FDI in Retail: Illusions of Progress

FDI in Retail: Illusions of Progress

Swaniti Initiative | November 21, 2012 | The Swaniti Blog

Writing Against The Motion: Menka Pandey
Menka is a Master’s student of Fashion Management at the National Institute of Fashion Technology, Kolkata.

The entry of Foreign Direct Investment in the retail sector is another conquest of the pro-MNC forces of liberalisation. However the Indian government and retail sector are disillusioned to think that it will improve rural infrastructure, reduce wastage of agricultural produce or will get farmers a better price. This is so because it is blind to the underlining fact that with major stakes involved, the retail MNCs primarily aims to control the markets and eventually dominate it so as to maintain a perennial flow of return. In such a scenario the market merely serves the interest of the multinationals in the end.

Therefore, the attempt of this article is to bring forth the real and pragmatic picture.

  • Let us begin with the argument that international retailers will serve consumer’s interest with their low prices. However this argument can be busted from the fact that it is primarily based on the principle of ‘buy cheap and sell costlier”. The initial low prices are compensated by the elimination of competition and rising prices in the long run.


  • Secondly, FDI in the retail sector will kill the manufacturing sector jobs. International retailers source from various countries to avail best prices. This will lead to subsequent decline of the domestic manufacturing .In contrast, the domestic retail sources locally to the benefit of the concerned sector. What is more concerning is that India does not have significant manufacturing reforms at place, to protect its indigenous sector from the arbitrary sourcing policies of the international players. One of the clauses of FDI is that all single brand retailers are required to source from within India. However there has been an ‘exception’ attached that waivers all those retailers who have specialized and technologically sophisticated products. Significantly, the granting of waiver is dependent on the word ‘feasible’, which the retailers can (and will) use towards their interest and not that this clause had any potency even before, but the ‘noble-intention’ of the government has already been challenged and quietly put in the cold storage by the Ministry of Commerce.


  • Thirdly, the innately flawed argument that the presence of international retailers would help develop back-end operations such as cold chains and other infrastructural development. This not only questions the capability of the Indian government’s efficiency to carry out such tasks but also fails to consider the simple idea that the building of cold chains or rural infrastructure can be tied to MNREGA, which is well equipped for such responsibilities.


  • Another argument that the supporters of FDI are widely propounding is that big retail will wipe out the middlemen, and therefore provide a better price to farmers. This however has no proven facts. In fact, studies have shown that the net income of farmers in US has come down from 70 per cent in the early 20th century to less than 4 per cent in 2005.This decline in the farmers share can be traced to the fact that big retailers come with their entourage of middlemen which includes quality controller, standardiser, certification agency, processor, packaging consultants etc. and it is this group that devours all the profits leaving the farmer to survive on meagre.


  • Also in the long run, these supermarkets follow an arbitrary pricing on account of their monopolistic power. There was a rise in prices in supermarkets in Latin America, Africa and Asia which was 20-30 per cent more than the price in open market.
  • Now coming to the tall claim that opening the Indian market to these global giants will create employment .This argument contradicts the statistical story. Indian retail sector is worth $400 billion with more than 12 million retailers employing 40 million people .Ironically and a significantly Wal-Mart’s turnover is also around $420 billion, with just 2.1 million workforce .Therefore it remains to the supporters of FDI to explain the logic that why would Wal-Mart entertain 12 million employees when it can earn the same margin with just 2.1million employees. Thus, the fact survives the argument that it is only the Indian retail sector which can shoulder the responsibility of sustaining that size of workforce.


  • Another disturbing aspect of FDI reforms is that it contains the state government’s prerogative. In its defence and in a bid to win the support, the central government stated that the state governments will have the final say in allowing FDI in their respective states. However, it remains a known fact that as per the international trade norms, member countries need to provide ‘National Treatment’ and being a signatory to Bilateral Investment Promotion and Protection Agreements (BIPA’s), India is obligated to it .Consequently state governments will have to open up for FDI, otherwise the industries will have their legal weapon to force the state governments to abide.

Thus, allowing 51 percent foreign direct investment, majorly resting on the short-term benefits. The government is the ignoring long-run consequences of the same. Given the global experience of retail MNCs choking the market access and dictating price policies in the host countries, it will be the test of the decision-making capacity of our policy makers, whether FDI can actually lead to deficit reduction, employment generation or agricultural growth that it promises.

Cover image credit: Business Insider
[notice_box]The views represented in this blog are those of the author. It does not represent the thoughts, intentions or plans of the Swaniti Initiative.[/notice_box]