Why is FDI in retail a political hot potato?

Why is FDI in retail a political hot potato?
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First Published: Mon, Feb 19 2007. 12 07 AM IST
Updated: Mon, Feb 19 2007. 12 07 AM IST
The recent letter by Congress president and United Progressive Alliance (UPA) chairperson Sonia Gandhi to the Prime Minister cautioning the Centre to tread the—foreign direct investment (FDI) in retail—path carefully has generated a lot of debate. Gandhi doesn’t favour an FDI ban, only wants adequate safeguards put in place, the Congress party clarified later.
Whether she was merely posturing on the eve of the assembly elections, or she was seriously voicing concerns that FDI in the retail sector would force large-scale unemployment and antagonize the much-solicited aam aadmi (common man) constituency, is a moot question.
Why is FDI in retail such a politically-sensitive issue? Why has the Indian government been under not-so-subtle international (read the US) pressure to open up its retail market? Why is there a retail rush amongst the big boys of Indian business as well as global retail giants?
Consider the following facts: India is currently considered to be the fourth-largest retail market in the world with estimated annual retail sales of more than $280 billion (contributing to more than 10% of the gross domestic product—GDP), and is growing at an impressive rate of 10% a year. No wonder, Wal-Mart Stores Inc., the world’s largest retailer, Britain’s Tesco and France’s Carrefour have identified India as a huge growth opportunity, especially as their home markets are becoming increasingly saturated and competitive.
FDI in retail is politically sensitive because only 4% of our retail market is accounted for by the organized sector (compared with 20% in China, 30% in Indonesia and 40% in Thailand); a whopping 96% is in the unorganized sector, involving 12 million to 15 million mom-and-pop stores and employing nearly 40 million people. With its low-level investment, retail has been and remains the most popular form of self-employment for people in urban and rural areas.
Forceful comments have been made both in favour and against the—FDI-in-retail—policy. Those in favour argue that FDI in retail would result in increased efficiencies in the value chain, employment creation and exports, while those ranged against it fear large-scale job losses and eroding the buyer’s monopoly power.
But Gandhi’s caution is both opportune and warranted. A careful study of the implications of FDI in retail, providing the necessary safety nets for the traditional retailers, instituting a regulatory mechanism and putting in place restrictions in terms of size, zoning, sourcing and capital requirement could help minimize the negative impact.
There is hardly any research available for the government to take a considered view on the subject as Gandhi has urged Prime Minister Manmohan Singh to do. The lone research, conducted by ICRIER and commissioned by the Central department of commercial affairs—on which the UPA government has based its current policy—is woefully short on this requirement.
Politically, occupational blocks have a strong affinity across states. This unity of an occupational group becomes evident whenever they are faced with a situation that challenges the entire occupation. The FDI-in-retail policy has the potential to snowball into an issue that may unify the trading community across the country.
The Congress party has perhaps sensed that an unregulated entry of foreign retailers may cause a political upheaval. Recent reports that the trade unions have joined hands with cooperative stores, retail associations and small-scale traders to launch a campaign against Wal-Mart’s entry show that these fears are not unfounded.
The Left parties have steadfastly opposed FDI in the retail sector and have now demanded a regulated mechanism for emerging domestic retail giants as well. Yet, despite their opposition, Left parties are unlikely to benefit much politically due to their limited presence in states outside West Bengal and Kerala. Further, being the principal props of the UPA government, opposition from the Left will lack conviction with the masses.
Even though the Bharatiya Janata Party (BJP) has made little attempt to articulate its concerns, the more the Left parties protest, the more it is likely to benefit BJP, which has, for long, had traders as its natural constituency.
The unabated inflation is hitting the aam aadmi constituency hard. Loss of jobs at a time when unemployment is growing in urban areas, as the latest National Sample Survey Organization draft report on employment reveals, could make the UPA government even more unpopular among this vital constituency.
The UPA government is well past its honeymoon phase. The imminent defeats in the assembly elections (particularly in the Prime Minister’s home state of Punjab) will seriously impede the government’s ability and authority to press ahead with major reforms in the days ahead.
Politics is all about perceptions. If the government were to seriously pursue the FDI policy in retail and the message goes that the present UPA government led by the Congress is anti-trader, what appears to be a trickle in loss of public support may soon turn into a flood.
(G.V.L. Narasimha Rao is a political analyst. His day job is managing director of Development & Research Services, a research and consulting firm. Respond to the column by writing to thebottomline@livemint.com)
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First Published: Mon, Feb 19 2007. 12 07 AM IST