Home > Musings > FDI in retail…sounding the death knell for Rathnamma

FDI in retail…sounding the death knell for Rathnamma

February 17, 2012

Every morning, Rathnamma sits on the footpath outside where I live in Mysore, selling greens and vegetables. I would watch her come at around 8 am and go about her business on most days. One day, I decided to talk to her and try and understand how much she could possibly earn each day. From my conversation with her, I understood that she would borrow Rs 500 each day from a money lender and go and buy the greens and vegetables every morning directly from farmers from the ‘unofficial’ market close to the exhibition grounds in Mysore. She would then spend about Rs 50 on an auto and bring the vegetables to this spot of hers. Her business would take around 2-3 hours to transact and she would end up with around Rs 750 each day. She would have to return Rs 550 to the money lender in the evening and the cycle would continue each day. I was fascinated by her story and the economics associated with it. Her family, the money lender, the farmers involved and the auto driver were all involved directly in this economy apart from the many others who could also be indirectly impacted. The Rs 150 that she made each day added to the family income. The vegetables she sold was possibly the freshest that one could get. As I chatted with Rathnamma, I thought about the recent controversy that India witnessed over allowing Foreign Direct Investment (FDI) in retail. There was so much of heat but very less light in the discussions that took place subsequently in Parliament before the Government decided to put the decision on hold. While there are arguments for and against FDI in retail, I tried to see the issue from ‘ground zero’, where people like Rathnamma live and transact their business.

We need to understand what retail business is, why foreign players are interested in doing this business in India and what the experience of other countries like China, Indonesia and Vietnam are. Would our country and the economy benefit from FDI in retail? How are the average small traders and Indian farmers going to be protected? Will the economy grow at the aggregate level but swallow up the poor in the process?

In 2004, the Delhi High Court defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). The retail industry is mainly divided into Organised and Unorganised retailing. Organised retailing refers to trading activities undertaken by licensed retailers i.e., those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately-owned large retail businesses like the stores run by Reliance, Birla and Tata group. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing – the local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy. Unorganized retailing is by far the most prevalent form of trade in India constituting 98% of total trade, while organised trade accounts only for the remaining 2%. Estimates vary widely about the true size of the retail business in India. Some have estimated that it is around Rs 8,00,000 crores and is growing at a rate of 40% per annum. Organised trade employs roughly 5 lakh people, whereas the unorganized retail trade employs nearly 3.95 crore people. One of the principal reasons behind the explosion of retail and its fragmented nature in India is the fact that retailing is probably the primary form of disguised unemployment/underemployment in the country.

Given the already over-crowded agriculture sector and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many million Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means and capital. And thus, a retailer is born, seemingly out of circumstance rather than choice. This phenomenon quite aptly explains the millions of petty shops and small stores. The explosion of retail outlets in the streets of Indian towns and villages is a visible testimony of this. The presence of more than one retailer for every hundred persons is indicative of the lack of economic opportunities that is forcing people into this form of self-employment. Because of this fragmentation, the Indian retail sector typically suffers from limited access to capital, labour and real-estate options. The typical traditional retailer follows the low-cost-and-size format, functioning at a small-scale level, rarely eligible for tax and following a cheap model of operations.

The Indian Government had conceived allowing large multi-national companies to set up multi-brand retail outlets in Indian towns with populations of more than 1 million. The Government’s logic seems to be that such cities can not only absorb and support these large stores, but will also ensure that the smaller shops and kirana stores will continue to flourish. Imagine if Wal-Mart, the world’s biggest retailer, sets up operations in India at prime locations in the 35 large cities and towns that house more than 1 million people. The supermarket will typically sell everything – from vegetables to the latest electronic gadgets – at extremely low prices that will most likely undercut those in nearby stores selling similar goods. Wal-Mart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means that a foreign company will buy big from India and abroad and be able to sell low – severely undercutting the small retailers. Once a monopoly situation is created, this will then turn into buying low and selling high. Such reorientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the traditional outlets are also likely to fold and perish, given the ‘predatory’ pricing power that a foreign player is able to exert. The producers and traders at the lowest level of operations will never find place in this sector, which would now have demand mostly for fluent English-speaking helpers. Having been uprooted from their traditional form of business, people like Rathnamma will unlikely be suitable for other areas of work. It is easy to visualise from the discussion above how the entry of just one big retailer is capable of destroying the whole local economy and send it hurtling down.

Supporters of FDI in retail argue that the advantages of allowing unrestrained FDI outweigh the disadvantages. They quote the example of Thailand, Malaysia and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their Governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their GDPs. One must also not forget how these countries, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets. The record of our politicians and bureaucrats in successfully enforcing regulatory laws is not very encouraging and the experiences of the above countries may not be a good example to refer to.

While there are arguments about the advantages of allowing FDI, one must try and look at this issue from the eyes of Rathnamma and traders like her. Her small pavement shop may not seem to be adding to the growing economy, but it ensures food on her table. What the Government in power needs to do is go beyond advocating the cause of these large corporations and start creating an enabling environment that will allow her access to more reasonable credit and a formal market system.

Balu

Categories: Musings