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FDI in retail: some thoughts

December 2, 2011 Leave a comment

The Parliament is at a standstill over allowing Foreign Direct Investment (FDI) in the retail business in India. The government, particularly Man Mohan Singh, his close associate Montek Singh Ahluwahlia and to some extent Pranab Mukherjee have been adamant in their support of the decision to allow FDI in retail. Kaushik Basu, the chief economic advisor to the government has been speaking out in support as well.

I don’t have major objections to their arguments that the entry of big retailers will probably bring down prices for the consumer, and push up prices for farmers, although it is not clear if such things will continue to happen if in the end there are only a few major players, constituting a cartel. There is also some merit in the claim that the bigger retail chains will be able to pay their workers better than the small shops can.

But I think the arguments against allowing FDI in retail are much stronger. I agree with with the opposition argument that the small trader will be wiped out if big retail becomes bigger. This is what  happened in the US during the latter part of the twentieth century, and to a great extent in the UK. These countries no longer have small corner shops serving the neighbourhood. Many small shops have been replaced by `superstores’ — the big giants of retail which carry just about everything under one roof, and even small ice cream shops or diners have been taken over or replaced by national chains. The death of small shops, and the related loss of jobs, which cannot be compensated by the jobs in big retail, may be more important to the health of the economy in the longer term than `reforms’. Small business also sources local production; small bookstores and music stores are more likely to carry stuff from local publication houses.  The big bookstore chains currently in Calcutta — Starmark and Crossword — carry almost exclusively titles in English, one small section of Bengali books is not remotely representative of what is actually available.

The other objection, not mentioned by the political parties in this debate, concerns revenue. Businesses based in India, both big and small, pay their taxes to India and spend their profits in India. Foreign businesses will send a large portion of their profits abroad, and because of `tax treaties’ will not pay any tax in India (and negligible amounts in Mauritius or other island nations through which they will operate). So India will get little or nothing from their profits. Of course, both are true for all foreign companies operating in India, and the peculiar reading of these tax treaties has been causing a major loss of revenue for the country. There can be an argument that the loss on both of these counts can be compensated by the investment made by these companies, and in fact the investment in infrastructure justifies the treaties and the legislation which allow the loss. But in the case of retail, there is no infrastructure that benefits from the FDI — procurement is not a manufacturing process, the infrastructure of big retail is not different in character from that of small retail, and in fact does not scale with turnover — warehousing does, outlets do not. So as far as revenue is concerned, FDI is likely to cause only loss, and if we remember  that infrastructure is usually the biggest beneficiary of revenue,  we see that FDI in retail will not contribute to improvements on that front, either directly or indirectly.

Political parties do not wish to bring this line of argument into the discussions, probably because they all benefit from backdoor contributions from businesses based abroad (but not necessarily owned by non-Indians) which take advantage of the tax treaties to move their money to Mauritius and other places.

All in all, FDI in retail  is a bad idea — it may mean short term gains for some people, notably the administration and ruling parties which will grant licenses, the big businessmen who will make things smooth from  the superstores to move in, and the media, which will gain a lot more in advertisements — they receive almost nothing from the small businesses. But in the long run, multinational superstores will destroy the Indian middle class, which is mostly supported by small businesses.

Categories: Finance, Politics Tags: , ,

So what was the problem with the JPC?

February 21, 2011 Leave a comment

I wonder if anyone else finds it curious that the government agreed to the JPC (joint parliamentary committee) even before the Parliament opened for the budget session, after the entire winter session was lost due to the logjam over scams, in particular the Rs. 1.7 lakh crore (that’s 1.7 x 10^12 = 1.7 trillion) 2G scam. The logjam was caused by the government refusing to accept a JPC, and the opposition trying to force one. And now, with a recess intervening, the government has agreed to the formation of JPC, and the opposition is muted in their jubilation. So why didn’t they accept one earlier?

Certain things have happened in the meanwhile, CBI has arrested Raja, the Supreme Court has goaded the CBI into questioning Anil Ambani, whose ADAG group is supposed to have benefited immensely from Raja’s policy of allocating 2G spectrum without an auction, CBI has filed an appeal in the Supreme Court against Advani (on the Babri Masjid demolition case), and Advani has apologised to Sonia Gandhi for saying that her family has huge undisclosed sums of money in Swiss bank accounts.

Make one wonder, were backroom deals done between the government and the opposition to ensure that only a few scapegoats are punished? Will we ever see a report on how much was paid as bribe by various people?  Will we ever see a return of the crores that went into these bribes? Will the nation regain more than a small fraction of the loss incurred to the exchequer? We have to wait and see.

The CWG billions

October 19, 2010 Leave a comment

Although I normally tend to disagree with almost anything said by Nitin Gadkari, I cannot help but agree with what he has said now. I don’t mean the thing about having `proof’ that all are indeed culpable, but the question that must have been on everyone’s mind since the announcement that the `Group of Ministers’ was going to discuss corruption in organising the commonwealth games. Kalmadi had a budget of only Rs.1600 crores (16 billion), while the total expenditure for the games, including all the construction work, was supposedly Rs.70,000 cr (700 billion). So why not probe where the rest of the money went? Why focus on only a tiny fraction? Anyone except those with unreasonable trust in the Congress party would wonder.

I also agree with Gadkari that the money siphoned out of these 700 billion went out by the Mauritius and similar routes. But I don’t agree that it is lying in Swiss banks. I expect it saw its way back to India as `Foreign Institutional Investor’ (FII) money, which flooded the stock market over last month. The figure for that is already $10 billion, i.e. about Rs.450 billion, which sounds like it could be the amount stolen from the CWG organisation kitty by the corrupt politicians and industrialists.

Corruption at this scale will probably never be fully exposed, since anyone who wants to probe this can be silenced, either by a gift of a few crores, or simply `silenced’.

Lessons from Bhopal: Financial Responsibility

June 15, 2010 Leave a comment

Another thought I had regarding Bhopal, and in general corporate responsibility regarding damage to life and property is: The government should, for companies owned in part or whole by foreign entities, block all repatriation of money whenever there are lawsuits for compensation due to death or injury above a certain amount. Such companies will not be able to buy foreign exchange under any guise until the court allows them to do so.

Of course the companies will not like such a law, and there will be many protestations regarding possible abuse of such a law. But such a law is needed as a sensible alternative for arrest, when it comes to companies. Individuals can be arrested, thus temporarily suspending their freedom of movement (and many other freedoms). Companies cannot be `arrested’ as such, but their CEOs and other decision-making individuals can be. For companies which are wholly owned by Indians, arrests are sufficient to ensure that the accused in cases of death or injury remain within the reach of courts. For companies which have foreign owners or shareholders, the law does not find it easy to reach those individuals, nor to get a hold of their assets in case compensation is granted. If these companies are stopped from converting their assets into foreign currency, those assets will remain within the reach of the courts till a decision has been reached on compensation etc.

Such a law would be much more useful than a law prescribing higher punishments to people who remain out of reach.

Liars and bankers

May 17, 2010 Leave a comment

News comes from Canada that according to cutting-edge research on child psychology, children who lie will do better in life. Apparently, the process of formulating a lie requires complex reconnections of the neural pathways in the brain, thus building an alternate reality while keeping the truth at the back of the mind. The scientist who carried out the research added `They even make bankers in later life.’

I am not sure I understood that sentence. Isn’t high finance the main place for big lies? So I would expect that those who start lying at an early age get better at it as they grow up … into bankers. Maybe he should have dropped the `even’ from that sentence.

Taxing the doctors

May 14, 2010 Leave a comment

As this news report from the BBC shows, doctors in Greece have been guilty of the same sort of practices as I mentioned in an earlier post, of not giving a receipt. And as the Greek economy has crashed and the people have started rioting in protest of the `austerity measures’, the government has fined a few doctors for underreporting their income. Surely our government can do something similar, after all, the Indian economy is in a worse shape than Greece’s — at least in terms of a much higher percentage of people being without food, water, clothing, education or medical services.

Gifts to the rich

April 25, 2010 1 comment

Thanks to Paranjoy Guha Thakurta for writing what must be in the minds of many — the government gets nothing by way of service taxes from doctors and lawyers, and could have gained an additional Rs. 10000 crores from taxing these two professions alone! And what he does not ask has been on my mind for a while — many doctors and lawyers with a private practice, i.e. outside a hospital or a firm, do not offer a receipt unless asked. Of course they always provide a receipt when asked, but many clients do not bother to ask for a receipt, especially if they are not reimbursed for the bills. Lawyers’ bills are not reimbursed in general anyway.

Guha Thakurta also mentions that `revenue foregone’, i.e. the revenue given up by the government by way of exemptions and concessions (and `incentives’ I suppose) to companies rose from Rs 4,58,516 crore in 2008-09 to Rs 5,40,269 crore in 2009-10. I wonder how much revenue is lost through not auditing the accounts of doctors and lawyers.

A possible RTI question would be how much income — outside salaries, if any — is declared by these professionals, and how many doctors and lawyers have been investigated by the Income Tax dept for lifestyles not appropriate to declared incomes.