By SRIPARNA PATHAK
The current policy in India on foreign direct investment (FDI) in multi brand retailing is permissive of 51 per cent of FDI. While debates rage on the pros and cons of increasing FDI in multi brand retailing in India, a number of studies point out as to how successful FDI in multi brand retailing has been in China, with the mention of Wal-Mart and Carrefour finding a definite place in such studies. Agreeably China is also a developing country, which started its process of reforms and opening up not too far back in 1978. But the conditions prevailing with particular respect to the levels of development are different in India and China. In order to better understand whether FDI in multi brand retailing has been in China or not, it is essential to take a brief look at the Chinese experience.
Historically, China has a vast and fragmented retail sector, and it took more than 12 years to liberalise its FDI regime. The first time that FDI was allowed in retail was in 1992, at 26 per cent. Global retailers like Wal-Mart, Carrefour and Tesco among others eagerly entered the market. In the initial years, foreign retailers were allowed to open only in select metropolises, and even within metropolises like Beijing and Shanghai, foreign retailers were allowed to operate only in districts where there were no local competitors. Through these measures, protection was provided to local retailers. Ten years later, in 2002, FDI in retail was raised to 49 per cent. It was only in the year 2004 that 100 per cent FDI in retail was allowed. By this time, ‘Made in China’ had already taken concrete shape.
In fact, even till date, the top five local retail chains in the country are dominated all of Chinese origin. The success of local retailers was enabled by the government which controlled the speed of the process of opening up, which provided local retailers with enough time to adapt. What FDI in retail did was that it led to a rapid increase in small outlets from 1.9 million to over 2.5 million since the liberalisation of the sector in 1992, and this doubled the employment in both retail and wholesale. As the manufacturing sector took off in the country because of special economic zones, tax incentives for foreigners and subsidies, suppliers began serving retailers such as Wal-Mart. In fact in 2010, as many as 15,000 Chinese suppliers were serving Wal- Mart and the company expanded its presence to 352 super markets in 130 cities across China. The concerns over local suppliers losing out automatically got addressed because of the manufacturing capabilities of the country.
The most important advantage of allowing FDI in multi brand retailing would be the elimination of intermediaries between the farmer and the consumer, in the form of retailers and sub retailers. In prevailing circumstances, the farmers sell their produce to the first intermediary and receive only one third or one fourth of the price paid by the consumers. The intermediaries add up their profit margins, hiking prices for the consumers who have almost no choice but to buy at the stated price. The Chinese experience shows that consumers actually benefit when options in the form of Suning or Carrefour for that matter are introduced in the market.
However, the Chinese experience in this sector has not been free of problems. According to several Chinese activists and academics, problems exist in the form of low wages, gender based discrimination, worker intimidation, unpaid overtime etc. Several workers from across the country have filed cases in local courts against several of these foreign retail giants. Economist Kenneth Stone who surveyed Iowa during Wal-Mart’s beginnings in the 1980s found out that local businesses were knocked out. According to Stone, between 1983 and 1993, Wal- Mart opened around 45 stores in Iowa, and the state in that period lost 555 grocery stores, 88 department stores, 298 hardware stores, 444 apparel shops among others. A loss in jobs was also witnessed. This is the impact that is caused as a result of the elimination of intermediaries. What needs to be kept in mind here is that an income reduction will be witnessed as a result of the displacement of small local businesses.
In India, which has followed a peculiar pattern of economic development, in which the shares of the services industry to gross domestic product (GDP) increased before the shares of the manufacturing industry could rise, a bleak scenario exists in case FDI in retail is increased. India, unlike China does not have a strong manufacturing base. India has only recently launched the ‘Make in India’ campaign and the bases for unleashing the prowess of manufacturing are not as strong as they were in China in the 1990s. A knock out of local businesses will only lead to more unemployment and decreasing levels of income. Additionally, as has been observed in most of the Wal-Mart shops in Beijing, most of the products sold are ‘Made in China’. When India is attempting to unleash its manufacturing potential, any outlet selling more Chinese goods in the Indian market, which will be cheaper than the domestically manufactured products, is not good news. This in fact will lead to dampening whatever little prospects there are of the ‘Make in India’ campaign. India, like China could first ensure that it has a strong enough manufacturing base, which will enable it to protect domestic players, and then it can think of permitting increased levels of FDI in the retail sector. Till the bases are not created, FDI in retail will only prove to be hazardous to the Indian economy on the whole, and no imagined benefit associated with FDI in multi brand retail will materialise.
(Dr Pathak is Associate Fellow at Observer Research Foundation, Plot Number II, D/18, Major arterial road, Action Area II, New Town, Rajarhat, Kolkata, West Bengal, Pin Code 700156, India)