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FDI in retail must be allowed

February 24, 2005 13:26 IST

At present, foreign direct investment (FDI) in pure retailing is not permitted under Indian law.

In 1993, the then finance minister Dr Manmohan Singh had changed the law to permit FDI in retail trade. Dairy Farm, a multinational corporation entered India on that opening. But, the next finance minister, P Chidambaram, to curry favour with the Communists in the then United Front government, changed the law again in 1996 to ban FDI in retail trade, but as with every Indian law there is a loophole by which foreign retailers can (and some do) operate in India through local franchises.

Now, in 2005, the new United Progressive Alliance government is grappling with same question whether or not to permit FDI in retail trade, but with the same ministerial personnel in a Congress party musical chair circus!

What is then the answer to the question: should FDI in retail trade continue to be banned?

The answer is obviously 'no,' especially, after the World Trade Organisation's Doha Round of talks. The WTO mandate now requires that India lift the ban or face WTO's 'cross-retaliation' measures, such as withdrawal of tariff and trade privileges that are available to India under the new General Agreement on Tariffs and Trade.

The cost of continuing with the ban is therefore prohibitive and, in any case, much more than what the Leftist and bogus Swadeshites claim as the consequences of lifting the ban. A cost-benefit analysis clearly points to saying 'yes' to FDI in retail trade.

The Leftists and Swadeshites in India have been continuously crying wolf about foreign goods and funds. They are however ready to accept that foreigners can guide their ideology (e g, Karl Marx) or that foreign doctors may do their heart by-pass or knee replacements.

Some of them do not even mind if foreign-born guide the Indian political destiny. But to allow foreigners as shopkeepers in India? Never, they say!

The track record of crying wolf of these Leftists and Swadeshites is pathetic. In December 1990, I had as Union commerce minister led the Indian delegation to participate in final Uruguay Round to consider the new GATT draft.

I had announced then that India would sign the new GATT agreement after the Dunkel draft was adopted. There was howl of protest in Parliament from the Left and those with Socialist or Swadeshi pretensions. India would become a colony again, agriculture would be laid barren and industry wiped out, they warned.

Moreover, the 'yellow peril' would sweep the nation through cheap batteries and electronics. The scare created in the media was stupendous.

But in the end did the worst happen? On the contrary, during the ten years since the signing of the new GATT, thanks to private initiative, India has become an IT superpower. This was made possible because of foreign funds seeking research on the Y2K problem.

The Indian pharmaceutical industry is on the way to dominating the world and our biotechnology is blooming. Moreover, Indian youth manning telephones have outsourced out of the Untied States so much that it is the American who is now worried about globalisation.

If instead of shooting ourselves in the foot in pathetic self-pity as we did during the last ten years, if instead the Union governments that have come and gone had spent money on R&D, and concentrated on providing world-class infrastructure and modernisation of food processing and textile industry, India could have become a developed country by 2010, instead of having to wait now till 2025 or later.

India can become a giant in a short time span in food processing and textiles, for which we have the potential because Indian agricultural production is the lowest cost in the world, and textile labour is the cheapest internationally.

Allowing FDI in retail trade, especially in groceries and garments marketing, is one sure way of doing it. Food processing and textiles will grow very substantially from the linkage effects of a modernised, globalised retail trade that only FDI can ensure. The employment generation for Indian youth would also be enormous.

Indian retail trade is of enormous size ($180 billion), nearly 10 per cent of GDP, employing 21 million persons, which is about 7 per cent of the labour force. It is six times bigger than Thailand and five times larger than South Korea and Taiwan. China's retail trade is 8 per cent of GDP and 6 per cent of employment.

But the trade in India is fragmented, unorganised, unnetworked, and individually small. The 12 million kirana shops, are mostly family or 'ma-pa' owned, with little capital for expansion or credit to receive or to extend to consumers.

About 96 per cent of these shops have 500 sq ft or less of space with limited stock or choice to offer. During all these years, instead of shedding tears for indigenous trade and resisting FDI, had the government declared it an industry, it would done the trade a world of good. Now it is being said that allowing FDI in retail trade would destroy this commerce! Will it?

A study by the Associated Chambers of Commerce of Industry of India, New Delhi, concluded that at least for the next ten years that will not happen. Thereafter, the present fragmented system may get phased out or evolved into more integrated networked units.

This is already happening without FDI. For example, ready-made garments have displaced the family tailor (but not tailoring), horse buggies or tongas have made way for the automobiles (but not reduced travel), and dharamshalas have been replaced by hotels (but not the cuisine).

Labour has been retrenched, but re-tooled and made more productive. That is what happened with development in Thailand, South Korea and now in China.

Thus we cannot allow the way we do things to remain frozen just because of the paranoia of the Left and Swadeshites. We need a rational approach toward FDI in India's retail trade; in particular, how after it is permitted free access, it is subject to regulatory supervision.

Modern retailing is designed not only to provide consumers with a wide variety of products under one roof, but also of assured home delivery and information feedback between consumers and producers. A modern retail outlet will also make it easy to buy on credit and provide for servicing and repair of products sold.

With IT application, the modern retail store can cut transaction costs such as due to inventory, delivery and handling. That is precisely how the US based Wal-Mart grew to be a giant because it reduced its distribution costs to 3 per cent of sales compared to 4.5 per cent of others.

With MIT Professor Sanjay Sarma's epochal innovation of RFID (radio frequency identification), which will do away with cash registers and clerks who are required to operate it, Wal-Mart will further reduce its costs.

Wal-Mart had entered the Chinese market a few years ago (in 1996). Now it wants to enter India and bring FDI to set itself up to network in India. As usual, the UPA is dithering on how to react because it is a coalition placed between a rock and quicksand. The WTO mandate is the rock, while the Left Front is the quicksand.

India is today the only major economy that still does not permit FDI in retail trade. In China, 35 of the world's top 70 retailers have already entered and set up business. They have helped boost exports. Wal-Mart alone exported in 2002 about $12 billion worth of goods. These retailers source their goods from inside China.

India is targeting for its GDP to grow by 8 to 10 per cent per year. This requires raising the rate of investment as well as generating demand for the increased goods and services produced. Exports is one way of generating that demand. Encouraging private consumption expenditure is another way.

Both these can be facilitated by allowing market-savvy, market-intelligent and best management practices, through corporations such as Wal-Mart, Carrefour, Ahold, JC Penny, et cetera to enter India.

These retail giant houses can bring their better managerial practices and IT-friendly techniques to cut wastage and set up integrated supply chains to gradually replace the presented disorganised and fragmented retail market. According to McKinsey, India wastes nearly Rs 50,000 crore in the food chain itself. These international retail outlets can help develop the food processing industry which requires $28 billion of modern technology and infrastructure.

As India's urbanisation grows, these modern food delivery systems are required. Foreign companies want to come in, and we need their money and techniques to prepare our transition to the inevitable globalised market of the future.

FDI in retail sector has been a key driver of productivity growth in Brazil, Poland and Thailand. This has resulted in lower prices to the consumer, more consumption and higher profit for the producer.

FDI in retail trade has forced the wholesalers and food processors to improve, raised exports, and triggered growth by outsourcing supplies domestically. The availability of standardised products has also boosted tourism in these countries.

Hence, time is now for us to shake off the last vestiges of Soviet-style socialism and comply happily with the WTO mandate to permit FDI in retail trade. The Indian consumer and the poor farmer will be the two biggest gainers from it.

Dr Subramanian Swamy served as minister of law, commerce and justice in the Chandra Shekhar government. A former professor of economics at Harvard, he is also president of the Janata Party.
Subramanian Swamy