From Local to Global

Had the government proposal not run into a buzzsaw of opposition, foreign investors might have given India’s retail industry a jumpstart. The government tried to limit the potential impact on at least 20 million traders by limiting the big-box stores to cities with more than 1 million people, allowing state governments the right of refusal, mandating that 30 percent of manufactured and processed products come from small domestic suppliers, and requiring foreign investors to invest at least 50 percent in backend infrastructure, explains Nayan Chanda in his regular column for Businessworld. The plan would have eliminated waste and curtailed India’s distributors who extend low prices to famers and mark up prices for customers in cities. Foreign investment in retail would not eliminate rural poverty, but modernizing operations can reduce prices and give customers greater choice. The exchange was not one-sided, Chanda notes. India could be missing a chance to unleash a multiplier effect in farmers’ wages, IT, infrastructure and a strengthened supply chain as well as introduce their own skills and products to major foreign retailers. – YaleGlobal

From Local to Global

FDI in retail is not a magic wand to remove India’s rural poverty but a study proves that it would help retailers grow
Nayan Chanda
Tuesday, December 13, 2011

Critics of globalisation in India have long complained how it has left rural India where the vast majority of population live, mired in poverty. Indeed, rural poverty is underlined by the fact that agriculture employs 52 per cent of the country’s workforce, but contributes only 17 per cent of the GDP. But when the government finally announced plans to usher rural India into the modern age it was forced to backtrack in the face of a firestorm. Traditional Left critics, opportunistic right-wing opposition and vested interests blocked the planned foreign investment in retail calling it an exploitation by neo-colonial multinational retailers such as Walmart and Tesco.

The BJP, which spearheaded the campaign, had itself proposed FDI in retail in its 2004 election manifesto. The Congress’s coalition partners find it politically convenient to denounce foreign investment as a threat to the livelihood of small traders. In order to limit the impact of big-box stores on 20-30 million small traders, the government limited their operations to cities with a population of more than one million, of which there are just 53 in a country with 600,000 villages. To mollify coalition partners, New Delhi said state governments were free to refuse such investment.

Addressing concerns about the country being flooded by cheap Chinese goods, the government had mandated retailers to procure at least 30 per cent of manufactured or processed products from small domestic industries. All this ring-fencing seems not to have had any impact on opponents who raise the spectre of massive job losses under foreign bulldozers.

Not surprisingly, small traders’ organisations and especially the middlemen who have been the principal beneficiaries of the inefficient retail trade were loud in opposition. While the middlemen mark up rates for urban consumers, paying low prices to farmers, some 40 per cent of fresh vegetables and fruits are wasted due to the lack of proper cold storage and transport facilities. In the most-detailed study on the impact of foreign investment in retail trade in 2008, the Indian Council for Research on International Economic Relations (Icrier), found that FDI would produce “a positive sum game” allowing small and large retail to not only coexist but also grow substantially in size. It concluded that the growth of organised retail will have “a positive multiplier effect on the Indian economy”, in particular investment in IT industries, cold chain infrastructure, and logistics to strengthen the supply chain, while improving farmers’ income. As per the government guidelines, foreign investors would be required to invest up to 50 per cent in back-end infrastructure.

Curiously, China which is often the yardstick of comparison has not been invoked in the debate over FDI. For the past two decades, China has modernised its agriculture and emerged as the world’s fourth largest fresh vegetable exporter by bringing in foreign investment in retail creating what a World Bank economist calls the “Super market Olympics”. Walmart introduced its signature automatic inventory replenishment technique to supply its 200 megastores in China, in the process, connecting its remote provinces to the global supply chain. Seventy per cent of Walmart’s global merchandise now comes from China, where it employs over 80,000 people and several millions work for its 20,000 suppliers.

Of course, introducing foreign investment in retail is not a magic wand to remove rural poverty. If Walmart is allowed into retail, Indian suppliers — whether farmers or manufacturers — will have to deal with Walmart’s cut-throat pricing policy. As presented in the new book Walmart In China, the company achieves its motto of ‘everyday low prices’ by driving down procurement prices in exchange for huge orders. The book quotes Hua, a garment supplier, saying, “It’s hard to make money from Walmart. Because of its size, a Walmart order can help factories keep running, but it cannot make them rich.”

Indian companies awaiting large orders from the giant should be prepared for strict requirements of production deadlines, quality and compliance with its codes of corporate social responsibility. This would anyway have been the entry cost of modernising agricultural and industrial production and retail trade. But for now, the reform is on hold and India’s population continues to grow by 19 million a year — mostly in rural areas.


The author is director of publications at the Yale Center for the Study of Globalization and editor of YaleGlobal Online.

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