It is a dirty picture. No, we are not referring to the title of the new Hindi film released in India earlier this week. We are referring to the state of Indian politics. Late on Saturday, the chief minister of West Bengal claimed that the finance minister of the government of India had assured her that the Centre would put the issue of allowing foreign direct investment (FDI) in multi-brand organized retail on hold, pending the evolution of a political consensus. Reading a cross-section of opinion on this matter, in the English language media in India that is, one is stumped by the extent of passion and emotion that has been brought to bear on the subject unburdened by any rigour.
The truth is that India’s colonial masters might have left some 65 years ago, but Indian minds remain colonized. Indian aviation companies sabotaged the entry of foreign airlines into the country. Today, they are desperate for them. Experimentation and open-mindedness are needed to learn to improve policy and the economy. Empirical validation rather than endless debates is a better way to verify one’s priors.
Not many reports referred to a comprehensive study published by the Indian Council for Research on International Economic Relations (Icrier) published in September 2008. It was a 130-page report and it had undertaken extensive surveys of unorganized and small retailers, farmers, producers and consumers in preparing the report.
FDI in retail was permitted up to 1996. Only in 1997 was a formal ban introduced. All that this enabling policy of the government does is to restore the status quo that prevailed up to 1996.
The authors of the Icrier report concede that the introduction of organized retail affected the turnover and profit of small and unorganized retailers. But their response has been more positive than the pessimistic naysayers in the media, in politics and in academics. The report, based on their surveys of small and unorganized retailers, notes that many of them took steps to improve their competitiveness. These responses ranged from adding new product lines, giving brands better display, renovation of the store, introduction of self-service, enhanced home delivery, more credit sales, acceptance of credit cards, etc. Clearly, access to bank credit is a problem for them and was not reported to be easily available even for those who wanted it.
The report offers useful suggestions to strengthen the competitive position of small retailers, including the provision of finance and organizing them into cooperative retail federations (as is done in Europe) to compete with large retail chains. Clearly, that is desirable and the introduction of FDI in retail might be the catalyst to bring about an improvement in their operating and financial conditions, too.
While the Icrier report notes with surprise that many lower middle-class families embraced organized retail shops more readily for lower prices, the truth is that the Indian consumer may not immediately abandon the neighbourhood shop. She may take years to get used to shopping in hypermarts. Therefore, whether the move leads to large-scale closure of small retail shops or not remains to be seen. If it were so successful as to force thousands of small retailers across the country to down their shutters, then surely there must be compensating economic benefits.
Those benefits are bound to occur in the farming sector. The farming sector needs many reforms. A choice of buyers for its produce and fewer intermediaries are two of them. “Transactions at various stages involved huge wastages estimated at 5-7% for foodgrains and 25-30% for fruit and vegetables (Annual Report 2006-07, ministry of agriculture, department of agriculture and cooperation). These factors inflate the final price to the consumer by nearly three times what the farmer receives, and the farmer’s realization of one-third of the final price compares poorly with two-thirds in most other countries.”
In the hope of scoring political goals against a beleaguered and barely functional Congress government, other political parties are prepared to put the nation’s economy at peril. J. Jayalalithaa opposes FDI in retail. Other political parties oppose her much-needed price increases in Tamil Nadu. Emulating populism and condemning pragmatism, Indian political parties are busy doing the devil’s work on the Indian economy.
India’s investment spending contracted in the third quarter. The country runs a current account deficit. The oil import bill could yet get out of hand if Western nations resorted to desperate printing of their currencies. India needs foreign funds to cover its trade deficit. FDI in retail could have sent a positive signal even if, on its own, it would not have changed either the face of the farming sector in India or brought in billions of dollars in foreign investment.
In the final analysis, this saga offers an excuse to those who are already running scared of Indian inflation, the fiscal deficit and the falling rupee. Indians, it seems, are determined to stonewall their way into the next economic crisis.
V. Anantha Nageswaran is a senior economist with Asianomics. These are his personal views. Comments are welcome at email@example.com
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