I have had numerous debates with my good friends over Government of India’s decision to allow 51% FDI in retail. Most of the opposition was out of fear for the neighborhood kirana store. I am sure there are many intellectuals who have argued what I am about to argue, but I am trying to take a different approach to convince the naysayers.
First, I am presenting my arguments using a fictitious town/city/state/country and evaluating it under two scenarios, Nehrustan without Wal-Mart and Nehrustan with Wal-Mart. Then I present my counter arguments based on commonly accepted economic theories.
Scenario 1: Nehrustan without Wal-Mart
Assume a secular socialist republic Nehrustan that consists of 10 people. Table 1 introduces each Nehrustani by the UID number given to them by Nil-e-Koni, last name, occupation and monthly incomes. A country (known for its Nehruism) very similar to Nehrustan has a savings rate of approximately 35% (or an expenditure rate of 65%).
For example, in Table 1, Mr. Mambani is a big business owner and employs 6 people. He earns Rs. 1,000 a month and spends 65% (Rs. 650) of that at the kirana store, and saves the remaining Rs. 350. His expenditure is the kirana store owner, Mr. Gupta’s revenue. Similarly, whatever the citizens spend at the kirana store is actually Mr. Gupta’s revenue. As a result, Mr. Gupta’s total monthly revenue is Rs. 1,820.
I am assuming Mr. Gupta reinvests 80% of his revenue to stock up on his inventory. So, Mr. Gupta’s income is 20% of Rs. 1,820 = Rs. 364. He also needs to spend on kirana (food and household supplies for himself) which is 65% of Rs. 364 = Rs. 237. In summary, Nehrustan as a region spends Rs. 2,057 and saves Rs. 1,107.
Scenario 2: Nehrustan with Wal-Mart
The biggest concern people have voiced during my interaction with them is that Wal-Mart will sell goods cheaper than the local kirana store. I don’t know how cheap so let’s assume a conservative estimate of 75%. Since Wal-Mart will sell goods at 75% of the price quoted by the kirana store, the new expenditure levels for each citizen will change. Table 2 shows the new expenditure and savings. Please notice the following changes:
Mr. Gupta went bankrupt. His income dropped to zero and this is what the critics are concerned about. But this concern consumes them so much that they ignore the the next two outcomes.
The monthly expenditure for Nehrustan drops from Rs. 2,057 to Rs. 1,365.
The monthly savings for Nehrustan increases from Rs. 1,107 to Rs. 1,435. Also note that the poorest Nehrustani, Mr. ABC now saves Rs. 8 more than he used to before Wal-Mart started selling for less.
Before someone points out that Mr. Gupta is now bankrupt and that the total income has dropped, I would like to point out that Nehrustan’s money in pocket has gone up tremendously. This is nothing but additional disposable income.
Disposable income generates demand for newer products. In this example, Mr. Gupta’s kirana store is not viable any more but we should not forget that Wal-Mart creates surplus disposable income which the citizens would like to spend.
For example, look at the aerial photographs below and notice how small businesses like a mobile shop, a hair salon, restaurants, and coffee shops surround the Wal-Mart. Infact, if you were to start a small business, would you not like to open it in an area which draws the most crowds? Some place like the one shown in the map below? So, although a kirana store is not viable, a restaurant, a novelty store, a beauty parlor, a laundry shop are attractive options for Mr. Gupta to consider if he doesn’t want to work for Wal-Mart.
I know the naysayers will be unconvinced because this example is a very simplified version of real life dynamics. So let me address some of their questions using broadly accepted economic theories.
Concern 1: Wal-Mart will sell things for less and hence force small businesses out.
Response: If Wal-Mart sells for less also means that kirana wala sells for more. So who benefits? The customers of that kirana wala who previously were paying higher than what they will pay at Wal-Mart. Critics of Wal-Mart essentially are saying that it’s ok if customers pay higher today, at least the kirana wala is making money. That means, we the critics should decide for the customers where they shop and we want them to shop at the kirana store even if they have to pay more for it.
Not fair, is it?
So it’s important to appreciate the fact that when Wal-Mart sells for less, a vast number of people benefit which includes thosee who live on Rs 20 or less a day. Should we force this extremely low income group to buy at a higher price because we don’t want the kirana wala to go away?
Is it fair on the poor who could be given the option of buying things for less but won’t because we care for the kiranawala more? In an economy, aren’t the consumers as important as the kirana wala?
Why then should we bat for the kirana wala who sells the same things at an higher price even to that group which makes less than Rs. 20 a day?
Concern 2: Wal-Mart offers low paying jobs.
If Wal-Mart offers low paying jobs, why would anyone work for Wal-Mart. Won’t they continue working for their current employer.
Concern 3: Wal-Mart offers higher pays and hence will steal employees of kirana stores.
Should we then deprive that employee of an opportunity to earn more. Should we be making this decision for him?
Concern 4: Wal-Mart will kill competition.
If today we have 100,000 kirana businesses competing against each other, when Wal-Mart joins in, we will have 100,001 kirana businesses competing against each other. How does that kill competition when the number of competitors goes up? Wal-Mart is just an example. With this regulation, won’t Wal-Mart’s international competitors also join in to compete?
Concern 5: Wal-Mart will start off with extremely low prices to bleed the small retailers and then jack up prices once the retailers are bumped off.
There is an inverse correlation between price and demand. Now, let’s assume that a smart business house like Wal-Mart which has a history of consistently selling for less does such a stupid thing. Once it jacks up its prices, will it not create opportunities for others (existing and new businesses) to lower their prices and eat into Wal-Mart’s market share?
Besides, Wal-Mart doesn’t work on this model. Its profits are driven by currency exchange rates between US and third world countries like China, India, Bangladesh etc. and economy of scale.
I hope I have addressed all questions but I will continue to update this post as and when I come across new concerns. Before I conclude, I would like readers to ponder over the following analogies.
Before we had broadband at home, we had to run down to the nearest cyber café to access the internet. With the advent of broadband at home (big business), how many times do we visit a cyber café (small business)? In hindsight, should we have opposed Airtel, Tata, and others’ move into this segment due to the fear that it will hurt cyber cafes? Yes, Airtel, Tata etc have hurt cyber cafes but aren’t the erstwhile customers of cyber cafes better off now than they were previously? Hasn’t India as a whole benefitted because of this convenience?
Before the arrival of Direct-to-Home technology, we relied on the local cable walahs. Should we have opposed Tata Sky due to the fear that it will kill small cable business owners? True, Tata Sky hurt local cable providers but aren’t the customers better off with the extra choices they have now than they had when Tata Sky wasn’t around?
Before the arrival of bookstore chains, we depended on our local bookstores. Now that we have Flipkart and Crosswords and what not, aren’t we the consumers better off than we were when we didn’t have the convenience of ordering books online from the comfort of our homes.
I could use the same argument for ATMs/Internet Banking vs Cashiers, Hotmail vs post/courier, Microsoft vs anything under the sun to draw similar analogies.
The more competition we have in every field, the better off we area as a society. Economic freedom has a proven record in bringing prosperity while government control has a proven and disastrous track record. You, me or the Government has no right to favor kirana wala at the cost of the poor consumer. It’s impossible to favor Mr. Gupta without robbing Mr. ABC.
Tags: FDI in Retail