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FDI in Retail

Facts & Myths

A Compilation of Articles by
* S. Gurumurthy * Shekar Swamy * Dr. Gautam Sen * Dr. S. Vaidhyasubramaniam * Prof. R. Vaidyanathan * P. Muralidhar Rao

Swadeshi Jagaran Manch Tamil Nadu

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FDI in Retail - Facts & Myths with Authors First Edition: November 2012 128 Pages Printed in India.

Published by Swadeshi Jagaran Manch, Tamil Nadu Book available at K75, 14th Street, Anna Nagar East, Chennai - 600 102. Phone : 94448 35513 / 9443140930 Email: Typeset at & Printed by New Horizon Media Pvt. Ltd., 177/103, First Floor, Ambals Building, Lloyds Road, Royapettah, Chennai 600 014. Ph: +91-44-4200-9603 Fax: 044-43009701

All rights relating to this work rest with the copyright holder. Except for reviews and quotations, use or republication of any part of this work is prohibited under the copyright act, without the prior written permission of the publisher of this book. Website :

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Publishers Note 1. FDI in Retail A Pernicious Policy Formulation 2. Obamas retail FDI self-goal 3. Market Economy? Or, Market Society? 4. 'Reform' at Nation's Cost 5. Selling Indias Retail Wholesale 6. Letting the Camel into the Tent 7. Why the Indian Model is Superior 8. Recipe for Unemployment 9. Reality Belies the Hype 10. Remember Salt Tax, Anyone? 11. How the World Burnt its Fingers 12. FDI will wipe out Small Traders 13. Retail FDI - for People or MNCs?

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14. How FDI in Retail will hurt Farmers 15. A Mexican Warning on Retail FDI 16. Why seek Retail FDI for Cold Storage? 17. Perils of State-aided FDI 18. FDI in retail threatens the Livelihood of Millions 19. Misplaced Hype over FDI 20. FDI in Retail Sector: Trade Policy Or Policy For Trade 21. Strengthening Local Trade The Way Out 22. FDI in Retail: The Illogical Claims

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Publishers Note

The UPA Government in September 2012 has, by a policy

notification, allowed 51% of Foreign Direct Investment (FDI) in Multi-brand Retailing. Betraying the promise of its own Finance Minister (who has since become the President of India) that the policy will be discussed in Parliament before final decision and braving some of its own allies and the entire spectrum of Opposition, the major partner in the ruling alliance has hastened to introduce the policy under the guise of reforms push. The ongoing debate on FDI in retail over a majority of the popular media and the pink media is intolerably superficial at times. For a rational debate, the fundamentals of conflicting alternatives must be understood. The English-educated Indian is often obsessed with the idea that anything foreign is good, without looking into the basic facts. And such ideas are mostly prompted by selfish interests in the name of consumer benefits not seeing the larger perspective or overall national interest. This book presents the facts and myths about the FDI in Retail Trade so that an informed decision could be arrived at by the readers. This book is a compilation of selective articles written by eminent personalities who have done an exhaustive study on the subject.
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We thank the authors, Sri S. Gurumurthy, Renowned Economic Thinker and well-known columnist, Prof. R. Vaidyanathan, IIM, Bangaluru, Sri Shekar Swamy, Group CEO, RK Swamy Hansa, Dr. S. Vaidhyasubramaniam, Dean, SASTRA University, Dr. Gautam Sen, Columnist and Sri P. Muralidhar Rao, Former National Convenor, SJM for having consented to publish their articles in this book. Sri J. Ravichandran has taken pains to collect all the related articles and Selvi R. Vijayanthi has assisted in the cohesive arrangement of the articles. We thank them profusely for the wonderful support. We are duty-bound to thank New Horizon Media (P) Ltd. and its staff for their unstinted cooperation in bringing out this book. Chennai 4.11.2012 Swadeshi Jagaran Manch Tamil Nadu

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FDI in Retail A Pernicious Policy Formulation

S. Gurumurthy

he UPA governments FDI policy, which allows entry of multinational retail giants like Wal-Mart in retail sector in India, gravely prejudices national economic and social interests. The commerce minister s admission that the new policy may enable global retail giants to get into multi-brand retail by investing in Indian companies shows how shamelessly the government is seeking to smuggle them into the crumbling indigenous retail corporates to save them. This policy subterfuge by the Congress, the major partner of the ruling dispensation, that is bereft of the support of even its allies for the proposal, betraying the assurance of its own Finance Minister to finalise the policy after discussion at Parliament, violates wellaccepted democratic conventions and political norms. It is also in clear breach of the Common Minimum Programme which binds the UPA coalition. More, since retail trade in India is not just a business but a community undertaking in most parts of India, it carries a high risk of social unrest. The unorganized retail trade in India represents the traditional, community-centric, low-cost and
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employment-intense retailing that includes but is not limited to, kirana shops, owner-run general stores, paan/beedi shops, convenience stores, hand cart and pavement vending. In this model a whole family works in one shop and a whole community is engaged in the trade in a defined area. It is collectively almost an unincorporated enterprise formed by relation-based communities now increasingly regarded as social capital. It is this model which has enabled the Patel community from Gujarat to leverage on their social capital to outmanoeuvre organized corporate motels in US and Canada and turn corporate motels into community Potels! Most advocates of corporate retail in India and of foreign retail firms in India seem to ignore the critical contribution of the present model of retail trade to the Indian economy and society. First, as its very structure and its reach from the main metros to the remote hamlets testify, this multi-layer retailing is the most decentralized economic activity in India after agriculture. Second, it constitutes almost 98% of total trade with an estimated 12 million outlets; in contrast, the organized trade accounts for just 2%. Third, it is the largest employment provider after agriculture again, employing an estimated 40 millions. In contrast, the largest retail giants in the world, the Wal-Mart employs just 5 lakh persons; this demonstrates how insignificant that is in comparison. Fourth, being self-employed, most of them are engaged in the trade along with their families, the work and livelihood of some 120 millions more rests on this sector. Fifth, the retail trade in India is run by community-centric social capital, not unrelated individual traders. Sixth, consequently, it is an open air community B-School for retailing that continuously
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generates, by sharing knowledge and experience through relations, huge community-based entrepreneurship. Seventh, it contributes to over 14% of Indias GDP, while the share of all companies in the BSE 500 index is some 4%! Eighth, this so-called unorganized retail segment has been growing at an average of over 8% per year for the last 8 years [1999-00 to 2006-07] which is second only to the construction trade that grew at some 10%. More. The retailing experience of the non-Western world has not been factored in by the policy makers. Japan has intensely protected its retailing which is also family and community-led and social capital-driven. In contrast countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have retracted and enacted new laws to check the prolific growth of foreign malls and hypermarkets to control their ill-effect on the economy and employment. In sum, the new policy is an attempt to replace through corporate-led retail the social capital-led retail in India while, in the motel business the US, the reverse has taken place with the Patel social capital replacing the corporates! The present Indian retail model is an efficient delivery mechanism for the rural India where the corporate mechanism too cannot reach except through the traditional model. But, if the social capital link to the retail trade is unsettled the entire distant and remote supply chain will suffer over a period, disturbing the social equilibrium and the organic social link evolved over several centuries. Before this ill-advised move, which is bound to fail, fails, it will lead to tectonic changes and cause tremors and tsunamis in the social capital-led retailing in India. It will displace millions of people from their places and jobs and undermine generation of new

The new policy is an attempt to replace through corporate-led retail the social capital-led retail in India
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entrepreneurship and disturb the social order. And lastly it mocks at the UPA slogan of inclusive growth as the proposed FDI policy tends to replace the OBC and minority communities in retail trade by foreign retail giants. The government should therefore withdraw, in the larger national interest, this pernicious policy announcement. Or else, the opposition parties including the BJP and its NDA constituents, and also the CPM and its third front partners should take efforts to raise the issue in the forthcoming Parliament session and ensure that this policy is overturned. This is clearly a test for the BJPs commitment to nationalism and the CPMs loyalty to the common man.

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Obamas retail FDI self-goal

S. Gurumurthy

It is Hillary Clinton, US secretary of state now and

Walmart director till 1992, who has been lobbying for foreign direct investment (FDI) in retail in India, the visa Walmart needs to enter India. Now it is the United States President Barack Obama himself. In the guise of urging a fresh wave of economic reforms, Obama has clearly asked India to invite Walmart. India is shocked at his ugly intrusion. The opposition is angry. The prime minister, as usual, is silent. The otherwise talkative India Inc too is quiet. Obama is not properly briefed, laments Veerappa Moily. Anand Sharma asserts, hesitatingly, Indias right to make policies. Some in the media bit shamelessly welcome Obamas uncouth intrusion editorially and with editorialised headlines like Policy paralysis in New Delhi reaches White House. Actually, is not the otherway round? Is it not the White House that seeks to transfer its worries to New Delhi? What drives the pressure on New Delhi for FDI in retail? Walmart lobbyists, Yes. However, the drive is deeper. Obama is desperate to lift the falling sentiments of US economy. The fundamentals of US and most European Union economies are weak with poor household, bank,
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government and national finances, all of them plagued by deficits and debts. That more and more paper money is being created and pumped in to keep households, banks and businesses solvent is now public fact. Some EU economies are actually bankrupt. On fundamentals, the US too would be, but for the US Dollar having unduly populated the world in its best times and co-opted the world to sink or sail with the US now. Obama and his advisers see no easy answer to such malaise built over three decades. The much touted US economic recovery since 2010, bargained at $6 trillion extra debt to US government since 2008, is turning into a mirage. From signs of fatigue in 2011 it is fear of downturn in 2012. In September 2011, the International Monetary Fund (IMF) downgraded the US economic growth from 2.5 per cent to 1.5 per cent and in 2012 from 2.8 per cent to 1.8 per cent. Recently, the Central Budget Office (CBO) US has predicted gloom for the US economy, with US deficit till 2019 projected at $9.5 trillion and the federal debt, $10 trillion in 2008 and $15.5 trillion in 2011, predicted to be $16.7 trillion by 2012. That is not all. US consumer debt is rising. Yet its consumption is falling from over 71 per cent in 2010 to less than 71 per cent in 2011. Household savings is down from over 8 per cent in May 2009 to 3.7 per cent in April 2012. The US needs more savings and more consumption together like simultaneous summer and winter! Understandably Obama looks for easy alternatives like fabricating sentiments to lift the markets. US economic thinkers, and their disciples world over, for instance, believe that if the emerging economies do well, US market sentiments and business
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confidence will rise. However, if China does well by more exports to US, that would actually do down the US. Again, if US consumers consume more, market sentiments and business confidence will rise, but that will dynamite household and the bank balance sheets even more. Yet, with the US now accustomed to living on the ventilator of market sentiments, not economic fundamentals, Obama believes that India opening its retail will lift market sentiments and business confidence in the US. He talks of additional jobs in US with Walmart in India. He is keen to show to American voters the FDI-in-retail trophy from India and promise more jobs to Americans. Not a single job may get added, but the sentiments will lift Dow Jones stock index, as Obama goes for polls. It is the presidential candidate Obama, more than President Obama, acting now. Obamas intrusion is not without background. Even before Obama visited India in end 2010, efforts were made to welcome him with an invite to Walmart. US government, US Inc and US media had been working ahead of his visit on the Indian government, India Inc and Indian media for an invite to Walmart. Before Obama, Mike Duke, Walmart CEO came to India, met all concerned and left, optimistic about a Walmart entry. India Inc and the Indian media began pushing Dukes wish, shedding tears for the Indian farmer, for his plight at the hands of the Indian traders. However, time was too short for the final act. By July 2011, the lobbyists had perfected the records for the final act. On November 24, 2011, the prime minister announced a policy to allow 51 per cent FDI in Indian retail trade. The delight of USWalmart was short-lived. The traders declared a strike. A united

In September 2011, the International Monetary Fund (IMF) downgraded the US economic growth from 2.5 per cent to 1.5 per cent and in 2012 from 2.8 per cent to 1.8 per cent.
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Opposition supported them. No roll-back asserted the government. The fatal blow came from within the UPA. Mamata Banerjee got the PMs decision put on hold, till consensus emerged among stakeholders. An accomplished success thus ended in utter humiliation. See how the powerful and multifaceted lobbies strike back. First the rupee mysteriously nosedives from 48-49 to a dollar in end February to between 55-57 during May to July. The rupees fundamentals do not deserve that kind of fall, says the Reserve Bank of India. The three-month premia for future delivery of dollars rises suddenly from 6-7 per cent in December 2011 to almost 11 per cent in Feb-Mar 2012. This perhaps causes a huge rise in the purchase of dollar in the spot market, and forces the dollar to rise and the rupee to fall. This actually needs inquiry. The rupees fall puts pressure on the soft points of Indian economy falling forex reserves and rising oil prices. Using the situation, lobbyists promptly start cry for economic reforms. In India reform means only opening the economy to FDI, particularly in retail now. Media and business lobbyists clamour for Walmart to save the Indian farmers! There is all round fear that, citing the stress, the government would go for an all-out opening of the economy, not just retail. Obamas intervention, however, has changed all that. He has made it impossible for the UPA government to invite Walmart now. If it opens the retail sector to FDI, it would be acquiescing to Obama. This needs a look at Indo-US history. For decades, the US was a suspect in the Indian mind. This long-held suspicion relates back to the Cold War days when the US promoted Pakistan and tormented India. Not much has changed despite the US being tortured by Pakistan now. Unaware of this sensitive history, Obama has blundered. His intrusion has raised questions over the motives of the US. QED: Obamas self-goal has torpedoed all possibilities of an Indian visa to Walmart in the near future. - The New Indian Express, July 18, 2012

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Market Economy? Or, Market Society?

S. Gurumurthy

The ongoing debate on FDI in retail is intolerably

superficial at times. For a rational debate, the fundamentals of conflicting alternatives must be understood. Here are some basic truths about conventional Indian retail. For thousands of years, retailing in India has been local community business selling retailers and buying households being familiar with each other. Even now Indian retailing is mostly neighbourhood, relation-based business. There are 15 million retailers in India, including hawkers and pavement vendors. This translates to the greatest retailer density anywhere in the world more than one retailer for 80 Indians! In contrast, China, more populous than India, has less than a twelfth of Indias retail density; just 1.3 million retailers one for 1000 Chinese. [Retailing in China 2010]. In India, one retailer does not stock all needs of all customers. Several neighbourhood retailers hawkers, roadside vendors, bunks and kirana shops taken together stock and meet all their needs. The Indian retail business is estimated at $400 billion. Of which the share of corporate is now 5%; the rest 95% is handled by traditional retailers. The wholesale-retail trade in India
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has evolved as part of its social milieu over millennia, organised and linked by local relations. According to a FCCI study, food read agriculture accounts for 63% of retail trade. Here, some 74 million strong small farmer-wholesaler-small retailer combine a social inheritance of generations works, not hierarchically, but laterally through neighbourhood relations. Some 58.8 million small-marginal farmers from 6.8 lakh villages, sell their produce at 47000 haats/shandies to some 15 million wholesalersretailers. It is the largest decentralised business in the world. They all operate within radius of 16km of where they are. Yet, only 40% of the food produced is traded; the balance 60% is barter-shared by social relations within villages. This [60%] sharing and [40%] trading keeps rural India alive. The Parliamentary Standing Committee Report on FDI in retail [June 2009] says that traditional retail employs 40 million people; and finds the corporate retail claim to 20 lakhs job highly exaggerated. The Committee is right. Walmart, with global turnover $ 422 billion employs just 2.1 million people. That is, with more than Indias retail business in its balance sheet, it provides less than 5% of Indias retail jobs! So the organised retails proven job potential is less than 1/20 of the performance of traditional retail. Where from did Anand Sharma get his maths that FDI in retail would generate 10 million jobs then? This stentorian noise for FDI in retail makes four claims. One, the organised retail would avoid the huge Rs 50000 crore waste of farm products due to lack of efficient supply chain; two, with middlemen eliminated the farmers would get better prices; three, Walmarts and Tescos would procure farm products and export them like they do from China, which traditional retail cannot. Four, it will yield more employment. The claim about employment is bogus. What Walmarts and Tescos could not do elsewhere, they would not do here. The next claim, namely, like in China, Walmarts and Tescos would ramp up Indias exports ignores the basics of Indian and Chinese
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economies. Chinas domestic consumption is low, just 35% of its GDP; the balance 65% is its exportable surplus. It has built this huge surplus over decades. India with a high domestic consumption of 58% has no such exportable surplus. Actually, it is sensible for Walmart to bring in goods from China, made cheaper by cheap Yuan, into India. Already Chinese goods is outselling Indian goods in India. India annual trade deficit with China, now $20 billion, is estimated to reach $278.5 billion by 2014! Far from making India prosperous, Walmarts and Tescos may impoverish it. The claim that FDI in retail will eliminate middlemen and enrich farmers is not borne out by facts. See the record of Tesco, the largest retailer in UK, in contrast. It exploits small farmers in UK and worldwide; hastens their replacement with monoculture plantations; poses serious risks for developing country farmers who have traditionally supplied to local street markets. Further, rather than growing their produce and taking it straight to a market, they have to deal with a chain of middlemen, supermarkets standards of uniformity in shape and size, risking rejection of lot of their produce . Farmer friendly FDI in retail is contradiction in terms. The campaign that FDI in retail would prevent waste by efficient supply chain management ignores two vital facts. One, the national highway forms only 2% of Indias road network, but handles 40% of the road traffic! The other roads can handle only trucks smaller than 20'; and link only local markets. Walmarts and Tescos cant build roads. The government has to. If it does,

Walmart, with global turnover $ 422 billion employs just 2.1 million people. That is, with more than Indias retail business in its balance sheet, it provides less than 5% of Indias retail jobs!
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Walmart or Tesco are not needed. Two, on storage, a recent MIT paper says that as demonstrated by the case study in rural India, the solution to food storage needs to be a bottom up approach. Communities need to be identified where the people have access to fresh food that is currently wasted and who are willing to put in the time to store it properly. Farm cooperatives are potential candidates . So, bottom up society, not top down Walmarts or Tescos, is the answer Finally, the debate on FDI in Indian retail misses out the most crucial point. Not only Indian retail, the whole of Indian economy, functions more on relations, less on contracts. Thats why 60% of the farm produce is socially shared. The trade in the rest are based on neighbourhood relations. When contracts replace human relations, it yields not Market Economy but Market Society, where even families function on contracts. Margaret Thatcher once said: There is no such thing as society. There are individuals and families. That is all. But, the experience of US/ West has proved that traditional families cannot survive without functioning traditional society. As US Bureau of Economic Research had foreseen in 1970s, now family functions have been effectively taken over by corporates and the State! Unbridled market first dismantles the relation-based society, then disturbs families, to yield a purely contract-based market society finally. The relation-less retail model of Walmarts and Tescos fits the contract based US/West. But, of late, even in the West, debate on Market Economy Vs Market Society has begun Market Society being derided as Anglo-Saxon. QED: The real issue is not FDI in retail, but what does the Indian government, economists and elites want in India finally? A relation-friendly Market Economy? Or, a relation-less Market Society? - The New Indian Express. December 5, 2011

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'Reform' at Nation's Cost

S. Gurumurthy

ndeed ironical. On the same Friday (September 14) Prime Minister Manmohan Singh rolled out the red carpet for Walmart, New York City, Americas largest, shut Walmart out. Again ironically the very Friday the UPA government handed the FDI bouquet to Walmart and lobbyists assured that small retailers are safe, Atlanticcities, a web-newspaper from the stable of the famous Foreign Affairs magazine, carried a devastating headline news: Radiating Death: How Walmart Displaces Nearby Small Businesses. Weeks ago, on June 30, over 10,000 people, shouting Walmart = Poverty, marched through Los Angeles, Americas richest city, against Walmart stores. On June 1, hundreds protested in Washington DC against Walmart. Say-No-ToWalmart is an ongoing movement all over the United States. Why focus on Walmart? It is worlds most powerful retailer; it has spent a lot to get the UPA nod for FDI in retail. Even as lobbyists here celebrate Walmart, it has become untouchable where it was born, in the US. Why is Walmart so hated in the US? Walmart will devastate local businesses, say New York trade unions and local communities. The mass protesters at Los Angeles too
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cited the same reason: small business will close down; and screamed Walmart has no heart and no morals. We dont want you in Los Angeles. Politicians in the US, however, seem to be like the UPAs cousins. In March last, the Los Angeles City Council had put a moratorium on big retailers, but, Walmart got building permits just a day before! Recall the 2G permit cut off date? Yet, the UPA certifies Walmart and its competitor cousins as compassionate to small retailers and farmers. It promises they will employ millions here. The evidence in the US is to the contrary. According to the Atlanticcities article, Walmart entered in Austin neighbourhood of Chicago in 2006. And by 2008, some 82 of the 306 small shops had closed down. The Economic Development Quarterly study found the closure rate around Walmart location at 35-60 per cent. Walmart radiated closure of 20 per cent of drug stores every mile from its stores; and 15 per cent home furnishing, 18 per cent hardware and 25 per cent toy stores. Studies in the US nail the UPA lie that FDI in retail will not hurt small shops. On job creation, a latest report (January 2010) titled Walmarts Economic Footprint prepared for the New York City Public Advocate says that Walmart kills three local jobs for every two it creates. So the job creation argument too is a lie. The third justification that the farmers will get better prices is a clever lie, and so needs a closer look. It suppresses the vital fact that Walmart does not buy, or pay, over the counter. It buys the
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nations next harvest in futures market and fixes farm prices. It also imports cheap goods from China and destroy local production like it has done in the US. Take the first case, with the recent experience of the US and the world. Rice prices in the US and world markets shot up by three times in April 2008 as compared to January 2007. It was then that the US President George W Bush made the funny remark that prices had gone up because the newly prosperous Indians had begun eating more! What was the truth? The USA Today (April 23, 2008) and CNN (April 24, 2008) quoted the California Rice Commission and USA Rice Federation as denying shortage of rice and saying there was enough stock. Why then were prices rising? It was because, said the CNN, Sams Club (Walmarts wholesale division), holding huge stocks, was pushing up the prices. US farmers accused speculators and futures market for the high prices. It was not farmers who traded in farm futures. Investment funds accounted for 40 per cent of wheat futures trade in the US in January 2008, which rose to 60 per cent by April. Wheat futures that was $4 a bushel in early 2007, rose to $14 per bushel in April 2008. The US farmer, who had sold his harvest in futures market, lost and Walmart, which had bought the futures, gained. Even if some farmers had some stocks Walmart, which had stocked at cheaper prices, refused to buy at higher prices, pointed out the media. Look at it this way. If the US farmers get remunerative prices from Walmart why does the US, with two per cent farming population, grant annual farming subsidies of $20 billion and the European Union, for its five per cent farming population, gift a subsidy of $74.5 billion annually. The experience of the US and West nail all three justifications for the FDI in retail as lies. Foreign direct investment in retail will incrementally hit the 12 million

The UPA certifies Walmart will employ millions here. The evidence in the US is to the contrary.
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family retailers in India; it will not help farmers; it will cut jobs. Even more dangerous, it will destroy the rural food security. Two of UPA governments reports of the Planning Commission Working Group on Agriculture for the XI Plan (2007-2012), and the 19th report of the Standing Committee of Parliament on Food (2006-2007) to Parliament themselves nail the lie that Walmart will link farm-gate to its gate and make Indian farmers rich. The reports describe the farm-gate thus: a total of 59 million of farming families (32 crore rural people) live on subsistence farms of five acres or less (while US farms are 250 times and the Australian, 4000 times, larger); about 60 per cent of food products is barterexchanged and consumed by farmers and farm labour, and as seed and animal feeds within villages; only 40 per cent move out of villages for commercial marketing. Even if a small part of the large local needs is drawn by an efficient Walmart from the farm gate to its gate, that will mean urban pricing in rural areas that will destroy the food security of two-thirds of Indians in villages. The Montek Ahluwalia-led Planning Commission report laments that the marginal farmers are certainly going to stay for a long time and what happens to them has implications for the entire economy. However, the small farmer is no waste. He is more efficient. His productivity a third higher, than in large farms. Small farmers use one-third of the total cultivated area and produce 41 per cent of nations food and 110 million tonnes of milk. If large ones replace them, the nations food production will fall by 7 per cent. The reformers do not know that recent global researches have confirmed that economy of scale that applies to industries does not apply to agriculture, where small ones are more efficient than large ones. QED: The reformers betray illiteracy; clamour for fame as reformers; secure it at nations cost. Reformers or deformers? - The New Indian Express, September 20, 2012

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Selling Indias Retail Wholesale

S. Gurumurthy

Finally, FDI in retail has arrived. The collapse of the

Rupee by one-fifth in just weeks, dwindling forex inflows and net FII outflows have forced a desperate government to sell Indias retail trade wholesale. Corporate and multinational lobbying to induct FDI in retail, branding it as big ticket reform, has been intense in the last few years. The lobbies have won. India has lost. The decision betrays a metropolitan bias; and exposes lack of understanding of Indias agricultural and rural economy. That it will endlessly damage the huge 1.2 million strong community-run retail business in India is undisputed. But the less known truth is that it will destroy food security in rural India. How? Read on. The principal lobby argument for FDI in retail is that the deep pocket and expertise of Walmarts to establish supply chain will make rural areas and farmers prosperous. It does not need a seer to say how illiterate those who advocate this view are about rural India. The report of the Working Group of the Planning Commission on Agricultural Marketing, Infrastructure, and Policy Required for Internal and External Trade for the XI Five Year Plan [2007-12], read along with the
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19th Report of the Standing Committee of Parliament on Food, Consumer Affairs, and Public Distribution [2006-07] submitted to Parliament draws the true picture of the rural/agricultural India. Compare the farms in India with those in the West. A total of 58.8 million of small and marginal farming families, that is over 32 crore rural people, live on farming in India. Their farm size is 5 acres or less. In contrast, in Canada, it is 1798 acres; in US, 1089 acres; in Australia, 17975 acres; in France, 274 acres; in UK, 432 acres. The US farm size is 250 times larger than the Indian; the Australian farms, 4000 times! Therefore, Farm Gate to Walmart supply chain that works in the US/West cannot be imagined here. Now look at how - and how much of - the Indian farm produce is brought to the market. The Farm Gate to Walmart theory is founded on the elimination of not only middlemen but also small farmers by making farming contractual and corporate to reap economics of scale. It ignores global studies and Indian experience that affirm that economics of scale does not operate in agriculture. Actually smaller farms gives better production. The SMFs in India farm about 34% of the cultivated area, but produce 41% of food grains; their productivity is 33% higher. Replace small farms by large ones. Nations food production will instantly fall by 7%. Not just food. SMFs produce most of the 100.9 million tons of milk. So, unless half the rural population is done away with, small farming cannot be dispensed with. The Working Group concluded: The small and marginal farmers are certainly going to stay for a long time in India - though they are going to face a number of challenges. Therefore what happens to small and marginal farmers has implications for the entire economy. More critical is that what SMFs produce, they consume and share with the farm labour; they have no surplus to sell. See how Walmarts will destroy their food security. A less known, stunning truth about rural India is that more than 60% of Indias food production does not enter commercial
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stream at all, but gets distributed, consumed within the villages. It is retained or stored by farmers for consumption, payment of wages in kind to farm labour; and for use as seed and feedstock for animals; for sale within the village. Even if a small part of the 60% un-marketed food production is drawn into the market through supply chain which Walmarts will establish, that will mean urban pricing in rural areas. Can SMFs and landless labour afford the market price and buy their food? Never. If that happens, will that what happened Alfanso mango in Konkan and Kerala fish not happen to rural food also? The Konkan people see, but dont eat Alfanso but only export it for high prices and spend that money on urban goods. And the Kerala fishermen fish and export it at high rates, get cash and drink foreign whisky! The FDI in retail undoubtedly puts at risk, t he food security of SMFs and agriculture labour who who constitute 2/3 of Indias population, as the supply chain of Walmarts will make Alfanso out of the basic food grains in rural areas. How does the marketable surplus of 40 percent of food produced by Indian farmers cross the village borders and enter the market? Nine out of ten tons [35%] of the surplus [of 40%] that enters the commercial stream enter the market through traditional Haats, Shandies, Fairs whose number is estimated at 47000. Only the balance of 5% directly enters the 6359 traditional wholesale Mandis organised under government supervision. Here begins the modern market economy where the surplus 40% of national production gets traded. This is from where the government procures and stocks food for the nation! How do the Haats/Shandies function? Some 3/4th of them are held once a week; 1/5th twice a week; 1/20th on daily basis; one Haat covers some 14 villages; all put together cover almost the

A total of 58.8 million of small and marginal farming families, that is over 32 crore rural people, live on farming in India.
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entire 6.58 lakh Indian villages. Some 2/3rd are held at 16 km from the villages; 1/4th at between 6 and 15 km; a tenth at less than 5 km. More than a third of the buyers walk to the Haat; 1/3 use bicycle; the rest use bullock carts, even motorised vehicles. According to the Working Group, at the Haats, the farmers not just trade, but also exchange social and cultural information about neighbourhood areas, settle marriages and disputes, make crop choice and discuss resource allocation. Therefore, the Working Group recommended that instead of asking the farmers to come to government for knowing what they should do and should not, the government should open its offices at the place where millions meet at the Haats. Now, by its retail FDI policy, the UPA government expects Walmart to go where the Planning Commission Working group had asked the government to go! See how the agricultural India is far removed from even the government. National Sample Survey data shockingly reveals that 7 out of 10 Indian farmers had not even heard - yes not even heard - of the Minimum Support Price [MSP] announced by the government with lot of fanfare; 81% of the those who have heard of it do not know - yes do not know - how to use it! This is because the MSP system operates only in Wholesale Mandis, not at Haats. That is why the Working Group wants the government to go to Haats. The Standing Committee rightly asked the government how will farmers who do not know what MSP is, make use of futures market. The government, which had no answer, finally banned forward trading in foodgrain. QED: Thanks to FDI in retail, twelve million community-run retail shops are in danger; and rural food security at risk. This is UPA governments gift for 2012 and onwards. - The New Indian Express, November 26, 2011

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Letting the Camel into the Tent

Shekar Swamy

The news came out recently that the committee formed

under the Chief Economic Advisor to the Government has recommended to the Cabinet that foreign direct investment in multi-brand retail (like Walmart, Tesco, Carrefour and others) should be permitted. As with any committee making such a recommendation, this one has gone on to justify why FDI in multi-brand retail would be beneficial to the country. The committee has talked about investment in supply chain infrastructure that is supposed to reduce wastage. It has stated that employment would go up, and farmers would somehow get a better pricing for their crop. While the reasons advanced by the Committee are questionable and would hardly stand up to close scrutiny, I would not enter that debate here, since these reasons are not central to the issue. There should be one main question that should be posed to determine if FDI in multibrand retail is justified will such multi-brand retail reduce the cost of distribution from the producer (be it farmer or manufacturer) to the end consumer? In marketing terms, this is known as the channel cost. In laymans terms, we can simply see it as the cost of
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moving/storing/ financing/selling incurred between the point of production and the point of final sale to the consumer. This is the main measure of economic efficiency that we should look at. Increase in cost Let me answer this upfront. Multi-brand retailers like the Walmarts and Tescos will increase the cost to the consumer substantially over time, compared with wholesale/retail practices in India. There is plenty of evidence to prove this conclusively. The increase in cost is not by some small percentage. Multi-brand retail mark-ups are at a minimum 2x, and as high as 9x more, compared with the retail/wholesale mark-ups in India. This cost is built into their model, and it is the premium paid by the average consumer in the West to get their everyday items of consumption. Let us compare the channel cost of four categories of daily-use products that will be available through multi-brand retail: Fast moving consumer goods like food, personal care products, toiletries etc; Clothing textiles and readymade garments; Overthe-counter pharmaceutical products; Cookware/kitchenware small appliances. Consumer goods: The distributor/stockist margin in India ranges from 4 per cent to 8 per cent, and the retailer margin ranges from 8 per cent to 14 per cent. The margin is on manufacturer s prices. They vary depending on company volume, market clout, type of product and so on. The total channel
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cost incurred by the distribution chain in India thus ranges from 12 per cent to 22 per cent. In the US and Europe, the Safeways and Krogers and Tescos mark up this category of products by 40 per cent on cost of goods, depending on product type, volume, demand, exclusivity and so forth. The channel mark up is 2x to 3x more than Indian channel/retail costs. We should not be misled by Sale prices and loss-leader promotions that they routinely employ to draw the customers. Clothing/garments: In the Indian textile business, the combined wholesale plus retail margin ranges from 35-40 per cent on the ex-mill price. In the readymade garments business, the margin at retail in a brand outlet seldom exceeds 30 per cent of ex-factory price. Compare this to a Macys or Marks & Spencer. These retailers routinely mark up by 2x to 4.5x, the price at which they procure the garments. Then they offer Sale discounts of 15-30 per cent. Even comparing the Sale price, these retailers mark-ups are 2x higher at the lowest end of the spectrum. Routinely, their mark-ups are thus 5x to 9x of what the retailers in India charge. OTC Pharmaceuticals: In India, the pharmacies and chemists are better organised as a trade body, and the supply side is highly fragmented. Therefore, they enjoy better retail margins. Even so, the retail chemists margin in India is at 20 per cent. Add the distributor/stockist margin of 10 per cent, and the C&F agents cost of 4 per cent, the total channel cost is a maximum of 34 per cent of ex-factory price. Compare this with a Walgreens

Talk of investment in supply chain and back-end logistics only diverts attention from the main issue of total channel cost.
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or CVS pharmacy in the US, or a Boots in the UK. These retailers mark up the OTC products by 2x or 3x or more, and then offer some items on Sale. These big retailers mark-ups are 6x more at the minimum, as far as channel costs go, compared to Indias pharmacies. Cookware/kitchenware: Indias channel costs for this category are lower. The combined distributor/retailer margin in India for products like pressure cookers and cookware is less than 30 per cent, out of which the retailer retains 10 per cent to 15 per cent only. For the same category of products, retailers such as Walmart, Bloomingdales and Sears in the USA would routinely mark up the merchandise by 100-200 per cent of landed cost. Even On Sale, at the lowest end, the channel mark up is 5x what they are in India. Indian distribution efficient All this evidence, available freely, suggests that the Indian distribution system, as it has evolved over the years, is among the most cost-effective and efficient in the world. For sure, our markets and bazaars do not have the polish of a mall in Europe or the US or Japan. But to the average Indian housewife, they offer remarkable value, and help her get along on low incomes. It is this balance that the proposed FDI in retail will upset over time. Talk of investment in supply chain and back-end logistics only diverts attention from the main issue of total channel cost. The government committee should focus on what is in the best interest of the average Indian, and not be swayed by industry lobbies and pressure from foreign governments. Our markets are highly efficient, driven from the bottom up by the self-interest of millions of small traders and merchants. Let us not interfere with this and fall into the Western trap of multi-brand retail. - The Hindu Business Line, June 16, 2011
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Why the Indian Model is Superior

Shekar Swamy

n the previous article, I had stated that big multibrand retailers in the West like the Walmarts and Tescos and Carrefours routinely mark up the prices on their entire basket of products by a minimum 2x, and this goes as high as 9x, compared with the retail/ wholesale mark-ups in India. The point that was made was that the efficiency of the channel should be determined by how much they charge the end consumer by way of mark-ups (which is the aggregate of the costs incurred and profits made by the channel). By this measure, I had concluded that the Indian distribution chain comprising wholesalers, distributors, stockists and retailers is among the most cost-effective and efficient in the world. How can this possibly be? No Consumer choice Anyone who has followed business practices and rules will know the following simple truth about markets. The more consolidated a market is, providing less choice to the consumer, the more the retailer can mark up and charge ever higher prices. In reverse, the more
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fragmented a market is, providing ever more choices in terms of sources to the consumer, the lesser is the markup, as the retailers have to charge the least possible amount to be competitive and stay in business. When big multi-brand retail gets into a market, their game plan is to eliminate competition and build market clout. Let us look at two examples. In the US, the retail market size (excluding food service and automotive) was estimated at $3 trillion in 2009. Walmart clocked over $300 billion in US sales, for a remarkable 10 per cent market share. Such consolidated power, acquired over time, is used to squeeze cost on the supplier side, and improve mark-ups on the consumer side. Walmart aims to be cheaper than other retailers, but its end goal is still to maximise returns to its shareholders. (People interested in learning about Walmart can get the book How Walmart is destroying America and the World by Bill Quinn.) UKs Tesco clocked sales of 61 billion ($99 billion) last year, and has a 30 per cent market share of the UK grocery store market, according to Wikipedia. This level of consolidation is unprecedented in the retail world, giving Tesco extraordinary power over both suppliers and consumers. A grocery shopper in the UK has at best a choice of two or three retailers in her vicinity (Tesco or Sainsbury or maybe an Aldi). This means, notwithstanding promotional offers, the price is always a premium, and retailers power over the consumers shopping pound is enormous. Their power over the manufacturer is also enormous, but that is another story altogether.
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Indian Scenario Compare this with India. We have dozens of small retailers in our immediate neighbourhoods vying for our shopping rupee. There is intense competition. Prices and mark-ups tend to be the lowest possible. We have a near-perfect market structure, where thousands of producers are providing goods to tens of thousands of retailers who are serving millions of consumers. No one really has the clout in the market to charge extra mark-ups. This is a ground-up phenomena, created by the energy and entrepreneurship of millions of small businesses. The government has played no role in organising this. The difference in market structure is illustrated in the visuals alongside. If big multi-brand retail is allowed to enter India, what happened in the West will be repeated here. The story is well documented. A big retail outlet will be launched in an area with big fanfare. There will be lots of promotions and predatory pricing below cost of many essentials for extended periods. (Walmart has an expression for this called Stomp the comp, meaning sweep aside the competition.) Consumers will be attracted by these deals, and will flock to the store. Small retailers cannot sustain loss of business for long. Most of them will fold up against this assault of big retail. It has happened without fail in every market. As the competition is wiped out, the big retailer gains clout over the suppliers and the consumers. They then get pricing power, gain control of the market, and steadily increase the mark-ups over time for maximising profits.

The committee has specified a minimum FDI investment of $100 million. That is like asking an Olympic heavy weight lifter to lift a 10 kg weight to qualify!
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Against the background of the information above which is available in the public domain, one cannot help wonder how FDI in multi brand retail has been recommended by the committee, led by the Chief Economic Advisor to the Government. Some of the criteria for investment are also inexplicable. For example, the committee has specified a minimum FDI investment of $100 million. That is like asking an Olympic heavy weight lifter to lift a 10 kg weight to qualify! While I respect the senior minds that have looked into this, I would venture to suggest that the role of policy in this matter should be to ensure the common good of the broadest base of the Indian population over an extended period of time measured in decades and not in years. Reconsider Policy Policy makers should not rush to please Western governments that are lobbying hard to open up the Indian retail market. Opening FDI in multi-brand retail will ill-serve the Indian retail sector and the hundreds of millions of households struggling to make ends meet. When the global financial crisis erupted in 2008, India was protected because the banking industry was not exposed to risk. The situation is similar in retail. Let us not bring in the bad oligopolistic structure of Western retail into India, a move which will really be irreversible and hold Indian consumers captive for times to come. - The Hindu Business Line, June 17, 2011

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Recipe for Unemployment

Shekar Swamy

In the articles on foreign direct investment in multibrand retail dated June 16 and June 17, I had highlighted two incontrovertible facts. First, that big retail in the West is expensive as it marks up the products by at least twice as much as Indian retail, and often many times more. Second, that big retail in the West is concentrated and oligopolistic, offers less choice and, hence, charges high prices. In this piece, I will offer evidence to highlight two points: Big foreign retail will eliminate jobs in the tens of thousands in manufacturing in the country, and Big foreign retail will reduce employment in hundreds of thousands over time in the retail sector. These two body blows will damage the livelihood of millions, with dramatic long-term implications. In time, the combined impact of this puts at major risk the social balance in the country. The issue of FDI in multi-brand retail is not about globalisation, competition and free markets. It cuts to the heart of the fragile economic and social ecosystem in India. Sounds too dramatic to believe? Please read on.

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Learning from the US People can rightly ask how we can predict the future of big foreign retail in India. The answer is simple. We are not predicting the future. We have to only look at what has happened elsewhere to understand what will happen here. A senior American academic thought-leader wrote this to me about big retail there: The one thing big retail always seeks is the lowest cost supplier wherever they may be, and, often that is offshore. A count of offshore products in Walmart, Target or any other retailer would reveal that few, if any, of them are locally manufactured. In the US, we have traded offshoring of almost everything we make for lower cost products in big retail. Were now reaching the point that Walmart can continue to find lower cost suppliers but we cant find jobs for people to earn enough to buy anything. Big retail has grown, and that seems to have resulted in the destruction of our manufacturing base. How serious is the erosion in manufacturing employment in the US? US manufacturing employment peaked in 1979 at 19.5 million. It has dropped ever since to 17.3 million in 2000, 14.3 million in 2004, 12.7 million in 2009, and to an all-time low of 11.8 million in 2011. This is a loss of 7.7 million jobs in manufacturing in 32 years about 240,000 jobs a year or 20,000 jobs lost per month. It is important to look at this over decades because impact of short-term developments such as recessionary cycles is evened out. While productivity gains in manufacturing (the ability to produce more with less people due to improvements in
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technology) is one reason for this decline, the other cause is the growth of big retail that buys merchandise offshore and causes manufacturing to shut down. The May 2011 unemployment level in the US is at 9.1 per cent or 13.9 million people unemployed. Despite an aggressive stimulus package of over $1.6 trillion thrown into the US economy since 2009 by the Obama administration, unemployment figures have stubbornly refused to come down. It cannot come down easily, because the very employment structure has been altered by big retail. The lesson is clear. FDI in multi-brand retail will lead to an explosion of offshoring of production from India. This will result in job losses in manufacturing at a galloping pace and scale that cant be imagined. In the news reports appearing on FDI in retail, there is hardly a mention of any policy on how the sourcing of goods will be handled. Retail occupation in India The Indian economy is not a good generator of jobs. The recently released Survey of Employment and Unemployment by National Sample Survey Office, 2009-10 has once again confirmed that over half (51 per cent) of the countrys workforce is self-employed, 16 per cent are in regular wage employment and 33.5 per cent are engaged as casual labour. In the past ten years, the category of regular wage employment, which is an indicator of the economys ability to generate jobs, has increased an average of only 1.74 million jobs a year. With our population growth of over 15 million a year, this level of job

US manufacturing employment peaked in 1979 at 19.5 million. It has dropped ever since to 17.3 million in 2000, 14.3 million in 2004, 12.7 million in 2009, and to an all-time low of 11.8 million in 2011.
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growth is inadequate to cope with the growth in the number of people who need employment. The retail sector in India, as an employer, is therefore enormously important to maintain social stability. Employment estimates in retail vary. There are some 13 million retail establishments in the country. According to IRS 2011 (one of the largest baseline studies), there are 25.5 million chief wage earners (including local vendors without a shop) who are engaged in the retail service. Employment in retail, which is self-motivated and at the ground level, is the second largest in the country, at 11 per cent of all employment, after agriculture. Unrecognised safety valve People who are on the economic knife edge make a simple living in this sector. FDI in multi-brand retail is squarely aimed at taking these people out. It will, over time, make this avenue of employment difficult for them. The economy cannot provide other alternatives as the data clearly shows. Without the safety valve of employment in retail, it is anybodys guess as to what shape future social unrest could take. Interestingly, the government is aware of all of this. The Parliamentary Standing Committee 90th Report on FDI in Retail, laid in the Rajya Sabha on June 8, 2009, has recommended a blanket ban should be imposed on foreign retailers from entering into retail trade in grocery, fruits and vegetables. This Committee report is obviously being ignored. The government says it wants to promote inclusive growth. The proposed FDI in multi-brand retail is a blunt weapon that will hammer employment in manufacturing and in retail. There cannot be a more anti-inclusive step than this. - The Hindu Business Line, July 5, 2011

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Reality Belies the Hype

Shekar Swamy

ig retail will not give farmers better prices, or reduce wastage. They will eliminate competition because their business depends on it. Discussing foreign direct investment in multi-brand retail in these columns, I have made the following points: 1) Big Retail in the West is expensive; they have much higher mark-ups compared with Indian retail. 2) Western Retail is concentrated, offers less consumer choice, and charges higher prices. 3) Big Retail is not good for employment in both manufacturing (due to offshoring of production) and in retail (as they take out the small retailers). Not surprisingly, there has been a flurry of responses questioning the views expressed. Recent news reports cite officials speaking of benefits of FDI in retail. Let us examine these so-called benefits. Myth about Farm Prices It is argued that there is a significant difference between what the farmer gets for his produce and what the consumer pays in the end. The difference is pocketed by middlemen.
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Since foreign retailers setting up shop in India will buy direct from farmers and sell to consumers, thus eliminating middlemen, they will pay better prices to farmers. The first obvious point to note is that Big Retailers are middlemen as well, operating with the same profit motive as any trader. Their business model is simple Buy Lowest, Sell Highest. Walmart calls their sourcing EDLC Every Day Low Cost. The argument is that when Big Retail, who are known to beat down their sourcing price, enters the market to purchase from the farmers, somehow they will ignore the prevailing prices, and out of the goodness of their heart, pay the farmers a higher price, because they are going to sell direct to consumers. This will clearly not happen. On the other hand, Big Retail will go into the farmers markets and will eliminate competition on the purchasing side over time to gain dominant status. Farmers will be at the mercy of Big Retail to sell their produce. Farmers prices will get hammered down, because that is what EDLC means. This does not mean that the consumer will get a lower price; it only means that the Big middlemen Retail will be able to charge the high markups on which their business is modelled. The only way to preserve the farmers interest over the long term is to ensure that there are multiple bidders for his produce at all times in the markets, to keep prices up at reasonable levels. This balance is guaranteed to be upset by Big Retail. For farmers to get good prices, three things have to be in place: 1) Good transportation infrastructure, mainly roads. 2) Ability to store perishables, including refrigeration. 3) Timely and correct market information. Indias cellphone service providers have substantially bridged the gap on point three. The other two have nothing to do with FDI in retail, as explained below.
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Myth about Logistics It is believed that Foreign Retail will improve supply-chain infrastructure and reduce wastage of farm produce. But Big Retail will invest in the infrastructure required to support their business, no more and no less. This will not solve the issue of wastage of farm produce, because the structural problems lie elsewhere. The twin infrastructure problems in India are roads and power. The government has taken steps to improve the quality of national highways. However, the problem is that of the over three million kilometres of Indian roads, the national highways constitute around 2 per cent, State highways 4 per cent while 94 per cent are district roads and village roads. The district and village roads are State subjects, and this is where the supply chain infrastructure falls apart. As for the power sector, with an installed capacity of 174,000 MW, the Central Electricity Authority has forecast a shortage of at least 10 per cent in FY 12 and beyond in most of the country, with peak shortages at higher levels. This leads to power cuts routinely in rural areas, making the operation of cold chains very difficult and expensive. Big Retail cannot address the issues of roads and power. Their ability to address the fundamentals of the supply chain, and reduce wastage of farm produce, will be limited. The biggest wastage of foodgrains is in the godowns of the Food Corporation of India, which is doing a manful job of a massive task. Yet the FCI has admitted to wastage of 1.3 million tonnes of foodgrains over the past decade, in response to a query under

Their resources are limitless. The investments will be at a disruptive level. Their sourcing will be global. Nothing that Indian business has done so far will compare with this.
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the RTI act. The authorities should fix this problem, instead of thinking about FDI in retail, which is fraught with negative consequences. Myth about Competition It is argued that Indian business houses are already into Retail and Big Foreign Retail cannot do further damage. Nothing can be more misleading than this argument. It comes from people who simply do not understand the forces that get unleashed with Big Foreign Retail. Indian business houses experience in the grocery retail trade is a decade old with Big Bazaar opening its first store in 2001. Their experience has not been an easy ride. Groups like Reliance, Aditya Birla and Spencers have declared losses of hundreds of crores, closed a number of stores in recent times, and are looking for an appropriate business model. Even with collective investments in thousands of crores, given the fragmented nature of the business, their market impact has been modest at best. When the Walmarts, Tescos and Carrefours enter, they come in to eliminate local competition completely because their business depends on it. Their resources are limitless. The investments will be at a disruptive level. Their sourcing will be global. Nothing that Indian business has done so far will compare with this. Neighbourhood stores will shut down in the hundreds and thousands across the country over time. The balance in the market place will be upset completely, and families and communities will be wiped out. This is not an imaginary scenario. It has happened everywhere they have gone. This is the reason why even the city of New York is fighting to keep Walmart out (see 2011/02/04/133483848/). (The Hindu Business Line, July 6, 2011)
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Remember Salt Tax, Anyone?

Shekar Swamy

e cannot risk overseas entities gaining any sort of control or even influence over the nations food supply chain that could impinge on our national security. Recent news reports say that the Committee of Secretaries has recommended 51 per cent Foreign Direct Investment in multi-brand Retail in the country. The matter awaits Cabinet approval. The die appears to be cast. Let us call this as it is. The government is about to open up the food supply chain of the Indian population at large to foreign retailers. This bears repeating the food supply chain of the country is to pass on to foreign companies. National security considerations are not part of the discourse. Where is national security coming into this? Before I provide a historical perspective, let me share some information on what is happening in Brazil right now. The country opened its doors to big foreign retailers in the 1990s. Fifteen years later, four weeks ago, a corporate deal was announced to merge Pao de Acucar, Brazils biggest supermarket chain, with

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Carrefour s (French) Brazilian operation. The deal would have created a combined entity that would have 27 per cent share of the Brazilian national retail market, and 69 per cent share in the Sao Paulo state. This means that a vast number of small retailers have been taken out in just 15 years. The deal has not closed at the time of this writing. The Economist dated July 9, 2011 said this about the deal: The outcome could hinge on any number of strategic, legal or political factors. Consumer welfare, however, will not be among them. The Brazilian government is but a bystander to these corporate games affecting the people. The simple lesson from these examples foreign retailers will consolidate their position in our country over time. This situation takes me back to the times when the British exercised control over the supply of salt to the Indian consumer, for 187 years. The first rules imposing Salt Tax were made by the British East India Company, as early as 1759. Since then, at different points in time, the Company first and the British government after 1857, played with the amount of salt tax levied, to suit their strategic imperatives. On several occasions, the tax on Indian salt was raised to enable the import and sale of English salt in the country. In order to harmonise regulations over the supply of salt, the British passed the India Salt Act of 1882. This created a government monopoly on the manufacture and sale of salt. Salt could be manufactured and handled only at official government salt depots, with a tax of one rupee four annas on each maund (82 pounds).

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People are familiar with Gandhijis Dandi march in 1930. The Salt Tax was not repealed by the British even after this extraordinary effort. The tax was finally abolished only in October 1946 by the Interim Government of India. The Salt Tax was one of the most pernicious, longest lasting sources of revenue that supported the British in India. The British had their hands in every Indians pocket, and it took forever to remedy this. The simple lesson here is that we cannot risk overseas entities gaining any sort of control or even influence over the nations food supply chain. The US examples Turning to the issue of national security, there are two examples from the US, the country that pushes for opening of markets, that will help us learn about this. In 2005, China National Offshore Oil Corporation (CNOOC), a company 70 per cent owned by the Chinese government, made an $18.5-billion bid to acquire UNOCAL, a second-tier US oil company. This was deemed as a move by China to get into US energy infrastructure. US lawmakers raised national security concerns and demanded a review. China was forced to withdraw the bid. In 2006, the stockholders of the Peninsular and Oriental Steam Navigation Company (P&O), a British firm, agreed to a sale of that company to Dubai Ports World. As part of the sale, Dubai Ports would have assumed the leases of P&O to manage major

The US has stopped oil companies and port facilities from passing into foreign hands on grounds of national security. Here in India, the authorities recommend opening our food supply chain to overseas interests.
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US port facilities in New York, New Jersey, Philadelphia, Baltimore, New Orleans, and Miami. There was uproar when the deal became public. The US House Panel voted 622 to block the deal. They deemed it against national security. The US has stopped oil companies and port facilities from passing into foreign hands on grounds of national security. Here in India, the authorities recommend opening our food supply chain to overseas interests. Security concerns We can raise this issue in a Western context. Two leading food retailers in the West are Safeway (US) and Carrefour (France). Safeways company value is $7.3 billion (Rs 33,000 crore) and Carrefours $21.5 billion (Rs 96,000 crore). These values are within reach of Indian business groups (Tata bought Corus for $7.6 billion; Mr Mittal acquired Arcelor for $38 billion). If there was a bid by a foreign company for these companies that serve millions of American and French families, wouldnt US and French law makers cite national security considerations? And they will be right in protecting their national security. Brazil teaches us that foreign retailers will in time take over a vast swathe of our countrys food supply chain, with the government as spectator. The Salt Tax experience teaches us that our people will pay a heavy price if control of food essentials passes over to foreign companies. The US teaches us that we should always put national security considerations ahead of anything else. Indias food supply chain (which is what retailing represents) is a matter of national security. It is not about opening up markets. Please, can we see it for what it is? (The Hindu Business Line, August 4, 2011)
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How the World Burnt its Fingers

Shekar Swamy

There has, of late, been a public relations overdrive for foreign direct investment in multi-brand retail. The bureaucrats want to move ahead with it. And politicians from the ruling party have expressed the need to build a political consensus. There appears to be a divide between the two. Those facing the electorate know the ground reality. In this matter, I hope the survival instinct of the politician prevails. This business cannot be about ramming policy changes through, using PR. It is about the lives of people. How will they be affected? Who will pay the price? What are the likely social consequences? What can we learn from other countries, to protect Indias interests? First, some explanation about the nomenclature FDI in multi-brand retail . A leader of a national trade group told me that many of his constituents do not even understand what it means. The Phrase is classic bureaucratic obfuscation. The bureaucrats are justifying such FDI by saying it will improve supply-chain infrastructure for perishables, which is but a fraction of the retail industry. Using this excuse, what is proposed is that
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the entire retail world will be thrown open to foreign retailers. They should really call it Inviting foreign companies to compete with all retailers and traders so that everyone understands what it means. The foreign retailers are likely to start with dry goods, as they tend to do around the world. These dry goods can be sourced from any part of the world. Every class of retailer, across product lines - garments, footwear, home furnishings, personal products, laundry, cleaning products, pharmaceuticals, furniture, kitchen and home appliances, white and brown goods, auto parts you name it - will come under attack. All sorts of retailers, and traders and intermediaries, run the risk of elimination. Manufacturers of merchandise will come under pricing pressure, and face the threat of a shut-down. All of this in the guise of improving supply chain infrastructure , which has no relevance to these categories. Concentration is the Game In markets around the world, Big Retail has steadily edged out smaller players, leading to unfair concentration. In the grocery business, market shares range from 20 per cent to as high as 80 per cent plus for just a few retailers. Entire countries depend on them, as they control the supply of food. Their shares, by country, are: Sweden 86 per cent, Belgium 79 per cent, Australia 78 per cent, Germany 75 per cent, Mexico 70 per cent, Canada 69 per cent, the UK 63 per cent, France 55 per cent, Brazil 38 per cent, Thailand 32 per cent, the US 30 per cent and Indonesia 20 per cent. In Brazil, Thailand and Indonesia, these shares have been achieved in just over a decade (Data source: Economic Times). The social upheaval comes about because Big Foreign Retailers will aim for concentration, and this results in elimination of local retailers, fewer number of stores, and less employment.
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In Thailand, over 30 per cent of independent small retailers were taken out in 10 years! We have 25 million chief wage earners in retail (Source: IRS). One percentage loss equals 250,000 jobs, comprising people who are not easily redeployed. If 30 per cent is lost, as in Thailand, this would impact 75 lakh jobs and 3.75 crore people (at five people per household). Readers can make their own estimates. The most poignant example of reduction in number of stores, and employment, is in the US. Between 1951 and 2011, the population of the US doubled from 155 million to 312 million. Yet the number of stores has actually declined from 1.77 million in 1951 to 1.5 million in 2011. The number of independent stores (with less than ten employees) has declined from 1.6 million to 1.1 million in the same period (see Table).
Year US Population Total Retail Establishments 1951 2011 155 Million 312 Million 1,770,000 1,500,000 1,600,000 1,145,000 Independents Chain Stores 105,000 350,000

(Source: Chain Stores in America, and Wiki)

It is misleading to suggest that Big Foreign Retail will enter India and improve employment. While these players will employ people, at the same time, they will be knocking off employment in large numbers in the overall economy. It is the net numbers that we should be looking at. Protecting Indias Interests Two nations that have not permitted their retail market to fall into foreign hands are Germany and Japan. While they have a concentrated retail sector, their major players are home-grown. They both have had strong laws regulating the retail sector, protecting the self-interests of the respective countries. The centrepiece of German anti-trust legislation is the Gesetz gegen Wettbewerbsbeschrnkungen, or GWB. Section 20(4) of this
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Act Against Restraints of Competition bans all undertakings with superior market power from selling a range of goods, not merely occasionally, below its cost price, unless there is an objective justification for this. In essence, this means it is illegal for German retailers to sell below cost to knock out competition. German zoning laws are strict and they ensure that big stores cannot be put up, except in designated city areas. Store hours are restricted, and big retailers have to use union labour. After a decade, and unable to turn in a profit in Germany, Walmart exited that country in 2007,taking a 1-billion loss. In Japan, the daikibokouritenpohou - the Large-Scale Retail Store Law - came into effect , in 1973 to protect small retailers. This law, unchanged till 2000, regulated the amount of selling space, store opening hours, and number of business holidays in a year. Most importantly, any proposal for a big store had to be notified and the views of the affected parties had to be sought before approval. In effect, this reduced the build-up of big stores for decades. Predictably, the US protested, and called the Japanese distribution system antiquated. The US missed the point completely. The law was designed to serve Japans interests, and it did that well. There is an uncharacteristic haste in India to rush through FDI in multi-brand retail. There are ways to protect national interests. The policy guidelines that have come out do not reflect them. The politicians would do well to understand how the 10-plus crore voters in this sector will be affected. If the policy is notified, there will be a groundswell that could well sow the seed for a government change in the next elections. - The Hindu Business Line, Aug 29, 2011
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FDI will wipe out Small Traders

Shekar Swamy

n 24 November 2011, the Indian government approved 51 percent foreign direct investment (FDI) in multi-brand retail stores and 100 percent in single brand outlets in its $450 billion retail market. The decision was met with a howl of protest from allies and opposition alike. Even several sections of the ruling Congress party have also expressed their reservation against the policy announcement. The country has not witnessed such a polarized view on foreign investment policy in the last two decades. The opposing sides Aligned in favor of FDI in retail are the sections of ruling establishment, policymakers, big foreign retailers, Indian corporate houses, well-heeled consumers, neoliberal think-tanks and the media. Aligned against the policy are millions of small traders and retailers, the broadest cross section of political parties representing the people at the ground level, and consumers who are sensitive to their environment. The divide is a classic case of the big multinational players in retail business trying to displace the small ones. India is perhaps the last big bastion of a rare-inSJM | 51

the-world grassroots oriented, bottom-up kind of place. The big top-down Wall Street mega-corporate driven system that believes that the world is theirs to dominate wants to take over the Indian market. Through the policy, the Indian policymakers have practically declared that this one is designed to support big capital and the predatory multinationals in retail. Let us examine what has been outlined under the new guidelines and what it actually means. Come if you have big capital The minimum amount fixed for foreign investment is $100 million (nearly Rs 500 crores). Only the big players in the retail business have this kind of capital. The Commerce Minister said that the big foreign retailers will invest not in millions but in billions. This is precisely the danger. Money power will take over a ready market, as it has happened in other countries. Just consider this. As they build scale, the foreign retailer can go into any mandi or market and buy up the entire supply of whatever is available there. All those dependent for a living as participants in the supply chain traders, retailers, goods handlers and others are likely to be rendered jobless. The government has explicitly stated that it wants to eliminate the current supply chain. This would work out to be a big advantage for foreign retailer, by policy design. Rural India under threat Under the policy guidelines, the foreign retailer is restricted to opening stores in large cities. This hardly matters because every retailer will start their operations in the big cities only. The real issue is on the sourcing side. The policy permits them to purchase locally all agricultural produce, including fruits and vegetables, pulses, fresh poultry, fishery and meat products, and sell them unbranded in their stores. They can virtually corner the trade in the rural areas, as they scale up their operations.
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If in a local region in India the trade is served by tens of thousands of small players, they will be displaced by giant retailers with massive procurement resources. It is well known that over 50 percent of the rural economy is made up of Services sector, and a big part of this belongs to trading and supplying to urban India. What other options do rural people have when their livelihoods are displaced by giant foreign retailers? Hardly any thought has been given to this issue since the policy framework is biased towards supporting the big players. Invitation to take over the market According to the policy, at least 50 percent of the investment made by foreign retailers must be in back-end infrastructure. Perfect, says the foreign retailer. They will have to invest in infrastructure in any case. They will set up their own warehouses besides their own fleet of trucks and wagons. It is well known that tens of thousands of small road transport operators make a living moving agricultural produce in India. Once the big retailers enter into this segment, the livelihoods for small transporters would be directly threatened. The primary reason behind the lack of physical infrastructure in rural India is the total neglect by the Indian authorities over the years. One cannot expect the small farmer-trader-retailer ecosystem to build such an infrastructure. Without building this infrastructure to support the small players, the government believes that this task should be carried out by big foreign players. By policy, the advantage to big foreign companies has been assured.

The government that views all Indian businessmen, companies and traders with a huge dose of distrust is quite happy to repose its trust with big foreign retailers who are defendants in hundreds of litigation cases all over the world.
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Concession to small and micro enterprises? The policy stipulates at least 30 percent of the procurement of manufactured and processed products should be sourced from small industry, as a concession to the small sector. Is this really a concession? Nearly two-third of the grocery trade comprises of food products, and a vast portion of this comes from the small sector. In India, leading consumer packaged goods companies get their brands manufactured through the small sector. The total supply from the small sector to the retail channels is likely to be upwards of 60 percent, at a conservative estimate. Therefore the policy takes away perhaps 30 to 40 percent of the market that the small sector is currently contributing. Isnt a huge advantage to big foreign retailers? Self certification? All compliance (for backend investment, procurement from small sector) is through self certification of the foreign retailers, as per the declared policy. This is touchingly nave. The government that views all Indian businessmen, companies and traders with a huge dose of distrust is quite happy to repose its trust with big foreign retailers who are defendants in hundreds of litigation cases all over the world. This clause would further benefit the foreign big retailers. Not long ago, New Delhi had announced the mantra of inclusive growth. However, the FDI policy announcement is contrary to the stated policy objectives of promoting inclusive growth as small players in the retail business would ultimately end up paying the price. - The Hindu Business Line, December 1, 2011

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Retail FDI - for People or MNCs?

Shekar Swamy

The UPA Government announced its policy last week,

of inviting big multinational retailers to come and take over the Indian market. Predictably, the pro-lobby that has worked behind the scenes has expressed delight. Oddly, the words and concerns of the masses who are about to be displaced and adversely impacted have found but a small voice in the media. Remarkably, never before has such a massively disruptive policy been pushed through with such grandstanding deception. States hands are tied A principal argument of the Government is that this is only an enabling policy and the States can determine if they will issue licences under the Shops and Es-tablish-ments Act to the multinational retailers to operate within their areas. This is in direct conflict with something called National Treatment that the Government has committed to investing countries. As of July, the Government of India has entered into Bilateral Investment Promotion & Protection Agreement (BIPAs) in order to promote and protect, on reciprocal basis, the investment of the investors. Such
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agreements have been signed with 82 countries, out of which 72 BIPAs have already come into force and the remaining agreements are in the process of being enforced. This information is available on the Ministry of Finance Web site ( The relevant clause defining National Treatment under this agreement reads as follows: Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State. In effect, what this means is that if a Nilgiris can operate in Chennai, a Big Bazaar in Kolkata or an Easyday in UP, the governments of Tamil Nadu, West Bengal or UP cannot prevent a Walmart or Tesco from opening shop. If the licence is denied under the Shop and Establishment Act, this can be legally challenged under the BIPA agreements. The entire country, including all State governments, is obligated under the BIPA agreements. Numbers dont add up The government has argued repeatedly that seeking a consensus does not mean seeking full agreement. While this is so, the essence of democracy is that a minority cannot determine policy for the majority. This is what has happened in this case. The Table lists the States, as cited by the Commerce Ministry, which have agreed to open up to foreign retailers. These States represent
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only 30 per cent of the total population of the country. The Government clearly does not have the numbers to impose this policy. While the former Finance Minister, now the President, promised in Parliament and in effect to the people at large that consensus will drive this decision, the action of the government is quite the opposite. Destroying Markets Many economists have argued in favour of FDI in retail, citing investment flows and need for deficit reduction, among other issues. All these are short-term con-sid-er-a-tions at best, and there are many ways to address these. The fundamental point has been missed. To borrow, and slightly modify, a famous phrase from an American president, It is the markets, stupid! The incontrovertible truth is that markets are the principal source of wealth generation and livelihood. It is precisely for this reason that big global capital will put a major stake on the ground here with a singular focus to control the markets and eventually dominate it, so that returns can flow copiously and in perpetuity. When this happens, as it has surely happened in country after country, the markets end up serving the interests of a few multinationals. The opposite is true in India today. Tens of millions of retailers, traders and vendors of all hues make a living off the markets. On the supply side, the markets are serving crores of farmers and other producers by providing ready access. The wealth generation is massively spread out, keeping people employed. On the consumption side, crores of Indians enjoy ready access to merchandise made available through the most frugal of wholesale and retail channels found anywhere in world. The markets in India serve the people of India. The global experience is that multinational corporatisation of retail chokes market access on the one hand, and dictates pricing to the consumers on the other.
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The locus of market control in the West rests with big retailers. This is the model of Western retail, riddled with problems, that is being unleashed in India. Anti-young at the core While the debate rages on with a lot of irrelevant smoke and mirrors, the demographic bulge in India is all but ignored by economists. See the Table. A massive 300 million people are in the age group of between 16 to 29 years, representing a third of the population above 12 years. Nearly 100 million are in the age group 16 to 19. Assuming that only one in four of them seeks employment, close to 25 million new jobs will need to be added over the next five years that is 5 million new jobs to be created annually. According to the Survey on Employment and Unemployment by the National Sample Survey Office 2009-10, the Indian economys job creation record in the past two years is abysmal. It is incredible that Retail, one of the prime sources of employment in the country, is being handed out on a platter out to multinationals with their proven record of poor employment generation. Cure worse than disease FDI in retail is being brought in supposedly to address issues of in-fra-struc-ture and to reduce wastage of perishables. In reality, the investments will come to take over the market. When that is done, the farmers and suppliers can forget easy market access, countless retailers and traders would have been displaced, and the consumers will be paying a higher price. Sadly, the markets will no longer be serving the people. - The Hindu Business Line, September 18, 2012
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How FDI in Retail will hurt Farmers

Shekar Swamy

With the government stating that its FDI policy on

multi-brand retail will be on hold till after the UP elections, the publicity assault to prepare the ground for it to be brought back is palpable. The strategy employed is the classic divide and rule. If the trader groups are against FDI, then let farmer groups be set up to fight the trader groups seems to be the ploy. We now see repeated stories in the media about how FDI in retail will benefit the farmers of India. We could have taken this seriously, but unfortunately the global evidence points in the other direction. Farmers in the West have paid a big price, with hundreds of thousands forced to shut down their farms, due to corporatisation of the farming sector, along with corporate concentration on the purchasing side among processors and retailers. Big retailers biz model Big retail in the West and elsewhere functions on a simple business model. Grow bigger and bigger till the market becomes an oligopsony a situation where a small number of buyers exert power over a large number of sellers. The UK food retailing industry, for
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example, is now dominated by just four supermarket chains who together account for over two-thirds of retail food sales. Likewise, the top five chains in the US account for over 60 per cent of food sales. This results in the retailer exercising enormous control over their suppliers, which includes the farmers. This is shown in the diagram: It is this structure that has reduced farm prices and has forced the closure of farms. Foreign retailers will replicate this structure in India over time, with disastrous consequences for the Indian farmer. Punjab example is wrong A prominent TV channel featured the story of a few farmers in Punjab highlighting how direct purchases of produce by a retailer had given them a higher yield. This is a type of faulty reasoning described in college textbooks as the fallacy of composition. The fallacy of composition arises when one infers that something is true of the whole from the fact that it is true of some part of the whole. The channel had obviously hand-picked a few farmers who suited its conclusion. The only way to assess the impact on farmers is to look at countries where big retailers dominate the market, and see how the entire farming community has fared. Lower prices to farmers A good way to measure the effect of retail power on farmers and farm workers is to look at the portion of each dollar spent on
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food at the supermarket referred to as the retail food dollar that goes back to the farm. By this measure, virtually all food producers in the US have seen their share of the retail food dollar decline over time, at points dropping so low that farmers have been forced out of business in droves. Here are just a few examples: In 1970, hog producers (those who raise pigs) in the US derived 48 cents of the retail dollar spent on pork. Three decades later, they received only 12 cents out of every retail dollar, causing loss to the farmers. While this happened, consumers didnt benefit from the low farm prices at all: retail pork prices stayed stable. (Source: Agribusiness Accountability Initiative) According to the US Department of Agricultures Economic Research Service, in 1990, ranchers and farmers received 60 cents of the retail dollar spent on beef, retailers received 32.5 cents and meat companies 7.5 cents. In 2009, the numbers were reversed retailers took 49 cents share of each dollar (up 16.5 cents) consumers spent on beef, while ranchers and farmers got 42.5 cents (reduction of 17.5 cents) and meat packers 8.5 cents. The breed of the small rancher/farmer in the US is under threat as they go out of business in large numbers year on year. (Source: ) In the UK, the Royal Association of British Dairy Farmers has complained vociferously that prices

In the US, farmers received direct commodity subsidies of over $167 billion in the period 19952010. The European Union paid direct farmer subsidies of 39 billion ($51 billion) in 2010 alone. Why these subsidies if the big retailers are paying the best prices to the farmers as claimed?

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paid to farmers for fresh milk are simply unsustainable, with the average farmer losing money on each litre of milk produced. This has happened even as the supermarkets margin on fresh milk has increased steadily over the years. While it costs the consumer 1.45 to buy four pints of milk at a supermarket such as Tesco, the farmer receives just 58 pence (40 per cent) of this, causing a loss of 3 pence for every four pints. Small farmers have closed their dairy operations as a result. In India, dairy farmers receive as much as 75 per cent of what the consumer pays for a litre of milk. (Source:http:// Subsidies prop farming If big foreign retailers are expected to shore up our farmers as claimed by the publicity reports, there is no evidence of this in the countries where these retailers have spread their wings the widest. In the US, farmers received direct commodity subsidies of over $167 billion in the period 1995-2010 (Source: region.php?fips=00000) The European Union paid direct farmer subsidies of 39 billion ($51 billion) in 2010 alone. Why these subsidies if the big retailers are paying the best prices to the farmers as claimed? Sorry example of Mexico Mexico (population 112 million) signed the North American Free Trade Agreement in 1994. It has since witnessed a virtual takeover by Walmart which has gained nearly a 50 per cent share of the countrys retail market. Mexico can now be described economically as a vassal state. A combination of big retail and imports under NAFTA has driven
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over 1.25 million small Mexican farmers 25 per cent of the countrys farmers off their farms. Consequently, the illegal immigration to the US, which was to have been reduced because of NAFTA, has more than doubled to nearly 6 million Mexicans. Even a fraction of such a displacement in India, arising out of misguided policies, will cause social disruption on a vast scale. (Source: India has more than 58 million small farmers, 12 million small retailers and 26 million small and micro enterprises representing over 450 million people. The 300 MPs of the parties who opposed FDI in retail are right. Disturbing this mass of people is not politically sustainable. - The Hindu Business Line, December 25, 2011

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A Mexican Warning on Retail FDI

Shekar Swamy

Several months have elapsed since the Centre kept in

abeyance the decision of the Cabinet to permit foreign direct investment (FDI) in multi-brand retail. Thanks to opposition from its own allies in the UPA and to avert a crisis on this issue, the Government has postponed it and is working on building a consensus among political parties. Even as we keep hearing murmurs in the media that the decision will be revived, a remarkable expose about Wal-Marts (the worlds largest retailer) fraudulent practices has appeared in The New York Times. The story broke on April 22 in the print version with the headline, Vast Mexico Bribery Case Hushed Up by Wal-Mart ( The bribery relates to the period prior to 2006. The development in Mexico has important lessons for India. The article reported the web of corruption woven by Wal-Mart de Mexico to dominate the market. The New York Times examination found credible evidence that bribery played a persistent and significant role in WalMarts rapid growth in Mexico. The information came out in the open when a Wal-Mart de Mexico employee (Mr Sergio Cicero Zapata, a lawyer who served the
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company for 10 years) who was in charge of obtaining permits became disgruntled and disclosed the facts to the US headquarters. Rapid rise in Mexico Wal-Mart entered Mexico in 1991. In two decades, the company has grown to a position of domination with nearly 50 per cent market share of the retail sector. Wal-Mart de Mexico has 2,765 stores and restaurants in that country, nearly four times as many stores as its nearest rival, Soriana. The company has opened new outlets at the average rate of nearly 11 a month, every month over the past 21 years. Wal-Mart has emerged as the largest private sector employer in Mexico with 209,000 employees. Two observations are noteworthy. Those who have argued that Indian small retail will coexist with big foreign retail should note that Wal-Mart de Mexico has displaced and swept aside the local retailers with ease in just two decades. For those who argued that FDI in multi-brand retail will increase employment, it is pertinent to note that Wal-Mart has taken over nearly half of Mexicos retail business with just over 200,000 employees (the countrys population is 112 million). In contrast, the Indian retail sector provides employment to 40 million people. Wal-Marts findings Wal-Mart despatched investigators from the US to Mexico who unearthed evidence of widespread bribery. They found a paper trail of suspect payments totalling more than $24 million (Rs 120 crore). They found documents showing that Wal-Mart de Mexicos top executives not only knew about the payments, but had taken steps to conceal them from the headquarters. In addition, investigators found that an amount of $16 million (Rs 80 crore) was directly paid by the company as contributions and donations to governments in 2003-05.
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Eduardo Castro-Wright

The bribes were paid through outside lawyers, fixers known as gestores (pronounced hes-tore-ehs). Wal-Marts investigators found 441 gestor payments just in 2003-05 (around three a week). The bribes bought zoning approvals and permits, reductions in environmental impact fees and the allegiance of local leaders. The bribes were paid in order to build hundreds of new stores so fast that competitors would not have time to react.

Wal-Mart violated both the US and Mexico laws. In the US, the company violated the Foreign Corrupt Practices Act, a federal law that makes it a crime for American companies and their subsidiaries to bribe foreign officials. The then Mexico CEO, Mr Eduardo Castro-Wright, was identified as the driving force behind years of bribery. He was promoted to a bigger role in the US and became Vice-Chairman of WalMart in 2008. Matters came to the knowledge of Mr H. Lee Scott Jr, Wal-Mart global CEO, in 2005. He transferred the bribery investigation back to Mexico, where the General Counsel (who himself was implicated) closed it down. None of Wal-Mart de Mexicos leaders were disciplined. Irreversible damage Upon hearing about The New York Times story, Wal-Mart finally reported this matter to the US Justice Department in December, and to the Securities & Exchange Commission. As overseas bribery is a criminal violation of the US laws, the US authorities will pursue action against Wal-Mart. This could result in the arrest of senior executives and/or payment of substantial penalties. The case will then be closed.
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What this will never be able to reverse is the damage caused to tens of thousands of small retailers, farmers and suppliers in Mexico who have been forced to shut down in the wake of WalMarts expansion, and their families. Given that Wal-Mart now overwhelmingly dominates the Mexican market, it has made the entire country is dependent on itself for supply of essentials, presumably limiting the action that the Mexican authorities can take. Wal-Mart has become too big to fail in Mexico, and the country has become reliant on a foreign company that is governed from beyond its borders. Protecting Indias interests A simple regulatory framework can protect Indias interests against such developments. It is accepted practice that an individual with an unacceptable criminal or litigation record is denied a visa to enter countries such as the US. Similarly, companies that have been convicted of fraud or been the subject of investigation for monopolistic and restrictive practices or other serious wrongdoing (such as damage to the environment) should be denied permission to enter India. When a company makes an application to the Government for opening shop in India, they should be required to make a full disclosure of their litigation record, and cases of criminal misconduct from their operations across the world. Companies with a poor record should be disqualified automatically.

Companies that have been convicted of fraud or been the subject of investigation for monopolistic and restrictive practices or other serious wrongdoing should be denied permission to enter India.
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When new information comes to light, it is perfectly in order to review decisions previously taken. The Government should study the Mexican example and formulate its policies suitably to protect the masses from the onslaught of big foreign retail. - The Hindu Business Line, May 29, 2012

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Why seek Retail FDI for Cold Storage?

Shekar Swamy

ne of the major reasons cited for such foreign investment is that this alone is the answer to building our nations cold storage chain, to reduce wastage of fresh fruits and vegetables. Let us look at two simple low-cost solutions, both of which can be indigenously developed, tested and deployed on a mass scale. LESSON FROM NIGERIA This inspiring example comes from the region around Kano, in northern Nigeria, an area characterised by hot days, low relative humidity and low rainfall that is concentrated within three months. The region is home to a third of Nigerias population of over 150 million people. The people are mostly small farmers and cattle-rearers. The area suffers from poor roads and power shortage, making cold storage difficult (a description that applies to vast tracts of India). Consequently, farmers had to sell their produce at low prices, since they could not hold the produce.After studying the problem in depth, Mohammed Bah Abba, an
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enterprising lecturer at the Jigawa State Polytechnic, Dutse, came up with a unique solution. Hailing from a family of potters, he invented the pot-in-pot system of cooling (called zeer in local language). The pot-in-pot technology consists of two earthenware pots of different diameters, one placed inside the other. The space between the two pots is filled with wet sand that is kept constantly moist, thereby keeping both pots damp. Fruit and vegetables are put in the inner pot, which is covered with a damp cloth. The phenomenon that occurs is based on a simple principle of physics: the water contained in the sand between the two pots evaporates towards the outer surface of the larger pot where the drier air is circulating. The evaporation automatically produces cooling, causing a drop in temperature of several degrees in the inner container, extending the life of the perishable foods inside. In tests conducted, the temperature in the inner pot was reduced by 6-8 degrees C in 12 hours, and could be maintained by keeping the sand moist. The shelf life of the produce improved significantly, as shown in the table. The impact of the pot-in-pot was a reduction in the wastage of fresh fruits and vegetables. Farmers could hold the produce longer and sell on demand at higher prices. The cost of a pot-inpot unit is around $5 (less than Rs 300). Will this work in India? Tests can be run in different States to answer this question. The concept is not new as it is similar to matka-cooled water served in many parts of our country. More than 30,000 units are being sold annually in northern Nigeria. This cant happen unless it is successful.
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The cooling required for many perishables is much more than what can be achieved in the pot-in-pot. However, this inexpensive non-electrical system can be the first level of storage in the farmers homes, for produce which are amenable to this system. Lakhs of these of varying sizes can be deployed at a very low cost. We all know how a bank locker works. We rent space as required, have access to it when we want, and pay a modest usage fee. Now, imagine a cold storage room at the village level of size 20' width x 25' length x 10' height 5,000 cu ft of space. Experts refer to this as a walk-in cooler. BANK LOCKER EXAMPLE A cold storage space of this size can be set up for a capital cost of under Rs 7 lakh (land excluded), for a cooling level of 5 degrees C, which will cover most fresh fruit and vegetables. (Temperature and moisture requirements do vary. Meat, for example, needs to be frozen. Even that can be set up.) Each cooler can be run by an owner-operator, throwing up lakhs of rural employment opportunities. The electricity cost for such a storage locker (5 KW per hour, running 18 hours a day) is estimated at Rs 4,000 per week. Farmers can rent space in the cold locker on usage basis. The rental cost per 100 cu ft will be just around Rs 400 per week (assuming 50 per cent capacity utilisation, and a target revenue of Rs 10,000 per week to cover electricity cost, manpower and return on investment). The government can guarantee a return on this infrastructure investment, like it has done for fertiliser plants (The real challenge will be access to continuous supply of electricity, a problem that is common to all). India can set up 100,000 (500 million cubic feet) of these cold storage lockers in the villages and mandis for a cost of just Rs 7,000 crore.
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To put this amount in perspective, the government is spending Rs 40,000 crore on the National Rural Employment Guarantee Act (NREGA), which shows we have the resources. India can build the largest disaggregated ground-level cold storage chain in the world. I spoke to two experts in cold storage to collate and verify this information. They were excited that this could be done. One of them even offered to build a prototype to prove the point. TRANSPORTATION COLD CHAIN The cost of adding refrigeration to a 7-9 tonne truck is around Rs 6 lakh. An expert in trucking whom I spoke to confirmed that truck operators will add this to their trucks, once they understand the higher rentals they can charge. For a modest investment which can be indigenously funded, we can create a fleet of tens of thousands of refrigerated trucks plying all over the country. The pot-in-pot system, the cold storage locker chain, the refrigerated trucks, and presumably other simple ideas all of these can be created easily. FDI in multi-brand retail, with the massive damage it will cause to farmers and traders and the entire ecosystem, is not required to address the cold storage issue. Instead of handing over our markets and cold chain infrastructure to foreign companies, we can create our own inclusive solution that will be the envy of the world. - The Hindu Business Line, January 16, 2012

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Perils of State-aided FDI

Shekar Swamy

ake no mistake about it. Our country is about to be economically invaded in the name of foreign direct investment (FDI) in multi brand retail, and the consequences are going to be profound. Only this time the guardians of the gate are the ones throwing it open, much to the glee of the few who will benefit from it and to the dismay of the millions whose future is being taken away from them. All of this goes under the name of liberalisation and reform the euphemism for giving away our markets, perhaps the nations most sustainable long term asset. The state has made it clear that it will go to any length to extend support to the biggest multinationals and aid the entry of big capital into the country. It does not matter if this is detrimental to the indigenous mass of small capital entrepreneurs, farmers and producers of all hues. In making its case, the state has chosen to overlook all evidence available around the world about the continuing negative impact of Big Box retailers. As this invasion unfolds, it will result in large scale displacement of the small people in favour of big foreign capital. As invaders are wont to do, they will divert
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the income flows from the local people to large foreign capital. It is deeply regrettable that the state is aiding this through a stream of misleading information and arguments that dont stand scrutiny. There is a new master in the house and its called foreign investors. Whatever we do as a nation, the governments first filter appears to be How will it affect the sentiment of foreign investors? Will they be displeased? What can we do to keep the foreign investor smiling at us? The reality is that we should not be devising policies to please this mistress, but doing what is right by our people. By its very nature, foreign capital will frequently threaten to go elsewhere or not come in. It will always demand that conditions should be perfectly suited for it to exploit the local market, never mind how it affects the people. The remarkable point is that even as we have opened the retail markets, the state has not even bargained for any beneficial reciprocal arrangements (like how about increasing the US H1B visas so that a major constraint is removed for our IT industry). This shows how much the state is willing to bend to please the mistress. How much foreign direct investment has been coming in? It was only $47 bn or 7.7 per cent of total investments in the country in 2011-12. Compare this to non-resident Indian (NRI) remittance inflows of $66 bn (Source: Reserve Bank of India) in the same period, which comes in on its own with no strings attached. If the government wants to, it can significantly boost the inflow of NRI funds, with a little bit of stimulus and a well thought-out programme. While there are good answers like this to get funds into the country, it is inexplicable why the government has chosen to follow anti-people measures, like FDI in the retail sector.
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Having decided to aid multinationals, the government has exaggerated and presented erroneous information to support its position. Out of the many such examples, here are two important ones. Take the figures of losses of agricultural produce. Government officials have repeatedly said that 40 per cent of fruits and vegetables are wasted post-harvest. Therefore FDI in retail is required to develop the back-end infrastructure. This is grossly incorrect. As per a detailed study commissioned by the government and conducted by the Central Institute of PostHarvest Engineering and Technology (CIPHET), Punjab, the wastage of fruits is only between 6 to 18 per cent and vegetables is between 6 to 12.5 per cent. Completed in 2010, CIPHETs nationwide quantitative assessment of harvest and post-harvest losses covered 46 agricultural produce in 106 randomly selected districts. The summary of the study of post-harvest loss is available on the website of Ministry of Food Processing Industries ( CategoryId=1314). CIPHETs post-harvest loss estimates in India compare favourably with western countries. The Food and Agriculture Organisation has estimated 36 per cent loss of fruits and vegetables (refer graphic) in America, Canada, Australia and New Zealand, the countries where big retail is most developed. While the methodologies may differ, these figures are nevertheless indicative. If big retail cannot prevent such losses in these countries or they are responsible for a chunk of it surely they cannot address this issue in India.

The global experience is clear. With big retail, farmers lose, traders and retailers lose, and consumers lose. Only the big multinational companies win.
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The second example of misrepresentation is the alleged benefits to farmers. The argument goes that since middlemen will be eliminated from the supply chain, farmers will be paid more by the big retailers who will procure directly. While this is elegant in theory, the global experience is the opposite. Procurement of big retailers will hardly touch the small farmers, which is the largest constituent in our country. Big retailers will deal with large contract farms, which become their captive farms. Prices paid to farmers get hammered down consistently. As an example, look at the United Kingdom experience. As the share of the top four retailers increased from 54 per cent in 1996 to 65 per cent in 2006, the farmers share of consumer prices has gone down dramatically for milk, fruits and meat & pork. People argue that this is the way progress happens, defined as copying what has happened in the West. However, western retail is a deeply flawed structure. It holds farmers and suppliers captive through its monopsony (a market situation where there are only a few buyers for everything) bargaining power, and has systematically reduced the price paid to them. When compared to India, consumer prices are higher in the West, where big retail rules with its cosy oligopolies, for just about everything. The global experience is clear. With big retail, farmers lose, traders and retailers lose, and consumers lose. Only the big multinational companies win. How does one explain the State aiding this invasion? The answer is simple. Big capital is the mistress, and mistresses have their ways of winning, and it is seldom the fair path. - The New Indian Express, October 16, 2012

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FDI in Retail threatens the Livelihood of Killions

Dr. Gautam Sen

Nothing foreign retailers do in India can help the

dysfunctional UPAs electoral prospects in 2014. The electoral time-line, of eighteen months at most, cannot fit the most optimistic projection of any dramatic impact FDI in retail could have on the wider Indian economy. Manmohan Singh and his floundering ministerial colleagues are, therefore, either bedazzled by the notion that FDI in retail will eventually have significant positive economic consequences, or they capitulated to US demands for market access. A third reason could be that Indias carpetbagger politicos, having read the writing on the wall, are engaged in more malfeasance to arrange handsome pensions for comfortable enforced retirements in 2014. This treasonous UPA coup on behalf of Wal-Mart and Tesco has also been facilitated by brandishing the CBI (an organisation any new government ought to instantly disband) at the irredeemable political twins of Uttar Pradesh politics although it seems nothing sufficiently compromising was found in Mamatas closet to wield against her. But this sordid triumph may be shortlived in the quagmire of Indias ground-level politics. The repudiation by Indians of this disgraceful
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chicanery will be the final ignominy for a government without a vestige of self-respect or decency, leave aside concern for the nation and its people. The idea that Manmohan Singh and his boss have decided FDI in retail is an answer to the abysmal economic predicament into which they themselves recklessly have thrust India is not credible. These supposed sentiments do not fit the incompetent looters profile, which is the reputation the entire UPA will depart with, en masse, in 2014. A regime lacking imagination or political will has latched on to retail and FDI, blithely ignoring the multiplicity of complex supply-side problems that constrain the Indian agricultural sector in particular. Thus, one might conclude the UPA has succumbed to American pressure to allow majorityowned FDI in retail. When push comes to shove, the US authorities engage in every kind of skulduggery to get their way, as the Koondakoolam nuclear power plant debacle is demonstrating daily. And a weak, thoroughly discredited UPA regime is susceptible to other kinds of foreign blackmail. Information on the criminal activities of its most senior personnel, including concealment of loot abroad, can be leaked to the media.
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The implication insinuated by Indias purchased media that WalMart and Tesco wish to invest massively in India to helpfully transform it is laughable. A financially bankrupt Indian media has been silenced by the simultaneous policy promulgation allowing a 51 per cent FDI stake in it, making it froth at the mouth with greed. Indian retail constitutes 22 per cent of GDP, is the second largest employer after agriculture, and is growing rapidly despite all the statist misgovernance that could conceivably be inflicted on it. Its current estimated worth is $450 billion and expected to reach US$ 850 billion by 2020, a quarter of it in the organized segment, which is poised for extremely profitable take off. These projections do not presumably factor in the impact on the share of the organised sector in total retail should majority-owned FDI enter it. The share of the organized sector is likely to end up becoming significantly larger as a result of the very fact of foreign entry into Indian retail, reinforcing the resolve of foreign investors to muscle in. Foreign retailers wish to enter India because vast profits beckon. Organised Indian retail is expected to grow at 7 per cent over the next decade, not something they would have ever attempted to risk initiating at high cost. But they clearly wish to take advantage now because huge profits can be scooped up from it. Indian retail has already been identified as one of the most attractive investment prospects by international rating agencies. As a result, foreign retailers are also eyeing its mouth-watering promise, at a time when their own national markets have reached saturation point, with virtually no additional growth feasible except through increased market share. It might be inferred that existing joint ventures, like Bharti Retail-Wal-Mart and Tesco-Tata, are merely a prelude to potential policy changes that will allow 100 per cent foreign ownership, of which the 51 per cent provision is a harbinger. The foreign retailer will be the major source of additional capital and the increase in their ownership stake irresistible. The banks funding foreign retail
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investment in India are also flush with funds, having resumed their unprecedented historic plunder of global wealth, preempting 30 per cent of all US profits as rent though contributing less than 10 per cent valued added to GDP. The operation of retail majors in advanced economies demonstrates their huge market power, which enables them to extract unusually large rents through oligopolistic pricing and manipulation of government policy in their own favour. They undoubtedly enjoy the advantages of economies of scale by virtue of operational size, but also bully suppliers relentlessly over prices of products they purchase. Indeed they routinely dictate purchase prices to even powerful producers of well-known brands. The same producers of branded goods do not sell at a similar price to less powerful, local retailers who thus suffer an unfair competitive disadvantage. And lower prices for supplies do not necessarily benefit consumers and evidence suggests that own brand products of retail giants, competing against branded goods, do not mean lower prices for consumers and instead enhance profitability. There is also the issue of increasing returns to scale that seems to create monopolies or quasi monopolies in the retail sector that wield irresistible market power, allowing them to collect significant rents from the hapless consumer. The expansion of multi-product retail in India, with or without foreign participation, will surely administer a potent shock to the supply side of Indian agriculture. It could turn out to be equivalent to an enhanced second green revolution for productivity. The range, variety, quality and quantity of food products provided will encounter a massive challenge to adjust their entire supply chain. But Indian retail does not need to be foreign-dominated and joint ventures are a shortcut that will lead to the repatriation of significant profits indefinitely. Indian companies should take the time to build their own retail chains. They might consider hiring staff internationally and forming relationships with less prominent foreign partners, even if this
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means more effort and takes longer to acquire the expertise they need. Their expertise can grow with the Indian market, which would be of modest size initially. As a corollary, forming relationships with the very largest global players may be unnecessary at the outset. There is great temptation for most Indian retailers to engage in joint ventures for fear that competitors would gain a first mover advantage by collaborating with major foreign partners before them. Only government policy can ensure that such economic relationships inimical to the national interest are deterred. However, if foreign retailers cannot now be halted from entering India, though that is not yet the dilemma, legislation should compel the creation of separate corporate legal entities, quoted on the Indian stock market, for their Indian-owned operations. The political economy of the market power of FDI in retail is an issue that Manmohan Singh and his cronies deviously disdain to foreground. Once foreign retailers and the banks financing them enter India, they will be impossible to dislodge. They will simply buy policy-making since it is clear that pretty much anything can be purchased in India today from its infinitely corruptible politicians, the greatest danger to the welfare and survival of the nation. Their economic policy advisers, intellectually and morally bankrupt medieval school-men, are performing their designated task of providing obscure rationales for the politically-inspired looting that now constitutes contemporary economic life across the world. Not so long ago, their professional luminaries were, much like the witch-burning medieval clergy, arrogantly announcing the end of depressions,

The existing retail network of India embodies an entire way of life and social culture, with its fragmented structure and the dependence of a myriad of families on it.
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downturns, even the business cycle, and flaunting the most corrupt of accolades, the Nobel Prize, awarded for doing so. The existing retail network of India embodies an entire way of life and social culture, with its fragmented structure and the dependence of a myriad of families on it. It harbours and articulates distinctive local histories and personal relationships between buyers and sellers. These traits are not immutable and may not survive historic market forces, but one needs to question how policy and implicit public subsidies put them at a disadvantage in relation to new dominant players. The latter enjoy easier access to cheaper credit and public infrastructure fashioned to suit their specific needs. In the end, the desirability of a level playing field in which wider public infrastructure services are available to smaller players as well cannot be dismissed out of hand. If the big and small Indian retailer is to co-exist (though the former may assume an ascendant position), is it too much to ask that they are not ruthless corporate predators from the West, quick to unloose savage national political and military clout to get their way? Is this not what Western oil majors are doing at this very moment in the Middle East? They are destroying established State systems, with spurious propaganda about human rights, to which they have never subscribed, and replacing them with sub-state satrapies with which they negotiate lopsided oil contracts with alacrity. - News Insight, September 19, 2012

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Misplaced Hype over FDI

Dr. S Vaidhyasubramaniam

Thomas Friedman in his most recent article starts I

can remember bad presidential campaigns in good times and good campaigns in bad times, but it is hard to recall a worse campaign in a worse time. Mitt Romneys campaign has been about nothing, and President Obamas has been about Romney. Extending this rhetorical expression, the recent Obama interview on Indian reforms or the lack of it, has only proved how even great orators falter when the election fever hits them hard. In a TV-show last weekend, the Rajya Sabha Member of Parliament Mani Shankar Aiyar shockingly shared economist Bibek Debroys findings that the Gini coefficient of India has almost doubled in the last 10 years. The Gini coefficient, as applied to income and wealth has risen from 0.36 to 0.65 in urban India. The Gini coefficient is a number between 0 and 1 that measures the income distribution of a country. A coefficient of 0 means that everyone has the same income and 1 means that one person has all the income and everyone else has zero income. The Indian political establishment critically hit back with strong to mild reactions to Obamas interview. On the contrary, the Confederation of Indian Industrys (CII) urged the
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government to announce confidence-building reforms like opening up multi-brand retail. It added that such measures would send out positive signals to global investors. Are we interested only in sending signals but not sensing the signals that Bibek Debroy sent through Aiyar? The CII, the ASSOCHAM or the FICCI appear to be unconcerned about the increasing income disparities but more concerned about FDI. Are they not aware of the very little economic value addition of the highly celebrated and overly invited FDI? Are they not aware that the role of FDI in increasing Indias GDP during its prosperous years between 2000 to 2010 was marginal and the prosperity was driven by indigenous investment and consumption? Are they not aware of the Goldman Sachs Global Economic Paper No 187 (2010) that dismisses the need for FDI to support Indias infrastructure growth? Then why this hullabaloo over FDI in multi-brand retail when FDI in India is about nothing? The UPA government must be conscious of the fact that multilayer retailing in India is the 2nd most decentralised economic activity after agriculture and constitutes more than 95 per cent of trade leaving the remaining 5 per cent to organised trade. Contributing to 14 per cent of the countrys GDP while the share of all the BSE 500 companies is less than 10 per cent, unorganised retail is also the 2nd largest employment provider next only to agriculture. According to NSSO, 51 per cent of the total employment that is generated in India is through selfemployment and retailing plays a significant role in this. The role of retail does not occupy mainstream media but is silently adding an estimated annual investment of 25,000 crore contrary to the belief that investment in retailing is not forthcoming. While a majority of retailing is through unorganised familyowned businesses, organised retail is also expanding in a huge way. In a recent interview, Kishore Bayani of Future Group was upbeat about this expansion plans. Assuming a growth in line with GDP, indigenous creation will add more than a million retail
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outlets. On the supply side, there has been minimal consumer complaints regarding product availability, predatory pricing, work ethics and above all, the retail business has created an endured social safety net. The major complaint has been that of price rise and the solution to it is outside the retail industry orbit. Then why is the government trying to provide answers to a question that never exists? The reactions to FDI in multi-brand retail have been mixed. The Ministry of Commerce & Industry hopes that this will help farmers, create jobs and benefit consumers resulting in an improved supply chain and reduced inflation. India Inc also feels its a win-win solution. Some argue that India Inc has found a new business/ financial partner during these tough economic times. Political opponents vehemently argue that it will displace farmers, create huge unemployment and will leave consumers at the mercy of a powerful cartel known for its tough bargaining power. The leading retail chain in the world is Walmart. Its annual turnover at the end of last fiscal was close to $450 billion. The others in the top 5 put together will contribute to another $350 billion. Put together, they constitute `44,00,000 crore in combined revenue while the Government of Indias estimated revenue for the fiscal 2012-13 is `9,77,355 crore, lesser than Walmarts annual revenue in rupees. No prizes for guessing the unflinching power that they can command over the dwarf-like Indian unorganised retailers. With such high bargaining powers, it does not need a consultant to say that small retailers will be

6 leading retail chain stores of the world put together constitute `44,00,000 crore in combined revenue while the Government of Indias estimated revenue for the fiscal 2012-13 is `9,77,355 crore, lesser than Walmarts annual revenue in rupees.
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squeezed by these big guns and the so-called big Indian retailers may find it attractive to get sold. US Economists Stephan J Goetz and Anil Rupasingha in their study titled Wal-Mart and Social Capital, which was published by the American Journal of Agricultural Economics have found that the presence of Walmart has reduced social assets in the nearby communities. It is commonly believed that communities with high levels of social capital are relatively healthier and resilient. In fact, this was one of the main reasons for Indias resilience during the global financial crisis. Their study examined both communities in which new Walmart stores were built in the 1990s and those that already had a Walmart at the beginning of the decade and controlled other variables known to affect social capital stocks in a community, such as educational attainment. They found that communities that gained a Walmart during the decade had fewer non-profit groups and social capitalgenerating associations (such as churches, political organisations, and business groups). They also found that Walmarts presence depresses civic participation. Communities that had or gained a Walmart store in the 1990s had lower voter turnout in the 2000 presidential election. Walmart harms not only local retailers, but also a wide variety of other businesses and professionals that serve local retailers, such as banks and accountants. Another factor is the decline of the downtown and other neighbourhood business districts that have long served as gathering places and helped to sustain the web of connections that knit communities together. With this single example there seems to be a reasonable concern that FDI in multi-brand retail will not only distort the existing economic harmony in Indias unorganised retail but also will dismantle the economic spine of our country, its social capital. FDI in multi-brand retail will enrich corporate capital but impoverish Indias social capital. Result: Gini Gini high high. - The New Indian Express, July 25, 2012
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FDI in Retail Sector: Trade Policy Or Policy For Trade

Prof. R.Vaidyanathan

In Nocember 2003, some Bangalore-based newspapers

reported on page three the opposition by local traders to the operations of Metro, the German giant in the retail trade, including agricultural produce. That news item also looked like an afterthought, for filling the space after covering the escapades of noisy and vulgar celebrities. The English language media, which shouts on a daily basis from roof-top about the cherished press freedom, does not bother about a profound and far reaching issue, which is going to affect millions of Indians in terms of employment, culture and way of living. Recently, the Central Government paved way for 51% FDI in Multi Brand Retail creating significant debate among political parties even to the extent of affecting the stability of this Government. Even now, as usual, there are some ill-informed editorials by semi-literate editors in some of the business papers about the need for FDI in retail trade (along with all activities including maintenance of toilets, but excluding in print media, since that will be against their cherished press freedom). It is another
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issue that, for a crumpled silk tie or a bottle of IMFL, one could get prominent space in the editorial pages in some of these business papers. Unfortunately, there is not much debate (leave alone informed debate) even among the academicians and policy-makers about the far-reaching implications of the arrival of a global retailer like Walmart or Metro. Role of Trade in our Economy Trade constitutes the largest segment of the economy with a nearly 16.7 % share in NDP in 2010- 11, that is, in the aggregate NDP of Rs 43.2 lakh crore that year trade accounted for Rs 7.2 lakh crore [at 2004- 05 constant prices] higher than the share of manufacturing [at 13.4%] and Agriculture [at 15.0%]. (National Accounts Statistics of the CSO, New Delhi 2011). Trade is conducted mostly [more than 80%] by partnership / proprietorship firms with active involvement from members of family and community. More than 125 lakh kirana stores provide a source of livelihood to nearly 16 crore people. Retail trade has grown faster than the economy: it registered a compounded annual growth rate (CAGR) of 9.2% between 2004- 05 and 201011 when the Indian economy grew at 8.6%. The retail trade comprises all kinds of people and formats from street vendors to departmental stores of various types, shapes and characteristics. More than 80% of trade is accounted for by partnership and proprietorship forms often called the unorganized sector. The kirana shop adjacent to my home opens at 7 am and closes at 10pm every day, 365 days of the year. It is very efficient, and one can order through a mobile. The owner knows the tastes and price preferences of our family, but his business is classified as unorganized by our experts and economists. The retail trade suffers from two major handicaps. One is the
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non- availability of credit at reasonable rates from institutions; the other is the bribe one has to pay to the government babus to leave him in peace. The Gung-ho Go Global Gospel The shop till you drop crowd thinks that the panacea to all our ills is to encourage global chains in our retail markets. The argument is that the MNCs bring funds, efficiency and cost-effective solutions. The consumer should be happy!

Rebecca Mark

An MNC does not normally bring funds from outside sources as it can access them in our market by showing comfort letters from their parent companies. Many financial institutions, both government and private, are ready to lend to them below the prime rate as they are Global and suited-booted and tell nice lies with beautiful ties on their neck. Plus, they are run (even remote controlled!) by whites financial institutions in India do not deny white customers. That the MNC will bring funds from abroad is a mirage. Remember Enron, which was supposedly bringing Rs.10, 000 crore from outside. The final result is that our government institutions hold more than Rs. 6000 crore of worthless papers. Now RBI is asking these banks to show it as bad debt. Rebecca Mark (whose fame was that she walked on a ten inch high-heel shoe the length and breadth of Taj Hotel lobby

Should we replace the street corner Nadar or Muslim or Sardar or bania shopkeeper who can add fifty items without a calculator with a counter girl (no sexist bias) who cannot add five numbers without a machine?
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in Mumbai) claimed that millions were spent to educate Indians as part of that project. We either refuse to get educated in the true sense or want to be more educated in Rebeccian sense. We not only never learn, we dream the same wrong Technicolor dreams aided by pink papers. The other aspect is regarding the technology or knowledge base they bring with them. What technology? Do we want to dumb down India as Wall Mart has done to the US? Should we replace the street corner Nadar or Muslim or Sardar or bania shopkeeper who can add fifty items without a calculator with a counter girl (no sexist bias) who cannot add five numbers without a machine? Another issue is in terms of reduced cost. Has anyone done a proper study of the aggregate cost of these global retail chains? Most American homes have a retail store in their basement. They have at least one-month stock of coke and six-month stock of toilet paper since Sam Co. decides that mom and pop stores are to be shifted to individual households by offering great discounts. The refrigerator in every house is a retail shop and basements are godowns. In other words, individual households have become retail outlets using their credit card. For the economic expert, goods held by household is consumption but held by mom and pop store is inventory. Hence, inventory reduction has been achieved in the economy! Another aspect is the fuel cost of thousands driving miles to go to that rural supermarket and spending thousands of man or woman-hours doing nothing between the aisles. Do we want such a model here?

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My vegetable vendor carries half a truck- load of vegetables on his TVS 50 at morning 5am. In India small businesses use capital more efficiently than big ones- So supply chain if at all will be more expensive. As far as consumer prices they may come down initially but global experience suggest after predatory pricing for some time global companies will hike it to much higher levels since they need to increase returns. International Practices For anything and everything, the pink press wants Indians to emulate the Japanese, the French, the Germans and, at least, the South Koreans. All petroleum services and products, rice, tobacco, salt alcoholic beverages and fresh food traded at public markets are excluded in Japan from any distributional aspect by other country companies. Australia, Japan, South Korea do not allow whole trade services in petroleum, its products, rice, tobacco, salt, milk, fertilizers etc by foreign companies. The French, using their Loi Royer, simply restrict any development of hypermarkets to protect what they call the centers of French towns and villages and the living of small shopkeepers. Germany has legislative constraints on outlets above 1200 sq meter in size, not dissimilar to Frances Loi Royer. This is inspite of the fact that trade constitutes relatively smaller portion of their economy both in terms of employment and value addition compared to India. The paan- chewing, dhoti- clad, English- ignorant retail trader should not be seen as an inefficient entrepreneur who needs to be bleached by globally- accepted detergents. What he needs is

The paan- chewing, dhoti- clad, Englishignorant retail trader should not be seen as an inefficient entrepreneur who needs to be bleached by globally- accepted detergents.
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a level playing field, in the full sense of the term, with access to affordable credit and the abolition of inspector raj in the form of harassment by various arms of the government. Let us remember that we are still a savings based, family- oriented economy.

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Strengthening Local Trade The Way Out

Prof. R Vaidyanathan

The retail trade suffers from two major handicaps.

One is the non- availability of credit at reasonable rates from institutions; the other is the bribe one has to pay to the government babus to leave him in peace since middlemen are eliminated. Nagamma has been a flower vendor for more than 20 years in my suburb of Bangalore. When she needs a loan, she participates in chit funds. Sometimes, she has lost big as the chit funds were run by crooks. I advised her to open an account with a commercial bank for saving her hard earned money and perhaps to get a loan later. The banks know your customer (KYC) norms require proof of address, PAN cards, proof of date of birth everything but her dogs surname. She has no chance of getting this kind of KYC done. Large companies get loan rates below the prime lending rate, but my vegetable vendor gets it at 0.5% per day. They have to return 50 paise at the end of the day for every Rs100 borrowed in the morning. This works out to be more than 180% per annum. My retail provision stores man gets his money in an interesting way. He gets Rs45, 000 (for a loan amount of Rs50, 000) upfront and pays Rs500 a day for 100 days to repay his full Rs50, 000. It
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turns out to be more than 10% for three months. More than 70% of the working capital requirements of retail trade in 2009-2010 came from non-bank sources. The other perennial problem faced by the unorganized retail trade is the organized dacoity by minions of the state. They need to bribe the cops, bribe the municipal authorities and other local goons. The cost can be as high as Rs20 on an income of Rs200 or so per day. That is 10% of gross income. The same is true of fruit seller, the fast-food idli joint or the beauty parlor. A major portion of trade financing is done by non-institutional players like moneylenders. The planners should address this issue rather than encourage the retail revolution. Harassment from various minions of the state machinery such as police, municipal authorities, check post officials, labour department, weights and measurements etc (the list extends to at least 20 agencies) and the bribe tax paid is mind boggling. At a conservative estimate of 5%, we find that at least Rs 20,000 crore is the bribe extorted by various government agencies and regulators. Street-side vendors and hawkers have additional issue of zoning problems. The fact that they play an important role in the economy and have substantial entrepreneurship is neither recognised nor appreciated by the metropolitan elite. The pressure on the illiterate retail trader is huge. He borrows at atrocious rates to repay his dues and in the absence of any social security net, faces severe hardships. The government has been talking of improving the living standards of SC/STs, OBCs and Muslims. It is interesting to note that substantial portions of Muslims, who are into business, are in the retail trade. Instead of looking at these two important constraints imposed on the fastest growing and most productive and efficient retail trade, our planners want to open the field up for global sharks in the name of liberalization.
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Financing Trade Activities The credit availed by these sectors comes from the sellers (in the form of payables/receivables) or from open market (non-bank) sources and from bank sources. The financing of the activities by the non-corporate sectors, particularly in areas like trade (wholesale and retail), hotels and restaurants, is mainly from the private money markets where the rates of interest are much higher, at least twice that of a nationalized bank. These are cash flow-based lending rather than asset-based and are undertaken more by the unincorporated type of financing agencies. The organized non-banking sector is more into asset-based lending for items like machinery, equipments, trucks, etc. This is one of the major reasons for the large margins seen in trade, both wholesale and retail. For many of the fast moving consumer goods (FMCG), the gap between the company balance sheet figure and the street price figures is more than 35%, and one factor in this is the open market interest paid by the trade channels. In case of cash crops and vegetables, the gap between producer prices and consumer prices can be as high as 70 to 80%. Here again, the financing cost both for holding and transport plays a major role. In the recent past, the interest rates have been moving south and large corporates are in a position to access funds from banks at less than 10%. But the flower girl and my vegetable vendor get it at half percent per day (returning half a rupee for hundred rupees borrowed in the morning). This works out to be more than 180% per annum. My retail provision stores man gets it in an interesting way. He gets Rs 45,000 (for a loan amount of Rs. 50,000) upfront and pays Rs. 500 per day for 100 days to repay Rs. 50,000. It turns out to be more than 10% for three months. My barber gets it through a local chit process at around 4% per month. The fast food restaurant (idli joint) at the corner of the road gets funds at 3% per month from a non-bank agency. The private bus operator in the suburbs gets it at 2.5% and the
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construction contractor near home gets it at 3% per month. The plumber, carpenter, fitter, painter, etc get funds at 3 to 4% per month. The segmented financial markets present an ironical (if not tragic) picture of huge funds being available with bankers on the one hand and prohibitive interest rates at which funds are made available to trade and commerce, particularly the noncorporate, sector on the other. As already seen, the non-corporate sector has a dominant role in activities like trade (whole sale and retail), construction, hotels and restaurant, private transport and other services. These are clubbed together as unorganized sectors in our statistics and sometimes talked about as residual or informal sector. Asset-Based versus Income-Based Lending It is to be noted that market knowledge and information regarding these activities is not fully available with the commercial banker on an updated basis. The typical bank manager of a public sector bank has a two to three year tenure in a particular branch and is also shifted across activities like foreign exchange, administration, agricultural finance, personal banking, training, industrial lending, etc. By and large, the commercial banks have been geared to asset-based lending rather than lending based on the forecast of cash flows. This is all the more true of such activities like trade, transport, hotels and restaurants, construction, etc, where there are significant fluctuations in the cash flows on a daily basis. In other words, risk assessment capabilities are not adequate in the context of these activities. Also, funds need to be available to these players without much paperwork and based on personal assessment. These activities are mostly financed by the Non-Bank Finance Sector (NBFS), consisting of companies into chits and similar activities and Un-incorporated Business Entities (UIBs). Large segments of disparate activities are clubbed together under a single banner called NBFS. It ranges from unincorporated
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entities like moneylenders to large companies dealing in thousands of crores in leasing businesses. It also includes share trading companies and truck financiers. There has not been any significant attempt to focus on the distinct activities of these constituents by the planners. Unfortunately, there is no direct estimate available about the credit provided by the non-corporate bodies for trade and commerce in the economy. Elsewhere, we have estimated that in trade alone, the role of non-bank institutions in providing credit might be of the order of 60%. Hence, a significant role is played by the non-corporate financing bodies in our economy and the rates are much higher than that charged by the commercial banking system due to ease of transaction and trust-based lending. The result is segmented distribution system and prohibitive financing cost at the retail level. Concentric Circle of Lending Institutions There is a need to integrate domestic financial markets through a system of making the UIBs in the credit market as channel partners to large banks. The reforms have focused only on the liability side of NBFS and failures therein, but the asset side is
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equally important in terms of credit delivery to large segments of our economy. The significant role played by the non-bank institutions in the credit delivery mechanism has not been appreciated nor fully understood by the policy planners. The focus is more on the failure of some institutions. There have been failures in the nonbank sector in terms of institutions in both corporate and other forms of business. There are two types of failures. One belongs to the class of malfeasance on the part of promoters in terms of running these institutions, which has resulted in the depositors loss. This is related to the operational and supervisory mechanism. The other type of failure is related to the risk of the underlying assets invested in by these entities, and that is part of the business risk phenomena. There is a need to understand the return risk paradigm of any financial operation, and these entities are into cash flow-based lending as in activities like trade, hotels, construction etc. They do not have the benefit of the sovereign guarantee provided to public sector banks, nor have they any insurance facility as given to bank deposits. They also do not have the comfort letters provided to the MNC bankers in India by their parent companies abroad. In such situations, failures are to be expected when dealing with lakhs of institutions. In the case of failure of commercial banks, particularly public sector banks, it is explained as systemic failure and the government pumps in more funds for recapitalizing these institutions. The chances of failure of private institutions with significant risk taking activities are expected to be larger compared to government-owned, controlled and monitored institutions. Protecting the depositor interest should go hand in hand with enhancing the credit delivery mechanism to the largest sections of our economy. In a sense, the non-banking finance companies both corporate as well as non-corporate are the best route to finance these
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activities of the non-corporate sector, particularly for the future income-based lending. This is due to the fact that, in their area, they are market savvy and have the ability to rate the partnership/proprietorship groups and monitor them and recover the money lent to them. Hence, the public sector banks could finance the non-bank financial institutions on a wholesale basis and they in turn could fund the requirements of the non-corporate sectors in a chain of retailing credit and recovery functions. If the banks finance the NBFCs after rating them even at 4-5 % above prime lending rate (PLR), then these institutions could fund the non-corporate sector at perhaps 8-10% over and above the PLR. This is still lower than the open market rates of two and half to three times the PLR at which the sector, in many of these activities, is getting financed. The financing of the non-bank organizations (both corporate and unincorporated) by the commercial banks should be treated on par with priority sector lending as long as the end users are these sectors. This implies that the commercial banks gear themselves in rating the non-bank organizations rather than thousands of unincorporated entities in trade, transport, construction, and hotels and restaurants. In the case of non-corporate entities in the market, the commercial banker can be given the powers to license them and provide credit to them to reach the larger market. It can also be specified that only licensed non-corporate bodies will be permitted to

The financing of the non-bank organizations (both corporate and unincorporated) by the commercial banks should be treated on par with priority sector lending as long as the end users are retail sectors.
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operate in the credit market in terms of collecting deposits and also availing of loans from the banking institutions. This would provide opportunities to banks to enlarge their scope of operations and also provide the UIBs to carry on their business with loans from the banks. It will also introduce orderliness in terms of banks rating these entities for licensing them and reviewing it annually. The depositors are also protected to some extent in the context of assessment by the commercial banks for licensing them. This concentric circle of banking will bring to an end the current inverse relationship between the size of borrowings and the cost of borrowings without much application of credit rating of the borrower. It would also facilitate creation of proper database in these activities for credit rating of these entities. This would bring down significantly the cost of borrowing by the trade channels. Need for Integration of Domestic Markets If the competition from the international giants has to be effectively met by our local retail trader, then cost-effective and efficient credit delivery mechanism is important for these players. The trend in commercial banks today is to merge existing
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branches rather than create new ones, particularly in the context of the voluntary retirement schemes introduced. In such a situation, it may not be possible for the commercial banks to enlarge the network necessary to cover a larger portion of the non-corporate sector in future. That would leave a huge unserviced gap. Recognizing the important role of the NBFS in the credit markets, collect data to estimate their share to enhance the credit delivery to millions of service entities. The commercial banks can lend to these non-banking institutions that in turn can provide it to the trade entities. Globalizing our trade sector without domestic integration of the credit markets may lead to a situation of cherry picking by the global players and/or linkages created only at the creamy layer level without adequate strengthening of the base of the system. The paradigm of taking the UIBs as channel partners by the commercial banks in a large scale would facilitate the players in these fastest growing activities to compete effectively with global players in the emerging scenario. We should not start with the premise that the pan chewing, dhoti clad, Englishignorant retail trader is inefficient and cost-ineffective and should be bleached by globally accepted detergents for cleansing. It is required of us to recast the financial architecture of the Indian financial system if it has to ensure growth of the economy along with adequate availability of credit to the fastest growing sectors of the economy. The aggregate monetary policy of the central bank can be achieved if and only if the role of the NBFS, including the UIBs, is recognized and encouraged in our trade financing system.

A ministry to exclusively take care of domestic trade should be formed.

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What can be done The government should enhance credit availability through institutional channels by fixing targets, if needed. It should facilitate modernisation of spot markets like APMC and encourage linking up retail using technology to get the power of large purchases. The zoning system should be introduced to facilitate the livelihood of hawkers and other petty traders. A percentage of bribe tax should be impounded or government employees in identifiable areas should be levied a cess to create social security for retail traders. A ministry to exclusively take care of domestic trade should be formed. Last but not the least, let the reformers, many of whom are beneficiaries of pension from global institutions, understand that the retail trader, who is in his 50s, illiterate and has borrowed at exorbitant rates and has to bribe on a daily basis, doesnt have a future with this revolution. In a retail seminar, an expert mentioned that the progress of India will be measured by the footfalls in malls. There was applause. It shows that we have sold our civilisational souls to the well-heeled. Footfall culture is like pub culture both are oxymoron.

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FDI in Retail: The Illogical Claims

P. Muralidhar Rao

Prime Minister in his address to the nation, has given various arguments, legitimising his governments decision to open up FDI in retail. In the following analysis, an attempt is being made to put the things in right perspective. The arguments put forward by the Prime Minister are as follows: i. Growth of organized retail will create millions of good quality new jobs. ii. Infrastructure would be built and help saving agricultural produce from wastage. iii. Farmers will be benefited in form of high prices for their produce. iv. Consumers will be benefited, as they will get goods at cheaper price and thereby inflation can be curbed. Prime Minister has further stated that, We recognise that some political parties are opposed to this step. That is why state governments have been allowed to decide whether foreign investment in retail can come into their state. But one state should not stop another state from seeking a better life for its farmers, for its youth and for its consumers. To expose the hollowness of the governments arguments, let us take the last statement first. It seems
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that the argument has been made in order to persuade those state governments, who are opposed to the policy of FDI in retail. It is known to all that even Kerala, a state ruled by congress led alliance, has openly opposed the policy of FDI in multi brand retail. Flawed Argument as States hands are tied

Kaushik Basu

Government says that this is only an enabling policy and the States can determine if they will issue licenses under the Shops and Establishments Act to the multinational retailers to operate within their areas. This is in direct conflict with something called National Treatment that the Government has committed to investing countries. As of July, the Government of India has entered into Bilateral Investment Promotion & Protection Agreement (BIPAs) in order to promote and protect, on reciprocal basis, the investment of the investors. Such agreements have been signed with 82 countries, out of which 72 BIPAs have already come into force and the remaining agreements are in the process of being enforced.This information is available on the Ministry of Finance Web site. The relevant clause defining National Treatment under this agreement reads as follows: Each Contracting Party shall accord to investments of investors of the other Contracting Party, including their operation, management, maintenance, use, enjoyment or disposal by such investors, treatment which shall not be less favourable than that accorded either to investments of its own investors or to investments of investors of any third State.

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In effect, what this means is that if a Nilgiris can operate in Chennai, a Big Bazaar in Kolkata or an Easyday in UP, the governments of Tamil Nadu, West Bengal or UP cannot prevent a Walmart or Tesco from opening shop. If the licence is denied under the Shop and Establishment Act, this can be legally challenged under the BIPA agreements. The entire country, including all State governments, is obligated under the BIPA agreements. Who knows better than Prime Minister about the implications of international agreements. It seems that government in its hurry to open up FDI in multi brand retail is using flawed arguments like this. i. Employment: FDI in Multi Brand Retail will kill employment Prime Minister says, The growth of organised retail will also create millions of good quality new jobs. Crisis managers of the government, including Prime Minister has been trying to sell the argument that the proposed policy would lead to creation of 10 million jobs in the next 3 years. Argument of the government was that huge investments in the retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistics management and front-end retail. This is no new argument of the supporters of FDI in retail. Present Deputy Chairman of Planning Commission, Montek Singh Ahluwalia has been pushing this policy for a long time. During NDA regime when he was a member of Planning Commission, as chairperson of Task Force for creating 10 million jobs a year, he stubbornly supported FDI in retail and wrote in his report that FDI in retail would create quality employment for millions of people in the country. At that point, of time, the then government rejected his report; and for suggesting ways and means for creating additional employment opportunities,

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another committee under the stewardship of S.P. Gupta, was constituted. S.P. Gupta Committee made several recommendations for creation of 10 million employment opportunities annually in the country by way of labour intensive techniques and self-employment. No takers of the governments arguments However, crisis managers of the government are trying hard to sell this argument, but there are no takers of this argument. In fact, there is no basis of this argument and the same has been borrowed from publicity material of multinational retail giants. India has the highest shopping density in the world with 11 shops per 1,000 people. Even according to the Discussion Paper issued by the Department of Industrial Policy and Promotion, indicating Governments Intention to open this sector for FDI, also conceded that there are 120 lakh big and small shops in the country, employing 3.5 crore people directly. Apart from this, there are about 1.5 crore people engaged in wholesale, transportation and other related services for retailing. This is important to mention that 95 percent of small shops are being run by self-employed people. International Experience International experience tells that small retail has virtually been wiped out in USA and Europe. Many restrictions have been imposed by many states in USA and governments of various European countries to safe guard the interests of the small retailers. Many Southeast Asian countries also imposed stringent zoning and licensing regulations on Super Markets run by multinational retailers, after small retailers were being displaced. Entry of multinational corporations in the retail sector started in 1960s. These companies have taken over the majority of retail business in many developed and some of the developing countries. 80 percent of USAs retail business is under the control of multinational business. Similar is the situation in England
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and other west European countries, where more than 70 per cent of the retail business is run by these MNCs. Brazils and Argentinas 40 per cent retail trade is in the hands of organised retailers. Even in China their share has surpassed 20 per cent. Organised retailers, who were totally absent in 1960, have displaced small retailers in different proportions in several countries. Today top 200 largest retailers account for 30 per cent of the worldwide demand. Over 50 Fortune 500 companies and around 25 out of Asian top 200 firms are retailers. It is obvious that organised retailers pushed those, who were gainfully employed in retail sector, out. Even the report of ICRIER, which though cannot be accepted, because of its bias towards organised retailing, concluded that 2 per cent shops would close every year, if FDI were allowed in multi brand retailing. Looking at the international experience the small shops will close down at a much faster pace than this, as these multinational retail giants like Walmart practice predatory pricing policy (selling goods at much cheaper price than the procurement price). At present government is saying that they intend to allow opening of retail stores by these MNCs in 53 big cities of India. This may lead to a large-scale unemployment because of closure of small shops in these cities. Unemployment is going to increase not only because small shops would close down, but also because of decline of manufacturing in the country. These retail giants are always in search of cheap products, in order to maximize their profits. Taking a clue from USAs experience, we find that most of the goods sold in the stores of Walmart in USA come from China. Off shoring is the normal practice of these retailers. It is no secret that Walmart is the

Opening up of retail for FDI is along with a rider that they will procure at least 30 per cent of their items from small-scale industry. This condition is also not in tune with WTO agreements.
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largest buyer of Chinese products in the world. Today American shoe industry, which was world renowned, is totally closed because multinational retailers do not procure shoes from America. If we look at the employment in the manufacturing sector in USA, we find that it was at its peak at 195 lakh people employed in manufacturing sector. This number has gradually being declining and by 2011 it has come down to merely 118 lakhs. This means that manufacturing employment in USA has gone down by 77 lakh in just 32 years. Situation is no different in countries of Western Europe. Thus, it is very clear that if FDI in retail is allowed, there will be a sharp increase in off shoring of products in the country and thus a widespread unemployment in manufacturing sector also. While announcing its policy for opening up of retail sector for FDI, government tried to confuse, though unsuccessfully, that opening up of retail for FDI is along with a rider that they will procure at least 30 per cent of their items from small-scale industry. Later on, the government had to concede that this condition is not for procuring from SSIs from within the country. This condition is also not in tune with WTO agreements. Therefore, if FDI in retail is allowed, most of our small-scale industry, especially in the consumer goods sector will be forced to close down. Apart from manufacturing, other sectors, which are likely to hit badly, are transport and wholesale retail, which again are providers of significant employment opportunities. The company which is pushing itself and aspiring to open business in India, with total turnover of 422 billion dollars globally; provides employment to only 2.1 million people. With
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much more turnover as compared to India, the company provides less than 5 percent of Indias retail jobs. The claim about employment is bogus. What Walmarts and Tescos could not do elsewhere, they would not do here. From where Anand Sharma (Commerce Minister), gets the figure of 10 million jobs from FDI in retail is a big question. Yet, the UPA certifies Walmart and its ilk as compassionate to small retailers and farmers. It guarantees they will employ millions here. But the evidence in the US is to the contrary. According to Atlanticcity, Walmart entered the Austin neighbourhood of Chicago in 2006. And, by 2008, out of the 306 small shops in business before its entry, 82 had closed down. The Economic Development Quarterly study found the closure rate around an average Walmart location at 35-60 per cent. Walmart radiated closure of 20 per cent of drug stores every mile from its stores; and 15 per cent in home furnishing, 18 per cent in hardware and 25 per cent of toy stores. Studies in the US nail the UPAs lie that FDI in retail will not hurt small shops. On job creation, a latest report (Jan 2010) titled Walmarts Economic Footprintprepared for the New York City Public Advocate says that Walmart kills three local jobs for every two it creates. ii. Myth of infrastructure growth and food safety One of the major arguments, justifying decision of the government to open retail sector for Foreign Direct Investment (FDI), or in other words opening up of more than 22 lakh crore of huge retail sector for multinational corporations is that this decision of the government would result in all-round development of rural infrastructure, especially warehousing and cold storages. Argument of the government is that, a significant amount of agricultural produce go waste due to lack of storage facilities in the country. It is said that due to lack of investment in cold storages more than 50 per cent of the vegetables go waste, and the one and the only solution to these problems is FDI in retail. Government argues that when these multinational giant
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corporations in retail sector will come they will make a huge investment in warehousing and cold storages. Government also says that, these corporations would be asked to channelise at least 50 per cent of their investment into infrastructure. If we look into the reality, even going by governments argument of need of foreign investment in infrastructure, it would be interesting to note that, FDI in warehousing and cold storages was allowed more than a decade back. However, no FDI could get attracted into this sector (warehousing and cold storages). There is no denial of the importance of storage infrastructure for agriculture and farmers well-being. This is also true that because of lack of storage agricultural produce goes waste. However, the basic question is that, whose responsibility is the provision of storage infrastructure. We understand that, about 60 per cent of Indias population is directly or indirectly dependent on agriculture, and storage constitutes a major need for agriculture. However, even after 64 years of Independence the government has failed to provide this important infrastructure. In the process of taking a decision to open retail sector for FDI, the Department of Industrial Policy and Promotion, Government of India, issued a Discussion Paper and cited Mid-Term Appraisal of the Tenth Five Year Plan. The Discussion Paper says, Mid-Term Appraisal of the Tenth Five Year Plan made a strong case for FDI in modern retailing as entry of modern foreign retailers through joint ventures in India would help develop backward linkages to sources of supply and thus develop a domestic supply chain capable of meeting international standards. It further says, Allowing FDI in joint ventures is likely to provide access for domestic suppliers to international retailing which purely domestic modern retailers may not be able to offer. Infrastructure: Essentially governments responsibility It is unfortunate that to legitimise the entry of the multinationals in retail sector, the government is taking the shield of lack of
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storage facilities for agriculture produce. Is this not the responsibility of the government to either create this storage capacity on its own or encourage private sector to create this by way of subsidies, fiscal concessions or other incentives. In the 65 years after Independence, the government has failed miserably on this front. Government has no right to penalise the small retailers for no fault of theirs. The paper circulated by the government gives an argument that creation of this infrastructure requires an investment of rupees 7,687 crore and therefore we need FDI in retail, so that multinational retail giants would create this infrastructure. This argument is not tenable. In a country where the size of annual budget is more than Rs 12 lakh crore, for this small investment of merely 7,687 crore, we cannot legitimise the death warrant for small retailers, especially when they are not at fault. Further if at all these multinational companies would provide storage infrastructure, it would only be provided to strengthen their own supply chain. We cannot expect that the cold storages built by these multinational corporations would keep potatoes produced by our farmers and save them from hardships. Big retailers actually cause food wastage If we think that, entry of multinational retail companies would reduce wastage of food, we are highly mistaken. Global data about food wastage indicates that, the USA, European countries and other developed countries are much ahead of India and other Asian countries in terms of wastage of food. According to international data, in Europe food loss and waste per person per year is 280 kg, in North America it is 295 kg and in South and

According to international data, in Europe food loss and waste per person per year is 280 kg, in North America it is 295 kg and in South and South-East Asia it is only 125 kg.
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South-East Asia it is only 125 kg. It is not mere coincidence that the countries where food wastage is maximum, are the countries which are dominated by multinational organised retailers. Answer to this dilemma, is provided by Food and Agriculture Organisation (FAO) of United Nations. According to FAO, a major reason for food wastage is that, organised retailers (supermarkets) in order to look more quality conscious reject a major portion of agricultural produce at the farm gate due to rigorous quality standards concerning weight, size, shape and appearance of crops. Therefore, large portions of crops never leave the farms. Even though some rejected crops are used as animal feed, the quality standards might divert food originally aimed for human consumption to other uses. FAO further says that, Large quantities on display and wide range of products/brands in supply lead to food waste in industrialised countries. Retail stores need to order a variety of food types and brands from the same manufacturer to get beneficial prices. Consumers, also expect a wide range of products to be available in stores. A wide range of products does, however, increase the likelihood of some of them reaching their sell-by date before being sold, and thereby wasted. When shopping, consumers expect store shelves to be well filled. Although certainly beneficial for sales statistics, continually replenished supplies mean that food products close to expiry are often ignored by consumers. Direct sale of food products by the farmers to the consumers or from shops is the solution to the food wastage provided by FAO. Therefore building of big warehouses and cold storages infrastructure as a part of supply chain management by multinational retail giants is neither in the interest of farmers nor is in the interest of the people at large, as farmers may lose due to rigorous quality standards and loss of food due to the marketing policies of the supermarkets.
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In a country like India small vegetable shops are actually key to food safety and minimisation of food wastage. In this context building of warehouses and cold storages are important, but they should be built near villages by government, maybe with the help of private sector. Mega stores or giant multinational corporations are certainly not a solution for wastage of food. If FCI is not able to handle its affairs properly, solution does not lie in surrendering to Walmart. We have to ensure food security of our people by building our own infrastructure. This has become even more important in view of the proposed food security legislation. iii. FDI in Retail is Anti Farmer Government had tried to boil down the debate on the need to permit FDI in retail with reference to farming community, stating that it would bring boon to farmers and farming in the country. Government borrows this argument from the pamphlets of multinational retail giants like Walmart, arguments put forth by officials of US government and other interested parties. It is obvious that those who have business interest in opening up of FDI in retail would advocate FDI at any cost. It is unfortunate that the government, who is supposed to be the protector of national interests, also buys the arguments of the stake holders. Pamphlets of Bharti Walmart say that they give 7 to 10 percent higher price to farmers, then what they get from Mandi. They claim that farmers get expert advice on better crop planning and management. Because of the support from the company, farmers will have an opportunity to maximize and improve income by offering better quality. Officials of the USA government, who have been acting like agents for change in policy framework, also are trying to argue that FDI in retail would be in the interests of the farmers. They claim that large organized retail would not only benefit consumers, who would enjoy lower prices owing to cost efficiencies, but also farmers, as these companies would provide stable market and purchase their produce at reasonable prices.
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The (borrowed) arguments of the government in this regard require verification in light of the experiences of the countries, where these multinational retail giants have been operating. If we look at the experience in the United States, we understand that USA is a country of large farmers, farming activity is operated on a large scale, and in a way, it is an industrial agriculture. On the other hand, retail trade is getting more and more concentrated in the hands of large retailers. Therefore as per the argument of the government and multinational retail giants, farmer would have got greater share on the sale of agricultural produce. However, experience tells a different story. In USA aggregate food expenditure increased from $833 billion in the year 2000 to $1200 billion in 2009 (increase of nearly $370 billion). On the other hand, cash receipts at farm increased from nearly $197.6 billion to $282.2 billion (nearly $85 billion). Therefore, it is clear that over the years multinational retail giants have tried to fleece the farmers more and more. According to the Department of Agriculture, United States, estimates during the period 2000 to 2009, the farm share of the retail price fluctuated between 23 and 28 percent in case of fresh vegetables and between 25 and 30 percent in case of fresh fruits. Justification that farmers will get better prices is a clever ploy; so needs a closer look. It suppresses the vital fact that Walmart does not buy, or pay, over the counter. It buys the nations next harvest in the futures market and buys at prices pre-fixed. It also imports cheap goods from China and destroy the local production like it has done in the US. Take the first case, with the recent experience of US and the world. Rice prices in the US and world markets shot up by three times in April 2008 as compared to January 2007. It was then that the US President George Bush made that funny remark that prices had gone up because the newly prosperous Indians had begun eating more! But what was the truth? USA Today (April 23,.2008)
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and CNN (April 24,2008) quoted the California Rice Commission and USA Rice Federation as denying shortage of rice and saying there was enough stock. Why then were prices rising? Because, said CNN, Sams Club (Walmarts wholesale division), was holding huge stocks and was pushing up the prices. American farmers accused speculators and the futures market for the high prices. Farmers sold, but did not trade in, farm futures. Investment funds accounted for 40 per cent of the wheat futures trade in the US in January 2008, which rose to 60 per cent by April. Wheat futures, which was $4 a bushel in early 2007, rose to $14 per bushel in April 2008. The US farmer, who had sold his harvest in futures market, lost and Walmart, which had bought the futures, gained. When some farmers wanted to sell their small balance stocks, Walmart, with cheaper stockpile, refused to buy at higher prices, pointed out the media. Look at it this way. If the US farmers get remunerative prices from Walmart why does the US, with 2 per cent farming population, grant annual farming subsidies of $20 billion? And, the EU, for its 5 per cent farming population, gift a subsidy of $74.5 billion annually? If we compare the experience in other countries where these retail giants are operating with that of India, there are some interesting observations. In 1950 US farmers were receiving over 40 percent of consumer expenditure on food, today it is down to average 25 percent. In USA, farmers get 45 percent of retail price in case of milk, 41 percent of eggs and 32 percent of meat products. In India (where FDI in multi brand retail is yet to come), farmers

In USA aggregate food expenditure increased from $833 billion in the year 2000 to $1200 billion in 2009 (increase of nearly $370 billion). On the other hand, cash receipts at farm increased from nearly $197.6 billion to $282.2 billion (nearly $85 billion).
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get Rs. 26 out of Rs. 34 retail price of milk (Amul), which comes to 76.5 percent, Rs. 22 out of retail price of Rs. 35 per kg of sugar. Farmers do get a rough deal in case of vegetables and fruits, because of lack of infrastructure. Nevertheless, Indian model tends to give more benefit to farmers as compared to USAs model. Government argues that opening of the FDI in retail would wipe off intermediaries and thus would benefit the consumer. Theoretically, it may be correct but practically it is not. International experience tells that there are hardly a few multinational giants that control majority of the food sales. These companies enjoy some degree of monopsonic power (a situation where each buyer has some monopoly over purchases). In Western Europe, there are 3.2 million farmers, selling over 160 million consumers but there are only few firms making purchases from these farmers, thereby enjoying monopsony over food purchases. In UK there are only 4 firms controlling about two third of food products purchase. Similar is the situation in the USA, where more than 60 percent of the food sales are in the hands of only 5 companies. Even India has had the experience of procurement of food grains by big corporates and we find consumers paying Rs20-25 per kg as price of wheat flour, whereas farmers get meager Rs 11-13 per kg for wheat sold. About 10 years back, this was not the case. Difference between wholesale price/ procurement price of wheat and consumer price of wheat flour never was more than 20 percent. If the government claims that foreign retailers would provide rural infrastructure like warehousing and cold storages, it is grossly misleading, as FDI in warehousing and cold storages was allowed more than a decade back, but no foreign investment could be attracted in this sector. Therefore, any infrastructure they build would be for exploitation of farmers and not for their benefit. Provision of infrastructure is the responsibility of the government (both state and center). Government even after more than 6 decades of independence has failed miserably in providing infrastructure in the form of warehouses and cold storages. Now
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to cover up its own inefficiency in providing infrastructure in rural areas, the government is arguing for FDI in multi brand retail, stating that these multinational companies will provide infrastructure in the rural areas. As per governments own admission, we need hardly Rs. 7,687 crores to build infrastructure in the rural areas. This is no big an amount to justify FDI in retail, destined to ruin crores of small traders and causing heavy loss to crores of farmers. International experience shows that farmers are caused heavy loss by multinational retail giants in the name of quality and standards. According to a report of Food and Agriculture Organisation (FAO) of UN farmers lose due to rigorous quality standards and the marketing policies of the supermarkets. Building of big warehouses and cold storages infrastructure as a part of supply chain management by multinational retail giants neither is in the interest of farmers nor is in the interest of the people at large. This is so because farmers are forced to destroy their rejected products or use those as animal feed, which in case of small retailers would have been channelized for consumption of human beings and farmers and would be paid for the same. This is the loss, which a country like India can hardly afford, as majority of population is reeling under severe hunger and malnutrition. iv. Illogical claims on controlling price rise by MNCs One of the major arguments put forward by the government in justifying its decision to open retail sector for Foreign Direct Investment is that it would control inflation. Perhaps the common people reeling under inflation may welcome any policy that provides relief from inflation. But why the government is pushing this policy despite opposition from almost all nonCongress political parties, whether in government or in opposition, social organisations, labour and farmers organisations, forces us to verify the claims of the government in this regard.
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What Government claims? Government says that, bringing multinational giant retail companies into retail sector in the country would reduce the distribution cost of the goods. Government claims that these companies procure goods from farmers and manufactures directly and therefore the margins earned by the intermediaries would be eliminated. Benefit of lower cost of procurement would be passed on to the consumers and therefore these MNCs would be able to bring a check on inflation. Government also claims that these companies make use of latest technology in handling the material, supply chain and distribution. This can help in reducing the prices paid by the consumers. Government even claims that these companies can even pass on the benefit of their efficient system to the small retailers. Government claims are devoid of any research Though government makes this rhetoric, it has failed to give any basis for its claims. Even the sponsored researched reports of ICRIER have failed to justify this policy on these grounds. Even committee of secretaries has also repeated the same argument without any basis from international experience. Interestingly Inter-Ministerial Group (IMG) headed by chief economic advisor Kaushik Basu was also found arguing for opening up of multi brand retail to FDI on the pretext of controlling food inflation. It said that the government should consider such liberalisation at the earliest as Indias retail sector continues to be primitive and there is evidence that there are large losses that occur as products pass through the supply chain from farm to the retail customer. It argued that because of dated technology and managerial methods used to move products from one part to another there is value erosion that occurs all the way which, in turn, raises the prices that consumers have to pay. Therefore, IMG argued that reform in this sector can be an effective inflation busting measure. Whereas IMG has failed to
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give any basis for their recommendation, Food and Agriculture Organisation of UN has given a contrary research finding, that these MNCs are actually causing a big loss of food material for various reasons. Therefore, this argument of IMG is not tenable. If we go deep into the arguments of the government and its officials, they are actually not based on their own research. These arguments are in fact borrowed from the sponsored reports of multinational retailers like Walmart, Tesco, Carrefour. Higher mark-ups of retail giants In India margins of wholesalers and retailers are much less than the mark-ups of multinational retail giants. Higher mark-ups of multi-brand retailers are in-built in their business model. Markup is difference between the consumer prices and production costs. For comparative analysis of mark-ups of small Indian retailers and that of multi brand retailers, let us take different product groups separately. In case of consumer goods, like food products etc., margin of distributors and wholesalers is between 4 to 8 per cent and that of retailers is between 8 to 14 per cent. This margin is added to the production cost. Therefore, channel cost of distribution chain in India is between 12 to 22 per cent. If we look at multi brand retailers, their mark up on procurement price is nearly 40 per cent. In case of garments segment in India, total margin of wholesalers and retailers is between 35 to 40 per cent. However, the experience of multinational retailers shows that they put a price tag on garments of 2 to 4.5 times of their procurements price. As such their mark-up is 5 to 9 times of Indian retailers. In case of drugs and medicinal product we find that margin of retailers is up to 20 per cent, wholesalers up to 10 per cent and of C & F agents is up to 4 per cent. On the other hand, multinational retailers like Boots (UK) and Wallgreens (USA), have a mark-up of 2 to 3 times that of their procurement price. Therefore their mark-up is at least 6 times that of Indian retailers. In case of kitchenware, Indian small retailers channel cost is hardly 30 per cent, whereas retailers like Walmart etc.
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put a mark-up of 100 to 200 per cent on their procurement price. As such in case of kitchenware mark-up by multinational retailers is at least 5 times more than small Indian retailers. If we consider these mark-ups in different categories, then even if they announce sales from time to time, their prices would be much larger than the prices charged by present day small retailers. This is due the fact that these multinational retailers enjoy monopoly power, as there are only a few retailers (normally not more than 5) in any country. As already stated above higher mark-ups of organised retailers (MNCs), built-in their business model, are due to the fact that process of retailing involve much higher costs as compared to small retailers. Though they maybe able to procure goods at a lower price by exploiting farmers and manufacturers due to their monopsony (monopoly as a buyer) power, but they may not be able to sell cheap in the long run, as they face high selling costs in terms of rentals of stores, warehousing and cold storage, other fixed costs and high rate of profiteering. In the words of Shekhar Swamy these multinational retailers open their stores with much fun and fare, announce lower prices for products sold in their stores, and will continue to sell these products at those prices till competition from small retailers is totally finished. It is an open secret that multinational retailers sell their
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products at predatory prices to wipe-off competitors. Predatory price strategy has been adopted by these giant international retailers world over, wherever they had gone. Predatory prices are the prices, much lower than the procurement prices. This is made possible by their deep pockets. We understand each of these international retailers control significant share of markets in their respective areas of control, in countries, where they are operating. This makes their financial muscles strong. We cannot imagine small shopkeepers incurring loss even for a month in order to keep them in competition with international retailers, but we see these international retailers ready to forgo billions of dollars to push small retailers out of business, as they are eying on more than 22 lakh crore of rupees of Indian retail market.

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S. GURUMURTHY Sri S. Gurumurthy is one of Indias well-known professional Chartered Accountants and a highly respected and sought after corporate advisor. He is the All India Co-convenor of SJM, a powerful opinion making body which creates acute debate on Economic issues in India. He regularly contributes columns in leading newspapers and magazines.

SHEKAR SWAMY Sri Shekar Swamy is the Group CEO of R K SWAMY HANSA. He holds an MBA (Delhi), and an MS from Northwestern University. His area of specialization is in developing business, marketing, and communication strategies globally. He is a Visiting Faculty, Northwestern University, USA.

GAUTAM SEN Dr. Gautam Sen taught international political economy to graduate students for two decades at the London School of Economics & Political Science. He has published widely on the political economy of development, international trade issues, defence economics and India in scholarly journals and newspapers

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S. VAIDHYASUBRAMANIAM Dr. S.Vaidhyasubramaniam, Ph.D., GMP


is the Dean - Planning & Development and Indian Overseas Chair Professor of Management, SASTRA University, Thanjavur. He is an ardent writer in leading Indian dailies on various issues especially on higher education.

R. VAIDYANATHAN Prof. R. Vaidyanathan is Professor of Finance and Control and UTI Chair Professor in the area of Capital Markets. He is the Chairperson for the Centre for Capital Market and Risk Management [CCMR] at IIM, Bangaluru. He is a National Fellow of ICSSR. He has written wellresearched articles on various issues concerning India.

P. MURALIDHAR RAO P. Muralidhar Rao is a socio-political activist and thinker with strong nationalistic fervour. He has done M. Phil (Political Psychology) from Osmania University. He is the former National Convenor of Swadeshi Jagaran Manch.

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World Beyond Marx & Market Vande Mataram: The Song of the Soul Stolen Indian Wealth Abroad How to bring it back? Women: Liberated Vs Revered

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Swadeshi Jagaran Manch, Tamil Nadu

No. 75, K Block, 14th Street, Anna Nagar East, Chennai 600 102

Where the mind is without fear and The head is held high Where knowledge is free..... Into that heaven of freedom, my Father Let my country awake - Rabindranath Tagore

hile capitalism solely rests on Market and State as the twin socio-economic delivery systems, socialism primarily rests on the State as the delivery system. In contrast, the Swadeshi thought relies on the social institutional order, besides Market and State, as the socio-economic delivery system. This makes the Market and the State share the public space with family, community and society. Swadeshi Life is based on Dharma: Swadeshi believes that, mere rule of law is inadequate to lay the ground for social interactions. A higher order of life has been in practice in India; all non-official community and social transactions take place on this higher principle of life called dharma, even today. Dharma - an ancient Indian concept, which has no English equivalent - means that which sustains. In its wider sense, it implies the nourishment of all aspects of life individual social global. Swadharma forms the very core of Swadeshi; Swadeshi is the living tradition of India. Though buried under the veneer of the superficial West-centric Indian exterior it is still the largest sustaining force and the core of Indian society, economy and polity.

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Essential ingredients of the Swadeshi Thought : Swadeshi means that which is natural and native to a country and society, but allows scope for assimilation of wholesome and beneficial elements from the outside. This applies to economics as well as politics, culture as well as technology It is the principle of preferring the neighborhood to the remote It commands need-based life, and rules out greedbased unlimited consumption as an end. It renews and relies on family, community and society as socio-economic delivery systems. It does not substitute these traditional institutions by the State and the Market It does not mean isolation from other nations; but presents a global alternative, which accepts only need-based trans nationalism Swadeshi restores economics to its earlier definition which even now the dictionary meaning of economy indicates, namely, practical human needs, frugality, savings, thrift etc. and seeks to remove the latter-day distortion of defining economics as multiplication of wants and efforts to satisfy them, powered by greed Swadeshi rejects materialistic and imperialistic homogenisation and aimless transnationalism of the Western assumption Swadeshi is a multidimensional thought, embracing civilisational, political and economic aspects of human life and presenting an integrated vision of life in harmony with nature

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Goal & Objectives Creation of a just world order based on integral and holistic life vision Building a self-reliant nation Nourishment of Bharatiya cultural values Preservation of natural wealth Ensuring national security, unity and integrity Balanced development of all regions and the society as a whole

Swadeshi Jagaran Manch, Tamil Nadu is engaged in the following multi-pronged activities in tune with the above objectives : Organising informed discussions on various policy initiatives of the Government Facilitating industry-institution partnership between the performing communities and the academicians Awakening the youngsters and the civil societies to the proud features of India Promoting entrepreneurship Conducting Awareness Yatras

If you are interested in serving the nation, If you are for building a Strong India, Super Power India.

Join Swadeshi Jagaran Manch

For details, please call :
Mr. Nambi Narayanan 94431 40930, Dr. Srinivasan 94426 20965 Or E Mail to,

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