Oppose FDI in Retail

What I dreaded since a long time is happening. And I am stunned to see that several of my esteemed peers and colleagues, especially from the Fourth Estate, celebrating the Government’s call to allow FDI in Retail.

I am worried because this would change the landscape of the country, kill dreams of millions of small entrepreneurs, and would be the beginning of the real MNC Raj.

The real economic backbone of India over the past two decades, has been the small businesses owned by the middle class that spans the length and breadth of the country. These are the small mom and pop shops in your neighborhood, often called kirana stores. These are the small retailer of garments in the next street. These are the grocery stores that sells everything from vegetables to vinegar. These are the friendly computer dealers next door.

The FDI in Retail will crush this backbone.

Government is selling the pros very aggressively which can be summed up as follows.

  1. FDI in retail would benefit the consumer. You won’t be fleeced by the next door shop owner, and will avail the best at the lowest price, in increased competition among the large retailers.
  2. Farmers will benefit as they can sell their goods directly to the LFR, and avoid the middleman completely.
  3. The unorganized sector does not pay any taxes. Even if they are organized, they avoid paying taxes. There is a lot of black money in this sector.

Consumer is the King, is a myth.
I’ve been consulting for various businesses for the past decade or so, and I know that no business is a charity. All of them want to sell a perception – they offer the best in terms of value. In reality, all of them just want to make more.

All Large Format Retailers (LFR) have offers that look great on paper, and would be cheaper compared to a kinara store next door. Cheaper by how much? By a few bucks only. Like on Atta or Rice, it would be two to five Rupees per kilogram. They want you to abandon the next door shop, and drive all the way to the LFR for a few bucks less.

In reality, you get this discount because you end up buying a lot. All LFR stores take advantage of the fact that consumers value their time, energy, and the distance they have travelled to reach their mall. Most consumers are not comfortable unless they end up spending a few thousands on a visit to the mall. You end up spending that kind of money, not just because you can afford to, but also because it’s seen as a return of investment for the time, energy and the distance you have travelled to reach the mall.

You end up spending thousands so you can get back your return of investment. When you buy more, you end up getting bigger discounts, chances to take part in schemes that you have a million in one chance of winning. You return home with a feeling that you have saved big money.

You also end up buying several goods that you may not have purchased in the first place, had the shopping experience not prompted you to purchase it.

I did a dipstick survey with my friends and relatives about large purchases. This is what I figured:

  1. They end up spending more than they planned to, and purchased more.
  2. They all feel they saved money
  3. They all agree that some of the stuff they bought may not be used immediately; some may not be used at all.

This implies that at least 10 percent of what you buy on average from an LFR is either a waste or a not-at-all necessary buy. I have quoted a conservative figure here.

You don’t spend similar amounts with the nearby kirana shop, where you buy for the day or the week. Of course, you defend the decision by saying that you don’t get similar discounts.

Some time back, I checked with Metro, touted as the biggest discount wholesaler in Bangalore and also compared to prices that my local store was willing to provide, after a round of bargaining and for volume purchase. I was surprised that in almost all items which I needed, the local store was more than willing to match.

You can bargain with the local store, and not feel ashamed in doing so!

Farmers in this country have never got a good bargain, thanks to the middlemen. When you buy a coconut for Rs. 10 or a kilo of onion for Rs. 18, you need to know that the farmer who has grown the crop, gets just 20 per cent of what you pay. The middlemen or the wholesaler gets a large cut. But the middleman is not a single entity, there are multiple hands, and then they also face the issue of perishable nature of agricultural products, and the cost of transporting them into the cities and towns.

While there would be a temporary benefit for farmers if they sell directly to an MNC retailer initially, I doubt it will last long. Knowing how an MNC works, it would be just a matter of time before they formed a cartel and squeezed the farmers.

Finally the question about unorganized sector not paying taxes. Agricultural produce in this country is generally not taxed, or is taxed very low. The rest of the products sold at a local store are branded, and they all are taxed at multiple levels; the manufacturer pays an excise duty as well as sales tax. The distributor pays sales tax too. A retailer who is the last link in the chain, and other traders, apart from the provisional stores, also pay their taxes. They employ very ordinary people who all earn less than 10,000 on an average. Where’s the question of  income tax for people working in unorganized sector, when 99.99% will not fall under any taxable bracket.

In India, the opposition does not need any reason to oppose. This naturally means that states manned by BJP and its allies will oppose the bill. However, it’s just a question of time for these states to bend. The Communist states like Kerala and West Bengal will not allow, unless the MNC retailer is a Chinese.

The Finance Minister of the country says that if the bill is not passed, the stock market would crash by 400 points. When masters of this economy are enslaved to the stock market phenomenon, then there’s little hope in our leadership.

If the FDI in Retail happens, many of the shop keepers will be forced to shut down. Many of them are fairly old, they are not even employable. No doubt, the LFRs would employ many youngsters. Yes, a number of urban MBAs will get jobs. But at what cost? At least a hundred million will be rendered jobless.

It’s the duty of every citizen to protect and promote his neighborhood, and ensure that local businesses flourish.

Further Reading

  1. This paper, prepared by Stephan Goetz and Hema Swaminathan of the Department of Agricultural Economics and Rural Sociology of Pennsylvania State University, describes what effect the opening of a Wal-Mart can have on a whole community. 
  2. Impact of Malls on Small Shops and Shoppers, a research paper presented in the Economic and Policy Weekly, June 2, 2007, describes the results of a survey of small shops who have been affected by the growth of malls in and around Mumbai.

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Categories: Random Thoughts | Tags: , , | 2 Comments

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2 thoughts on “Oppose FDI in Retail

  1. It will be interesting to see how this shapes up. Convincing arguments you’ve got there. I found this report. Check maadi. Especially the comments. http://globalspin.blogs.time.com/2011/11/28/why-india-should-stop-fearing-wal-mart/#ixzz1f7Ko1qQB. Obviously, there is no mention of Target or Old Navy anywhere. I might be on your side then. 😉 Sorry, it’s really not a laughing matter, is it? Ah well.

    • Yes, the comments in the article are from people better informed than the writer herself. The long term effects on the economy, on your locality can be catastrophic.
      It will be all hunky dory when they step in, and with well oiled PR machinery, they may win over the farmers too. A farmer would be happy getting a Rupee or two extra on a kilogram of onions,in the initial days. Once the competition is destroyed the MNC retailers will show their true colors. They have deep pockets and can play the game for longer period.

      Young people like you would definitely want to shop at one of these fancy outlets merely for the shopping experience. However you have responsibilities towards your neighborhood, your town/city/village and also towards your country.

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