FDI Norms: Is the ‘Ease of Doing Business’ an Inclusive Agenda?

Does the introduction of FDIs in critical sectors allow consumers to accrue more benefits through increased competition or does it cement the presence of big players and displace local industries?

On 28 August, the current government eased Foreign Direct Investment (FDI) norms in various sectors including single brand retail trade (SBRT). Of the various norms declared for SRBT, the ones of significance are the relaxations of online trading and the 30% domestic sourcing norms for the foreign brands.

While these moves can strengthen the “ease of doing business” for the foreign brands, they are also being doubted for their potential to displace the local industry of comparable commodities. Such concerns become particularly pertinent, given the fact that 90% of India’s $700 billion retail market falls in the unorganised and micro sector.

This recalls broader questions that mark the debate on FDIs in general: does FDI uplift the domestic industry it is introduced in or do its neo-liberal roots alienate it further? How effectively has the government managed its erstwhile policies of FDI liberalisation, especially in multi-brand retailing?

We take a look at the EPW archives to explore answers to these questions, which can further initiate a broader policy dialogue on the need, efficacy and governance of FDI inflows in critical sectors.

Effects on Small-Scale and Indigenous Traders

Retailing in India is predominantly constitutive of more traditional forms of retailing (kirana shops, streets vendors such paan/beedi stalls, etc), employing 3.95 crores in the unorganised retailing sector (2001-02). According to Guruswamy et al, this fragmented and sprawling retail industry in India is the primary site for disguised unemployment/underemployment. Arguing against the implementation of FDI in the retailing industry, they claim such a “labour-displacing” activity cannot be introduced unless viable alternatives have been instituted, or else the erosion of the traditional retailing sector would lead to mass-scale unemployment and poverty.

Only until the tardy growth of the manufacturing sector is addressed properly and its productivity chart starts to look prettier, could one begin thinking of dislocating some of the retailing workforce into this space. Until that day, disturbing the hornet’s nest would be one very painful experience for the economy.

Abhirup Sarkar argues that the long-run benefits accruing from FDI in the retailing industry would balance the short-run disruption borne by workers. Providing an analogy of the industrial revolution in England, he states, while the working class was made worse off in the short-run due to sudden loss in employment, they were able to partake in the fruits borne in the long-run. Hence, although it is inevitable for small-scale supply chains and indigenous traders, the most affected by FDI, to undergo it unscathed, the long-run would ensure that the underprivileged are presented with new opportunities as long as suitable measures are taken by the government.

What kind of protective measures can the government take? First, the public distribution system should have enough infiltration and bite in the rural areas to protect the rural poor from a possible rise in the prices of grains and vegetables. Second, the government should reconsider the gamut of tariffs and quantitative restrictions to counterbalance the effects of more easy international trade through multinational retailers. Third, the government should make an effort to compensate for the loss of jobs and livelihood, at least partially. The retail stores may be required to fill up a certain proportion of their labour requirements from displaced small traders. Also for the purpose of making these small traders employable in the new set up, appropriate training programmes may be set-up by the government. The multinationals may be taxed, if required, to finance these programmes.

However, not all assume such a stance. For one, such a theory does not account for social differences that are entrenched in, and drive capitalist systems. Hence, for those who are already economically marginalised due to their social statuses, trickle-down economics is merely lip service. This is the argument put forth by Anand Teltumbde in responding to an article presented by Chandrabhan Prasad and Milind Kamble. The article notes that FDI in retail will open up the “traditional, caste-bound retail sector” to Dalit entrepreneurs, making them beneficiaries due to the “modern and caste neutral” gaze of FDI. However, Teltumbde recalls that such a viewing of the neutralising-modern-capitalist system is not new. Citing Marx’s own (failed) prophecy of India’s railway system dismantling the caste system in India, he emphasises that economically institutionalised caste differences still remain today. For example, Dalit entrepreneurs are predominantly employed only in traditional sectors (such as brick and mortar), with a negligible presence in knowledge-based industries (considered as modern). This, rather than being seen as upward mobility of Dalits, signifies the upward mobility of other classes who have transitioned to more modern industries, leaving the lower-end ones for Dalits.

Globalisation undoubtedly benefits people, including Dalits, but only a minuscule section. The majority, being “uncompetitive,” is pushed to suffer ontological insecurities and existential uncertainties. Ideologically, the votaries of globalisation are favourably disposed towards extreme individualism, social Darwinist competition and belief in the free market as a panacea for social mobility. All that the poor are comforted with is “trickle down” theory, which is theoretically untenable and empirically false.

Government’s Execution of Its Regulations on FDI

In the context of the Bharti-Walmart venture, K S Chalapati Rao and Biswajit Dhar lay down the intricate web of backdoor investments that allowed the two corporations to flout FDI norms in the multi-brand retail trade with abandon. These loopholes in the system were taken advantage of by the big corporations even before the multi-brand retail trade was formally opened for FDI in 2012 by the Indian government. This raises questions about the government’s ability to effectively monitor the execution of its own regulations on FDI, as well as its inadequacy in questioning the need for FDI regulations.

While BWM [Bharti-Walmart] is into wholesale cash and carry business, BRL, the wholly-owned subsidiary of Cedar [previously Bharti Retail Holdings], is in retail operations. The crucial question, therefore, is the nature of relationship of Cedar and BRL [Bharti Retail Ltd.] with Walmart… it is not a mere trading relationship. As has been widely reported, Cedar issued interest-free compulsorily convertible debentures (CCDs) in March 2010 against the Rs 455.80 crore it received from Walmart group. The CCDs were to be converted into equity shares within 18 months, i e, by September 2011. The date of conversion was however extended first by 12 months, i e, till September 2012 and on 20 September 2012 by another 12 months. There are enough indications which suggest that Cedar operated as a JV [Joint Venture] of Bharti and Walmart in spite of it being wholly owned by the Bharti entities in terms of the subscribed equity capital. Indeed, on 25 March 2010 Cedar itself referred to a joint venture agreement following which Cedar’s Articles of Association (AoA) were amended.

This deficiency of the government, of overlooking the implementation of FDI norms, is also raised by Sukhpal Singh. Looking at the food supermarket experience in India and globally, he argues that the expansion of supermarkets through foreign investments in India must be paused so as to re-evaluate existing glitches in the system.

The biggest fear in India is not that the FDI per se will be more disadvantageous for farmers or traditional retailers than domestic corporate investment; it is that the government and its agencies may not be able to regulate and monitor the operations of the global retailers. If the monitoring of wholesale “cash and carry” stores so far is anything to go by, there is no regulation and existing players are openly flouting the norms at the store level. They are known to carry out retail sales in the garb of wholesale, as the size of a single purchase (minimum ticket size) was just Rs 500 in one store and Rs 1,000 in case of another store.

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