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.