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Q&A: Pranab Bardhan, University of California (Berkeley)

'Opposition to FDI in retail is misguided'

Dilasha Seth  |  New Delhi 

Pranab Bardhan

The economy is slowing, inflation is still uncomfortably high, the government lacks the money for a stimulus and the Reserve Bank of India is locked in a growth-versus-inflation dilemma. In this situation, Pranab Bardhan, professor of economics in University of California, Berkeley, tells Dilasha Seth that foreign direct investment (FDI) in retail could have provided the economy a much-needed booster and none of the feuding parties has the right perspective. He also says the contentious food security Bill will not unduly increase the burden on the exchequer, if subsidies are realigned.

The Indian economy seems to be in turmoil, with industrial growth contracting 5.1 per cent in October and the fiscal deficit running high. What are the options before the government?
Let’s look at the recent reform in retail that has been held up. I am in favour of opening the retail sector. It is not just about FDI but also about reforming domestic retail. There are two kinds of opposition. One is that small kirana stores will suffer and the other is the “East India Company syndrome”, where foreigners will exploit our farmers. Both are misguided. They say foreigners will come and exploit our farmers. What is happening now? Our own traders are exploiting the farmers today. In most states, the food ministry decides on a small number of traders who will buy from farmers. This gives traders monopoly power. So there is collusion. The food ministries in most states are highly corrupt. They get money from traders and select two or three of them; these traders get monopoly powers and exploit farmers.

So you mean the entry of foreign companies will ensure that traders lose that monopoly power?
The way to reduce exploitation is not foreign or domestic but to increase competition. So if Walmart or Carrefour want to buy from farmers, they should be allowed to do so. That way, if someone is paying a farmer low prices, he can sell his produce to someone else. So the important thing is competition. FDI is also advantageous since foreign players have a lot of money to invest in cold storage. At least 40 to 50 per cent of our fruit and vegetables go waste for lack of cold storage and refrigerated transport. This requires high initial investment. There is no reason Reliance cannot do this, the distinction between foreign and domestic retail doesn’t matter. But foreign retailers can also bring technology in inventory management, which is very important.

But do you believe that kirana stores will bear the brunt at the cost of increased technology, back-end infrastructure and reforms?

Any small kirana shop near a big Reliance shop will suffer. But there are ways to avoid that. Quite often, small shops do not get their supply from farmers but buy from monopoly traders. On allowing foreign retailers, these small stores will buy from foreign retailers. These large operations will have economies of scale. And kirana stores will now get supplies at a cheaper price. So they will benefit.

Another reason kirana shops will not go out of business is that, quite often, poor buy on credit and not cash. Also, in many big shops, you pay through credit cards; since poor don’t have credit cards, they will go to kirana shops.

Finally, in many remote tribal areas, big shops won’t work. No one will travel 1,000 km to buy. So corner shops have to be there. Don’t expect them to be wiped out. They will have some competition in big cities, but will also have advantages, as they will buy cheap.

Also, the big retail chains can also use small shops as local agents of big stores. Think about these things. Otherwise, the discussion is oversimplified. I don’t think either party is thinking properly on the issue.

India’s economic growth today is being supported mainly by services, which do not create as many jobs as manufacturing. Growth in industry or manufacturing is on the decline. How do you see this?
Services is a huge sector. We think a major part of services comes from software, real estate, finance and so on. But all of this together will not even constitute one-third of the services sector. So, it depends on which service sector we are talking about. We haven’t seen much data about how the informal sector is linked to the formal sector. One kind of informal sector supplies to the formal sector. So, if the formal sector develops, the informal sector will also develop. Of course, we can’t generalise but some parts of the informal service sector are also expanding. For example, private tuition is an informal service that is growing fast. The religious tourism sector is also expanding. In some parts of the services sector, the only way to resolve the problem is to provide better social transfers, better electricity

There is a big debate on subsidies and whether the government should curtail them. How do you see that?
Our country grows by nine or 10 per cent, yet half of our population doesn’t share in this growth. It is unsustainable growth, which is not legitimate. But spending or throwing money at something is not enough; the real problem is that more than half of social spending is wasted or stolen. The government should spend more on health, education, vocational training, public sanitation and so on. Essentially, the government should redesign the spending structure first, and then reform it. It’s not just a fiscal issue, but a political issue.

There is a huge debate over the food security Bill in India. The Cabinet deferred the issue this week owing to differences over the subsidy burden. What do you think?
Coming to the food Bill, it is not just a question of fiscal consolidation. Yes, social sector spending is very high, but we need to think about how much subsidy goes to the relatively rich. Nearly two-thirds of the subsidy goes to the relatively rich, which is about nine per cent of GDP. If we are giving nine per cent to the relatively rich, we shouldn’t mind giving one or two per cent to the poor. Now, if the food security Bill is implemented, it will account for nearly one per cent of the budget. Nobody talks of the nine per cent that goes to the rich. What is needed is realignment as well as reallocation of resources.

And how do we do that?
For instance, if you take the diesel subsidy, much of it goes into expensive cars and a large part of the subsidy on kerosene is used in trucks, while more than half the utilisation of LPG cooking gas is by the middle and upper classes, not the poor. We have a subsidy on higher education, when most poor drop out at primary and middle levels. So we need to reallocate subsidies. It doesn’t necessarily involve increasing total spending but needs realignment.

First Published: Fri, December 16 2011. 00:28 IST