Recently, courageous leaders of industry told the government that the paralysis in policymaking and implementation over the last few months is bad in all ways for the future of the country. Their anxiety had more justification when the ?Bombay Club? of industrial leaders wanted the postponement of the opening of the Indian economy in 1991. We have also had heads of chambers of commerce and sometimes even their elected presidents, presumably to curry favour, mouthing unjustified but fulsome praise for central government budgets??dream budget?, ?ten out of ten marks?, etc.
A few days ago, respected industrial managers stated that the government opening FDI to retail was crucial for the progress of the economy. They were against the suspension of the proposal. In effect, they were buying into the specious arguments based on little data by the minister of commerce.
Obviously, there must be FDI in retail. The claim that it will transform the economy is astonishing.
The present economic and political situation is grimmer than it was even in 1991. Then, it was a crisis in the balance of payments, when crude oil prices had risen suddenly. Narasimha Rao took advantage of the ?crisis? to open and so transform the economy by removing the stranglehold of industrial and import licensing and implementing drastic tax reforms and rate reductions.
Since then, the government discovered the vote gathering potential of good social welfare programmes and injected vast sums of money into the economy along with substantial amounts for infrastructure investment. However, no attempt was made to streamline all expenditures, eliminate wastage and theft, and substantially improve administrative accountability at all levels. Now a growing current account deficit, rising external debt mainly due to corporate and bank borrowings, and the serious economic and financial crisis in the developed world have added to severe inflationary pressures and the collapse in the external value of the rupee, leading to declining industrial production and a lowering of the growth rate.
Transformational reforms must again look to internal market development. Government expenditures must be reduced by introducing efficiency, reducing waste and theft, thoroughly overhauling the administration and making institutions like the judiciary and the police more effective and speedy. Industry must be given better access to credit while incompetent ones must be merged or closed, policies on coal, gas, power, etc, must be made less personalised and more consistent. FDI in retail will add new methods and technologies but cannot be called a transformational reform.
Agriculture has received scant attention from this government. Spending has been on ephemeral subsidies and loan write-offs, much less on building assets. No foreign investor seeking profits can improve low agricultural productivity. We need roads, dams, watershed development, canals, storage, cold stores, cold transport and pricing reforms to make more remunerative prices available to farmers, improve credit access, improve quality delivery of fertilisers and pesticides, assure universal crop insurance, etc. National chain stores will, as in other countries, negotiate special prices and credit terms with supplier companies for the majority of items, namely packaged goods, breads and meats and fish?a facility not available to the old mom-and-pop/kirana stores. This has started happening in India as well, with the Indian chain stores able to drive hard bargains with supplier companies for lower prices and credit terms that are not available to kirana stores, making them less competitive. Foreign chains will accelerate this process.
Fifteen million or so retail merchants contribute immensely to society, with the services they provide to rich and poor customers?of credit, delivery, range of products, etc. They earn little and, over time, many of them must find more remunerative employment in organised retail or elsewhere. But they are not parasites on the system. Similarly, the much-abused wholesalers and commission agents for fruits and vegetables do give otherwise unavailable services of credit, delivery, sorting, accepting all qualities, etc. Indian retail and wholesale trade has successfully reached products to remote corners of our poorly connected country. For example, Burra Bazar in Kolkata, the wholesale market in Cuttack and Naya Bans in Delhi.
An Inter-Ministerial Task Force on agricultural marketing reforms recommended in 2002 (accepted by all states) to promote competitive agricultural markets in private and cooperative sectors, direct marketing and contract farming programmes, progressively dismantle controls and regulations under the Essential Commodities Act to remove all restrictions on production, supply, storage and movement of, and trade and commerce in, all agricultural commodities, substantially step up inflows of institutional credit to farmers for marketing of crops (pledge financing) to enhance their holding capacity and obtain remunerative prices, expand availability of warehousing services in rural areas by introducing negotiable warehousing receipt systems for agricultural commodities and allow futures trading in all agricultural commodities to improve price risk management and facilitate price discovery by amending the Forward Contracts (Regulation) Act, 1952. Most of these much-needed reforms are pending and need government action, not FDI.
Government investment in agriculture has been lagging since 1991. Rural roads, storage and cold storage, transportation including cold transport, more market-oriented agricultural marketing, dams, irrigation canals, check dams, improved access to credit to the small farmer, guaranteed quality of seeds, pesticides, fertilisers and other inputs, have been known to be urgent needs of farmers. They have happened selectively and spasmodically. Foreign investment in retail can only touch small pockets of the country. Government investment and reforms are essential precursors and cannot be replaced by FDI in retail. Indian agricultural policies are neither efficient nor equitable.
FDI in retail is not a transformational reform, a panacea for the ?policy paralysis?, or for India?s agricultural development. Industry leaders must not allow themselves to parrot government arguments.
The author is the first chairman of CERC, independent director on R-Infra and R-Power, and an extensive commentator on infrastructure
