Friday, November 25, 2005

Allow Foreign Direct Investment in Retail.

With the bad showing of the Union government’s party and its coalition partners in the recently concluded Bihar state elections, serious rifts which are evident among many members of the coalition who fought against each other is likely to aggravate during the oncoming winter session of parliament. Amongst the many topics which will test the strength of the coalition, with the Congress party and the Left Front taking opposing view points would be on the issue of Foreign Direct Investment in Retail industry. The government’s indication that it would be in favor of opening up the Indian retail sector to foreign investment has been as expected met with the left’s threats to withdraw support to the UPA government. In the 90’s during the early days of the globalization, with Dr. Manmohan Singh as the union finance minister, the retail trade industry had been opened up for FDI, but later was repealed under pressure from the left by P. Chidambaram during the days of the third front government. It seems that by some funny twist of fate the same two people in similar capacities again have to face the left front on this issue now.

FDI has been opened up in other sector of industry and the number of government approvals has been on the increase steadily. During the 1st seven months of 2004, there has been a net inflow of Rs. 9503 crores which is approximately 80% of total FDI inflow 2003. 2005 has also seen a lot of reform in this sector. With reforms like the increase of FDI cap in aviation from 40% to 49% the overall growth rate in 2005 has also been on similar lines. Press note 18-the restrictive regulation which required a foreign partner in an Indian joint venture to get the Indian partner’s no objection to start a new venture in the same field, has been abolished. In the retail industry however, the picture is not very rosy. According to an A.T. Kearney report, the market in India is estimated at around $225 billion out of which only a dismal 2% or $4.5 billion amounts for organized retailing. With the demography of India indicating a young population and an overall booming economy the spending power of the populace has increased. The need for new shopping environs and increased spending is bound to fillip the growth in this sector by 15% to 20% in the coming two to three years. Retail in India is amongst the largest industries accounting for 10% of GDP and around 8% of employment.

With India on the global map for foreign investors around the world, there is a large amount of foreign capital waiting to pour in. India is listed 5th in the UNCTAD survey of favorable investment locations. In the retail scene, global conglomerates like Wal-Mart from US, Shoprite from South Africa have been eyeing the Indian market keenly. METRO GmbH, the German retail bigwig has opened shop in Bangalore. Although fraught with regulatory restrictions, the METRO group with their “Cash & Carry” format has started business selling for resale and corporate purchases. The Foreign Investment Promotion Board of FIPB allows foreign investors to enter the market under the banner of test marketing products for a period of two years. Under these norms the FDI is allowed in wholesale cash & carry but not under the retail trade. With the similarities in the test marketing route to actual retail trading the commerce ministry is hoping to scrap this test marketing route to plug FDI in retail trading.

The entry of METRO GmbH had sparked of protests from the left wing. The company has been accused of starting retail trading directly at their outlets in the name of wholesale. The propaganda machine has been blaming the government of looking the other way by allowing the company to continue operations even when there have been reports of METRO selling products not essentially meant for resale which is stipulated under norms. The Indian retail industries share a large market, which is mainly unorganized. The entry of these large foreign conglomerates is set to usher in an era of large scale organization in this market with modern strategies and newer technology. The left parties are willing to downplay these constructive features by mooting concerns over the so called predatory pricing regimes followed by such companies sounding a death knell to the smaller Indian retail companies.

Predatory pricing practices have been a common feature in arguments against large retail chains around the world like Wal-Mart. Although companies like Wal-Mart have in the past engaged in such practices, it is a case in point to note that such practices have failed and been the bane of these companies. To further allay such misconceptions it might be worthwhile to look into the rates of inflation which are a key index to the struggle in pricing. In fact trying to decrease rates of inflation by practices like monetary infusion, or increase in the stock of country’s money can prove counterproductive. There has been a debate over this issue in economic circles recently with Ben Bernake, the successor to Alan Greenspan as the chairman of US Federal Reserve being in support of such a policy of monetary infusion. The capitalist frame of thought on this issue propounded by none other than Ludwig Von Mises, the famous economist of yesteryear is that trying to increase the stock of money when the inflation rises above a certain level and decreasing it when there is deflation at a certain level, in other words, inflation targeting, cannot be achieved without misleading economy with an illusory boom. This would in simple common sense mean that, practices like predatory pricing will not be successfully possible if there is no indulgence of the Reserve bank of India in socialist practices like monetary infusion.

With India targeting a GDP growth rate of 8% there is definitely a need for more capital investment in retail, it being among the largest industries of the country. The influx of new technology like RFID (Radio Frequency Identification Tags) in the retail industry which is bound to follow any FDI in retail will make businesses more efficient. Also the organization which this capital is bound to bring will actually play in favor of the Indian retail scene. A survey by FICCI indicated that there also needs to be a reform in the FDI policy guidelines set up by FIPB. A whopping majority of surveyed foreign investors have indicated that one of the most obvious deterrents for investing in India is the unstable nature of these policy guidelines. It has to be acknowledged that FIPB has put up online a manual which allays the fears of foreign investors by clearly indicating the guidelines and restrictions to foreign investment in India. But a rethink on increasing the cap of investments is required. Economic policy under socialist pretexts tends to be perfunctory in terms of dealing with illusory booms which lead to recessions by calling for more government control, thereby threatening the ideal of a free economy. The caprice by successive Indian governments with regard to reform in FDI policy is a case of a lack of will to weed out communist influence from economic polity. With countries like China being ranked higher than India in the UNCTAD survey of profitable investment locations one is bound to see that there is definitely a trend in favor of a capitalist economy around the world. Ludwig Von Mises, the noted economist strongly voiced his support for lassiez-faire capitalism as the most advanced economic theory; whether India can move, albeit slowly, towards such a system would in part depend on how it deals with this contentious issue of allowing private capital to flow into one of India’s largest industries.


1. Investing in India: Foreign Direct Investment-Policy & Procedures, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India.

2. Retail Trading- Why FDI should be allowed: Jayanthi Iyengar in the Hindu Business Line

3. FDI in Retail must be allowed- Dr. Subramainan Swamy, Rediff Business portal.

4. Mises Institute: Why money supply matters- Thorsten Polliet

5. Mises Institute: What does inflation targeting mean- Roger Garrison

6. People’s Democracy, December 14, 2003: FDI threatens 3 crore Indian retailers- weekly organ of CPI(M)


Anonymous said...

One should have a proper appreciation of the factors involved in global trade policy decisions before recommending that FDI should be allowed in retail.

There are many excellent articles on the web on this.
e.g. see

venkat said...

Thank you for sharing this post.

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