1. 10 REASONS WHY FDI IN RETAIL IS A BAD IDEA.
Posted by sanjaykaul on December 2, 2011 · 8 Comments
The explosion of opinion on the issue of Foreign Direct Investment in the retail sector
in India has confounded most of us with dubious data, incorrect analysis and
obfuscatory lobbying. Time to set the record straight. 10 good reasons why it is a bad
idea.
1. FDI in retail is a non-critical area of intervention. Nobody in urban India
is suffering for lack of ‘access’ to food or grocery items. If at all it is the public
distribution system that is diseased with corruption and needs to be replaced or
removed. Access to food is an issue in the remote and rural impoverished areas of
the country, where as the fine print tells you, FDI in retail will not be implemented.
Comparative examples that try and portray an opposition to FDI in retail as
regressive are not only misplaced, they are patently suspect. [Montek Singh
Ahluwalia of the Planning Commission included, who suggested that arguing
against FDI in retail was like complaining that the taxis would dislodge theTonga].
To imagine that FDI in retail exemplifies a progressive mindset shames us into
thinking that an ability to buy in the comfort of a twenty thousand square feet air
conditioned space is more indicative of progress than providing similar quality
housing for its citizen or schools for our children. The taxi took over theTonga for
reasons of speed and protection from the elements. FDI in retail projects no such
benefit. We already get what we need for our daily needs through local general
stores and local big format stores. The gloss of a shiny international brand name
atop a store is not enough of a differential.
2. Middlemen are key to distribution. The myth about ‘farm-to-store’ supply
chain should end with the simple fact that middlemen will not be removed from the
operation but that existing middle men will be replaced by bigger, more organized,
more prosperous middlemen. Anyone who knows the business of distribution
knows that there is nothing called a direct sale from farmer to retail, unless it is
self-owned farm by the retailer. The process requires a minimum of three
transactions. From the farmer to the transporter, to the distributor and to the end
supplier. There are middlemen even if you make a direct purchase and underwrite
the farmer’s produce and each point of contact costs something to keep his or her
services going. The middleman is not an enemy of the state. The middleman is
being paid for services rendered, his is not a free lunch. He is the conduit that
makes delivery possible. Removing middle men, as is being claimed by votaries of
FDI in Retail does nothing for the families of those who will be obliterated by the
new model that will take over: the retailer will have his own middle men in the
system, and that is all the difference there will be. The argument advanced by many
including some farmer lobby groups that there are 4 to 10 layers of middle men
between producer and retail are not only humbugging they are undermining free
market movements where nobody can get in line unless he performs a function. The
other charge, that a policy failure produced such layers of middlemen can be
countered with a simple answer – FDI in Retail cannot remedy a policy failure. It is
the government’s job to fix that, not Walmart’s.
3. Farmers will not get better prices. The idea that the farmer will get a better
price for his produce if FDI in Retail is allowed is a baseless suggestion. The open
market does not work on altruism and social service. It negotiates the best for itself

2. so it can corner the most for itself. Farmer suicides are not because they cannot sell,
as is being written about by irresponsible columnists and business leaders but
because they are unable to get remunerative prices for their produce qwing to poor
quality produce due to lack of proper crop management or crop failure, an inability
to pay back their loans or make ends meet and lose their land. To suggest that
foreign retailers would be so teary eyed at the plight of farmers that they would
offer a premium on produce which is available at less is plain childish. Fact is that
the markets, if allowed to function without controls, will take their own route to
price discovery. And remember, the more clout a buyer has, the lesser the seller gets
per capita. That is a law of the free market. FDI in retail cannot do any more than
local big format retailers are already doing. Those that argue that FDI in retail will
bring succor to farmers and reduce prices for consumers need to explain why, when
there are home grown large format retailers, that is not already the case. How can
you expand on a theme when you admit that it is not working? The farmer is only
an emotional hook in the pro FDI lobbyist’s scheme. The truth is that more than
70% of revenues of large format stores come from non-food items where the farmer
does not even figure. All the stories in media about farmer unions supporting the
move are motivated through two straight facts: lobbying with a generous dose of
cash infusion into these unions by food majors and retail chains and the other more
important fact – they are right about some farmers in their areas, specially Punjab
getting a better deal. But the cost of that is this: big retail and food processors alter
crop selection to have farmers produce to order. So, because Pepsi needs potatoes
for their chips, farmers skip the Dal season and other such produce in favour of
extensive cultivation and specialization towards potato cultivation. Now they are
right – that particular farmer is doing well – contract farming is profitable, but in
effect an entire range of products are now in short supply. Precisely why Dal and
cereals and vegetables are becoming costlier by the day. This is apart from the other
real problem – corporates do not like dealing with a dozen small producers. So they
focus on one or two large producers and create conditions for the rest to either
submit to a larger contractor or just sell the land and move out of business.
4. Brands compete to secure market share. Market share can only be
secured at the cost of another existing competitor. It is equally naive to
imagine that the anomalies of predatory pricing will be taken care of once the sector
is open to competition. Let us understand the idea of competition. All competition
starts from a baseline price point. The base line price already exists with the current
prices the farmer gets. All competition is normally over and above that base line.
Nobody sells below his purchase price. But what is being debated here is the ability
of the big retailer to sustain losses for a long period of time by selling under cost to
dismantle competition owing to deep pockets. Brands will go on a losing spree to
corner market share. That is an old principle. Walmart will sustain losses to counter
Carrefour and a Carrefour will do the same to contain another competitor. In a fight
of such giants, the small retailer and the kirana shop owner of today stand no
chance. As a caveat, one should be wondering what the local large format stores
would face and why they are supporting a policy shift that could hurt them. After
all, Spencer and a number of smaller retailers hardly stand a chance in the face of a
Walmart. Well the reason is simple: The only reason you hear some of them
support the idea is because [a] some want to raise money from markets abroad to

3. run their unprofitable enterprises for a little longer until they hope to break even
[b] access cheaper funds which the Government and its fiscal laws have made
almost non remunerative or [c] hope to be taken over and bought out. Note that the
retail business is cut throat and many large-format or branded stores have already
folded. Subhiksha inSouth India and Vishal and Sabka Bazaar in the North come to
mind immediately. Most of the existing local large format retailers who support the
idea are folks who are looking for a bail out or hoping to sell their operations on the
back of decent valuations.
5. Big Retail cannot co-exist with small retail. That big retail can coexist
with kirana is a flat impossibility. It can’t because big retail alters the playing field
permanently. The instruments of small retail are redundant in the schema of big
retail. The grammar of big format selling influences the buying habits of people.
The kirana sells on the basis of daily consumables of a middle class. The big-format
pushes for bulk sales, weekly big purchases where you buy four when you need one
simply because it is priced in an attractive deal for the day. The kiranaand the small
retailer cannot bundle promo packs because it can’t deal directly with producers.
Big retail is habit altering. It is not an alternate, not an expansion of choice but a
modification of the manner of consumption and sale. Big retail does not encourage
balanced consumption but exists on the principle of overuse, and excess. Big retail
altered the psyche of an entire generation of Americans – consumers, producers
and manufacturers alike. The idea that shopping can be a weekend activity, where
you load up on supplies for a week comes from a country where joint families are
not known, buying fresh vegetables daily is unknown, where women don’t cook and
burgers are staple diet. Weekend buying leads to storage. Which leads to oversized
freezers; which leads to more frozen food, and to more heat-and-eat dishes, and the
spiral of the other problems of plenty. Indians don’t consume like that and there is
much to be said about buying fresh and local, as the world is now discovering.
6. Big Retail is one big cause of food inflation. That food inflation will be
curtailed with FDI in Retail is a plain lie. Food inflation has to do with supply side
shortages and distribution bottlenecks that have mostly to do with government
policy in each case. The advent of big retail will not induce any farmer to grow more
food or make any dent in the fossilized mechanisms of food procurement and
distribution policies of Government. The truth remains that agriculture has suffered
for long, that farmers do not get remunerative prices and that they are unable to
pay back whet they have borrowed. Food inflation is a derivative of the paralysis of
government and states and nothing to do with FDI in retail. We’re talking about
FDI in retail for God’s sake, not FDI in agriculture. The other startling aspect of FDI
in retail is that it is being sold as the answer toIndia’s farming woes. Congress MP
Jyoti Mirdha has pointed out that the FDI introduced in the agriculture sector in
2006 is yet to show any progress, so where is the basis for moving on to FDI in
retail. What FDI could not do for agriculture directly, it will do through FDI in retail
is a bit of a big joke.
7. Consumers do not get better prices. Consumers will get lower prices is
another figment of the lobbyist’s fertile imagination. Prices never come down. Big
bazaar or Walmart, prices never come down. The argument is a facetious assault on
the principle of growth and inflation. Big retail can at best sell you cheaper potatoes
or five such items carefully selected on seasonal variations or bulk deals with

4. producers cheap for only a week and no more. For everything else you buy from
them, you will pay more. That is how big retail works. To qualify this, read this
comment from a KPMG expert who was arguing for FDI in retail: “To draw
consumers, [big] retailers squeeze suppliers and ensure efficiencies in categories
that drive foot falls. They balance it out by enjoying higher margins in categories
where impulse buying is high” [Anand Ramanathan quoted in Economic
Times,1st Dec 2011] The reason there is no data on this is because it is not in the
interest of big retail or big media to support the idea. Think about infrastructure
and overheads. A large format retailer, if it is not within an existing mall and aims
to be the size of Walmart stores will have to put up its own air-conditioning plant,
parking, galleys, staff, vans, transport, machinery and processes that simply cannot
offset any purchasing bulk deals to support the idea of cheaper prices. That prices
of food items are cheaper at big retail outlets is also not without a serious caveat.
Comparing prices is not the only criterion: you have to compare quality as well. Has
anyone ever bought fresh vegetable produce from a big retailer – nobody will accept
that quality from a local vendor. The jargon about cereals and selected stuff being
cheaper is sketchy at best and the reason there is no data on this is because nobody
wants to reveal the modus operandi of selective discounting by big retailers as a
marketing tool rather than any real principle of lower pricing. The survey published
in a newspaper is an in-house attempt which does not answer to the most
fundamental discrepancy – why does every survey attempt at comparing prices of
chosen commodities at kirana stores with big retail outlets: how about comparing
one big retail outlet with another and explain why they do not conform to the same
price principle across the board?
8. Big Retail kills small jobs. More jobs will be created when big retail comes in
is a fallacy and a purposeful falsehood. For an economy where 80% of the
population engaged in trade and local retailing is self employed, how do the
numbers stack up if you dislodge even 20% of that population. Does any math
support the theory that any number of big retailers in a city likeDelhi will be able to
support 5 lakh people who will progressively be thrown out of business due to their
advent? For a government that is unable to provide employment in big cities with
reasonable opportunities, the impact in smaller ones will be unmanageable. The
30% caveat that is being bandied about as a bulwark against large scale
displacement of local producers is also a charade because it does not concern itself
with produce but infrastructure investments that big retailers must make, [as a
safeguard, in the Government’s weak words] without explaining that these could be
the plywood and the roofing they use to set up their retail stores or the marble tiling
and the bathroom fixtures or even the trucks they buy. So what protection is this
worth? Then again, even if this were to be reworded to ensure that the 30% limit
pertained to produce and not infrastructure, which gigantic micro management
agency would pore over their account books to determine this on a daily or monthly
basis?
9. Big Retail is relative to Real Estate. Retail is a first cousin of the real estate
industry. Already the calculators are out fantasizing about the acreage these new big
format retail marts will need and the newer malls that will be coming by design
around such anchor stores. Big Retail loves Big Development and vice versa. The
upshot is that the already skewed real estate market will only get more out of

5. control and housing for middle classes and the ordinary folks that much farther. Big
retail creates the grounds for large scale property price hike throwing up a new
spiral of inflation in real estate space – a totally unregulated, unbridled, black
money haven. Another reason why the smaller retailer will have to pack up and
move – can’t afford the real estate.
10. FDI in Retail is a political hot-potato and a non-issue. The political
expediency attributed to the opposition on the issue of FDI in Retail is actually
misdirected and it is the government of the day which should be under a cloud of
suspicion for the timing of this move. If this is about proving that there is no
paralysis in governance, it is plainly a bravura act which should be set aside for the
moment. On the other hand, if this passes for reform, how about we discuss instead
FDI in education, a sector that holds the key to prosperity for this country and its
future generations. If this is a sop for theUS and the rest of the west, let us learn
from their mistakes – profligacy in consumer spend and consolidation of business
are dangerous instruments in the economic life of a country. Let us not bail out
those who would take us down the precise route that landed them in hell. India
must decide if it wishes to trade its cultural, dietary and social habits for the old
western paradigm of conspicuous consumption and whether it can stave off the
easy charm of easy money and draw a new plan where the farmers are attended to
immediately, incentives woven into their crop cultivation habits, offer remunerative
prices which keep him engaged and allows him to prosper. This pandering to the
urban consumer with the idea that he will have more choice and better pricing is a
charade and its bluff must be called. The urban consumer they are talking about
probably earns Rs 5 Lacs annually on average and is already spoiled for choice. If it
is all about saving a few rupees per kilo on a packet of Ariel detergent, is it worth
sending a man out of work for that? Can a Government which cannot provide jobs
afford to argue with that? All the media support for FDI in retail is connected to
their advertising potential and business cross holdings. Media houses are naturally
not saddled with the responsibility of finding employment for the burgeoning
population of the country and they must be excused their fit of greed. The best way
to test their integrity is to ask if they are okay with FDI in media.