India today is perhaps the only developing country where the jaundiced view of Foreign Direct Investment (FDI) persists, says Jagdish Bhagwati,University Professor of Economics and Law at Columbia University. What happened in the Parliament appears to be a knee jerk reaction of the belated British Empire when East India Company who came to India for trade, colonized the country and ruled it for a century. An inept government and muddle-headed opposition caused a wholesale debacle on retain reforms. By opposing retail sector reforms the political leadership is not merely sabotaging this important reforms, they are also throwing up road blocks to the deepening and broadening of the post-1991 reforms that are so badly needed today.

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a firm with new markets and marketing channels, cheaper production facilities, access to new technology, products, skills and financing. For a host country or the firm which receives the investments, it can provide strong impetus to economic development. In the past decade, FDI has come to play a major role in the internationalization of business.

What are the issues? First there is the fear that the small shopkeepers and retailers who number in millions will be crushed. Second, the proposed Indian reforms additionally raises the traditional bogeyman about FDI because the opening of large stores is linked to the entry of foreign multi brand retail giants such as Walmart, Tesco and Carrefour, which would be dangerous to the economy. Some, especially NGOs feel that FDI in multibrand retail has completely failed. All of the three statements are false. FDI in multibrand retail has definitely not failed. It has grown in several developing countries including China. Retail reforms is a win-win proposition. Allowing FDI in multibrand retail will benefit the country immensely as it will bring investments into the development of complete back-end infrastructure. More importantly it will benefit farmers in the form of better realisation for their produce as well as better prices for the consumer. The FDI policy would result in billions of dollars of investment and the retail market would spread more uniformly and would be lucrative for all concerned. It is reported that today the Indian farmers get only one third of the retail price of agricultural commodities. Despite creation of a Food Processing Ministry during late Shri Rajiv Gandhi period, at present only a small proportion of fruits and vegetables are processed and bulk of the produce gets spoiled due to the absence of storage facilities. This year the production of potatoes in North India — Haryana and Punjab — has been very large resulting in crash in prices. The other day farmers of Haryana had expressed their protest by throwing the potatoes and blocking the GT Road. While commenting on the Parliamentary decision not to take up FDI discussion Mr. Rajan Bharti Mittal, Vice-Chairman and MD, Bharti Enterprises said, “It is unfortunate that such an important and much needed economic reform has been suspended.” He reiterated that allowing FDI in multi-brand retail will benefit the country immensely as it will bring investments into development of complete back-end infrastructure.

The positive experience of other countries should inform the FDI policy debate in India. In reality, foreign multibrand retailers would not completely replace Kiranas store but create more jobs and crucially would be linked with revenue generation and overall economic development. In countries like Brazil, Thailand, Malaysia and China, relaxation of FDI has resulted in reduction of unemployment and increased revenue generation for the economies as a whole. Moreover the current provision of FDI policy allow state governments the leeway to step in and provide the incentives and financial support to improve the competitiveness of the kirana. This is what the Malaysian Government did when it reformed the small sector in 1954-55. There is lot of international experience that the state governments can similarly learn from. Undoubtedly the kirana stores provide certain facilities. They extend credit and provide personalised home delivery based on years of mutual trust and interaction. These qualities are almost impossible to replicate in modern retail stores. It is for these reasons that traditional kirana stores and bazars have continued to thrive in big and small cities despite the introduction of modern retailing. China, Russia and Indonesia allow 100 per cent FDI in retail, whereas the proposals in India is for only 51 per cent FDI. If foreign retails are allowed, contract farming will enable farmers to bargain for an assured minimum price linked with quality and quantity. Farmers groups across the country represented to the government in favour of FDI. Direct procurement will eliminate three or four middleman who are now taking away 40-50 per cent commissions without any value addition. In this way, it is a win-win situation for farmers, retailers and consumers. A study conducted by the Delhi based independent think tank, Indian Council for Research on International Economic Relations, highlighted significant benefits to farmers from organised retail. Another study conducted in a community of cauliflower growers showed that the farmers received a 25 per cent higher price on average when they sold directly to retailers than when they sold to the mandis. Ajay Jakhar, Chairman of Bharat Krishak Samaj, wrote to Prime Minister in favour of allowing FDI in retail. Jakhar is critical of the parties opposing FDI in retail. “The parties that are protesting the Government decision are expressively concerned only for the kirana store owners. No one seems concerned about the benefits that farmers will get if their produce is purchased directly by big retailers.” The Congress could have easily mobilized support from farmers to back its policy. But it did not, said Mr. P. Chengal Reddy, Secretary General, CIFA, which claims to represent over 40 million farmers. The Government that portrays itself as being pro-farmers is in inertia in mobilizing support amongst farmers for a decision that would benefit them.

To protect small and micro enterprise the Government has made it mandatory for foreign retailers to source at least 30 per cent of its requirement from Indian small and micro enterprise. It is clarified that this condition does not violate World Trade Organisation (WTO) norms as the multilateral rules that prohibit local content requirement only apply on goods and not services.

Limited information is available on the impact FDI would have in the dairy sector of India. Amul says FDI in retail will hurt farmers. According to Mr. R.S.Sodhi, Managing Director, GCMMF, Anand farmers retailers will squeeze margins and threaten brands with cheaper substitutes. Citing the international farm comparison network data, he said, milk producers in the US get only 38 per cent share of the consumer’s dollar spend on milk, while the rest was earned by the processors and retailers. In the United Kingdom, the milk producers get only 36 per cent. However, in India the milk producer is getting more than 70 per cent of the consumer rupee on an average, particularly in AMUL. Moreover the milk producer affiliated to cooperatives get more than 80 per cent of the consumer’s rupee. Mr. Sodhi further said that in the US farmers’ share in the consumer’s price has declined from 52 per cent in 1996 to 38 per cent in 2009 and in UK it has declined from 56 per cent in 1996 to 38 per cent in 2009.

The dairy farmers in Gujarat are lucky since they are being supported by a strong farmers’ organisation. In most parts of India such an institutional arrangement does not exist. Consequently milk producing farmers get no more than 50 per cent of the share of the consumer’s rupee. The Prime Minister, Dr. Manmohan Singh has clarified that “we have not taken this decision on FDI in retail in haste. It is our firm conviction that it would benefit India.” Let us have faith in him.

(N.R. Bhasin)