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Resource centre on India's rural distress
 
 

The perils of retail therapy in India

-Live Mint

There is no dearth of advisors for a government considered to be in the grip of a policy paralysis and whose prime minister is dubbed an “underachiever”. In this season of India-bashing, US President Barack Obama spared some time from his election campaign and offered some pearly words of wisdom on the Indian economy. This came at a time when in his own backyard, thousands of people marched in Los Angeles on 30 June against Wal-Mart, accusing it of underpaying and exploiting workers. This was followed by marches in other US cities on 2 July, the 50th anniversary of Wal-Mart.  One example of paralysis that Obama specifically mentioned was the government’s inability in opening the retail sector for foreign direct investment (FDI). While our private sector and government spokespersons have not taken Obama’s statement lightly, they do agree that FDI in retail does remain a visible symbol of reforms for a government seen to be reversing the reforms that it started with. Their anger was not against the content of Obama’s statement, but on grounds of nationalist pride.
 
But why has this issue become a symbol of the government’s commitment to reforms, or the lack of it as policy paralysis? Ever since the debate began, FDI in retail has been seen as a cure for all our ills. It will bring foreign exchange, which is important in the face of a rising current account deficit and the falling rupee. It will certainly help reduce inflation by bringing down prices of goods, particularly agricultural produce, thus, obviating the need for any intervention by the central bank. As a result, interest rates will come down and investment will pick up, and we will be back on the path of high growth, away from the current situation of double-digit inflation. Not only that, at a time when the country is going through “jobless growth”—the United Progressive Alliance government having created only a million jobs in its first incarnation—a liberalized FDI regime will create more than 10 million jobs in the retail sector alone. Finally, it will also ensure higher incomes for farmers and help reduce poverty.

So why should one oppose FDI in retail? Primarily, because none of the above assertions are based on facts and is nothing more than wishful thinking. The US is the best place to analyse the role of retail giants on farm produce prices (the prices received by the farmers) and retail prices (prices paid by the consumers). The US Congress commissioned studies in the wake of the spike in food prices in 2008 on the causes of the problem. One of the studies was on the linkage between farm gate and retail prices. The average value of farm share (the share of total retail price received by farmers) declined from 41% in the 1950s to around 35% in the 1970s, and then declined sharply after the 1980s to only 18.5% in 2006. That is, for every dollar worth of food bought by the consumers, only 18.5 cents were received by farmers. The rest was accounted for by advertisements, marketing, profits and so on. This varied across food crops, with a slightly higher share to farmers for eggs and poultry to as low as 8% for cereals and bakery products. For rice and wheat, the price received by farmers was only 19 cents for every dollar worth of these commodities sold in supermarkets. For the record, an Indian farmer gets anywhere between 60% and 70% of the retail price for rice and wheat. The percentage varies, but is upwards of 50% for most of food items, including eggs and poultry.

In real 1982-84 dollars, the total spending by consumers on food increased by almost four times. But the total income received by farmers declined in real terms after reaching a peak in the mid-1970s. So where did the increased spending go? It went to the retail chains as profits. Another interesting finding from the study is on the nature of price stickiness of food items, which seems to depend on the extent of monopoly enjoyed by retail giants. In those markets where the concentration of market power is very high among the retail giants, the markets also exhibit a trend of downward price stickiness (that is, prices adjust upwards, but do not come down even if farm prices come down). So what was the impact of such retail chains on inflation? Data from the Food and Agriculture Organization on food prices does not suggest any evidence that countries with higher penetration of retail giants did any better than those without it. Food prices rose in almost all countries, including the US and Europe.

What about their potential effect on employment in India? An ICRIER study in 2008 estimated the Indian retail market to be close to $409 billion. Compare that with Wal-Mart’s revenue of $405 billion. While for the same revenue, the Indian retail sector employed close to 40 million workers, Wal-Mart employed only 2.1 million workers. The total employment of the top five retail giants together was less than four million, close to 10% of the total employment in the retail sector in India. While it is sure that the total employment created by these retail giants will not be close to 10 million as the government has been claiming, it will certainly destroy livelihoods of millions of workers currently engaged in the sector.

Needless to say, the evidence is hardly conclusive on the lofty promises made in favour of FDI in retail. But more than that, these claims seek to divert attention from real issues of reform required in the agricultural sector. The short cut to containing inflation is not in bringing FDI in retail but in our own existing policies of food-supply chains and archaic laws that govern our markets for agricultural products.