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Corporate Dec 5, 2012

Will Wal-Mart do the job we don’t want to do ourselves?

By R Jagannathan

The debate over foreign direct investment (FDI) in multi-brand retail is getting surreal. Witness the statements made by Sushma Swaraj, and the equally doubtful replies of Kapil Sibal in yesterday's debate (read here).

Neither the opposition, nor the government is speaking the truth for the simple reason that nobody can really predict whether the entry of Wal-Mart and other such global retailers will be beneficial or harmful.

The government says it will benefit farmers and create jobs, the opposition says it will destroy kiranas, and both of them could be right in a small way, but wrong in a big way. Nobody can really say how Indian farmers and kirana stores will adapt to competition, and how Wal-Mart will adapt to India. We will know only after a few years.

FDI in retail is thus really a shot in the dark, and even though there is ample evidence that Wal-Mart has indeed destroyed mom-and-pop shops in the west, the situation is so different here that it is impossible to presume that it will do the same damage here.

Instead of being truthful on the real issue, the government is telling us how Wal-Mart will help farmers when our policies already allow foreign retailers to do so. Reuters

So it's worth debunking the specious arguments put forth both by those who want Wal-Mart and those who don't. At the very least, they should junk bogus arguments and start discussing how to help our kiranas to compete, and how to help our farmers to gain from Wal-Mart.

The first argument for allowing FDI in multi-brand retailing is that it will help farmers obtain a better price. Plus, it will create jobs. The truth is jobs can be created even by Indian big retailers, and not particularly by Wal-Mart. Jobs depend on local labour and employment creating policies, not foreign investment.

The second argument is that Wal-Mart will help improve the supply chain from farm to fork. This is true, but the fact is 100 percent FDI is already allowed in food processing, cold chains and logistics. Wholesale cash-and-carry trading is already open to Wal-Mart. What the government is not telling us is this: Wal-Mart won't make these investments till it is allowed to set up its own shopfront - which is where the real margins are.

Instead of being truthful on the real issue, the government is telling us how Wal-Mart will help farmers when our policies already allow foreign retailers to do so. This help is not forthcoming without the rider of being allowed to open their own shops.

Third, the government fails to tell us that its own policies are not helpful to farmers. Farmers can get higher prices if they are allowed to develop export markets. But we place curbs on free trade in order to keep domestic prices down. We allow exports only when prices crash in the home market due to temporary over-production, whether it is in rice or vegetables.

Fourth, farmers can get better prices even in domestic markets. But we don't have a free domestic market. The problem with "middlemen" is a self-created problem, with state governments forcing farmers to sell their produce at mandis - where middlemen dominate. Chandrabhan Prasad and Milind Kamble, writing in The Times of India today, point out that middlemen, called adhatiyas, preside over mandis and the Agricultural Produce Marketing Committee markets.

"Adhatiyas preside over mandis (marts) and regulate trading in foodgrains, vegetables and fruits. From farms to kirana stores, they call the shots. The Mandi Parishad rules make it mandatory for farmers to bring their products to adhatiyas. Kisans who bring their trucks full of apples from Shimla or vegetables from Meerut don't have the freedom to sell their produce to whosoever they want. It is some adhatiya who sells their produce for a commission."

If this is the case, it is obviously our domestic anti-market policies that prevent farmers from getting a better price. Wal-Mart is merely an additional battering ram to break this nexus between politicians and middlemen. Apparently, we need a Wal-Mart to fix our own problems. We can't honestly battle our own vested interests unless we give it a more esoteric justification.

Fifth, those opposed to FDI always trot out the China argument. If Wal-Mart comes here, Chinese good will overrun the Indian markets. Quite apart from the fact that Chinese goods are already taking over the world due to their extremely low prices, the truth is everybody - from Apple to Nike to our own makers of white and brown goods - uses Chinese costs to expand the market.

Many Indian small manufacturers have given up manufacturing and have taken to imports to improve their turnover and profits. In short, Indian manufacturing - which began from trading - is now going back to trading because we are simply not competitive.

The only way to become competitive is by removing regulations, lowering corruption and creating enabling conditions for people to produce at low costs. But our policies are headed in the other direction.

Land, an important element of overhead costs, will become more and more expensive once the Land Acquisition Bill - which wants farmers to be compensated at four times the market price, not to speak of rehabilitation costs - is passed by the UPA government. Our manufacturing will thus become even more uncompetitive once this happens.

Labour laws do not allow our manufacturers to hire and reduce jobs depending on demand conditions. As a result, Indian manufacturing is becoming more and more capital-intensive, and organised labour is becoming more expensive. Thanks to make-work schemes like NREGA, labour costs are rising faster than capital costs.

Carmakers Hyundai, Honda and Maruti are at the forefront of the drive to use more robots for many operations in their Indian plants, reports The Economic Times. After its recent factory violence, Maruti has decided to accelerate automation of many more of its operations in Manesar, and this trend is evident in other factory floors as well.

Clearly, the China argument is important, but the real reason for India losing it competitive advantage in manufacturing vis--vis China is our land, capital and labour policies, and not FDI in retail.

If the UPA needs to be attacked, it should be for failing to reform our land, labour and agricultural produce markets, which are killing the India growth story.

Our businessmen know this, and this is one reason why they use crony links to get favourable deals on land and related policies to make money.

FDI in retail will succeed or fail in India the same way Indian business succeeds or fails - by making compromises with the political system and through corruption.

And that's the real tragedy about FDI in retail, not the mere fact of Wal-Mart's threat to kiranas.

by R Jagannathan

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