Debunking the great FDI savior




I had begun with a pro-FDI stance out of a natural affinity for the new, for change. However, as I am reading and thinking more, I think the FDI coming up so suddenly is little more than a quick fix by our government to cover up the now pinching consequences of massive mis-governance of finances. I also have started thinking that the FDI is against our interests as a country.

Today being the anniversary of the Bhopal Gas Tragedy gave me an opportunity to read the same story I read every year from a perspective of FDI and my thoughts crystallized. I find myself being far less inept at thinking numbers than I imagine, and the results seeming so outrageous is not my incompetence, but they really are outrageous is what I am discovering.

Today, when FDI was shelved for the time being, the comments that followed gave some insight on the reasons FDI is so attractive. It is (as always) money. @sonaliranade put it so brilliantly, that I quote three tweets of hers here.

With no #FDIIinRetail and $100 billion debt repayment due next year, expect Rupee to go 65 instead of 58 to the $. [1]

The $100 billion debt repayment in 2012 equals total imports of oil + Gold in 2011. [2]

Our oil imports are roughly $50 billion. Our gold imports last yr were $65 billion. Repayments next yr 100 billion  Reserves 310 billion. [3]

From the sound of this, it seems like the FDI will save our economy. I see it differently. Once the market opens, sure there will be a rush of investment that will continue as long as there is potential for investment. Once the new investments are done, we will be right back to where we are, with competition for our income created by us. So, likely slightly worse.

To use a metaphor, it is like selling jewelery to repay your bar bills. You can sell it once, then it is gone. Unless you stop drinking, there will always be bills depending on your ability to earn and repay, or sell more things. Without reform, we will be exactly there. With reform, we don’t need FDI, because we’ll have a better economy anyway. To open up FDI in Retail now and buy time for reform is naive. We did it in the 90s. Look where we are right now. When the going is good, we have exploited it without giving back. Absolutely nothing has happened to change this.

And there are several arguments made in favor of FDI that don’t cut it with me. There is nothing that requires FDI and a lot that shifts government responsibility to private entities or otherwise obfuscates matters, which you can’t hold accountable in the same way. Presenting some arguments here.

Beginning with an article I was asked to “read and learn”. This is one that tells us “Why India Should Stop Fearing Walmart” and it says two things of interest:

Walmart has set itself a target of increasing farmers’ incomes by 20% over five years.

This sounds incredible, till you realize it isn’t per year, it is over five years. Inflation right now is 11.8 per cent. Assuming an easy 10% for calculations, prices will be 61% more after five years. Asked many people and verified this. Income increasing by 20% over five years means the farmers will actually be getting poorer. Even if we say this miracle fix of FDI brings inflation down to 5% (which is so far only in the realm of imagination, is 28% or so of price rise over 5 years. The farmers will still be getting poorer.

India’s traders and kirana shop owners have had more than six decades of protection from foreign competition…

This is pure bullshit. It assumes a default that FDI is a norm that the government didn’t follow for the sake of the traders and kirana shop owners. FDI is a choice, not a norm. For that matter, our politics also hasn’t improved. Should we apply for returning to colony status? Why one rule for an objective you want that is different from others? FDI has started sounding like a pancea!

Also the assumption that fear of Walmart is what prevents FDI is bullshit, as is the assumption that all who oppose FDI are closet socialists. There is also nothing wrong about fearing Walmart or being a socialist for that matter. This is just sour grape labeling and pseudo ad hominem superiority, and I will not address it further. India is a free country and people and governments are free to make choices that they think are appropriate.

There are better fish to fry. Using mostly arguments made by @sonaliranade because she makes excellent and clear points.

FDI in Retail was such a stupid way to sell agriculture reforms. Shoot the bum who came up with the idea.

Agree. Agricultural reforms are a right of our farmers, not something to be left to corporates to install better practices for farmers they deal with.

Wastage in Agriculture supply chain ranges from 30% to 50%. That amounts to $ 140 billion in potential savings that are lost today. [4]

This is an important point. It is also the reason for a lot of people to support FDI in retail, because big chains will automatically install their systems for more efficient storage and transport. However, this doesn’t need FDI. If that kind of interest or incentive is there, no reason why a TATA or Reliance shouldn’t do it. Walmart buys their cold storage systems. They don’t manufacture them. We can buy them too! Besides, there is scope for a lot of innovation and streamlining that needs more organization than expense. The bottom line is that this whole area has been neglected, and is now pointed out as a carrot for getting the flood of money into an economy sabotaged through more neglect. The bottom line is that this is a story of neglect all through. Something that can’t be fixed through FDI. It needs reform.

There also is a harm in allowing FDI for this purpose. If it is foreign investors who make these investments, the supply chain gets dependent on them. Which, for a population of our size is a thoughtless dependence. Particularly when there is absolutely nothing to support a farmer who chooses not to go with these retails AND the chances diminish considerably because some facilities are there, so the deficit is no longer as compelling.

Some other thoughts:

Middlemen are Indians too. While the system is inefficient, or they add considerably to inflation of cost to cover risks, they do have risks. It is typical “lynch mob” thinking to knowingly promote something harmful to them – and they are a massive number. The same goes for retailers. That is a considerable size of the population – wholesalers, retailers, transporters. Chances are that we have a few minorities that are lesser in size. Deliberately setting them up to be out-competed by giants whose resources they can’t pray to match is plain bad administration. Competition happens among equals. This is not equal.

Many argue that this isn’t how it plays out in US or UK. But the systems and support available to the small time businessmen in US or UK is considerable. They don’t have to build every resource from scratch. Unless we make it possible and within their affordability to create the complex systems we have suddenly started expecting, we have no right to blame them for not offering them.

There seems to be a fantasy that farmers will benefit from directly supplying to retailers. This makes the asumption that these fancy systems will be cheaper than cheaper system with more middlemen padding things, but it is a possible assumption. What gets ignored is that the money now moves away from the rural sectors to corporates and worsens our rich-poor divide while laying off vast numbers of people. This may be a good idea for countries with excellent employment rates where you streamline labor, it is bad news for countries plagued with unemployment already. There are arguments that people will get paid better. But what does it mean if one person gets paid better, and puts four out of jobs? And don’t even begin to say that there won’t be layoffs involved, because efficiency is exactly where these systems earn. Less people doing more work.

Also the fantasy about farmers earning more. Why would they earn more? Retail chains cater to customers, not suppliers. Show me the businessman who will pay more for something available in the open market for less. Some have given the example of chip manufacturers paying far more to farmers they buy from directly. Those potatoes are expensive. They are a different quality, cultivated for low starch, large size and take more labor than regular potatoes. Farmers aren’t getting better rates for the same thing!

That is like saying retailers will pay Basmati prices for any rice. Simply not true! There simply is no need to pay more than regular prices without getting more. If they get more, it shouldn’t be seen as a favor!

The biggest problem I have with FDI in retail is that our governments have consistently shortchanged the people to keep a “climate” condusive to business [read: bending rules]. To me, no matter the pluses and minuses of the others, going afoul of our constitution to create opportunities for non-Indian entities at the cost of Indian entities is pure fraud, and we have shown no ability to over come it enough to be trusted with FDI Retail not being another scam.

To see the extent to which our own failed us in the pursuit of investment, read Tehelka’s write up on the Bhopal Gas Tragedy last year. The scale and collusion of the management of the accident, the extent and duration for which the victims have been left with no recourse to justice , are an eye opener for which side of “progress” the government stands on.

In my eyes, the FDI would be another such action where Indian traders and middlemen would be expected to pitch against the organized efficiency of large businesses without adequate support to develop competing systems. In other words – the gift of an entire market segment to non-Indians.

India cannot hope to compete for prices in the manufacturing sector. China would buy and sell us to us and make profit. With time, such a move is likely to diminish the space for Indian products and end up moving money out of India. It can be argued that the best man wins, but it is  a whole different debate if a government is at all required to provide businesses of other countries the tools to out compete its own people.

We have a bad track record of getting justice on international forums. Prosecuting Indian entities is far simpler than chasing foreign ones. It will be to our disadvantage to ensure accountability once the presence of foreign investors in India grows. It will also be a blow against the country and the interests of the people if we are not able to effectively bring exploitation or crimes to book. There are other problems too.

There isn’t a single plan with what to do when these middle men become idle. Larger numbers of unemployed people have been co-related with increased crimes and other social problems.

Others have argued that there are industries we need. Sure. If we can’t establish our own set ups as per our requirements or if it is somehow cheaper to buy… it is worth a shot for importing. No need for people to open shops here.

Today, India debates Foreign Direct Investment in the Retail sector. There are ongoing relationships waiting on government to smooth their way on the Nuclear power front. At the same time, the countries these would be multinational retailers would come from are going through #occupy movements to reclaim their opportunities lost in a haze of capitalism.

If this is not the halowed capitalism, perhaps it is important to read the increasing questioning of capitalism being compatible with democracy happening in international media.

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About the Author

Vidyut
Vidyut is a blogger on issues of National interest. Staunch advocate of rights, learning and freedoms. @Vidyut

8 Comments on "Debunking the great FDI savior"

  1. whoa vidyut your arguments almost made me a non believer of the fdi. pretty convincing points out there.

    yep i do agree with sonali ranade that this inviting fdi is more of a debt serving  operation.  do remember that our PM is an eminent economist. unfortunately for him he cant swallow or spit the hot liquid hehe so he came up with the brilliant idea of taking this opportune movement to introduce the bill gauge the reaction. well he did get the feedback. believe me next general election even if they get a good majority they wudnt even talk about it. its a stop gap affair for balance of payments.

    Honest opinion FDI in retail sector is all hogwash. if i was walmart wudnt even think of coming here unless im gonna make two fold profits. unless i have a lot of convincing power and time on my hands. practicality is difficult here. what we are all talking here are based on numbers and models. with India being so diverse in terms of geographic location, climate, people language unless the foreign companies  do a proper study it becomes difficult for them to survive here. 

    its not that as if they will jump at the chance and do things right away. permission today will mean they may set up shop a few  years down the line. hence like sonali says money will not flow in immediately.

    cold storage. request some of you to do a field visit. our ryots or farmers have enough cold storage’s and proper transport facilities its just that it aint organized and its under the strong hold of a few powerful politicians who play with the market just like some of our brokers in the share market. pawar is prime example of stranglehold on sugar industries in maharashtra.

    question also arises here that are you ready for the plurality of brands. when you visit a super bazaar you already have so many ingenious brands that it is difficult to choose one among them and you buy only because of your brand royalty. are u ready to experiment with new brands without comparison to  your already established brand. 

    r u aware of metro cash and carry. it sells products only to retailers that is kirana shops with cst and local st registration. but none of the kirana guys buy from there. they all go to the local sazi mundi or the apmc (government set up) to buy the raw materials and products.

    government seriously needs to look at one thing to benifit the farmer. establish a set pattern to fix support price for the farmer so that he never looses. prime example where government has benifitted the farmer is sugarcane procurement price.
    if it can be done there why cant it do it for other things also.

    read history during school that alahudding khilji already had this sort of support system for the farmers and ensured they got a good deal always.

  2. whoa vidyut your arguments almost made me a non believer of the fdi. pretty convincing points out there.

    yep i do agree with sonali ranade that this inviting fdi is more of a debt serving  operation.  do remember that our PM is an eminent economist. unfortunately for him he cant swallow or spit the hot liquid hehe so he came up with the brilliant idea of taking this opportune movement to introduce the bill gauge the reaction. well he did get the feedback. believe me next general election even if they get a good majority they wudnt even talk about it. its a stop gap affair for balance of payments.

    Honest opinion FDI in retail sector is all hogwash. if i was walmart wudnt even think of coming here unless im gonna make two fold profits. unless i have a lot of convincing power and time on my hands. practicality is difficult here. what we are all talking here are based on numbers and models. with India being so diverse in terms of geographic location, climate, people language unless the foreign companies  do a proper study it becomes difficult for them to survive here. 

    its not that as if they will jump at the chance and do things right away. permission today will mean they may set up shop a few  years down the line. hence like sonali says money will not flow in immediately.

    cold storage. request some of you to do a field visit. our ryots or farmers have enough cold storage’s and proper transport facilities its just that it aint organized and its under the strong hold of a few powerful politicians who play with the market just like some of our brokers in the share market. pawar is prime example of stranglehold on sugar industries in maharashtra.

    question also arises here that are you ready for the plurality of brands. when you visit a super bazaar you already have so many ingenious brands that it is difficult to choose one among them and you buy only because of your brand royalty. are u ready to experiment with new brands without comparison to  your already established brand. 

    r u aware of metro cash and carry. it sells products only to retailers that is kirana shops with cst and local st registration. but none of the kirana guys buy from there. they all go to the local sazi mundi or the apmc (government set up) to buy the raw materials and products.

    government seriously needs to look at one thing to benifit the farmer. establish a set pattern to fix support price for the farmer so that he never looses. prime example where government has benifitted the farmer is sugarcane procurement price.
    if it can be done there why cant it do it for other things also.

    read history during school that alahudding khilji already had this sort of support system for the farmers and ensured they got a good deal always.

  3. There are advantages FDi will bring in terms of standards compliance and more detailed grading of quality leading to overall improvements in quality. However, again, there is nothing stopping India from doing this.

    About the cold storage systems and such. They are a vary minor part of transport and handling retail, though they are a big challenge. The question of quality and efficiency suffers from many things easily remedied that should cut down significant losses. The fact is that we don’t do them. It is not a government priority.

    While FDI in retail sector will help develop them, it will further alienate those not in the retail chain. Eventually, this will mean that the “country’s agriculatural revolution” leaves behind those not working with foreign companies, and this is very dangerous for the overall growth of the country, because the country’s obligation to provide reform and better conditions for its citizens gets further neglected because of this illusion of excellence that is actually corporate/private and not for all.

  4. There are advantages FDi will bring in terms of standards compliance and more detailed grading of quality leading to overall improvements in quality. However, again, there is nothing stopping India from doing this.

    About the cold storage systems and such. They are a vary minor part of transport and handling retail, though they are a big challenge. The question of quality and efficiency suffers from many things easily remedied that should cut down significant losses. The fact is that we don’t do them. It is not a government priority.

    While FDI in retail sector will help develop them, it will further alienate those not in the retail chain. Eventually, this will mean that the “country’s agriculatural revolution” leaves behind those not working with foreign companies, and this is very dangerous for the overall growth of the country, because the country’s obligation to provide reform and better conditions for its citizens gets further neglected because of this illusion of excellence that is actually corporate/private and not for all.

  5. The arguments that you have listed in questioning the FDI in retail sector are quite sound but I would like to raise certain points regarding this in the present context.

    Let us analyze the system in its present condition and probably we would be able to find a reasoning as to why the Indian retailers weren’t able to build efficiencies needed. I am basically looking at the farmers (the producers) and the final customers. If a newer system is able to give them a chance to be well off, then I would like to take that chance. As for the middlemen, I will address them later.

    As of now the produce of the farmer passes through multiple traders and then to the final consumer. Is there a value-add in the chain? No. There is simply a transfer of goods. Let us try and first understand why the Indian chains haven’t been able to develop a sustainable supply chain. The Indian companies who have entered the segment have no prior exposure of operating in this segment. So, they are basically competing with the traditional system which doesn’t force them to develop an independent supply chain. All firms respond to competitive environment. And when a firm is faced with such heavy investments, only an external force can make them move. When an international chain steps in, things will change. Why? Coz they have a certain way of operating. They work on the system of independent supply chains to lower their procurement costs. Such a competitor would force the Indian retailers into action and look at supply chain optimization leading to better market control.So, it is not a point of dependency on the foreign investors but its about triggering the system into action.

    Now to the point of them further dominating the farmers. For simplicity, let us assume that there are two middlemen in the system, between the farmer and retailer who sells it to the end consumer. The price earned by the farmer is say x, the price paid by the end consumer is z, the price paid in between being say, y1 and y2. (x < y1 < y2 < z). Is there any value addition taking place which justifies the rise in the price? No. Is there anything stopping a retailer who is ready to make investments in a cold supply chain from paying the farmer a price greater than x but less than y1 (keeping in mind the investment costs)? No. Would the farmer benefit? Yes. Can the free market ensure this? I believe so.

    For a self-sufficient supply chain, a firm needs to have all links in sync. The supply chain that exists now doesnt share in the risk-return part of the producer. They take part in the return but not in the risk. As crops are harvested seasonally, the middlemen walk away with huge gains at the expense of the farmer and the end consumer, coz the farmer cant store the produce and needs to sell asap. And the consumer needs the produce through out the year. I expect the international players to be ready to make contracts with the farmers to have reliable supply, especially because they would have the cold chains ready to take advantage of the seasonal variations. 

    Coming to agriculture reform. An agriculture revolution is desperately needed. Coz cultivable land in India is very high. But productivity per hectare is very low coz of the primitive methods being used. So, first of all we produce less than we should and second, we waste a good part of it coz we cant store it. This results in high cost to the end consumer and low revenue to the producer. There are many techniques available in the modern world (and no, I am not referring to GM crops. I can give references of pioneers in this if anyone needs) which can raise productivty. A farmer's revenue depends on how much he can sell and at what price he can sell. The government can only provide cheaper loans to the farmers. The part about improving productivity is left to the farmers or to some NGOs. If a firm is interested in developing a robust supply chain, then I believe that at some point of time, it would be inevitable that such practices would be implemented. There is more possibility of this change happening through a firm with business interests rather than in the existing system. And again, if there is a chance, then I would risk taking it. 

    Onto government developing supply chains. This is an idea that I have heard often in the recent past on many forums and to put it bluntly, it is ridiculous. Have we forgotten the inefficiencies that exist in all government machinery? Why do we want to create another such demon? Have we forgotten how the FCI functions? And most importantly, the government must realize its role. Its role is to make the economic environment conducive for investments, not to make investments where it has no expertise. In some ways, the last decade has seen some measures taken in this regard. Our national and state highways have improved and are closing in on world class levels. A system is being pushed for wherein transportation vehicles need not wait for hours at octroi points. Efforts are on to improve irrigation facilities. These are the measures that the government needs to take. To cut the red tape. Not think of investing in cold chains. It will end up being more inefficient and just increase the burden on the tax payers.

    Now to the middlemen. The growth of an economy happens when its citizens are engaged in gainful employment. Adding more people to a system just increases its inefficiency, not its productivity. The middlemen in this system are not doing any value-addition to the products. And when there is no value-add, you are simply inflating the final cost for transfer of products. Employing 5 people to do the job of one is not a way to improve the economy of the country. You are just reducing the value of that job. Yes, the government must have plans for employment for these middlemen. But just because of them, it doesn't make sense to drop the idea. Entry of multi-nationals brings forth lot of opportunity. For example, there is a shortage of industry level cold storage builders in India. They can find an opportunity there. They have good people skills. And these businesses just need management of the technical people. Or else, they can enter into cold storage themselves. There is not dearth of opportunity, if one cares to look for it. But it will surely drag them out of their comfort zone, which no one likes.

    It would be ideal if agricultural reforms can occur without any intervention. But it won't. It should have taken place a decade back but its still waiting in the wings. And I believe that without an external impetus, this won't happen.

    • Excellent points made by Harish. I completely agree with them.
      I would like to add only one point which is missed by many people: GDP growth. 
      This quarter GDP growth is at 6.9%. This is mainly on account of poor performance of manufacturing sector. Significant reduction in foreign inflows is also an important contributing factor.
      In such an environment, we need more FDI. This reform should have been done years ago. 

  6. The arguments that you have listed in questioning the FDI in retail sector are quite sound but I would like to raise certain points regarding this in the present context.

    Let us analyze the system in its present condition and probably we would be able to find a reasoning as to why the Indian retailers weren’t able to build efficiencies needed. I am basically looking at the farmers (the producers) and the final customers. If a newer system is able to give them a chance to be well off, then I would like to take that chance. As for the middlemen, I will address them later.

    As of now the produce of the farmer passes through multiple traders and then to the final consumer. Is there a value-add in the chain? No. There is simply a transfer of goods. Let us try and first understand why the Indian chains haven’t been able to develop a sustainable supply chain. The Indian companies who have entered the segment have no prior exposure of operating in this segment. So, they are basically competing with the traditional system which doesn’t force them to develop an independent supply chain. All firms respond to competitive environment. And when a firm is faced with such heavy investments, only an external force can make them move. When an international chain steps in, things will change. Why? Coz they have a certain way of operating. They work on the system of independent supply chains to lower their procurement costs. Such a competitor would force the Indian retailers into action and look at supply chain optimization leading to better market control.So, it is not a point of dependency on the foreign investors but its about triggering the system into action.

    Now to the point of them further dominating the farmers. For simplicity, let us assume that there are two middlemen in the system, between the farmer and retailer who sells it to the end consumer. The price earned by the farmer is say x, the price paid by the end consumer is z, the price paid in between being say, y1 and y2. (x < y1 < y2 < z). Is there any value addition taking place which justifies the rise in the price? No. Is there anything stopping a retailer who is ready to make investments in a cold supply chain from paying the farmer a price greater than x but less than y1 (keeping in mind the investment costs)? No. Would the farmer benefit? Yes. Can the free market ensure this? I believe so.

    For a self-sufficient supply chain, a firm needs to have all links in sync. The supply chain that exists now doesnt share in the risk-return part of the producer. They take part in the return but not in the risk. As crops are harvested seasonally, the middlemen walk away with huge gains at the expense of the farmer and the end consumer, coz the farmer cant store the produce and needs to sell asap. And the consumer needs the produce through out the year. I expect the international players to be ready to make contracts with the farmers to have reliable supply, especially because they would have the cold chains ready to take advantage of the seasonal variations. 

    Coming to agriculture reform. An agriculture revolution is desperately needed. Coz cultivable land in India is very high. But productivity per hectare is very low coz of the primitive methods being used. So, first of all we produce less than we should and second, we waste a good part of it coz we cant store it. This results in high cost to the end consumer and low revenue to the producer. There are many techniques available in the modern world (and no, I am not referring to GM crops. I can give references of pioneers in this if anyone needs) which can raise productivty. A farmer's revenue depends on how much he can sell and at what price he can sell. The government can only provide cheaper loans to the farmers. The part about improving productivity is left to the farmers or to some NGOs. If a firm is interested in developing a robust supply chain, then I believe that at some point of time, it would be inevitable that such practices would be implemented. There is more possibility of this change happening through a firm with business interests rather than in the existing system. And again, if there is a chance, then I would risk taking it. 

    Onto government developing supply chains. This is an idea that I have heard often in the recent past on many forums and to put it bluntly, it is ridiculous. Have we forgotten the inefficiencies that exist in all government machinery? Why do we want to create another such demon? Have we forgotten how the FCI functions? And most importantly, the government must realize its role. Its role is to make the economic environment conducive for investments, not to make investments where it has no expertise. In some ways, the last decade has seen some measures taken in this regard. Our national and state highways have improved and are closing in on world class levels. A system is being pushed for wherein transportation vehicles need not wait for hours at octroi points. Efforts are on to improve irrigation facilities. These are the measures that the government needs to take. To cut the red tape. Not think of investing in cold chains. It will end up being more inefficient and just increase the burden on the tax payers.

    Now to the middlemen. The growth of an economy happens when its citizens are engaged in gainful employment. Adding more people to a system just increases its inefficiency, not its productivity. The middlemen in this system are not doing any value-addition to the products. And when there is no value-add, you are simply inflating the final cost for transfer of products. Employing 5 people to do the job of one is not a way to improve the economy of the country. You are just reducing the value of that job. Yes, the government must have plans for employment for these middlemen. But just because of them, it doesn't make sense to drop the idea. Entry of multi-nationals brings forth lot of opportunity. For example, there is a shortage of industry level cold storage builders in India. They can find an opportunity there. They have good people skills. And these businesses just need management of the technical people. Or else, they can enter into cold storage themselves. There is not dearth of opportunity, if one cares to look for it. But it will surely drag them out of their comfort zone, which no one likes.

    It would be ideal if agricultural reforms can occur without any intervention. But it won't. It should have taken place a decade back but its still waiting in the wings. And I believe that without an external impetus, this won't happen.

    • Excellent points made by Harish. I completely agree with them.
      I would like to add only one point which is missed by many people: GDP growth. 
      This quarter GDP growth is at 6.9%. This is mainly on account of poor performance of manufacturing sector. Significant reduction in foreign inflows is also an important contributing factor.
      In such an environment, we need more FDI. This reform should have been done years ago. 

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