Monday, November 28, 2011

Why I am against FDI in retail

So a lot of hue and cry is currently being raised about the entry of foreign players like Walmart in the Indian multi-brand retail sector. This would become possible by allowing 51%FDI(Foreign Direct Investment)which is at the moment limited to 25%.

I would, in this post describe my reservations against this move. Before I go on, let me assure you that I think my economic views are quite moderate. That said, I am still strongly against this FDI in retail for the following reasons:

Here are the arguments presented by the proponents and their critique

1) FDI will help farmers by creation of back end infrastructure like supply chains and cold storage: While it is true that big retail would invest a lot of money in supply chain etc. but the question is for the benefit of who? In the west(or at least in Canada) that supply chain is mostly used to import bananas from Ecuador, apples from New Zealand and so forth) Essentially the supply chain is used to import goods from ultra cheap industrial scale farms all over the world (since it's so damn efficient and causes such a huge carbon footprint). To buy local food one needs to go to China town or other locally owned stores so obviously am not able to see the benefits this supply chain will have for local farmers in India. Essentially if a region has a bad crop and farmer is expecting to get compensated by higher prices this will not happen since the 'efficient' supply chain will enable stores to import cheaper produce from elsewhere.

2) Consumerism: It is often touted by businessmen that they are simply feeding the demand of the population. We know from observation that this is simply not true. Businesses create demand, Advertising makes us want to buy things. India is a growing economy and needs to decide what kind of development it really wants. We are already witness to the effect of consumerism on rural India a stark example of which is farmer suicides. Distinguished historian Ramachandra Guha points out the psychological impact consumerism has had on the rural farmer which looks upon himself as a loser in this quest for glamour. He points out that farmers in India have always been on the brink but they were not killing themselves in the past.

I know that disparity is inevitable, especially in a high growth economy. It will grow before it comes down. But we don't have to make it so in your face that a large part of the population feels like a loser.

The point I am trying to make is that the social engineering capability of a 400 billion dollar company like Walmart is many times more than Kishore Biyani. The socio economic impact it may have on an already volatile society where a large number of population is extremely frustrated can be disastrous.


3) Efficiency may not always be good: Economists would know that while efficiency will definitely increase GDP it also creates a more efficient way to deliver the profits to the top. The argument that big retail will create more jobs is simply absurd. How is it supposed to be efficient if you say you will employ even more people per square feet (one economist pointed out) than the corner stores.

4) What economics misses: Economists count well being by the number of good you buy, they are not concerned whether you actually needed that product or not. For an economist a $10 box of cigarette is better than a $4 cup of coffee but common sense tells us this defies logic. So why promote an industry which will make Indians buy things they do not need albeit at a lower price. I am all for lowering import tariffs, let Starbucks in India, let us not pay 300% duty on french wine. In fact single brand retail is just fine, but we simply do not need Walmart in India.

The job to create supply chains, efficient taxation to facilitate interstate movement of trucks, devolution of better technology to farmers cannot be outsourced.

Let there be FDI in infrastructure, technology, manufacturing but eating MTR ready to eat packages (because you can get 10 for a cheap price at Walmart and the packaging is attractive) instead of home made dal is not going to help anybody's cause even as it enhances our GDP.

The change that big retail creates in consumption habits of people is simply not healthy regardless of efficiency.