India: FDI in retail

FDI in retail - choice and consequences

Monday , January 09, 2012 at 15 : 25

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A brief background

2011 has been a very eventful year both for India and the UPA government. Obviously Anna Hazare's movement for the Lokpal Bill and the battle against corruption eclipsed other events. But beyond politics, the other big story is about India's economy that is already showing signs of a slowdown. High inflation, declining performance of key economic indicators including inflow of Foreign Direct Investment or FDI, reports of flight of capital coupled with a burgeoning fiscal deficit were enough to set the alarm bells ringing.

To tackle inflation, the Reserve Bank of India aggressively raised interest rates thirteen times in nineteen months. Globally and locally, the forecasts for India's growth were revised downwards. The Indian economic story appeared to be fast losing steam and sheen.

This was both paradoxical and ironical since after the global recession in 2008, there was a global hype of a resurgent and emerging India. It appeared that everyone needed to publically acknowledge India's emergence and also seek greater access to one of the world's largest markets to boost their own sagging economies.

The heads of State and Government of all the five permanent members of the UN Security Council visited India in 2010, each one contributing towards building the image of a superpower in the making. India and its economic potential were the toast of the season.

However, and unfortunately for the UPA government, diametrically opposed to this positive image buildup, 2010 also became the big bang season of exposes. The hitherto unheard proportions of mega corruption scandals sickened even the most pacifist of middle class India, who so far had always seemed to look the other way. The Commonwealth Games, Adarsh Society and biggest of them all, the 2G Telecom Spectrum scam, among others, began to sour the mood of the populace. Much was happening and much too fast. The UPA's image, fragile so far, was shattered.

By early 2011, corporate leaders wrote an open letter to the Prime Minister expressing concern over "Governance Deficit". A few days later, Home Minister Chidambaram in an interview to the Wall Street Journal candidly admitted that "there is indeed a governance deficit in some areas and perhaps there is also an ethical deficit". It was no surprise that by February 2011, Prime Minister Dr Manmohan Singh, through a media interaction, felt the need to try and soothe frayed nerves by calling for restraint.

In his opening remarks Dr Singh said, "an impression has gone around that we are a scam-driven country." He added "This is weakening the self-confidence of the people of India, and denting the image of the country."

Beginning April 2011, the season belonged to Anna and his movement for a Lokpal Bill to root out corruption.

Introduction of FDI in retail

In November 2011, to boost the economy and investor confidence, the government announced its big ticket reform - 51 per cent FDI in multi-brand retail. The doors were finally to be opened to the world's biggest retailer Walmart, which boasts of sales of over US $ 400 billion through 9,600 retail units operating in 28 countries. The government's sale pitch was focussed - jobs will be created and the much needed investment in food processing and establishment of cold chains in agriculture will take place.

But what the government was unable to foresee was the magnitude of the political storm over its decision. The principal opposition BJP, the Left Front parties and even UPA allies like the Trinamool Congress, aggressively protested against FDI in multi-brand retail.

The entry of Walmart was seen as a threat, not an opportunity. India's manufacturing sector and millions of small jobs both in agriculture and retail were at grave risk, opposition parties countered. Why can't the government invest in setting up cold chains, they asked? For the agriculture sector, the specific example of administered minimum support price protecting the interests of sugarcane farmers was highlighted.

The Government seemed unable to defend its position. Even the UPA's perennial trouble shooter, Finance Minister Pranab Mukherjee was unable to get protesting allies back on board or opposition parties to end the logjam in Parliament. The FDI decision was finally put on hold, in a state of induced coma, at least till the completion of the politically important forthcoming Assembly elections in Uttar Pradesh and other states.

This brings us to the moot question - does India really need Walmart or FDI in multi brand retail? The answer is slightly more complicated than a direct yes or no.

Facts and figures to consider

Consumption leads to demand, which encourages manufacturing and supply. This eventually leads to growth. And debt or borrowing is an integral requirement for boosting growth. Without capital, there can't be growth. That's basic economics.

A cursory glance through this table published in the Website of the Global Finance Magazine, is fascinating especially in context of household debt, and also of relevance to our India story.

	Countries	Government	Nonfinancial business	Households	Financial Institutions	Totals
1	Japan (2009)	197%	95%	69%	110%	471%
2	UK (2009)	59%	110%	103%	194%	466%
3	Spain (2009)	56%	141%	87%	82%	366%
4	South Korea (2009)	31%	116%	78%	107%	333%
5	France (2009)	80%	114%	44%	84%	323%
6	Italy (2009)	109%	83%	41%	82%	315%
7	Switzerland (2007)	37%	75%	118%	84%	313%
8	USA* (2009)	67%	79%	97%	53%	296%
9	Germany (2009)	73%	69%	64%	80%	285%
10	Canada (2009)	65%	56%	88%	50%	259%
11	China (2008)	32%	96%	12%	18%	159%
12	Brazil (2008)	66%	30%	13%	33%	142%
13	India (2008)	66%	42%	10%	11%	129%
14	Russia (2008)	5%	40%	10%	16%	71%

A basic analysis of the data reveals the following:

1. Some of the most developed countries having large and industrialised economies are also countries with very high household debt. These include Germany, Japan, South Korea, Spain, Canada, USA, UK and Switzerland.

2. The BRIC countries uniformly have significantly lower levels of household debt - Brazil, China,Russia and India.

Given the facts, one is tempted to conclude the following - the consumption driven model of growth logically leads to high levels of debt at the government, business and finally the household levels. Conspicuous consumption or demand for lifestyle goods and services can be a serious contributor in raising the level of household and individual debt.

Why India seems attractive

India has traditionally been a savings-driven society and that's one of the reasons why, many experts opine, we have sailed relatively smoothly as compared to others during periods of economic crises. This was true during the South East Asian crisis in 1997, then the economic embargo after the Pokhran Nuclear Tests, and the most recent one in 2008.

Our middle class is huge (estimated at over 350 million), and we are traditionally a country with high savings. This makes us attractive to any multinational business house. Therefore, at the individual level, if we dramatically increase consumption and expenses primarily on lifestyle choices, logically we would be contributing to national and even international economic growth.

So if we buy goods at Walmart and enjoy the shopping experience, in reality we would be actively contributing towards significant money transfer to a multinational based out of the USA, which after retaining profits, would end up sending majority of this money to China, where most goods are being manufactured. The government appears to be cognizant of this very issue, which is why they proposed that at least 30 per cent of the procurement of manufactured / processed products shall be from "small industries" (presumably this refers to "small industries" in India). However, the 30 per cent requirement, on the face of it, appears to be grossly inadequate to deal with the issue of foreign manufactured goods flooding the Indian markets through multinational retail chains.

Does India need Walmart? - The risk

In the world of free economies, free flow of investment without restrictions is generally understood to be the normal way forward. That's simply the business model of global trade and commerce. However, as we dramatically increase conspicuous consumption, we run the risk of racing down the same path as evident in the "developed" countries of Europe and North America - reduce savings, and when required, even mortgage the future with the borrowings of today to meet our lifestyle decisions for a good life.

Sure, over the last one decade itself, consumer choice in India has expanded at an unimaginable pace. Shopping today in our fast growing malls can be a delightful experience. And like anywhere else in the world, we don't need to carry wads of money in our pockets. The credit and debit cards enable instant decisions and instant payments.

Should we go berserk and relentlessly pursue the consumption based model of growth as in the "developed" world, there are risks we should be aware of - risks that we certainly should not ignore. For history, even in India, is replete with examples of what happens when high-flying young executives lose jobs suddenly. Around 1996, when there was a correction in the media industry, many channels went bust or folded up. High flying and well-paid jobs were lost overnight, making life very tough for many.

The same story repeated itself with the dot com boom and bust around 2002. And again, during the global recession in 2008. While not so long ago we saved for a rainy day, now we are increasingly being tempted to use our savings for the 'next best thing' that may raise our 'social standing' and conspicously, our lifestyles.

The principle of borrowing today for a good life while ignoring future risks, appears to be exactly what we have also been relentlessly doing with Planet Earth so far. The consequences of the global race for fast depleting natural resources are now becoming seriously evident. No longer can one reject concerns related to the environment on the grounds of obstructionism to development. Climate change is a reality that we have to accept, whether we like it or not. And because of it, our well-being and even survival might be severely threatened. While denial is the easiest way forward, sooner or later we will need to take hard decisions.

(By the way, it is worth a thought - it snowed for the first time in recorded history in Pathankot which is at the foothills of Himachal Pradesh, and at an average elevation of 1000 feet above the sea level. This elevation is way below what is normally considered the snow line).

The model of economic growth for today, need not be fountainhead of the problems of tomorrow. And when we know that there are going to be problems down the road, why must we relentlessly follow this route at all?

We can either bury our heads in the sand and accept a paradigm that runs its own set of significant risks, or we can explore means to pursue an indigenous economic model which might better meet our own set of requirements.

So far the Indian economy has sustained global shocks since consumer demand and expenditure has largely been circulating within the country itself. With Foreign Direct Investment in Retail, we may well have Chinese goods on American shelves in an Indian market. Where would the money go? First to the multinational business houses, and then to chinese manufacturers.

Would this lead to a new form of economic colonialisation? Quite possibly. We need to be more circumspect than to allow that to happen.

(Nalin Satyakam Kohli is an entrepreneur, educationist and former TV news anchor. The views expressed in this article are completely the personal views of the author.)

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