Jaideep A Prabhu
Vaad-Prativaad: The FDI ‘Reforms’ are a Boost to India’s Economy II
This article originally appeared in CRI content has now been subsumed in The views expressed here are personal and do not necessarily reflect those of the editors of

Welcome to the second round of Vaad Prativaad (Round I may be found here).

FOR THE MOTION: Ritwik Priya

I thank Mr Muthuraman for his opening salvo in this edition of Vaad-Prativaad.

I believe it’s fair to summarize his views as following – retail is special, there’s a need for gradualism, and hence 51% foreign ownership directly is too much. He argues through six specific points, which I shall address one by one, but let’s begin by observing that even if we somehow agree with his premises, his conclusion does not follow.

Mr Muthuraman’s first argument is that because retail employs a large number of people, displacing them would create a large pool of unemployed masses who would be difficult to re-train and re-deploy. Which industry does this most apply to, even more so than retail? Agriculture. Does Mr. Muthuraman also oppose mechanisation of agriculture? Does he insist that farmers who, for example, buy John Deere tractors are responsible for the displacement of those who continue to till their lands through more manual means and hence we think of a gradualist approach to letting farmers buy tractors?

About 60% of India’s labour force is now engaged in agriculture. A decade ago, it was much higher, closer to 70%. Where did those 10% people go? Who re-trained & re-skilled them? The answer is : the rest of the economy. This is for 10% of the total labour force of India. By comparison, the 10% of retail industry displacement that Mr Muthuraman visualizes is rather miniscule, irrespective of how large it looks when compared to the IT industry. We could slice and dice how many people which sector absorbed from the agriculture influx, but that would be useless in predicting which sectors will absorb displacement of retail industry workers. The best we can do is to repeat : the rest of the economy.

Note that for the 10% displacement in 5 years scenario raised here, retail productivity would have to grow at 2% over and above growth rate of retail, which seems prima-facie unlikely and depends strongly on by how much retail sales themselves grow. Malthusian visions of big, efficient industries displacing an unskilled and unprepared workforce are fundamentally contingent on pessimistic projections of growth. Mr Muthuraman provides us no reasons to believe that retail productivity will outstrip retail growth by 2% if foreign players are allowed to come in.

Mr Muthuraman’s second argument is that most of the collateral sectors are open to FDI anyway and it’s only last mile retailing that’s left, so allowing 51% FDI in retail does not achieve much. Could be. But he underestimates the fact that the big name retailers, for all their efficiencies in running back-end supply chains, ultimately thrive on the fact that they’re able to offer the most sasta-sundar-tikau interface to the customer. You cannot expect a Wal Mart to be purely a logistics player in India and expect to realise efficiency gains from that. The kind of piece-meal treatment of each part of the chain that Mr. Muthuraman engages in is incomplete.

But even if we grant his argument for a moment,  so what? Perhaps the value chain benefits as conventionally argued for are overstated. That something is overstated does not mean that it is not important enough, taken on its own. Unless Mr Muthuraman makes the case that specifically because of this policy being enacted right now, some other things that were more important and would have been done will now no longer be done, it is hard to see why the mere overstatement of FDI’s benefits is grounds enough to delay it.

Mr Muthuraman’s third point confounds me. Domestic credit penetration is indeed lower in India but this is not in itself any cause for worry about working capital financing – it simply means that Indian households are not neck deep in mortgage debt. Remember that working capital is turned over multiple times in a year and at any given point in time only constitutes, roughly, the amount of inventory+trade credit outstanding in the economy. This is scarcely more than 2 months of sales, or about 15% of GDP. Second, why does he think that domestic retailers should be borrowing in foreign currency abroad to be competitive? Fx risk is deadly and surely unnecessary for working capital financing of retail, which is by nature local and short term.

His argument about cost of funds is a fair one. Trade credit is nothing specific to large international chains – many consumer goods manufacturers in India extend credit to their distributors who in turn extend it to their retailers, who may in turn even extend credit to their customers. But yes, cheap funding costs are one of the competitive advantages of any large business. I’d argue, however, that this is more of a threat to the existing Indian multi-brand chains, which have a similar business model as say Wal-Mart and may get out-competed on cheap funds, rather than smaller retailers, whose business model is fundamentally different and relies more on being able to reach vast sections of semi-urban populations close to their homes. As I argued in my opening piece, the distributor/wholesaler/end-retailer nexus on which Indian retail relies is unlikely to be broken, for its competitive advantages lie not in getting cheap funding, but in reaching far-flung households and getting business from them based on informal credit relationships. This is unlikely to be replicated by big box retail, domestic or foreign.

Mr Muthuraman’s fourth point is about agricultural procurement and it’s a strange one. How exactly does an APMC monopsony get replaced by a Walmart one if Walmart is allowed to enter multi-brand customer retail? Is that politicaly feasible at all? Will Carrefour allow that to happen? Will Reliance, or Future Brands? Does he really believe that foreign players can manipulate Indian politicians better than domestic conglomerates? Does he have a single example of that happening in India? India’s corporate history is littered with domestic businesses that have lobbied their damned hardest to stack the deck in their favour and keep all sorts of competition out – automobiles, infrastructure, media, you name it. Coca Cola, instead, has to fight it out with Pepsi, just like it does everywhere in the world.

His points about many other things needing reform are well taken. I just fail to see how they’re relevant to this debate.

Mr Muthuraman’s fifth point is really many points, all pointing towards the competitive advantage of MNC big-box retailers over Indian ones. Most of them are well taken, though through all of them one wonders – who is he really worried about, the small retailer or the big-box domestic retailer? Many specific ones show somewhat questionable reasoning. My objections:

  • What is predatory about ‘predatory’ pricing? The consumer benefits, increasing her ability to purchase more goods, many of which  will be bought in smaller shops, depending on what is being bought. The long term-ism of foreign retailers, if true, is actually a benefit. 20 yrs of cheap prices and greater efficiency will create so much growth in the economy that all those displaced by MNC retailers will probably be absorbed by other sectors multiple times over.
  • Walmart’s cost of equity (or even debt) capital will change in response to its India operations, much the same way as if it were financing its India operation as a separate project – this is basic corporate finance. Sure, it may still be cheaper than Indian retailers, but this has to do with Walmart and what it signifies, not the country of its origin. Indeed, if anything, Walmart’s financiers are in all probability likely to overstate the risks of WalMart competing in a market that’s unlike any in the world and that it doesn’t quite know.
  • Yes, it has superior expertise in procurement, but that’s the whole point! Why do you want to protect the less competent purchase manager at Reliance Retail, Mr Muthuraman?
  • Regulatory oversight – interesting that Mr Muthuraman mentions tax evasion and interest free loans, given the recent spate of home bred, Indian, politically connected, on all sides of the political spectrum, business deals that have come under the scanner recently for the same. He has a surprisingly romantic & patriotic notion of the comparative ethics of Indian and foreign businesses, which hardly seems borne by evidence. Is it hard to regulate and tax MNCs? Perhaps so. Have homegrown businesses proved any easier? Doubtful. We will need to improve cross-border tax coordination – the Vodafone case he cites is a good example – and need to reform the gaps in our laws, sure. But I find it remarkable that every other instance of market power gouging that Mr Muthuraman cites comes from domestic players. His own examples, I’d argue, suggest that his fears may be unfounded. I think it’s safe to say that while we strengthen our cross border tax and legal system, we shouldn’t be worried by speculative claims about big MNCs gaming the system – if anything, they will mostly just ensure that the domestic ones aren’t gaming it.

Indeed, much as I’m loathe to invoking dead 19th century economic journalists with simplistic views of the world, Mr. Muthuraman’s points remind me so much of Frederic Bastiat’s Candlemakers’ petition that I can’t help but link to it here.

Mr Muthuraman’s sixth point is a politically partisan point and basically suggests that no government should make a decision that its successor will overturn. Given India’s political rhetoric, this would suggest that no decision should ever be taken. Given India’s administrative continuity, however, I’d say his fears are largely unfounded. But I’m not particularly concerned about this point – if we need to delay this from now to 2014, we can do so. But I’d be interested in seeing if he will be willing to support the initiative immediately if Congress/UPA was to come to power again in 2014, or will it then mean 5 more years to get an even more clear mandate.

To summarize, while I may even concede Mr Muthuraman’s point about gradualism based on elevating the weight I place on the potential risks and reducing the weight on potential benefits by a little, it’s not at all clear to me how 51% foreign stake with insistence on investment in physical infra, and leaving the final decision to the states, is non-gradualist or radical. If anything, it is far too incremental, unlikely to lead to the kind of growth spurt that we need.

I wouldn’t be very impressed by the Chinese experience, by the way. China is a known hot-bed of state patronage of domestic business, shown most admirably by Andrew Wedeman in his book Double Paradox. Long time-frames of decades for foreign entry are more about protecting the domestic big-boxers than about protecting the small guy.

Indeed, if I was allowed to make another macroeconomic point in a largely micro debate, the development experience of Latin America, India & East Asia shows, crudely speaking, that of the two most commonly used forms of mercantilist industrial policies, import substitution fails and export subsidy works. Protecting the local retail industry is precisely import substitution. It is neither good for the economy at large, nor for the retail industry itself.

I’d like to see Mr. Muthuraman address the case I’ve made for human capital development on the job, my critique of the inherent Luddite low-growth logic of his fears for the small guy, and  the speculative, protectionist nature of his comparison between Indian & MNC big-box retailers directly.

In conclusion, I’m willing to accept many premises of Mr Muthuraman’s arguments. I just don’t think his conclusions follow.

 *        *        *        *         *        *        *        *


The two phrases “The default decision should be to allow!”   and “ The sector in question is irrelevant” betrays the analytical and logical aspect of the main argument and highlights the ideological position of the author!  Unless one appreciates the unique nature of retail industry in India, there is no basis for arguing for or against FDI in this sector. Consider this: India has the world’s highest per-capita  number of retail outlets! Contrast this with other per-capita statistics – Milk – 134th rank in per-capita consumption; Power – India is 2 KWhr per capita vs 20+ KWHr per capita in Developed countries; Steel – India is 7 kg per capita, as against 350 kg per capita in Developed countries! If we think for a minute why in Retail outlets alone, India will lead the world, the answer will make one appreciate the importance of “protection” that this industry deserves. In India, retailing is NOT run as a business, but more as a livelihood for a large section of population!

Unique nature of Indian retailing industry

The author, arguing FOR the motion, says that the default decision should be to allow FDI! No arguments here. FDI in telecom, aviation, television, refrigerator, automobiles, all are welcome! The relative sizes of employment generated in these industries are small and the displacement of labour due to “creative destruction” of enhanced competition can be accommodated in other sectors quite comfortably! But what the author does not appreciate is the unique nature of retail industry in India. It is, in 90% of the instances, not a “business” in the true sense of the word, but a “livelihood”. Taking an ideological position and stubbornly argue without taking into consideration specifics at hand can be disastrous. A respected opinion-maker, Atanu Dey says thus (which mirrors the author’s view that the default decision should be to allow). “Let me put this very politely. Those who are against investment are idiots. Note: investments. Without adjectives.”! Is this so? Can we have FDI in DRDO? In ISRO? In NPCIL? Stuxnet, anyone? So, I would urge the author to disrobe his ideological position and assess the specific impact of FDI in Retail before forming an opinion, for or against!

Impact on retailers

The next argument that the author makes, arguing FOR the motion, reads “So what will be the impact of this policy on retailers? The short answer is, we don’t really know. But we have clues that we need not be overly concerned. Even after many years of growth, modern trade still accounts for less than 5% of India’s retailing.” Is that so? Conflating organized retailing and FDI is the most common blunder most proponents of FDI in retail make, without fully understanding the nature of competition! As I said earlier, this is comparing street bully with a 800-pound gorilla! FDI has, in several industries, displaced local players – Where are BPL, Solitaire, Uptron, Keltrons of the world? But I don’t have a drop of tear to shed for them. It is a natural process of creative destruction and I am sure the labour in these businesses mostly got absorbed in other sectors which were rapidly growing; the entrepreneurs may have lost their shirt, but that is the risk that they took in running a business! Now, contrast this with Retail industry – this is such a vast industry, that even 10% displacement from this sector is more than the entire population of IT & ITES employees in India!  Is it worth the risk when the author himself says “we don’t really know the impact”?!

Eliminating middlemen

The author also conflates, erroneously, the bunch of local distributors, dealers and wholesalers with the retailers, who run the shop! The retailers in India will have no problems if all the middlemen are eliminated by the global giants, who can still operate “Cash and Carry” model of wholesale trade; in fact, this model is already quite successfully implemented by Metro, Walmart (thru JV with Bharti), Tesco, etc.  FDI in these sectors, even 100% FDI, should be welcome with a red-carpet. Improving supply chain efficiency, eliminating wastage in food products, etc. are all much developments that India can ill-afford to postpone. But here again, clear rules of the game would be a pre-condition to avoid the monopsony situation that we discussed in the earlier post.

Impact on farmers

On the farmers, the author says thus: “As for the farmers, they currently operate in a supply chain that passes only about one-third of the final prices back to them. This is substantially lower than the same figure in more developed economies dominated by organized retail.” Can this statement be substantiated with data?! Answer is a big No!  The channel margin in United States is atrociously high. In fact, channel margins in India are significantly lower than in the Western economies.

Refer Page 41, tables A4.1, 2 & 3. The farm gate price to the retail price ratio is 4x for Beef, Chicken and Egg (these are the only products covered in this study). Are these higher or lower than the “one third of the final prices” that author quotes in Indian context? An anecdotal evidence here: I have personally witnessed Tirupur garment manufacturers, who pack the final garment with MNC retailers, are asked to affix stickers in these garments with prices of USD 29.95, USD 39.95 etc., when the price they get are Rs. 40 and Rs. 50 per piece!! Even if these are sold on “Everyday Low” prices at the retailers, the mark-up is 10x or 20x, and not 3x! A much more detailed study on segment-wise channel margin across various product categories have been presented by Mr. Shekhar Swamy in this paper. (Refer Page 4 of 23)

Ideological position may prove disastrous

This quote by the author proves that the motivation for allowing FDI in Retail is more ideological than logical: “Again, the sector in question is irrelevant. We want more hard assets and more competition all round. We should have FDI in retail, in aviation, in media, wherever. At the very least, we have no business disallowing it.

Just substitute the word “FDI in Retail” with “FDI in agriculture” to see the fallacy of the argument that the author makes in favour of FDI. Imagine FDI is opened up in Agriculture, citing the same reasons as “Investment is good” “default decision should be to allow” etc. And some large multinationals enter the scene to gobble up farmlands, brings in large automated machines for all the legs of the farming lifecycle, and in the process displaces some 20 crore farmers (out of 26 crores employed in agriculture) out! Won’t we see daily riot on the streets? Even if such FDI in agriculture allegedly benefits the consumers at large by reducing the cost of farming through scale efficiencies, is this an acceptable proposition? What do we do with such large sections of population if they are rendered unemployed?  FDI in Retail, if done in the current form, has the same potential to displace large sections of population employed by this sector. China has shown us the way – we have to do it over a prolonged period, assessing the impact of each small move on all the stakeholders, get buy-in from the stakeholders and proceed cautiously!

India is not unique in being a “Protectionist”

Every country tries to protect some of its “key” sectors – energy for United States, which banned Chinese company CNOOC from bidding for Unocal citing security reasons! Agriculture for Japan, where you cannot import even a morsel of rice! Mining for Indonesia, Fisheries for Australia, the list can go on. Please visit this link.

This clearly proves that EVERY country even among the most developed OECD has at least a few sectors that have restriction on foreign ownership. It is because certain sectors are holy cow for those countries. It is Agriculture and Retailing for India; FDI is welcome in every other sector which does not threaten national security.

Risk taking, at whose cost?

The author notes “It is not my contention that we know for sure that balance of judgement lies necessarily in favour of small retailers or farmers. But we have enough clues to be optimistic.” Having seen the relative size of retail sector vis-à-vis other sectors of the economy, can we afford to stake the lives of such a large population based on certain ideological prescriptions? Can’t we see the data presented in other countries and assess the impact?

To sum up, I agree with every point that the author makes – default decision must be to allow, more the investments the merrier, etc. except that these theoretical constructs and ideological positions should be juxtaposed with the ground reality for each specific sector. And the author’s arguments are high on rhetoric and shallow on data points supporting the arguments to defend FDI in Retail. Hopefully, the rejoinder will address some of these lacunae. Or even better, the author is convinced based on the data points, and we all can witness a change of heart and mind here! It doesn’t cost much to hope for the better, does it?