Views | Costly retail brinkmanship

Views | Costly retail brinkmanship

Finance minister Pranab Mukherjee has brokered a temporary truce in the foreign direct investment (FDI) in retail imbroglio. His formula—“Yes to hold back, no to roll back"—seems to have been a sufficient face-saving gesture for Trinamool Congress leader Mamata Banerjee to fall in line. Never since the reforms were initiated has there been such widespread opposition to a government initiative. Resistance from the Left is not a surprise. Being in the opposition, a volte-face from the Bharatiya Janata Party (BJP) was also expected. What is surprising is that the partners of the United Progressive Alliance (UPA) such as the Dravida Munnetra Kazhagam (DMK) and the Trinamool also came out in opposition. Even many Congress leaders, including the Kerala Pradesh Congress Committee chief, came out against the move. Most of the major states declared they would not allow global giants in their retail sector.


Why is there so much opposition? Why is the government equally insistent? Needless to say, there are two sides to the debate.

The first is the controversy regarding the employment impact of FDI in the retail sector. It is the adverse impact of FDI on the employment prospects of the workforce of 40 million and more that has triggered the emotional outburst against the government proposal. Trade is a residual employment sector, accommodating a large number of people who failed to enter the organized sector, or obtain gainful employment in agriculture. Given the current scenario of nearly jobless growth, the government proposal would severely undermine the livelihood of an unacceptably high proportion of the workforce in the trade sector.

Surprisingly, the employment impact is also the chief argument of the government in favour of FDI in the retail sector. The government claims additional direct employment of four million in the next three years. It is an outlandish claim. Further, the proponents of this view ignore the loss of jobs in the unorganized sector, given the vast productivity difference between organized and unorganized retail trade. For every job in a supermarket, around 20 jobs will be lost in the non-supermarket sector.

Another related issue is the ouster of tiny, small and medium enterprises, and concentration of trade among retail chains. The proponents of liberalization point out that in many countries, the small sector coexists with large format retailers. No doubt the small sector would survive. However, the overwhelming evidence from developed and developing countries has been that of a dramatic increase in concentration in the retail sector. The market share of the top five retailers in the total retail sales is as high as 97% in Australia and more than 50% in most of Europe.

A third set of issues is related to the implications of greater economies of scale, improved technology and greater efficiency of retail giants for farmers, small producers and consumers. It is here that the proponents of reform seem to have pitched their tent. Farmers and small producers would gain through sharp reduction in trade intermediaries and improved preservation and processing technologies. The critics, on the other hand, insist that the emergence of “oligopsonistic" (that is, fewer) players in the source market would adversely affect unorganized farmers and small producers. The international experience of multinational agri-business enterprises has almost invariably pointed to a decline in the share of value and position in the value chain for farmers and small producers.

As for consumers in the upper echelons, there is an attraction of wider consumer choice and satisfaction of a developed country experience in shopping. However, for this category, price is not a major factor. The competition in the retail sector is through heavy advertising and promotional measures rather than through reduction in trade margins. Indeed, the experience is that trade margins have tended to rise rather than fall.

In short, the pros and cons of FDI in retail are such that it is important to have a wider debate and deliberation. There is nothing in the nature of this policy decision that warrants the current obsession of the central government and the brinkmanship tactics that Manmohan Singh has employed. The real reason lies outside the retail sector. The Prime Minister’s intention seems to be to give a strong message to those who have started to suspect the political will of his regime to pursue the neoliberal agenda. With the rupee under pressure, the tendency of foreign institutional investors to withdraw has to be nipped in the bud. In the case of the nuclear agreement, Singh’s brinkmanship paid off. To him, FDI in retail seemed to hold out the prospect of yet another repeat performance.

The outcomes in both the cases have been very different. The nuclear agreement was not an emotive issue for the masses. However, allowing FDI in retail has struck a discordant note with every trader in every nook and corner of the country. The popular support seems to be limited to an urban fringe. Even if Singh wins in the present round of brinkmanship, unlike in the nuclear deal, there will be a heavy political price to pay.

T.M. Thomas Issac is former finance minister of Kerala

Comments are welcome at theirview@livemint.com