The ruse of FDI in retail sector

It is no longer a matter of debate that the Indian economy is under stress. A mild stagflation coupled with the so-called “twin deficits” (fiscal and current account deficits) has led to warnings of a possible downgrade by international rating agencies. Unfortunately, the so-called reforms by the government, especially the opening of the retail sector to foreign investors, are hardly the answer to the problem. To make matters worse, the political reaction to the issue of foreign direct investment (FDI) in retail has only added to the government’s woes and now poses a threat to its political stability.

While the political fallout was merely a matter of time—the government is battling a credibility crisis and a generalized policy failure—the economic rationale for FDI in retail is rather unjustified. This is both on grounds of sound policy and in terms of the much touted possibilities from the opening up of this sector. Some of these claims were tested against available national and international evidence in an earlier article on the issue of FDI in retail (“The perils of retail therapy in India”, Mint, 19 July). Contrary evidence has not prevented the government from making the audacious claim that 100 million additional jobs will be created in the retail sector alone. The track record of this government in its previous avatar is somewhat different: it is one of “jobless growth”. This government created a paltry one million jobs in the entire five-year period from 2004-05 to 2009-10, the bulk of them, low-quality employment. This record does not inspire confidence in the lofty claims it is now making on the possibilities of job creation in the retail sector.

The claims that FDI in retail will help farmers realize true prices of their products and consumers get cheap goods are not sound. These are not based on sound logic or available evidence. The claim is contradictory. The nominal concession of insisting that companies source 30% of their requirements from the domestic market is not a safeguard against the dumping of cheap goods from other countries, especially China, which will compete with India’s small-and-medium industries. Most retailers will, in any case, source food products from the domestic market thereby fulfilling the criteria, but will source the bulk of non-food products from cheap sources such as China. Not only will this hurt fragile small-and-medium enterprises, it will also effectively end the prospects of a manufacturing revival in this country.

Honestly, except for the colour of money, FDI in retail will not bring anything that is not already available in the domestic economy. Capital, clearly, is not a problem. Nor is the required technology, rocket science. The fact that domestic retail giants haven’t done well either in terms of operations or in terms of investing in back-end infrastructure suggests that the problem lies elsewhere. The net result has been that not many multi-brand retailers have shown strong interest of investing in India. The ones such as Ikea of Sweden were anyway coming to Indian shores because they are single brand retailers and cater to niche segments.

It is hard not to conclude that FDI in retail and the associated package of a diesel price increase and attempts to strictly limit the subsidy on liquefied petroleum gas are nothing but a smokescreen to divert attention from real reforms that are needed to put the Indian economy back on track.

While the government was quick to respond to the demand of foreign investors for opening the retail and aviation sectors, it has hardly moved an inch on the much delayed reforms in Agricultural Produce Marketing Committees. The problem of inflation management required correcting supply bottlenecks and avoiding the nominal hike in diesel prices. Nor has the government made its intentions clear on the goods and services tax or the direct tax code. But while these reforms may seem politically volatile, even social sector reforms such as revamping the public distribution system by universalizing it and making it legally binding through the National Food Security Act are nowhere in sight. The short-sightedness of the government on agricultural policies is also visible in its effort to streamline fertilizer subsidies through the nutrient-based subsidy regime that has resulted in rising fertilizer prices. The government also doesn’t seem sure of where it stands regarding the land acquisition Bill and many other laws.

The choice of soft targets and the focus on appeasing foreign rating agencies may not do any good to the economy, but the delay in effecting real changes does make it difficult, by every passing day, to pull the economy out of the mess.

But such changes require a realization that reforms mean deeper structural and systemic changes in the economy and not symbolism such as allowing FDI in retail. This will not help the government rebuild its image as a reformist government. It will only raise questions on its ability to solve economic problems.

Himanshu is assistant professor at Jawaharlal Nehru University and visiting fellow at Centre de Sciences Humaines, New Delhi.