The Benefits of FDI In Retail to Indian Farmers and Consumers –Busting the Myths
From the day the Government of India notified FDI in Retail allowing foreign companies to have 51% stake, there has been a flurry of opinions both for and against allowing Big Retailers like Walmart an entry into India. Though most of the opinions have been in support of the move there have been a few voices of caution against the entry of Big Box Retail. Most of the debate arguing why Kiranas won’t be hit or farmers will benefit, are sadly backed by very limited empirical evidence in terms of similar experiences in other countries. Let us look at some the biggest arguments in favor of FDI and examine why they might well turn out to be pipe dreams:
1. Walmart will provide better prices to Farmers
One of the biggest arguments in favor Big Box Retail has been that this will eliminate multiple layers of middlemen thereby giving better prices to the farmers. In theory this does sound very plausible, but in practice by eliminating layers of middleman Big Box retail manifests itself instead as the single biggest middleman leading to an Oligarchy – very few Big Box retailers providing limited choice for both the farmers and end consumers. Empirical evidence in developed countries tells us that in reality the farmers get squeezed by Big Retailers and get paid very poorly for their produce:
– Farmers in Punjab have supposedly benefitted by indulging in Contract Farming for Bharti-Walmart, PepsiCo(Lays Chips) etc. But there have also been reports of big firms entering into contract farming agreements with the farmers and then going back on their commitment when the produce is available cheaper from other sources 1
– Tesco in the UK has been beset with multiple allegations of harming farmers interests. It has been fined 10 million pounds for price fixing of dairy products 2
– In a study of the Nicargaun agricultural market a Michigan State University found prices paid by Walmart are “significantly lower” than those paid by the traditional market9
2. Walmart will not threaten local Kirana stores as they will build stores far away from urban centers
The business model of Walmart in the US has been to build massive stores in the suburbs offering free parking to shoppers. Real Estate availability and low car ownership makes that model unviable in India. That doesn’t Walmart will employ same strategy in India. Look at Tesco in the UK, almost every street/area has a small Tesco store which resembles a local Kirana Shop. Why will not Big Box retail adopt that model in India? Lately Walmart in the US plans to open smaller shops called Mini-Express which resembles to take on local mom n pop stores3
3. Walmart will provide additional employment
One of the biggest arguments in favor of Walmart has been that it will provide additional employment. Entry of big retail is touted to create millions of additional jobs. This again is not supported by experiences in the west. Indian Retail largely dominated by family owned Kirana stores already employs more than 4 million people. In addition to these a significant number of people work in the supply chain and distribution areas. Government only talks about the jobs Walmart is expected to created but does not consider the jobs that will be lost due to shutting down of thousands of Kirana stores. What this means is that in the near future an owner of Kirana store may end up becoming a minimum wage labourer in a Big Box Retail store!
Net effect will only be job losses as various studies show:
– University of California study suggests that for every new retail job created by Wal-Mart, 1.4 jobs are lost as existing businesses downsize or close4
– Hunter College study on the impact of Walmart found a new store kills three local jobs for every two they create5
– With their large entrenched supply chain in China, Big Box Retail will have a devastating effect on local manufacturing can be devastating. Studies indicate US has lost large number of manufacturing jobs to china ranging anywhere between 200,0006 to 1.2 millions7 jobs
– Walmart worldwide employs about 2 million employees for an annual sale of $405 billion. That means a revenue generation of about $200,000 per employee. Indian Retail sector generates about $400 billion annually and employees close to 4 million people. Surely this means lesser number of people will be employed going by global standards
4. Walmart will provide better wages to workers
It is argued that Walmart will help get workers get better pay. This is far from the truth. Walmart is a cost competitor driving down costs of suppliers, farmers and employees to ensure low prices can be offered to consumers and large profits for the shareholders. Walmart is known to provide one of the lowest paying jobs. Empirical evidence and studies show this:
– Wal-Mart’s average annual pay of $20,774 is below the US Federal Poverty Level for a family of four 5.
– Wal-Mart employees earn 20 percent less than retail workers on average.
– Walmart not only drives down wages of its own employees but also reduces wages in supporting industries. National Employment Law Project (NELP) study shows that Walmart’s outsourcing depresses wages In U.S. Warehouses
5. Walmart will bring in much needed FDI
Walmart is touted to bring in the much needed FDI into India by making it mandatory to invest $100 million into the country. This looks to be very good proposition but there are lot of ifs and buts:
– Will this investment be made via Mauritius route to ensure no taxes can be levied on any future transactions?
– Like it happened in the case of Dabhol and 2G scam tainted telecom companies, which were touted as FDI turned out to be a big NPA on Indian banks as the proposed FDI dollars were in reality rupee loans!
– How much of this money will be used to invest in building fresh capacity versus buying out existing Indian loss making retailers? This will help the rich businessmen the most
– Most importantly over the year how much of money from India will be taken away by Walmart as profits for its US Shareholders?
6. Walmart will provide technology
I find this particular argument hilarious. What is the propriety technology that Walmart will bring? Indian IT services firms are some of the biggest providers of technology services to the likes of Walmart. Why cant existing Indian Retailers get access to the same technology?
7. States have the freedom to prevent entry of Big Box Retailers
This is one of the biggest canards being spread by the government. India is a signatory to the Bilateral Investment Promotion & Protection Agreement (BIPAs) which makes it mandatory for the state governments to let the likes of Walmart operate. It simply means if Reliance Retail or Foodworld has shops in West Bengal, Mamata Banerjee cannot ban foreign retailers alone! In addition a Kerala HC judgment struck down the previous Left Front government decision to ban Indian Big Retail under the Shops & Establishments act
If Walmart truly provided all the benefits being claimed why does our government shy away from telling us that Walmart is banned in many big cities of the US like New York, San Francisco, San Diego and so on?
By eliminating middleman, distributors and small time retailers, Walmart has become the single biggest middleman gobbling away all the profits from the farm to the fork, thus helping the founder Sam Walton’s family earn a combined wealth in excess of $100 billion which is roughly equal to the wealth of the bottom 40% of Americans combined. Do we in India want emulate the US and help accelerate this wealth of the Waltons at the cost of our farmers, consumers and Kirana shop owners is the big question.
2. Tesco fined for price fixing http://www.bbc.co.uk/news/business-14473931