FDI in multi-brand retail in India - A blunt body blow

By Shekar Swamy,

Group CEO, R K SWAMY HANSA and Visiting Faculty, Northwestern University, USA.

The views are personal.

The big boys of global retail must be readying the champagne. The Indian corporate sector with investments in retail is rejoicing at the prospect of the deals they can be doing shortly to shore up their balance sheets. At the time of this writing, the government which has been talking about an ‘inclusive’ agenda for growth is about to deal a body blow to the small traders and the entire retail and distribution chain, by allowing 51% foreign direct investment in multi-brand retail. This will be a huge mistake that the country will pay for over time. For the present, the government can claim that it is on track with its “reforms” agenda and that is all they seemed to be concerned with for now. The manner in which the policy is outlined is itself a dead giveaway that the policy makers are well aware of the pitfalls. They are declaring that this is a policy designed to support big capital and the predatory multinationals in retail. The policy states in action that the government is not concerned about the interests of the small and medium businesses in the millions that will be adversely affected. Let’s look at what has been outlined and what it means.

1. Foreign retailers will have 51% equity interest. This means they can control the Indian operations and consolidate the financials with the parent company. All kinds of transfer pricing will be possible which will not be transparent in India. Investments can be made without accounting for losses in the parents’ books, in the year incurred (it can be classified as investment in the books for a period of time). This opacity is what big companies seek all over the world. They can lose money for years and decades, and call them “investments”.

2. The minimum amount fixed for foreign investment is $100 mn … over Rs 500 crs at today’s exchange rates. By definition, the policy is designed in favour of the big guys. In reality, the big foreign retailers will invest billions to take over a ready market, as they have done in other countries. With global sales in the hundreds of billions of dollars, and with unlimited access to capital, even the sky is not the limit for what they can invest. The small Indian retailer and wholesaler and trader will simply be swept aside by their money power. Just consider this. As they build scale, the foreign retailer can go into any mandi or market and buy up the entire supply of whatever is available there. All those dependent for a living as participants in the supply chain will be rendered jobless. Money power will enable the big foreign retailer to set the price at which they will buy. It will enable them to hold and sell at any price they want. This will be the exact opposite of what is in place today.

3. The foreign retailer can purchase locally all agricultural produce, including fruits and vegetables, pulses, fresh poultry, fishery and meat products, and sell them unbranded in their stores. They can virtually corner the market and trade in these products. If in a local region in India this trade is served by tens of thousands of small people, they will be replaced by giant retailers with money power. What the small trader will do when his livelihood is taken away appears not to be a concern of the government.

4. The policy says that at least 50% of the investment must be in “back-end infrastructure”. What constitutes “back-end infrastructure” is not defined (not seen in the media so far). Perfect, says the foreign retailer. They will have to invest in infrastructure in any case. They will set up their own warehouses. They will have their own fleet of trucks. In India, lakhs of small truckers and owners of LCVs make a living moving agricultural produce. To the extent the big retailers take this over, this avenue of making a living will be closed.

5. The policy recommendation stipulates at least 30% of the procurement of manufactured and processed products should be sourced from “small industry”. Such a concession is made precisely because policymakers are aware that small industry is under threat. What is lost in this is the fact that Indian retail trade sources far more than 30% currently from small industry. So this is no concession. Small industries will suffer a massive loss of access to the consumer and market.

Further such a stipulation cannot be implemented. The game of the big foreign retailer is one of building scale and fixing large sources of supply. How will the small supplier cater to them? How will the government ensure this happens? There is no clarity on this.

6. All compliance is supposed to be through self certification of the foreign retailers. They are supposed to maintain all records. In reality, what is the method to monitor them? So this process of self certification is touchingly naïve. The Indian government that views all Indian businessmen, companies and traders with a huge dose of distrust is quite happy to repose its trust with a bunch of big foreign retailers who are involved in hundreds of litigation issues all over the world. Why this faith in companies whose track record the world over is hardly clean?

7. The policy states that retail locations should be restricted to cities with one million plus population. This is to protect the smaller cities and rural areas from the predatory practices of the foreign retailers. This shows that the policy makers know and understand the implications. They are sacrificing the small retailers in the cities with full knowledge of the consequences.

8. The government is retaining the first right to procure agricultural produce. This is hardly a policy. Such a right exists with or without stating it. It is an admission that things can go wrong, if foreign retailers end up controlling the nation’s food supply chain. This misses the point to a large extent. Even if the government keeps the right to procurement, but if the distribution channels are controlled by foreign entities over time, the nation’s interest is still in jeopardy.

The government is playing with the lives of millions of small people. It is remarkable that a government that talks the language of “inclusive growth” is sacrificing the aam aadmi to support big foreign capital. As the old observation goes, it is not what they say but what they do that reveals the true colours.