Monday, September 24, 2012

The FDI threat?

The Prime Minister, Dr. Manmohan Singh, finally 'bit the bullet' and announced a slew of economic reform measures. When cornered, even a cat puts up a fight. The government definitely was cornered by a lots of issues. The biggest being fiscal deficits. Now, there may be a big, big controversy and disagreement over how oil companies compute their losses made on sale of diesel, petrol, kerosene and LPG below market prices. But, the point is that these are auditor-approved losses and hence, the government has to compensate for these losses, as they do not allow the oil companies to freely set these. And hence, the government had to raise the price of diesel, as crude price was rising through the summer and almost through the entire year. But, that is not the point of discussion here.

The second, which we would all agree with is the aspect of foods getting destroyed due to lack of adequate storage and distribution infrastructure. Hence, an artificial inflation, when harvest quantities at farms are not drastically short. The government, on its part, failed to erect cold storage facilities, store houses and a flexible policy on farm harvest procurements. For decades, the wholesalers in the agriculture produce market committees (APMCs) have ruled the roost and enjoyed a monopoly in procuring farm produce. The monopoly extended to labour that could be used to load and unload the produce. The farmer was forced to pay for labour to unload his produce. He couldn't get cheaper labour of his own to do the work. These two monopolies- the wholesalers and the APMC labourers- have never worked in favour of the farmers. What more, they are such a strong political force, that very few have dared to take them on. These people have never invested or enabled anybody to invest in infrastructure that will prevent loss of food products between the farm and the fork. The government's monopoly too, has hurt the cause. We keep on hearing about how grains are rotting in granaries and not effectively reaching those who need them. But, will FDI solve this particular problem? I do not think so.

A set of people who would be affected by entry of Wal-Mart, etc. are the kirana shop owners and people whom they employ. But, they have been weathering the heat from players like Big Bazaar, Reliance Fresh, More, etc. Why would they suddenly wilt if Wal-Mart arrives on the scene? As I have said in a previous post, big retail shops tend to sell products in large packaging. E.g. a toothpaste of 200 gm., or three soap-bars together. But, when a city like Mumbai has more than 50% of its population living in slums, are they going to buy from the big retailers? Mind you, many of them are not poor in the perceived sense, but just that they can barely make their ends meet. Most of them, have a monthly credit with the local kirana store. And they buy stuff in small packages. A bar of soap, half-a-kilo of sugar at a time, etc. FDI in retail, if implemented as seen in North America and Europe, is not going to help these marginal families.

A bigger issue that should be of worry to many, is the accounting practices of many of the wholesalers and kirana store owners. Never, do we get a receipt, with its sales tax and VAT numbers. Most of the sales accounting is done on a piece of newsprint quality paper. So, many of us, of the salaried class, whose income taxes are routinely cut even before we get to see our pay-check should be definitely worried if these kirana stores are paying the taxes that are due. Will the big-box retailers be honest enough to pay their taxes? May be not 100%, but compliance would be way better than the kirana stores. If you haven't noticed, do check the receipts you get from stores like Big Bazaar, D'Mart, etc. They do carry a CST/BST number and VAT registration number and the sales do get recorded into their accounting system. Kirana stores have, for long, not modernised their business practices. If they do not, then they would definitely lose business to the big-box retailers, whether Indian or foreign.

Finally, is the government in a looking-London-talking-Tokyo mode? There was a time when the unions of employees of leading national banks went on strike, refusing computerisation in banks. They feared that this would lead to job losses. They pressurised the banks into agreeing on a fixed pace of computerisation, which was so slow that banks would never have achieved computerisation in a reasonable time-frame. To get over this, the government allowed private banks into the market. These had completely new labour, free from the union tactics of nationalised banks' employees. They introduced a slew of computerisation and digitisation in their working, which made banking easy. People flocked to them in large numbers. This scenario made the unions of public banks realise that if their branches are not computerised fast enough, they would any way lose business and customers. And after two decades of allowing private banks, government banks are still competing and flourishing, only because their employees chose to adapt. Similarly, is the government forcing the wholesalers and kirana owners into modernising their business practices through another way? Ghee seedhi ungali se nahi nikal raha, to ungali tedhi karni hi padati hai.

Finally, is FDI in retail going to benefit anybody? It is definitely a double-edged sword. Consumers may get better quality stuff at cheaper rates. Producers may get better deals. But all depends on how honestly is the policy implemented and how honestly is the implementation tracked to achieve its stated goals.
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