed out of its commitments to Punjab farmers. Both firms have vehemently denied this.

If, as the BJP made it out to be, the issue was about the poor farmer, surely there were other issues that needed to be raised? After all, farmers lose about 8-10% of their earnings to arhatiyas in government-controlled mandis who have a monopoly over sales—a farmer cannot directly approach a buyer, or vice versa, the deal has to be consummated through an arhatiya who takes all of 5 minutes, or maybe it’s 10, to auction off a few trucks of produce. How come no one whose heart bleeds for the farmer raised this, much less did anything about it?

If the debate was really about foreign investment, how come no one spoke about the significant investments made by FIIs in several retail chains in India? According to data cited by corporate law firm AZB & Partners’ founding partner Ajay Bahl, Bata has 18% FII investment, Titan 16%, Pantaloon 22% and Tribhovandas Bhimji 11%—it is true this is FII and not FDI, but both are foreign capital, and surely FDI is preferable to FII.

And the debate certainly wasn’t about kiranas even though Swaraj brought tears to many eyes when she read out the anti-retail FDI letter by Congress leader Priya Ranjan Dasmunsi who continues to remain in a coma for 4 years now—the helpful cameras in Parliament helpfully panned to Dasmunsi’s wife Deepa who is now a member of Parliament from her husband’s constituency. If it was about kiranas, why aren’t those opposed to retail FDI, and this includes the SP, also protesting about a Reliance Fresh or a Big Bazaar—after all, it can’t be more honourable for a kirana to die at Reliance’s hands than at Walmart’s.

In any case, anyone who has even a passing acquaintance with retail—which means you go shopping at least once a year—knows, it is not the kiranas that are closing down, it is the big retailers. So Subhiksha shut shop after its 1,600 outlets accumulated a debt of R750 crore and couldn’t pay it back; Pantaloon Retail’s gross debt of R6,300 crore means it has a debt/ebitda of an unviable 5.5, which is why the company is busy selling off stakes in group ventures; Shoppers Stop, about a fourth of Pantaloon by way of sales, has a lower, but equally uncomfortable, net debt/ebitda of 3.6 times.

There’s also the fact that there’s enough scope for kiranas to grow. With India’s retail opportunity all set to grow from $490 billion this year to $810 billion by 2021, even assuming organised retail’s share trebles to a really ambitious 20% by then, this still allows kiranas to increase sales by as much as 40% in real terms during this period—that’s not small change by any means, and certainly not indicative of a sector under stress. And why should it be, given that, the way inner-city retail space is so limited, rentals can eat up as much as 30% of turnover, making it unviable for organised retail to be in city centres. Oh yes, given that just 22 cities are open to retail FDI, the at-risk market is just about $40 billion out of the total $490 billion retail market—so in the extremely unlikely event of all kiranas being driven out of business, we’re still not talking of catastrophe. After all, for the kiranas to be driven out of business, this means Walmart will have to be offering 25-30% discounts over the kirana—surely the substantial consumer savings, and the dramatic fall in interest rates as a result, have to count for something?

But what about employment, the anti-retail-FDI brigade will ask? Apart from the fact that organised retail seems to be hiring more people per square foot, and at much higher salaries, than kiranas (Bharti’s Easyday hires 19 persons for each 2,600 square foot store as compared to 2-3 for a 500 square foot kirana)—this is, it is true, not the same as employment per rupee of sales—the fact is that employment changes all the time in dynamic economies. Between 1993 and 2004, for instance, the number of supervisory staff fell from 2.4 million to 1.5 million and clerical workers from 8.5 million to 5.3 million while construction workers rose from 5.4 to 13.1 million, hotel/dhaba workers from 1 to 1.5 million, maids and domestic help from 2.2 to 2.9 million and hairdressers from 1.3 to 1.8 million…

If it wasn’t about kiranas, farmers or employment, what was the debate about? It was always about political posturing and dealmaking, so the person with more strings to pull, more favours to dish out, won the day. That’s an important lesson for the UPA as it goes about rebuilding the credibility it spent the last 8 years destroying.

sunil.jain@expressindia.com

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