Thursday, August 9, 2012

Debate on FDI in Retail

FDI in multi-brand retail: A premature idea

After my article last month (Retail FDI Won't Help, ET, July 13), a number of readers called up to ask if I was against FDI in multi-brand retail. However, this was not the intent of that article. My principal point was that FDI in multi-brand retail is an outcome of a general FDI policy and not the policy itself. I further argued that FDI in retail is in any case limited by lack of reforms in agriculture so that even if it was permitted, no FDI would be forthcoming. The general point then was that excessive focus on FDI in multi-brand retail would seem to indicate that it is the principal instrument of reform, which it certainly isn't. The political opposition that would follow (which it has!) would then give greater ammunition to opponents of the reform process.
In other words, FDI in multi-brand retail (at the moment) is bad politics and bad economics. To further argue that it is up to the states to implement the policy begs the question as to why not then let the policy come from the states themselves. Yet, the issue of FDI in multi-brand retail is important enough to merit a closer look at some of the suggested pros and cons of such an outcome. This article is an attempt to do just that.
Argument 1: FDI in multi-brand retail will reduce inflation. The main cause of inflation today is shortage of agricultural production particularly in processed foods and vegetables (though, for some reason, the RBI does not think so. It would seem the RBI governor only visits markets when he wants a haircut!).
Hence, this argument goes that FDI in multi-brand retail will eliminate the 40% wastage of food grain that currently occurs. Apparently, foreign investors will provide the warehouse storage capacity that is currently lacking. In analysing this argument, it must be remembered that, currently, the Indian corporate sector is more or less free to undertake (notified) contractual agreements with farmers for supply of output.
Yet, after almost a decade of domestic organised retail of agricultural products and huge tax breaks for investment in warehouse facilities, such facilities have failed to materialise. Why then have domestic agents not found this investment profitable? And why is it expected that foreign investors would do so? As I argued in this column last month, lack of this investment is more due to the controlled nature of agricultural production than lack of foreign investors.
Argument 2: FDI in multi-brand retail will give more remunerative prices to farmers. About 95% of farmers have small farms of one hectare or less. Presently, the APMC Acts require the sale and purchase of farm produce in government-designated markets. So, we have the peculiar situation where the corporate sector is free to contract with farmers anywhere while farmers tend to sell in regulated markets.

FDI in multibrand retail will not further reform agenda

ET Bureau Jul 13, 2012, 05.24AM IST

By: Manoj Pant
The crisis of the euro, a current account deficit of over 4%, double-digit inflation, corruption in governance and a failing political system. It would not be unfair to say that these factors have combined in varying degrees at different times to lead to the conclusion that the globally-acclaimed Indiagrowth story seems to be heading for an unhappy ending.

Many have labelled this - unfairly, I think - as India's second crisis comparable to 1991 when the reform story began. Backed by the media, the economic reformers have argued that much of this is due to the 'incompleteness' of the 1991 reforms. Many have argued that this crisis should be used to take reforms forward.
The direction? FDI in multi-brand retail and pension funds, the general goods and service tax and the Direct Taxes Code. In this article, I will focus on multi-brand retail. This has been in particular focus because, presumably, permitting FDI in retail trade will improve the unfavourable investment climate. I will argue here that while it is true that economic reforms have been incomplete, FDI in retail trade is no solution, and is only a symptom and not the cause of incomplete reforms.
To tell my story, it is necessary to start with the economic reforms of 1991. The background of the balance-of-payments crisis is well known. The main objective then of reforms was to eliminate the administrative shackles of the licence raj. How this was achieved is crucial to understanding the story I am trying to tell. What were the main features of the 1991 reforms? It is useful to do a sectoral check. Here, the main sectors where reforms took place after 1991 were the external sector, industry and the financial sector.
In the external sector, the two principal steps taken were to reduce tariff levels and to free the exchange rate from administrative control. In the case of tariffs, a system of quantitative, or administrative, restrictions was replaced by equivalent tariffs that were then progressively reduced under WTO agreements. In the same way, administrative restrictions on exchange rate movements were removed as the rupee was allowed to devalue in stages over the following years.
In the industrial sector, the major change was the Industrial Licensing Policy, 1991, which removed administrative control of production, the licence raj, enshrined in the 1957 policy. In the same vein, external competition was encouraged via foreign direct investment (FDI) that was given preferred status vis-a-vis portfolio investment. Finally, financial sector reforms took the form of the broadening of the market for equities and opening up the state-owned banking sector to competition from both foreign and domestic banks.
Since 1991, then, reforms have taken the form of further decontrol along the lines indicated above. The most crucial feature of these reforms was that they only required legislation by the central government. And herein lies the problem.
The major sector left out of the reform process was the agriculture sector. This is true whether one talks of corporate links to farmers, reform of the antiquated government purchase system (the APMC Acts), land-use issues and so on. This was because while the other sectoral reforms could be blamed on an uncaring central government, agriculture was a state subject. Since legislators are voted in at the state level, any reform in the agriculture sector could have major political implications. Some reforms were necessary. But who would bell the cat?
Now consider FDI in multi-brand retail. The main argument is that it would lead to creation of storage facility for food grain so that the current 40% wastage in government facilities would be ended. This would also increase market supplies and, hence, help in combating inflation. However, it is not clear why the domestic players in multi-brand retail have not developed these facilities - if profitable - over the last decade or so, and why foreign investors would suddenly jump into this high-cost activity. The ability to buy food grain for stocking would also be stymied by state APMC Acts - still applicable in most states - whereby private buyers are pre-empted by government managers as grain can only be sold in designated outlets. There is the additional problem of a ban on inter-state movement of food grain. But removal of these bottlenecks requires major reforms in the agriculture sector and this is the domain of state governments.
The bottomline? It is necessary to remove administrative controls on the agriculture sector that today benefit only the large (politically well-connected) farmers. As in the other sectors, this will create the economic conditions whereby issues like FDI in multi-brand retail will find less political resistance. The Indian growth story rests on its demographics and is alive and kicking. To argue that this needs FDI in multi-brand retail or sectors like pension funds to kick-start is poor understanding of macroeconomic fundamentals.
Above two news articles are by Manoj Pant published in ET.On this subject my views submitted on blogs were as under

If a person gives alms to a beggar everyday for years together, it becomes a way of life for the beggar. Beggar is thus used to and addicted to getting easy money without making any labour to get it.

If all of a sudden the donor stops giving arms due to his own fiscal problems, the beggar may claim the alms as a matter of right, claim the alms from donor threaten the donor of dire consequences and ultimately blame the donor for making his life miserable.

Similarly after 2008 subprime crisis which originated from USA and European countries, government of India headed by Great economist Manmohan Singh donated billions and billions of rupees to business men in the name of stimulus package. Several tax concessions, subsidies and interest relief were provided to businessmen, CRR and SLR were reduced to enhance liquidity in the system and extended all types of relaxation to foreign investors to increase Foreign Direct Investment.

As a result of unwarranted stimulus package extended by GOI to corporate sector to give a boost to the economy , businessmen as also bankers  are now addicted to same and therefore interested in continuance of all relaxation, reliefs and subsidies and even more  enhanced stimulus package notwithstanding the fact that the same has proved to be counterproductive, self destructive and finally suicidal act for majority of Indians in a span of a few years only.

Now when the financial crisis produced by the stimulus package is trying to disturb the economy badly and when government of India is trying to curtail the stimulus package gradually, the same business men community who were addicted of getting alms in way of tax relief, interest relief and subsidies and who were tuned to live lavishly and spend freely are now without any hesitation demanding continuance and increase of alms in the name of stimulus package.

Businessmen who accumulated wealth equivalent to hundreds of crores of rupees in last few years without making hard labour in the same proportion are now demanding same alms from the government, blaming government of policy paralysis and finally accusing government of creating current financial crisis.

It is pity that India which had nourished a dream of becoming number one in the world, the same India after 60 years of freedom has become dependent of FDI for survival of Indian economy. Manmohan Singh led government is so much hungry of FDI that it is ready to discard Mamta led Trinamool Congress and admit corruption ridden Mulayam , Lalu and Mayawati in UPA for survival of not the Indian economy but for survival of Congress Party and UPA government.

Manmohan Singh who is considered as Doctor in Economics has absolutely failed to make India self dependent, self reliant and self sufficient. He failed to increase domestic savings and domestic investment to give a boost to agriculture production, industrialization and in creating employment opportunities in India. It is pity that Indian talent are going abroad to boost up the economy of foreign countries and Indian businessmen are now giving preference to investing in foreign countries to boost their own profits.

Manmohan Singh led government may claim of helping poor by MANREGA but in fact it failed completely to create permanent source of income for rural or urban poor at their location. It failed to provide quality education and quality medical treatment at affordable price to economically backward Indians. It failed to provide even pure drinking water, permanent electricity and sanitary arrangement to 100 billion Indians. It is ridiculous the policies which are solely responsible for growing sickness in the economy are being prescribed as medicine to cure the sickness. It is bad luck that still MMS is proud of his policy of reformation and ready to provide the same as medicine to critically sick economy

 Poor and rich both are now addicted of getting subsidy, one for their survival and other for their growth. Government is however hungry of FDI not for upliftment of standard of living of Indian poor or to boost up the profitability of Indian businessmen community but to strike at the root of middle class families whose survival depends on retail business . After all it is only middle class who has to bear the brunt of fiscal crisis , price rise, inflation, corruption and all negative features of Indian economic system. Obviously the great economist MMS is bent upon adding fuel to fire , he is neither bothered of pitiable position of Indian poor nor frustration growing in Indian youth due to shrinking employment opportunities.

The government accused of rampant corruption, policy paralysis and of being anti poor is unfortunately busy in dividing Indians by extending favour to some caste or community and depriving some others by using economic powers invested in it. Government uses secular card or quota maha-mantra to keep best performer like Nitish Kumar, Narendra Modi like persons out of power. Government talks of secularism when people of India talk of price rise, employment opportunities, safety, and corruption free administration and real development.

It is pity that even opposition political parties due to their historical ego and conflicts are divided on petty issues and hence fail to stop present government taking anti national and anti people decisions.

No solution is  as such possible in near future from the present government so far the problem of price rise, inflation , fiscal deficit , unemployment ,corruption etc are concerned.

BSNL is incurring loss and private telecom service providers like Airtel and reliance are earning huge profit. Why?

Coal mines allotted to private business houses at throw away prizes have earned huge wealth but Coal India Limited is on the verge of booking loss. Why?

Private banks are earning higher and higher profit and mobilizing higher and higher business but government banks are booking nominal profit that too by concealing  bad assets and by not making desired provisions on staff cost or for bad assets. Why?

Railway having monopoly business is also booking loss. Oil companies are booking loss but by dint of government sharing the burden shows profits. Why?

Inspite of best economist leading the country, inflation is unmanageable, price rise is beyond control, fiscal deficit is beyond control, current account deficit is growing, unwarranted imports are allowed and last but not the least corruption is increasing without any restrain or without any effort to stop it. Why?

Government says loss making branches should either be brought in profit or closed within three years of its establishment. Why public sector undertakings incurring loss consistently for years together are not closed?

Government says unemployment rate has come down as per survey conducted by labour department. May I ask them a question, “Whether labour offices in all districts are performing the task assigned to them honestly and sincerely?”

Are all unemployed youth registering their cases with employment exchanges? If not, how government has concluded that unemployment growth rate has come down?

Has government failed in ensuring equi-distribution of GDP growth said to have been achieved despite global slowdown and global slowdown?  

Are subsidy sanctioned in favour of common men in form of fuel and fertilizer subsidy more than subsidy allowed to rich class exporters, importers and industrialist?                                                                     

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