In my last column, I mused on India?s economic reform process and inclusive growth, in the context of opening up multi-brand retail to FDI. I want to return to the question of political capital, and policy thinking about reform in the retail sector.
On using up political capital, I think ongoing events have proved me wrong. Opposition to opening up multi-brand retail has come from the same quarters as opposition to other reform measures, including the Pension Bill and Companies Bill. On all these, the government has openly looked for compromises that will lead to acceptance of the reforms. If that is the case, then moving on multiple fronts may give the government more chance of getting some changes through, not less. The government has also reset its approach to FDI in retail, marshalling interest groups that might benefit, and saying more to make the case for the positive consequences of the change. So even if it lost some political capital initially, it should recover it quickly.
All that said, the economic logic of the FDI decision still needs to be articulated more clearly. Much of the public discussion and the government case have focused on benefits to farmers by cutting out middlemen. However, it does not follow that replacing existing middlemen with other powerful buyers will increase the farmers? slice of the total pie. Other things equal, this would happen only if there is increased competition among their buyers. Indeed, this could result from new entry through FDI, but the issue needs to be highlighted more clearly, and incorporated into the policy. When the government?s committee of secretaries cleared the proposal in July, news reports said that domestic firms were looking for partners or even buy-outs from foreign entrants: merely replacing large domestic retailers with foreign ones will not increase competition. Interestingly, the Boston Consulting Group-Confederation of Indian Industry report on organised retail never mentions the word ?competition?.
The aforementioned report focuses on organised retail, not FDI per se. The potential advantages of organised retail include greater efficiency of operations (including backwards through the supply chain), better working environments and training, and faster expansion leading to more job creation. But why can Indian firms not achieve these gains themselves? The argument is that global retailers will bring in expertise that is not always easily available in India, including for supply chain management and worker training. This is certainly believable. But foreign firms often face their greatest challenges in the retail sector, because they are at the end of the supply chain, and because local knowledge of preferences matters most in retailing. So how well foreign entrants might do is a matter for conjecture until they are given a chance. And an argument that they may not succeed is at the opposite end of the spectrum from concerns that they might succeed too well.
The public discussion of FDI in multi-brand retail also seems to ignore the existing investment of foreign retail giants such as Walmart and Carrefour in wholesale stores. It would be useful to know how these ventures are performing, and whether they have brought about any improvements in the supply chain. Again, economic logic suggests that if the greatest problems are before the wholesale stage, then modern, efficient wholesaling is where policy leverage should be applied, rather than retailing. The BCG-CII report mentions that Bharti-Walmart stores have helped create vocational programmes for potential employees, suggesting that training can be realised at this earlier stage of the value chain. And British retailer Tesco has shelved plans to open wholesale stores in India, preferring to focus on setting up warehouses and back-end infrastructure for Tata?s Star Bazaar stores.
If one can realise the presumed benefits without opening up FDI to multi-brand retail, is there an economic case for the reform? The core benefits must be increased investment and increased competition. Everything else will flow from those two changes, if they follow the reform. Consumers will likely benefit as a result. Farmers may benefit, but they probably need a host of other policy reforms to happen as well, in order to realise any substantive gains. It seems disingenuous to claim that this single policy change is a panacea for what ails India?s farm sector.
Of course, to take a more nuanced and cautious view of the benefits of a reform makes it more difficult to persuade those whose support is needed. On the other hand, perhaps the politicians could have said that opening up FDI in multi-brand retail will not make a huge difference in the short run, but will make a small contribution to improving the lives of many Indians. They could even have said that there are more important issues on its agenda, such as pension reforms and modernising the laws governing companies, and made a public case for these bigger reforms. In that case, the FDI decision could have been seen in perspective, as a relatively small but positive change.
The author is professor of economics, University of California, Santa Cruz