FDI in Retails: The Myths and the Realities

Image

Enormous heated discussions have been started with the government’s decision of allowing FDIs in retail sector. While the people in govt telling us that it will change the economic scenario of country, many parties including the allies of congress party are opposing it. I have tried to examine the various arguments given by the both sides in light of available facts.

I have seen a full page advertisement in a local daily where GOI telling the people how FDIs in retails will bring prosperity in India:

1-    It will be in farmer’s interests and increase their income by providing fair value for their products, increased facility of cold storages, warehouses and discarded intermediaries.

2-    Approximately 10 million new employment chances.

3-    Low price and better value to consumers.

4-    It is in the interest of country.

5-    Other infrastructural developments in rural areas.

While the people against the FDIs in retails say it will destroy the small retailers and snatch the employment chances.

I have gone through various available studies regarding the impact of retail chains all over the world. Since the Walmart is a giant leader as compared to others (its revenue generation is even more than the aggregate of other top four players in this sector), I have taken this as my case study.

Walmart has 8500 stores in 15 countries under 55 different names with over 22.5 lakh employees. While it has 4250 stores and employed 16.1 lakh workers in US, its international operations including UK has only 6.60 lakh workers in 4268 stores. So, while their worker per store ratio is 380 in US it is only 155 in outside US. It can be lesser in Asian countries.

The company does business in nine different retail formats. Supercenters, food and drugs, general merchandise stores, bodegas (small markets), cash and carry stores, membership warehouse clubs, apparel stores, soft discount stores and restaurants. For this they adopted to  establish super centers, neighborhood markets, discount stores(departmental stores) and express stores (simple grocery shopping to focus to small town and in large cities where physical space is at a premium ) .the last two are actual threat to the existing medium size and small retailers.

For the concern of jobs, Walmart says, it has provided more than 2.1 lakh jobs in US during 2001 – 06. Alternatively, the Economic Policy Institute estimates that during 2001-06, Walmart’s trade deficit with china alone eliminated nearly 2, 00,000 US jobs. Another study at the University of Missouri found that a new store increases net retail employments in the county by 100 jobs in the short term, half of which disappear over five years as other retail establishment closed.

Kenneth Stone, professor of economics at Iowa State University, in a paper published in Farm Foundation in 1997, found that some small town can lose almost half of their retail trade within 10 years of walmart store opening. He concludes that small towns are more affected by “discount mass merchandiser stores” than larger towns and that shop owners who adapt to the ever changing retail market can co-exist and even thrive in this type of environment.

Another study at Tuck School of Business found Walmart’s entry into a new market has a profound impact on its retail competition. When Walmart opens in a new market, median sales drop 40% at similar high volume stores, 17% at supermarkets, and 6% at drug stores. Loyola University Chicago study suggested that the Impact a Walmart store has on a local business is co-related to its distance from the store. The leader of that study admits that this factor is stronger in smaller town and does not apply to more urban areas.

Another study for Ludwig Von Mires Institute suggested that Walmart’s low prices caused some existing business to close , the chain also created new opportunities for other smaller business, so the process of  “creative destruction“ unleashed by Walmart has no statistically significant impact on the overall size of small business sector in US .

Studies show, consumers benefit from lower costs. Another study by Global Insight found that Walmart’s growth during 1985-2004 resulted in food-at-home prices that were 9.1% lower and consumer prices index were 3.1% lower they would otherwise have been. A study in 2005 at Massachusetts Institute of Technology measured the effect on consumer welfare and found that the poorest segment of the population benefits the most from the existence of discount retailers. A 2004 paper by two professors at Pennsylvania State University found that US counties with Walmart stores suffered increased poverty compared with counties without Walmart. Dr. Raj Patel, author of ‘stuffed and starved: Market power and the hidden battle for the world food system‘, said in a lecture at the University of Melbourne (2007), that a study in Nebraska looked at two different Walmart, the first which had just arrived and “was in the process of driving every one else out of business but, to do that, they cut their prices to the bone, very, low prices.” In the other Walmart, “they had successfully destroyed the local economic crater with Walmart in the middle, and, in that community the price were 17% higher.”

Walmart also blamed for tough employee ethics, gender discrimination, treatment of employees and product suppliers, environmental practices, extensive foreign product outsourcing and use of public subsidies, and the impact of stores on the local economies of towns in which they operate. Walmart also been criticized for using sweatshops and prison labour. For example, in 1995, Chinese dissident Harry Wu charged that Walmart was contracting prison labour in Guangdong Province. There have been also reports of teenagers in Bangladesh working in sweatshops 80 hrs per week at $0.14 per hour, for Walmart supplier Beximco. Walmart pay very low wages even in US. In 2001, the average wage for a Walmart clerk was $ 13,861 and for associates (salesmen) was $ 17,874 in 2004, while the federal poverty line for a family of three was $ 14,630. So, they pay healthy is a myth.

So, from the above what I conclude, is

1-    Farmers are not going to gain as much as shown by the govt and some so called economic experts but, they’re not going to lose anything.

2-    These retail chains will not pose any big threat to the small shops but the medium grocery shops and general merchandisers in the closed vicinity of a retail chain will certainly lose a lot.

3-    Improvement in infrastructure is a myth. They’re not coming here for any charity work. The cold storages, warehouses they would establish, for their own purpose. However, the consumers will definitely get a benefit.

4-    The expectation for new/ fresh jobs is also a myth. And, the people who get indirectly employed might have already working somewhere. Nor they’re going to get good payments.

5-    The intermediaries will become the suppliers of these chains.

6-    Fair trade practices are also a myth. Almost all chains use aggressive tactics to kill small retailers, low weight, and selling products after the expiry date, low quality products. You can imagine this would be even easier in India.

7-    It is going to increase trade deficit of India with china. The expert says, the Walmart alone constitutes 10% part of the current trade deficit of US with China.

In my opinion The FDIs in Retails is neither going to bring any economic revolution in India nor will destroy small traders. The question is why BJP opposing it? The answer is, for the same reasons the Congress party opposed the FDIs in aviation and insurance in their regime. Moreover, why BJP would support any govt whose popularity is at its lowest, esp. when we see the Congress party couldn’t even convince their own allies.