Retail window closed, for now

It was the former US Secretary of State, Dr Henry Kissinger who, while dealing with the USSR in the 1970s, perfected the art of economic diplomacy. His basic principle of no unilateral concessions was not new but the policy of ‘linkage' was: If the USSR wanted wheat or toilet paper — both, usually — it would have to back off on some military thing. It is not clear whether the Finance Minister, Mr Pranab Mukherjee's latest statement about needing the approval of the States for opening up multi-brand retail falls in the Kissingerian linkage category. But the fact remains: Having given in to one US demand relating to FDI limits in the pension industry — the Government can fix them through an executive order and will not need Parliament's approval — it may have been decided that one thing at a time is good enough. Given that there is no hurry to open up multi-brand retail, the Government may well have decided to wait till it gets something from the US in return. Besides, some important Assembly elections are coming up and it would be prudent not to antagonise the small traders. Whatever the reason — and it could be a combination of many, including some corporate aspect that involves protecting Indian retailers — by saying that a consensus amongst the States and the Centre is required, Mr Mukherjee has probably put off the entry of foreign investors in multi-brand retail for a very long time. He has also thanked the BJP which, as a champion of the small traders has been opposing multi-brand entry, for support on the pension Bill. Linkage works at home also.

The case for foreign entry into retailing has always been more seductive than sensible — for both well-off Indians and foreign shopkeepers. This is natural given the size of the Indian market and its growth, especially at the upper end. But as research in the US has shown, the aggregation of millions of small retailers into a few large ones has a peculiar outcome: it may lower prices for the consumer because of scale but, a la the East India Company, it does not necessarily increase incomes for the producer. Indeed, it is only by squeezing the producer on price (but not reducing their own margins, which they take over from the small traders) that the large retailers are able to deliver lower prices to the consumer while making large profits themselves. The irony is that while the BJP is fighting for the traders, no one is fighting for the producers, except the CPM perhaps in its own awkward way. Hopefully, the States will now take up the cause of the farmers and the SMEs.

That said, there can be no gainsaying the fact that big foreign retailers bring many benefits such as improvements in supply chain logistics, technology, quality and, above all, access to foreign markets. Many independent studies have shown the contribution of the big foreign retailers to China's exports. This, too, has to be kept in view.