The Hindu Business Line : The retail road to nirvana

The Government's stand on allowing FDI in retail trade is still not very clear. It cannot reveal all its cards, as much would depend on what others offer. There has to be a trade-off between areas such as cross-border supply of, say, BPO services and the movement of natural persons, where we have competitive strengths in relation to offers being received.

IN recent months, senior economists in the Government have exhibited a new-found faith in the retail road to economic development. Generally, economists are known to be circumspect while offering advice. Not the new school of reform economists. They seem to have answers to all our questions . The attachment to FDI in retail trade is an instance.

The Economic Survey 2004-05 recommended it saying: "FDI in retail trade can not only organise a significant part of the largely unorganised domestic retailing, but also invite established global retail brands into the Indian market, thereby creating greater outlets for outsourcing and marketing Indian products."

The Mid-Term Appraisal (MTA) of the Tenth Plan stressed the same view and elaborated how FDI in retail trade would develop backward linkages and create a domestic supply chain to meet international standards. Briefing the press , the Deputy Chairman of the Commission added: "What we have said is that FDI in retail should be considered by the Government and I think it should be considered." Sadly for the economists, the Government did not share their faith.

The issue is not new and has been debated for long. In 1993, in the early years of reform, when Dr Manmohan Singh was the Finance Minister, the law was changed to permit FDI in retail trade. Two companies secured approval for foreign equity. Soon, the reform process had a setback. In 1996, when the United Front was in power and Mr Chidambaram was the Finance Minister, it decided to ban FDI in retail trade. This was under pressure from the communist parties.

Later, when the BJP/NDA came to power, it made feeble attempts to change the law. It engaged the Indian Council for Research on International Economic Relations (ICRIER) to study the situation. After two or three years of research, ICRIER came out strongly in favour of FDI in retail trade on the same grounds that are now relied upon by the Economic Survey and the MTA.

It limited its recommendation to 49 per cent in keeping with the then norm for FDI .

However, the BJP was in two minds over lifting the ban and there were deep differences within the NDA constituents. The NDA did approve of two companies — Metro GmbH of Germany and Shoprite Checkers of South Africa — to engage in the wholesale cash-and-carry business.

Metro was known to have abused the conditions attached to FIPB approval and entered retail business covertly. Some pizza chains were known to have exploited legal loopholes and expanded business through franchisees. The atmosphere was getting vitiated and gave rise to public resentment.

The NDA lost its nerve when it realised that the community of retail traders in the country was against FDI in retail. It did not dare risk the votes of 30-40 million traders in the election. Conveniently, it left the decision to the successor government.

Any hope that the UPA would effect a change in the FDI policy on retail trade is unrealistic. Its dependence on the Left is vital for political survival and the Left's reservation on FDI in retail is no secret. The CPI(M) has been consistently opposing the policy to permit FDI in retail from the BJP days.

An article in People's Democracy (December 14, 2003), hit hard against FDI in retail trade and explained how FDI threatened three crore Indian retail traders. It dealt at length with the alleged abuses of Metro.

The UPA government could not have allowed the issue to languish. There was intense pressure from the international retail lobby, backed by certain governments. Moreover, under the WTO time-table for `services' negotiations, India had to make time-bound offers — by the end of May 2005.

Major consultants like AT Kearney portrayed India as the "second most attractive destination" for the retail industry among emerging markets. McKinsey & Co. and the CII, in another report, suggested that retail giants such as Tesco, Carrefour and Ahold were waiting for a signal to enter the country. Much of the hype was created by the work on the MTA.

When John Menzer, President of Wal-Mart, met the Prime Minister, Dr Manmohan Singh, on May 12 rumours gave rise to expectations of a favourable decision.

The defining moment perhaps was when the CPI General Secretary, Mr A. B. Bardhan, wrote to the Prime Minister a couple of days before the Wal-Mart meeting. He demolished the logic of the economists and said that the step would affect four crore retailers in India.

Expressing concern over "various announcements and statements made by various Ministers on the crucial subject of FDI in retail sector", he pointed out that it was against the principles of the CMP.

Mr Bardhan also reminded the Prime Minister that when he was Leader of the Opposition in the Rajya Sabha, he had spoken against injection of FDI in retail. It is clear that these concerns cannotbe disregarded by the Government in finalising a policy on FDI in retail and in preparing a negotiating brief for the WTO meetings.

Full details of the decisions on the WTO are not available. What have been disclosed so far suggest the level of maturity we have reached in making policies involving the lives of millions of our people. As the Commerce Minister, Mr Kamal Nath, explained: "What we ultimately offer will depend on what is offered to us." Reports say that the government is not opening up the services sector for retail, legal and auditing segments. Even earlier, in December 2004, India was unwilling to accept the WTO definition of retail trade citing administrative difficulties. It rejected the request for opening up the sector in its negotiations.

True this is due to the opposition from domestic players, who are apprehensive of their future with competition from other players. However, the government's stand is still muted. It cannot reveal all its cards, as much would depend on what others offer. There has to be a trade off between areas like cross border supply of services like BPO and movement of natural persons, where we have competitive strength in relation to offers being received.

Had the government yielded to pressure from the foreign lobby or succumbed to the theories of economists, we would have lost the bargaining advantage well before the negotiations commenced.

It is not clear why the MTA could not relate its analysis and recommendations to the larger issues of WTO and the need to safeguard national interests. Happily, the Government, unlike its economists, has taken the view that there is no retail road to nirvana.

(The author, a former Finance Ministry official, has extensive experience in international, financial and trade issues.)

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