Financial Daily from THE HINDU group of publications
Thursday, Sep 29, 2005
Foreign Direct Investment
Marketing - Insight
FDI in retail A question of jobs, not ownership
In the Indian perspective, any policy that creates jobs is good policy. Any industry, Indian- or foreign-owned, that generates employment is welcome. The question over foreign direct investment (FDI) in retail is not as much about ownership as about jobs.
The Indian retail industry is highly fragmented. According to AC Nielsen and KSA Technopak, India has the highest shop density in the world. In 2001, it was estimated that there were 11 outlets for every 1000 people. Since the agriculture sector is over-crowded and the manufacturing sector stagnant, millions of young Indians are virtually forced into the service sector. The presence of more than one retailer for every hundred persons is indicative of how many people are being forced into this form of self-employment, despite limitations of capital and space.
Trade/retailing is the single largest component of the services sector in terms of contribution to the gross domestic product. It accounts for 14 per cent of the service sector, i.e., twice that of the next largest economic activity in the sector banking and insurance. The total number of retail outlets (both food and non-food) was 8.5 million in 1996 and 12 million in 2003, a 41 per cent rise.
The CSO's employment numbers give a comprehensive picture of the importance of this form of livelihood in India. Organised retail trade employs roughly 0.5 million people and unorganised 39.5 million. The fact that about 4 per cent of the population is employed in the unorganised retail trade speaks volumes about how vital this business is to the socio-economic equilibrium in India.
In 2004, Wal-Mart had a turnover of $256 billion and it recorded a net profit of $9 billion. Its 4,806 stores employs 1.4 million persons. The average size of a Wal-Mart outlet is 85,000 square feet and the average turnover about $53 million. The turnover per employee is $1,82,000.
By contrast, the Indian retailer had a turnover of Rs 1,86,075 ($4,100 approximately) and only 4 per cent of the 12 million retail outlets occupied space larger than 500 square feet. The total turnover of the unorganised retail sector, which employs 39.5 million persons, was Rs 735,000 crore. India has 35 towns each with a population of over one million. If Wal-Mart were to open, on an average, one store in each of these 35 cities and if each achieved the average Wal-Mart performance per store, the turnover would amount to over Rs 8,033 crore and number of employees to only 10,195.
Extrapolated to the rest of the country, it would mean displacing around 4,32,000 persons. In other words, every new Wal-Mart employee will render 40 retailers surplus. If FDI retailers with deep pockets were to take over 20 per cent of the retail trade, this would mean a turnover of Rs 1,47,000 crore. This represents an employment of about 43,000 persons, displacing nearly eight million persons in the unorganised retail sector.
The most important argument against modern retailing and supply chain integration is that it displaces labour in a labour-surplus society. Till such time that we are in a position to create jobs on a large scale in manufacturing and construction, it would make eminent sense to keep on hold any policy that results in the elimination of jobs in the unorganised retail sector.
The primary task of the government is still providing livelihoods and not create so-called efficiencies of scale by creating redundancies. If we assume 40 million adults in the retail sector, it would translate into around 160 million dependents. Opening the retailing to FDI means dislocating millions from their occupation and pushing vast number of families under the poverty line. The Western concept of efficiency is maximising output while minimising the number of workers involved. This will only increase social tensions in a developing country like India, where tens of millions are still seeking gainful employment. Companies such as Wal-Mart boast about how they give the consumer better value. Not surprisingly, Wal-Mart procured $20 billion worth of goods from China and just $1 billion worth of goods from India. This is simply because China is a better producer of manufactured goods and not because Wal-Mart has stores there.
Consider a chain such as Wal-Mart with a single point of procurement entering India. Since it already procures huge quantities from China, this make for a massive entry point of China's largely state-owned consumer goods industry into the insatiable market made up of the new consuming elite.
It is true that it is in the consumers' best interest to obtain quality goods and services at the lowest possible price. However, this vocal assertion by the chattering class cannot override the responsibility of any government to provide economic security for its vulnerable population. Countries such as China, Malaysia and Thailand, which have opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the horrific expansion of the new foreign malls and hypermarkets.
In a recent Oxfam study, a decade ago coffee producers earned $10 billion from a global market worth $30 billion. Now they receive less than $6 billion in a global market over $60 billion. Large numbers of producers now interact with monopolistic marketing structures and these chains transfer a large and growing proportion of added value away from producers to companies in industrialised countries.
Neither scale nor efficiency has raised the incomes of the coffee producers. The lessons are clear, bulk procurement plays havoc with producer's margins. Enabling legislation and positive regulation is required to expand our industrial sector whose contribution to employment generation and GDP is much lower than that of the services sector.
The percentage contribution of industry to GDP growth in 1992-96 and in 1997-03 was 30.9 per cent and 23.7 per cent respectively, while for China over roughly the same period it was 62.2 per cent and 58.5 per cent.
We need to address issues at home before we inviting problems from abroad. Vocal proponents of FDI need to ponder a bit more about India's true circumstances.
(The authors are Senior Fellow and Research Associate respectively at the Centre for Policy Alternatives, New Delhi.)
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