FDI in Retail
FDI in Retail
FDI in Retail
Keep India
Independent!
NO FDI
India FDI Watch
www.indiafdiwatch.org
info@indiafdiwatch.org
A fter farming, retailing is India’s major occupation. It
employs 40 million people. A sizeable majority of
owner/employees are in the business because of lack of other
opportunities. The decade of liberalisation has so far been one
of jobless growth. It is no wonder that retail has become the
refuge of these millions. Lopsided economic development is
transforming India from an agrarian economy directly to a
service oriented post-industrial society.
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• joint venture where the Indian firm was an export
house
• franchising (KFC, Nike)
• sourcing from small-scale sector;
• cash and carry operation (Giant in Hyderabad)
• non-store formats- direct marketing (Amway).
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Scenario 1 - The economy grows at a faster rate, say 8%
or above and the benefits of growth ‘flows
down’ the line (not simply “trickles down”)
benefiting even the poorest of the poor.
Economic and social disparity reduces,
‘poverty line’ becomes a topic of economic
history, and purchasing power across
different economic class increases and
Human Development Index (HDI) improves
substantially.
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To tackle the problem of “jobless growth” which became
the defining feature of economic development of India in recent
times, the Planning Commission had set up two expert groups.
The first Task Force, under Montek Singh Ahluwalia, was set
up in 1999 and produced its report in 2001. It recommended
a number of programs of economic policy reforms, such as
de-reservation of small industries and expanding the role of
FDI in small industries and trade. It emphasized more on
the increase in the rate of growth than special programs for
creating jobs. Dissatisfied by the approach of the Task Force,
the Planning Commission had set up a Special Group in
2001 under the Chairmanship of Dr. S. P. Gupta, Member,
Planning Commission, to study the same problem. In the
order appointing the Special Group, the Deputy Chairman
of the Planning Commission pointed out that the earlier Task
Force had not paid adequate attention to the issue of the large
backlog of under-employment. The Planning Commission
was obviously not quite happy with the emphasis laid by the
Task Force on growth per se (Venkitaramanan, 2002).
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I
Uniqueness of Indian retail market
The Indian trading sector, which enjoys a few thousand
years of history, has some unique features. These features
identified as under, should be considered before allowing FDI
into retail trade.
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to develop this strategic business unit (SBU). In the
last two years, different distribution models have been
tried/ experimented. Recent developments indicate
that HLL-Unilever is moving towards geocentric mode
of operation from the age-old polycentric mode. In
the new operational structure, the food division may
become the hub for Unilever’s global food operation.
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5. Retail sector contributes 14% of the Indian GDP. Apart
from its economic contribution retail sector immensely
contributes to the political system by acting as a shock
absorber and maintaining social stability. Thus when
a factory shuts down rendering people jobless; the
farmers remain idle during off seasons or get evicted
from the land; the stagnant manufacturing sector fails
to provide jobs to the thousand of unemployed youths;
the retail sector absorb them all. Skilled labor turns
into a street hawker, a farmer delivers milk packets
door to door, an educated unemployed youth hawks
newspapers and a better off unemployed person starts
a telephone booth and retails telecom cards as an
‘add on’ service. Again when the factory reopens (in
exceptional cases); harvesting time arrives; some of
these new entrants leave the retail trade and return
back to their respective jobs.
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discussed unique features of the Indian retail sector
should get due consideration in the current debate on
inviting FDI in retail trade.
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II
Identification of major beneficiaries of FDI
– the push and pull factors
Why is the government so keen in inviting FDI in the retail
sector? While searching for this answer, we must remember
that already major retailers have entered into the retail market
through franchise and other arrangements. FDI is another
such arrangement through which foreign firms can exercise
more control in the management of their Indian operations.
There could be the following possible reasons for inviting FDI
in retail trade:
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• Management experts questioned whether there
were benefits for producers, particularly those
producing increasingly varied products targeted
for smaller and smaller market niches. They
reported, “nearly 70 per cent of managers admit
that excessive complexity is raising their costs and
hindering their profit growth.” This implied that
too much innovation merely increased complexity
without creating economic benefits for either the
producer or the consumer.
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disposable income of Indian middle class (300 million)
has increased by 20% (The Telegraph, UK).
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18%. Undoubtedly, this region has emerged as the
hottest destination for trade FDI.
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8. Trade liberalization and improvement in
communication systems have increased the opportunity
for the retailers to buy their products from producers’
worldwide. Some of the factors that have contributed
to this trend are: reduction in tariff, incentive in foreign
investment, cheaper real time communications, and
cheaper transport. Cut throat competition among
major retailers in the develop countries compelled
them to take advantage of this opportunity to maintain
their profit.
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III
Possible impact on marginal producers and
work force
- The experiences of other countries
The third important missing issue in the whole debate is
the possible impact of such action on numerous small and
marginal producers especially in the agrarian and handicraft/
handloom sectors. To get an idea about the possible impact
on marginal producers and workers, we shall restrict our
discussion to previous research findings on this issue.
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the practice of persistently selling some
frequently purchased products below cost,
and that this contributed to the situation in
which the majority of their products were
not fully exposed to competitive pressure
and distorted competition in the supply of
groceries.
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• It was found that a majority of these practices
were carried out by many of the main parties.
They included requiring or requesting from
some of their suppliers various non-cost-
related payments or discounts, sometimes
retrospectively; imposing charges and making
changes to contractual arrangements without
adequate notice; and unreasonably transferring
risks from the main party to the supplier. A
request from a main party amounted to the
same thing as a requirement. These practices,
as per the Commission, gave rise to a complex
monopoly situation.
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shelves and clothes rails in the world’s major
shopping centers to the fruit and vegetable farms
of Latin American and Africa and the garment
factories of South Asia and China.
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predictable orders and high airfreight costs for
missed deadlines, the small producers are pushed
to the walls. Moroccan factories producing for
Spain’s major department store. E1 Corte Ingles
must turn orders round in less than seven days.
‘The shops always need to be full of new designs,
we pull out all the stops to meet the deadline …
our image is on the line’ said one production
planning manager. But the image they hide is of
young women working up to 16 hours a day to
meet those deadlines, underpaid by 40 per cent
for their long overtime working.
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• In the USA, by 1997, supermarkets and even
bigger ‘super-centers’ owned by companies like
Wal-Mart and Kroger controlled 92 per cent of
fresh-produce retailing. In the UK, by 2003, just
five supermarket chains controlled 70 per cent of
the market.
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in the case of Fair-trade bananas to little as 1.5%
on traditional farms. In comparison, the trading
companies the likes of Del Monte, Chiquita, Dole
and Fyffe’s could be getting up to a third of the price
whilst retailers took around 40%.
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IV
Impact on existing labor laws
In the light of recent police atrocities against labors of
Honda factory at Gurgaon and repeated suggestions by
advisers and consultants like McKinsey to bring in drastic
reforms in the Indian labor law to make it more flexible
allowing easier implementation of the ‘hire and fire’ policy,
one of the findings of the Oxfam report may look very
relevant. Governments should strengthen protection of its
workers in the face of intense commercial pressures. Instead
many have traded away workers’ rights, in law or in practice.
Under pressure from local and foreign investors and from IMF
and World Bank loan conditions, they have often allowed
labor standards to be defined by the demands of supply chain
flexibility: easier hiring and firing, more short-term contracts,
fewer benefits, and longer periods of overtime. It brings a short-
term advantage for trade, but at the risk of a long-term cost to
society. The economic success of the ‘global retailing model’ as
propagated by Wal–Marts, Royal Aholds etc requires flexible
labor market to survive. Like many other governments, if
Indian government also abolishes the safe guards it had
enacted over the years, to protect its labor force, the business
environment would become conducive for global integration.
Enough indications are already there to apprehend that the
government is also planning to bring in changes, as desired by
the external forces, in the existing labor laws.
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The industries that the Labor Ministry has suggested for
exclusion from the purview of the Act included, IT, services
in ports, railway stations, hospitals, education and training
institutions, guest houses, constructions and maintenance of
buildings, roads and bridges, export oriented units established
in Special Economic Zone. We may recall that most of the
services proposed for exemption of the existing contract act
are part of the latest submission of the GOI to the existing
negotiation process under GATS.
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V
Safeguard options available with the
government to protect the interest of small
producers and suppliers
Service TNCs are putting all their efforts to bring in
suitable changes in the GATS to safeguard their vested interest.
For example, major associations of global retailers like FTA
(Foreign Trade Association) and European Services Forum
(ESF), which has global retail firms such as Metro, Ahold and
Marks & Spencer as members, have taken renewed initiatives
to introduce a separate agreement under WTO on trade
and investment to safeguard their overseas investments. For
example in a position paper on trade and investment in April
2003, European Services Forum demanded, a legally binding,
comprehensive WTO agreement on rules for investment.
According to that document (ESF, 2003), a WTO agreement
on investment should:
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• Promote scheduling of concrete and specific
commitments by WTO members, to further open their
markets to foreign direct investment.
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India is a larger economy than Thailand with a mature
political system. In the changed global trading environment,
to protect the interest of its small producers and workers
how much safeguard the government of India will be able to
bargain in the on going GATS’ negotiation process, is another
important issue that should be monitored carefully.
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Concluding Remarks
The FDI debate has opened up many issues which deserve
proper attention of the policy makers before the retail sector is
opened up to foreign investors. The findings and deliberations
in this paper reveal that unlike in other sectors, FDI in retail
will have a much wider impact on the economy. Essentially,
organized global retail chains will break the traditional
symbiotic relationship that exists between small producers
and small retailers. Also, in the new retailing format, due to
unequal terms of trade in a monopoly like situation, small
producers and suppliers are likely to suffer most.
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that 30% of equity is held by indigenous Malayans. Philippines
insist that 30% of inventory by value be grown within the
country.
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contribution to the GDP has grown at an average rate
of only 3.7%.23 If this sector is given due attention, and
allowed to take wings, then it could be a source of great
compensation to the displaced workforce from the retail
industry.
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ACORN