Not to FDI in Retail in India
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- Not to FDI in Retail in India
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Not© FBI in Retail in India
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India FDI Watch
ww. indiafdiwatch. org
info@indiafdiwatch. org
ACORN
096 04
After fanning, retailing is India’s major occupation. It employs 40 million people. A sizeable
majority of owner/employees are in the business because of lack of other opportunities. The decade of
liberalisation has so far been one of jobless growth. It is no wonder that retail has become the refuge
of these millions. Lopsided economic development is transforming India from an agrarian economy
directly to a service oriented post-industrial society.
The Indian retail industry is highly fragmented. According to AC Nielsen and KSATechnopak, India
has the highest shop density in the world. In 2001, it was estimated that there were 11 outlets for every
1000 people. Since the agriculture sector is over-crowded and the manufacturing sector stagnant, millions
of young Indians are virtually forced into the service sector. The presence of more than one retailer for
every hundred persons is indicative of how many people are being forced into this form of self
employment, despite limitations of capital and space.
The current debate on allowing foreign direct investment (FDI) in India’s retail trade primarily focuses
on two issues - employment and consumer welfare. Supporters of this move have developed consumer
centric arguments while the opponents are more concerned with its adverse impact on employment. In
a recent article in the Economic and Political Weekly, Guruswamy et al. (March, 2005) deliberated on
this issue in detail and made an empirical estimation of the future job losses, should the government
allbw entry of FDI in retail sector. The estimated job loss ranged between 4,32.000 and
6,20,000
In percentage terms this works out to over 1.0% -1.5% of current work force of around 40 millions
(The Telegraph; UK, estimates it as 80 millions) engaged in retail trade in India. Though FDI in retailing
is not allowed (as of December 26, 2005), the Government of India has a more liberal policy towards
wholesale trade; franchising and commission agents’ services. Foreign retailers have already started
their operations in India through
joint venture where the Indian firm wa
franchising (KFC, Nike)
sourcing from small-scale sector;
cash and carry operation (Giant in Hye
non-store formats- direct marketing (A
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Large international retailers of home furnishing and apparels like Pottery Bam, Gap and Ralph Lauren
have made India as one of their major sourcing hubs. In February 2002, the world’s largest retailer, WalMart opened a global sourcing office in Bangalore. Up to 100% FDI is allowed in Cash and Carry
wholesale. The Great Wholesaling Club Ltd is one such example. (Mukherjee, 2000).
In the latest ‘revised conditional offer ’ submitted by the GOI to WTO in August 2005, under article XLX
of the GATS, India has offered to undertake extensive commitments in
a number of sectors/sub-sectors including wholesale trade services and distribution services (limited to
sei-vices incidental to energy distribution but excluding energy trading
and load dispatch function), marine and air transport services.
In the revised offer by the GOI under the on going GATS negotiation, we observe a systematic move
towards creating the basic infrastructure essential for the smooth functioning of modem retail chains.
The bottlenecks like lack of proper storage facilities and efficient logistic services have been addressed
through liberal FDI policy in air and maritime transport services and maritime auxiliary services, which
included storage and warehousing services in the ports.
To analyze the effect of FDI on Indian retail sector, we have made two different projections of Indian
economy in the next five years when the level of FDI inflow is expected to increase.
Scenario 1 - The economy grows at a faster rate, say 8% or above and the benefits of growth ‘flows
down’the line (not simply “trickles down”) benefiting even the poorest of the poor. Economic and social
disparity reduces, ‘poverty line’ becomes a topic of economic history, and purchasing power across
different economic class increases and Human Development Index (HDI) improves substantially.
Scenario II - Economy grows, as predicted, at a higher rate of say 8% but the benefits of growth
“trickles down” at a slower rate. Economic and social disparity widens, middle class and poorer sections
get marginalized, purchasing power of the majority of the population does not improve, transition towards
market economy becomes painful, and we observe a phase of “jobless growth”. The working class
looses its bargaining strength and HDI does not improve much.
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If the social economic condition in the next five years prevails in the same way as described in Scenario
1, issues like employment loss would loose to attract much attention, as the expanding economy with
better distributional equity would be able to absorb such shocks. Moreover, with a general rise in purchasing
power, consumer would prefer more choices and better quality of products, which a modem retail chain
would be able to offer.
If however, we observe the recent social economic trends, the projection as per Scenario
II is more likely. One of the special features of economic growth in India in the 1990s was the decline of
“employment elasticity” (employment generated per unit growth of output). In specific terms, while the
employment elasticity of the 1980s and early 1990s was 0.5, it decreased to 0.16 in the late 1990s. The
higher capital intensity of economic growth due to globalization and competitive pressure was responsible
for this.
To tackle the problem of “jobless growth” which became the defining feature of economic development
of India in recent times, the Planning Commission had set up two expert groups. The first Task Force,
under Montek Singh Ahluwalia, was set up in 1999 and produced its report in 2001. It recommended a
number of programs of economic policy reforms, such as de-reservation of small industries and expanding
the role of FDI in small industries and trade. It emphasized more on the increase in the rate of growth
than special programs for creating jobs. Dissatisfied by the approach of the Task Force, the Planning
Commission had set up a Special Group in 2001 under the Chairmanship of Dr. S. P Gupta, Member,
Planning Commission, to study the same problem. In the order appointing the Special Group, the Deputy
Chairman of the Planning Commission pointed out that the earlier Task Force had not paid adequate
attention to the issue of the large backlog of under-employment. The Planning Commission was obviously
not quite happy with the emphasis laid by the Task Force on growth per se (Vfenkitaramanan, 2002).
Montek Singh Ahluwalia who headed the first Task Force, is back to the management of the Indian
economy with a much higher responsibility as Deputy Chairman of the Planning Commission. It is most
likely that he would pursue the same policies, may be more aggressively, he recommended earlier. Under
such conditions, employment elasticity in the next five years is likely to decline further resulting to the
widening of the economic disparity among different groups, as projected in the scenario II. Based on this
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projection, we shall analyze the likely impact of FDI on major stakeholders of the Indian retail sector
through addressal of few important issues.
I
Uniqueness of Indian retail market
The Indian trading sector, which enjoys a few thousand years of history, has some unique features. These
features identified as under, should be considered before allowing FDI into retail trade.
1.
Products and services normally reach the end consumers from the manufacturer / producers
through two different channels: (a) Producers sell via independent retailers (vertical
separation), (b) directly from producer to consumer (vertical integration) .In the later
case, producers establish their own chain of retail outlets; develop franchise (Lafontan
and Slade, 1997).
2. In India however, the above two modes of operations are not very common. At present,
less than 3% of the retail transactions in India are done in the organized sector (vertical
separation), which is likely to be increased to 15%- 20% by 2010 (Fitch Ratings, 2003).
Till date, it is restricted to metro cities only. The second type (vertical integration) is
common to few national and subsidiaries of global firms. Moreover, Indian wholesale
trade is not properly organized. Apart from few government initiatives like formation of
Tea, Coffee, Spices Boards; State Trading Corporations- most of which have become
defunct by now, private initiatives have mostly remained localized. The two notable
exceptions could be the recently launched e-procurement network ‘e-chopal’, developed
by ITC Ltd- a diversified cigarette company in which the global tobacco giant the British
American Tobacco (BAT) has substantial stake. Through e-chopal, ITC wants to procure
agricultural products directly from the farmers for their food division. The other initiative
has been made by Hindustan Lever Ltd. (HLL) - the Indian subsidiary of global FMCG
giant Unilever. HLL had opened a separate food division few years ago. Though this
division has hot contributed much in terms of revenue, HLL has put in huge resources to
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develop this strategic business unit (SBU). In the last two years, different distribution
models have been tried/ experimented. Recent developments indicate that HLL-Unilever
is moving towards geocentric mode of operation from the age-old polycentric mode. In
the new operational structure, the food division may become the hub for Unilever’s global
food operation.
Baring these exceptions, the commonly used model in India, unlike in developed countries where
large trading companies play a significant intermediate role -like the 11,000 odd trading companies
(‘shosha’) of Japan , is the dominance of small and medium players. The trading sector is highly
fragmented with large number of intermediaries. The wholesale trade in India is also characterized
with the presence of thousands of small commission agents, stockiest and distributors who operate
strictly at a local level. Apart from these, in many cases the small producers - mostly artisans and
farmers, sell their goods directly to the end consumers through their participation in the market
as sellers. Existence of thousands of such individual producer cum sellers (in some cases it
becomes a family affair when say, the father is a producer and the son is a seller and so on) arc
examples of “vertical integration” of the Indian retail sector.
3. The Indian retail sector exhibits a unique example of customer relationship management
where numerous small vendors develop customer relationship with their consumers by
staying closer to them, either by opening a tiny outlet in the residential area or by hawking
goods at the doorstep of the consumers. In this process, a personal relationship, most
often extending beyond the business interest, develops.
4. Another note worthy feature of the Indian retail sector is the absence of any barrier to
entry or exit. Any one can enter or leave the Indian retail sector at any point of time.
5.
Retail sector contributes 14% of the Indian GDP Apart from its economic contribution r
retail sector
immensely contributes to the political system by acting as a shock absorber
and maintaining social stability. Thus when a factory shuts down rendering people jobless;
the farmers remain idle during off seasons or get evicted from the land; the stagnant
manufacturing sector fails to provide jobs to the thousand of unemployed youths; the
retail sector absorb them all. Skilled labor turns into a street hawker, a farmer delivers
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milk packets door to door, an educated unemployed youth hawks newspapers and a better off unemployed
person starts a telephone booth and retails telecom cards as an ‘add on’service. Again when the factory
reopens (in exceptional cases); harvesting time arrives; some of these new entrants leave the retail trade
and return back to their respective jobs.
6. After agriculture, probably, the incidence of disguised unemployment (and under employment)
is highest in the Indian retail sector. Small retailers (nearly 12 million outlets) most of whom
operate in the unorganized sector, dominate the trade. Though Guruswamy (2005) estimates that
more than 6 lakhs of people involved in the unorganized retail sector would be displaced if
global players like Wal-Mart’s capture even 20% of the retail trade, in reality we may not observe
any visible change in the unemployment level. Only the percentage of disguised employed (rather
disguised unemployed) population in the retail sector would increase.
7. The organized retail sector in India is in its nascent stage. Not a single firm in India (except retail
oil outlets of petroleum companies) has a nation wide presence. All major retail TNCs still get
identified with the home countries like Wal-Mart (USA), Royal Aholds (Netherlands), Carrefour
(France). Absence of a major Indian player with a nation wide multi-product retail chain will put
the Indian retailers at an uneven platform in any form of bargains vis-a-vis their overseas big
brothers It is only fair that the above-discussed unique features of the Indian retail sector should
get due consideration in the current debate on inviting FDI in retail trade.
II
Identification of major beneficiaries of FDI - the push and pull factors
Why is the government so keen in inviting FDI in the retail sector? While searching for this answer, we
must remember that already major retailers have entered into the retail market through franchise and
other arrangements. FDI is another such arrangement through which foreign firms can exercise more
control in the management of their Indian
operations. There could be the following possible reasons for inviting FDI in retail trade:
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♦ Organized domestic retailers want to collaborate with the world leaders to expand their existing
business.
t Proprietary expertise in retail trade exists with few global players only. The latter would not
transfer their expertise to local firms unless they are allowed to operate in the domestic market.
( The government needs FD1 to meet foreign currency crisis
♦ Only the global retailers can satisfy the rising and varied demands of Indian consumers.
♦ Foreign firms are interested in the growing Indian domestic market.
t India is an emerging procurement hub for global retailers especially for handicraft products
(including textiles) and semi-processed local food items.
♦ Share of FDI in the trading service is declining in the developed countries. Capital is looking for
a better pasture. Major players are loosing their popularity.
♦ New rules in international trade encourage movement of FDI across nations to maximize return
on investment.
Analysis of the above possible reasons reveals the truth behind the move. The findings, which have been
presented in a table as, ‘pull and push factors’give a better insight into this debate. The first four possible
reasons as above may be termed as ‘pull factor’and the remaining four as ‘push factors’
1. Business Today (May 8,2005) reported that, among the big Indian retailers, views on FDI issue
was mixed. Those in favor of FDI argued that huge amount (up to Rs. 10,000 crore) would be
required in the next five/six years to improve the share of organized retail in India from current
3% to 10% of the total retail trade. Indian investors were reluctant to invest such a huge quantity.
In this context, it may be argued that unlike in manufacturing, capital requirements in retail is
very low. The vendors substantially finance a large component of the business - the working
capital (Mukherjee, 2002).
2. In the literature on retail, presence of any cutting edge proprietary expertise - either technical
or managerial could not be traced. FDI movement could not be linked to transfer of any such
expertise.
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3. The Government of India at present is burdened with huge balance of payment surplus. As of
August 2005, the surplus was $ 133.6 billion. The argument in favor of inviting FDI to attract
foreign exchange is not acceptable.
4. Domestic organized retailers can offer wide range of important products to the consumer.
Moreover through franchise channel, global retailers like KFC, Subway, etc. can offer high
quality service to the domestic clients. On the question of wider choice, new findings suggest
that availability of wider options develop complexity in the consumer decision taking process
leading to stronger brand loyalty! Research reveals that an average grocery store in USA, offers
35,000 to 40,000 SKUs (stock keeping units) versus 12,000 to 15,000 thirty years ago. The
suppliers offer about 20,000 new items each year; with 1,000 being new efforts while the rest
are line extensions. However, the top 5,000 items still account for about 90 percent of sales, as
they did thirty years ago (HBS Working Knowledge, Readers Respond: Is Less Becoming
More? November 14, 2005). Below we mention few recent findings (Heskett, 2005) on this
important issue.
t Management experts questioned whether there were benefits for producers, particularly
those producing increasingly varied products targeted for smaller and smaller market
niches. They reported, “nearly 70 per cent of managers admit that excessive complexity
is raising their costs and hindering their profit growth.” This implied that too much
innovation merely increased complexity without creating economic benefits for either
the producer or the consumer.
t Another expert commented that there were problems associated with too much choice
on the customer’s side. As choice increased, search costs increased, and decisions
involved evaluation of more options. Since human by nature were elementally rational
beings, this could mean that consumers discounted or ignored a lot of the options. This
could increase brand loyalty as a mechanism that reduced search and evaluation costs.
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♦ There was also the issue that with more options, it took longer time to make a decision.
At the same time, due to social changes, consumers had even less time to make choices,
especially for everyday products that have smaller wallet share. This again indicates
relying on known branded items. On the seller side if one could satisfy customers well
once, they might be more likely to stick with that seller even though they have more
choices.(HBS Working Knowledge, Readers Respond: Is Less Becoming More?
November 14, 2005).
5. Among the top ten emerging market retail destinations, India ranked 2nd in term of attractiveness
(Business Today). The richest 20% of the Indian population (over 200 millions) who as per
1999 data grabbed over 43% of the total consumable items (HDR 2005, Page - 235) is a
significantly large market for attracting global retailers. Between 1999 and 2003, the disposable
income of Indian middle class (300 million) has increased by 20% (The Telegraph, UK).
6. Major retail chains like Wal-Mart and Tesco have already opened their procurement centers in
India. For large-scale procurement operation, they will have to invest in infrastructure and
develop an efficient supply chain. This requires huge investment. By opening retail chains in
the host country they would like to exert monopoly power eliminating other major buyers from
the market. In this context, we must remember that India is fortunate to be part of two major
bio- diversity hot spots out of a few remaining bio-diversity hot spots of the world. The wide
food variety and rich heritage of textile and other handicrafts makes India a very attractive
sourcing destination for retail giants. In the absence of national champions like Marubenis in
India, the small and medium enterprises/ suppliers of this country will loose the opportunity of
earning better revenues in the global market. But they will have to bear the additional risks of
global market fluctuations. Wal-Mart had procured goods worth $ 1.5 billion from India in
2004, which is expected to touch $ 2. billion this year. From India, Wal-Mart mainly sources
home furnishings, T-shirts, night-suits etc (HBL, November 15, 2003; May 13,2005). It has
also been reported that Wal-Mart has already proposed to the West Bengal government to take
over the fresh food markets of in and around Kolkata. Though the government has not accepted
10
the proposal as yet, it has not rejected it either. The government has ‘kept the multinational
company waiting’/ HBL, October 29,2005).
7. Analysis of FDI stock for service sector by industry indicates, between 1990 and 2002, the
share of inward FDI stock in the trade has declined from 25% to 18%. In the same period,
outward FDI stock has declined from 17% to 10%. During the same period, out of the total
inward FDI in trade, developed countries’ share declined to 78% from 90%. Of the remaining
22%, developing countries share were 4% and that of Central and East European (CEE) countries
were 18%. Undoubtedly, this region has emerged as the hottest destination for trade FDI.
It must be understood that the share of developed countries had declined from 99 per cent in
1990 to 88 per cent in 2002. The estimated world inward FDI, average annual flows, by sector
and industry, between 1989-1991 and 2001-2002 figures indicate that after finance, trade, and
business activities,’transport, storage and communication’, is the only other service industry,
which attracts relatively high FDI. However, if we take in to account the share of FDI in trade,
compared to other prime service industries, we find a remarkable decline (between 1991, and
2002) in the share (from 20.15% to 12.35%) of trade but steep rise in the share of‘transport,
storage and communication’ sector - a sector related to supply chain management (SCM). In a
global economy, SCM is an integral part of trading services. The above table on FDI data flow
also indicates the increasing attractiveness of developing and CEE countries’ trade sector to the
foreign investors.
In February 2005, Wal-Mart Canada, the Canadian arms of Wal-Mart Stores, closed one of its
two Quebec stores, after the company announced the stores financial situation was ‘precarious’.
(Datamonitor, 2005), Apart from market saturation in developed countries, it is reported that
retailers like Wal-Mart are facing opposition from local communities. According to a recent
survey under taken in US, 38% respondent had expressed negative view about the Wal-Mart
Stores. 56% of the Americans agreed with the statement that Wal-Mart was ‘bad for America’
and its prices came ‘with high moral and economic costs’ (HBL, December3, 2005). Many
European countries have also initiated different measures to restrict the market distorting power
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of giant retailers. All these factors might have contributed to the movement of FDI from
developed to emerging markets.
8. Trade liberalization and improvement in communication systems have increased the opportunity
for the retailers to buy their products from producers’ worldwide. Some of the factors that have
contributed to this trend are: reduction in tariff, incentive in foreign investment, cheaper real
time communications, and cheaper transport. Cut throat competition among major retailers in
the develop countries compelled them to take advantage of this opportunity to maintain their
profit.
Ill
Possible impact on marginal producers and work force
- The experiences of other countries
The third important missing issue in the whole debate is the possible impact of such action on numerous
small and marginal producers especially in the agrarian and handicraft/ handloom sectors. To get an idea
about the possible impact on marginal producers and workers, we shall restrict our discussion to previous
research findings on this issue.
1.
In April 1999, the Director General of Fair Trading (DGFT) referred to The Competition
Commission, UK, for investigating the supply of groceries from multiple stores in Great Britain.
The Competition Commission identified 24 multiple grocery retailers who supplied groceries
from supermarkets with 600 sq. meters or more of grocery sales area, where the space devoted
to the retail sale of food and non-alcoholic drinks exceeded 300 sq meters and which were
controlled by a person who controlled ten or more such stores.
The major findings of the Commission were:
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• Examination of the price trends in the industry revealed an overall decline of 9.4per cent in the
real price of food from 1989 to 1998.
• Regarding pricing practices, the Commission examined five practices allegedly carried out by
the main parties, about which they had received complaints and concluded that three of them (a)
(b) and (c) below distorted competition and gave rise to a complex monopoly situation. The first
two of these (a) and (b) also operated against the public interest:
(a) It was found that all the main parties (with the exception of two) were engaged in the
practice of persistently selling some frequently purchased products below cost, and that
this contributed to the situation in which the majority of their products were not fully
exposed to competitive pressure and distorted competition in the supply of groceries.
(b) It was also found that the practice of varying prices in different geographical locations
in the light of local competitive conditions, (‘Price flexing’), was carried on by major
retailers.
(c) The Commission observed that Asda, Booth, Budgens, the Co-ops, Safeway, Sainsbury,
Somerfield, Tesco and Waitrose adopted pricing structures and regimes that, by focusing
competition on a relatively small proportion of their product lines, active competition on
the majority of product lines could be restricted. This distorted competition in the retail
supply of groceries because not all the parties’ products were fully exposed to competitive
pressure.
• The Commission received many allegations from suppliers about the behavior of the main
parties in the course of their trading relationships. Most suppliers were unwilling to be named, or
to name the main party that was the subject of the allegation. As the Commission could anticipate
a climate of apprehension among many suppliers in their relationship with the main parties, the
Commission had put a list of 52 alleged practices to the main parties and asked them to tell which
of them they had engaged in during the last five years.
• It was found that a majority of these practices were carried out by many of the main parties.
They included requiring or requesting from some of their suppliers various non-cost-related
payments or discounts, sometimes retrospectively; imposing charges and making changes to
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contractual arrangements without adequate notice; and unreasonably transferring risks from the
main party to the supplier. A request from a main party amounted to the same thing as a requirement.
These practices, as per the Commission, gave rise to a complex monopoly situation.
• To address these adverse issues effectively, the Commission recommended a statutory Code of
Practice.
2.
Oxfam’s research project investigated the condition of millions of poor workers mostly women
who work in different developing countries to fuel export growth. For this, it interviewed
hundreds of women workers and many farm and factory managers, supply chain agents, retail
and brand company staff, unions and government officials. In all, the research included interviews
and surveys spread over 12 countries with 1,31 Oworkers, 95 garment factory owners and
managers, 33 farm and plantation owners and managers, 48 government officials, 98
representatives of unions and non-govemment organizations (NGOs), 52 importers, exporters,
and other supply chain agents, and 17 representatives of brand and retail companies The research
documented the experiences not only of women workers, but also of their employers, the
managers and owners of farms and factories. Few important findings of the report are:
t Retail and brand companies have positioned themselves as powerful gatekeepers between
the world’s consumers and producers. Their global supply chains stretch from the
supermarket shelves and clothes rails in the world’s major shopping centers to the fruit and
vegetable farms of Latin American and Africa and the garment factories of South Asia and
China.
t Globalization has hugely strengthened the negotiating hand of retailers and brand companies.
New technologies, trade liberalization, and capital mobility have dramatically opened up
the number of countries and producers from which they can source their products, creating
a growing number of producers vying for a place in their supply chains. These companies
have tremendous power in their negotiations with producers and they use that power to
push the costs and risks of business down the supply chain. Their business model, focused
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on maximizing returns for shareholders, demands increasing flexibility through ‘just-in-
time’ delivery, tighter control over inputs and standards, and ever-lower prices.
J Under such pressures, factory and farm managers typically pass on the costs and risks to
the weakest links in the chain: the workers they employ. For many producers, their labor
strategy is simple: make it flexible and make it cheap. Faced with fluctuating orders and
falling prices, they hire workers on short-term contracts, set excessive targets, and sub
contract to sub-standard unseen producers. Pressured to meet tight turnaround times, they
demand that workers put in long hours to meet shipping deadlines. And to minimize
resistance, they hire workers who are less likely to join trade unions (young women, often
migrants arid immigrants) and they intimate or sack those who do stand up for their rights.
$ The demands for ‘just-in-time’ delivery have typically cut production times in few sectors
by 30 per cent in five years. Coupled with smaller, less predictable orders and high airfreight
costs for missed deadlines, the small producers are pushed to the walls. Moroccan factories
producing for Spain’s major department store. El Corte Ingles must turn orders round in
less than seven days. ‘The shops always need to be full of new designs, we pull out all the
stops to meet the deadline ... our image is on the line’ said one production planning manager.
But the image they hide.is of young women working up to 16 hours a day to meet those
deadlines, underpaid by 40 per cent for their long overtime working.
t Global supply chains have created new opportunities for labor-intensive exports from lowcost locations. The result is a dramatic growth in the number of producers, heightening
competition among the world’s factories and farms for a place at the bottom of the chain. At
the top end, however, market share has tended to consolidate among a few leading retailers
and brand names. Such an imbalance between intensely competing producers and relatively
few buyers in the global market put the small suppliers at the receiving end. The owner of
a Brazilian shoe factory, facing intense international competition to sell to leading footwear
retailers in Europe commented: ‘We don’t sell, we get bought’.
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t Over the past twenty years, fresh produce and food service industries have headed towards
global consolidation. In the food service industry, US-based Yum Brands has 33,000
restaurants - including Taco Bell, Pizza Hut, and KFC - in over 100 countries, and is
especially focusing on expansion in China, Mexico, and South Korea. Supermarkets -
grocery retailers with multiple stores - dominate food sales in rich countries and are rapidly
expanding their global presence.
t In the USA, by 1997, supermarkets and even bigger ‘super-centers’ owned by companies
like Wal-Mart and Kroger controlled 92 per cent of fresh-produce retailing. In the UK, by
2003, just five supermarket chains controlled 70 per cent of the market.
t Since supermarkets are increasingly controlling food retailing, the world’s farmers are
competing for a place in their supply chains. It can be good business, especially for farmers
selling top-quality and out-of-season produce. But fresh produce is a risky business. And
the extreme imbalance in negotiating power between a handful of supermarkets and the
world’s farmers means that most of the gains from trade are captured at the top. Supermarkets
are pushing price and payment risks onto farmers and growers, controlling packaging and
delivery requirements, squeezing producers’margins, and focusing on technical, not ethical
standards.
3.
In 1981, an UN study also suggested similar picture of deprivation of local producers. But
Oxfam data shows that during last twenty years, the condition of the poor suppliers of fresh
fruits have deteriorated further. The UN study showed that the ‘retained value’ from the
Philippines bananas sold in the Japanese market by TNCs in 1974 was only 17% of the retail
price. And the Thailand, fresh pineapples in 1978 canned and marketed by US TNC Dole,
earned only 35% of the final consumer value of canned pineapples. Of this 35%, only 10%
went to the share of the agriculturists and rest 25% to processing, packaging etc. which were
predominantly done by TNCs’ subsidiaries. In another recent report (Biz/ed, 2004), which
corroborates with the above observation, it was estimated that in case of bananas sold in European
16
market by US multinationals, the farmer might get around 10% of the price of a banana with
workers getting anything from 9% in the case of Fair-trade bananas to little as 1.5% on traditional
farms. In comparison, the trading companies the likes of Del Monte, Chiquita, Dole and Fyffe’s
could be getting up to a third of the price whilst retailers took around 40%.
4.
In a recent documentary film titled Wal-Mart- the High Cost of Low Price, on Wal-Mart, its
director, Robert Greenwald high lighted various practices of the mega retail outlet which were
not expected from a business house who preached ethical business. Commenting on the film,
in Fortune, November 28, 2005,Colvin (2005) wrote
‘’...It is (the film) a response to the great social disrupter of our times- the emergence
of a friction - free global economy. This news film,
is a cry from the hearts of the
people being wrenched from the old world in the new and not liking it. There are millions
of them, and they will demand to be heard in the media, the markets, and government.’
The government before taking a final decision to allow FDI in retail sector to strengthen this model of
global trade should review the above findings. Small suppliers, unorganized
workers and consumers are the major looser as global retailers and brand owners consolidate their power
through free movement of global capital. GATS have opened up opportunities before the entrepreneurs
of the developing countries to participate in the international trade as one of the many small suppliers to
the global supply chains. The global retailers now optimize their return on capital through implementation
of a complex
model of supply chain management that consists of services, manufactured goods and commodities
sourced mostly from low cost offshore destinations. But this model has an in-built over-exploitive character
that has already been exposed to a large extent by various research findings as above. (Dey, 2005)
IV
Impact on existing labor laws
In the light of recent police atrocities against labors of Honda factory at Gurgaon and repeated suggestions
by advisers and consultants like McKinsey to bring in drastic reforms in the Indian labor law to make it
17
more flexible allowing easier implementation of the ‘hire and fire’ policy, one of the findings of the
Oxfam report may look very relevant. Governments should strengthen protection of its workers in the
face of intense commercial pressures. Instead many have traded away workers’ rights, in law or in practice.
Under pressure from local and foreign investors and from IMF and World Bank loan conditions, they
have often allowed labor standards to be defined by the demands of supply chain flexibility: easier hiring
and firing, more short-term contracts, fewer benefits, and longer periods of overtime. It brings a short
term advantage for trade, but at the risk of a long-term cost to society. The economic success of the
‘global retailing model’as propagated by Wal-Marts, Royal Aholds etc requires flexible labor market to
survive. Like many other governments, if Indian government also abolishes the safe guards it had enacted
over the years, to protect its labor force, the business environment would become conducive for global
integration. Enough indications are already there to apprehend that the government is also planning to
bring in changes, as desired by the external forces, in the existing labor laws.
The government of India has taken an initiative to allow the existing textile firms to exercise the option
of dividing their employees into ‘core’and ‘non core’workers. While
the existing labor laws would be applicable to ‘core’ groups, the firm would have the flexibility to recruit
and retrench the ‘non core’ workers provided the unit undertakes that
each of these workers would be employed for 100 days a year. (HBL October 31,2005) Recently it has
been reported (ABP 16.11.05) that the communist government of the state of West Bengal has been
seriously considering to ban trade union activities in IT enabled services like Call centers. The Ministry
of Labor, Government of India has already proposed (HBL, Octoberl6, 2005) to amend the Contract
Labor Act of 1970.
The industries that the Labor Ministry has suggested for exclusion from the purview of
the Act included, IT, services in ports, railway stations, hospitals, education and training
institutions, guest houses, constructions and maintenance of buildings, roads and bridges,
export oriented units established in Special Economic Zone. We may recall that most of the services
proposed for exemption of the existing contract act are part of the latest submission of the GOI to the
existing negotiation process under GATS.
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V
Safeguard options available with the government to protect
the interest of small producers and suppliers
Service TNCs are putting all their efforts to bring in suitable changes in the GATS to safeguard their
vested interest. For example, major associations of global retailers like FTA (Foreign Trade Association)
and European Services Forum (ESF), which has global retail firms such as Metro, Ahold and Marks &
Spencer as members, have taken renewed
initiatives to introduce a separate agreement under WTO on trade and investment to safeguard their
overseas investments. For example in a position paper on trade and investment in April 2003, European
Services Forum demanded, a legally binding, comprehensive WTO agreement on rules for investment.
According to that document (ESF, 2003), a WTO agreement on investment should:
4
Be legally binding and based on the fundamental legal principles of most favored nation and of
national treatment (i.e. non-discrimination);
4 Contain:
A stand-still against the introduction of new barriers on to investment;
Post investment protection;
Protection of all material and intellectual property of the company;
Effective protection against direct expropriation as well as against indirect expropriation through
discriminatory treatment
A mechanism for compensation in the case of expropriation
Independent and bind disputes settlement mechanisms;
Right of the company to determine its own ownership structure and provisions on legal, regulatory
and administrative transparency;
t Promote scheduling of concrete and specific commitments by WTO members, to further open
their markets to foreign direct investment.
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Earlier in 2001, F7A demanded for the abolition of any restriction - neither product exclusion nor sectoral
limitation for mode 3 (Commercial presence). It also called for the
strengthening of the investment rules (GATS). Euro Commerce, the employers’ confederation, not only
lobbies for liberalization under the GATS agreement, but also pushes for the reduction of tariffs in
NAMA and Agriculture, since the retail sector wishes to import its merchandise as cheaply as possible.
Before investing in the emerging economies, the global TNCs now want concrete and specific
commitments on unlimited freedom of operation from the host countries. They expect, all such
commitments to be made under GATS frame work so that once any commitment is made; the host
government looses the option to retract from it in future. In this context, the experience of Thailand,
which opened up its retail sector for FDI in the 1980s, could be an eye opener for us. The Thai government
liberalized their trading sector before the GATS negotiation process was started. European retail giants
Tesco, Royal Ahold, Carrefour had set up their operations in Thailand. As expected, many of the
traditional retailers had to down their shutters unable to compete with global firms in an unequal fight.
For example, traditional traders controlled 74% of the retail market in 1997 but by 2002, their share
came down to 60%. Faced with severe criticism from local retailers, the government announced that
they would put control on large retail establishments by imposing the zoning policy regulation. In 2002,
the ‘Retail Business Act’was enacted to control the expansion of foreign retailers. However, the Thai
government changed their decision on zoning regulation allegedly under pressure from European
Commission (EC) who had requested Thailand to open up their retail sector through GATS negotiations.
As WTO lists zoning laws as “trade barriers”, it is feared that the Thai government would loose the most
effective tool to control the expansion of giant retail chains if they further open their retail sector through
commitments under the GATS negotiation process. (Deckwirth Christina)
India is a larger economy than Thailand with a mature political system. In the changed global trading
environment, to protect the interest of its small producers and workers how
much safeguard the government of India will be able to bargain in the on going GATS’ negotiation
process, is another important issue that should be monitored carefully.
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Concluding Remarks
The FD1 debate has opened up many issues which deserve proper attention of the policy makers before
the retail sector is opened up to foreign investors. The findings and deliberations in this paper reveal that
unlike in other sectors, FDI in retail will have a much wider impact on the economy. Essentially, organized
global retail chains will break
the traditional symbiotic relationship that exists between small producers and small retailers. Also, in the
new retailing format, due to unequal terms of trade in a’ monopoly
like situation, small producers and suppliers are likely to suffer most.
Also it is necessary to ensure that no giant pipeline of cheap manufactured goods suddenly disgorges its
products to the detriment of the Indian manufacturer thus causing extreme social disruption. Therefore
our policy should be to ensure that there is no foreign exchange outgo from the first year. The total value
of imports to be retailed and the total value of exports to be retailed should match (not taking capital
inflows) every year. We cannot approve of a situation where there are vast imports from the network of
thousands of manufacturing sweatshops in China for five years while the Indian suppliers are being
developed for later supplies and set off. If FDI in Retail is to be permitted, it should be made foreign
exchange neutral for each year, at least for the first ten years.
As in the Thai model where no large markets are permitted within 15 km of the city center - all our
metros should have a locational limitation.
It will be better to follow the Chinese model of caution and hurrying slowly. China just allowed FDI in
retail in 1992 and the cap was at 26%. After 10 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. 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 favor its own homegrown
retail firms. 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.
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09604
In order to prevent such drawbacks, the government can adopt certain measures to strengthen the domestic
unorganized retail sector. Few suggestions are:
1. The retail sector in India is severely constrained by limited availability of bank finance. The Government
and RBI need to evolve suitable lending policies that will enable retailers in the unorganised sectors to
expand and improve efficiencies.
2. A National Commission must be established to study the problems of the retail sector and to evolve
policies that will enable it to cope with FDI - as and when it comes. The proposed National Commission
should evolve a clear set of conditionalities on foreign retailers on the procurement of farm produce,
domestically manufactured merchandise and imported goods. These conditionalities must be aimed at
encouraging the purchase of goods in the domestic market. Conditionalities must also state the minimum
space, size and specify details like, construction and storage standards, the ratio of floor space to parking
space etc. Giant shopping centres must not add to our existing urban snarl.
3. Entry of foreign players must be gradual and with social safeguards so that the effects of the labour
dislocation can be analyzed & policy fine-tuned. Initially allow them to set up supermarkets of a specified
size only in the metros to make the costs of entry high and according to specific norms and regulations,
so that the retailer cannot immediately indulge in ‘predatory’ pricing.
4. In order to address the dislocation issue, it becomes imperative to develop and improve the
manufacturing sector in India. There has been a substantial fall in employment by the manufacturing
sector, to the extent of 4.06 lakhs over the period 1998 to 2001, while its contribution to the GDP has
grown at an average rate of only 3.7%.23 If this sector is given due attention, and allowed to take wings,
then it could be a source of great compensation to the displaced workforce from the retail industry.
5. The government must actively encourage setting up of co-operative stores to procure and stock their
consumer goods and commodities from small producers. This will address the dual problem of limited
promotion and marketing ability, as well as market penetration for the retailer. The government can also
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facilitate the setting up of warehousing units and cold chains, thereby lowering the capital costs for the
small retailers.
6. According to Indialnfoline.com, agro products and food processing sector in India is responsible for
$69.4 billion out of the total $180 billion retail sector (these are 2001 figures). This is more than just a
sizeable portion of the pie and what ijiakes it even more significant is the fact that in this segment,
returns are likely to be much higher for any retailer. Prices for perishable goods like vegetables, fruits,
etc. are not fixed (as opposed to, say, branded textiles) and therefore, this is where economies of scale are
likely to kick in and benefit the consumer in the form of lower prices. But due attention must be given to
the producer too. Often the producer loses out, for example, when the goods are procured at Rs.2 and
ultimately sold to the consumer at about Rs. 15 as in the case of tomatoes now. The Government themselves
can tap into the opportunities of this segment, rather than letting it be lost to foreign players. And by
doing so, they can more directly ensure the welfare of producers and the interest of the consumers.
7. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that procurement prices for
perishable commodities are fair to farmers and that they are not distorted with relation to market prices.
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