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Retail FDI, wholesale disaster

Publication Date : 26-09-2012


Imagine a society where 80 per cent of all grocery sales are monopolised by just five giant retailers like Walmart, Tesco and Carrefour, locally grown fresh food is replaced by processed, low-nutrition items, and people's attire based on traditional fabrics is destroyed by synthetic clothing.

Most South Asians would consider this a nightmare. But it's not very far from what has happened in much of Western Europe and North America over 30 years, especially as regards groceries, clothes, and increasingly, fruits and vegetables.

That's the trajectory on to which Prime Minister Manmohan Singh has pushed India by permitting 51 per cent foreign direct investment in multi-brand retail. This is his strategy to boost GDP (gross domestic product) growth by feeding the "animal spirits" of entrepreneurs, in this case hated transnational corporations (TNC) like Walmart.

This decision is one of the most destructive measures ever taken in India. It will undermine the livelihoods of millions of petty traders, kirana shop-owners, street vendors and dirt-poor kabadiwalas who contribute to society by recycling waste and reducing carbon emissions. Its benefits will be limited to TNCs and India's shopping-mall-addicted urban elite.

The decision is rooted in the bravado of a leader who doesn't care for his own people, especially the poor, but is ashamed at being called an "underachiever" by the West. So he has hardened his neoliberal stance just as neoliberalism stands globally discredited.

Dr. Singh's bravado will extract a heavy price from the nation. The Congress party, which is foolishly indulging him, will soon find that he has become a great political liability. He has wantonly provoked the Trinamool Congress to walk out of the United Progressive Alliance (UPA) and weakened his own credibility.

The arguments cited for opening up retail trade to supermarket chains are wrong, if not dishonest too, including creation of new jobs, elimination of middlemen, better prices for farmers, and benefits to consumers.

India's trade sector has a turnover of US$450 billion and employs 44 million people. Walmart has a comparable global turnover ($420 billion), but employs only 2.1 million. For each new job it creates in India, at least 17 workers will lose employment.

India's experience with retail, recently opened up to domestic corporations like Big Bazaar and Reliance, shows that it harms extremely vulnerable people.

Corporate retailers routinely resort to predatory or below-cost pricing to attract customers initially -- only to jack up prices later. TNCs have deep pockets and can absorb big initial losses. They will only increase excessive concentration and non-competitive practices.

Supermarkets won't eliminate middlemen, but introduce new ones, such as buying agents, processors, packagers, quality checkers, and all kinds of corporate consultants.

Farmers will become vulnerable to manipulative and monopolistic practices of TNC chains vis-a-vis which they lack bargaining power. TNCs can beat down their prices through harsh negotiations and threats of de-listing.

Giant retailers routinely abuse their "buyer power". In the European Union, supermarket chains reduce "the number of suppliers to a few or just one" and tie them down. They extract the lowest possible prices, while imposing all kinds of fees and extra payments on them.

These include "retro-active payments," such as costs of advertisements and renewal of stores, listing fees and slotting fees, and delayed payments through which to reap unearned profits.

These can add up to a high 50 per cent of suppliers' revenues in Italy, and 70 per cent in France, often leading to their ruin. Surveys find that small and medium enterprises and farmers are especially vulnerable. So much for farmers' interests!

Many supermarket chains sell goods under "private labels", that is, products with their own brand labels. This is claimed as a new opportunity for suppliers. But supermarkets can threaten both branded product suppliers and "private label" producers with de-listing.

Supermarkets alone decide "what products are sold on the shelves" and hold all the trump cards. So "private labels" have become "an important additional element" of "buyer power."

Many European countries have over the years witnessed a serious reduction in the number of "small independent retail stores as well as independent wholesalers, and a lack of opportunity for them to expand due to the collective dominance of a few supermarket chains. It has also resulted in growing concentration of buying arrangements…"

In the long run, "buyer power" affects consumer interests -- through "decreasing choice and quality of products, lack of food available in local neighbourhoods, decreasing innovation of products for consumers, and increasing dependence on private labels."

No wonder supermarket prices, initially pitched low, soon catch up with open-market levels and overtake them by 20 to 30 per cent. This is the universal evidence from the West and from Thailand, Malaysia, Indonesia and Brazil.

This evidence also suggests that it's impossible to secure compliance with conditions such as 30 per cent sourcing from small-scale industries. Under World Trade Organisation rules, these cannot be limited to national producers. In India, the condition has already been diluted to favour Swedish home-furnishings retailer Ikea.

Consumer choice decreases as supermarket concentration grows and the number of viable chains falls. When only a few buyers dominate the market, monopolies get formed quickly, allowing them to dictate terms.

The giant retailers can steeply raise their margins and also resort to more unfair labour practices for which they are notorious, including anti-union policies, ultra-low wages, and use of prison/bonded labour.

They can increasingly source consumer durables like electronic goods from companies like Foxconn, which runs 13 factories in China amidst appalling working conditions, such as a 12-hour working day with a six-day week.

Why, some of their Indian collaborators would be only too willing to supply similar products at ultra-low prices, while demanding "liberalisation" of labour laws so they become "competitive" with Foxconn. This would spell a race to the bottom -- and great social retrogression.

So at the end of the day, the FDI-in-retail policy will have achieved not higher GDP growth -- the rise will probably be marginal -- but large-scale destruction of livelihoods, and greater depredation on some of India's most underprivileged people.

The writer is an eminent Indian columnist.


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