The dubious benefits of FDI in retail

K. RAMESH | Updated on March 12, 2018

The experience of US and Mexico with FDI in retail is far from encouraging.

It happened about two decades back. As a young lawyer, I was sharing the dais with a just retired IPS officer, addressing an elite gathering. I had just returned from a visit to Singapore and I asked him why the police could not evict all pavement and roadside vendors within a week.

The police officer chose to be silent before the public. He later informed me in private that the police did not need a week, but just a couple of days to remove the small traders, shops or miscellaneous service outfits occupying the pavement. But he cautioned that this would have a disastrous impact.

As the small-time vendors have little opportunity to participate in the mainstream economy, they make their living with prohibitively high-cost borrowings. When they are prevented from selling their wares without being provided an alternative livelihood, the crime rate would go up. I was educated on how I was hopelessly wrong in comparing thinly populated countries such as Singapore with India, that accommodates one-sixth of people in this planet.

Bringing in FDI in retail at this juncture is bound to wipe out India’s strengths.

Population advantage

Suddenly, in the last few years, the growing population of India has not been perceived as its continued weakness. Half the population depends on small-time trading or entrepreneurship for survival. Foreign investment, in the last two decades, has contributed less than 5 per cent to the economy, while the real wealth creation has come from the household sector, which includes proprietary and partnership firms.

The Government benefits from such a tiny sector, without enabling it to access cheap capital through the banking sector. This unorganised sector, therefore, deserves better treatment from the Government. Even as this issue is waiting to be addressed, the Government has opened the country’s trade to Walmart.

Walmart’s overtures

It is one thing to permit FDI in manufacturing (or high priority technology content sectors), as was done in 1991, and quite another to think that FDI will be a panacea for all the country’s ills. Has the Government factored in the very large trading population, who may not be aware of the possible damage to their livelihood?

What has the experience been with Walmart in the country of origin and abroad? FDI comes with big promises of promoting employment. The entry of the trading giant, Walmart, led to the closure of 40,000 US factories between 2001 and 2007, resulting in throwing millions of people out of their jobs.

It is in these years that imports from China to US tripled in value from $9 billion to $27 billion! According to the US Census, between 1992 and 2007, the number of independent retailers fell by more than 60,000.

As Walmart’s business continued to grow and the stores began to expand, communities lost their local retailers and there was less demand for services such as accounting and graphics design. Less advertising revenue for local media outlets also resulted in fewer accounts for local banks.

The classic example is the story of destruction of Iowa. In 1983, Walmart opened its first store in the State. Since then, several other retail stores were forced to close shutters.

The growth of Walmart has resulted in decreased wages, the shrinking middle-class and increase in working poor. The savings due to shopping at Walmart cannot compensate for the loss of job opportunities and income. There are well-researched articles suggesting that the US is being transformed from a technologically-advanced manufacturing economy to a mere consuming economy on account of higher imports.

Walmart has ensured that the American family would not be able to afford shopping anywhere else. Right now, the average family of four spends approximately $4,000 a year at Walmart. This year, the Walton family (owners of Walmart) will be able to pocket billions in dividends from their holdings.

The bargaining power of the global trading giant with the Governments is so high that it eventually puts pressure on State finances, through tax-breaks, effective outsourcing models to kill production jobs, and demands for increased investment in social initiatives by Governments due to job displacements.

Hasty decision

Walmart faced allegations of bribery that helped it set up stores much ahead of its competitors within Mexico. This resulted in violation of Mexican law and the US Foreign Corrupt Practices Act. Thorough investigations were not carried out due to technicalities in the law of limitation and to avoid further adverse publicity to Walmart.

There are studies that to show that giant trading corporations such as Walmart contribute to poverty, which could prove costly in a country such as India with dense population with diverse base.

One strong argument put forward is the possible savings to the consuming public. Perhaps, in the absence of FDI in retail, a section of affordable consumers is paying more. But that does not mean the displacement of small-time traders is a desirable development. Opening up India to overseas trading giants on an exaggerated perception of benefits of foreign investment is not such a wise policy decision.

(The author is a corporate lawyer and a fellow of ICAI.)

Published on October 02, 2012

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