In keeping with the spirit enunciated by its founder-leader Arignar Anna of ‘extending hand for relations and raising voice for rights’, DMK high-level Executive Committee meeting presided over by Kalaignar adopted two important resolutions on matters of national importance, urging the Central government 1.to reject in toto the recommendations of Kelkar Committee on measures for expediting economic reforms and 2. To reconsider the decision to permit Foreign Direct Investment (FDI) in retail sector.
As far as Kelkar Committee recommendations are concerned, within hours of the submission of the report, the Finance Ministry declared that some of the recommendations in the report are contrary to the government’s declared objective of “sustained and inclusive growth”.
“The government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable, and measures must be taken to protect the poor and vulnerable sections of the society,” said Arvind Mayaram, Secretary, Department of Economic Affairs.
The government has also sent indications that it is not likely to relent on the food subsidy front. “It has reiterated its intention to implement the promise of food security for all,” Mayaram said.
The Food Ministry will oppose the Kelkar Committee’s report, which has recommended heavy cuts in subsidies, Ministry sources revealed.
The Kelkar report has recommended that subsidies should be eliminated to stem the dwindling finances. According to the report, half of subsidy on diesel should be eliminated during the current financial year, and the rest in the next fiscal. As for kerosene, the report recommended a cut of 33 per cent in the ongoing subsidy.
The report also argued that the planned food guarantee scheme would enlarge the fiscal deficit problem. It warned that huge subsidies would push the fiscal deficit to an unmanageable 6.1 per cent of the country’s gross domestic product (GDP) in 2012-13.
But sources said that the food ministry would convey its opposition to the recommendations to the Finance Ministry.
The sources said that Congress leadership was eager to rollout the Food Guarantee Scheme as soon as possible as it considered the scheme vital to enhance its image. The sources added that the Food Ministry was of the view that harsh fiscal measures couldn’t be taken on issues which concern the poor.
It may be noted here that the food ministry has already compelled the government to abandon a planned move to increase the price of PDS sugar for BPL (below poverty line) families from Rs 13.50 to Rs 24.
Besides on subsidies, the recommendations of the Kelkar Committee on direct and indirect taxes are rewarding the rich with tax cuts while putting the burden on the middle classes and the common people by cutting their savings and the returns earned from them. Among the sops to the rich, corporate tax rate is to be reduced to 30 per cent for domestic companies and the tax on dividends withdrawn. The richest sections will need pay only a 30 per cent income tax.
With the tariff on imports to be brought down to a maximum of 10 per cent in a short span of time, apart from attacking domestic production, customs revenues would be adversely affected. Added to this there would be the revenue loss from the reduced direct taxes. Overall, the recommendations would further intensify the decline in the tax-GDP ratio.
The Kelkar Committee’s recommendations are iniquitous as it seeks to equate different types of tax exemptions. Exemptions on small savings and house construction loans that encourage savings and housing investment by the middle classes is equated with the tax concessions and exemptions that benefit the rich (such as export earnings). Exemptions should be reduced or done away with only in the case of profit earners who are not being taxed even though they derive much benefits from facilities provided by the State at low or no cost. At a time when interest rates are falling, doing away with tax benefits aimed at encouraging savings will adversely affect the household savings rate and make savings difficult for the middle class.
The recommendation of an agricultural income tax to deal with the revenue loss that would accompany the other measures is to evade the problem. First of all levying of an agricultural income tax is a state subject and cannot be a means to neutralize Central revenue loss.
Hence, the DMK has demanded the Centre to reject the recommendations of Kelkar committee in toto.
Notwithstanding the widespread opposition to FDI in multi-brand retail trade, the government has gone ahead with the notification. The rules announced by the government for FDI in multi-brand will serve the interests of MNCs like Wal-Mart, TESCO and Carrefour. The investment floor of 100 million dollars (Rs 550 crore) is insignificant for the giant retailers like Wal-Mart which are multi-billion companies.
The restriction that foreign retail outlets should be in cities with over 10 lakh population is also irrelevant because these are precisely the urban centres which the MNCs want to access as they are the most lucrative segment of the market. “Furthermore, the rules provide that in states/union territories which do not have cities having a population of more than 10 lakh, foreign retail outlets may be set up in cities of their choice.” Thus foreign supermarkets can be set up in all parts of the country and in a wider range of urban centres.
The condition for making at least 50 per cent of the investment in ‘backend’ infrastructure is being cited to argue that this would lead to more cold chains and other logistics, benefiting the farmers. International experience has, however, shown that procurement by MNC retailers do not benefit the small farmers. Over time, they receive depressed prices and find it difficult to meet the arbitrary quality standards.
Domestic interests will be harmed by the dilution of the conditions set for FDI in single-brand retail. Earlier, the rule was that for FDI above 51 per cent in single brand retail, there was a mandatory sourcing of at least 30 per cent of the value of products sold from Indian “small industries/village and cottage industries.” Now this has been diluted. It is stated that instead of mandatory sourcing it is “preferably” from small and medium enterprises etc. Further, the definition of small industries has also been done away with.
Moreover, in India, next to agricultural and handloom sectors, retail sector offers traditionally the third largest employment.
The unorganised retail trade in India represents the traditional, community-centric, low-cost … employment intense retailing that includes, but is not limited to, provision shops, owner-run-general stores, paan-beedi shops, convenience stores, and hand-cart and pavement vending. In this model a whole family works in one shop and a whole community is engaged in the trade in a defined area. Most advocates of corporate … and retail firms … ignore this critical contribution of the existing system to the Indian economy and society (emphasis added). This “multi-layer retailing is the most decentralised economic activity in India after agriculture. Second, it constitutes almost 98 percent of the total trade with an estimated 12 million outlets. In contrast, organised trade accounts for just 2 percent. Third, it is the largest employment provider after agriculture, employing an estimated 40 million people”. In contrast, the world’s largest retail chain, Wal-Mart, employs just about five lakhs. Fourth, being “self-employed … with their families”, this activity comprises “120 million people”.
It is “retailing that continuously generates … huge community-based entrepreneurship”. And then “it contributes over 14 percent of India’s GDP, while all the companies in the BSE 500 Index, put together is some 4 percent”. Also that the “unorganised retail segment has been growing at an average rate of over 8 percent a year for the last eight years (1999-00 to 2006-07). … second only to construction …” Let us consider seriously that “if this social capital link to retail trade is unsettled, the entire distant and remote supply chain will suffer over a period, disturbing the social equilibrium and the organic social links that have evolved over … centuries”.
Walmart entered in Austin neighbourhood of Chicago in 2006. And by 2008, some 82 of the 306 small shops had closed down. Further, the Economic Development Quarterly study found the closure rate around Walmart location at 35-60 per cent. Such studies in the U.S. reject the assertion that FDI in retail does not hurt small shops. On job creation, a January 2010 report titled ‘Walmart’s Economic Footprint’, prepared for the New York City Public Advocate, says that “Walmart kills three local jobs for every two it creates”. Jayati Ghosh, an eminent Indian economist cited by Karan Thapar, asserts that “one Walmart store in India will displace 1400 small retail stores costing 5000 jobs”. This, too, is dismissed by the government as meaningless.
As for Walmart offering better prices, please recognise it does not buy or pay for goods over the counter. It purchases the nation’s next harvest in futures market and fixes farm prices. It also imports cheap goods and destroys local production like it has done in the U.S. And an outstanding example of this is provided by President George W. Bush, who gratuitously observed “that rice prices had gone up because newly prosperous Indians had begun eating more”. In truth, as detailed by USA Today (April 23, 2008) and CNN (April 24, 2008) the “California Rice Commission and USA Rice Federation” denied there was a “shortage of rice”, explaining that it was because ‘Sams Club’ (Walmart’s wholesale division) was holding ‘huge stocks’, and ‘pushing up the prices’.
Two government reports — of the Planning Commission Working Group on Agriculture for the XI Plan (2007-2012), and the 19th report of the Standing Committee of Parliament on Food (2006-2007), to Parliament — themselves nail the lie that Walmart will link farm-gate to its gate and make Indian farmers rich.
There is then that assumption that this variety of capital inflow is the answer to our present trade and current account deficits. First, this is neither true nor tenable. The trade account deficit of about US$150 billion and the current account deficit exceeding 3 per cent of GDP is very alarming and may lead to a balance of payments crisis of much graver nature than the 1990 position. It is this continuous pressure on the “trade account and the sudden withdrawal of funds by FIIs from the stock market that has weakened the Indian Rupee”, (Rs. 16 in 1991 to as low as Rs.50 per U.S. dollar), resulting in a “devaluation of more than 300 per cent”, thus becoming one of the major causes of imported inflation in the country during the past two decades.
When it comes to FDI in retail, the beneficial impact on the common man is altogether less obvious than in the case of lowering the diesel subsidy. What FDI in this sector may be expected to do is to take the shopping experience in India to the next level. Surely, cavernous supermarkets make it easier to shop for those with deeper pockets. Precisely because the supplier caters to this cohort the quality of the groceries may be expected to rise. In fact, we have already seen this happening, even without FDI, with organised retail spreading in India. But those on a daily wage and no ready cash are unlikely to patronise these suburban behemoths. They may be expected to prop up the provision store with its infinite capacity for apportioning their stuff to suit the customer’s purse and willingness to extend credit. So the Opposition may well be crying wolf over the imminent disappearance of the corner store.
But the government’s claim of a ‘win-win’ with higher prices for farmers and lower prices for customers with the advent of FDI may be somewhat exaggerated. For precisely because the large retailer must cut through the supply chain to deliver this outcome, there would be some displacement in the middle. The government counters this reasoning by pointing to investment at the backend, in cold storage and such. This is possible of course, but we would want to wait and see the full combined effect once all effects have worked their way through the economy. Some part of the corner-store complex will survive purely because there are too many poor people in this country yet, generating a substantial demand for low quality food with lower mark-ups.
It is when it comes to inflation though that the present round of announcements by the government has little or nothing to offer. The suggestion, first made when the proposal was mooted some months ago, that FDI in retail would dampen inflation is difficult to fathom. The source of the current inflation is a veritable excess demand for vegetables and a manufactured excess demand for the principal foodgrains, in the absence of a universal PDS all over the country.
It would be appropriate to conclude by asking whether the government makes too much of foreign investment, desirable as it is. With respect to its heroic recent announcement, there is the issue of the suppliers’ response. Walmart’s Asia President Scott Price is reported to have already stated “we are not in any rush” to enter India. But there is a query more general than the likely response of foreign investors to the overtures being made presently. In the two decades since 1991, India has not attracted much FDI, giving us an idea of what may be expected in a future with or without FDI in retail. Some perspective is to be had from looking at the Chinese experience. For an idea of the relative roles of FDI and domestic investment in generating growth in that country, note that FDI as a share on the domestic product had peaked in 1993. It was only 6 per cent even then, and has declined progressively since to a figure less than half of it. This suggests that China’s double-digit growth cannot be explained by alluding to the FDI it attracts. Is our own government overrating the power of foreign investment to transform India’s economy?
That’s why the DMK has discomfort in wholeheartedly welcoming the decision. v
As far as Kelkar Committee recommendations are concerned, within hours of the submission of the report, the Finance Ministry declared that some of the recommendations in the report are contrary to the government’s declared objective of “sustained and inclusive growth”.
“The government is of the view that in a developing country where a significant proportion of the population is poor, a certain level of subsidies is necessary and unavoidable, and measures must be taken to protect the poor and vulnerable sections of the society,” said Arvind Mayaram, Secretary, Department of Economic Affairs.
The government has also sent indications that it is not likely to relent on the food subsidy front. “It has reiterated its intention to implement the promise of food security for all,” Mayaram said.
The Food Ministry will oppose the Kelkar Committee’s report, which has recommended heavy cuts in subsidies, Ministry sources revealed.
The Kelkar report has recommended that subsidies should be eliminated to stem the dwindling finances. According to the report, half of subsidy on diesel should be eliminated during the current financial year, and the rest in the next fiscal. As for kerosene, the report recommended a cut of 33 per cent in the ongoing subsidy.
The report also argued that the planned food guarantee scheme would enlarge the fiscal deficit problem. It warned that huge subsidies would push the fiscal deficit to an unmanageable 6.1 per cent of the country’s gross domestic product (GDP) in 2012-13.
But sources said that the food ministry would convey its opposition to the recommendations to the Finance Ministry.
The sources said that Congress leadership was eager to rollout the Food Guarantee Scheme as soon as possible as it considered the scheme vital to enhance its image. The sources added that the Food Ministry was of the view that harsh fiscal measures couldn’t be taken on issues which concern the poor.
It may be noted here that the food ministry has already compelled the government to abandon a planned move to increase the price of PDS sugar for BPL (below poverty line) families from Rs 13.50 to Rs 24.
Besides on subsidies, the recommendations of the Kelkar Committee on direct and indirect taxes are rewarding the rich with tax cuts while putting the burden on the middle classes and the common people by cutting their savings and the returns earned from them. Among the sops to the rich, corporate tax rate is to be reduced to 30 per cent for domestic companies and the tax on dividends withdrawn. The richest sections will need pay only a 30 per cent income tax.
With the tariff on imports to be brought down to a maximum of 10 per cent in a short span of time, apart from attacking domestic production, customs revenues would be adversely affected. Added to this there would be the revenue loss from the reduced direct taxes. Overall, the recommendations would further intensify the decline in the tax-GDP ratio.
The Kelkar Committee’s recommendations are iniquitous as it seeks to equate different types of tax exemptions. Exemptions on small savings and house construction loans that encourage savings and housing investment by the middle classes is equated with the tax concessions and exemptions that benefit the rich (such as export earnings). Exemptions should be reduced or done away with only in the case of profit earners who are not being taxed even though they derive much benefits from facilities provided by the State at low or no cost. At a time when interest rates are falling, doing away with tax benefits aimed at encouraging savings will adversely affect the household savings rate and make savings difficult for the middle class.
The recommendation of an agricultural income tax to deal with the revenue loss that would accompany the other measures is to evade the problem. First of all levying of an agricultural income tax is a state subject and cannot be a means to neutralize Central revenue loss.
Hence, the DMK has demanded the Centre to reject the recommendations of Kelkar committee in toto.
Notwithstanding the widespread opposition to FDI in multi-brand retail trade, the government has gone ahead with the notification. The rules announced by the government for FDI in multi-brand will serve the interests of MNCs like Wal-Mart, TESCO and Carrefour. The investment floor of 100 million dollars (Rs 550 crore) is insignificant for the giant retailers like Wal-Mart which are multi-billion companies.
The restriction that foreign retail outlets should be in cities with over 10 lakh population is also irrelevant because these are precisely the urban centres which the MNCs want to access as they are the most lucrative segment of the market. “Furthermore, the rules provide that in states/union territories which do not have cities having a population of more than 10 lakh, foreign retail outlets may be set up in cities of their choice.” Thus foreign supermarkets can be set up in all parts of the country and in a wider range of urban centres.
The condition for making at least 50 per cent of the investment in ‘backend’ infrastructure is being cited to argue that this would lead to more cold chains and other logistics, benefiting the farmers. International experience has, however, shown that procurement by MNC retailers do not benefit the small farmers. Over time, they receive depressed prices and find it difficult to meet the arbitrary quality standards.
Domestic interests will be harmed by the dilution of the conditions set for FDI in single-brand retail. Earlier, the rule was that for FDI above 51 per cent in single brand retail, there was a mandatory sourcing of at least 30 per cent of the value of products sold from Indian “small industries/village and cottage industries.” Now this has been diluted. It is stated that instead of mandatory sourcing it is “preferably” from small and medium enterprises etc. Further, the definition of small industries has also been done away with.
Moreover, in India, next to agricultural and handloom sectors, retail sector offers traditionally the third largest employment.
The unorganised retail trade in India represents the traditional, community-centric, low-cost … employment intense retailing that includes, but is not limited to, provision shops, owner-run-general stores, paan-beedi shops, convenience stores, and hand-cart and pavement vending. In this model a whole family works in one shop and a whole community is engaged in the trade in a defined area. Most advocates of corporate … and retail firms … ignore this critical contribution of the existing system to the Indian economy and society (emphasis added). This “multi-layer retailing is the most decentralised economic activity in India after agriculture. Second, it constitutes almost 98 percent of the total trade with an estimated 12 million outlets. In contrast, organised trade accounts for just 2 percent. Third, it is the largest employment provider after agriculture, employing an estimated 40 million people”. In contrast, the world’s largest retail chain, Wal-Mart, employs just about five lakhs. Fourth, being “self-employed … with their families”, this activity comprises “120 million people”.
It is “retailing that continuously generates … huge community-based entrepreneurship”. And then “it contributes over 14 percent of India’s GDP, while all the companies in the BSE 500 Index, put together is some 4 percent”. Also that the “unorganised retail segment has been growing at an average rate of over 8 percent a year for the last eight years (1999-00 to 2006-07). … second only to construction …” Let us consider seriously that “if this social capital link to retail trade is unsettled, the entire distant and remote supply chain will suffer over a period, disturbing the social equilibrium and the organic social links that have evolved over … centuries”.
Walmart entered in Austin neighbourhood of Chicago in 2006. And by 2008, some 82 of the 306 small shops had closed down. Further, the Economic Development Quarterly study found the closure rate around Walmart location at 35-60 per cent. Such studies in the U.S. reject the assertion that FDI in retail does not hurt small shops. On job creation, a January 2010 report titled ‘Walmart’s Economic Footprint’, prepared for the New York City Public Advocate, says that “Walmart kills three local jobs for every two it creates”. Jayati Ghosh, an eminent Indian economist cited by Karan Thapar, asserts that “one Walmart store in India will displace 1400 small retail stores costing 5000 jobs”. This, too, is dismissed by the government as meaningless.
As for Walmart offering better prices, please recognise it does not buy or pay for goods over the counter. It purchases the nation’s next harvest in futures market and fixes farm prices. It also imports cheap goods and destroys local production like it has done in the U.S. And an outstanding example of this is provided by President George W. Bush, who gratuitously observed “that rice prices had gone up because newly prosperous Indians had begun eating more”. In truth, as detailed by USA Today (April 23, 2008) and CNN (April 24, 2008) the “California Rice Commission and USA Rice Federation” denied there was a “shortage of rice”, explaining that it was because ‘Sams Club’ (Walmart’s wholesale division) was holding ‘huge stocks’, and ‘pushing up the prices’.
Two government reports — of the Planning Commission Working Group on Agriculture for the XI Plan (2007-2012), and the 19th report of the Standing Committee of Parliament on Food (2006-2007), to Parliament — themselves nail the lie that Walmart will link farm-gate to its gate and make Indian farmers rich.
There is then that assumption that this variety of capital inflow is the answer to our present trade and current account deficits. First, this is neither true nor tenable. The trade account deficit of about US$150 billion and the current account deficit exceeding 3 per cent of GDP is very alarming and may lead to a balance of payments crisis of much graver nature than the 1990 position. It is this continuous pressure on the “trade account and the sudden withdrawal of funds by FIIs from the stock market that has weakened the Indian Rupee”, (Rs. 16 in 1991 to as low as Rs.50 per U.S. dollar), resulting in a “devaluation of more than 300 per cent”, thus becoming one of the major causes of imported inflation in the country during the past two decades.
When it comes to FDI in retail, the beneficial impact on the common man is altogether less obvious than in the case of lowering the diesel subsidy. What FDI in this sector may be expected to do is to take the shopping experience in India to the next level. Surely, cavernous supermarkets make it easier to shop for those with deeper pockets. Precisely because the supplier caters to this cohort the quality of the groceries may be expected to rise. In fact, we have already seen this happening, even without FDI, with organised retail spreading in India. But those on a daily wage and no ready cash are unlikely to patronise these suburban behemoths. They may be expected to prop up the provision store with its infinite capacity for apportioning their stuff to suit the customer’s purse and willingness to extend credit. So the Opposition may well be crying wolf over the imminent disappearance of the corner store.
But the government’s claim of a ‘win-win’ with higher prices for farmers and lower prices for customers with the advent of FDI may be somewhat exaggerated. For precisely because the large retailer must cut through the supply chain to deliver this outcome, there would be some displacement in the middle. The government counters this reasoning by pointing to investment at the backend, in cold storage and such. This is possible of course, but we would want to wait and see the full combined effect once all effects have worked their way through the economy. Some part of the corner-store complex will survive purely because there are too many poor people in this country yet, generating a substantial demand for low quality food with lower mark-ups.
It is when it comes to inflation though that the present round of announcements by the government has little or nothing to offer. The suggestion, first made when the proposal was mooted some months ago, that FDI in retail would dampen inflation is difficult to fathom. The source of the current inflation is a veritable excess demand for vegetables and a manufactured excess demand for the principal foodgrains, in the absence of a universal PDS all over the country.
It would be appropriate to conclude by asking whether the government makes too much of foreign investment, desirable as it is. With respect to its heroic recent announcement, there is the issue of the suppliers’ response. Walmart’s Asia President Scott Price is reported to have already stated “we are not in any rush” to enter India. But there is a query more general than the likely response of foreign investors to the overtures being made presently. In the two decades since 1991, India has not attracted much FDI, giving us an idea of what may be expected in a future with or without FDI in retail. Some perspective is to be had from looking at the Chinese experience. For an idea of the relative roles of FDI and domestic investment in generating growth in that country, note that FDI as a share on the domestic product had peaked in 1993. It was only 6 per cent even then, and has declined progressively since to a figure less than half of it. This suggests that China’s double-digit growth cannot be explained by alluding to the FDI it attracts. Is our own government overrating the power of foreign investment to transform India’s economy?
That’s why the DMK has discomfort in wholeheartedly welcoming the decision. v
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