A Bumpy Ride for FDI

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Indian politics and media in the latter half of 2012 put FDI in retail on center stage. The reasons were quite vivid. In a show of audacity, the United Progressive Alliance government has decided to further open up the retail trade sector to foreign investment. Foreign investors will be permitted to enter the hitherto prohibited multi-brand retail segment and hold equity of up to 51 per cent in the units established. Other sectors to open up FDI in India are Aviation, Pharmaceuticals, Insurance and Pension.

Two sides of the coin

Facing the threat of having its credit rating downgraded to junk, the Indian government has been running out of time to show it is serious about fixing an economy that has been hard-hit by a global economic crisis and political gridlock at home. Finally, despite all the opposition and without having the consensus of alliance, UPA opened up the gates for the foreign companies in a desperate attempt to save the sinking economy. This move is nothing short of a declaration that UPA would proceed with implementing its agenda of economic reform, irrespective of whether there is majority support for, let alone a consensus on, that agenda.

The claims that FDI will bring in loads of employment and solidify the looming economy are contrary to the fact that the immediate and direct effect of FDI would be a significant loss of employment in the small and unorganised retail trade which would be displaced by the big retail firms. Prices paid to and returns earned by small suppliers, especially in agriculture, would be depressed because a few oligopolistic buyers dominate the retail trade. Moreover, once the retail trade is concentrated in a few firms, retail margins would rise, with implications for prices paid by the consumer, especially in years when domestic supply falls short.

Even if the postulations made by the UPA government turn out to be true, as vivid from the fact that India’s foreign direct investment inflows grew by over 65% year-on-year to $1.94 billion in October, according to the Department of Industrial Policy and Promotion (DIPP), yet the scenario won’t turn around overnight.

Hurdles in the way

The decision of implementing the FDI has been left to the states and most of the states have already rejected the concept as whole. Due to such strong opposition, most of the organizations have decided to wait till the clouds of mystification disperse and the scenario becomes clear for investment.  Even after the state’s blessings, which is unlikely to happen in most of the cases, large retailers would need to acquire large swathes of land in prime areas, which is a monumental task. Secondly, companies like Walmart are able to reap supply-chain efficiencies in the U.S. because of a strong infrastructure. The same thing can’t be said of India. Thirdly, taking into account that Indian consumer is a very complex persona, organized retail seems to be a small fish that would neither threaten the livelihoods of “kirana” shops, as portrayed by the Opposition, nor restore the financial health of the nation, as hoped by the government.

The road for FDI turned out to be quite a rough one in India. Whether it was inside the parliament or outside it, the issue turned out to be a centre stage for all the controversies. The step to let FDI in multi-brand retail didn’t go down well with Opposition parties and erstwhile UPA ally Trinamool Congress, which decided to withdraw support from the government over the issue and others, including hike in diesel prices. The issue stalled proceedings of Parliament till the government agreed to a voting on allowing of FDI in multi-brand retail that it managed to win, thanks to the abstention of Samajwadi Party and Bahujan Samaj Party.

Just when the government thought it was done with the issue, Wal-Mart’s disclosure in the US that it spent close to $ 25 million since 2008 on its various lobbying activities, including on issues related to “Enhanced market access for Investment in India”, created furor again. The company, however, stressed that it did not pay bribes to anyone in India. It was IKEA that made news continuously in the single-brand segment. The Scandinavian retailer wanted the government to relax the clause for mandatory sourcing of 30 per cent from MSMEs. After months of dialogue, the government relented and relaxed it for single brand segment which seems to be a favor done to IKEA.

On one side exist the exaggerated claims made by the government that FDI will be beneficial for the economy as well as common man and on the other side stands the small retailer who is genuinely worried about his livelihood supported by the opposition. Now that the foreign retailer have been granted a foothold in the market, only time will tell if the arrival will kill the neighborhood kirana stores or they will co-exist.