As DMK President Kalaignar has said the Party had been consistently opposing the idea of permitting Foreign Direct Investments (FDI) in Retail sector in India right from the time it was mooted and had been warning that it is dangerous leading to catastrophic consequences for the economy and people of the country. Moreover, it is also in contravention of the letter and spirit of the Common Minimum Programme of the UPA.
The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as the ‘second most attractive retail destination’ globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14% to the national GDP and employing 8% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.
Trade or retailing is the single largest component of the services sector in terms of contribution to GDP. Its massive share of 14% is double the figure of the next largest broad economic activity in the services sector.
The retail industry is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local maligai shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
Unorganized retailing is by far the prevalent form of trade in India – constituting 98% of total trade, while organised trade accounts only for the remaining 2%. Estimates vary widely about the true size of the retail business in India. AT Kearney estimated it to be Rs. 4,00,000 crore and poised to double in 2015. On the other hand, if one used the Government’s figures the retail trade in 2002-03 amounted to Rs. 3,82,000 crore. One thing all consultants are agreed upon is that the total size of the corporate-owned retail business was Rs. 15,000 crore in 1999 and poised to grow to Rs.35,000 crore by 2005 and keep growing at a rate of 40% per annum. In a recent presentation, FICCI has estimated the total retail business to be Rs. 11,00,000 crore or 44% of GDP. According to this report dated Nov. 2003, sales now account for 44% of the total GDP and food sales account for 63% of the total retail sales, increasing to Rs.100 billion from just Rs. 38.1 billion in 1996. Food retail trade is a very large segment of the total economic activity of our country and due to its vast employment potential, it deserves very special focused attention. Efficiency enhancements and increase in the food retail sales activity would have a cascading effect on employment and economic activity in the rural areas for the marginalized workers. Thus even without FDI driving it, the corporate owned sector is expanding at a furious rate. The question then that arises is that since there is obviously no dearth of indigenous capital, what is the need for FDI? It is not that retailing in India is in the need of any technology special to foreign chains.
A simple glance at the employment numbers is enough to paint a good picture of the relative sizes of these two forms of trade in India – organised trade employs roughly 5 lakh people , whereas the unorganized retail trade employs nearly 3.95 crore! According to a Government of India study the number of workers in retail trade in 1998 was almost 175 lakhs. Given the recent numbers indicated by other studies, this is only indicative of the magnitude of expansion the retail trade is experiencing, both due to economic expansion as well as the ‘jobless growth’ that we have seen in the past decade. It must be noted that even within the organised sector, the number of individually-owned retail outlets far outnumber the corporate-backed institutions. Though these numbers translate to approximately 8% of the workforce in the country (half the normal share in developed countries) there are far more retailers in India than other countries in absolute numbers, because of the demographic profile and the preponderance of youth, India’s workforce is proportionately much larger. That about 4% of India’s population is in the retail trade says a lot about how vital this business is to the socio-economic equilibrium in India.
Organised retail is still in the stages of finding its feet in India even now. Though organised trade makes up over 70-80% of total trade in developed economies, India’s figure is low even in comparison with other Asian developing economies like China, Thailand, South Korea and Philippines, all of whom have figures hovering around the 20-25% mark. These figures quite accurately reveal the relative underdevelopment of the retail industry in India. (Here development is used in the narrowest sense of the term, implying lean employment and high automation)
It is important to understand how retailing works in our economy, and what role it plays in the lives of its citizens, from a social as well as an economic perspective. India still predominantly houses the traditional formats of retailing, that is, the local maligai shop, paan/beedi shop, hardware stores, weekly sandhais, convenience stores, and bazaars, which together form the bulk. Most importantly, Indian retail is highly fragmented, with about 11 million outlets operating in the country and only 4% of them being larger than 500 square feet in size. Compare this with the figure of just 0.9 million in the US, yet catering to more than 13 times of the Indian retail market size.
The Indian retail industry was, and continues to be, highly fragmented. According to the global consultancy firms AC Neilsen and KSA Technopak, India has the highest shop density in the world. In 2001 they estimated there were 11 outlets for every 1,000 people. Further, a report prepared by McKinsey & Company and the Confederation of Indian Industry (CII) predicted that global retail giants such as Tesco, Kingfisher, Carrefour and Ahold were waiting in the wings to enter the retail arena. This report also states that the Indian retail market holds the potential of becoming a $300 billion per year market by 2010, provided the sector is opened up significantly. It does not talk about creating additional jobs however, which should be the prime concern of the policy maker.
One of the principal reasons behind the explosion of retail and its fragmented nature in the country is the fact that retailing is probably the primary form of disguised unemployment/underemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many million Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means and capital. And thus, a retailer is born, seemingly out of circumstance rather than choice. This phenomenon quite aptly explains the millions of maligai shops and small stores. The explosion of retail outlets in the more busy streets of Indian villages and towns is a visible testimony of this.
The presence of more than one retailer for every hundred persons is indicative of the lack of economic opportunities that is forcing people into this form of self-employment, even though much of it is marginal. Because of this fragmentation, the Indian retail sector typically suffers from limited access to capital, labour and real estate options. The typical traditional retailer follows the low-cost-and-size format, functioning at a small-scale level, rarely eligible for tax and following a cheap model of operations.
As on January 1st of this year, there were 413.88 lakhs job seekers registered at the Employment Exchange. They register at the exchange, to enjoy the benefits and security that a job in the organised sector provides – lifetime employment, pension, and union membership etc. But over the period 1992¬93 to 2001-02, only a total of 30,000 jobs have been added in the organised sector in the whole country.
A vast majority is aware of what these figures signify – that they are most unlikely to get such jobs. Therefore, they find jobs in the informal sector, mostly in retail. Retailing is by far the easiest business to enter, with low capital and infrastructure needs, and as such, performs a vital function in the economy as a social security net for the unemployed. India, being a free and democratic country, provides its people with this cushion of being able to make a living for oneself through self-employment, as opposed to an economy like China, where employment is regulated. Yet, even this does not annul the fact that a multitude of these so-called ‘self-employed’ retailers are simply trying to scrape together a living, in the face of limited opportunities for employment. In this light, one could brand this sector as one of “forced employment”, where the retailer is pushed into it, purely because of the paucity of opportunities in other sectors.
The largest retailer in the world ‘Wal-Mart’ has a turnover of $ 256 bn. and is growing annually at an average of 12-13%. In 2004 its net profit was $ 9,000 mn. It had 4806 stores employing 1.4 mn persons. Of these 1355 were outside the USA. The average size of a Wal-mart is 85,000 sq.ft and the average turnover of a store was about $ 51 mn. The turnover per employee averaged $ 175,000. In 2004 Wal-Mart had a 9% return on assets and 21% return on equity.
By contrast the average Indian retailer had a turnover of Rs. 186,075. Only 4% of the 12 million retail outlets were larger than 500 sq.ft in size. The total turnover of the unorganized retail sector was Rs. 735,000 crore employing 39.5 mn persons.
Let alone the average Indian retailer in the unorganized sector, no Indian retailer in the organised sector will be able to meet the onslaught from a firm such as Wal-Mart – when it comes. With its incredibly deep pockets Wal-Mart will be able to sustain losses for many years till its immediate competition is wiped out. This is a normal predatory strategy used by large players to drive out small and dispersed competition. This entails job losses by the millions.
India has 53 towns each with a population over 1 million. If Wal-Mart were to open an average Wal-Mart store in each of these cities and they reached the average Wal-Mart performance per store – we are looking at a turnover of over Rs. 80,330 mn with only 10195 employees. Extrapolating this with the average trend in India, it would mean displacing about 4,32,000 persons. If large FDI driven retailers were to take 20% of the retail trade, as the now somewhat hard-pressed Hindustan Lever Limited anxiously anticipates, this would mean a turnover of Rs.800 billion on today’s basis. This would mean an employment of just 43,540 persons displacing nearly eight million persons employed in the unorganized retail sector.
With possible implications of this magnitude, a great deal of prudence should go into policymaking. Rather we seem to moving towards a policy steamrolled obviously by vested interests acting in concert with the CII & FICCI. We need to take a deep hard look at FDI in the retail sector.
Given this backdrop, the recent decision about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, with arguments to support both sides of the debate. It is widely acknowledged that FDI can have some positive results on the economy, triggering a series of reactions that in the long run can lead to greater efficiency and improvement of living standards, apart from greater integration into the global economy. Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption.
But the most important factor against FDI driven “modern retailing” is that it is labour displacing to the extent that it can only expand by destroying the traditional retail sector. Till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense that any policy that results in the elimination of jobs in the unorganised retail sector should be kept on hold.
Though most of the high decibel arguments in favour of FDI in the retail sector are not without some merit, it is not fully applicable to the retailing sector in India, or at least, not yet. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy, will render millions of small retailers jobless by closing the small slit of opportunity available to them.
Imagine if Wal-Mart, the world’s biggest retailer sets up operations in India at prime locations in the 53 large cities and towns that house more than 1 million people. The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. Wal-Mart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means a foreign company will buy big from India and abroad and be able to sell low – severely undercutting the small retailers. Once a monopoly situation is created this will then turn into buying low and selling high.
Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighbouring traditional outlets are also likely to fold and perish, given the ‘predatory’ pricing power that a foreign player is able to exert. As Nick Robbins wrote in the context of the East India Company, “By controlling both ends of the chain, the company could buy cheap and sell dear”. The producers and traders at the lowest level of operations will never find place in this sector, which would now have demand mostly only for fluent English-speaking helpers. Having been uprooted from their traditional form of business, these persons are unlikely to be suitable for other areas of work either.
It is easy to visualise from the discussion above, how the entry of just one big retailer is capable of destroying a whole local economy and send it hurtling down a spiral. One must also not forget how countries like China, Malaysia and Thailand, who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets15.
Given their economies of scale and huge resources, a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer. But stopping an Indian retailer from growing bigger is something current public policy cannot do, whereas the State does have the prerogative in whether foreign entry in the retail sector should be stalled or not.
It is true that it is in the consumer’s best interest to obtain his goods and services at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits.
If you assume 40 mn adults in the retail sector, it would translate into around 160 million dependents using a 1:4 dependency ratio. Opening the retailing sector to FDI means dislocating millions from their occupation, and pushing a lot of families under the poverty line. Plus, one must not forget that the western concept of efficiency is maximizing output while minimizing the number of workers involved – which will only increase social tensions in a poor and yet developing country like India, where tens of millions are still seeking gainful employment.
This dislocated and unemployed horde has to be accommodated somewhere else. But if you look at the growth rates of labour in manufacturing and industry, you wonder where this new accommodation can be found? Agriculture already employs nearly 60% of our total workforce, and is in dire need of shedding excess baggage. That leaves us with manufacturing as the only other alternative. With only 17% of our total workforce already employed in industry, which contributes altogether only 21.7% of our GDP, this sector can hardly absorb more without a major expansion.
So far Indian economy has been heavily geared towards the service sector that contributes 56% of our GDP. The service sector’s contribution to the increase in GDP over the last 5 years has been 63.9%. Having a high contribution from services is an attribute that is characteristic of developed economies. What is anomalous in the Indian case is the fact that in other fast developing economies, say China, manufacturing accounts for a significant share of GDP, whereas in India, manufacturing contributes a mere 23.1% of the GDP.
It is evident that the manufacturing sector has been the engine for economic growth in China, which has been growing at 10.1% since 1991. In India, the credit for its 5.9% growth over the corresponding period goes mostly to the service sector. Ironically it would seem that the Indian economy is getting a post-industrial profile without having been industrialised!
Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding process. If there aren’t any goods being manufactured, then there will not be many goods to be retailed! This underlines the importance of manufacturing in a developing economy. One could argue that the alarmingly low contribution of industry is attributable to the structural adjustments going on the sector, getting rid of the flab and getting ready to compete, but that still cannot undermine the seriousness of the issue at hand, in that only 6.215 million out of productive cohort of 600 million is employed in organised manufacturing.
Only until the tardy growth of the manufacturing sector is addressed properly and its productivity chart starts to look prettier, could one begin thinking of dislocating some of the retailing workforce into this space. Until that day, disturbing the hornet’s nest would be one very painful experience for the economy.
No protagonist of FDI in the retail sector denies that it will render a large number of existing workers in retail shops unemployed. The contention that in the long run more employment opportunities will be created is not relevant to India in the present situation. Even if we accept that in the long run the employment situation is going to be far better, one must not forget what Keynes said: In the long run we all will be dead.
It is not beyond dispute that in the long run the total volume of employment opportunities will be much more than the employment opportunities lost in the short run by the entry of FDI and the efforts to build mega marts and modernization efforts. There are two points to be noted in this connection. First, FDI will come here to make more profits because the wage rates are much lower as compared to Western countries. Efforts will be made to eliminate all sorts of distributors by taking the goods directly from the producers. Also, mechanical and electronic devices will be used to dispense with the workers. Whatever workers remain will be made to handle more goods per worker. All these changes will lead to a big reduction in the number of workers in the retail trade. Second, most of the people engaged in the retail sector at present are not educationally very qualified. When they are rendered unemployed by forcibly having to down their shops’ shutters, they will not be absorbed anywhere else. FDI coming into the retail trade will require workers with modern skills in electronics and management. Hence it is wrong to say that human sufferings will be inconsequential.
Since the mega marts will be oriented primarily towards serving the newly emerging middle and upper classes, the composition of goods will reflect this orientation. Consequently, the pattern of production will show a bias towards them. The needs of the poor will be neglected. The poor and downtrodden will feel betrayed because the UPA in its Common Minimum Programme promised “to enhance the welfare and well-being of… workers, particularly those in the unorganized sector and assure a secure future for their families in every respect.” Once this feeling of betrayal sinks into society, it will lead to disastrous consequences for the country as well as its present ruling coalition because everyone in this country has a vote and with this people express their rejection of the rulers and their policies. One needs to investigate whether the defeat of the Narasimha Rao-led Congress was due to the Ayodhya incident and the rejection of the BJP-led NDA was solely due to the Gujarat massacre or economic reforms and their consequences also had a role in both the defeats!
