FDI in retail: A trick or treat?

The writer takes a look at the recent shotgun reforms undertaken by the scam-tainted government

About a year ago, when the murmurs on FDI in retail were beginning to gather momentum, Moneylife published this article written by me on the subject. (100% FDI in retail in India, good or bad...). The article still holds true. Obviously, there is no way matters can be generalised into convenient compartments; it is much deeper than the small-shop-versus-large-supermarket. Likewise, on supply chain, we could write a book in India. Very briefly, FDI should be simple to understand—if somebody wants to invest in India, then they do it because they see some gain for themselves. It is not always monetary or out of goodness of the heart, as their lobbyists would like us to believe, or as various East India Companies have shown us in the past.

 

So why this urgency? After all, money does not grow on trees. If it has to come, it will come, right? Right. Through proper channels, therein, lies the rub. Two big reasons shine so bright, that like the sun in the sky. We choose to not see the brightness directly knowing fully well it is there.

 

Firstly, to be frank, not much has changed on the ground in India to justify the sort of urgency being referred to as “sweeping reforms”. Unless, of course, the term ‘sweeping’ is being used in the sense that, as much as could have been looted in the last few years by the various formations in control in New Delhi, that remnants like FDI in retail are amongst the final ‘sweepings’1 waiting to be lifted.

 

1 — The maritime and commercial context of sweepings refers to the cargo left behind after the main cargoes have been discharged or taken away, and by rights these sweepings have to be taken away so that the ship or warehouse can receive more, and this is free money for those who are given the job of cleaning things up.

 

The second and more important real reason for urgency is, and visible for those who would like to see even if they were blind, that it is becoming increasingly more difficult to park hot money abroad in a variety of tax havens and offshore centres—whether it is London/New York/Singapore trio with satellites, Commonwealth-linked tax havens controlled mostly by the Square Mile in London, the American enclaves in Delaware and Wyoming and more, or better known tax havens like Cyprus, Luxembourg, Cayman Islands, Switzerland, Mauritius, Isle of Man, et al.

 

Be it Carl Levin chasing money to tax in the US and the Romney taxation gaffes in the election year or the way the investment banking industry is suddenly running to cover its bases especially out of London, the word is out—if you had money parked anywhere, be ready to either lose it or pay taxes on it somewhere. This is emanating the loudest from the OECD/developed countries who would love to get their hands, in these globally distressed times, on funds from people and corporations that came from somewhere else but ended up becoming resident or domicile in their countries or in tax havens under their control.

 

That's the single most important reason why anybody and everybody connected to India, with a finger in any hot money pie in danger of getting stranded abroad, is desperate to roll it back into India. It doesn't get simpler than this. You can't move money between tax havens of late without running the risk of losing it totally.

 

Fair enough, the country could do with her prodigal sons and thieves returning to pay back their debts to society, which is not such a bad idea especially when the larder starts to run empty. But letting them in without any checks or balances on where the money came from—are we that stupid or hungry? Give us a chance, a fair chance at good governance, and see how Domestic Direct Investment comes tumbling out of all over India, as it already in from the “unorganised sector”.

 

Say we wanted to start a small shop; then even before we could roll up the shutters, we would have to explain where every last rupee used as capital came from. But if you and I were smarter and able to first of all loot and scoot on a variety of scams, send the money out and then wanted to bring the money back in, then what better route than through unimpeded FDI?

 

Investment in retail, civil aviation—and others such as coastal shipping and the real estate for example—is certainly welcome. But the larger question is—why only for the foreign investor? Where aren’t we making the investment climate in India more attractive for the domestic investor?

 

To those who will not learn from history, a short trip back in time to the Calcutta and Madras of the final days of the Mughals—the concessions given to the Hastings, Clives and the Yales, and the countervailing additional transactional costs on domestic commerce during the era of Jagat Seth and Mir Qasim—is suggested.

 

Let us have some clarity and transparency on investments in India and ensure that the foreign investments coming in are identifiable, just as it is for domestic investments. At the same time, let us not try to kill the “unorganised sector”, by giving FDI unchallenged access to our markets.

 

Otherwise, we have to be prepared for another era of slavery or, worse, become a battlefield between the warring powers of the West on one side and China on the other.

 

The need of the hour is good domestic governance. And nobody seems to be bringing that up.

 

(Veeresh Malik had a long career in the Merchant Navy, which he left in 1983. He has qualifications in ship-broking and chartering, loves to travel, and has been in print and electronic media for over two decades. After starting and selling a couple of companies, is now back to his first love—writing.)

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    COMMENTS

    Veeresh Malik

    8 years ago

    One single point which needs to be answered by FSSAI and other authorities is this - what guidelines will prevail for processed food and packaging at these foreign FDI based retail outlets?

    Vaidya Dattatraya Vasudeo

    8 years ago

    In US itself these Malls are being opposed. The local areas have started opposing them and are encouraging the local shops. It is being done actively. Should we not learn from that either. Are we so ignorant or is it being ignored for personal vested interest, of businessmen and primarily of Politicians. It is worth noting an article by Mr. Swaminathan, in local news paper in Pune, that we expect an inflow of about Rs.5000 crore in the infrastructure development because of this, and a sum of Rs.25,000 crore is lying with Agricultural Department. The ulterior motives are beyond doubt. These people should be called and punished as traitors instead of the Cartoonist who only say that the king is naked.

    MOHAN

    8 years ago

    Mr. Montek Singh Ahluwalia says in a interview FDI is welcome because we need to modernize Retail Business. He also says it will give quality jobs to young people.

    1. Can only Foreign companies bring in modernity to this sector?

    2. What is is meant by "modernization of retail industry"? (A computer and an electronic weighing machine?)

    3. What is meant by "quality jobs"? (A suit and and a necktie" ?)

    4. Is it not a fact that modernization reduces chances of unskilled jobs? (How many of our poor youths are computer literate? )

    5. If a young man gets an employment in a foreign retail shop as a salesman, what are his promotion chances? Can he ever become the GM etc? (btw, What is the rate of attrition in this industry in foreign countries)

    6. Many of the workers employed in supermarkets are employed on temporary basis. Can the government assure that there will not be any temporary employees in foreign retail chains?


    7. What will happen to middle aged and old people who are now running small retail shops? (Will the Government give them Pension ?)

    REPLY

    Vaidya Dattatraya Vasudeo

    In Reply to MOHAN 8 years ago

    An excellent questionnair. As I understand, the words 'Many of the workers ' should be corrected to ' Most of the workers '.

    Regarding the raising of the issues in the Parliament, what good has ever been achieved by doing this. At the same time, I must admit, I do not have any sensible / workable solution in my mind.

    Veeresh Malik

    In Reply to MOHAN 8 years ago

    Mohan ji, these are very good questions for Montek Singh/Planning Commission, and you can ask them as an RTI Application here:-

    http://planningcommission.nic.in/rti/ind...

    rgds/VM

    M G WARRIER

    In Reply to Veeresh Malik 8 years ago

    Many of the issues raised by Mohan are based on perceptions. While the link is useful, better not to try RTI route for 'information' which are not likely to be there on records. The questions will have to be raised when these people meet the press or issues may have to be raised in Parliament.

    Dr Anantha K Ramdas

    8 years ago

    Sir: thanks for your forthright comments on the issue, and the urgent need to bring in good domestic governance.

    That's the point at stake here.If you and were to choose a wrong set of guys to represent us in the Parliament we are doomed before started the governance part!

    We have criminals with cases pending against them that are as long as Bhramaputra; our elected criminals swindle and become crorepathis and they hardly pay taxes; they talk about black money while they themselves have tonnes of it abroad. There is no light at the end of this long tunnel... it is just dark, darker and darker as we go into it.

    First let us elect clean people to govern and start with a clean slate. The current slate is so dirty that it cant be cleaned; so let us scrap it once and for all, and start all over again!

    REPLY

    Veeresh Malik

    In Reply to Dr Anantha K Ramdas 8 years ago

    Thank you for your comments.

    MOHAN

    8 years ago

    Nobody is against Economic Reforms. But the civil society is apprehensive about the so called economic reforms announced now. They are very suspicious. The common man is worried about the Prime Minister’s ability to deliver as he is surrounded by shrewd and corrupt elements. The PM many a time cheated the people of India on the price rice issue. He repeatedly said the prices would come down. Since the prices did not come down he requested people to give him at least one year for making the prices to come to the normal level. But it never happened. Now, after the Diesel price hike the prices of essential commodities are likely to skyrocket within a few weeks. There is trust deficit. The common man does not trust Man Mohan Singh any more. What is the use in strengthening the hand of a chicken hearted person? He must resign immediately or he will be forced to resign soon. Wait!

    REPLY

    Vaidya Dattatraya Vasudeo

    In Reply to MOHAN 8 years ago

    You have said it very boldly and correctly that PM has cheated us. He says he does not have a magic wand and it takes time. Does it mean 8 years is a small period. It is true that money does not grow on trees. But he also knows that it can be retrieved from the air or can easily be mined, without getting black spots of coal.

    FDI in retail may improve loan recovery from farmers

    According to a representative body of cooperative agriculture banks federation, increase in income of farmers due to FDI in retail would also lead to improvement in recovery of loans from them

     
    Batting for FDI in multi-brand retail, a representative body of Cooperative Agriculture Banks Federation has said it (the decision) will help farmers to fetch better returns and also lead to improvement in recovery of loans from farmers, reports PTI.
     
    "Definitely, FDI in retail will result in more income for farmers because big international retailers will be procuring agricultural commodities directly from farmers and pay them more prices to them while eliminating the middlemen," KK Ravindran, managing director of National Cooperative Agricultural & Rural Development Banks' Federation Ltd (NCARDBF) told reporters.
     
    NCARDBF also said that increase in income of farmers would also lead to improvement in recovery of loans from farmers.
     
    "As farmers will be benefited (because of FDI in retail), we will also be benefited. They (farmers) will return our money and there will be improvement in recovery and thereafter more funds could be deployed in agriculture," NCARDBF Chairman K Sivadasan Nair said.
     
    State Cooperative Agriculture and Rural Development banks are functional in 19 states except Maharashtra, Assam, Orissa and Tripura. The total outstanding finance including investment credit to agriculture sector by banks is pegged at Rs15,800 crore with non-performing asset (NPA) level of 20%.
     
    The loan recovery of these banks in the country was 45.6% last year, though Ravindran expected that the loan recovery would improve in current fiscal year than that of last financial year.
     
    During the conference, the apex body of cooperative lending structure sought from the Centre to turn the cooperative agriculture and rural development banks to fully fledged banks like commercial banks operating in the country.
     
    "We want that Reserve Bank of India (RBI) should allow us to function like a commercial bank and then we can accept deposit like banks which can be used for other banking services other than financing to farm sector," Ravindran said.
     
    "There are some cooperative banks operating like Punjab, Kerala, Rajasthan, West Bengal which are running efficiently and they can be converted into a fully fledged banks," said Ravindran.
     
    With overdue in farm loans for investment purpose rising in most of the states, NCARDBF said it was decided to examine the feasibility of giving relief to farmers (who defaulted due to genuine reasons) by rescheduling their outstanding dues to enable them to pay in easy instalments.
     
    Banks would be allowed to take legal recourse in respect of wilful defaulters who avoided repayment in spite of having capacity of pay as part of measures to strengthen the long term cooperative credit structure, it said.
     
    The Centre will be urged to reduce interest rate on long-term loans which is currently 10% for farmers through refinance by NABARD or provide interest subvention which is given on crop loans, the body said.
     
    It was also suggested to consider the feasibility of issuing revolving guarantee by state governments instead of yearly one and to examine the possibility of waiving the fee for guarantee given for state cooperative agriculture and rural development banks, it added.
     
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    COMMENTS

    Dr Anantha K Ramdas

    8 years ago

    Mr Balakrishnan is right.

    As long as we have a hoard of moneylenders freely operating in villages and small towns, and charging exorbitant rates of interest, there is really no hope for debt-free farmer. All talk of banks being able to or willing to pump in more credit to the farmer is truly meaningless unless the Banks come forward, take over the loan-sharking money lenders business, and establish direct link with the farmer, any other method is only an exercise futility.

    We need the government to take a page of Mother India movie, and totally displace the village moneylender as the first step towards recovery of any sort for the farmer.

    R Balakrishnan

    8 years ago

    FDI has nothing to do. Maybe a tripartite agreement when there is contract farming will help reduce bad loans. In many states, farmers have no intention to repay, having gotten used to the waivers. There is so much peer pressure. If I pay back, you do not and then the loan gets waived, I look like a fool. So better both of us dont pay. This is first hand information

    M G WARRIER

    8 years ago

    Opinions like this make one feel that financial literacy is lacking not only at lower levels. Is it the case that once FDI in retail business becomes a reality, some ‘giant’ foreign retailer will land on the farms and start procuring produce at a price not related to Indian market? The possibility is that the present ‘middlemen’ will become their agents and may, in all probability, make more money.

    Policy reforms pick up, downside risk to growth reduced: Morgan Stanley

    GDP growth will return to a higher slope curve, with policy reforms from the government, says Morgan Stanley

    The government has initiated bold measures to reduce the fiscal deficit and revive private investment in a meaningful manner, according to Morgan Stanley Economics Research. The diesel price hike by Rs5 per litre and the decision to allow FDI (foreign direct investment) in multi-brand retail and aviation at a higher level are just two examples. This needs to be pursued further as given below:

     

    First, accelerate the implementation of major public policy reforms. These include:

     

    • Strengthening institutional capacity to allocate critical national resources such as land and minerals to the private corporate sector in a transparent manner for rapid industrialization.

    • Enacting the Goods and Services Tax Act (GST)—value-added tax.

    • Strengthening institutional capacity to manage the awarding of major infrastructure projects through public-private route, which should increase transparency.

    • Building a comprehensive plan for energy security along with a systematic program for energy pricing reform.

    • Initiating fiscal consolidation that aims to reduce the national government deficit and improve the mix of its expenditure towards development spending.

    • Initiating policy measures to boost the productivity of the rural workforce and manage rural wages growth to a more moderate level matching the trend in productivity.

     

    Second, the government needs to identify and fast-track 25-30 large infrastructure and core industrial projects: Some of the public policy reforms highlighted in the first part above are likely to take time to be reflected in the growth numbers. Hence, Morgan Stanley believes that in the near term there is an urgent need to accelerate investment growth with concerted effort to achieve it. The government could support speedier implementation of projects that are already under way, or else encourage new projects that can be taken up for execution quickly to ensure that investment activity is revived in a more timely fashion. These projects could be those that have a limited call on land and mineral resources.

     

    Morgan Stanley believes that the government should focus in particular on infrastructure investment, which can be taken up in a counter-cyclical manner, because weak global sentiment could weigh on manufacturing investment. For instance, many Indian cities need a jump-start in critical urban infrastructure facilities and the central government could provide a capital grant of about $10 billion to initiate projects worth $40-$50 billion.

     

    Morgan Stanley says that that in many cases the plans for such infrastructure projects are ready but they need a determined push from the central government. With the government providing leadership in policy reforms, the downside risk to growth is reduced and the GDP growth will return to a higher slope curve.

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