FDI in multi-brand retail
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.
Learning from the US
People can rightly ask how we can predict the future of big foreign retail in India. The answer is simple. We are not predicting the future. We have to only look at what has happened elsewhere to understand what will happen here.
A senior American academic thought-leader wrote this to me about big retail there: “The one thing big retail always seeks is the “lowest cost supplier” wherever they may be, and, often that is offshore. A count of offshore products in Walmart, Target or any other retailer would reveal that few, if any, of them are locally manufactured. In the US, we have traded offshoring of almost everything we make for lower cost products in big retail. We're now reaching the point that Walmart can continue to find lower cost suppliers but we can't 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? (See graphs).
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 technology) is one reason for this decline, the other cause is the growth of big retail that buys merchandise offshore and causes manufacturing to shut down. The May 2011 unemployment level in the US is at 9.1 per cent or 13.9 million people unemployed. Despite an aggressive stimulus package of over $1.6 trillion thrown into the US economy since 2009 by the Obama administration, unemployment figures have stubbornly refused to come down. It cannot come down easily, because the very employment structure has been altered by big retail.
The lesson is clear. FDI in multi-brand retail will lead to an explosion of offshoring of production from India. This will result in job losses in manufacturing at a galloping pace and scale that can't 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 country's 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 economy's 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 growth is inadequate to cope with the growth in the number of people who need employment.
The retail sector in India, as an employer, is therefore enormously important to maintain social stability. Employment estimates in retail vary. There are some 13 million retail establishments in the country. According to IRS 2011 (one of the largest baseline studies), there are 25.5 million chief wage earners (including local vendors without a shop) who are engaged in the retail service. Employment in retail, which is self-motivated and at the ground level, is the second largest in the country, at 11 per cent of all employment, after agriculture.
Unrecognised safety valve
People who are on the economic knife edge make a simple living in this sector. FDI in multi-brand retail is squarely aimed at taking these people out. It will, over time, make this avenue of employment difficult for them. The economy cannot provide other alternatives as the data clearly shows. Without the safety valve of employment in retail, it is anybody's guess as to what shape future social unrest could take.
Interestingly, the government is aware of all of this. The Parliamentary Standing Committee 90th Report on FDI in Retail, laid in the Rajya Sabha on June 8, 2009, has recommended a “blanket ban should be imposed … on foreign retailers from entering into retail trade in grocery, fruits and vegetables”. This Committee report is obviously being ignored.
The government says it wants to promote ‘inclusive growth'. The proposed FDI in multi-brand retail is a blunt weapon that will hammer employment in manufacturing and in retail. There cannot be a more anti-‘inclusive' step than this.
(The author is Group CEO, R K SWAMY HANSA and Visiting Faculty, Northwestern University, US. The views are personal.)
(To be concluded.)
Keywords: foreign direct investment, multi-brand retail, employment
Comments:
The writer has given a lot of figures on loss US manufacturing jobs. How much of this job loss is due to big retail. No statistics is given. But he jumps to the conclusion that big retail in India will lead to offshoring of production from India. To where? China, US? Definitly not US which is importing a lot from others. Apropos loss of jobs in retail in India. When telegraph was invented there was a furore that mail delivery boys would lose their jobs. From telegraph we have come to internet, Facebook etc. How many postmen lost their jobs. When LIC wanted to computerise, there was a long drawn agitation by the trade union. Bank unions stalled computerisation for more than two decades fearing loss of employment. Today we consider cheque economy obsolete and are marching towards 'Mobile banking'. Loss of employment is a bogey brandished by leftists. But the caravan has to move on. Of course there is room for differing opinions. Big retail brings its own benefits. Let us welcome it!
job losses due to technological advances is different from what will happen due to the entry of foreign equity in retail in India. why are we so attracted to the FDI in retail. are we not capable of creating our own Indian retail model which can be replicated elsewhere.there are certain components of any local economy that should not be altered blindly.in-fact we should try to encourage the cooperative movements in retailing, just as we did in the milk production business.here,various players at different points of production and distribution can join hands and create our very own local module. some interesting examples are the apna bazaar and sahkari bhandar in mumbai.lets accept that the gooraa saahbs are not always right and do not necessarily have the panacea.
The author has not given any statistics to show that small shopkeepers will be thrown out of livelihood if there is a mushrooming of multibrand super markets. You cannot prove a point by mere assertions. We do not go to super markets to buy one match box, or a tube of paste, or such purchases when we are short of time. Mum and Dad shops will always be in demand for such times. There is no point in comparing the situation in US with that of India, because in the US labour cost is exorbitant and hence it is natural that they source their labour intensive from outside. That is not the case in India. This scare about multi brand retail is a product of the leftists' imagination because they are always trying to find fault with anything that is from US.
the retail market in India is not organized...these multi brand retail concept is making the market organized, competitive and giving more choice to consumers.
A very tenuous connection is being made & exaggerated between loss of manufacturing jobs and organized Retail in the US. The economic reality is that in a globalized world, the most efficient sources will win (whether it's Taiwan for laptops or China for most everyday manufactured goods). In any case, the US Retail scenario is a bad comparison to India because of various factors (sprawling suburbs as opposed to dense urban populations being one of them). A more appropriate comparison would be with China, where local sourcing has only increased multi-fold after retail FDI was allowed. This is natural since retailers will discover and trade with more local suppliers once they set up shop in a country. Global retailers are indeed looking for cheap suppliers, but ultimately the end customers benefit. Also, the bulk of kiranas and small retailers will continue to thrive because of their strengths in local customer understanding &convenience.
Agreed Multi Brand Retail will be a recipe for unemployment.In india hundread thousand people work in small grocery shops, these people live on the edge. They hardly earn about Rs 150 to 200 a day,that too after working for long hours. If Big Retail Giants enter indian market they will destroy the livelihood of these small grocery shop owners. It will be good for consumer as they will enjoy economies of scale. They would be paying less, but at what cost???. This is just the tip of the ice-berg. What about those jobs that will be lost once the production base shifts overseas, where cost of production is lower than that in india. Consequence of FDI in retail will be disastrous.
The two primary arguments Mr.Swamy has put forth in his views against FDI in multibrand retail do not apply to India. First argument of manufacturing getting offshored happened in USA due to the fact that their production costs (especially labour costs) are high. Most of the offshoring happened to the eastern countries - especially China and India. The very same companies importing products from India for their retail houses in US have no need to come to India and again look elsewehere for their products. What product categories in which China scores over India (such as light electronic items, toys etc) our market is already full of these imported items - every mom and pop store around the corner is selling these "chinese" goods arleady! Walmart need not come and start this. I am surprised that Mr.Swamy is not quite aware of this. In the long run hiding your country's manufacturing inefficiencies and protecting them does not help. Will continue the reply post....
The second argument of loss of employment due to FDI again in the retail sector again is a misplaced idea. There will just be shifting of employment (legitimate employment) from the unorganized sector to the organized sector. That's all. What loss of employment does Mr. Swamy lament about? Is he against the possible end of some the child labour from the unorganized sector? Or does he want the illegitimate and exploitative practices of the unorganized sector to continue? Does he have any statistics on how many of the so called employees in the unorganized sector are of legitimate age to work? Or can he supply how many employees in the unorganized sector get paid proper wages? Will continue...
Does he know how much of the sales in the unorganized sector go unreported and cause huge losses to the exchequer in terms of lost sales tax revenues? Even with all the FDI coming does he really think that the traditional retail outlets are going to be totally wiped out? No chance. May be it will go from 90% to 80% of all retail. No more. I think India's economic situation is vastly different from what the USA's situation was and to expect the same consequences here is not logical. Let us welcome FDI in Retail sector wholeheartedly. It will lead to a better life for all Indians.
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