If pronouncements by the commerce minister are anything to go by, November 2011 is a watershed moment comparable only to 1984, when Rajiv Gandhi took the visionary step of liberalising large parts of the economy. The comparison seems contrived since the current situation is riding on Cabinet approval for just one policy change — allowing 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent in single-brand retail.
The government even released advertisements in newspapers to remove the so-called “misconceptions”. The script writers of the policy and advertisement seem to have gone to the school of “orbital dialogue,” perpetuating more myths than those opposing it have managed. Unfortunately, there is smoke and mirrors on both sides of the debate.
The minister is reported saying four million jobs will be created in three years by opening up FDI in retail. Even assuming FDI in retail will immediately lead to mega-investments, the current reality tells a different story. A review of existing organised retailers show a turnover in the range of $15 billion to $18 billion, leading to the creation of about one million direct and indirect jobs. This implies that FDI retailers need to generate $60 billion of turnover in India by then. That could be 40 to 50 per cent of the total retail market in 53 cities with over one million population they will be allowed to operate in, sounds preposterous does it not? Even if my estimates are 50 per cent off the mark something is hopelessly amiss in the government’s projections. I would hazard a guess that in three years it would be a Herculean achievement if FDI leads to the creation of even 0.3 to 0.4 million net additional jobs.
At the same time, contrary to the view of those opposing FDI, it is also unlikely that there will be large-scale extinction of the kiranas or small stores. The truth is that there is little clarity, since global experience with opening retail FDI in different countries has been mixed and the degree of future impact extremely difficult to assess. The logic that multinational retailers will not invade the turf of the local kirana is also misplaced since significant consumer spend takes place in the neighbourhood stores. Over time, the multinational retailer will want to capture this by setting up neighbourhood stores and not be confined to suburban hypermarkets.
Over the past year, we were being told of how FDI would help lower persistent food inflation, this is now being tempered and caveats introduced. The government now says Agriculture Produce Marketing Committee (APMC) Act that states the use to control procurement and distribution of agricultural produce is one of the key culprits impacting food inflation. Poignant appeals are now being made by the Centre to the states to amend the APMC Acts. Why has expedient action in amending APMC Act become contingent on the decision to allow FDI? Is the government inadvertently saying that, despite knowing all these years that the APMC Act led to inefficiency resulting in higher prices for the citizen, they did not see the urgency to amend the Act? Would the reduction in prices due to the repeal or amendment of the APMC Act not get conveniently projected as the result of FDI?
The much-touted logic of increased remuneration for the farmer is also tenuous. To quote from an article by Professor Janat Shah of IIM Bangalore, an “empirical study using US data has shown that the farm value share of consumer expenditure for domestically produced farm foods has steadily declined from 33 per cent to 21 per cent during 1970 to 1994. According to a European study, the real farm producer price index of total farm production fell by 27 per cent over the period 1990-2002”.
The other norms – a minimum investment limit of $100 million, 50 per cent of it in backend systems and so on – are just smoke and mirrors. The $50 million backend infrastructure investment by an FDI player in the food retail business is so negligible that it is unlikely to lead to any serious investment in the cold chains or agri-supply chain needing billions of dollars.
The government also seems to have tied itself up in knots over the much-touted 30 per cent procurement norm from small and medium enterprises (SMEs). It now appears that the retailer is not bound to source this from Indian SMEs! Other riders like limiting operations to towns with one million population are enablers rather than riders; almost 50 per cent of the national urban disposable income resides in these 53 cities and no FDI retailer wants to go anywhere else for now.
We are told that the proposed FDI norms are the outcome of careful calibration. This begs the question: Of what? An opportunity to evolve a unique Indian approach to FDI in retail, creating resultant backend benefits in agri-supply chain has possibly been missed. There is no denying we need large doses of investment and technology to improve our relatively inefficient agri-supply chain. If our policy makers are convinced that the only solution to attract this investment is contingent on opening FDI in food retail, we could have evolved different norms. A differentiated FDI policy that would necessitate food retailers, as distinct from others, to bring in a much higher level of FDI investment, commitment to backend investment of, say, $500 million to $750 million over a five-year or reasonable period could have been considered. This would eliminate non-serious players and attract only those with significant capital and expertise in this sector. It would not allow an FDI player to experiment with low front-end investment in food retail without making a strong financial commitment in backend infrastructure.
Those exulting about the near-term transformative impact of FDI in retail seem to mostly be promoters of existing domestic organised retail chains or those with an economic interest in the arrival of multinational players. The former, creaking under mounting losses are the likely immediate beneficiaries with possible divestments of their shareholding and creation of joint ventures helping them extract value for themselves. Alas, the much-touted benefits to the average farmer or consumer seem far removed from the picture.
The author is a Bangalore-based independent corporate advisor
