There is a clamor for foreign direct investment (FDI) in the retail trade, which is dominated by Partnership and Proprietorship (P&P) firms. Unfortunately there is not much debate about the far-reaching implications of arrival of global retailers like Walmart in the economy. This is one area where the level playing field argument is not only meaningful but also significant. Also the State Governments should be consulted and their consent should be critical in this area affecting millions of families.
Trade constitutes the largest segment of the economy with a nearly 16.5 per cent share in NDP in 2009-2010, that is, in the aggregate NDP of Rs 39.8 lakh crore that year trade accounted for Rs 6.5 lakh crore [at 2004-05 constant prices] higher than the share of manufacturing [at 13.5%] and Agriculture [at 15.2%]. (National Accounts Statistics of the CSO, New Delhi 2011).
The growth rate [CAGR] in trade in real terms during this period 2004 to 2010 was 9.0 per cent, which is significantly higher than that of agriculture and nearly that of manufacturing.
Trade is conducted mostly [more than 80%] by partnership /proprietorship firms with active involvement from members of family and community. More than 125 lakh kirana stores provide a source of livelihood to 16 crore people. Retail trade has grown faster than the economy: it registered a compounded annual growth rate (CAGR) of 9.4% between 2004-05 and 2008-09 when the Indian economy grew at 8.66%.The retail trade comprises all kinds of people and formats — from street vendors to departmental stores of various types, shapes and characteristics. More than 80% of trade is accounted for by partnership and proprietorship forms — often called the “unorganized” sector. The kirana shop adjacent to my home opens at 7am and closes at 10pm every day, 365 days of the year. It is very efficient, and one can order through a mobile. The owner knows the tastes and price preferences of our family, but his business is classified as “unorganized” by our experts and national income data.
The footfall in his shop cannot be measured using western models (since there is no place for anybody to set foot inside his shop), and so he is derided and ignored. It is like clubbing housewives along with prostitutes in our census data to show them as unproductive citizens.
The retail trade suffers from two major handicaps. One is the non-availability of credit at reasonable rates from institutions; the other is the bribe one has to pay to the government babus to leave him in peace.
Nagamma has been a flower vendor for more than 20 years in my suburb of Bangalore. When she needs a loan, she participates in chit funds. Sometimes, she has lost big as the chit funds were run by crooks. I advised her to open an account with a commercial bank for saving her hard earned money and perhaps to get a loan later. The bank’s “know your customer (KYC)” norms require proof of address, PAN cards, proof of date of birth — everything but her dog’s surname. She has no chance of getting this kind of KYC done. Large companies get loan rates below the prime lending rate, but my vegetable vendor gets it at 0.5% per day. They have to return 50 paise at the end of the day for every Rs100 borrowed in the morning. This works out to be more than 180% per annum. My retail provision stores man gets his money in an interesting way. He gets Rs45, 000 (for a loan amount of Rs50, 000) upfront and pays Rs500 a day for 100 days to repay his full Rs50, 000. It turns out to be more than 10% for three months. More than 70% of the working capital requirements of retail trade in 2009-2010 came from non-bank sources.
The other perennial problem faced by the “unorganized” retail trade is the “organized” dacoity by minions of the state. They need to bribe the cops, bribe the municipal authorities and other local goons. The cost can be as high as Rs20 on an income of Rs200 or so per day. That is 10% of gross income. The same is true of fruit seller, the fast-food idli joint or the beauty parlor.
Instead of looking at these two important constraints imposed on the fastest growing and most productive and efficient retail trade, our planners want to open the field up for global sharks in the name of liberalization.
The argument is that the MNCs bring “funds” and “efficiency” .An MNC does not normally bring funds from outside sources as it can access them in our market by showing “comfort letters” from their parent companies. Many financial institutions, both government and private, are ready to lend to them below the prime rate as they are “Global”. That the MNC will bring funds from abroad is largely a myth. Remember, Enron which was supposedly bringing Rs 10, 000 crore from outside. The final result is that Indian FIs are holding more than Rs 6,000 crore of worthless paper.
Has anyone studied the “aggregate cost” of these global retail chains? Most American homes have a retail store in their basement. In the US, it is an issue of labor shortage but in India there is surplus that is part of the large self-employed group. For the economic expert goods held by household is consumption but held by mom-and-pop store is inventory. Hence, inventory reduction has been achieved in the economy. Not much space is available in Indian houses to convert them as “retail stores”. Another aspect is the fuel cost of driving long distances to the super-market and spending thousands of man-hours between aisles. Plus mobile phones are useful in placing orders from our Mata-Pita stores [also known as mom and pop stores in USA].
All petroleum services and products, rice, tobacco, salt, alcoholic beverages and fresh food traded at public markets are excluded in Japan from any “distributional aspect” by companies of other countries. Australia, Japan, South Korea do not allow trade services in petroleum, its products, rice, tobacco, salt, milk, fertilizers etc by foreign companies. French using their Loi Royer simply restrict any development of hypermarkets to protect what they call the “centres of French towns and villages and the living of small shopkeepers”. Germany has legislative constraints on outlets above 1200 sq.m. Shops and establishment Act is under State governments and so are the APMC yards. It is important that the state Governments are consulted and their concurrence taken.
The paan-chewing, dhoti-clad, English-ignorant retail trader should not be seen as an inefficient entrepreneur who needs to be bleached by globally-accepted detergents. What he needs is a level playing field, in the full sense of the term, with access to affordable credit and the abolition of inspector raj in the form of harassment by various arms of the government. Let us remember that we are still a savings-based, family-oriented economy.
The author is Professor of finance at IIM-Bangalore—The views are personal.
Tags: FDI in Retail