May 12, 2006

Retail FDI - Lessons in Misleading the People

Kamal Nath

Let me think.......

The Government and the Minister of Commerce Mr. Kamal Nath in particular, have become quite adept at creating confusion in order to achieve the objective of pushing and justifying a non-existent case for FDI in Retail sector.

After a short lull, the Government has again started floating the premise that the objection to inviting foreign investment in Retail stems from the opposition to big from the small. It is trying to mislead the people by suggesting that the entire argument against foreign direct investment in this sector is confined to the philosophical question of big vs. small. The apparent strategy is that the moment a few large domestic retailers come up, the government could claim that since large retailers are already co-existing with small retailers, there is no harm in having foreign retailers as well who are large.

The arguments against retail FDI are much stronger and fundamental and the main issue is whether FDI in this sector is essential and justified or not. The unequivocal answer to this is: NO. A policy of allowing FDI in this sector can only benefit the global retailers by giving them a permanent footing to earn billions in potentially the largest market in the world in future. This benefit would be available to them virtually free of cost because any investment they make would be only to create their own assets and run their own operations.

The second point which the Government, starting from the Prime Minister, have been at pains to highlight at every available opportunity, is that the country needs $ 150 bn. in FDI in the next few years. This argument is cleverly sought to be linked to suggest that FDI in retail is part of this need. This is just a smokescreen. The country does not need this amount in just any random sector. If the Government has done the home-work to arrive at this magic figure, it must have obviously also worked out the desired sector-wise composition of the $ 150 bn. estimate. Logically, this figure would include only critical areas of high priority like infrastructure and industry and certainly not a no-priority area like Retail where in any case the inflows cannot be large and where, in contrast, there is no worthwhile benefit. On the other hand, there is no shortage of domestic capital for this sector.

In fact, the Government has failed to show a single provable benefit from FDI in Retail sector, as already discussed in another article (see here). On the other hand, most of the arguments and assertions of benefits flowing some time in future (including the supposed big benefits to agricultural sector) that have been floated from time to time, have been comprehensively and admirably dealt with and effectively countered in a longish article elsewhere on the web, specifically as they relate to India (see here). Even the Left parties have demolished the Government's arguments in their discussions with the Government and in public.

The Government has now let it be known that the Commerce Ministry, along with the PMO is working out a proposal to permit FDI in specific branded products like sports goods (read "Nike"?). This very proposal gives the lie to the Government's lofty claims of FDI in Retail sector doing wonders for the country. By no stretch of imagination can it be claimed that allowing FDI in selective segments like sports goods or such other insignifcant area can do any good for the country at all. In even considering such a proposal, the government has practically destroyed its case in the main, for it is obvious that the only real beneficiaries will be the retailers that set up base under this proposed policy. In any case, such brand segments can very well make do with the franchise option available to them at present.

The conclusion is unavoidable that the Government's intentions do not indicate any public interest being served. Private interests, perhaps? Who knows.

What about the assurances to Wal-mart and others then, that they would be allowed? Hmmmm.... May be the Commerce Minister and the PMO still have something up their sleeves to spring a last minute surprise.


Madhab said...

It is sickening how the Government tries to go about its work.

Anonymous said...

Govt. wants to prove to the US Govt. that it is grateful for the US support of the nuclear deal?

K.R. Menon said...

The developments in this matter confirm the people's feeling that the Left parties are just paper tigers. They can only show their broken teeth which cannot bite.

confused said...

Now, why exactly do you oppose FDI in reatil? What wrong will occur if FDI is permitted?

Then we shall talk about the need or lack of it.

madhab said...

Why oppose FDI in Retail? Because it is not essential and it will result in an ever-increasing and heavy outflow of foreign exchange for the country for all time to come without any corresponding benefit to the country. It has to do with CBA in the country's context.

I hope you learn your economics especially international trade policy.

I hope you are also aware of the events in India 390 years ago when a Mughal emperor allowed trading rights (similar to what the govt. of the day is trying) to the British and the rest is history. If you are aware of the history, it seems that nothing has been learnt from it and we still have that same mentality of saying "what's wrong,let them earn their millions".

To understand why there is objection to FDI in retail, it needs sufficient national pride that our own entrpreneurs are well able to do retailing and that we do not need any foreigners to sell groceries and allow them a share in our GDP which rightfully should accrue to the Indian entrpreneurs.

For some simple thoughts, please see one of the articles referred in the above article.

Anonymous said...

Seems confused has not carefully gone through what is written in the blog and reflecting on it, before giving comments.

greensatya said...

I am pro-FDI in retail. Among other things it will make retail an organised sector. Agreed it can be made organised even witout FDI, like Reliance pitching in this sector. But it is FDI which will transfrom it into Organised sector.

The biggest benefit of retail becoming organised sector is curb on Tax Evasion. At present very few retail stores do pay tax as their sales are mostly without receipt or under the counter. This tax evasion is detrimental to honest tax payers.

Kishu Lalwani said...

It is ridiculous to say that we should invite foreign capital to reduce tax evasion!!

This means that
a) Indians are all tax evaders,
b) Foreigners are scruplulous tax payers (you are unaware of the billions of dollars of tax frauds by major corporations?)
c) The country should be ready to allow billions of dollars of profit and capital apprecation to be taken out of the country for the taxes that these foreign direct investors will pay
d)The Govt. is totally incompetent and after levying the taxes they will not be able to collect legitimate taxes for all time to come.

Come on, people need to grow up.

The vested interests are trying to sell their case for FDI in retail precisely by such flimsy, irrelevant arguments.

Anonymous said...

How many kirana shop owners pay taxes on their income? Why go to such lengths to protect a section that rarely if ever, pays taxes.

Large retail stores bring in taxes to the government, a decent shopping experience, quality and choice to the customer.

If our Indian retailers have so far not decided to get into this sector, I say, bring in FDI in retail. Perhaps that will spur those Indian retailers (such as Reliance) who have been twiddling their thumbs so far to get their act together.

And all of you kiranawallah defenders, quit harping like tired old Nehruvian socialists on the East India company, the India of today is strong enough to take on the world and come out on top. Believe in yourself instead of bringing out the bogeyman!

madhab said...

Perhaps anonymous has not read carefully the earlier comments as regards the absurd idea to invite fdi to check tax evasion!! can anything be so bizzare?

And you do not need to bring global retailers and let them pull out billions just to 'spur indian retailers'.

And as regards the mistaken notion about India being strong enough to 'take on the world', perhaps anomymous has no idea how the real world, the superpower like USA and the global giants operate and the ruthless game of international trade politics where not even a dollar is given free, let alone the licence to make billions from Indians. This has nothing to do with Nehruvian socialists which are irrelvant for the present discussion.

anonymous II said...

Man, anonymous is naive he wants to invite foreigners to give a 'decent shopping experience'?

If he has not faith in the Indian business to provide a good retail model, how can he talk of being strong enough to take on the world. Is this not diametrically opposite contradiction?

Kamini said...

Anonymous must be living in a distant village or in a time-wrap if he thinks that you cannot find "a decent shopping experience, quality and choice to the customer" in the country.

Kamini said...

Anonymous must be living in a distant village or in a time-wrap if he thinks that you cannot find "a decent shopping experience, quality and choice to the customer" in the country.

greensatya said...

Those who are jumping on my comment about "bringing FDI to check tax evasion" should read it again and carefully.

I said it is one of the benefit of Retail sector becoming organised sector.

How many neighbourhood grocery stores give you cashmemo and how many supermarket don't give you cash memo ? now do you ppl understand how tax evasion will be checked ?

The bigger super market always hand out cashmemo/receipt so all the sales are on record and tax has to be paid for them. This is not practised by most of the present retail stores leading to tax evasion.

So yeah bring in FDI to turn retail into an organised sector.

Kamini said...

Sorry previous reader, one cannot buy the argument that if some retailers are indulging in tax evasion, that justifies getting foreigners in. That's just not logic. You should read the points raised by Kishu Lalwani.

If today small retailers are not giving cashmemos or not paying taxes the fault is with the consumers on the one hand in not demanding cash memos and second on the government for not enforcing the law. It is simply impossible to assume that this situation will continue for ever.

Even if this argument has no substance, still assuming it to be right just for the sake of argument, that still does not mean that organised retail means only FDI!!!

How many supermarkets and organised retailers have come up in your city (assuming you are in a city). By your own statement they are all giving cashmemos and none of them are foreign retailers as yet. Does it mean that only retailers who are FDI wil give cashmemos?

Sorry but such major economic and trade policy decisions cannot be made on such flimsy considerations.

Anonymous II said...

It would be better for some of the readers to read through the article as well as the links carefully so that their comments may be more meaningful.

greensatya said...

Kamini - The main point I raised was that retail sector should be turned organised. Once it turns that then whether a customer demands or not cashmemos will be printed.

And don't pass the buck on customers. Why should they be interested if govt gets the tax or not ? so this is the reason they dont ask for cash memo now.

Well FDI is not necessary for turning Retail into organised and I had mentioned it. Wish you had carefull read my first comment where I had mentioned Reliance. And if you have any idea of Indian economy and transformation of various sectors after economic liberalisation then you won't be asking "whether FDI is required for turning retail to an organised sector". Please read the development of other sectors and you will have your answer.

As per your suggestion of reading Mr Keshu's comment. I don't think his comment even merit reading it twice. He has gone to do extrapolation of comment and went way beyond the context.

And Anonymous ii - If you put that comment for me then -- if you don't find some comments meaningful then please let it be so. No one needs a lecture from you to read what and read what not.

if it was not for me then excuse me.

confused said...


What is the nonsense about Indian money flowing outside? And please can we get over the 390 years mentality?

Look, this is a globalized world, you are repeating the same arugments which the Commies used to keep India in poverty for 45 years. All foreigners are evil. As a consumer all Iwant is the best product for the best price. Thats all. Whether it comes from someone who is an indian or not is immaterial for me. All those who think otherwise should only buy Ambassadors because all other cars manufacuted in India are made by companies ownedby non-Indians.

Look, I wont try to be too logical here,heh! but US has outsourced almost its entire manufacturing sector, has it become poorer?

And if an India businessperson is good, he will beat the competition, if he is not-please let us save money and buy decent goods.

Please accept the reality of a globalized worlds, or the outsourcing Industry in India would have never developed.

Kamini said...

Greensatya, to quote what you said:
"Agreed it can be made organised even witout FDI, like Reliance pitching in this sector. But it is FDI which will transfrom it into Organised sector."

What you are implying is that only FDI can transform retail into organised sector. Well, this is not true if you have seen some major retailers doing business already in an organised way. What you are further implying is that fdi will first turn retail into organised sector and that will mean that all business will be done with cashmemos and that will earn taxes for govt. I see you are convinced about your logic.

As to development of other sectors, one could keep arguing but certainly retail is not one sector where you need fdi to develop it. You can of course keep your view. I also do not find anything objectionable in Mr. Kishu's comments as he has simply tried to bring your point to a logical interpretation of what you are saying in effect.

Confused, if you say there is nothing wrong in billions flowing outside India in return for peanuts of benefits, you are far removed from realities of global trade politics. Globalisation does not mean that we are part of some global nation that it would not matter if wealth flows out of the country.

Asking if USA has become poorer is not the right question. We are not talking about importing essential goods and services we are talking of getting something which is not essential. And as to USA not becoming poorer, you are perhaps not aware of the trillions of dollars of deficits that country is running and its global debt and it is only the importance of the dollar that is letting it sustain. In spite of all the bravado of India being strong and our own people being competent and we need not worry of foreign competition etc., we do need to worry. All countries do and all countries including USA of which many are enamoured, are deeply protectionists when their own interests suffer whether it is in goods, where they impose anti dumping duties or non tariff barriers or in case of services, they trry to restrict when it starts hurting. e.g. restrictions on outsourcing. And in any case it is totally out of place to compare USA with India. Both are too far removed in terms of economic development and experience in dealing with competition and global politics. In most areas, India is like a toddler. No need to be fooled by nice words which foreigners say about India's progress and our own imagination that we are on the way to become a superpower. Even China which has developed into a giant and is way ahead of India, has only last year fully opened up FDI in retail and that too because of the compulsions of its WTO Commitments. One would be naive to think that such an important concession like allowing a share in the huge domestic market should be given away just so that the consumer can get a good shopping experience! Whether it is 390 years of history or not, India continues to be taken for a ride even today when they are too many who think in such a devil may care fashion.

Trouble with FDI in retail is, that once they are in, they are in. You cannot kick them out or prevent them from repatriating billions made from the common man.

Big talk of globalisation is fine as long as one has not directly suffered from its ill effects.

Dr. Tarun Bhalla said...

In the interesting discussion by the readers, someone is talking of 390 year old mentality. Exactly! The same mentality that was the reason for allowing the British to set foot in the country for 'trading' and loot it for the next 300+ years, seems to be continuing in the approach of some who say "let them come, what can they do".

We cannot ignore history, because history is what enables us to learn from past mistakes. Sadly, even in the present generation, we have not learnt any lessons!

Anonymous said...

Most people in US hate Walmart because of the low quality of jobs it creates. Indian system of retail is much better because a single walmart is equivalent to at least 1000 small owner operated shops. By allowing a single walmart, you are creating a 1000 poor quality jobs.

Madhab Sen said...

I fully agree with anonymous. He has said something that makes sense instead of going along with others like sheep.

Well said!

Although the peculiar thing is that Walmart supporters quite illogically claim exactly the opposite that they provide quality employment than shop owners because the latter are underemployed whereas walmart employees are fully employed! And our govt. with no thinking of its own, eagerly buys such arguments. (Read Economic Times, Mumbai, 22nd April 2005)

Madhab Sen said...

Further to earlier comment, the govt. is so confused that at one point the Commerce Minister said that "the employment potential, especially for low-end skilled workers, would be substantial once retail chains with big volumes step into the market."

So there you are! Govt. is just out to get them in by any means.

In any case, the fact remains that employment will be generated when consumption grows which would lead to growth of retail stores. FDI has nothing to do with it. Even when small shops grow or domestic large retailers set up shop, employment will increase. There is no reason why employment can increase only if foreign owned shops are there. On the contrary, foreign retailers as a rule will always employ less number of people than a domestic retailer because in India, employers are used to have more numbers of employees.

diabolic preacher said...

thanks for the link

Anand said...

FDI in retail is not just for the Walmarts and TESCOs..Our own retailers need it..
For instance, any idea on how the back-end operations in retail work?? it depends a lot on IT..we need a lot of investment into technology building...US retailers have all their warehouse handling's all manual labor in India..we need to improve..

And how is the money for so much of investment going to come...FDI for sure...

nidhi kamath said...

just read this article thanks to a link on twitter.

its an excellent summary which proves we dont need fdi in this area.

as for the previous coment, the reader seems to think india is still in the dark ages and cant do anything without foreign help!

does he know our management capabilities and financial power? ppl and businesses also have money flowing out from their ears and dont need walmart or tesco money.