by Sreevidya Raman
India is ushering in an age of reforms. The current developments on foreign direct investments (FDI) in multi-brand retail, diesel price hikes, and the cap on subsidised LPG are spurring passionate debates. While the country still does not seem to have moved past Prime Minister Manmohan Singh’s uncharacteristically bold stance against West Bengal Chief Minister Mamata Banerjee1, we should first understand its economic implications. We will discuss FDI in the retail and aviation sectors, then move on to diesel price hikes, and the cap on subsidised LPG.
To explain what an FDI entails, let us take the example of a country A that invests money into the production of goods and services of a country B, in the hopes of making a profit. They achieve this either through buying a company in country B, or by expanding its operations of an existing business into country B. In other words, an investment by one country in another country’s economy is known as a foreign direct investment. The Government of India has now allowed up to 51 percent FDI in multi-brand retail, which has come under some criticism. Those that support the measure argue that it has been introduced to encourage inflow of funds into the country by demonstrating to the outside world that the Indian government is ready to take action in the face of a difficult economic situation. Those who are against it, on the other hand, interpret it as bowing down to foreign pressure. Because the central government does not hold all the power, the decision on whether or not to allow FDIs has been left in the hands of the State governments.
So, what will the poor man do when a retail giant like Walmart makes its way into the Indian market, occupying a large part of the market share? How can the average neighbourhood store owner possibly compete with such a globalized establishment? The answer is simple. He will compete with them in the exact same way that he competes with large Indian retailers. In other words, the small grocery store owner will provide home delivery services and will often go out of his way to provide specialized goods to ensure consumer loyalty while his ‘well-established’ competitors will lose out on these customers due to their inability to provide such personalized services. Walmart and Tesco will be unable to ‘steal’ such customers. Or as Arvind Singhal of retailing consultancy Technopak Advisors so aptly put it:
One fear is that small and medium enterprises will be victimized as large multinational retailers will sell their products at very low prices so that they can drive out existing Indian retailers leading to a market dominated by a few foreign firms. However, one of the main causes of concern is that such a scenario would not only harm Indian retailers, but also farmers, as market dominance implies that farmers would be forced to accept almost any price offered by the new foreign retailers. However, a strengthened legal framework in the form of the Competition Commission of India (CCI) has been created which covers all the sectors of the economy, and is available to employ in the instance of any anti-competitive behavior, including pricing commodities at very low rates. Thus, the opening up of the retail sector could potentially benefit farmers as it would increase competition within the sector and thereby minimize the gap between farmers and retailers by reducing the power of middlemen (the intermediaries between the farmers and retailers), leading to higher prices for farmers’ produce.
Some argue that multi-brand retailing will lead to the breakdown of established supply chains as the foreign retail giants begin to dominate the market. However, the CCI is meant to ensure that such a scenario will not arise through increasing investment by retail chains in supply chains. This will lead to reduction in the wastage of crop, which happen for two main reasons: inadequate storage facilities and the middleman's refusal to release crops as higher supply would reduce the price of foodgrains and thus, their profits.
India is ushering in an age of reforms. The current developments on foreign direct investments (FDI) in multi-brand retail, diesel price hikes, and the cap on subsidised LPG are spurring passionate debates. While the country still does not seem to have moved past Prime Minister Manmohan Singh’s uncharacteristically bold stance against West Bengal Chief Minister Mamata Banerjee1, we should first understand its economic implications. We will discuss FDI in the retail and aviation sectors, then move on to diesel price hikes, and the cap on subsidised LPG.
To explain what an FDI entails, let us take the example of a country A that invests money into the production of goods and services of a country B, in the hopes of making a profit. They achieve this either through buying a company in country B, or by expanding its operations of an existing business into country B. In other words, an investment by one country in another country’s economy is known as a foreign direct investment. The Government of India has now allowed up to 51 percent FDI in multi-brand retail, which has come under some criticism. Those that support the measure argue that it has been introduced to encourage inflow of funds into the country by demonstrating to the outside world that the Indian government is ready to take action in the face of a difficult economic situation. Those who are against it, on the other hand, interpret it as bowing down to foreign pressure. Because the central government does not hold all the power, the decision on whether or not to allow FDIs has been left in the hands of the State governments.
So, what will the poor man do when a retail giant like Walmart makes its way into the Indian market, occupying a large part of the market share? How can the average neighbourhood store owner possibly compete with such a globalized establishment? The answer is simple. He will compete with them in the exact same way that he competes with large Indian retailers. In other words, the small grocery store owner will provide home delivery services and will often go out of his way to provide specialized goods to ensure consumer loyalty while his ‘well-established’ competitors will lose out on these customers due to their inability to provide such personalized services. Walmart and Tesco will be unable to ‘steal’ such customers. Or as Arvind Singhal of retailing consultancy Technopak Advisors so aptly put it:
“Even when modern retail started in India, there was hullabaloo that the mom-and-pop stores will be wiped away. This has been proven to be wrong. And if Indian retailers have not managed to harm the unorganised sector, there is no way foreign investments will. It has been already proven that both organised and unorganised sectors can co-exist without much friction.”Therefore, the entrance of these retail giants will not mean the end of existing Indian retailers, but will only mean the growth of the retail sector as a whole.
One fear is that small and medium enterprises will be victimized as large multinational retailers will sell their products at very low prices so that they can drive out existing Indian retailers leading to a market dominated by a few foreign firms. However, one of the main causes of concern is that such a scenario would not only harm Indian retailers, but also farmers, as market dominance implies that farmers would be forced to accept almost any price offered by the new foreign retailers. However, a strengthened legal framework in the form of the Competition Commission of India (CCI) has been created which covers all the sectors of the economy, and is available to employ in the instance of any anti-competitive behavior, including pricing commodities at very low rates. Thus, the opening up of the retail sector could potentially benefit farmers as it would increase competition within the sector and thereby minimize the gap between farmers and retailers by reducing the power of middlemen (the intermediaries between the farmers and retailers), leading to higher prices for farmers’ produce.
Some argue that multi-brand retailing will lead to the breakdown of established supply chains as the foreign retail giants begin to dominate the market. However, the CCI is meant to ensure that such a scenario will not arise through increasing investment by retail chains in supply chains. This will lead to reduction in the wastage of crop, which happen for two main reasons: inadequate storage facilities and the middleman's refusal to release crops as higher supply would reduce the price of foodgrains and thus, their profits.
Furthermore, lower prices at retail level also imply lower rates of inflation, which in recent times, has always been greeted as good news. Consumers now get more variety and better products because of the introduction of better technology and branding practices.
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| Courtesy cartoonistsatish.blogspot.in |
We now come to the second source of debate concerning FDIs: the decision to permit foreign airlines to take a 49 percent stake in domestic airlines. The move was undertaken with the hope of rescuing domestic airlines by bringing in strategic investors at a time when domestic carriers were in desperate need for funds to minimize the heavy losses that they had accumulated. But it is a little unrealistic to think that foreign airlines will buy stakes in loss-making domestic carriers, especially taking into consideration high fuel prices and operational costs. Thus, although FDIs in the aviation sector are a step in the right direction, they are too small a measure to take at a time when the only way to improve the aviation scene at the domestic level would to be to dramatically improve infrastructure so that the rate of use of domestic airlines increases so that the sector can minimize losses.
Singh’s plan to boost economic growth through encouraging entrepreneurs to once again become competitive by liberalizing the economy is a sound plan conceptually, but whether it will be successful is a question the economy will answer for itself soon enough.
In part two of this article, we will go over the predicted and planned impacts of the diesel price hike and the cap on subsidised LPG, and what respective parts they play in Singh’s agenda for the economy.
Footnotes
1 Padgaonkar, Dileep. "Back In Great Form." Keralacm.gov.in, 20 Nov. 2012. Web. 20 Nov. 2012. <http://www.keralacm.gov.in/images/stories/newspaper/2012/times2_sep20.pdf>.
Hay, Rob. "India Eases Open the Door for FDI." Fruitnet.com. N.p., 17 Sept. 2012. Web. 21 Nov. 2012. <http://webcache.googleusercontent.com/search?q=cache:4lZlmJggAq4J:www.fruitnet.com/content.aspx%3Fcid%3D15409+&cd=2&hl=en&ct=clnk&gl=in>.
"Irrational Exuberance." The Hindu, 17 Sept. 2012. Web. 21 Sept. 2012. <http://webcache.googleusercontent.com/search?q=cache:GuGEpSWcv3sJ:www.thehindu.com/opinion/editorial/article3904601.ece+fdi+retail+fall+in+wastage&cd=1&hl=en&ct=clnk&gl=in>.
"The Pros and Cons of FDI in Retailing." - Business Today. Http://businesstoday.intoday.in, 25 Nov. 2012. Web. 22 Sept. 2012. <http://businesstoday.intoday.in/story/fdi-in-retail/1/20408.html>.
References
"Airline Industry Expecting Positive Response: Ajit Singh." Zeenews.india.com, 21 Sept. 2012. Web. 21 Sept. 2012. <http://zeenews.india.com/business/news/companies/airlineindustry-expecting-positive-response-ajit-singh_60784.html/airline-industry-expecting-positive-response-ajitsingh_60784.html>.Hay, Rob. "India Eases Open the Door for FDI." Fruitnet.com. N.p., 17 Sept. 2012. Web. 21 Nov. 2012. <http://webcache.googleusercontent.com/search?q=cache:4lZlmJggAq4J:www.fruitnet.com/content.aspx%3Fcid%3D15409+&cd=2&hl=en&ct=clnk&gl=in>.
"Irrational Exuberance." The Hindu, 17 Sept. 2012. Web. 21 Sept. 2012. <http://webcache.googleusercontent.com/search?q=cache:GuGEpSWcv3sJ:www.thehindu.com/opinion/editorial/article3904601.ece+fdi+retail+fall+in+wastage&cd=1&hl=en&ct=clnk&gl=in>.
"The Pros and Cons of FDI in Retailing." - Business Today. Http://businesstoday.intoday.in, 25 Nov. 2012. Web. 22 Sept. 2012. <http://businesstoday.intoday.in/story/fdi-in-retail/1/20408.html>.
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