The FDI Debate: Political Drama or Economic Reform?

[A guest post by Nupur Gupta. Nupur is an Oxford economics graduate specialising in monetary policy issues in India, currently working as an economic consultant in London]

FDI has been thrown like a ball from one side to another in the Parliament. The debate of whether FDI in retail or FDI in general should be allowed in India has been a long-stretched one. With political incentives contaminating economic decisions, our politicians seem to focus more on the words they speak and how they rhyme rather than on the content itself. After much hoo-hah, I am glad that the final decision has been in the right direction, whether by parties politically bailing out the government or by actively supporting the reform, it doesn’t matter.

The big question still remains – will FDI be for the good or for the bad? As with everything else, one can argue in both directions. However, in my opinion, if we want to prosper over the longer term, we have to let go of our attachment to existing systems. The benefits from FDI in multi-brand retail has immense first and second order effects which should not be ignored. Improved infrastructure, increased choice, greater stability and a stronger placement in the global market are just a few of those. India has done well so far in producing respectable growth following the 1991 reforms. But it is time to move on, more forward and higher.

Why are some politicians so against it?

It seems like the politicians who are against this reform are thinking more about themselves than the common man. They have played around with words to show that they are thinking about the public, but it seems like they are more concerned that these foreign companies will not entertain corruptive behaviour, and will not co-operate with political incentives. If Secretary General, Mr. P Chengal Reddy of Consortium of Indian Farmers’ Association, himself says that approximately 50% of the food that farmers grow go to waste due to a lack of infrastructure, and that Tescos and Walmarts would improve the existing system, why are they ignoring him?

So what really are the economic benefits of this?

To start, the larger retail chains are most likely to bring in greater warehousing facilities. One of the major concerns of farmers in the past have been their fluctuation in income due to reliance on weather conditions. During high monsoon periods, many of the crops get destroyed, while during pro-longed dry conditions, crops do not grow. The Tescos and the Walmarts will be able to effectively store crops during times of excess supply, and release them during times of shortage. This will help stabilise the supply of food products, thereby stabilising food prices, both for the farmers (in the form of revenues) as well as for end consumers (in the form of expenditure). We all know that inflation is one of the most important issues facing Indian policymakers today. Given the significant contribution of food inflation to WPI in India, this predictability of food prices will benefit the economy and its people over the longer term. The RBI will be able to focus monetary policy on more constructive issues, rather than scrambling to keep inflation under check. And hopefully, the foreign media will finally stop resisting India due to its ’unpredictable’ inflation.

As for the consumers, traditional economic theory suggests that more variety leads to higher utility and happier consumers. Products currently unavailable at a reasonable cost in India would become available through these multi-brand retailers. In a previous post on C20sit was recognised that the fear that multi-brand retailers would increase prices after driving the kirana stores out of business does not conform to international experience. In my opinion there is enough competition within the global multi-brand retail market, that market forces would not allow excessive prices to persist. And in the end, its the consumer’s choice. If they prefer their ’kirana’ stores, they may still go there.

What are people scared about?

That these multi-brand retailers will drive out the ‘kirana’ stores? The kirana stores are spread across the city and town, within residential areas and cater to families who need their groceries fast, nearby and at short notice. It is always going to be easier to go down the road to pick up a packet of daal or a few vegetables rather than travel to a multi-brand retail shop. We already have domestically owned supermarkets like Spencer’s and Food Bazaar which are co existing with the kirana stores. So why now with the introduction of Tesco and Walmart would these stores go out of business? If anything, the inefficiency and lack of customer relationships displayed by Spencer’s and Food Bazaar would be improved as a result of competition in multi-brand retail. And for those who prefer the personal touch when buying their groceries, they could still go to the kirana stores.

These were only the first-order benefits. The second-order benefits extend to the wider economy. Improved infrastructure, increased employment, increased investment, increased productivity, stronger Rupee, more stable inflation…the list goes on.As a final thought, if there are concerns about farmers getting the stick while the foreign investors keep the carrot, it is possible for the government to introduce regulation which protects the farmers to some extent while giving the investors enough scope for making the investment commercially viable. One policy option is to introduce minimum prices multi-brand shops have to pay farmers. This would provide a revenue floor for the farmers, protecting their income levels. It should however be preferred that market forces determine prices.  More details and recommendations on policy options will follow in my next article.