FDI in retail, it appears, has been welcomed by and large. The benefits are far too tantalizing for the consuming public: single avenue, greater choice and best of all, lower prices. The much-burdened RBI celebrates it: “FDI in retail will help cool inflation” it says. Our learned, elitist government economists celebrate it as a pro-farmer initiative: Farmers (producers) will be offered better prices and the much-hated middleman will finally be eliminated by vertically integrating the supply chain. Politically, this is a masterstroke: Urban India has been almost bribed to stop thinking (and voting) on issues of corruption and inflation.
So there’s a very rosy picture of FDI in retail and to oppose it would mean to identify one’s self with the anti-reform, anti-West, backward thinking types. Be that as it may. The dangers of FDI in retail are very real and it must be opposed. Several arguments have already been made it is important for anyone who opposes FDI in retail to focus on the two aspects that are most celebrated about FDI in retail: lower product prices and better farmer prices. Similarly, it is incumbent on those who support FDI in retail to address the argument of loss of livelihood and quality of life among traders. But let’s leave that to them.
We begin with the claim that FDI in retail will reduce prices and tame inflation. This argument is premised on a key aspect of the Walmart structure: Integration of the supply chain. In the present scenario, a number of intermediaries exist between the producer and the final consumer. The prevailing analysis is that each intermediary transfers products to the next intermediary at a profit until the product is eventually sold to the final consumer. Owing to these intermediaries, the prices of goods are high. Now, FDI in retail promises to offer better prices for the consumer by replacing the vast number of intermediaries with ONE middleman. As per the Walmart structure, since there is only one big middleman between the producer and the consumer, hitherto existing intermediate price increases will be eliminated, thereby decreasing the overall price of the commodity.
Similarly, the move is thought to benefit farmers because there will be only one intermediary i.e. the big FDI-backed retailer. The absence of myriad intermediaries means that there is no pressure to sell at cheap prices. In other words, the middleman who would hitherto coerce the producer to sell to him at lower prices by convincing him that the product would not sell in the market if it was highly priced is eliminated. Conversely, the presence of only one retailer means that products can be sold to the retailer at a higher price. Of course, the retailer is expected to accept a higher price given that he in turn can charge a higher price from the consumer.
This is the logic on which FDI in retail has been sold to the country. This is the logic that middle India has bought. And this is the logic which needs to be challenged if we are to save any of the three stakeholders viz. consumers, farmers and intermediaries. Now here’s the problem: Retail FDI seeks to replace innumerable middlemen with one Big, Fat Middleman! So the big retailers will first begin with high farm prices and low consumer prices until they have taken every small trader out of the supply chain and until the big retailer has become the ONLY intermediary between the producer and the consumer.
From a business perspective, this is an enviable position. It is also a position from which the big retailer can flex its muscles and dictate terms in the supply chain. From this position, there is nothing to challenge the retailer if it offers low prices to the producer and sells at higher prices to the consumer because there are no competitors save only for similarly sized retailers. This oligopoly is the danger we must be alert to because far from lowering prices, it threatens to increase consumer prices manifold. There is no poetic justice here since the poor farmer has no choice but to sell at lower prices.
The other big promise of FDI in retail is that it will ease out inflation in the economy. The last paragraph explained how the retailer is in a position to dictate prices of commodities. But for a moment, let’s assume that everything in the previous paragraph is untrue or unfounded. Even so, retail FDI will not cool down inflation. At best, it can postpone inflation. The reason is simple. Inflationary pressure in the economy is almost entirely caused because of a commodity shortage and the consequent inability of supply to meet India’s ever-growing demand. This cannot be solved by retail FDI. This requires a serious revamping of our agricultural policies towards improving farm productivity.
There are other economic implications that must not be ignored. The unorganized retail sector will eventually be wiped out by big, organized retailers. They will no doubt be forced into unemployment and possibly poverty. Now, we have a Central government that acts according to the diktats of socialist fundamentalists in the National Advisory Council (NAC). The NAC, as we know, has piloted the rural employment guarantee scheme (NREGA) and plans to have the Food Security Bill introduced. So will the newly unemployed trader be given an allowance from NREGA? Will the food security coverage be expanded so as to extend to him? Where will the money to do this come from? And will our government increase our taxes? These are the dangers of a government that does not think; and cannot think!
Tags: FDI in Retail