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LATEST NEWS UPDATES | FDI in multibrand retail will not further reform agenda-Manoj Pant

FDI in multibrand retail will not further reform agenda-Manoj Pant

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published Published on Jul 13, 2012   modified Modified on Jul 13, 2012
-The Economic Times

The crisis of the euro, a current account deficit of over 4%, double-digit inflation, corruption in governance and a failing political system. It would not be unfair to say that these factors have combined in varying degrees at different times to lead to the conclusion that the globally-acclaimed India growth story seems to be heading for an unhappy ending.

Many have labelled this - unfairly, I think - as India's second crisis comparable to 1991 when the reform story began. Backed by the media, the economic reformers have argued that much of this is due to the 'incompleteness' of the 1991 reforms. Many have argued that this crisis should be used to take reforms forward. 

The direction? FDI in multi-brand retail and pension funds, the general goods and service tax and the Direct Taxes Code. In this article, I will focus on multi-brand retail. This has been in particular focus because, presumably, permitting FDI in retail trade will improve the unfavourable investment climate. I will argue here that while it is true that economic reforms have been incomplete, FDI in retail trade is no solution, and is only a symptom and not the cause of incomplete reforms. 

To tell my story, it is necessary to start with the economic reforms of 1991. The background of the balance-of-payments crisis is well known. The main objective then of reforms was to eliminate the administrative shackles of the licence raj. How this was achieved is crucial to understanding the story I am trying to tell. What were the main features of the 1991 reforms? It is useful to do a sectoral check. Here, the main sectors where reforms took place after 1991 were the external sector, industry and the financial sector. 

In the external sector, the two principal steps taken were to reduce tariff levels and to free the exchange rate from administrative control. In the case of tariffs, a system of quantitative, or administrative, restrictions was replaced by equivalent tariffs that were then progressively reduced under WTO agreements. In the same way, administrative restrictions on exchange rate movements were removed as the rupee was allowed to devalue in stages over the following years. 

In the industrial sector, the major change was the Industrial Licensing Policy, 1991, which removed administrative control of production, the licence raj, enshrined in the 1957 policy. In the same vein, external competition was encouraged via foreign direct investment (FDI) that was given preferred status vis-a-vis portfolio investment. Finally, financial sector reforms took the form of the broadening of the market for equities and opening up the state-owned banking sector to competition from both foreign and domestic banks. 

Since 1991, then, reforms have taken the form of further decontrol along the lines indicated above. The most crucial feature of these reforms was that they only required legislation by the central government. And herein lies the problem. 

The major sector left out of the reform process was the agriculture sector. This is true whether one talks of corporate links to farmers, reform of the antiquated government purchase system (the APMC Acts), land-use issues and so on. This was because while the other sectoral reforms could be blamed on an uncaring central government, agriculture was a state subject. Since legislators are voted in at the state level, any reform in the agriculture sector could have major political implications. Some reforms were necessary. But who would bell the cat? 

Now consider FDI in multi-brand retail. The main argument is that it would lead to creation of storage facility for food grain so that the current 40% wastage in government facilities would be ended. This would also increase market supplies and, hence, help in combating inflation. However, it is not clear why the domestic players in multi-brand retail have not developed these facilities - if profitable - over the last decade or so, and why foreign investors would suddenly jump into this high-cost activity. The ability to buy food grain for stocking would also be stymied by state APMC Acts - still applicable in most states - whereby private buyers are pre-empted by government managers as grain can only be sold in designated outlets. There is the additional problem of a ban on inter-state movement of food grain. But removal of these bottlenecks requires major reforms in the agriculture sector and this is the domain of state governments. 

The bottomline? It is necessary to remove administrative controls on the agriculture sector that today benefit only the large (politically well-connected) farmers. As in the other sectors, this will create the economic conditions whereby issues like FDI in multi-brand retail will find less political resistance. The Indian growth story rests on its demographics and is alive and kicking. To argue that this needs FDI in multi-brand retail or sectors like pension funds to kick-start is poor understanding of macroeconomic fundamentals. 

(The author is faculty at JNU)

The Economic Times, 13 July, 2012, http://economictimes.indiatimes.com/opinion/columnists/manoj-pant/fdi-in-multibrand-retail-will-not-further-reform-agenda/articleshow/14858959.cms

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