Foreign investment is generally beneficial as it
creates jobs, adds value, and contributes to the GDP. Companies like Hyundai,
Ford and Honda have built a giant automobile industry in India now producing
over 2 million cars and tens of thousands of new jobs. By 2017 India will emerge as the third largest car making country in
the world producing over 7 million automobiles. This would not be possible
without foreign investment, technology and leadership. In sector after sector
foreign investment has created huge new capacities catering to domestic and
foreign markets. The level of foreign ownership makes little difference to the
contribution foreign companies make to the economy. The desirability of foreign
investment must never be questioned as long as it creates jobs, adds value and
contributes to development. And these are just the factors that go against
foreign direct investment in retail.
Study after study in developed and developing
countries alike have shown that big box retail rather than creating jobs,
destroy jobs. In fact their utility in developed economies is due to the labor
savings they achieve. Classical economics was wary of the monopolistic producer
who would charge ‘too much’ from the poor working classes while producing the
much-needed ‘bread’. The single producer was the dread from which economists
sought ‘perfect competition’, meaning many producers catering to many consumers
resulting in fair competition in a perfect market. Adam Smith could never have
conceived of a global operator with a huge hoard of cash and instant
information becoming a ‘sole’ consumer. To the economists ‘monopsony’ was a
theoretical concept – to be defined as a construct before belaboring the
dangers of a monopoly. The danger of monopsony, seldom thought of by economists
as a threat, is now upon us. In the
last three decades the advents of giant retailers like Walmart (turnover $422
billion in year ended January 2011) and producers like Nestle (turnover 60.9
billion Euros year on year October 2011) have made monopsony a reality.
The bulk buying and the recourse to monopsonic
practices result in pushing down producer prices, undoubtedly with resultant
benefits to the consumer. Thus, the more of a commodity large retailers
purchase in bulk, the lower the prices growers of agricultural commodities
obtain! Studies by FAO and Oxfam attest to this.
For
instance, a decade ago coffee growers earned $10 billion from a global market
of over $30 billion but now they receive less than $6 billion out of a global
market $60 billion.
The cocoa
farmers of Ghana now receive only 3.9% of the price of a typical milk chocolate
bar but the retail margin hovers around 34.1%.
A banana
farmer in South America gets 5% of the retail price of the banana while 34%
accrues to distribution and retail.
The table below from “Oxfam: International
Commodity Research – Coffee” clearly indicates the price of coffee during the
period 1980-2000 plunging as production scales new heights. Analyzing the
reason for this the study explains that the major cause for it as follows: “The high level concentration along the
coffee supply chain is clearly not to the advantage of producers, who are price
takers. Multinationals involved in the coffee sector control an ever-
increasing percentage of processing, marketing and retailing. Because they are
facing a multitude of small producers in 80 poor countries, multinationals can
set the rules of the game. This buyer-driven supply chain means that
multinationals capture most of the value-added linked with the production of
coffee. Multinationals can put a downward pressure on producer prices by
playing one producer against the other or by encouraging new countries or
regions to start producing coffee via foreign direct investment”.
The
average size of a Walmart is about 100,000 sq.ft and the average turnover of a
store is about $ 53.2mn, each employing about 300 workers. The turnover per
employee averages $ 175,000. Wal-Mart has a 9% return on assets, a 21% return
on equity, and its CEO Michael Duke's $35 million salary, when converted to an
hourly wage, worked out to $16,826.92. In comparison to this new employees are
paid $8.75 an hour that would gross $13,650 a year. By contrast the average
Indian retailer had an annual turnover of Rs. 330,000. Only 4% of the 12 million
retail outlets were larger than 500 sq.ft in size. India has 53 towns each with
a population over 1 million. If Wal-Mart were to open an average Walmart store
in each of these cities and they reached the average Walmart performance per
store – we are looking at a total turnover of over Rs. 141,000 million with the
employment merely of about 16,000 persons. Extrapolating this with the average
trend in India, it would mean displacing about 758,000 persons. Quite clearly
Walmart is not going to create more jobs in India. On the contrary it will
cause a massive loss of jobs in direct retail. This is the experience in the
USA also. A 2004 study by the Pennsylvania State University concludes that
counties with Walmart stores suffered increased poverty than those, and
suggested that it was the displacement of higher paid workers in small family
owned retailers. Another 2007 study has shown that towns in Nebraska with and
without Walmart fared similarly different in terms of joblessness and poverty.
A study of Wal-Mart’s expansion in Iowa found that 84 percent of all sales at
the new Wal-Mart stores came at the expense of existing businesses within the
same county. Business Industry analyst, Retail Forward, predicted that for
every new Super center that Wal-Mart opens, two local supermarkets will close.
It will
appropriate at this stage to consider the sizes of these giant retailers.
Walmart’s turnover exceeds the GDP of Norway, which ranks 20 in the list of
GDP’s. It’s almost four times the next largest retailer Carrefour.
This is indicative of the power of the corporation.
Typifying this power was the less than a day visit to India by the Chairman of
Walmart Stores Inc, Mr. S. Robson Walters on November 6, 2009, described as a
by Walmart as a private visit, and when the only person he called on was the
Prime Minister, Dr. Manmohan Singh. After he departed Commerce Minister Anand
Sharma said: “This is not the time for us to revisit the policy. Single-brand
retail is good enough. Those who have commenced operation are happily doing
business and so we cannot tweak the policy as of now.” The persuasive powers of
such a large corporation can never be underestimated. Despite the unequivocal
position of the government, as stated by its Commerce Minister, this very same
government on November 24 announced that it was opening up the retail sector to
up to 51% foreign ownership. Now one may ask if any of the other stakeholders
in India’s retail business would have had such easy access to the higher
echelons of government?
The major argument in favor of the benefits a
Walmart or Carrefour will bring centers around the perceived benefits to
agriculture and better prices to the farmer. Surprising all, Congress general
secretary and MP, Rahul Gandhi, told election gatherings across Farrukhabad and
Kannauj in UP that FDI would solve the puzzle of a kilogram of potato fetching
Rs 2 or less to the farmer and a packet of potato chips costing Rs 10. "A
packet of chips is made from just half a potato," he added, virtually turning
the opposition to FDI into a conspiracy against farmers. One might suggest to
him that PepsiCo has been buying potato and tomato for sometime now without
making a dent on farmer prices.
Empirical evidence from many countries where big
retail chains dominated show that on the contrary farm realizations actually
decline.
A recent
joint study in Finland by Agrifood Research Finland and Pellervo Economic
Research Institute reveals that for each kilo of rye bread purchased in 2010,
for which the consumer paid 3.52 Euros, 1.24 went to the seller, while the
grower received only 14 cents. A further 1.74 Euros were shared by the milling
company and logistics, while the rest went to the state as taxes.
The study
also revealed that while the trade got 19% of the takings on food, it went up
to 29% in 2009. Finally, the study showed that food prices rose faster than
other consumer goods between 2000 and 2010.
Big business
and MNC’s like PepsiCo, Cargill, ConAgra and even ITC and Reliance have been
procuring food grains and farm produce for several years now and there is no
evidence that general prices have increased. Even where better prices were paid
to contract farmers, data available suggests that input costs have been higher.
Simple economic logic tells us that nobody pays more for a commodity that can
be obtained for less. Business is about extracting profits and not about
charity.
Protagonists of FDI in retail talk a lot about
modernizing the supply chain. Consider this. The National Sample Survey
relating to household expenditures reveals that fruits and vegetables only
account for 9.88% of urban household expenditure. It is widely agreed that the
supply chain that links the Indian producer to the domestic consumer is
primitive, outmoded and wasteful. Many studies exist that detail the extent of
wastage. One will readily concede that large format retailing with its capacity
for bulk procurement and capital investment, even if it accounts for a fraction
of the retail trade in the sector, might be able to make some headway in
modernizing the supply chain.
But before we get into the 'for and against'
argument vis-à-vis FDI, we must also ponder over the fact that a modern and
nationwide supply chain has been created, indigenously, for milk and milk
products which account for 8.11% of household expenditure. Similarly we have an
effective supply chain for food items such as cereals, pulses, and sugar and
edible oils, which together account for 24.16% of household expenditure. All
other non-food goods purchased by our households such as tobacco products and
alcohol, processed foods and snacks, toiletries, detergents, garments etc which
together account for 52.57% of all urban household expenditure are made
available for consumption by modern and efficient supply chains. Thus, what the
average household does not get from a modern supply chain is a very small part
of its purchase. So the argument that the pro-FDI lobby extends vis-à-vis of
FDI in Retail of modernizing the entire supply chain is a bit exaggerated. The
supply chain as it is now is mostly modernized and efficient, and what is yet
to be modernized covers only a very small part of urban household consumption.
The argument then that we need the merchants of the western world like Walmart
to modernize just 9.88% of the supply chain is a bit bogus and self-serving.
More than
anything else it is Walmart's Chinese connection that should cause us to worry.
While Walmart has 352 stores in 130 Chinese cities with a total turnover of
$7.5 billion, Walmart directly buys via its procurement centers at Shenzhen and
Dalian over $ 290 billion worth of goods from more than 20,000 Chinese
suppliers, 70% of its 2010 turnover of $420 billion. Of this over $60 billion
of goods are exported to the USA alone, making Walmart the fifth largest exporter
to the USA, and also suggesting that Walmart’s procurement from China is the
major source of its profits.
With its huge monopsonic power, Walmart actually
depresses wages, by forcing suppliers to cut costs. A good example to
demonstrate the low wages in the Chinese labour market is contained in a report
by Thomas Fuller in The International Herald Tribune of August 3, 2006, which
investigated the percentage split in profit in the shoe industry between the
Chinese factories and those who market and sell the finished products in the US
and Europe. The factory owners after the
laborious process of manufacturing makes a profit margin of 65 cents per pair
of shoes, which are sold ex-factory for $15.30. “A major U.S. retailer, after factoring in shipping, store rent and
salaries, sells the boots for $49.99. Assuming a pretax profit margin of about
7 percent, an average among large U.S. retailers, it earns $3.46 on the same
pair of boots.” However the story doesn’t end with the unfair profit
margins. The Chinese laborers, who make the shoes, box them and even affix the
price tag, are the ones who get the worst deal. The International Herald
Tribune says “Yet for all the sweat that goes into making shoes in Tianjin, the
factory payroll is equivalent to $1.30 a pair, 2.6 percent of the U.S. retail
price.” Should the salary of every worker in the Chinese shoe factory be
doubled, the retail price in the US would merely go up from $49.99 to $5.29
Even if one were to ignore the manipulated value of
the Yuan to make Chinese made goods export competitive, it is clear that by
keeping wages low and without the protections afforded to labor by trade
unions, collective bargaining, overtime and assurance of good working
conditions, China is in effect subsidizing exports. What the flow of cheap
Chinese goods through the Walmart direct pipeline from China into India will do
to Indian companies, particularly the SME’s can well be imagined. Even without Walmart, Indian SME’s are
being driven out in sector after sector by cheap Chinese imports. For instance
there is no light fittings industry left in India. Same for toys. One can well
imagine what a Walmart pipeline will do to the hosiery and woolen goods
manufacturers in Ludhiana and Tiruppur. The once prosperous clock making industry
around Rajkot has almost entirely fled to China. Millions of jobs in the
semi-organized sector now stand threatened. In 1985 Sam Walton, the founder of
Walmart was forced to say: “Something must be done by all of us in the
retailing and manufacturing areas to reverse this serious threat of overseas
imports to our free enterprise system… Our company is firmly committed to the
philosophy by buying everything possible from suppliers who manufacture their
products in the United States.”
We should also be worried about our fast growing
trade deficit with China. The trade
deficit with China is now likely to exceed last year's record $20 billion
figure. India's trade deficit with China widened to $14 billion after seven
months this year, as China's overall trade surplus soared to the highest in
two-and-a-half years amid an unexpected surge in exports to the European Union.
With bilateral trade reaching $41.5 billion in July, by rising 17 per cent and
on track to surpass last year's record $61.7 billion figure, the Indian
government should be concerned by this latest import data. Burgeoning trade
deficits have contributed significantly to the recent steep devaluation of the
rupee. But is the government worried enough to seek to narrow the deficit?
Having said all this, one must concede that change
is remorseless. The constant displacement of workers by machines and methods is
the story of the future. Textile mills made most weavers redundant, just as
robots in automobile manufacturing have rendered many workers as surplus. This
is the story in all sectors of manufacturing. While the future cannot be
avoided there is no need to hasten the pain. Big box retail will bring benefits
to many stakeholders; not the least being the state, which will see improved
realization of taxes and the construction industry, which will be called to
build the new retail centers. Better quality control and good management
methods will spread into other sectors and down the supply chain manufacturers
will demand from their suppliers what is demanded of them by their buyers.
Given our pressing need to absorb growing numbers
from the hinterland into our labor pool, should we exacerbate our problems by
facilitating foreign procurement coupled with efficient local distribution,
thereby suffocating our own manufacturing industry?
This at a time when we still have not got around to
facilitating lower cost and more efficient manufacturing in India through
enabling legislation and regulation. The
contribution of industry to GDP in 1992-96 and 1997-2003 was 30.9% and 23.7%
for India, while for China over roughly the same period it was 62.2% and
58.5%15. We need to address issues at home before we unthinkingly or
unintentionally invite problems from abroad. The Government would be better
advised to address this issue first, rather than devoting itself entirely to
the cause of foreign retailers.
Different countries have dealt with the problem of
the sudden onset of giant foreign retailers differently. In Thailand no large markets are permitted within 15 km of the city
center. It might be better to follow the Chinese model of caution and
hurrying slowly. China just allowed FDI
in retail in 1992 and the cap was at 26%. After ten years the cap was raised to
49% when local chains had sufficiently entrenched themselves. 100% FDI in
retail was permitted only in 2004, after the infant retailing industry had
acquired some muscle. Walmart in China however is a very different company
to what it is in then USA or elsewhere. 15000
suppliers serve its China operations alone, and Walmart China claims that over
95% of its goods sold in china are sourced locally.
Even in as liberal an economy as Japan, large-scale
retail location law of 2000 stringently regulates factors such as garbage
removal, parking, noise and traffic. Recently
Carrefour decided to exit Japan by selling off its eight struggling outlets
after four years to the Japanese Aeon Co as the extremely cumbersome Japanese
regulations blatantly favor its own homegrown retail firms. Malaysia’s
Bumiputra clause insists that 30% of equity is held by indigenous Malayans.
Philippines insist that 30% of inventory by value be grown within the country.
The US or European experience shows that retail
giants destroyed the livelihood of small shopkeepers, who became employees of
such giants for paltry salaries. A retail supermarket encompasses the entire
chain and shrinks the intermediaries – lowering costs and removing jobs. In a
country with no social security net – the replacement of thousands of retailers
by a single large intermediary will shrink jobs by the millions in distribution
industry. What option will these millions have then except to take to the
street? Many talk of the revolution in retail, but governments must be more
concerned with revolutions forming on the streets.
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