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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 Many small shops have been replaced by `superstores’ — the big giants of retail which carry just about everything under one roof, and even small ice cream shops or diners have been taken over or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: , ,