I am encouraged to write on FDI after reading a news article
about Mrs. Nirmala Sitharaman, newly elected Commerce and Industry Minister in
the Government of India and her statement of not allowing FDI in multi-brand
retail any more. This issue has been of special importance particularly in view
of the decision of the previous government to allow multi-brand retail stores
like Wal-Mart to operate in India. Bhartiya Janata Party (BJP) had already
indicated in their manifesto that they will review FDI in multi-brand retail.
As a result after the statement of the honourable minister, there has been
several discussions on the topic in favour and against of such initiative by
the newly elected government. Therefore, it is the high time for us to
deliberate on the topic and discuss its pros and cons and examine the resultant
impacts, if further expansion of companies like Wal-Mart or other international
multi-brand retail stores are allowed to operate in India.
I am not an economist but I have gone through training and
courses in principles of macroeconomics from the University of Melbourne,
Australia. Besides that my banking, finance and management consulting
background and thirty plus years of work experience in different parts of the
world, have given me insights and multi-dimensional understanding of the social
economics. Being a certified management consultant and a member of
CMC-Canada since 2009, I am also tuned to think and plan strategically on key
areas of management and finance.
According to the
Department of Industrial Policy and Promotion (DIPP) data published on May 22nd
2014; in the year 2013-14 foreign direct investment in India grew by 8%
year-on-year to USD 24.3 billion. The highest amount of FDI came in service
sectors amounting to USD 2.22 billion, automobile industry USD 1.51 billion,
telecommunications USD 1.3 billion, pharmaceuticals USD 1.27 billion and
construction development industry USD 1.22 billion. If we take the country wise
investment then Singapore led the FDI with USD 5.98 billion, followed by
Mauritius USD 4.35 billion, UK- USD 3.21 billion and the Netherlands USD 2.27
billion. All this happened when India’s economic growth rate slowed to a
decade’s low of 4.5% in 2012-2013. Therefore, in order to
improve the concerted flow of FDI, we will have to understand the
macro-economic policies and factors influencing the course of FDI in different
parts of the world.
The central tenets of economy is that the market under
ideal condition allocates resources efficiently and if those conditions does
not exist and market failed to provide optimal conditions then the role of the
government becomes actively involved in the economy for better outcome. This is
the rational of government’s macro-economic policy. No important economies of
the world allow its macro-economic policies to be determined purely by the
market forces. If this is allowed to happen then ‘might is right’ will
become rules of the game, competition will be eliminated and government’s
social policies will be compromised. Therefore, the management of macro economy
is one of the central responsibilities of the government world over.
FDI is the best source of economic development for any country
as it brings colossus amount of money from foreign investors/companies willing
to participate in different projects and capitalize on their investments. This
investment is infused into the economy as a sole investor or by participating
into joint ventures. Recently Europe experienced significant increase in
foreign direct investment as fears of protracted recession started
receding. As per the research conducted by Ernst & Young, in the year
2013 the region received $303.50 billion for nearly 4,000 FDI projects and
created 166,000 jobs. However this data conceals the findings that it was
mostly intra-regional investments driven by companies with headquarters in one
European country and investing in another. UK was the most popular destination
for FDI followed by Germany and France.
According to Chris Cummings, CEO of the CityUK – “one of the
main reasons business is attracted to the UK is because of the quality and
depth of its talent pool. But the UK has become less friendly on immigration”.
He said – “We want companies to come here, but then we don’t let them bring in
the people they need.” This shows that the motivating factor of FDI is not only
to induce companies to invest but to also consider country’s political and
socio-economic structure before allowing the flow of FDI to come in.
Therefore foreign direct investment is decided more by the
socio- economic reasons while considering the political consequences of such
investments. Economists can suggest the economic benefits of FDI and how it is
going to impact GDP (Gross Domestic Products), per ca-pita income or
unemployment index of the country but they cannot think of the political
fallout which depends upon the long term impacts on the society, work culture,
psychological and physical health of people, and social disintegration. Direct
and indirect influence on the government and inevitable political interference
also needs to be considered due to the sheer size of their financial muscles
and ability to manipulate the governance of a country by giant companies like
Wal-Mart. Pundits of economics may suggest the benefits of FDI economically but
political factors are beyond their ambit. For understanding the subtle
influencing factors capable of creating a huge new culture in future by these
giant companies over a period of time, one need study their history and how
they have forced upon this culture world over.
This is the reasons that instead of investing in countries going
through economic turmoil like Spain and Portugal, European investors have
preferred to invest in more matured market like UK, Germany and France. There
is no doubt that the FDI is the major source of reviving an ailing economy but
we also have to understand its pitfalls. Those who beat the drums of FDI should
understand that the unplanned flow of FDI will always have negative
fallout in long terms on country’s political and socio-economic structure.
When BJP government announced their opposition of allowing FDI in
multi-brand retail then lot of hue & cries were made in the press and by
the outgoing government, as if Indian economy will go down the drain if
Wal-Mart is not allowed to expand.
Decision allowing FDI’s in multi-brand retail sector needs to be
considered strategically after visualizing the ensuing effects on local
economy, tax collection and unemployment. By distancing from the un-thoughtful
alliance with the multi-national companies, India has been able to hold on to
its economic independence until now. Now in view of the burgeoning middle class
population having phenomenal purchasing capacity, giant retail stores of the
world are vying for a piece of $518 billion Indian retail market. Earlier
in March UK’s retail giant Tesco has tried to make its presence into the Indian
market by entering into a joint venture with Tata Group’s retail venture Trent
Ltd but yet to be endorsed by the new government. The French retailer
Carrefour has also been trying to ink a deal with an Indian partner but without
much of success.
Wal-Mart Stores Inc. of USA called-off its joint-venture with
Bharti Enterprises and decided to go solo with cash and carry operations in
India. They opened their first Best Price Modern Wholesale Store in Amritsar
2009 and now they have 20 stores in 8 states. Globally Wal-Mart is one such
company that employs 2.1 million workers worldwide with annual revenue of $443
billion, is the largest private sector employer in the world only next to U.S
Department of Defense and China’s People Liberation Army.
As per the report published by David Moberg, one of the most
coveted anthropologists, journalist and writer of US – Wal-Mart casts a global
shadow across the lives of hundreds of millions of people. Their
obsessively cost-cutting measures and actions shape their landscape, work
culture, income distribution, consumption patterns, transportation, logistics
and communication, politics and culture and the organization of industries from
retail to manufacturing from California to China. It would be a mistake to say
that Wal-Mart is following the new logic of retail competition, for Wal-Mart
reinforces all dimensions of the emerging business climate and they set the
rules.
Naive may think that FDI in multi brand retail companies like
Wal-Mart will bring prosperity and boost local economy by providing
employments, are misnomer. In fact they have done more damage to countries than
the good. Internet is abound with real life experience of people having worked
with Wal-Mart and how company squeezed salaries of their employees and buying
prices from suppliers to their advantage. In another story, how lots of
mom-and-pop business was closed down in Galesburg town in Illinois, USA due to
the competition imposed upon them. As per David Moberg- Such stories illustrate
a new dimension of “The Wal-Mart Effect,” as journalist Charles Fishman, former
metro and national reporter of the Washington Post, titled his book on the
far-flung influence of Wal-Mart.
Boosters of the company contend that every new store has just
two relevant effects: First, it energizes the local economy; and second, lower
prices for local shoppers compensate for other negative effects.
Whereas, the preponderance of research tells a different
story. The net effect of Wal-Mart entering a local market is to reduce local
employment, reduce area wage rates and total payroll (especially in retail),
eliminate other businesses (especially small shops and small chain stores that
directly compete with Wal-Mart), and raise poverty rates. University of
California, Irvine, economist David Neumark and his colleagues reported in a
2007 study that “on average, Wal-Mart store openings reduce retail employment
by about 2.7%, implying that each Wal-Mart employee replaces about 1.4
employees in the rest of the retail sector.”
Wal-Mart knocks out many
local businesses, economist Prof. Kenneth Stone of Iowa University discovered
when he surveyed Iowa during the company’s first decade there starting in the
1980′s. Between 1983 and 1993, Wal-Mart opened around 45 stores in Iowa. During
that period, the state lost 555 grocery stores, 88 department
stores, 298 hardware stores, 444 apparel
shops, 293 building supply stores, and 511 other
retail outlets–as much as 43 percent of some categories of
retail stores. More recently, a team from Loyola University found that 82 out
of 306 businesses within a four-mile radius of Chicago’s first Wal-Mart failed
since the giant retailer opened in 2006, eliminating an estimated 300 jobs,
roughly equaling the number of workers in the new Wal-Mart.
When Wal-Mart displaces local small businesses, it also
typically reduces income and employment for local business-service providers,
such as lawyers, bankers, accountants, printers, and newspaper publishers,
since those services are centralized in Wal-Mart headquarters. Weakening
small-business and professional networks further diminishes the community’s
social capital, according to economists Stephan Goetz of Pennsylvania
University and Anil Rupasingha, research policy adviser at Federal Reserve Bank
of Atlanta.
Wal-Mart has also quite likely reduced U.S. employment
throughout its extensive supply chain, despite suppliers’ expectation that they
would hire more people as Wal-Mart sold more of their product. But there are
stories, well documented by Fishman and others, of Wal-Mart’s virtual
dismantling of iconic supplier firms such as Huffy (bicycles), Master Lock
(padlocks), Lakewood Engineering & Manufacturing (fans), and L.R. Nelson
(lawn sprinklers).
As far as their influence on politics is concerned, from the
2000 election cycle through the 2012 cycle, the Waltons (Owners of Wal-Mart)
and the Wal-Mart PAC spent nearly $17 million in federal elections. More than
$11.6 million went to GOP (Republican) candidates and committees.
In another story, Wal-Mart’s Mexican arm, Walmex, stands accused
of greasing local officials’ palms over several years to speed the granting of
permits to open new stores. Managers at group headquarters in Bentonville,
Arkansas, were apparently informed about the payments (which were said to be
made through intermediaries) in 2005. They launched a probe, but wound it down without
disciplining anyone. They did not disclose any of this to the authorities until
last December. Wal-Mart says it began an “extensive” investigation last autumn
into its compliance with the Foreign Corrupt Practices Act (FCPA), America’s
anti-bribery law.
I am not against FDI in principle but I am against the way
previous government allowed multi-national giants like Wal-Mart to operate in
India. If we allow them to sell products made in China or elsewhere then how it
is going to make positive impacts on the Indian economy? In fact in
long-term, their investment will become much smaller than the profit they will
make from the overall turnover and gradually all small-scale industries
including small to mid size stores around them will be closed. The way US has
created China as manufacturing monster of the world by moving out most of their
small and mid-size businesses and now it has become difficult to contend the
misery of unemployment.
Similarly if strategic
thinking is not made now, India will alone be responsible in growing Wal-Mart
exponentially and making them the biggest retail monster of 21st century. Advocates of capitalism should not
forget that in the name of market economy US has already ruined their economy
by moving manufacturing facilities in consumer durable and non-durable to
China. In the process Americans have lost their jobs to Chinese and accumulated
$17.5 trillion debt by mortgaging their country to lenders.
Therefore India should
not follow the western philosophy and economic theories in toto.
Every country has their own pros and cons and keeping in view of the
population, social and cultural structures, unemployment and poverty a
strategic decision in regards to FDI should be taken. To my mind it will be the
best to allow conditional FDI in multi-brand retail if they are willing to sell
75% to 80% products made indigenously in India in their retail stores. This
will not only put a check on imports and improve the balance of payment of the
country but it will also encourage FDI in multi-national single brand
manufacturing in India for the purpose of feeding these multi-brand retail
stores.
Last Week Indian government under the leadership of Prime
Minister Narendra Modi announced their intentions of 100% FDI in the defence
sector. I think it is a very calculative and intelligent move not only to woo
large arms manufacturer to make India as their manufacturing base but it will
also make a substantial dent on the $37.5 billion defence budget which is
draining the precious money meant for the social uplift and elimination of
poverty. This will also generate employment to thousands of people directly or
indirectly through ancillary manufacturing units and related service sectors.
This will also bring in new technology and will provide impetus to India’s host
of industries such as metals, plastics, electronics, computer and software,
research and development etc , and will make India as one of the arms exporters
in the world.
I am sure one day government of India will also allow 100% FDI
in other infrastructure projects such as Railway, Roads, Nuclear Power, Sea
Ports, Ship Building, Agriculture, Transportation, Civil Aviation, hospitality
etc. However terms and conditions of such investments have to be tailored
made according to the socio-economic and political structure of the nation. Now
the country has gone in safe hands and they have the vision to make dream come true
for 1.25 billion people.
Suman Saran Sinha
Certified Management Consultant
Toronto, Canada
June 3rd, 2014
