FDI in Retail - Facts & Myths

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FDIin RetailFacts & Myths

Swadeshi Jagaran ManchTamil Nadu

A Compilation of Articles by

* S. Gurumurthy

* Shekar Swamy

* Dr. Gautam Sen

* Dr. S. Vaidhyasubramaniam

* Prof. R. Vaidyanathan

* P. Muralidhar Rao


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2 | FDI in Retail - Facts & Myths

FDI in Retail - Facts & Myths

with Authors

First Edition: November 2012

128 Pages

Printed in India.

Published by

Swadeshi Jagaran Manch, Tamil NaduBook available at

K75, 14th Street, Anna Nagar East,Chennai - 600 102.

Phone : 94448 35513 / 9443140930Email: [email protected]

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New Horizon Media Pvt. Ltd.,

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Chennai 600 014.

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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 theprior written permission of the publisher of this book.

Website : www.swadeshitn.org


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Contents

Publishers Note / 5

1. FDI in Retail

A Pernicious Policy Formulation / 7

2. Obamas retail FDI self-goal / 11

3. Market Economy? Or, Market Society? / 15

4. 'Reform' at Nation's Cost / 19

5. Selling Indias Retail Wholesale / 23

6. Letting the Camel into the Tent / 27

7. Why the Indian Model is Superior / 31

8. Recipe for Unemployment / 35

9. Reality Belies the Hype / 39

10. Remember Salt Tax, Anyone? / 43

11. How the World Burnt its Fingers / 47

12. FDI will wipe out Small Traders / 51

13. Retail FDI - for People or MNCs? / 55


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14. How FDI in Retail will hurt Farmers / 59

15. A Mexican Warning on Retail FDI / 64

16. Why seek Retail FDI for Cold Storage? / 69

17. Perils of State-aided FDI / 73

18. FDI in retail threatens the

Livelihood of Millions / 77

19. Misplaced Hype over FDI / 83

20. FDI in Retail Sector: Trade PolicyOr Policy For Trade / 87

21. Strengthening Local Trade The Way Out / 93

22. FDI in Retail: The Illogical Claims / 103


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Publishers Note

The UPA Government in September 2012 has, by a policynotification, 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 ofOpposition, 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 thewonderful 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 Swadeshi Jagaran Manch

4.11.2012 Tamil Nadu


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The UPA governments FDI policy, which allows entryof multinational retail giants like Wal-Mart in retail

sector in India, gravely prejudices national economic

and social interests. The commerce ministers

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, betrayingthe assurance of its own Finance Minister to finalise

the policy after discussion at Parliament, violates well-

accepted 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, itcarries a high risk of social unrest.

The unorganized retail trade in India represents the

traditional, community-centric, low-cost and

FDI in Retail A Pernicious Policy Formulation

S. Gurumurthy


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e m p l o y m e n t - i n t e n s e

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 forjust 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-ledand 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 throughcorporate-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 chainwill 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 clearlya 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 andWalmart 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 USmedia 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 July2011, 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 US-

Walmart 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 ofdollars 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 intolerablysuperficial 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 takentogether 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 wholesalers-

retailers. 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 globalturnover $ 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 takingit 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, withmore 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 thecontract 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

Indeed 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-To-

Walmart 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 hasbecome 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 aroundWalmart 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 Commissionand 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 inJanuary 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 CommissionWorking 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 barter-

exchanged 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 ofmilk. 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 theRupee 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 economicsof 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 cannotbe 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 destroytheir 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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SJM | 25

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 beginsthe 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 evenheard - 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 whatMSP 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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SJM | 27

Letting the Camel into the Tent

Shekar Swamy

The news came out recently that the committee formedunder 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 multi-

brand retail is justified will such multi-brand retail

reduce the cost of distribution from the producer (be itfarmer 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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m o v i n g / s t o r i n g /

f i n a n c i n g / s e l l i n g

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-brandretail 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-useproducts that will be available through multi-brand retail:

Fast moving consumer goods like food, personal care products,

toiletries etc; Clothing textiles and readymade garments; Over-

the-counter pharmaceutical products; Cookware/kitchenware

small appliances.

Consumer goods: The distributor/stockist margin in Indiaranges 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

manufacturers prices. They vary depending on company

volume, market clout, type of product and so on. The total channel


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SJM | 29

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 markup 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 whichthey 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 asWalmart, 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 Indiandistribution 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 interferewith this and fall into the Western trap of multi-brand retail.

- The Hindu Business Line,

June 16, 2011


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SJM | 31

Why the Indian Model is Superior

Shekar Swamy

In the previous article, I had stated that big multi-brand 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 ruleswill 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 mark-

up, 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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SJM | 33

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. Thegovernment 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 iswiped 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 whichwill really be irreversible and hold Indian consumers captive

for times to come.


June 17, 2011


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SJM | 35

Recipe for Unemployment

Shekar Swamy

In the articles on foreign direct investment in multi-brand 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 thefuture 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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SJM | 37

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 anexplosion 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 to17.3 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 enormouslyimportant 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 allemployment, 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 provideother 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 ablanket 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.


July 5, 2011


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SJM | 39

Reality Belies the Hype

Shekar Swamy

Big retail will not give farmers better prices, or reducewastage. 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 followingpoints: 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 downtheir 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 marketsand 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 mark-

ups 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 tostore 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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SJM | 41

Myth about Logistics

It is believed that Foreign Retail will improve supply-chain

infrastructure and reduce wastage of farm produce. But Big Retailwill 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 ofat 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, andreduce 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 investmentswill 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. Nothingthat 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 http://www.npr.org/ 2011/02/04/133483848/).

(The Hindu Business Line,

July 6, 2011)


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SJM | 43

We cannot risk overseas entities gaining any sort ofcontrol 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 DirectInvestment 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 foreignretailers in the 1990s. Fifteen years later, four weeks

ago, a corporate deal was announced to merge Pao de

Acucar, Brazils biggest supermarket chain, with

Remember Salt Tax, Anyone?

Shekar Swamy


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Carrefours (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 vastnumber 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, atdifferent 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 ofsalt. 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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SJM | 45

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), acompany 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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SJM | 47

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 learnfrom 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

How the World Burnt its Fingers

Shekar Swamy


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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 youname 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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SJM | 49

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 Independents Chain

Establishments Stores

1951 155 Million 1,770,000 1,600,000 105,000

2011 312 Million 1,500,000 1,145,000 350,000

(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,takinga 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 notifiedand 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, andit 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 agovernment change in the next elections.


Aug 29, 2011


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SJM | 51

FDI will wipe out Small Traders

Shekar Swamy

On 24 November 2011, the Indian governmentapproved 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-in-


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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 advantagefor foreign retailer, by policy design.

Rural India under threat

Under the policy guidelines, the foreign retailer is restricted to

opening stores in la

FDI in Retail - Facts & Myths

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