FDI on Hold

Retail giants FDI versus local bania COMMERCE BY MUFTI MUBASHIR

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The decision of central government to go ahead with Foreign Direct Investment (FDI) in retail trade has evoked mixed feelings. Before we discuss pros and cons of FDI, it is important to decipher meaning of FDI. In common parlance, it implies opening of market (retail) to foreign players. Retail trade market caters to daily needs of common masses which will see foreign investment to the extent of 51%. Retail giants like TESCO, WALMART will set up their stores in 53 cities which are qualified for FDI. What is the effect of FDI entry on our domestic market? Obviously, the government and those who support it, are in favor of allowing entry of retail giants. The Prime Minister said that the decision was not taken in haste, but the benefit of common man was the guiding principle. This will bring in latest technology to India and improve agricultural sector by saving farm produce from being destroyed. Entry of foreign players will cut down inflation and common man will get his essential needs on lower rates. The government is of the view that about ten million jobs will be created in next three years. Gainful employment opportunities in agro processing, these retail giants will revolutionize the agricultural sector from field to store. It will bring in remunerative pricing by eliminating exploitative middle men. It will improve our backend infrastructure, as it will receive a minimum of $100 million as investment in this sector. However voices of dissent argue that there will be job losses, small retailers will be replaced by corporate giants. They will resort to predatory pricing to create monopoly, jobs in manufacturing sector will be lost. The kiryana wala who oppose the entry of corporate giants constitute the unorganized sector are small time shopkeepers. These 50 million shopkeepers staged protests against the government decision to allow entry of FDI. Political parties cannot afford to annoy these local shopkeepers as they constitute the vote bank of india. These banias may be despised, but they are a force to be reckoned with. The government has no choice but to roll back FDI in retail sector. More so the government had compromised a key clause to protect these kiryana walas. It was suggested that the international chains like Walmart should integrate small retailers in their supply chain and one of the suggestion was 30 % of sales should be through these small retailers, but the clause was dropped. Small time kiryana wala has the feel of his local market, he sells milk through his heart, knows his customers. Even as the pendulum swings, our state went head over heal to allow global retailer to set up their store in Jammu, so much so, that our state is first to have Bharti walmart opening its shutters. Jammu traders have demanded closure of retail shop. The consumer was the one who would benefit from the entry of FDI. It is being pleaded that ultimately it will give choice of international brands and quality products at throw away prices to the consumer. The experts still believe that their entry would have been a good bargain. Consumer needs change, the supplier needs change, farmers need change and infrastructure needs change is a remark by CEO of Future Group. Looking back, when East India Company came for trading they changed the nomenclature of Bengal, which was known as food bowl of India. The English directed that all Bengalis should switch over to grow cash crops and dominated them with their imperial designs. India will soon become the dumping ground for imperialistic policies and products. It took India so many sacrifices to get freedom from British rule and it will take many more years to throw away the concept of FDI. The government has buckled under pressure from banias and political compulsions. Net result: FDI on Hold!

FDI in retail debate should start from principles about the nature of FDI: Manoj Pant
Manoj Pant Dec 9, 2011, 06.47am IST Tags:

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wto| UPA| Retail| Kirana stores

The impasse in Parliament has been resolved by deferring the issue of FDI in multi-brand retail till a consensus emerges on the issue. The turmoil in Parliament does not say much for UPA's managers. They were unable to anticipate the likely uproar that the new announcement would create. Especially, as all expert opinion had indicated that inflation would certainly come down by December and take the steam out of the Opposition demand for a discussion on this issue. But this mismanagement has actually continued right from the handling of Anna Hazare in August, the poor political response to questions on inflation and so on. There is, of course, the 'conspiracy theory' that I will not go into now.

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But the fact remains that the issue of FDI in retail and FDI in general are still unresolved. While many commentators have given a whole lot of facts and figures for and against FDI in retail, here I will outline some general issues about FDI in particular and then look at the current debate. First, why FDI? It represents the last step in the involvement of a foreign company in another economy. A foreign company would rather sell via exports to (or purchase inputs in) another country as this does not involve any fixed costs of FDI. For countries protected by trade or other barriers, it would be still less expensive to license the sale of foreign products in foreign markets as returns to licensing are far more assured. To put it more simply, the FDI decision is less reversible than the decision to export or licence sale. A look at FDI in India since about 1980 by and large validates this theory. Second, what is FDI? FDI is actually a bundle of services that includes, most importantly, use of proprietary technology, managerial expertise or some other firm attribute not available to local firms. But what is crucial in determining the supply of FDI is the technology factor. This is also the reason why many developing countries have been wooing FDI since about 1990 or so. What is more interesting is the finding of empirical studies that it is the presence of foreign companies (small or large) rather than purchase of technology via blueprints, or licensing, which is most effective in technology diffusion in the host country. Third, does FDI matter? It does in a globalised world. This is evident in the close link between FDI and trade. Given the fact that, today, production centres are generally a part of worldwide supply chains, particularly in the manufacturing sector, it is FDI that provides crucial supply linkages. Where a host country has crucial inputs, FDI would then complement trade. Where the host country has an important market, FDI would displace trade. In WTO parlance, the second case is often called 'market access'. But probably the most crucial issue is that FDI provides strong competition to large domestic producers. This is particularly important in developing countries where a few large domestic producers can create sufficient entry barriers for other entrants. Let us now apply this to the retail sector. The comparison with most developed countries is meaningless. In these countries, organised retail came up naturally as a consequence of rising labour costs. This is hardly relevant in India where organised retail is about 5% of the total. But what is most confusing is the present protest against FDI in retail. For, the organised and large domestic players already have free rein. They have not, and will not, displace kirana stores because of the labour cost factor. So, why should FDI do so? Similarly, why should FDI suddenly bring in cold storage depots if they have not yet come up? Surely,cold chains will come when the organised retail market expands sufficiently to make these investments profitable.
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As the organised sector expands, there is no doubt that the middlemen would lose their jobs. This happened for the army of Indian washermen or dhobis, less than 20 years ago. But this has little to do with FDI per se. As cities which are consuming centres move away from agricultural or industrial production centres, the economies of large-scale transportation will make small traders extinct. Urbanisation will create this distance. To me, the strongest case for FDI seems to lie in the competition issue, since market access or technology are not so important: retail is no rocket science and WTO has ensured that market access in manufactured goods does not require FDI. In fact, the problem is the 51% clause that forces foreign retailers to partner domestic players in their domestic monopoly. In that case, the 'fall in price' argument for FDI also disappears. Whether no FDI or 51%: domestic large players are laughing their way to the bank. No wonder they have kept out of the debate.

Insight: The day Europe lost patience with Britain

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By Luke Baker and Julien Toyer

BRUSSELS | Sun Dec 11, 2011 7:26pm EST

(Reuters) - It was billed as a summit to save the euro. It may be remembered as the day Europe lost patience with Britain, as most of the continent threw its lot in with EU founding members

France and Germany and committed to binding their economies ever more tightly.

There was plenty of talk of history in the making in the week before the Dec 8/9 gathering of European Union leaders - the eighth this year. But it was all about the currency and whether it would survive the strains of a debt crisis that over the past two years has engulfed Greece, spread to Ireland, Portugal, Spain and Italy and now threatens France and even mighty Germany. As the summit began, there was no hint of the drama that was to come in the early hours of Friday, the moment when Europe split, 26 against one, after about 10 hours of talks. Britain has always had an uneasy relationship with its EU partners, choosing not to join the single currency or sign the open borders Schengen treaty and often kicking against what it sees as Brussels "interference."

But this was a low point. The first time in 39 years that a British prime minister had used a veto to block an EU agreement. David Cameron cast it is a bold and necessary decision to protect British interests. Most of the rest of Europe appeared to regard it as reckless and went a different way. Hours later, when the leaders briefly reconvened to finish their discussions, Cameron cut a lonely figure. French President Nicolas Sarkozy appeared to avoid an extended hand as Cameron walked to his seat. The build up to this last summit of the year had been much like the previous seven. The language had been recognisable too, even if market pressures had added an unprecedented degree of urgency to glacial EU decision making. Overnight borrowing from the European Central Bank hit its highest level since March at the start of December, showing the degree of tension amongst banks. PROFOUND CONCERN U.S. Treasury Secretary Timothy Geithner had spent several days in Europe before the summit. The United States, like all of Europe's trade partners, had been watching the accelerating debt crisis with profound concern, worried for their own economies and banks. In meetings with the head of the ECB, Mario Draghi, and euro zone finance ministers the conversation was all about the two-year-old debt crisis and how to resolve it. The issues: the role of the ECB, how far should or would it stand behind countries to buy them breathing space, the scale of the euro zone's rescue fund, the part to be played by the IMF, and should the EU let private bondholders off the hook. Geithner spent time in Frankfurt, Berlin, Paris, Marseille and Milan. London didn't figure on his itinerary. During the same week, German Chancellor Angela Merkel and Sarkozy spoke frequently and met in person. There were contacts with Spain's incoming Prime Minister Mariano Rajoy. Draghi was closely involved in discussions at all stages, insiders say. Once more, Cameron was peripheral. Immediately before the summit, the U.S. assessment of Europe's progress was, in broad terms, they know what they need to do but they need to work out how they're going to do it. As one U.S. official put it, fixing the flaws of the 13-year-old single currency - a monetary union without coordinated budget policy - could not happen overnight. But the Europeans were moving closer to addressing the problem at its root. That assessment captured well the mood in the hours heading into the latest in a long line of "crunch" summits. Germany - Europe's biggest economy - was intent on changing the European Union's treaty to enshrine stricter budget discipline and penalties for countries that failed to adhere to them, to ensure there could be no repeat of the current crisis. From the German perspective, only by reforming economies, cutting social benefits and working longer would the indebted members of the euro zone and the single currency emerge from the turmoil. Printing money would buy only a temporary respite and would remove the incentive to reform. France was ready to back Germany in a push for full-blown treaty change, but really favoured the idea of an intergovernmental treaty - akin to a sideline agreement - among the 17 euro zone members, anchoring the single currency and its members at the heart of a new Europe. NATIVITY PLAY Britain's prime minister, under pressure from a sizeable anti-EU element in his own party, set off for the Brussels meeting straight from his son's school nativity play, having promised during a particularly raucous session of parliament the previous day that he would defend Britain's interests at the summit. With hindsight, the choreography on the evening of Thursday, Dec 8 probably should have been clear to Cameron and everyone else. Speaking a few hours before the summit began, European Commission President Jose Manuel Barroso issued this challenge to Europe's leaders: "What I expect from all heads of governments is that they don't come saying what they cannot do but what they will do for Europe." Luxembourg Prime Minister Jean-Claude Juncker, who chairs euro zone finance ministers' meetings, was the first to arrive at the Brussels venue. Juncker said he preferred to see unanimity on treaty change among the 27, but if that wasn't possible, the 17 members of the euro zone would have to go it alone. "Their relationship is more intimate than between the 27." When Cameron arrived in Brussels on Thursday it was after 6 p.m.. His first meeting was with Italy's new Prime Minister Mario Monti, an unelected "technocrat" charged with getting Italy's finances in order. Europe's fourth biggest economy has a debt to GDP ratio of 120 percent after years of stagnation under Silvio Berlusconi. The meeting was brief and was followed by 45 minutes of talks with Merkel and Sarkozy. Cameron was accompanied at that meeting by Foreign Secretary William Hague and Jon Cunliffe, the prime minister's most senior EU adviser, the architect of the rules that helped keep Britain out of the euro and Britain's next ambassador to the EU. One official who saw the three leaders emerge said they were "visibly tense." BRITAIN'S ISOLATION Then came dinner and the start of the meeting that was to end in Britain's isolation. Sources involved described how events unfolded. The intention was to get the 27 leaders to agree on what they wanted for a stronger euro zone first, and then work out how to achieve it, officials said. It was disagreement over the means, not the objective, that led to the break down. An official present at the negotiations said Cameron had begun by saying that he understood there was a desire for treaty change, and that he wanted it too, but if Britain were to give its backing, it needed something in return. "His reasoning appeared to be: 'you want treaty change, I want treaty change', 'I need something because you are asking for something'," the official said, describing it as logic that wasn't going to fly. At that point, the British prime minister set out two concessions he wanted in exchange for Britain's support on treaty change. "One was a safeguard on the internal market ... but that was not the problem," the official said. "Then he launched the idea on financial services." Financial services account for about 10 percent of Britain's economy and the government has been at pains to shield the sector from regulation emanating in Brussels. Britain had shared the outlines of its thinking with some of its partners, officials said, but it hadn't circulated anything approaching a document sufficiently detailed to form the basis of discussion. For that reason, the demands were news to many of the people around the table. But it wasn't just the way Cameron went about it, it was the substance of the demands. He was effectively asking for a softening of regulation on Britain's financial sector at a time when many voters and politicians believe banks are largely to blame for the crisis Europe is suffering and want tighter regulation on the sector. DEAD FROM THE START "Politically speaking, when the banks are considered the enemy and the root of all the problems we have today, Cameron's arguments were the wrong arguments at the wrong time for the wrong people," the official said. "Politically, he was dead from the start." At that point old enmities came into play, rooted in a widely-held French view that Britain never really belonged in the European Union in the first place. "The French were using all this as a really perfect alibi to get rid of the British. Sarkozy used the proposals of the British to justify an intergovernmental treaty," the official said, explaining that intentionally or otherwise, Cameron had played straight into Sarkozy's hands. It may have appeared things couldn't get worse for the British prime minister, a relative novice on the EU stage. "It took 10 or 20 minutes to see that most of the participants were not pleased at all with the idea of Britain getting an opt out or exceptional treatment for their financial services and it didn't fly at all. There was no understanding for it. David Cameron obtained nothing. Just nothing." "We understand his domestic political situation. He is a prisoner of domestic constraints." Another official present at the talks recalled the moment, in the early hours of Friday, when European Union President Herman Van Rompuy, who chaired the meeting, proposed moving forward with an intergovernmental agreement of the 17 euro zone nations, with an open invitation for other countries to join. "France said yes, immediately followed by Germany and then one by one, in a matter of seconds the member states of the euro zone backed the Franco-German call. Within a few minutes, the non-euro zone member states decided they wanted to be in and left Cameron completely isolated. The swing was very, very quick. Everybody was on board in a matter of minutes. I think it was obvious inside the room that Cameron was shocked by the swiftness with which his allies left him alone." "Cameron made a serious miscalculation. He genuinely thought he could get something back in return and underestimated the willingness of the euro zone to move on. That's our view. This deal has probably saved the euro, but all this will now have serious repercussions on the relationship between Britain and the EU." (additional reporting by Matt Falloon and Mark John in Brussels, Paul Carrel in Frankfurt, David Lawder in Washington; writing by Janet McBride; editing by David Stamp)