Respected Sir,
Namaskar!
The issue of in FDI Multi-brand retail sector is out in suspension by the central government due to mere political reasons. But the issue is far from over. It may or may not come into reckoning for some time but the pressure from international and domestic lobbies will definitely continue.
During the debate on the issue when it was hot and a breaking news many factors were discussed but as it happens in the media debates the focus was more on popular issues. So these have been debated from both side ad nauseam. So they are dealt with summarily in the paper.
This paper is an attempt to raise some basic questions about FDI in general and in the retail sector in particular.
The paper is being send for your perusal and feedback. Your valuable opinion on this very important issue is solicited.
If you feel proper and useful you can use the paper for any further circulation, printing etc. An intimation to the undersigned will be appreciated but not a must.
Dhanyosmi (I am Gratified) in anticipation.
With Warm Regards
Mukul Kanitkar
Vivekananda Kendra Kanyakumari
09497472232
FDI in Multi‐brand Retail sector
Where is the need??
Raising political and economic questions seldom discussed.
Mukul Kanitkar
Vivekananda Kendra, Trivandrum
madhyachal@gmail.com
www.uttarapath.wordpress.com
Index
I. The Context
II. The Present Debate
A. The Issues discussed at present:
III. Let us discuss the Real issues
A. Is Media the right forum of policy debate? :
B. Political issues:
1. Domestic politics:
2. Food Security:
3. International Geo-politics:
C. Economic Issues:
1. Need of FDI? :
2. What's the bargain? What did India get in return?
3. Technical Upgradation? In Retail?? :
4. Are we Capital starved? :
5. Source of FDI:
6. Is there any economic Rationale for FDI? :
7. Mala-fide? Ignorance?? What's behind the decision??
IV. The Mind‐set of policy makers
A. An Overview of Reforms:
B. Role of domestic Liberalization:
1. Role of foreign capital needs a close look??
C. Adverse effects of Globalization:
D. Other effects of Reforms:
E. The second Landmark 1998:
F. The Ugly side of Reforms:
G. Blind Followers of the West:
V. Real Reforms needed
A. Technical input in right areas:
B. Community base micro-capital Generation:
C. Rationalizing the Tax structure:
1. Arthakarnti Proposal.
D. Recovery of Black money stashed abroad:
E. Decentralize Rural Development model:
F. Constitutional reforms:
VI. Conclusion
The Context
The union Cabinet takes a decision to allow 51% FDI in multi-brand retail
sector. Though it is an executive decision, as the parliament is in session,
naturally it is taken up by all the political parties. The allies of the
government take a firm stand. Opposition is united across the ideological
boundaries. The government has to bow down. The decision is suspended
pending consultation to create broad consensus among the stakeholders. But
though the decision is in suspension the issue is far from dead and buried. It
is better to discuss it logically in the comparative calm rather than racking
up unrelated issues in the political haste. This issue paper aims at discussing
the real issues involved in the Policy of inviting FDI in general and in its
implications in retail sector in particular. It is an observation that the present
debate has bye-passed these real issues and is focused on the side issues.
This is an attempt to discuss the wide implications of the mind set that not
only invites and welcomes FDI but projects it as the only panacea for all the
economic problems of the great country of 120 crores.
The Present Debate
The issue of FDI in multi-brand retail sector is much deeper than what meets
the eye. It is not just an issue of wrong timing or lack of political consensus.
The political parties may support or oppose any issue on popular
considerations. One can not blame them for that. The manner of opposition,
claims for and against the issue is also sometimes aimed at the gallery
rather than being serious matters of policy considerations. We are
witnessing all kinds of claims and counter claims on the issue of FDI in retail
sector.
The Issues discussed at present:
Inflation control, Employment generation, Future of Small retailers, Farmers
well being- Are these the real issues or side issues given prime attention due
to vested interests?
The government is not clear on its policy objectives. The 4 page note on
which the cabinet took the decision was illusive on the specific aim and
objective of the policy. For public consumption some tall claims are being
made by the prime minister, finance minister and also the commerce
minister. One claim is about controlling price rise. Discussing the logical and
practical merit of the argument is of no use. The main question is, 'Is
inflation in food prices the real motivation for this policy decision?' If so, will
the decision be revised if the inflation is not controlled? The other populist
claim is, 'This will create millions of jobs.' Again the same question is job
creation the main objective then the choice could have been some other
sector like manufacturing, IT hardware and infrastructure development
which would have created much more jobs for even the unskilled labour. The
FDI in retail sector is feared to displace more self employed people than it
ever can employ. The difference between the two is very large in-fact
multifold. There is a need to refer to the data available on these companies
in the west about this crucial factor. Many studies have shown this
downward trend in employment opportunities due to entry of big players in
retail in US as well as Europe.
These two claims about inflation and employment could be explained as
responses to the actual fears of the public also articulated by the political
parties. But what is the real objective behind the policy? The government
must come out with the real aim behind this decision.
The opposition is equally superficial in some of its arguments. The fear of
large corporations eating up small retailers may be a real threat but is not a
convincing economic argument. Politically it is very sound issue as it touches
millions of families which are dependant on the retail business directly or
indirectly but these threats can be dealt with some regulations. The present
policy decision has provision of allowing foreign investors to open outlets
only in cities with population in excess of one million. But again the question
remains, 'Is the protection of small retailers the main issue in opposing the
FDI in multi-brand retail?' Though the studies in the west as also in the East
Asian countries show that the big retail chains displace small retailers
completely, Indian conditions are not the same. Studies on effect of
domestic retail giants like Big Bazaar on the small retail business have
shown mixed trends. According to one study Audacious Kiranas vs Organised
Retailers by Abhinava S. Singh, Siddharth G. Das and Mamta Mahapatra
(published in - http://www.scmsgroup.org/scmsjim/pdf/2008/scms%20journal%20July-
20Sept.%202008.pdf#page=93), "Although initially there was a mass exodus of
consumers (87 percent) shifting to Big Retailers, our findings suggest that a
majority of them have come back (68 percent) to the old and reliable
Kiranas"
This has cultural reasons also. For us in India human relations are more
important than mere impressive mechanization.
Another issue raised in this connection is about the relation of retail stores
with the farmers. Those opposed to FDI claim that it will ruin the farming
community by hard bargain and aggressive policies followed by the large
corporate. The government claims that it will benefit the agriculture sector
as it will remove the middleman. Direct purchases, efficient supply chains
and contract farming will give more returns to the farmers. This will also
bring down the food prices claims the government. Again, if the government
is serious about farmers plight it can take more direct policy measures like
banning speculative trade of farm produce in the commodity market and
streamline the agriculture produce markets (mandis). You will not need FDI
in retail to give more returns to farmers or bringing down food prices as a
side effect. At the same time a detailed study of the practices of multibrand
retail giants in direct purchases from farmers and supply chain
management adopted by them in the countries of their origin and also in the
Asian countries like Thailand and Indonesia where they have operations
need to be done before any such claims are entertained.
Let us discuss the Real issues
Is Media the right forum of policy debate? :
Both political and economic discussion of the issue was taking place in the
media, as the highest policy debating forum, the parliament was made
dysfunctional by its own custodians. The popular perception deliberately
created by the government spokespersons put the blame on the opposition
but the real responsibility of running the parliament lies with the ruling
combine. It seems the major political partner of the ruling coalition is too
arrogant to have much needed flexibility of approach and political honesty.
The sad result is -- it has to keep on bargaining on key issues even with its
so called allies and external supporters. But that irony is a subject for
another detailed discussion.
Political issues:
The political debate in the media is centered more around the timing of the
decision than the merits and effects of the policy in itself. One can
understand the anxiety of political parties and leaders who have to face the
people regularly. Their electoral fate depends on the popular perception.
Hence it is natural for them to take postures to suit the time. They indulge in
shameless u-turns on policy issues depending upon on which side of the
Loksabha speaker their benches are. But it is baffling that so called political
observers and experts in the media have not discussed the political fall-outs
of this important policy decision of the cabinet.
Domestic politics:
Issues to be debated politically should include the ideological mutations,
diversions and even contradictions of the political lot. There is also a policy
conflict involved with bill for food security being pushed on one hand by the
super cabinet, the NAC and this blatant attack on the food sector on the
other. The issue of multi brand retail sector along with the looming danger of
introduction of contract, corporate farming is directly related to the food
security of the country. This needs serious consideration.
Food Security:
Even if we accept the economic claims that the FDI will help in ensuring the
food security in the rural sector by favorably affecting agriculture marketing,
the political question remains, 'Is it sound geo-political move to out-source
the food security of the country to foreigners even to a marginal extent?'
The experience of the agriculture rich African nations need to be deeply
studied in this connection. With influx of Food giants PepsiCo and
MacDonald's in contract farming and cattle raising in many African countries
like Kenya the results have been far from glossy. Famines followed by
political uncertainty in Rwanda, Namibia and Ethiopia also need to be
examined from this angle of corporate involvement in agriculture sector and
its impact on food security and political stability of these countries.
International Geo-politics:
Another geo-political issue hardly discussed in this connection is the
prudence of opening capital flow in basic sectors. The FDI in Multi brand
retail is not just an economic issue is amply clear by the enthusiasm with
which the US ambassador jumped in to promote the decision of Indian
government. With banks, International financial forums and multilateral
commercial, industrial, and environmental conventions increasingly
becoming battlegrounds for regional and global geopolitical diplomacy, the
flow of capital across the frontiers does not remain a mere economic issue.
This needs to be studied in depth by the political analysts. China with its
trade surplus with almost every country except Taiwan and a whopping 3
trillion USD investment in the US is way ahead in this game of financial
diplomacy or to express it more alarmingly 'Capital Imperialism'. India with
its great domestic savings and surplus capital available unused in the banks
has a great potential to put some competition. But it demands a complete
overhaul of political point of view of political establishment, diplomatic
bureaucracy and political thinkers in the country towards economic issues.
Economic Issues:
The national discourse on the economic reforms in general and on the issue
of FDI in Retail sector lacks originality and intellectual honesty. The debate is
mostly steered by the interested players indulging in a wide spread
perception management campaigns. Media understandably is influenced by
its sponsors which includes government to a great extent. Government
spending on audio- visual and print publicity is one of the main sources of
existence for many media establishments. The other major revenue source
is the corporate world. So naturally the voice of the large population can be
heard only by way of street protests, peaceful or otherwise.
The main culprit for the lack of honest debate in the national interest is the
'intellectual class' How many Indian universities have the requisite infrastructure,
trained manpower, know-how or even the will power to conduct
scientific studies related to policy issues? The result is that we lack an
informed debate on policy issues of long term national importance. The
present issue of FDI in retail sector is one such issue. It demands not only a
political consensus but a thorough national debate on basic economic issues.
Need of FDI:
Let us discuss some basic economic questions about FDI. When and why
does a country need capital from foreign sources? Simplest of the answer is
when you do not have enough domestic capital to be invested in the
economy for the growth engine to keep firing. Another reason could be that
some sector or area of economy needs impetus in the form of new
technology which can come only with an investment attached to it. Third
logic could be you need to deal in international trade; hence there will be
give and take. You give some and in return get some. The government
needs to explain these three points.
What's the bargain? What did India get in return?
The US has been pressing India for the FDI in retail but before agreeing to it
did India get a bargain? They could have got some concessions for their
export of agricultural produce or for the textile industry. What's the deal? Let
the country know as that can be only one logical reason for the policy
decision. The other two possible factors do not count in this case.
Technical Upgradation? In Retail??
There certainly is no new technology on offer from the international retail
giants. We already have our own multi-brand retail chains. Their technology
is as good as any of the international corporate in the field. In fact Vishal
Mega mart and Big Bazaar are real management success stories, beginning
from scratch growing to a great height with tremendous expansion. Reliance
fresh had largest capital to start with but relatively not so successful a
venture for Ambanis. It has become a bit of burden on the group. Big Bazaar
of Biyanis is also under pressure for extra push in the form of added capital.
Hence these big brothers in India are all lobbying hard for the FDI. That will
help them survive at this crucial juncture.
Are we Capital starved? :
In fact India has surplus Capital available. We generate more domestic
capital in one year than the whole FDI in 2 decades.
As an economy India is not short of capital in the domestic market. In fact
we have surplus capital available with our economy in plenty. According to
RBI's annual report the gross domestic Capital generation in 2008 was Rs.
1845513 Crores and is increasing every year. (See the tale below)
(http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1013)
There is no official statistic available for the capital surplus with the banks
but the market studies by some agencies give figures for different banks.
When we add up the capital surplus figures for 2010-2011 for top ten Indian
banks the figure comes to Rs. 17663665 Crore
(http://business.mapsofindia.com/india-company/top-10-bankingcompanies.
html).
The total FDI received last year is just Rs. 113485 Crores. (US$22697 Million
to be precise, converted at present rate of 50 Rs approx. would have been
quiet less at the time it was invested as Rupee was much higher at that
time) This comes to be just 6% of the Gross domestic capital generated and
mere 1% of the surplus capital in the top ten Indian banks. This tells the
story. We have huge amount of capital unused in our own kitty and yet we
are inviting FDI in a sector which is very crucial to our National interest.
Source of FDI:
There is another very crucial angle to the FDI story. In the last decade total
FDI received is Rs 351731 Crore or US$ 81010 million. The largest investor
country wise is Mauritius. www.indiaonestop.com providing the data from
official source of Union Commerce ministry comments on the country wise
chart, "The country wise figures for 200-01 to January 2009 reveal Mauritius
in the leading position accounting for about 43.3 percent of total FDI inflows
into India. The US and UK is far behind it with 7.72 percent and 6.41 percent
respectively. FDI from Mauritius during this period stood at $ 35180 million.
In terms of Rs it stood at Rs 1527677 million. FDI by US and UK during this
period stood at $ 6171 million and $ 5153 million. In terms of Indian
currency it comes to Rs 271491 million and Rs 225415 million respectively."
The FDI inflow from Mauritius in the 2009 was US $ 11208 million whereas
its GDP (PPP) that year is US $ 16630 million. So the country is investing
almost 65% of its GDP in India. Does that sound plausible? But it is a fact.
We must study this interesting phenomenon very closely before we jump
into any economic calculations about FDI. Why Mauritius? Whose money is
this? Is it real Capital from foreign FIIs or corporate coming to India for
business? Not much data about the detail of this capital flow through
Mauritius is available in the open source. But the experts in international
investment investigating the Black money issue have an idea. They tell us it
is the dirty money stashed away which is coming back to our market this
way. It is not only tax evasion related black money. Most of it is generated
by way of dirty and antinational means of corruption, kickbacks in
international contracts, drugs, illegal arms, terror money etc. This is
transported by the infamous havala transactions and parked in the tax
havens. This dirty money is given a chance to come back in Indian market in
the form of FDI. The criminal is allowed to enjoy this investment legally
without any punishment or even detection.
So! Is there any economic Rationale for FDI? :
The economics of FDI in retail sector thus fails to convince its need,
relevance or even the rationale for the policy decision. No Capital shortage,
no technological advancement and nothing in return; this sums up the
economic calculus of the cabinet decision taken in an apparent haste without
any attempt for political consensus. Their is no urgent need for foreign
exchange either. We have a comfortable cushion with total forex reserve as
in Mar 2011 at US $ 304,818 million with the balance of payment deficit
being at just US $ 13050 million. Further more this discussion on the
economic mathematics of FDI with the major share coming from a country
like Mauritius also brings back the more important issue of National security.
When simple mathematics works out against any necessity for the opening
of retail sector to FDI, why the government is bent upon taking this
decision?
Mala-fide? Ignorance?? What's behind the decision??
Usually when such illogical decisions are forced on the nation their is either a
vested interest working behind the scene or a weak statesman in utter
foolishness leading the nation into a hopeless situation. There are interesting
revelations when one goes little deep in the FDI analysis. One chart shows
the foreign technology transfer approvals from 1991 to 2008 under the FDI.
http://www.indiaonestop.com/FDI/foreigntechnologytransfer.htm
Mauritius does not find place in the top five countries is no surprise. The fact
that US is topping the list with more than 22% approvals is also not
astonishing. What is most curious in is that the 5th place is occupied by Italy
with over 6% of the approvals. Very interestingly in the FDI inflow list Italy
does not find place in the Top 15 countries. The traditional technological ally
of India Russia or the recent world leader China is also not seen in the top 5
countries with technology transfer approvals. One can not say if this throws
some light on how decisions are being taken in Indian government, but one
thing is clear that there is not much relation in FDI inflow and technology
transfer. So the argument that FDI improves the technology in that sector
does not hold ground on imperial experience of past 2 decades.
The Mind‐set of policy makers
Coming back to the discussion on hand, the present Prime minister is tagged
weak but not even the strongest of his critiques can dare call him a fool. Not
at least in economic matters. So why is he pressing for such a useless
policy? The answer to this puzzle lies in the Paradigm that governs the
economic thinking in the establishment. We are the victim of following the
alien models, which have failed miserably in their own land of birth. Till 1991
we followed the socialist model and after that we are trying hard to ape the
US led western model of free market economics. We will not go into the
current state of affairs in the western economies but instead would look
within. The policy decision about the FDI in retail sector is being touted as
second generation reforms by the government and the economic analysts
alike. It will be interesting to take an overview of our national experience of
the 'Reforms' post 1991.
An Overview of Reforms:
The first generation reforms were initiated by a minority government in
1991. That it was a politically weak government without clear majority in
parliament is not a mere coincidence. Facing the challenge of communal
tension the political genius of PM Narasimha Rao gave full freedom to his
world-bank pensioner, finance minister. This proved an unintended blessing.
Dr Manmohan Singh aggressively advocated economic reforms but
cautiously implemented the same bit by bit. The first part of the first
generation reforms was labeled liberalization, other two being termed as
Privatization and Globalization. Though very difficult to bring about, when
proposed, liberalization was well received across the political and ideological
frontiers. In fact except the adamant left everyone welcomed this much
awaited move. The country paralyzed by license, permit and inspector raj
heaved a sigh of relief. The legal dismantling and the restructuring of almost
all the government departments was not done in a day. Laws were changed
to make things easier. Technology was used to make the permits, chalan
and reporting in tax departments and others more accessible to the public.
Single window interface with the public was introduced in many
departments. Except for the changes in labour laws other things were
smooth and well appreciated equally by the business world and people at
large.
Role of domestic Liberalization:
Liberalization of policies had another effect. The Indian potential was
unleashed. The barriers between states were also raised. Inter state trade
was fully opened. The quality Basmati Rice from Punjab can now be sold in
the rice eating states like Tamilnadu and Bengal. This was not possible
before 1991. This openness of the market gave a great opportunity to hence
marginalized innovators in the Indian economy. This domestic intra national
phenomenon is yet not explored fully. A deeper study as to the rise of
domestic players in the economy as a result of 1991 reforms is long
overdue.
Role of foreign capital needs a close look??
One of the reasons why such study is not taken up is that the mainstream
economist and policymakers are convinced that the entry of foreign capital
as well as competition offered by the multinationals is the only cause behind
the great Indian story. This needs to be researched carefully. There are
obvious sectors like automobile where we see the influence of international
players. The competition not only gave a boost to quality in this field but
also gave a wide range of choice to the customers. To think that the
aggressive loan marketing was behind the automobile boom would be a wild
jump inspired by the very visible advertisement explosion. It would be
interesting to know the exact share of financed vehicle compared to the cash
purchases, especially in the two-wheeler category. Nevertheless, this was
globalization in action. The opening of market for foreign brands in the
consumer goods section had a very visible impact. The market as was known
in the 1980s changed completely. It was a pleasant shock for the middle
class consumer. To go to the market and purchase whatever one wishes was
a dream come true to this generation used to long waitlists and scarcity in
almost every thing.
Adverse effects of Globalization:
But has the international competition tonic worked similar wonders in all the
sectors of our economy? Certainly not. The very prospering textile industry
got a jolt after the signing of WTO. Though the then commerce minister
fought a great deal to extract a better deal for India than what the
developed countries then were ready to give, the textile sector was one of
the many casualties of this historical blunder. Still Indian textile industry is
a force to recon with, but the diversified, decentralized nature of the
production was hit sharply by the change in policy. Surat and Ahmadabad
saw thousands of looms going out of work. Gwalior, once known for the
textile mills, even today the audio tape in the shatabdi train tells it as one of
the features Gwalior was known for, now hardly has 1-2 units functioning.
More than 1.5 crore families were affected by this. Globalization effect needs
to be studied more objectively than the advertizing market reviews or the
protestor's exaggerations. What we need is a pure disinterested academic
exercise.
The soft drink market is again an example where the domestic players are
totally wiped out. There were many local soft drinks in the market before
1991. Campa-cola and fanta being the largest of the local brands. Parle and
Godrej had a very prospering beverage business. But most of it was taken
over or simply purchased by the two giants Pepsi and coke. The whole
market has changed thereafter. In other FMCG products the competition has
become increasingly lopsided. The more diverse and localized products are
finding it very difficult to stand on their own. We are not talking about the
likes of Nirama or Ghadi in detergents. But the smaller manufacturers in
almost all the districts. Many are still surviving on sheer quality advantage
and loyalty of their consumers. It again is a relationship for us.
Other effects of Reforms:
The liberalization part of the reforms was thus very effective. The
globalization part has mixed results. There are many other things in the
story. The exponential growth of services sector is one very important
factor. The BPO and other out sourcing opportunities were cashed by many
Indian entrepreneurs. There was phenomenal jump in the salary structure of
the private sector followed by the 5th and 6th pay commissions in the
government also. This increase in purchasing power led to real estate boom.
As the rates of property skyrocketed the NRIs from Middle East and other
parts of the world jumped on the bogie. Soon in major cities the property
prices went out of reach of the common man. The native of the land could
only be the seller. Many did not mind selling their land in exchange of fat
amount and a small flat in the complex. As such the concept of real estate
is a very notional thing. Land prices go up with every transaction in the
neighbourhood. But the bubble had to burst. It has in some metros and a
slump has come in many other big cities. In relatively smaller urban cluster
the real estate is still on the rise.
The second Landmark 1998:
Pokaran changed the psyche of the nation.
1991 is considered to be a landmark in the shift. But there is another date to
be remembered-- 11th may 1998, the Pokaran day. This changed the psyche
of every Indian whether in India or abroad. The confidence was palpable. We
could feel it in the coffee shop discussion same evening. Every one was
thrilled. The professional efficiency, complete secrecy and precise execution
shown by the nuclear test was told and retold like an epic. It was not just a
pride for the strategic ability. It was more like, "Yes! We can do it." India can
do it was the message. The scientific or technological achievement was not
as great as the Integrated missile programme, Space technology
achievements or the super computer but the patriotic fervor attached to the
nuclear test was unmatched. This changed the whole out look of Indians to
look at themselves as a nation. Apart from this psychological and strategic
impact there was an economic fall-out. Economic Sanctions were imposed by
US, followed by all the developed countries including Japan. Japan was
major donor to India in urban infrastructure development. It was said by an
economic observer that the bomb was exploded in Pokaran in Rajasthan but
the tremors were felt in the North block. The Finance ministry officials
termed the decision as suicide. It was felt that the nation on course of
economic reforms had been derailed. But the result was something
unimaginable. The whole nation geared up. There was hardly any impact felt
except for technological block-out. But there also we developed many
indigenous technologies during that period in Space and defence sector.
IRSO and DRDO became icons of Indian capability in research.
Immediate crisis was of balance of payments. With the stoppage of even the
aid funds and loans from outside the challenge was on the foreign exchange
reserve. But the RBI declared the India Development bond and later the
resurgent bonds for the NRIs. The Diaspora responded with renewed
enthusiasm. Financial prudence mingled with nationalistic pride motivated
the NRI's to invest in the bonds. The bonds received overwhelming response
many times the initial target set by the government. The average Indian
started taking pride in the achievements of their fellow countrymen. The
NRIs have been achieving great things in scientific and economic field all
over the world but there was hardly any mention of these achievements
back home. But post 1998 it all changed. We started believing in ourselves.
Hotmail fame Sabeer Bhatia and Intel's Vinod Dham became household
names.
This coincided with two major reform related activities. The disinvestment
was in full swing. Government was off-loading all its non paying assets. This
brought in a lot of capital in the domestic market. The PSUs were also
restructured and made more corporate in management. Many government
companies were formed like Department of telecommunications commercial
activities were made into a company -BSNL. Even the state electricity boards
were trifurcated into companies. This coincided with the great infrastructure
building projects of linking the Highways, the golden quadrilateral along with
Pradhanmantri Sadak yojana to link Lakhs of villages. These gave impetus to
the steel and cement production and had cascading effect on the domestic
market. The Sanctions were lifted within three years. The world came to
recon India as an emerging power. The Elephant was moving. The basics of
Indian economy gave it a sound platform. Population which was seen as a
burden was now called demographic dividend. The whole perspective
changed.
The Ugly side of Reforms:
The story is not all glossy. There are many hiccups. Rationalizing subsidies
was a great challenge. The political scene had also changed almost parallel
to the reforms. The days of single party rule were over. The era of coalition
politics had its own dynamics. This acted as a break for many reform as
many policy decisions had to be postponed, hold back or even completely
given up for political considerations. In the hind sight many of these breaks
seem to have done good to the economy. Rather than getting on to the
roller coaster of reforms and completely turning into a western economy
India progressed cautiously at its own typical Indian pace. There are other
questions about the fruits of growth reaching to the masses equitably. The
statistical data suggests that the gap between the poor and the rich has
been widening. Poor have become poorer. Their number has gone up
substantially. This shows that blindly following the global financial model
may not suit Indian conditions.
Blind Followers of the West:
Now we have 20 years of experience of this reformed economic model. We
are told we have not ripped all the fruits because we have not done enough.
Look at China we are told. But have we learnt the correct lessons is the real
question. As pointed out earlier due to lack of impartial, objective academic
study we really do not know the real movers of our robust economy. If we
go by the set rules and follow the Free market model of the west there is all
the possibility that we would also end up in the same soup. Some things are
taken for granted by our economic intellectuals while talking about the
reforms. We have not checked their validity. The first and foremost is about
the foreign investment. We are told more of it the better. Hence increase the
sectors, increase the percentage and roll out red carpets. All state are
organizing big festivals to attract foreign investments. We are told you have
to change your laws to suit them. We are told the tax structure is to be
widened then only we can reduce the fiscal deficit. Competition is the only
solution. Look at the automobile sector where the foreign competitors have
forced our own manufacturers to improve etc.
This is the mind set under which the decision to allow FDI in the retail sector
is taken. It may be the genuine opinion of the decision makers that it is for
the good of the country. Giving them this benefit of doubt we can still
logically proceed to analyze the need and texture of next generation of
reforms. It is not always true that increasing the dose of the same medicine
will give a better result. We have to diagnose the patient and then give the
medicine according to the ailment.
Real Reforms needed
We definitely need reforms, but what are they. Do we need more capital? Do
we need more competition? or is it something else that we need.
Following are few points on the type of reforms urgently needed for India to
be able to sustain the growth and convert its potential into reality.
Technical inputs in right areas:
Taking the home conditions into account not the needs of the investor.
We need to understand the lay of the land. We have to look at India from its
own eyes. We have to take into consideration its own strengths and
weaknesses. Like population we may be on the wrong footing in assessing
our own strengths. Population can be used as strength if we have labour
intensive policies. Educating our masses is not a one year programme so in
addition to that we must have opportunities for the uneducated and
unskilled labour. If this national perspective is taken into consideration we
will know we have more prospect of employment generation in IT hardware
sector than the software. We need FDI and technological support from
friends like Taiwan in this sector.
Community base micro-capital Generation:
Cooperative has been a successful model in some regions.
Our community based capital generation has proved to be a great boon.
More than 1200 such community based commercial and industrial clusters
have been identified by researchers. The great Noble prize winning
experiment of Mohammad Yunus of Bangladesh in micro-financing has been
in practice in India for centuries. The community based entrepreneurship can
be an innovation in micro capital generation. Co-operative is another
successful model in this field. Amool in Gujarat and sugar and cotton cooperatives
in Maharashtra have proved to be better suited for Indian
environment. There is ample scope of improvement in this sector. But the
great strength of this model is that it is participatory, everyone involved is a
stake holder. This gives opportunity for more equitable growth. This is just
one aspect of our very rich social capital waiting to be cultivated and
harvested by the society free from governmental intervention. We do not
need any policy to promote these communities to produce and trade. What
we need is to give them complete freedom from the limitations of the state
machinery which is the legacy of the colonial rule. It was the British Raj
which in the first place had deprived the community life of its economic
creativity and freedom to express it in a suitable economic activity. After
independence we have done little to revive this spirit of our masses. The
liberalization has given a limited scope and many of these traditional
communities have worked wonder.
Rationalizing the Tax structure:
Minimum tax from maximum people and no multiple taxing of economic
activity.
The tax structure demands rationalization. Just by tightening the rules and
forceful recovery we may raise the revenue of the government but that
won't address the issue. There is no study of un-taxed economic activity in
India. We are not talking about illegal tax evasion. But most of the trading
activity in India is not in the Government radar. We are running a parallel
economy which is estimated of the same size of the GDP if not more. This is
not necessarily black money. No doubt most of it is born out of tax evasion
practices. But there is legitimate, diversified, small-scale economic activity
which can not be taxed. It is so un-organized that to try to tax it will break
down the whole machinery. Hence we conveniently ignore it. On the other
hand we tax the organized activity over and again. The same thing is taxed
so many times. This illogical taxing promotes evasive practices. This can be
cured with a very simple innovation.
Arthakarnti Proposal.
It was first suggested by a small scale industrialist and has now evolved into
a movement by name Arthkarnti. The proposal is so simple that the modern
economist used to complexity is baffled. Arthakranti proposes a single tax
model. It advocates that all the taxes except customs be replace with one
tax. They have named it transaction tax. It has to be a small fraction, say
2%. That is all the tax that will be levied on the transaction once for all. On
every deposit in the bank 2% will be deducted by the bank. 0.65% on behalf
of Union Government, 0.65% for the state 0.35% for the local body like
Panchayat or Municipal Corporation and remaining 0.35 % for the banks
administrative expenses. With total computerization of the bank operation
this is just a matter of developing the relevant software. The calculations
made by the experts show that this small amount will fetch more revenue to
the government than what it gets at present. To promote maximum
transactions to be done through bank, Arthakranti proposes a parallel step
to stop the big currency notes. These two steps taken simultaneously will
widen the tax net to almost all the transactions and will also curb the
generation of Black money in the economy.
Recovery of Black money stashed abroad:
Legal options under present laws, New laws, Check on Hawala, Banning the
Participatory notes.
Another major reform demands the recovery of Black money stashed
abroad. The legal avenues under the existing national and international laws
or need for legislating, amalgamating new laws/ordinances can be discussed.
But there can be no two opinions that the huge amount parked unutilized in
the tax havens must be brought back into the legal economic machinery.
This may eliminate the need for any foreign investment. Instead we will be
in a position to bail out the crisis ridden European nations. We have to start
with banning the participatory note completely and immediately. They have
proved to be the dark horses in the stock exchange. Their flow has been
controlling the bullish and bearish trends in the share market robbing the
small genuine investor of hard earned money.
Decentralize Rural Development model:
A decentralized development model is the need of the hour. Rather than
following the international standards of development which demand
urbanization of majority rural population, we need to evolve our own modus
operandi to suit our realities. It will be easier to for us to equip our villages
to be centers of vibrant economic activity rather than displacing majority of
rural population to the cities converting them into a big slum.
Constitutional reforms:
A political system rooted in the national historical and cultural moorings.
There is a dying need for reform in our political structure. The Westminster
model of democracy needs a revamp. Taking the vastness of the land,
enormity of population and inherent diversities into account we need a
model of our own. The present constitution has served us well, better than
many of our contemporaries for last 6 decades but that is no reason to
continue the same, unchanged. It is high time we constitute a fresh
constitution draft committee and then debate and approve it in specifically
elected constitutional convention. We the people of Bharat need to give unto
ourselves a fresh Constitution.
Thus, we need to prioritize our national reform agenda. One can not say that
first do the above then only other reforms can be taken up. A Country as
large and as complex as ours will definitely have to work on many fronts. As
the scope of this paper was limited to FDI related reforms we have not
discussed many required reforms in many other fields of national life such as
education – primary and higher, natural resource management, Energy
security etc. But definitely the above listed reforms must be taken up on
priority. They are obviously more important than the FDI. In fact without
these reforms FDI is useless and even counterproductive.
Conclusion
In conclusion it can be said that FDI policy in general and FDI in multi-brand
retail in particular need to be looked into from more fundamental point of
view. The geo-political issues, threats and challenges must be studied
thoroughly. The economic alternatives also need to be explored. There is no
doubt that India needs to continue the reforms and next generation of
reforms are urgently needed, but the context and content of such reforms
need to be rooted in the soil and should cater to the realities of the land
rather than the theories of the international cartels.
Indian society has an economic potential to regain its past glory. As was
expressed by William Dalrymple in article titled, "Empire strikes back" in the
Telegraph, UK in 2007 –
"Extraordinary as it is, seen from the wider perspective the rise of India and
China is merely nothing more than a return to the ancient equilibrium of
world trade. Today, we Europeans are no longer the gun-toting, gunboatriding
colonial masters we once were, but instead are reverting to our more
traditional role: that of eager consumers of the much celebrated luxuries and
services of the East."
The basic foundation of Indian economy is very sound but we need to build a
suitable edifice on this foundation to realize its full potential.
Namaskar!
The issue of in FDI Multi-brand retail sector is out in suspension by the central government due to mere political reasons. But the issue is far from over. It may or may not come into reckoning for some time but the pressure from international and domestic lobbies will definitely continue.
During the debate on the issue when it was hot and a breaking news many factors were discussed but as it happens in the media debates the focus was more on popular issues. So these have been debated from both side ad nauseam. So they are dealt with summarily in the paper.
This paper is an attempt to raise some basic questions about FDI in general and in the retail sector in particular.
The paper is being send for your perusal and feedback. Your valuable opinion on this very important issue is solicited.
If you feel proper and useful you can use the paper for any further circulation, printing etc. An intimation to the undersigned will be appreciated but not a must.
Dhanyosmi (I am Gratified) in anticipation.
With Warm Regards
Mukul Kanitkar
Vivekananda Kendra Kanyakumari
09497472232
FDI in Multi‐brand Retail sector
Where is the need??
Raising political and economic questions seldom discussed.
Mukul Kanitkar
Vivekananda Kendra, Trivandrum
madhyachal@gmail.com
www.uttarapath.wordpress.com
Index
I. The Context
II. The Present Debate
A. The Issues discussed at present:
III. Let us discuss the Real issues
A. Is Media the right forum of policy debate? :
B. Political issues:
1. Domestic politics:
2. Food Security:
3. International Geo-politics:
C. Economic Issues:
1. Need of FDI? :
2. What's the bargain? What did India get in return?
3. Technical Upgradation? In Retail?? :
4. Are we Capital starved? :
5. Source of FDI:
6. Is there any economic Rationale for FDI? :
7. Mala-fide? Ignorance?? What's behind the decision??
IV. The Mind‐set of policy makers
A. An Overview of Reforms:
B. Role of domestic Liberalization:
1. Role of foreign capital needs a close look??
C. Adverse effects of Globalization:
D. Other effects of Reforms:
E. The second Landmark 1998:
F. The Ugly side of Reforms:
G. Blind Followers of the West:
V. Real Reforms needed
A. Technical input in right areas:
B. Community base micro-capital Generation:
C. Rationalizing the Tax structure:
1. Arthakarnti Proposal.
D. Recovery of Black money stashed abroad:
E. Decentralize Rural Development model:
F. Constitutional reforms:
VI. Conclusion
The Context
The union Cabinet takes a decision to allow 51% FDI in multi-brand retail
sector. Though it is an executive decision, as the parliament is in session,
naturally it is taken up by all the political parties. The allies of the
government take a firm stand. Opposition is united across the ideological
boundaries. The government has to bow down. The decision is suspended
pending consultation to create broad consensus among the stakeholders. But
though the decision is in suspension the issue is far from dead and buried. It
is better to discuss it logically in the comparative calm rather than racking
up unrelated issues in the political haste. This issue paper aims at discussing
the real issues involved in the Policy of inviting FDI in general and in its
implications in retail sector in particular. It is an observation that the present
debate has bye-passed these real issues and is focused on the side issues.
This is an attempt to discuss the wide implications of the mind set that not
only invites and welcomes FDI but projects it as the only panacea for all the
economic problems of the great country of 120 crores.
The Present Debate
The issue of FDI in multi-brand retail sector is much deeper than what meets
the eye. It is not just an issue of wrong timing or lack of political consensus.
The political parties may support or oppose any issue on popular
considerations. One can not blame them for that. The manner of opposition,
claims for and against the issue is also sometimes aimed at the gallery
rather than being serious matters of policy considerations. We are
witnessing all kinds of claims and counter claims on the issue of FDI in retail
sector.
The Issues discussed at present:
Inflation control, Employment generation, Future of Small retailers, Farmers
well being- Are these the real issues or side issues given prime attention due
to vested interests?
The government is not clear on its policy objectives. The 4 page note on
which the cabinet took the decision was illusive on the specific aim and
objective of the policy. For public consumption some tall claims are being
made by the prime minister, finance minister and also the commerce
minister. One claim is about controlling price rise. Discussing the logical and
practical merit of the argument is of no use. The main question is, 'Is
inflation in food prices the real motivation for this policy decision?' If so, will
the decision be revised if the inflation is not controlled? The other populist
claim is, 'This will create millions of jobs.' Again the same question is job
creation the main objective then the choice could have been some other
sector like manufacturing, IT hardware and infrastructure development
which would have created much more jobs for even the unskilled labour. The
FDI in retail sector is feared to displace more self employed people than it
ever can employ. The difference between the two is very large in-fact
multifold. There is a need to refer to the data available on these companies
in the west about this crucial factor. Many studies have shown this
downward trend in employment opportunities due to entry of big players in
retail in US as well as Europe.
These two claims about inflation and employment could be explained as
responses to the actual fears of the public also articulated by the political
parties. But what is the real objective behind the policy? The government
must come out with the real aim behind this decision.
The opposition is equally superficial in some of its arguments. The fear of
large corporations eating up small retailers may be a real threat but is not a
convincing economic argument. Politically it is very sound issue as it touches
millions of families which are dependant on the retail business directly or
indirectly but these threats can be dealt with some regulations. The present
policy decision has provision of allowing foreign investors to open outlets
only in cities with population in excess of one million. But again the question
remains, 'Is the protection of small retailers the main issue in opposing the
FDI in multi-brand retail?' Though the studies in the west as also in the East
Asian countries show that the big retail chains displace small retailers
completely, Indian conditions are not the same. Studies on effect of
domestic retail giants like Big Bazaar on the small retail business have
shown mixed trends. According to one study Audacious Kiranas vs Organised
Retailers by Abhinava S. Singh, Siddharth G. Das and Mamta Mahapatra
(published in - http://www.scmsgroup.org/scmsjim/pdf/2008/scms%20journal%20July-
20Sept.%202008.pdf#page=93), "Although initially there was a mass exodus of
consumers (87 percent) shifting to Big Retailers, our findings suggest that a
majority of them have come back (68 percent) to the old and reliable
Kiranas"
This has cultural reasons also. For us in India human relations are more
important than mere impressive mechanization.
Another issue raised in this connection is about the relation of retail stores
with the farmers. Those opposed to FDI claim that it will ruin the farming
community by hard bargain and aggressive policies followed by the large
corporate. The government claims that it will benefit the agriculture sector
as it will remove the middleman. Direct purchases, efficient supply chains
and contract farming will give more returns to the farmers. This will also
bring down the food prices claims the government. Again, if the government
is serious about farmers plight it can take more direct policy measures like
banning speculative trade of farm produce in the commodity market and
streamline the agriculture produce markets (mandis). You will not need FDI
in retail to give more returns to farmers or bringing down food prices as a
side effect. At the same time a detailed study of the practices of multibrand
retail giants in direct purchases from farmers and supply chain
management adopted by them in the countries of their origin and also in the
Asian countries like Thailand and Indonesia where they have operations
need to be done before any such claims are entertained.
Let us discuss the Real issues
Is Media the right forum of policy debate? :
Both political and economic discussion of the issue was taking place in the
media, as the highest policy debating forum, the parliament was made
dysfunctional by its own custodians. The popular perception deliberately
created by the government spokespersons put the blame on the opposition
but the real responsibility of running the parliament lies with the ruling
combine. It seems the major political partner of the ruling coalition is too
arrogant to have much needed flexibility of approach and political honesty.
The sad result is -- it has to keep on bargaining on key issues even with its
so called allies and external supporters. But that irony is a subject for
another detailed discussion.
Political issues:
The political debate in the media is centered more around the timing of the
decision than the merits and effects of the policy in itself. One can
understand the anxiety of political parties and leaders who have to face the
people regularly. Their electoral fate depends on the popular perception.
Hence it is natural for them to take postures to suit the time. They indulge in
shameless u-turns on policy issues depending upon on which side of the
Loksabha speaker their benches are. But it is baffling that so called political
observers and experts in the media have not discussed the political fall-outs
of this important policy decision of the cabinet.
Domestic politics:
Issues to be debated politically should include the ideological mutations,
diversions and even contradictions of the political lot. There is also a policy
conflict involved with bill for food security being pushed on one hand by the
super cabinet, the NAC and this blatant attack on the food sector on the
other. The issue of multi brand retail sector along with the looming danger of
introduction of contract, corporate farming is directly related to the food
security of the country. This needs serious consideration.
Food Security:
Even if we accept the economic claims that the FDI will help in ensuring the
food security in the rural sector by favorably affecting agriculture marketing,
the political question remains, 'Is it sound geo-political move to out-source
the food security of the country to foreigners even to a marginal extent?'
The experience of the agriculture rich African nations need to be deeply
studied in this connection. With influx of Food giants PepsiCo and
MacDonald's in contract farming and cattle raising in many African countries
like Kenya the results have been far from glossy. Famines followed by
political uncertainty in Rwanda, Namibia and Ethiopia also need to be
examined from this angle of corporate involvement in agriculture sector and
its impact on food security and political stability of these countries.
International Geo-politics:
Another geo-political issue hardly discussed in this connection is the
prudence of opening capital flow in basic sectors. The FDI in Multi brand
retail is not just an economic issue is amply clear by the enthusiasm with
which the US ambassador jumped in to promote the decision of Indian
government. With banks, International financial forums and multilateral
commercial, industrial, and environmental conventions increasingly
becoming battlegrounds for regional and global geopolitical diplomacy, the
flow of capital across the frontiers does not remain a mere economic issue.
This needs to be studied in depth by the political analysts. China with its
trade surplus with almost every country except Taiwan and a whopping 3
trillion USD investment in the US is way ahead in this game of financial
diplomacy or to express it more alarmingly 'Capital Imperialism'. India with
its great domestic savings and surplus capital available unused in the banks
has a great potential to put some competition. But it demands a complete
overhaul of political point of view of political establishment, diplomatic
bureaucracy and political thinkers in the country towards economic issues.
Economic Issues:
The national discourse on the economic reforms in general and on the issue
of FDI in Retail sector lacks originality and intellectual honesty. The debate is
mostly steered by the interested players indulging in a wide spread
perception management campaigns. Media understandably is influenced by
its sponsors which includes government to a great extent. Government
spending on audio- visual and print publicity is one of the main sources of
existence for many media establishments. The other major revenue source
is the corporate world. So naturally the voice of the large population can be
heard only by way of street protests, peaceful or otherwise.
The main culprit for the lack of honest debate in the national interest is the
'intellectual class' How many Indian universities have the requisite infrastructure,
trained manpower, know-how or even the will power to conduct
scientific studies related to policy issues? The result is that we lack an
informed debate on policy issues of long term national importance. The
present issue of FDI in retail sector is one such issue. It demands not only a
political consensus but a thorough national debate on basic economic issues.
Need of FDI:
Let us discuss some basic economic questions about FDI. When and why
does a country need capital from foreign sources? Simplest of the answer is
when you do not have enough domestic capital to be invested in the
economy for the growth engine to keep firing. Another reason could be that
some sector or area of economy needs impetus in the form of new
technology which can come only with an investment attached to it. Third
logic could be you need to deal in international trade; hence there will be
give and take. You give some and in return get some. The government
needs to explain these three points.
What's the bargain? What did India get in return?
The US has been pressing India for the FDI in retail but before agreeing to it
did India get a bargain? They could have got some concessions for their
export of agricultural produce or for the textile industry. What's the deal? Let
the country know as that can be only one logical reason for the policy
decision. The other two possible factors do not count in this case.
Technical Upgradation? In Retail??
There certainly is no new technology on offer from the international retail
giants. We already have our own multi-brand retail chains. Their technology
is as good as any of the international corporate in the field. In fact Vishal
Mega mart and Big Bazaar are real management success stories, beginning
from scratch growing to a great height with tremendous expansion. Reliance
fresh had largest capital to start with but relatively not so successful a
venture for Ambanis. It has become a bit of burden on the group. Big Bazaar
of Biyanis is also under pressure for extra push in the form of added capital.
Hence these big brothers in India are all lobbying hard for the FDI. That will
help them survive at this crucial juncture.
Are we Capital starved? :
In fact India has surplus Capital available. We generate more domestic
capital in one year than the whole FDI in 2 decades.
As an economy India is not short of capital in the domestic market. In fact
we have surplus capital available with our economy in plenty. According to
RBI's annual report the gross domestic Capital generation in 2008 was Rs.
1845513 Crores and is increasing every year. (See the tale below)
(http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1013)
There is no official statistic available for the capital surplus with the banks
but the market studies by some agencies give figures for different banks.
When we add up the capital surplus figures for 2010-2011 for top ten Indian
banks the figure comes to Rs. 17663665 Crore
(http://business.mapsofindia.com/india-company/top-10-bankingcompanies.
html).
The total FDI received last year is just Rs. 113485 Crores. (US$22697 Million
to be precise, converted at present rate of 50 Rs approx. would have been
quiet less at the time it was invested as Rupee was much higher at that
time) This comes to be just 6% of the Gross domestic capital generated and
mere 1% of the surplus capital in the top ten Indian banks. This tells the
story. We have huge amount of capital unused in our own kitty and yet we
are inviting FDI in a sector which is very crucial to our National interest.
Source of FDI:
There is another very crucial angle to the FDI story. In the last decade total
FDI received is Rs 351731 Crore or US$ 81010 million. The largest investor
country wise is Mauritius. www.indiaonestop.com providing the data from
official source of Union Commerce ministry comments on the country wise
chart, "The country wise figures for 200-01 to January 2009 reveal Mauritius
in the leading position accounting for about 43.3 percent of total FDI inflows
into India. The US and UK is far behind it with 7.72 percent and 6.41 percent
respectively. FDI from Mauritius during this period stood at $ 35180 million.
In terms of Rs it stood at Rs 1527677 million. FDI by US and UK during this
period stood at $ 6171 million and $ 5153 million. In terms of Indian
currency it comes to Rs 271491 million and Rs 225415 million respectively."
The FDI inflow from Mauritius in the 2009 was US $ 11208 million whereas
its GDP (PPP) that year is US $ 16630 million. So the country is investing
almost 65% of its GDP in India. Does that sound plausible? But it is a fact.
We must study this interesting phenomenon very closely before we jump
into any economic calculations about FDI. Why Mauritius? Whose money is
this? Is it real Capital from foreign FIIs or corporate coming to India for
business? Not much data about the detail of this capital flow through
Mauritius is available in the open source. But the experts in international
investment investigating the Black money issue have an idea. They tell us it
is the dirty money stashed away which is coming back to our market this
way. It is not only tax evasion related black money. Most of it is generated
by way of dirty and antinational means of corruption, kickbacks in
international contracts, drugs, illegal arms, terror money etc. This is
transported by the infamous havala transactions and parked in the tax
havens. This dirty money is given a chance to come back in Indian market in
the form of FDI. The criminal is allowed to enjoy this investment legally
without any punishment or even detection.
So! Is there any economic Rationale for FDI? :
The economics of FDI in retail sector thus fails to convince its need,
relevance or even the rationale for the policy decision. No Capital shortage,
no technological advancement and nothing in return; this sums up the
economic calculus of the cabinet decision taken in an apparent haste without
any attempt for political consensus. Their is no urgent need for foreign
exchange either. We have a comfortable cushion with total forex reserve as
in Mar 2011 at US $ 304,818 million with the balance of payment deficit
being at just US $ 13050 million. Further more this discussion on the
economic mathematics of FDI with the major share coming from a country
like Mauritius also brings back the more important issue of National security.
When simple mathematics works out against any necessity for the opening
of retail sector to FDI, why the government is bent upon taking this
decision?
Mala-fide? Ignorance?? What's behind the decision??
Usually when such illogical decisions are forced on the nation their is either a
vested interest working behind the scene or a weak statesman in utter
foolishness leading the nation into a hopeless situation. There are interesting
revelations when one goes little deep in the FDI analysis. One chart shows
the foreign technology transfer approvals from 1991 to 2008 under the FDI.
http://www.indiaonestop.com/FDI/foreigntechnologytransfer.htm
Mauritius does not find place in the top five countries is no surprise. The fact
that US is topping the list with more than 22% approvals is also not
astonishing. What is most curious in is that the 5th place is occupied by Italy
with over 6% of the approvals. Very interestingly in the FDI inflow list Italy
does not find place in the Top 15 countries. The traditional technological ally
of India Russia or the recent world leader China is also not seen in the top 5
countries with technology transfer approvals. One can not say if this throws
some light on how decisions are being taken in Indian government, but one
thing is clear that there is not much relation in FDI inflow and technology
transfer. So the argument that FDI improves the technology in that sector
does not hold ground on imperial experience of past 2 decades.
The Mind‐set of policy makers
Coming back to the discussion on hand, the present Prime minister is tagged
weak but not even the strongest of his critiques can dare call him a fool. Not
at least in economic matters. So why is he pressing for such a useless
policy? The answer to this puzzle lies in the Paradigm that governs the
economic thinking in the establishment. We are the victim of following the
alien models, which have failed miserably in their own land of birth. Till 1991
we followed the socialist model and after that we are trying hard to ape the
US led western model of free market economics. We will not go into the
current state of affairs in the western economies but instead would look
within. The policy decision about the FDI in retail sector is being touted as
second generation reforms by the government and the economic analysts
alike. It will be interesting to take an overview of our national experience of
the 'Reforms' post 1991.
An Overview of Reforms:
The first generation reforms were initiated by a minority government in
1991. That it was a politically weak government without clear majority in
parliament is not a mere coincidence. Facing the challenge of communal
tension the political genius of PM Narasimha Rao gave full freedom to his
world-bank pensioner, finance minister. This proved an unintended blessing.
Dr Manmohan Singh aggressively advocated economic reforms but
cautiously implemented the same bit by bit. The first part of the first
generation reforms was labeled liberalization, other two being termed as
Privatization and Globalization. Though very difficult to bring about, when
proposed, liberalization was well received across the political and ideological
frontiers. In fact except the adamant left everyone welcomed this much
awaited move. The country paralyzed by license, permit and inspector raj
heaved a sigh of relief. The legal dismantling and the restructuring of almost
all the government departments was not done in a day. Laws were changed
to make things easier. Technology was used to make the permits, chalan
and reporting in tax departments and others more accessible to the public.
Single window interface with the public was introduced in many
departments. Except for the changes in labour laws other things were
smooth and well appreciated equally by the business world and people at
large.
Role of domestic Liberalization:
Liberalization of policies had another effect. The Indian potential was
unleashed. The barriers between states were also raised. Inter state trade
was fully opened. The quality Basmati Rice from Punjab can now be sold in
the rice eating states like Tamilnadu and Bengal. This was not possible
before 1991. This openness of the market gave a great opportunity to hence
marginalized innovators in the Indian economy. This domestic intra national
phenomenon is yet not explored fully. A deeper study as to the rise of
domestic players in the economy as a result of 1991 reforms is long
overdue.
Role of foreign capital needs a close look??
One of the reasons why such study is not taken up is that the mainstream
economist and policymakers are convinced that the entry of foreign capital
as well as competition offered by the multinationals is the only cause behind
the great Indian story. This needs to be researched carefully. There are
obvious sectors like automobile where we see the influence of international
players. The competition not only gave a boost to quality in this field but
also gave a wide range of choice to the customers. To think that the
aggressive loan marketing was behind the automobile boom would be a wild
jump inspired by the very visible advertisement explosion. It would be
interesting to know the exact share of financed vehicle compared to the cash
purchases, especially in the two-wheeler category. Nevertheless, this was
globalization in action. The opening of market for foreign brands in the
consumer goods section had a very visible impact. The market as was known
in the 1980s changed completely. It was a pleasant shock for the middle
class consumer. To go to the market and purchase whatever one wishes was
a dream come true to this generation used to long waitlists and scarcity in
almost every thing.
Adverse effects of Globalization:
But has the international competition tonic worked similar wonders in all the
sectors of our economy? Certainly not. The very prospering textile industry
got a jolt after the signing of WTO. Though the then commerce minister
fought a great deal to extract a better deal for India than what the
developed countries then were ready to give, the textile sector was one of
the many casualties of this historical blunder. Still Indian textile industry is
a force to recon with, but the diversified, decentralized nature of the
production was hit sharply by the change in policy. Surat and Ahmadabad
saw thousands of looms going out of work. Gwalior, once known for the
textile mills, even today the audio tape in the shatabdi train tells it as one of
the features Gwalior was known for, now hardly has 1-2 units functioning.
More than 1.5 crore families were affected by this. Globalization effect needs
to be studied more objectively than the advertizing market reviews or the
protestor's exaggerations. What we need is a pure disinterested academic
exercise.
The soft drink market is again an example where the domestic players are
totally wiped out. There were many local soft drinks in the market before
1991. Campa-cola and fanta being the largest of the local brands. Parle and
Godrej had a very prospering beverage business. But most of it was taken
over or simply purchased by the two giants Pepsi and coke. The whole
market has changed thereafter. In other FMCG products the competition has
become increasingly lopsided. The more diverse and localized products are
finding it very difficult to stand on their own. We are not talking about the
likes of Nirama or Ghadi in detergents. But the smaller manufacturers in
almost all the districts. Many are still surviving on sheer quality advantage
and loyalty of their consumers. It again is a relationship for us.
Other effects of Reforms:
The liberalization part of the reforms was thus very effective. The
globalization part has mixed results. There are many other things in the
story. The exponential growth of services sector is one very important
factor. The BPO and other out sourcing opportunities were cashed by many
Indian entrepreneurs. There was phenomenal jump in the salary structure of
the private sector followed by the 5th and 6th pay commissions in the
government also. This increase in purchasing power led to real estate boom.
As the rates of property skyrocketed the NRIs from Middle East and other
parts of the world jumped on the bogie. Soon in major cities the property
prices went out of reach of the common man. The native of the land could
only be the seller. Many did not mind selling their land in exchange of fat
amount and a small flat in the complex. As such the concept of real estate
is a very notional thing. Land prices go up with every transaction in the
neighbourhood. But the bubble had to burst. It has in some metros and a
slump has come in many other big cities. In relatively smaller urban cluster
the real estate is still on the rise.
The second Landmark 1998:
Pokaran changed the psyche of the nation.
1991 is considered to be a landmark in the shift. But there is another date to
be remembered-- 11th may 1998, the Pokaran day. This changed the psyche
of every Indian whether in India or abroad. The confidence was palpable. We
could feel it in the coffee shop discussion same evening. Every one was
thrilled. The professional efficiency, complete secrecy and precise execution
shown by the nuclear test was told and retold like an epic. It was not just a
pride for the strategic ability. It was more like, "Yes! We can do it." India can
do it was the message. The scientific or technological achievement was not
as great as the Integrated missile programme, Space technology
achievements or the super computer but the patriotic fervor attached to the
nuclear test was unmatched. This changed the whole out look of Indians to
look at themselves as a nation. Apart from this psychological and strategic
impact there was an economic fall-out. Economic Sanctions were imposed by
US, followed by all the developed countries including Japan. Japan was
major donor to India in urban infrastructure development. It was said by an
economic observer that the bomb was exploded in Pokaran in Rajasthan but
the tremors were felt in the North block. The Finance ministry officials
termed the decision as suicide. It was felt that the nation on course of
economic reforms had been derailed. But the result was something
unimaginable. The whole nation geared up. There was hardly any impact felt
except for technological block-out. But there also we developed many
indigenous technologies during that period in Space and defence sector.
IRSO and DRDO became icons of Indian capability in research.
Immediate crisis was of balance of payments. With the stoppage of even the
aid funds and loans from outside the challenge was on the foreign exchange
reserve. But the RBI declared the India Development bond and later the
resurgent bonds for the NRIs. The Diaspora responded with renewed
enthusiasm. Financial prudence mingled with nationalistic pride motivated
the NRI's to invest in the bonds. The bonds received overwhelming response
many times the initial target set by the government. The average Indian
started taking pride in the achievements of their fellow countrymen. The
NRIs have been achieving great things in scientific and economic field all
over the world but there was hardly any mention of these achievements
back home. But post 1998 it all changed. We started believing in ourselves.
Hotmail fame Sabeer Bhatia and Intel's Vinod Dham became household
names.
This coincided with two major reform related activities. The disinvestment
was in full swing. Government was off-loading all its non paying assets. This
brought in a lot of capital in the domestic market. The PSUs were also
restructured and made more corporate in management. Many government
companies were formed like Department of telecommunications commercial
activities were made into a company -BSNL. Even the state electricity boards
were trifurcated into companies. This coincided with the great infrastructure
building projects of linking the Highways, the golden quadrilateral along with
Pradhanmantri Sadak yojana to link Lakhs of villages. These gave impetus to
the steel and cement production and had cascading effect on the domestic
market. The Sanctions were lifted within three years. The world came to
recon India as an emerging power. The Elephant was moving. The basics of
Indian economy gave it a sound platform. Population which was seen as a
burden was now called demographic dividend. The whole perspective
changed.
The Ugly side of Reforms:
The story is not all glossy. There are many hiccups. Rationalizing subsidies
was a great challenge. The political scene had also changed almost parallel
to the reforms. The days of single party rule were over. The era of coalition
politics had its own dynamics. This acted as a break for many reform as
many policy decisions had to be postponed, hold back or even completely
given up for political considerations. In the hind sight many of these breaks
seem to have done good to the economy. Rather than getting on to the
roller coaster of reforms and completely turning into a western economy
India progressed cautiously at its own typical Indian pace. There are other
questions about the fruits of growth reaching to the masses equitably. The
statistical data suggests that the gap between the poor and the rich has
been widening. Poor have become poorer. Their number has gone up
substantially. This shows that blindly following the global financial model
may not suit Indian conditions.
Blind Followers of the West:
Now we have 20 years of experience of this reformed economic model. We
are told we have not ripped all the fruits because we have not done enough.
Look at China we are told. But have we learnt the correct lessons is the real
question. As pointed out earlier due to lack of impartial, objective academic
study we really do not know the real movers of our robust economy. If we
go by the set rules and follow the Free market model of the west there is all
the possibility that we would also end up in the same soup. Some things are
taken for granted by our economic intellectuals while talking about the
reforms. We have not checked their validity. The first and foremost is about
the foreign investment. We are told more of it the better. Hence increase the
sectors, increase the percentage and roll out red carpets. All state are
organizing big festivals to attract foreign investments. We are told you have
to change your laws to suit them. We are told the tax structure is to be
widened then only we can reduce the fiscal deficit. Competition is the only
solution. Look at the automobile sector where the foreign competitors have
forced our own manufacturers to improve etc.
This is the mind set under which the decision to allow FDI in the retail sector
is taken. It may be the genuine opinion of the decision makers that it is for
the good of the country. Giving them this benefit of doubt we can still
logically proceed to analyze the need and texture of next generation of
reforms. It is not always true that increasing the dose of the same medicine
will give a better result. We have to diagnose the patient and then give the
medicine according to the ailment.
Real Reforms needed
We definitely need reforms, but what are they. Do we need more capital? Do
we need more competition? or is it something else that we need.
Following are few points on the type of reforms urgently needed for India to
be able to sustain the growth and convert its potential into reality.
Technical inputs in right areas:
Taking the home conditions into account not the needs of the investor.
We need to understand the lay of the land. We have to look at India from its
own eyes. We have to take into consideration its own strengths and
weaknesses. Like population we may be on the wrong footing in assessing
our own strengths. Population can be used as strength if we have labour
intensive policies. Educating our masses is not a one year programme so in
addition to that we must have opportunities for the uneducated and
unskilled labour. If this national perspective is taken into consideration we
will know we have more prospect of employment generation in IT hardware
sector than the software. We need FDI and technological support from
friends like Taiwan in this sector.
Community base micro-capital Generation:
Cooperative has been a successful model in some regions.
Our community based capital generation has proved to be a great boon.
More than 1200 such community based commercial and industrial clusters
have been identified by researchers. The great Noble prize winning
experiment of Mohammad Yunus of Bangladesh in micro-financing has been
in practice in India for centuries. The community based entrepreneurship can
be an innovation in micro capital generation. Co-operative is another
successful model in this field. Amool in Gujarat and sugar and cotton cooperatives
in Maharashtra have proved to be better suited for Indian
environment. There is ample scope of improvement in this sector. But the
great strength of this model is that it is participatory, everyone involved is a
stake holder. This gives opportunity for more equitable growth. This is just
one aspect of our very rich social capital waiting to be cultivated and
harvested by the society free from governmental intervention. We do not
need any policy to promote these communities to produce and trade. What
we need is to give them complete freedom from the limitations of the state
machinery which is the legacy of the colonial rule. It was the British Raj
which in the first place had deprived the community life of its economic
creativity and freedom to express it in a suitable economic activity. After
independence we have done little to revive this spirit of our masses. The
liberalization has given a limited scope and many of these traditional
communities have worked wonder.
Rationalizing the Tax structure:
Minimum tax from maximum people and no multiple taxing of economic
activity.
The tax structure demands rationalization. Just by tightening the rules and
forceful recovery we may raise the revenue of the government but that
won't address the issue. There is no study of un-taxed economic activity in
India. We are not talking about illegal tax evasion. But most of the trading
activity in India is not in the Government radar. We are running a parallel
economy which is estimated of the same size of the GDP if not more. This is
not necessarily black money. No doubt most of it is born out of tax evasion
practices. But there is legitimate, diversified, small-scale economic activity
which can not be taxed. It is so un-organized that to try to tax it will break
down the whole machinery. Hence we conveniently ignore it. On the other
hand we tax the organized activity over and again. The same thing is taxed
so many times. This illogical taxing promotes evasive practices. This can be
cured with a very simple innovation.
Arthakarnti Proposal.
It was first suggested by a small scale industrialist and has now evolved into
a movement by name Arthkarnti. The proposal is so simple that the modern
economist used to complexity is baffled. Arthakranti proposes a single tax
model. It advocates that all the taxes except customs be replace with one
tax. They have named it transaction tax. It has to be a small fraction, say
2%. That is all the tax that will be levied on the transaction once for all. On
every deposit in the bank 2% will be deducted by the bank. 0.65% on behalf
of Union Government, 0.65% for the state 0.35% for the local body like
Panchayat or Municipal Corporation and remaining 0.35 % for the banks
administrative expenses. With total computerization of the bank operation
this is just a matter of developing the relevant software. The calculations
made by the experts show that this small amount will fetch more revenue to
the government than what it gets at present. To promote maximum
transactions to be done through bank, Arthakranti proposes a parallel step
to stop the big currency notes. These two steps taken simultaneously will
widen the tax net to almost all the transactions and will also curb the
generation of Black money in the economy.
Recovery of Black money stashed abroad:
Legal options under present laws, New laws, Check on Hawala, Banning the
Participatory notes.
Another major reform demands the recovery of Black money stashed
abroad. The legal avenues under the existing national and international laws
or need for legislating, amalgamating new laws/ordinances can be discussed.
But there can be no two opinions that the huge amount parked unutilized in
the tax havens must be brought back into the legal economic machinery.
This may eliminate the need for any foreign investment. Instead we will be
in a position to bail out the crisis ridden European nations. We have to start
with banning the participatory note completely and immediately. They have
proved to be the dark horses in the stock exchange. Their flow has been
controlling the bullish and bearish trends in the share market robbing the
small genuine investor of hard earned money.
Decentralize Rural Development model:
A decentralized development model is the need of the hour. Rather than
following the international standards of development which demand
urbanization of majority rural population, we need to evolve our own modus
operandi to suit our realities. It will be easier to for us to equip our villages
to be centers of vibrant economic activity rather than displacing majority of
rural population to the cities converting them into a big slum.
Constitutional reforms:
A political system rooted in the national historical and cultural moorings.
There is a dying need for reform in our political structure. The Westminster
model of democracy needs a revamp. Taking the vastness of the land,
enormity of population and inherent diversities into account we need a
model of our own. The present constitution has served us well, better than
many of our contemporaries for last 6 decades but that is no reason to
continue the same, unchanged. It is high time we constitute a fresh
constitution draft committee and then debate and approve it in specifically
elected constitutional convention. We the people of Bharat need to give unto
ourselves a fresh Constitution.
Thus, we need to prioritize our national reform agenda. One can not say that
first do the above then only other reforms can be taken up. A Country as
large and as complex as ours will definitely have to work on many fronts. As
the scope of this paper was limited to FDI related reforms we have not
discussed many required reforms in many other fields of national life such as
education – primary and higher, natural resource management, Energy
security etc. But definitely the above listed reforms must be taken up on
priority. They are obviously more important than the FDI. In fact without
these reforms FDI is useless and even counterproductive.
Conclusion
In conclusion it can be said that FDI policy in general and FDI in multi-brand
retail in particular need to be looked into from more fundamental point of
view. The geo-political issues, threats and challenges must be studied
thoroughly. The economic alternatives also need to be explored. There is no
doubt that India needs to continue the reforms and next generation of
reforms are urgently needed, but the context and content of such reforms
need to be rooted in the soil and should cater to the realities of the land
rather than the theories of the international cartels.
Indian society has an economic potential to regain its past glory. As was
expressed by William Dalrymple in article titled, "Empire strikes back" in the
Telegraph, UK in 2007 –
"Extraordinary as it is, seen from the wider perspective the rise of India and
China is merely nothing more than a return to the ancient equilibrium of
world trade. Today, we Europeans are no longer the gun-toting, gunboatriding
colonial masters we once were, but instead are reverting to our more
traditional role: that of eager consumers of the much celebrated luxuries and
services of the East."
The basic foundation of Indian economy is very sound but we need to build a
suitable edifice on this foundation to realize its full potential.
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