Column : Rejecting retail-FDI smacks of mercantilism

Written by K Vaidya Nathan | K Vaidya Nathan | Updated: Dec 31 2011, 06:15am hrs
When Barack Obama was sworn in as the 44th President of the US in January 2009, there was some scepticism and cynicism in India as he had expressed quite strong views about outsourcing in his campaign speeches. Though he never specifically mentioned India, there was little doubt about which country he was referring to. Many within the US reasoned that benefiting from the skilled, cost-effective and efficient Indian human resources will be favourable to the US economy in the long run. And, thankfully, despite the political rhetoric, the GEs of the world did not stop relocating jobs to India, as it was economically the most sensible thing to do.

The idea that allowing economies to liberally invest and freely trade in goods and services enhances welfare was put forth in a book published on March 9, 1776, titled An Inquiry into the Nature and Causes of the Wealth of Nations, more commonly known as The Wealth of Nations by economist and philosopher Adam Smith. Prior to his magnum opus, the prevalent economic doctrine was mercantilism, in which government control of foreign investment and trade was of utmost importance. Mercantilism was the dominant economic school of thought in Europe throughout the late Renaissance and early modern period. Mercantilism instigated many intra-European wars of the period and arguably fuelled European imperialismboth within Europe and the rest of the world.

The biggest imperialist of that era, Britain, was famously called by Napoleon Bonaparte as a nation of shopkeepers. The phrase, though made popular by Napoleon, was actually coined by Adam Smith, a Brit himself, who was a staunch believer in free trade and investments and a strong

opponent of the then prevailing dogma of mercantilism. Mercantilist policies included forbidding trade to be carried in foreign ships, limiting wages and investments in colonies, discouraging foreign businesses to set shops, etc. Mercantilists were antagonistic about Smiths concept of free trade, free enterprise, free investments, and the free movement of people and goods. In other words, it went against the precepts of a laissez-faire economy. One of the key assertions of mercantilism was that national wealth can come only through domestic investments or by wealth transfer from colonies. Smith was highly critical of this theory of wealth and he clearly understood the class bias in the merchant system that supported it. In fact, Smith criticised colonialism and expressed great concern about investment and trade practices instituted by the merchant class, which often worked against the economic interests of the citizenry. The dogma of mercantilism came full-circle when politicians of Britains richest colony of the past recently set aside FDI in retail to safeguard its shopkeepers even though FDI would have been in the economic interest of its citizenry. The arguments put forth by these politicians would have made a mercantilist proud.

To understand how FDI in retail may help, we need to understand the role of retail. Simply put, a retailer is one who stocks producers goods and sells it to consumers. Fundamentally, retail is the link that connects individual customers with producers. How efficiently the goods reach consumers defines the value-add of retail. Currently in India, that link is fraught with huge inefficiencies. The inadequacies are in handling, storing, transporting, grading, sorting, maintaining hygiene standards, refrigeration technology, packing, etc. Currently, a series of middlemen form the supply chain from the producer to the consumer. These middlemen traditionally have exploited the farmer, who often gets a raw deal, literally. Moreover, each of the links in this long chain of middlemen have little incentive, ability or competence to invest in handling, storing, transporting, packing, etc. Even in aspects where they have a significant benefit, like avoiding wastage, they do a poor job. In fact, India currently has the highest wastage of perishables in the world. With rising prices of essential commodities, this pointless wastage is outrageous and almost criminal.

The voguish and dangerous rhetoric that we hear about FDI in retail is the claim that an inefficient industry may be harmed by investment, especially FDI, where know-how and expertise can alleviate deep-rooted inefficiencies embedded in the system, which are otherwise difficult to weed out. Globally, all economies compete to attract FDI with persuasive advertisements soliciting investors. China and India have been able to attract substantial FDI in the last two decades. These two behemoths may not have woken from their slumber if they had not liberalised their economies and allowed foreign investments. Indian retail, which is the second largest in the world, needs a stimulus like FDI to get rid of its sluggishness and inefficiencies. The rhetoric of restricting investments in inefficient sectors runs contrary to one of the subtlest but most powerful concepts in economic theory that free trade and investments enhance welfare. The world would be a better place to live if politicians, with their myopic agendas, do not resuscitate mercantilism either in the US or in India.

The author, formerly with JP Morgan Chase, is CEO, Quantum Phinance