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FDI in retail and Left's hypocrisy
A V Rajwade
 
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October 24, 2005

In the context of the debate about FDI in retail sector, I had argued last week about the benefits of encouraging its transformation into an organised industry. There are a few other points, too: a number of new jobs will be created, far better paid than the underage labour we still see toiling in small shops.

Circulation of black money and tax evasion will be curbed as big employers, as distinct from owner-managed chains, will have to keep proper records. The benefits to the producer and consumer through better prices, and through lesser wastage throwing up exportable surpluses, will also benefit the economy as a whole.

Does India need FDI in retail?

I had ended the article with a question: do we really need FDI in retail trade apart from the entry of the domestic corporate sector? To my mind, the entry of foreign players will not only help improve the systems currently being employed by the Indian retailing chains, but the increased competition for both supplies and consumers will help improve prices at both ends of the spectrum.

If you look back over the inflation experience of the past 50 years, one thing is abundantly clear: with the abolition of industrial licensing, competition amongst manufacturers has ensured that inflation in prices of manufactured goods remains modest.

Indeed, if we have entered an era of lower inflation than the erstwhile average of around 8 per cent, it is, perhaps, not so much because of a far wiser or tighter monetary policy but because of competition keeping price rises in check, even at a time of high commodity prices and low real interest rates that horrify policy makers of an earlier generation.

This is true not just of the manufacturing sector. Take services: thanks to competition, we have the world's cheapest and quite efficient mobile telephone network. The competition in airlines has led to the middle-class entering the rarefied atmosphere of air travel on its own and not at the employer's cost.

Even in the US, Wal-Mart, the world's biggest retailer, known for its "everyday low prices" policy, is credited with keeping inflation low. Clearly, efficient distribution and retailing has an inflation dimension.

The hollowness of the anti-FDI argument is also underscored by the fact that no Leftist voice has been raised against the attempts that our oil companies are making to enter retailing in other developing countries.

The logic seems to be that what we do is virtuous but would not like others to do it. We applaud Indian restaurants capturing the palates of the world; simultaneously, we do not like McDonald's or Pizza Hut or Pepsi to come here. This attitude represents either confused thinking or hypocrisy.

Ostensibly, the Leftist opposition is based on the apprehension that the entry of foreign majors in organised retailing would render many unemployed in the existing distribution system.

While this concern is somewhat out of tune with the Left's traditional contempt for the bourgeoisie, which owns much of retailing, it has nothing to do with whether the retail chains are foreign or Indian-owned.

When will we learn that if a foreigner makes money here, that does not necessarily mean that we lose, and that growth and development are not a zero sum gain!

Balance of Payment data and the exchange rate for the first quarter of the current fiscal year were released by the RBI on September 30. The existence of large reserves and continued inflow of capital seem to have blinded us to what seems to me to be a dangerous deterioration in the current account, which has turned adverse by $9.6 billion in just one quarter (Q1 over Q1).

If similar deterioration continues quarter after quarter over the fiscal year, we could end up with a current account deficit of, say, $45 billion or almost 6 per cent of GDP!

From another perspective, projecting the first quarter's changes in exports (22 per cent), imports (63 per cent) and net invisibles (12 per cent) into the last fiscal year's data (that is, data for 2004-05) yields an even more horrendous current account deficit of almost $60 billion (trade deficit over $90 billion), or even worse than that of the US as a percentage of GDP! And there was nothing extraordinary in Q1.

Granted that such a straight-line projection is not logically rigorous, these are frightening numbers by any standards. And, this deterioration is not only because of the high oil prices -- non-oil imports in Q1 have grown almost 80 per cent, much faster than oil imports. In any case, there are few prospects of a drop in the oil price.

Overall, one is surprised that commentators like Abheek Barman (Times of India, 9.10.05) and Swaminathan Iyer (Economic Times, 12.10.05) are advocating an appreciation of the rupee. Basing the strength of a currency on capital flows is a dangerous folly - ask the Mexicans and the south-east Asians.


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