PROS AND CONS OF FOREIGN DIRECT INVESTMENT IN INDIAN RETAIL MARKET

 The govt of India proposed 51% foreign direct investments(FDIs), in retail sector, which became most controversial with the big hungama  conducted by major opposition party(BJP),Mamata Banerjee,Leftists and many other regional parties across India.Many of the political parties are opposing this move based on their political grievances.Many of the people are also opposing this move out of fear that it will ruin the local retailers, this fear factor is just because of little knowledge and inability to analyze FDIs nature(Nature of FDIs demands to have little knowledge on economics which obviously a frustrating factor for common people like us).This fear factor is being aggravated by opposition parties successfully.In this regard i would like to give you some pros and cons, of FDIs, based on arguments raised by protesters and supporters.

 India’s retail sector is already opened for indigenous operators(major participants being reliance,Aditya Birla group,Tata group,Pantaloon Retail,K Raheja Group,Piramal Group,Bharti-Walmart(a joint venture)). There is no logic in keeping foreigners out. Entry of foreign players means more competition, improved supply chain efficiencies and better offerings for consumers and, most likely, better prices for farmers. This concept already proved in the area of telecom and software sectors successfully . In telecom sector the entry of Vdafone didn't end the business of BSNL,Tata and other perhaps Indian players are sharing major market Airtel being predominent. In software services the entry of Microsoft,IBM and many other foreign companies didn't end the business of Infosys,TCS and many other Indian companies instead this sector has created hundreds of small and marginal s/w companies,became financially good source of employment to lakhs of people and also emerged as one of the major source to raise forex to Govt of India.Same hungama conducted by the then contemporary opposition to curtail entry of service sector in 1991,but ultimately time proved what is right and what is wrong.

Same concept would definitely successful in retail market also if the proposed FDIs bill is implemented with strong determination. Let us see the features of proposed bill and their +ve and -ve sides.

Some Important feature:
 1) FDIs can not move into any prat of a state without prior-permission of state govt  even though the central govt permitted it.

  2)Can't be accepted in any city where population is less than 10 lakh.

  3)Even in cities with more than 10 lakh population also foreign players needs     permission

   4)50% Investment has to be spent on development of infrastructure.

   5)3 years lock-in period.(Govt is trying to reduce this,but it should not be reduced at any cost)

Indian govt has ensured enough provisions to safeguard the interests of kirana shops, farmers and small manufacturers by imposing conditions (on foreigner retailers) such as domestic sourcing norms, entry at the discretion of States and permission to operate in cities with a population of 10 lakh or more. Investment has to be made to create back-end infrastructure such as cold storage chains(crucial for food processing sector) which would be a great help for farmers belongs to horticulture and vegetable growers.In fact Govt already allowed 100% FDIs in food processing and cold-storage but this scheme didn't attract investments since retail sector is totally closed.

So, with the above restrictions on one side and the competent Indian corporate on the other side it would hardly possible for any foreign player to monopolize the market.It only can give good competition to Indian players and will reduce the gap between production cost and consumer market cost of commodities.To sustain this competition all these companies has to start procurement directly from farmer by bifurcating middle men(who are one of major exploiters of farmer). Here the worst impact is on middle men and the primary benefit is to farmer since he will get fair price on per with market.Farmers will get some relief than the present but they won't get rid of all the problems since the agrarian unrest is not only linked up with middle men but also depends on erratic monsoon,lack of mechanization and scientific management,degraded land due to green revolution,irrigation facilities,illiteracy of farmer and disguised unemployment.With the latter reasons productivity is getting effected and by the former reason remunerative price rate is getting effected, all put together breaking the backbone farmer.

This middle men layer consists of small money lenders(costliest credit) and procurement agents(in some villages money lender himself is a procurement agent)  . In India we have nearly 6 lakh villages and each village contains 5-6 middle men on average and each person would provide direct employment to max of 10-15 members on seasonal basis,then  the total number put together 5.76 crore people.Out of this people the direct labor to middle man are also agriculture labor,they would get their work farm land, but the remaining 36 lakh people will feel the worst impact of the policy for initial period, later on they will find different work depending on their skill set(most of these people migrated to urban ares in case of China).

China and many other third world countries have opened up their market many years before.we can well compare ourselves with China in this regard since it is issue regarding consumer market,both countries have large consumer market. Any company would like to stay in larger markets either foreign or domestic person, this made China to reap the FDIs successfully.China opened it's economy in 1992 and utilized the technological advancements and Forex brought in by foreign players and emerged as major exporter in retail market.The status of international standard to their consumer product is gift given by healthy competition between foreign and domestic corporate people.China gradually lifted it's cap on FDIs to zero.Even after 20 years of it's reforms still local entrepreneurs are dominant with large market share than foreign players like Walmart and Tesco.

Walmart was rejected by local retailers in some cities of USA. Entering into any city of USA is very possible to Walmart since it is domestic player in USA, but same thing is not possible in case of India since walmart or any other foreign company not belongs to the category of domestic player.It has limitations and permissions to expand it's business as per proposed FDI norms. 


Responses from different sections of society: 

Strong protesters:

BJP: They are totally against to this policy since:

1) Initiator is Congress

2)Highly interested in protecting corporate interests.

3)Part of vote bank politics(Interested in mid term elections).

Mamata Banerjee: Against to it, she became so popular on this issue by posing instability to govt.

It would be highly difficult to analyze her stand because her interests and words change from time to time.Her party's( trinamool congress) election manifesto supported this move.When a journalist questioned about the manifeso she replied him that "it is a print mistake".


Communist parties: Opposing the move.

They interested in govt to handle everything.they don't like if anything going out of govt clutches as it is their basic ideology.This principle will work when we have Prime Minister to an attender(total of executives(these people are main) and bureaucrat) with optimum level  of honesty and integrity which we can't expect at these times.

Regional parties: some are supporting(generally part of UPA ),some are opposing (generally from NDA except Trinamool Congress).

Strong supporters:

  1)Most of UPA members since they are coalition partners of congress

  2)Majority of economists

      

The reasons are only political and vote bank politics.Frankly speaking we have some politicians with cabinet rank in many states who don't  know even how FDIs benefit in reducing the burden of Current deficit in the shorter run and trade deficit in the longer run.This is the sorry state of our political affairs today.Under this kind of circumstances we can't expect smooth process of these kind of policies.


FINALLY THE SUCCESS OF THIS MOVE IS POSSIBLE ONLY WHEN IT SERVES THE PURPOSE OF MANUFACTURING INDUSTRY BY DEVELOPING FOOD PROCESSING INFRASTRUCTURE .STRONG DEDICATION IS REQUIRED FROM GOVT SIDE TO PERSUADE INTERNATIONAL PLAYERS AND BRING TO INDIA WITHOUT CHANGING MENTIONED RESTRICTIVE PROVISIONS.


Sources:

http://www.thehindu.com/business/Economy/chinese-retailers-give-global-giants-run-for-money/article2681679.ece?textsize=small&test=2
 
http://www.thehindubusinessline.com/opinion/article3946087.ece
 
http://www.thehindu.com/news/national/mamata-other-states-will-toe-west-bengals-line-on-fdi/article3942978.ece

http://www.thehindu.com/opinion/op-ed/article3897906.ece

http://swaminomics.org/?p=623 




  

 

Subsidies of crude oil is ment for rich.....not for poor

                            
It he wake of the recent increase in petrol prices and India’s growing fiscal deficit situation, it is important to understand why diesel prices should also be revised upwards.
For several decades, India has been subsidising the price of diesel. But in recent years, both the global environment and the Indian economic scene have undergone substantial changes.
Despite this, many economic policies, such as the heavy subsidy on diesel prices, have remained unaltered over the period,this needs serious reconsideration.
For ex:  in the last six years, the average growth rate of crude oil prices (based on the Indian basket) has been at 13.5 per cent.
During the same period, however, the average value of diesel under-recoveries, as a percentage of fiscal deficit, stood at 14.6 per cent!
Similarly, between 2009 and 2010, when global oil prices fell by more than 21 percentage points, diesel under-recoveries as a percentage of fiscal deficit fell only by 13 percentage points.
What is wrong in subsidising diesel?
It is vital to understand that subsidies are associated with two important (negative) economic fallouts, besides many others.

First, a subsidy of any kind involves a disincentive to use the subsidised good or service efficiently as they have been obtained cheap.
Second, the government can finance a subsidy only by expanding its fiscal deficits. In the process, scarce resources are transferred from a private party (tax-payers) to the government.
It is well documented that owing to the absence of a profit motive in government spending, such resource transfers leads to decreased productivity.
Revision in diesel prices, no doubt, would entail temporary displeasure, and resistance from the pubic and political parties. But it would only help the country’s cause to keep political interest aside, and focus on the economic benefits.
In the name of shielding the economy from fuel price volatility, the government is exposing future generations to tougher times. It is time people realise this fact.
The Government may also want to look back at the heavily resisted policy shifts in the 1990s that has created a lot of positive changes in the Indian economy.


source: some statistics has been taken from frontline and economic survey of india.

definitions:
fiscal deficit : government's total expenditures minus the revenue that it generates
diesel under-recoveries: the amount of money that is being given away by govt refineries to corporate refineries in the name of subsidies.

Prime minister of India----speech on recent policy changes.

My dear brothers and sisters,

I am speaking to you tonight to explain the reasons for some important economic policy decisions the government has recently taken. Some political parties have opposed them. You have a right to know the truth about why we have taken these decisions.

No government likes to impose burdens on the common man. Our Government has been voted to office twice to protect the interests of the aam admi.

At the same time, it is the responsibility of the government to defend the national interest, and protect the long term future of our people. This means that we must ensure that the economy grows rapidly, and that this generates enough productive jobs for the youth of our country. Rapid growth is also necessary to raise the revenues we need to finance our programmes in education, health care, housing and rural employment.

The challenge is that we have to do this at a time when the world economy is experiencing great difficulty. The United States and Europe are struggling to deal with an economic slowdown and financial crisis. Even China is slowing down.

We too have been affected, though I believe we have been able to limit the effect of the global crisis.

We are at a point where we can reverse the slowdown in our growth. We need a revival in investor confidence domestically and globally. The decisions we have taken recently are necessary for this purpose.

Let me begin with the rise in diesel prices and the cap on LPG cylinders.

We import almost 80% of our oil, and oil prices in the world market have increased sharply in the past four years. We did not pass on most of this price rise to you, so that we could protect you from hardship to the maximum extent possible.

As a result, the subsidy on petroleum products has grown enormously. It was Rs. 1 lakh 40 thousand crores last year. If we had not acted, it would have been over Rs. 200,000 crores this year.

Where would the money for this have come from? Money does not grow on trees. If we had not acted, it would have meant a higher fiscal deficit, that is, an unsustainable increase in government expenditure vis-a-vis government income. If unchecked, this would lead to a further steep rise in prices and a loss of confidence in our economy. The prices of essential commodities would rise faster. Both domestic as well as foreign investors would be reluctant to invest in our economy. Interest rates would rise. Our companies would not be able to borrow abroad. Unemployment would increase.

The last time we faced this problem was in 1991. Nobody was willing to lend us even small amounts of money then. We came out of that crisis by taking strong, resolute steps. You can see the positive results of those steps. We are not in that situation today, but we must act before people lose confidence in our economy.

I know what happened in 1991 and I would be failing in my duty as Prime Minister of this great country if I did not take strong preventive action.

The world is not kind to those who do not tackle their own problems. Many European countries are in this position today. They cannot pay their bills and are looking to others for help. They are having to cut wages or pensions to satisfy potential lenders.

I am determined to see that India will not be pushed into that situation. But I can succeed only if I can persuade you to understand why we had to act.

We raised the price of diesel by just Rs. 5 per litre instead of the Rs 17 that was needed to cut all losses on diesel. Much of diesel is used by big cars and SUVs owned by the rich and by factories and businesses. Should government run large fiscal deficits to subsidise them?

We reduced taxes on petrol by Rs. 5 per litre to prevent a rise in petrol prices. We did this so that the crores of middle class people who drive scooters and motorcycles are not hit further.

On LPG, we put a cap of 6 subsidised cylinders per year. Almost half of our people, who need our help the most, actually use only 6 cylinders or less. We have ensured they are not affected. Others will still get 6 subsidised cylinders, but they must pay a higher price for more.

We did not touch the price of kerosene which is consumed by the poor.

My Dear Brothers and Sisters,

You should know that even after the price increase, the prices of diesel and LPG in India are lower than those in Bangladesh, Nepal, Sri Lanka and Pakistan.

The total subsidy on petroleum products will still be Rs. 160 thousand crores. This is more than what we spend on Health and Education together. We held back from raising prices further because I hoped that oil prices would decline.

Let me now turn to the decision to allow foreign investment in retail trade. Some think it will hurt small traders.This is not true.

Organised, modern retailing is already present in our country and is growing. All our major cities have large retail chains. Our national capital, Delhi, has many new shopping centres. But it has also seen a three-fold increase in small shops in recent years.

In a growing economy, there is enough space for big and small to grow. The fear that small retailers will be wiped out is completely baseless.

We should also remember that the opening of organised retail to foreign investment will benefit our farmers. According to the regulations we have introduced, those who bring FDI have to invest 50% of their money in building new warehouses, cold-storages, and modern transport systems. This will help to ensure that a third of our fruits and vegetables, which at present are wasted because of storage and transit losses, actually reach the consumer. Wastage will go down; prices paid to farmers will go up; and prices paid by consumers will go down.

The growth of organised retail will also create millions of good quality new jobs.

We recognise that some political parties are opposed to this step. That is why State governments have been allowed to decide whether foreign investment in retail can come into their state. But one state should not stop another state from seeking a better life for its farmers, for its youth and for its consumers.

In 1991, when we opened India to foreign investment in manufacturing, many were worried. But today, Indian companies are competing effectively both at home and abroad, and they are investing around the world. More importantly, foreign companies are creating jobs for our youth -- in Information Technology, in steel, and in the auto industry. I am sure this will happen in retail trade as well.

My Dear Brothers and Sisters,

The UPA Government is the government of the aam aadmi.

In the past 8 years our economy has grown at a record annual rate of 8.2 per cent. We have ensured that poverty has declined much faster, agriculture has grown faster, and rural consumption per person has also grown faster.

We need to do more, and we will do more. But to achieve inclusiveness we need more growth. And we must avoid high fiscal deficits which cause a loss of confidence in our economy.

I promise you that I will do everything necessary to put our country back on the path of high and inclusive growth. But I need your support. Please do not be misled by those who want to confuse you by spreading fear and false information. The same tactics were adopted in 1991. They did not succeed then. They will not succeed now. I have full faith in the wisdom of the people of India.

We have much to do to protect the interests of our nation, and we must do it now. At times, we need to say "No" to the easy option and say "Yes" to the more difficult one. This happens to be one such occasion. The time has come for hard decisions. For this I need your trust, your understanding, and your cooperation.

As Prime Minister of this great country, I ask each one of you to strengthen my hands so that we can take our country forward and build a better and more prosperous future for ourselves and for the generations to come.

Jai Hind.