Mumbai: The Shop Around The Corner was the quintessential independent book store. Located in New York’s Upper West Side, it had been a place where children would come with their families to not just buy books, but also read together. Over the decades, the store owner had formed a special relationship with families in the neighbourhood. After her passing, her daughter managed the store, not just selling books but, as she saw it, shaping people’s childhood memories. When a large retail chain decides to open a store in the area, The Shop Around The Corner’s very existence is threatened. It cannot compete with the low prices offered by the retail chain. Consumers start switching, and a decades-old store eventually goes out of business.
This story forms the backdrop for dot-com era romantic comedy You’ve Got Mail, starring Tom Hanks and Meg Ryan. Owing to their rivalry in business and competing visions for what a book store should be, the two protagonists hate each other in real life, but unknowingly covet each other deeply in an anonymous, Internet-based relationship. Their differing worldview on what constitutes a good book store is at the heart of the great debate between philosophers and economists on the Left and Right too.
This debate has manifested itself in India over the government’s decision to allow foreign direct investment in retail. The backlash against foreign direct investment (FDI) in retail has come from almost all Opposition parties and even some members of the UPA coalition. They believe it will destroy livelihoods for kirana store owners and reduce incomes for small and marginal farmers. Modern retail, with its emphasis on low prices, may result in the loss of some jobs - or more realistically, a slower growth in the number of jobs in the retail sector. This is a corollary to the fact that more capital and better management will improve per-employee productivity.
Modern retail chains may cut into the earnings of small shop owners, although it could also be that small stores buy produce from foreign retailers as many of them have already been doing with Indian retail chains. But without doubt, some players won’t be able to compete. Like The Shop Around The Corner, they will have to shut down.
Still FDI in retail is a vital reform, and the government has taken the right policy action. Studies by the Indian Council for Research on International Economic Relations (ICRIER) have found conclusively that the entry of organized retail did not displace unorganized players - the rate of closure on account of competition from organized retail was at 1.7 % per annum. If organized retail as a whole is not the villain it is being painted to be, then how does it matter whether it entails domestic or foreign investment? Greater capital investment in the sector might exacerbate the short-term pain in the transition, but it will also displace relatively inefficient Indian chains. Global chains haven’t always succeeded outside of their home countries. For example, Walmart may have done well in China, but has not enjoyed the same success in Europe.
Critically, the government failed to manage the consensus-building process effectively in introducing FDI in retail. It picked a moment of weakness to implement a difficult reform. By building in dubious restrictions such as defining which towns can have foreign-owned retail stores and including diktats on the amount of procurement retailers must make from small-scale industries, the government has betrayed its own lack of faith in the reform. These restrictions are lame attempts to appease entrenched special interest groups, whose interests are inimical to the interest of Indian consumers, who would be the biggest beneficiaries of FDI in retail.
Moreover, since a large number of people are employed directly and indirectly in the unorganized retail trade, the challenge for the government is to ensure that the short-term upheaval that will be caused by such a reform doesn’t lead to a long-term dislocation. This can only be addressed by implementing further reforms that create more productive jobs. It is impossible for India’s burgeoning youth to be productively employed in PSUs and schemes like the Mahatma Gandhi National Rural Employment Guarantee Scheme. There must be a holistic strategy to execute economic reforms. Long-delayed enactment of taxation, commodity pricing and agriculture procurement reforms are already major constraints on realizing the positive economic impact of FDI in retail.
Conducting reforms is imperative to sustain growth, but they must also be designed well and executed properly. Else, the naysayers will be proved right and there will be public anger towards the private sector, which will be demonized as a destroyer of livelihoods and a profiteer at the expense of the poor. The tragedy is the government lacks conviction politicians, including the Prime Minister and UPA chairperson, who believe in markets and have the temerity to articulate and champion the case for such reforms to various interest groups and the public. With the Prime Minister’s backing, the Disinvestment Minister in the NDA government Arun Shourie openly spoke of the virtues of private enterprise and markets when he privatized government-owned companies for the first time in India’s history.
The fable of The Shop Around The Corner rings true in all market-oriented economies. Customized clothing makers in London’s storied Saville Row found themselves unable to compete with the onslaught of ready-to-wear high-street fashion, and many of them closed down. The street once famed for its bespoke tailors recently saw the opening of American casual wear chain Abercrombie & Fitch.
The catch is that the economies of London and New York are open and dynamic enough to absorb such change, since they are far more free from government control. This is simply not the case in India, and also why the government must design and sequence its reform policies correctly, following through with more market reforms if it indeed manages to push through FDI in retail.
Rajeev Mantri is director of GPSK Investment Group and Harsh Gupta is director of Catallaxy Finance