By J. D. Sethi
The performance of the Indian economy in 2011- 12 was so disappointing that it makes us wonder whether India’s growth story has come to an inglorious end. But look at the current euphoria about the prospects of India’s growth. There have been dramatic developments in policy making during say a week beginning September 14. First, the government increased the price of diesel by Rs. 5 per litre from September 14. This measure is designed to cut down the fiscal deficit which is threatening to reach or even exceed 6 per cent of GDP. The original target of 5.1 per cent is simply not feasible. Second, there is the package of policy reform permitting FDI in multi-brand retail and civil aviation. Optimists expect around $ 16 billion of FDI would flow into retail in the next three years.
The Congress-led United Progressive Alliance government drew criticism from all quarters for its failure on economic reforms. In its attempt to please all the constituents and supporting political parties, the Congress was literally forced to put all reforms on a back burner. In addition to economic slowdown, the atmosphere was filled with scams, kickback and corruption. Prime minister, Dr. Manmohan Singh received flak from industry circles for being a silent spectator presiding over a drowning economy. The foreign media too did not spare Dr. Singh for staying inactive with mouth closed and eyes shut to the reality.
It is against this background that the Congress government finally got up from its long laziness and sleep. As a first step, the government hiked the prices of petrol and recently of diesel. I feel there is no other alternative, other than hike in prices considering the economic reality. These items are already heavily subsidised in our country and the public exchequer cannot afford to bear additional burden of subsidy. This was followed by opening the Indian economy to foreign domestic investment (FDI) in multi-brand retail. India has already allowed FDI in single brand retailing. Multi-brand means retail outlets in all consumer goods that is, electronics to fruits and vegetables. These are not big game-changers for the economy. However, even for these marginal kinds of reforms, UPA had to wait for four years for a consensus, finally without any success.
Corporate India was expecting this liberalisation of retail markets long back. After India moved into the era of economic liberalisation starting from 1984, I feel there is absolutely no point in holding back reforms in retail sector. I know that FDI in retail has also negative side to it. But, the gains in terms of investment, employment generation, empowerment of the producers including farmers and competitive prices to consumers would outweigh any negative effect. Investments at the back-end and front-end of the retail sector would provide sunshine days to producers and competitive choices to consumers. The perceived threat to small store owners and Kiranawallahs is actually blown out of proportion. The Indian market is too big and nobody will be thrown out by the big retailers. The Marts, the Big Bazars, the multinational retail chains, the malls can never be at war with the Kirana market segment. The consumer segment for everybody is different. The kiranawala will continue to dominate the neighbourhood customers. The kiranas in rural India are totally safe from multi-brand retail competition as it is economic suicide for such corporates to establish their shops in villages. At the most, there could be some setback for the middlemen, that is, those who are into pure trading. These are those who neither add value to the producer or to the consumer. They exploit producers and farmers by offering low prices and sometimes even starvation rates for their produce. They also exploit the consumers with high prices. Indian markets are traditionally known for the middlemen taking the major slice of the cake, as high as 45 per cent share of the price of Fast Moving Consumer goods (FMCG) and food products keeping producers poor and consumers unhappy.
We should also read the warning signals depending on the experience of multinational players in retail markets. In the beginning, the foreign investors and big retail chains encourage producers by eliminating the hold of middlemen. The traders i.e. the “bania” would still be there to provide services to the big and small retailers. They would compete with the multi-brand retail corporates. The multi-brand retail chains find it profitable to establish direct relationships with the producers. This improves the productivity of farmers, puts more purchasing power in their hands and improves their quality of life. It is really a big multiplier effect in terms of employment and self-employment. But, after a lapse of years, the business strategy of the multinational retail operators is bound to change. Once the producers are dependent on these big corporates in retail markets, there is a danger that these corporates take the place of the middlemen and could behave like the Indian traditional “banias”. The probable problems of the future should not stop us from FDI in retail. Even as the situation stands today, the producers stand exploited and they do not get the fair return for their effort. It is only initiatives like Amul in Gujarat will stand as monuments of empowerment of dairy farmers which later are replicated in other parts of the country. FDI in retail does not mean that foreign capital will dominate our retail markets. We also have purely domestic players with retail chains which would grow due to the growing new segment of consumers for multi-brand retail shops.
With FDI in retail, things can only shine for the Indian economy. They cannot be gloomy. How far they can shine would depend on the response from the producers and farmers. In addition to the initiatives from the retail industrialists, the state governments should also have an agenda to orient and assist the rural producers in terms of their capacity building to take the advantage of liberalised retail markets.
There is news from the BJP for the 2014 elections. BJP has announced that they would scrap FDI in retail if returned to power. The political opposition of BJP to the Congress is natural and should always exist. But, our national political parties should consider economic reforms as a continuous process. There is need for all political parties to accept a common minimum economic agenda. Talk of reversal looks good for the ear but may not be sound for the health of our economy. It should not so happen that politicians and political parties win and the people lose. INAV
(The writer is a former member of the Planning Commission)