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China's experience in retail FDI could inspire India's own expansion

Jyoti Malhotra  |  New Delhi 

The withdrawal of Mamata Banerjee's Trinamool Congress from the has set the stage for Prime Minister to get some of his mojo back. At a Saturday evening briefing in Delhi, general secretary and close aide of Bangladesh prime minister pointed out that “now that the climate had changed,” he expected both countries to soon sign the Teesta waters agreement and India to ratify the Land Boundary Agreement with Bangladesh.

To blame Banerjee for India's ills with Bangladesh, however, has always been a bit unfair, as foreign affairs is one of the few undiluted prerogatives of the Centre. But now that the has once again come to the aid of the beleaguered Congress over the question of allowing 51 per cent foreign direct investment in multi-brand retail, the prime minister looks determined to push this particular matter of investment into India.

Certainly, the Left and Right is united in political opposition to this issue, and it can also be argued that in a country as diverse as India, there is place for both the big retailer as well as the neighbourhood grocery store, which services its client base with such unfailing regularity and courtesy that it can never be replaced by the gargantuan super-market.

Except, as practising economists know, there is little space for sentiment in the hard-nosed world of big business. None other than the chairman of the Prime Minister's Economic Advisory Council, C Rangarajan, has admitted that the kirana store will be displaced by the big retailer but that this will push the former to clean up their act and create a better strategy to fight the new kid on the block.

In fact, the invasion of big brand retail by giants such as Walmart, Carrefour and Tesco “from the US, France and the UK, respectively” will not only affect small vendors, but also have a massive impact on India's agriculture. To be sure, these retailers will eliminate the middleman and deal directly with the farmer, but studies by Oxfam and the Stanford School of Business have shown that the level of destitution and starvation has gone up in countries such as Ethiopia and Nicaragua after Walmart exercised its muscle to reduce the prices of coffee growers at source.

It may be argued that India is hardly Ethiopia or Nicaragua and that the level of existing sophistication in India's retail market means that local retailers will not simply roll over and disappear. Still, Tesco Lotus, Tesco's arm in Thailand, sued a former member of parliament in Thailand in 2007, Jit Siratranont, for $2 million because he said Tesco’s operations in his country were “aggressive”. In fact, Thailand does not permit any super-market chains within 15 km of the city centre, which is the exact opposite of the Indian decision to allow supermarkets only in cities with population over 10 lakh (that is, 53 cities in India).

Let us look at how China, the growing superpower, dealt with super-retail brands. Although opened the economy in 1979, China opened up FDI in retail only in 1992 and that was limited to 26 per cent. Ten years later, in 2002, that cap was raised to 49 per cent. It was only in 2004 that 100 per cent FDI in retail was allowed, after local Chinese manufacturing had acquired teeth.

China, in fact, is a really interesting example of how it transformed Walmart USA. As China ramped up its own manufacturing sector, through subsidies, special economic zones and other perks, as many as 15,000 Chinese suppliers were serving Walmart China in 2010; the company had expanded its presence to 352 supermarkets in 130 cities across China. Exports to the US amounted to $60 billion annually. Walmart China now claims that 95 per cent of its goods sold in China are sourced locally.

Certainly, India has benefitted enormously from the economic reform launched in 1991 under the steely eye of then finance minister Manmohan Singh, although most people forget that it was his prime minister, Narasimha Rao, who not only allowed him the vision to unleash India’s “animal spirits”, but also gave him the political space to do so.

Twenty years later, the prime minister has the unprecedented opportunity to change the way in which India functions, both in terms of domestic policies as well as foreign affairs. FDI in multi-brand retail must be followed by other visionary decisions, especially in the neighbourhood, and especially if economics must be used as a weapon to bring the political classes closer together.

Bangladesh must be the first stop, for a signature on the Teesta waters pact as well as a ratification at home on the Land Boundary Agreement. Doing both could transform the course of politics inside Bangladesh and help out its beleaguered Sheikh Hasina, who has gone out on a limb on her support of India. When elections are held in India and Bangladesh within six months of each other, over 2013-14, India’s gestures must be counted as elements in her re-election.

First Published: Mon, September 24 2012. 00:54 IST