Recipe for unemployment

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.)

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