Wal-Mart is coming to India—so what are you gonna do about it?

Almost two weeks ago, on 16^th of September, 2012, the government of India led by economist Prime Minister Manmohan Singh took the decision to allow foreign direct investment (FDI) in multi-brand retail. This decision follows weeks of speculation where the Prime Minister repeatedly made the statement that some tough decisions will have to be taken in order to rejuvenate the sluggish economy. For two years in a row the UPA government has fallen short of its projected growth target of 8% and the growth figures have hovered around the 5% mark. The government that is not only responsible for this decrease in growth rate but also for high inflation and a series of multi-billion dollars corruption scandals, is now trying to project FDI in retail as a sweet pill that will cure our ailing economy and improve the lot of the common man, who has been reeling under soaring prices of everyday commodities for more than three years now. Since Wal-Mart is arguably the biggest player in multi-brand retail, this decision is generally being perceived as one that would facilitate the entry of this retail giant in India.

The UPA government tried to bring this issue in the parliament last year as well but owing to strong opposition from its allies as well as from the opposition, it deferred it till a consensus could be evolved. However, it didn’t do anything to make the public and its representatives aware of the benefits of FDI in multi-brand retail in India so that a consensus could be evolved. Rather, the government, with an attitude that smacks of arrogance, imposed this decision on the Indian population without feeling the need to justify or clarify or elaborate upon the pros and cons of it. And quite unexpectedly this decision has brought all the opposition parties together and they have taken to the streets to protest against this decision and at the same time to educate the masses of the grave repercussions of this decision. The government claims that this decision will benefit the farmers and that it won’t have any adverse effect on the small time corner shop retailer. The opposition on the other hand is busy in the streets warning the public that the entry of retail giants like Wal-Mart will facilitate the exploitation of farmers and will force the small time retailers out of business. The Indian media, for the last fortnight has discussed nothing but the impact of FDI on common man. I have been following these debates consistently and unfortunately, although not surprisingly, barring a couple of anchors, Ravish Kumar on NDTV being one of them, the debates have generally focussed on the political rhetoric and very few statistical realities or research based studies have been put forth to educate the public. I am going to discuss some of the major issues raised in these debates and try to provide some ground level realities that political rhetoric tries to ignore as per its convenience.

Will this decision benefit the Farmers?

The agro-based economy of India has a unique distinction of being a leader in farmer suicides. According to National Crime Record Bureau Data (2009), 216000 farmers committed suicides between 1997 and 2009. With the size of land holdings shrinking with every generation and the input cost of agricultural increasing with every passing year, it is becoming increasingly difficult for the farmers to make ends meet. So how is the FDI going to help solve this solution? Will it do something to lower the input cost? For instance, provide cheaper seeds to the farmers or help them with some superior quality fertilizer at subsidized prices; or maybe miraculously increase the size of their land holdings? “No,” says the government,” but it will provide a fair price of their produce, build infrastructure like cold storage etc. to minimize wastage so that the farmer can get the maximum return for his investment. In the current scenario, the farmer generally sells his produce in the mandis through a middlemen or the arhatiyas who take his stock on as is where is basis. Will Wal-Mart do the same? No. It will grade the produce and will pick up only the high grade produce leaving the farmer to take care of the rest at his own expense. So, while there is no decrease in the input cost, the farmer will be left over with the low grade produce and he will now have to find means to dispose it off. The government says the farmer will still have the option to go to the mandis, but does it really want us to believe that the corporate giant will let the mandis retain their current status where they are run through individual entrepreneurship? With its millions of dollars, how difficult it will be for Wal-Mart to take control over the mandis and thereby bring in its corporate culture in them.

So, is corporatization of mandis a bad thing? Instead of the filth-ridden stinking places that they are nowadays we’ll have clean, air-conditioned, glass-walled places where the farmer will bring his produce. Is there something wrong with this image—the Farmer bringing his produce in a multi brand high tech wholesale market? But who is buyer here? It will be a monopolized setup where the Farmer will not have any choice but to sell his produce at whatever price he is offered. How will it benefit the farmer, I fail to understand.

But the fact remains that the farmers are committing suicides and something needs to be done. But Wal-Mart is not the answer. Lowering the input cost is the answer. Providing them the benefits of the agricultural research so as to increase their inputs is the answer. Making infrastructure like better roads and cold storages is the answer. Shall the government of India, look up to companies like Wal-Mart to build cold-storages? Will such companies build cold-storages for the benefit of the farmers? Has our economist Prime Minister forgotten that profit is the only driving force behind any corporate decision and social welfare is nowhere on their agenda? What the Indian farmers need is pro-active support from the government and not the escapist approach that this government is adopting.

Does Wal-Mart sell only farm produce?

The government is trying to project Wal-Mart as a company that primarily sells farm produce, whereas the fact is that farm produce is a small segment of Wal-Mart’s operations. It sells everything from match-boxes to watches and from clothes to cosmetics. Who will supply this stuff to Wal-Mart’s stores in India? The agreement says that Wal-Mart or such companies will have to use 30% of their investment to buy retail brands from Indian companies. Sounds good. This means that our manufacturers will benefit from this since it will provide them with a ready market. But there’s a catch and that be explained by simple Arithmetic (I have been listening to Bill Clinton lately) :

Suppose Wal-Mart spends Rs. 100 annually

As per agreement it should spend Rs 30 on Indian brands

Where will it spend the remaining Rs. 70? On Chinese or some other cheaper brands.

Since Indian brands are costlier (thanks to high interest rates and high rates of power) than Chinese or say Philipino brands the amount of products that Wal-Mart will buy with Rs. 30 in India will be less than the products that it will buy with the same amount (Rs. 30) from other countries.

So Rs. 30 = say 10 Indian products on Wal-Mart’s shelves.

     Rs 30 = 20 Chinese products on Wal-Mart’s shelves + Rs 40 = another 25 products.

This means for every ten Indian brands on Wal-Mart’s shelves there will be at least 45 brands from China. And is there a brand protection or commodity protection guaranteed? No. Indian soaps will be competing against Chinese soaps which will be cheaper. So how can the Indian brands survive?

1.     By lowering the wages of already underpaid workers.

2.     By resorting to power theft or some other corrupt means to lower the production cost.

3.     Outsource their operations to China.

This simple calculation exposes the myth of the so called protection given to Indian manufacturers.

Will Wal-Mart put the neighbourhood shopkeeper out of business?

A lot of space in the opposition’s rhetoric has been occupied by the fear that the entry of Wal-Mart will force the neighbourhood shopkeeper to close his shop. By a rough estimate approximately 60 to 80 million people are directly or indirectly involved in small time grocery business. What will happen to them once these corporate giants occupy the retail market? They cite the examples of certain cities in the Western world where such mom and pop stores have gone out of business due to the entry to companies like Wal-Mart. Sadly this argument is as much devoid of facts and logical thinking as the pro-FDI arguments provided by the government. First of all, don’t you get a sense of déjà vu here? Didn’t we hear this rhetoric about a decade ago when the government allowed Indian corporates to open retail outlets? Weren’t there dharnas and protests against stores like Reliance Fresh? The small shopkeepers felt threatened then also or were at least made to feel threatened by the politicians. How many of them closed shop? No one as far as my personal experience is concerned and despite my best efforts I haven’t come across any study taken by anyone to analyze the impact of corporate retail on small time shopkeepers in the last decade.

People who are creating such fear psychosis are knowingly or unknowingly ignoring certain aspects of Indian retail business.

1.     Barring a small percentage of metropolitan families, Indians do not buy their groceries in bulk, the way people do in the West. Grocery shopping in Indian homes is based on immediate demand and not on the weekly or fortnightly calculations. So if my mom needs a kilo of sugar or a bag of rice, will she go to Wal-Mart? No. She’ll send her maid to the corner shop to fetch the stuff.  Let us suppose my mother changes her lifelong grocery shopping habits and decides that she’ll go to Wal-Mart every week to buy her supplies. Let’s us do simple maths and see if it makes economic sense.

Distance of Wal-Mart store from my house=7 Kms (conservative estimate)

To and fro Cab charges = Rs. 280

Average Weekly Grocery bill for a family of 4 people=Rs.1200

If the person goes by his own car then cost of petrol=Rs. 100 plus Rs.30 parking=Rs 110

Time spent in shopping = 2 hours

So Wal-Mart will have to provide a minimum of 10% (if mom learns to drive) or about 25 % (If she takes a cab) discount on every item to make it worth her effort and that too if decides to change her grocery buying habits drastically. With an average of 11 cars per thousand persons in India, I don’t see any reason for the local shopkeeper to fear.

2.     As far as the comparison with Western cities is concerned, the opposition is again conveniently ignoring the fact that the base of Indian middle class is swelling with every passing day. This continuous upward economic movement of population fills the gap created by the upward movement of its predecessors. So if Wal-Mart attracts some customers, there will be new customers to take their place and local shopkeeper’s business will not close down. Here’s an example—in the last two decades, thousands of families from the old, walled city of Amritsar have moved to the suburbs. So, does that mean that the old city has become a ghost town? No. It is as abuzz with activity as it has always been. The people who earlier used to live on the margins have bought those houses and their houses in turn have been bought by people who were further marginalized. This continuous upward economic growth of middle class is absent in the West and there is no one to take the place of space that becomes vacant due to the movement of people. So such a comparison is outright dumb and stupid.   

Manmohan Singh’s government has decided to impose to the FDI in retail and with its characteristic arrogance seems to asking the Indian populace, “So what are you gonna do about it?” I say Mr. Singh we don’t need to do anything since through this step you have merely admitted your inability to govern this country and ironically your utter lack of sound economic vision and judgment. To the opposition, I’d like to say that if they want to gain some political mileage, then they should present the fact based realities to the public instead of hollow political rhetoric. And to my neighbourhood shopkeepers Sharma ji and Gupta ji, my advice is stop wasting your time and money in dharnas and protests and not to buy into the emotionally charged, fact-starved rhetoric of the politicians. No Wal-Mart can provide me the comfort zone and recognition that I find in your shops.