THE Indian Parliament was at its transactional best when it passed the resolution favouring Foreign Direct Investment (FDI) in Retail when those who could have made a difference spoke against it but voted for it, either by punching the button or by going for a walk. There was debate, but it went along expected lines. The extreme right and left banded together, as is increasingly wont, and the floating centrists made a deal. Issues involved never got discussed. Name-calling passed off as debate.

Now let us start with the essentials. Most foreign investment is beneficial as it creates jobs, adds value and contributes to the GDP. Companies like Hyundai, Ford and Honda have built a giant automobile industry in India now producing over two million cars and tens of thousands of new jobs. By 2017, India will emerge as the third largest car making country in the world, producing over seven million automobiles. This would not be possible without foreign investment, technology and leadership.

In sector after sector, foreign investment has created huge new capacities catering to domestic and foreign markets. The level of foreign ownership makes little difference to the contribution foreign companies make to the economy. The desirability of foreign investment must never be questioned as long as it creates jobs, adds value and contributes to development. Incidentally, these are just the factors that go against foreign direct investment in retail.

Study after study in developed and developing countries alike have shown that big box retail rather than create jobs, destroys jobs. In fact its utility in developed economies is due to the labour savings it achieves. Classical economics was wary of the monopolistic producer who would charge ‘too much’ from the poor working classes while producing the much-needed ‘bread’. The single producer was the dread from which economists sought ‘perfect competition’, meaning many producers catering to many consumers resulting in fair competition in a perfect market. Adam Smith could never have conceived of a global operator with a huge hoard of cash and instant information becoming a ‘sole’ consumer.

To the economists, ‘monopsony’ was a theoretical concept – to be defined as a construct before belabouring the dangers of a monopoly. The danger of monopsony, seldom thought of as a threat by economists, is now upon us. In the last three decades, the advent of giant retailers like Walmart (turnover $422 billion in year ended January 2011) and producers like Nestle (turnover 60.9 billion euros year on year October 2011) have made monopsony a reality.

 

The bulk buying and the recourse to monopsonic practices result in pushing down producer prices, undoubtedly with resultant benefits to the consumer. Thus, the more of a commodity large retailers purchase in bulk, the lower the price growers of agricultural commodities obtain! Studies by FAO and Oxfam attest to this. For instance, a decade ago coffee growers earned $10 billion from a global market of over $30 billion, but now they receive less than $6 billion out of a global market $60 billion. The cocoa farmers of Ghana now receive only 3.9% of the price of a typical milk chocolate bar but the retail margin hovers around 34.1%. A banana farmer in South America gets 5% of the retail price of the banana while 34% accrues to distribution and retail.

The ‘Oxfam: International Commodity Research – Coffee’ clearly indicates the plunging price of coffee during the period 1980-2000 as production scaled new heights. Analyzing the reason for this, the study explains that the major cause for it as follows: ‘The high level concentration along the coffee supply chain is clearly not to the advantage of producers, who are price takers. Multinationals involved in the coffee sector control an ever-increasing percentage of processing, marketing and retailing. Because they are facing a multitude of small producers in 80 poor countries, multinationals can set the rules of the game. This buyer-driven supply chain means that multinationals capture most of the value-added linked with the production of coffee. Multinationals can put a downward pressure on producer prices by playing one producer against the other or by encouraging new countries or regions to start producing coffee via foreign direct investment.’¹ 

 

The average size of a Walmart is about 100,000 sq ft and the average turnover of a store is about $53.2 mn, each employing about 300 workers. The turnover per employee averages $175,000. Walmart has a 9% return on assets, a 21% return on equity, and its CEO Michael Duke’s $35 million salary, when converted to an hourly wage, works out to $16,826.92. In comparison to this new employees are paid $8.75 an hour that would gross $13,650 a year. By contrast, the average Indian retailer had an annual turnover of Rs 330,000. Only 4% of the 12 million retail outlets were larger than 500 sq ft in size.

India has 53 towns each with a population of over one million. If Walmart were to open an average Walmart store in each of these cities and they reach the average Walmart performance per store, we are looking at a total turnover of over Rs 141,000 million with the employment merely of about 16,000 persons. Extrapolating this with the average trend in India, it would mean displacing about 758,000 persons. Quite clearly Walmart is not going to create more jobs in India. On the contrary, it will cause a massive loss of jobs in direct retail. This is the experience in the USA also.

A 2004 study by the Pennsylvania State University concluded that countries with Walmart stores suffered increased poverty, and suggested that it was due to the displacement of higher paid workers in small family owned retailers. Another 2007 study showed that towns in Nebraska with and without Walmart fared similarly different in terms of joblessness and poverty. A study of Walmart’s expansion in Iowa found that 84% of all sales at the new Walmart stores came at the expense of existing businesses within the same county. Business industry analyst, Retail Forward, predicted that for every new Super centre that Walmart opens, two local supermarkets will close.² 

 

It will be appropriate at this stage to consider the size of these giant retailers.³ Walmart’s turnover exceeds the GDP of Norway, which ranks 20 in the list of GDPs. It’s almost four times the next largest retailer, Carrefour. This is indicative of the power of the corporation. Typifying this power was the less than a day visit to India by the Chairman of Walmart Stores Inc, S. Robson Walters on 6 November 2009, described by Walmart as a private visit, and the only person he called on was the Prime Minister, Manmohan Singh. After he departed, Commerce Minister Anand Sharma said: ‘This is not the time for us to revisit the policy. Single-brand retail is good enough. Those who have commenced operation are happily doing business and so we cannot tweak the policy as of now.’⁴ 

The persuasive powers of such a large corporation should, however, never be underestimated. Despite the unequivocal position of the government, as stated by its commerce minister, this very same government on 24 November announced that it was opening up the retail sector to 51% foreign ownership. Now one may ask if any of the other stakeholders in India’s retail business would have had such easy access to the higher echelons of government?

 

The major argument in favour of the benefits a Walmart or Carrefour will bring centres around the perceived benefits to agriculture and better prices to the farmer. Surprising all, Congress general secretary and MP, Rahul Gandhi, told election gatherings across Farrukhabad and Kannauj in UP that FDI would solve the puzzle of a kilogram of potato fetching two rupees or less to the farmer and a packet of potato chips costing Rs 10. ‘A packet of chips is made from just half a potato,’ he added, virtually turning the opposition to FDI into a conspiracy against farmers.⁵ One might suggest to him that PepsiCo has been buying potato and tomato for sometime now without making a dent on farmer prices.

Empirical evidence from many countries where big retail chains dominate shows that on the contrary farm realizations actually decline. A recent joint study in Finland by Agrifood Research Finland and Pellervo Economic Research Institute revealed that for each kilo of rye bread purchased in 2010, for which the consumer paid 3.52 euros, 1.24 went to the seller, while the grower received only 14 cents. A further 1.74 euros was shared by the milling company and logistics, while the rest went to the state as taxes. The study also revealed that while the trade initially got 19% of the takings on food, its share went up to 29% in 2009. Finally, the study showed that food prices rose faster than other consumer goods between 2000 and 2010.⁶ 

Big business and MNCs like PepsiCo, Cargill, ConAgra and even ITC and Reliance have been procuring food grains and farm produce for several years now and there is no evidence that general prices for inputs have increased. Even where better prices were paid to contract farmers, available data suggests that input costs have been higher. Simple economic logic tells us that nobody pays more for a commodity that can be obtained for less. Business is about extracting profits and not about charity.

 

Protagonists of FDI in retail talk a lot about modernizing the supply chain. Consider this. The National Sample Survey relating to household expenditures reveals that fruits and vegetables only account for 9.88% of urban household expenditure. It is widely believed that the supply chain that links the Indian producer to the domestic consumer is primitive, outmoded and wasteful. Many studies exist that detail the extent of wastage. One will readily concede that large format retailing, with its capacity for bulk procurement and capital investment, even if it accounts for a fraction of the retail trade in the sector, might be able to make some headway in modernizing the supply chain.

But before we get into the ‘for and against’ argument vis-à-vis FDI, we must also ponder over the fact that a modern and nationwide supply chain has been created, indigenously, for milk and milk products which account for 8.11% of household expenditure. Similarly, we have an effective supply chain for food items such as cereals, pulses, sugar and edible oils, which together accounts for 24.16% of household expenditure. All other non-food goods purchased by our households such as tobacco products and alcohol, processed foods and snacks, toiletries, detergents, garments etc., which together account for 52.57% of all urban household expenditure, are made available for consumption by modern and efficient supply chains.

Thus, what the average household does not get from a modern supply chain is a very small part of its purchase. So the argument that the pro-FDI lobby extends vis-à-vis of FDI in retail – of modernizing the entire supply chain – is a bit exaggerated. The supply chain as it is now, is mostly modernized and efficient, and what is yet to be modernized covers only a very small part of urban household consumption. The argument that we need the merchants of the western world like Walmart to modernize just 9.88% of the supply chain is thus a bit bogus and self-serving.

 

More than anything else it is Walmart’s Chinese connection that should cause us worry. While Walmart has 352 stores in 130 Chinese cities with a total turnover of $7.5 billion, it directly buys via its procurement centres at Shenzhen and Dalian over $290 billion worth of goods from more than 20,000 Chinese suppliers, 70% of its 2010 global turnover of $420 billion.⁷ Of this, over $60 billion of goods are exported to the USA alone, making Walmart the fifth largest exporter to the USA, also suggesting that Walmart’s procurement from China is the major source of its profits.

 

With its huge monopsonic power, Walmart actually depresses wages by forcing suppliers to cut costs. A good example to demonstrate the low wages in the Chinese labour market is contained in a report by Thomas Fuller in The International Herald Tribune of 3 August 2006, which investigated the percentage split in profit in the shoe industry between the Chinese factories and those who market and sell the finished products in the US and Europe. The factory owners after the laborious process of manufacturing make a profit margin of 65 cents per pair of shoes, which are sold ex-factory for $15.30. ‘A major U.S. retailer, after factoring in shipping, store rent and salaries, sells the boots for $49.99. Assuming a pre-tax profit margin of about 7%, an average among large U.S. retailers, it earns $3.46 on the same pair of boots.’

However, the story doesn’t end with the unfair profit margins. The Chinese labourers, who make the shoes, box them and even affix the price tag, are the ones who get the worst deal. The International Herald Tribune says: ‘Yet for all the sweat that goes into making shoes in Tianjin, the factory payroll is equivalent to $1.30 a pair, 2.6% of the U.S. retail price.’ Should the salary of every worker in the Chinese shoe factory be doubled, the retail price in the US would merely go up from $49.99 to $50.29.

Even if one were to ignore the manipulated value of the yuan to make Chinese made goods export competitive, it is clear that by keeping wages low and without the protections afforded to labour by trade unions, collective bargaining, overtime and assurance of good working conditions, China is in effect subsidizing exports. What the flow of cheap Chinese goods through the Walmart direct pipeline from China into India will do to Indian companies, particularly the SMEs can well be imagined. Even without Walmart, Indian SMEs are being driven out in sector after sector by cheap Chinese imports.

For instance, there is no light fittings industry left in India. Same for toys. One can well imagine what a Walmart pipeline will do to the hosiery and woollen goods manufacturers in Ludhiana and Tiruppur. The once prosperous clock making industry around Rajkot has almost entirely fled to China. Millions of jobs in the semi-organized sector now stand threatened. In 1985, Sam Walton, the founder of Walmart was forced to admit: ‘Something must be done by all of us in the retailing and manufacturing areas to reverse this serious threat of overseas imports to our free enterprise system… Our company is firmly committed to the philosophy by buying everything possible from suppliers who manufacture their products in the United States.’

 

We should also be worried about our fast growing trade deficit with China, which is now likely to exceed last year’s record $20 billion figure. India’s trade deficit with China widened to $14 billion after seven months this year, as China’s overall trade surplus soared to the highest in two-and-a-half years amid an unexpected surge in exports to the European Union. With bilateral trade reaching $41.5 billion in July 2011 by rising 17% and on track to surpass last year’s record $61.7 billion figure, the Indian government should be concerned by this latest import data.⁸ Burgeoning trade deficits have contributed significantly to the recent steep devaluation of the rupee. But is the government worried enough to seek to narrow the deficit?

 

Having said all this, one must concede that change is remorseless. The constant displacement of workers by machines and methods is the story of the future. Textile mills made most weavers redundant, just as robots in automobile manufacturing have rendered many workers as surplus. This is the story in all sectors of manufacturing. While the future cannot be avoided, there is no need to hasten the pain. Big box retail will bring benefits to many stakeholders; not the least being the state, which will see improved realization of taxes and the construction industry that will be called to build the new retail centres. Better quality control and good management methods will spread into other sectors and down the supply chain manufacturers will demand from their suppliers what is demanded of them by their buyers.

Given our pressing need to absorb growing numbers from the hinterland into our labour pool, should we exacerbate our problems by facilitating foreign procurement coupled with efficient local distribution, thereby suffocating our own manufacturing industry? This at a time when we still have not got around to facilitating lower cost and more efficient manufacturing in India through enabling legislation and regulation. The contribution of industry to GDP in 1992-96 and 1997-2003 was 30.9% and 23.7% for India, while for China over roughly the same period it was 62.2% and 58.5%15. We need to address issues at home before we unthinkingly or unintentionally invite problems from abroad. The government would be better advised to address this issue first, rather than devoting itself entirely to the cause of foreign retailers.

Different countries have dealt with the problem of the sudden onset of giant foreign retailers differently. In Thailand no large markets are permitted within 15 km of the city centre. It might be better to follow the Chinese model of caution and hurrying slowly. China first allowed FDI in retail in 1992 and the cap was at 26%. After ten years the cap was raised to 49% when local chains had sufficiently entrenched themselves. 100% FDI in retail was permitted only in 2004, after the infant retailing industry had acquired some muscle.⁹ Walmart in China, however, is a very different company to what it is in the USA or elsewhere. 15000 suppliers serve its China operations alone, and Walmart China claims that over 95% of its goods sold in China are sourced locally.¹⁰ 

 

Even in as liberal an economy as Japan, large-scale retail location law of 2000 stringently regulates factors such as garbage removal, parking, noise and traffic. Recently, Carrefour decided to exit Japan by selling off its eight struggling outlets after four years to the Japanese Aeon Co as the extremely cumbersome Japanese regulations blatantly favour its own home-grown retail firms.¹¹ Malaysia’s Bumiputra clause insists that 30% of equity is held by indigenous Malayans. Philippines insist that 30% of inventory by value be grown within the country.¹² 

The US or European experience shows that retail giants destroyed the livelihood of small shopkeepers, who became employees of such giants for paltry salaries. A retail supermarket encompasses the entire chain and shrinks the intermediaries – lowering costs and removing jobs. In a country with no social security net, the replacement of thousands of retailers by a single large intermediary will shrink jobs by the millions in the distribution industry. What option will these millions then have except to take to the street? Many talk of the revolution in retail, but governments must be more concerned with revolutions fomenting on the streets.

 

There are ways of achieving the former while avoiding the latter. Two simple suggestions to tweak the policy on the anvil are: (i) Insist that big box retailer’s be foreign exchange neutral, that is, they export as much as they import. (ii) Restrict big box retailers to outside municipal limits and to satellite towns instead of restricting them to within the 53 cities with more than a million people each. This will ease urban chaos and encourage people to move into less expensive housing outside the big cities. (iii) And finally, why put limits on foreign equity holdings? Allow companies like Walmart to own 100% of their business in India.

At the same time, the government must insist that they bring in foreign loans to finance their entire capital investments in India. This will enable Indian financial institutions and banks to remain within sectoral limits and to extend financial assistance to Indian retailers. Above all, the policy makers must realize that while it is an American corporation earning profits for its US shareholders, Walmart is mainly a retailer of Chinese goods. Its business model is quite unique. As Nick Robbins wrote in the context of the East India Company, ‘By controlling both ends of the chain, the company could buy cheap and sell dear.’ In this case, it means profits for the Americans, jobs for the Chinese.

 

Footnotes:

1. http://www.maketradefair.com/assets/english/CoffeeMarket.pdfpp5

2. Business Week, ‘Is Walmart Too Powerful?’ 6 October 2003.

3. http://www.deloitte.com/view/en_AU/au/news-research/media-releases/be28c2 f0a4c9d210VgnVCM1000001a56f00a RCRD.htm

4. Ashutosh Kumar, Daily News and Analysis, 1:50 IST, 7 November 2009.

5. Subodh Ghildiyal, ‘Rahul Gandhi comes out in strong support of FDI in retail’, TNN, 17 December 2011.

6. Paula Ropponen, ‘Retailers extend their grip on food prices’, Helsinki Times, 14 December 2011.

7. The Atlantic, December 2011, p. 82.

8. Ananth Krishnan, ‘Trade deficit with China widens to $14 billion’, The Hindu, 13 August 2011.

9. Report in The Hindu Business Line, 11 March 2005, attributed to Reuters.

10. Harvard Asia Pacific Review, 2006, ‘Walmart in China’ by Professor Gary Gereffi, Professor of Sociology and Director of the Center on Globalization, Governance and Competitiveness at Duke University in Durham, North Carolina and Ryan Ong, Research Associate at CGGC.

11. The Hindu Business Line, 11 March 2005, op cit.

12. ‘Bumiputra equity plan upsets retailers’, Malaysia Today MT-news.