De-Lurking on the Net

December 20, 2011

Stuttering Growth and Suspended FDI in Retail

Filed under: India — Geekay @ 10:56 am
Tags: , , , , , , , ,

The word “Growth” is very alluring everywhere in the world economy. For the sake of growth, Tony Blair, Gordon Brown in UK, did not want to put much regulation in place for banks and financial institutions just like in US and  in most countries in Europe, this lack of regulation was prevalent. In Indian context, the growth is linked with FDI in retail.  Though, it is true that FDI spurs the economic growth . But can any FDI be good?  For India, lately FDI in retail is seen needed as the decision making machinery of govt is on standstill. So, FDI in retail is seen much more than any normal FDI inflows could have been seen as it would have allowed to mask the govt inertia on policies. The growth of Indian economy is now faltering due to number of interest rate hikes which were seen necessary  to combat rampant inflation of almost 12%. Unfortunately, it has coincided with malaise elsewhere like corruption agitations in India and Euro crisis. So, instead of having FDI inflow, the foreign currency outflow is taking place and as a result  rupee is falling in spite of growing interest rates. Let us examine if FDI in retail is indeed growth promoting? One can understand that growth will definitely take place due to some FDI inflow but as this FDI in retail, will also destroy the middle level retail and wholesale businesses, a part of the economy will be destroyed too ? It means that net result could be zero towards the overall GDP improvement. The experience from last few years when FDI came in sectors as Telecom, Real estate, Insurance suggests that today India just need one type of investment i.e. FDI in infrastructure  be that in roads, railways or power plants and definitely not in retail. The argument offered by Rahul Gandhi for electioneering in UP is that farmers will get many times more for their produce than what they are getting now and most of wastage will disappear from the country.  Are these things true? Let us see.

First, the farmers will not get paid any higher price unless the contract between them and  big foreign retailers like Walmart, Tesco etc  start giving them higher price. Has anybody seen someone willing to pay higher price for anything if that person can get it cheaper. The only way farmers can get higher price is when they offer best quality pieces of their produce to these big retailers and their rest of the produce will have to be sold either  to small retailers or destroyed altogether as there is also an intention to eliminate the middle men meaning there won’t be any secondary market left for the slightly inferior looking produce at all . Thus such product will end up as in all probability a cattle fodder or garbage for composting and rotting just as they are doing now. I can not also see how this move will thus help in bringing down inflation which is claimed as one of the reason for FDI in retail. With time, the cost of fertilizers is not going to go down when petroleum prices are always going up. The cost of other inputs for farmer like electricity, seeds, labour cost will only go up and not down. So, it seems strange that the  farmers can be so gullible to be put in delusion by Congress and their cohorts about FDI in retail that it  will benefit them by offering higher prices by new mega retailers. Usually, the big retailers practice has been in all  countries where they operate to squeeze all their suppliers including farmers, so that their (retailers) margins improve and bigger they are, bigger their voices are in negotiating contract prices with any supplier. They also have big voice within govt. It means influencing govt regulation and import export regime.

Second, let use see about the investment turning up to enhance the cold storage and distribution centres capacity across the country.  Given that road and rail network capacity is not going up and is already not great in the country and so any improvement is this area will remain a big illusion. Another point to highlight in this regard is the need to boost the electricity production as adding a cold storages will mean the need for extra electricity supply. But has the govt of India have any surplus capacity anywhere in electricity supply? I do not think so. Therefore, a FDI in power generation is needed before seeking the cold storage capacity enhancement. Unless the FDI Bill specifically requires it for allowing 51% stake in such retails stores, nobody will add these cold storage capacities when an electricity constraint exists. Better policy would have been to give incentives  to existing wholesalers to create such a capacity, if at all such a capacity addition is made by anyone.

One  of the two bad things about FDI in retail is that it will eat away a big layer of middle men. It may sound good from a section that says that saving will be passed onto farmers and the delay between supplier and retailers will vanish. By doing so,  I can not see the bulging pockets of farmers or absence of  rotting vegetables and fruits.  A lot of reforms are needed for enabling to eliminate rotting.  Given that  new mega stores can only be out of towns unless the govt acquires inner town areas and clears them for building new stores. Which does not seem possible as the lack of parking in big cities is also due to this fact that the govt does not have any will for such inner city clearances.  Since, out of town stores means that almost all households should have their own transport which is not true for Indian households that means there is almost all the more need to retain the middlemen .As the middle men are all to be wiped out by this policy move.  So, it seems that India seems to be saying yes – it is OK to wipe out the middlemen and let us benefit foreign share holders in stead. If the govt prefers big retailers, then perhaps the banks in India can provide loans for mergers and acquisitions in retail industry and that can it usher in consolidation and build big local share holding rather than foreign equity holding. Of course that does not offer an instant fix of FDI inflow. I look at this in way that if India gets say FDI of $500 million in retail. It will keep paying in perpetuity a dividend of 51% on that $500 million. Also, the local retailers and local markets will be destroyed gradually as the big retailers take hold in the country. This investment can not improve the road or rail network or electricity production on whom the success of cold storage and distribution centres  really depends. Most of the retailers will start bringing more and more foreign products and thus increasing the trade deficit for India. Walmart and Tesco sell far more products from China, US, Europe. So, how much local goods will be replaced by foreign goods by these big retailers is another thing to worry about.

One feel great disappointment from Indian media as they always constantly toe the govt policy. Even though they are in private hands but it is such a shame they do not do basic analysis of anything because doing so would mean publishing something that will challenge the govt meaning inviting govt wrath on themselves.

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