FDI - How good?

The UPA Government announced its policy last week, of inviting big multinational retailers to come and take over the Indian market. Predictably, the pro-lobby that has worked behind the scenes has expressed delight.

Oddly, the words and concerns of the masses who are about to be displaced and adversely impacted have found but a small voice in the media. Remarkably, never before has such a massively disruptive policy been pushed through with such grandstanding deception.

States’ hands are tied

A principal argument of the Government is that this is only an enabling policy and the States can determine if they will issue licences under the Shops and Establishments Act to the multinational retailers to operate within their areas. This is in direct conflict with something called “National Treatment” that the Government has committed to investing countries.

As of July, the Government of India has entered into Bilateral Investment Promotion & Protection Agreement (BIPAs) in order to promote and protect, on reciprocal basis, the investment of the investors. Such agreements have been signed with 82 countries, out of which 72 BIPAs have already come into force and the remaining agreements are in the process of being enforced.

This information is available on the Ministry of Finance Web site (http://goo.gl/nAL7Y).

The relevant clause defining “National Treatment” under this agreement reads as follows: “Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State.”

In effect, what this means is that if a Nilgiris can operate in Chennai, a Big Bazaar in Kolkata or an Easyday in UP, the governments of Tamil Nadu, West Bengal or UP cannot prevent a Walmart or Tesco from opening shop.

If the licence is denied under the Shop and Establishment Act, this can be legally challenged under the BIPA agreements. The entire country, including all State governments, is obligated under the BIPA agreements.

Numbers don’t add up

The government has argued repeatedly that seeking a consensus does not mean seeking full agreement. While this is so, the essence of democracy is that a minority cannot determine policy for the majority. This is what has happened in this case.

Table 1 lists the States, as cited by the Commerce Ministry, which have agreed to open up to foreign retailers. These States represent only 30 per cent of the total population of the country.

The Government clearly does not have the numbers to impose this policy. While the former Finance Minister, now the President, promised in Parliament -- and in effect to the people at large -- that consensus will drive this decision, the action of the government is quite the opposite.

Destroying Markets

Many economists have argued in favour of FDI in retail, citing investment flows and need for deficit reduction, among other issues. All these are short-term considerations at best, and there are many ways to address these.

The fundamental point has been missed. To borrow, and slightly modify, a famous phrase from an American president, “It is the markets, stupid!” The incontrovertible truth is that markets are the principal source of wealth generation and livelihood.

It is precisely for this reason that big global capital will put a major stake on the ground here with a singular focus – to control the markets and eventually dominate it, so that returns can flow copiously and in perpetuity. When this happens, as it has surely happened in country after country, the markets end up serving the interests of a few multinationals.

The opposite is true in India today. Tens of millions of retailers, traders and vendors of all hues make a living off the markets. On the supply side, the markets are serving crores of farmers and other producers by providing ready access. The wealth generation is massively spread out, keeping people employed.

On the consumption side, crores of Indians enjoy ready access to merchandise made available through the most frugal of wholesale and retail channels found anywhere in world. The markets in India serve the people of India.

The global experience is that multinational corporatisation of retail chokes market access on the one hand, and dictates pricing to the consumers on the other.

The locus of market control in the West rests with big retailers. This is the model of Western retail, riddled with problems, that is being unleashed in India.

Anti-young at the core

While the debate rages on with a lot of irrelevant smoke and mirrors, the demographic bulge in India is all but ignored by economists. See Table 2. A massive 300 million people are in the age group of between 16 to 29 years, representing a third of the population above 12 years.

Nearly 100 million are in the age group 16 to 19. Assuming that only one in four of them seeks employment, close to 25 million new jobs will need to be added over the next five years -- that is 5 million new jobs to be created annually.

According to the Survey on Employment and Unemployment by the National Sample Survey Office 2009-10, the Indian economy’s job creation record in the past two years is abysmal.

It is incredible that Retail, one of the prime sources of employment in the country, is being handed out on a platter out to multinationals with their proven record of poor employment generation.

Cure worse than disease

FDI in retail is being brought in supposedly to address issues of infrastructure and to reduce wastage of perishables. In reality, the investments will come to take over the market.

When that is done, the farmers and suppliers can forget easy market access, countless retailers and traders would have been displaced, and the consumers will be paying a higher price. Sadly, the markets will no longer be serving the people.

-------------------------------------------------------------------------------- A system that generates wealth and jobs for millions will be replaced by retail giants with the pricing power to squeeze farmers and consumers.

-------------------------------------------------------------------------------- (This article was published in the Business Line print edition dated September 19, 2012)