FDI in retail (with regulation that ensures competition) is GOOD for India

I’m posting the draft FAQ that Freedom Team had started preparing. This was started many years ago, and never finished, nor was there time available to finish/update it.

Unfortunately there isn’t time even now.

However, I hope the key issues are covered in this draft document. I’ve also addressed this matter on a number of other posts.

DRAFT DOCUMENT

DRAFT

The position of the Freedom Team of India on FDI in retail

The Freedom Team of India (FTI) is a team of leaders who will contest elections to offer India the world’s best policies that will increase the liberty and prosperity of the ordinary citizens of India. All FTI thinking is aimed at maximising the freedom and prosperity of Indians. This strong perspective, based on liberty, inevitably leads to a focus on the impacts of a policy on the common man.

FTI does not take a narrow view of a policy and does not promote any vested interests (such as those of a certain sector of the economy, e.g. industrialists or producers)..

For over sixty years, India has been suffocated by Nehruvian and other socialist ideologies. These ideologies have choked the liberty of ordinary Indians to conduct their affairs and business in the manner that maximises their wealth. In this manner the people of India have been impoverished individually, thus reducing the wealth of all Indians.

Socialism and mercantilism go hand in hand. It was the fundamental discovery of Adam Smith, nearly 250 years ago, that trade maximises wealth. Both imports and exports are equally important in the economy. Exports alone (the mercantlist view) can benefit the producer but will inevitably harm the consumer through higher prices, thus reducing the wealth of the nation. Adam Smith would have strongly opposed Nehruvian socialism had he lived today.

But not just Adam Smith, even Chanakya knew of this wealth-creating strategy 2,300 years ago. India would do well to understand Chanakya’s economic policies. Although FTI promotes a more modern understanding of liberty than Chanakya, his ideas are a good place to start a sensible policy discussion for India.

Chanakya was India’s oldest economist (indeed perhaps the world’s oldest economist), and still rates better than most policy makers and economists of India. FTI is not afraid of seeking guidance from Chanakya.

Chanakya advocated greater liberty and greater trade. By sheltering the producers of India against competition, however, all that our socialist political parties have done is to impoverish our consumers and ensure that they get shoddy, third-rate products at high prices. No one has benefited from this sheltered economy. Even producers have suffered because consumers need to have purchasing power which only comes through lower prices and better quality.

The only way of wealth creation in a society is through increase in the wealth of its consumers, its ordinary citizens. And the only way to increase the wealth of ordinary consumers is to ensure that policies motivate the continuous supply of better goods at lower prices.

Both exports and imports form a critical part of this policy package. Full free trade and free investment will allow both the production of and supply of cheaper goods. The combination of free exports and imports (including investment) leads to wealth. Chanakya knew that. Unfortunately, India’s policy makers don’t know that..

The question of having any restriction on foreign investment is not arise except in strategic areas of national security. We need free imports and exports, including the free import and export of investment (which is merely the incipient, capital-intensive form of any good or service).

There are few Western countries today that prevent Indians from taking a major share in any productive activity abroad. That is because these countries have learnt to value free trade and investment. They not only welcome but seek greater foreign investment, for it strengthens their productive capacity.

It is important to note that retail is not merely a place of exchange. It is a part of the productive machinery of a society. It has its own science of technology, logistics, and management. The continuous application of latest technologies, logistics and management are critical for increased productivity of the retail sector.

Retail often constitutes a significant proportion of the final price of a good. In the case of perishables like vegetables, the retailer often keeps over 60 per cent of the final price of the good. It is critical therefore that competition in the sector be maximised. Competition in retail (which includes competition to improve technology, logistics and management) is critical to the supply of high-quality goods at lower prices to Indians, and thus to the increased prosperity of India.

Preventing the import of modern technology, logistics and management is a most absurd and harmful policy. However, such absurd and harmful thinking is typical of most Indian policymakers. In particular, both Congress and BJP come from a strong socialist background and do not have any sensible policy to offer India. No wonder, after sixty years of misrule by these parties, India is still one of world’s poorest nations  (on a per capita  basis), and one of the most corrupt

In this short brochure FTI explains the commonly asked questions about foreign direct investment (FDI).

FTI does not blame the citizens of India for getting confused about this issue. They have been grossly misled by their leaders for sixty years and it is therefore difficult for them to think clearly. It is going to be a challenge for Indians to start thinking clearly. FTI is offering some guidance on this matter through this FAQ.

Why is the retail sector being opened first?

When India is handicapped by all kinds of protectionism and subsidies, why should retail be opened to competition first?

Chanakya would have cast aside this question as being totally misguided. Just because there is bad policy in one sector does not mean that all sectors have to tolerate bad policies. FTI advocates the complete removal of all protections and subsidies, for that is the only fair position for the Indian consumer. Let people openly compete for our purchases, without having some form of hidden taxpayer (our) support.

We forget that in a subsidised and sheltered economy we pay twice: (a) for low quality high priced products which are the inevitable consequence of lack of competition, and (b) for the subsidy that is separately payable to the government through taxes.

There is no reason to subsidise or shelter the retail sector. Investment in this sector is not a national risk. Opening  the retail sector to competition will ensure that better quality goods are available at lower prices to consumers. This will put more money in the pocket of consumers who will then have money to buy other things. It will therefore create new consumer demand and help create many more new jobs.

You, as consumer, will benefit as competition among that reduces prices and provides better service.

There is another point to note.

While FTI does not take the sides of any particular sector (it takes the side only of consumers), it is clear that one of the biggest productive sectors in India – farm sector (agriculture has an 18.5 per cent share of the Indian economy, with 52 per cent of its workforce) – will significantly benefit. Farmers will get a better price for their produce since they will have access to superior logistics and cold chains.

The fact that opening retail to competition will strengthen the prices received by farmers (even as consumers experience a lower price) will also allow the removal of subsidies to the farm sector which will the be able to stand on its own feet.

Not only farmers, even small producers will benefit immensely by having direct access to large retailers. The opening of retail sector to competition will be good for India in many ways.

The real question to ask is why has retail not been opened yet to competition, not why it is the “first” sector to be so opened up.

The alleged loss of jobs

It may well be that I will benefit from more retail competition as a consumer, and even farmers and small producers will benefit. But won’t people in small retail shops lose their jobs?

FTI use only one measure of wealth – per capita income. It is the consumer’s wealth that matters, not a particular retailer’s wealth. FTI does not represent the interests of anyone who is entrenched because of lack of competition. It represents the future – where only the best producers (including in the retail sector) must survive.

It is true that some small retailers might be adversely affected, but data have shown that large retailers have not pushed out small retailers, who retain a monopoly of supply of certain basic products over their local area. It is often inconvenient to go to a large retailer who may be located 5 kilometers away. Therefore the local retailer will always continue to have a place in all societies.

It is also not easy for modern retailers to compete with small retailers in India. They will take their time to establish their logistics and distribution chains, and will need to train and upskill many people. In the short run, therefore there will be a significant increase in the number of jobs in India, with only minimal loss of local small shops.

However, no one permanently aims to be a small retailer. As consumers become wealthier and new jobs are created in a range of sectors, retailers who come under pressure from competition will be motivated to move to more productive sectors. All will benefit. Since consumers will definitely benefit, and also most producers, including farmers, there is simply nothing to fear from FDI in retail (source).

Assocham Secretary General D S Rawat has said that FDI in multi-brand retail would create over 10 million jobs in three years. It would also curb wastage of farm products and benefit farmers through better prices for their produce. [Source]

Will prices of retail goods really go  down with FDI ?

Transactions at various stages involved huge wastages estimated at 5-7% for foodgrains and 25-30% for fruit and vegetables (Annual Report 2006-07, ministry of agriculture, department of agriculture and cooperation) source

These factors inflate the final price to the consumer by nearly three times what the farmer receives, and the farmer’s realization of one-third of the final price compares poorly with two-thirds in most other countries. With competition and efficiency many intermediaries will be eliminated reducing the cost of final product

Loss by Indian manufacturers

Wouldn’t foreign retailers buy only from China or other cheap producers, to the detriment of Indian manufacturers?

If China is more cost effective it is good for the Indian consumer will save money to buy other (and more) things which will boost other industries. Also, through competition Indian companies will become more productive. The goal of all policy should be to enrich the Indian consumer. That’s the only thing that matters.

Note that such questions, taken to the extreme, would require India to stop buying anything cheap, and buy only the costliest (and shabbiest) product. That is the surest way to impoverish India. That has already been tried by socialist India for the past 60 years. It has merely destroyed India’s wealth.

Domestic industry is good enough

Can’t Indian companies like Tatas and Ambanis provide the best technology? Why do we need foreigners to tell us how to run a retail business?

It is inappropriate to differentiate between Walmart and Tatas. Businesses are driven by profits (and they should be). Nothing stops Tata (if it that good) from opening shops in USA and displacing Walmart, or taking over the entire retail sector in UK. The fact that Tatas and Ambanis are unfit to complete in USA is clear indication of their cosy, sheltered existence.

Let Tatas and Ambanis compete and prove their mettle. If they are better at their business, they will fend off foreign competition. Let us not shelter our incompetent industrialists. They have made enough money through bribing politicians to shelter them from competition. Let’s not pamper these fat cats. Let them fight it out in the marketplace, not in the policy space by blocking competition.

Profits flowing out of India

Wouldn’t the profits from retail flow out of India?

The profits can move out,  but the profits will go after  keeping farmer and consumer happy. The argument of profit  moving out holds true for any Indian MNC  also. A Tata or Reliance can make profit in India and then invest profits in some other country. All we should care is our interest – Good service for consumers and better deal for farmers

When economy of US & Europe is down, instead of strengthening their own countries’ economy, why FDI is ready to invest in India? Are they interested in making profits from India by exploiting market

It is true that western economies are slowing. Opening of FDI will be win-win for foreign retailers, Indian consumers and Indian farmers.

Political control of India “forfeited”

We saw a FDI of East India Company and saw the results of that investment we all know how much India was benefited by that.

East India Company was not FDI but a mere trading company. Its influence on India was negligible till it gained political power, at which stage it did not need any foreign investment. Indian money was used to invest. The difference is that there is no plan nor intention to hand over political control of India to foreign retail companies, nor are they interested. East India company had a government monopoly over trade with India. There are no government-sponsored monopolies in the USA or elsewhere today that will try to “take over” India.

East India company was a monopoly. That’s why it got support from the British government for its political actions (a support that was given very reluctantly). Indeed, the case of the EIC is very clear: it was the Indians who DESPERATELY wanted security and peace after chronic infighting for 100 years and therefore ASKED the British to step in, in almost all cases. Read your history if you don’t appreciate this basic truth. In the modern situation there are NO monopolies. Hence there is no possibility of foreign governments getting involved. It is a PURELY COMMERCIAL issue, not political. Microsoft won’t take over India just by opening an office in India. And so on.

ADDENDUM

Earlier related blog posts:

Pease ask your questions on FDI here

BJP, a party without principles. FDI in retail supported in 2004 but opposed today!

Expect now a revolution, a frenzy of investment in retail in India

Kautilya would have strongly favoured FDI and opposed Anna Hazare’s approach to alcohol

The taxpayer will not subsidise. The consumer will pay only if happy. So what’s the problem with FDI?

Some members of Professionals Party of India could make useful contributions to India

The Indian FDI fiasco, and how “my” government would have dealt with it

BJP and the communists are blood brothers. That’s not a surprise.
 

Fully agree with Obama that India’s FDI restrictions are harming India’s growth

Articles by others

http://broadmind.nationalinterest.in/2012/01/retail-fdi-a-controversy-of-illiteralism/

http://www.niticentral.com/2012/09/fdi-in-multi-brand-retail-is-good-for-the-economy.html

http://pragati.nationalinterest.in/2012/01/ultimately-the-market-is-the-winner/