Shop Poverty (at discounted prices)

In the wake of rising prices, the Government is seeking desperately for measures to tackle inflation. One of the recommendations put forward by an Inter-ministerial Group (IMG) on inflation was to allow Foreign direct Investment (FDI) in multi-product retail and thereby, bring down the prices and also, cut-down the margin between farm gate and retail prices. This is the first instance of a formal recommendation by a government panel to allow FDI in the retail sector which is highly sensitive and tightly policed.

The present market mechanism is inefficient because of the lack of investment in the logistics of the retail chain. India has a very limited integrated cold-chain infrastructure. As per some industry estimates – 25-30 percent of fruits and vegetables and 5-7 percent of food grains in India are wasted 1. Though FDI is permitted in cold-chain to the extent of 100 percent, through the automatic route; in the absence of FDI in retailing, FDI flow to the sector has not been significant.

By bringing in technical know-how and capital, FDI can induce competition in the retail industry. Improvement in supply chain infrastructure, investment in technology, up-gradation in agriculture, manpower and skill development, improvement in the overall productivity are some of the advantages that we expect from FDI in multi brand retailing.

Advocates of FDI in multi-brand retailing say that, through the removal of structural inefficiencies, farmers will benefit significantly from the option of direct sales to organized retailers. It means the profit realization by farmers selling directly to the organized retailers is expected to be much higher than that received from selling in the mandis. Consumers will also benefit as they can get products of better quality at lower prices.

An argument in favor of retail FDI is made in terms of investment needed for cold chain infrastructure in order to reduce wastage in the fruit and vegetable sector. The experience of domestic players in cold storage chain infrastructure sector shows that if the returns are not significant they will not invest in building this infrastructure or will withdraw as quickly as they invest. Today, in Gujarat there is only one chain left in the market. Others have wound up their procurement and retail operations as fast as they started them.

Investments (for cold chain storage for fruits and vegetables that accounts for a small part of farm production) that are expected in this sector by opening up the sector for foreign investment will take place only if they find it profitable. Since the supermarkets cannot sell products at a higher price than the present market price they have to cover up their cost of building up the infrastructure by giving less to farmers. So the comparison between the commission levied by the middle men from the farmers in the present scenario and the profit margin required by the foreign supermarkets to cover up their cost of building the infrastructure needs to be considered before opening up the sector for foreign investors. It is expected that foreign supermarkets remove traditional middlemen from trading. But in reality they will be replaced by well dressed middlemen with fancy positions like quality controller, certification agencies, packaging industry, processors, wholesalers.

It is expected that the foreign players will help the farmers to become economically viable. But it has not happened in the US where the world’s biggest retailer Walmart is based, instead farmers are supported by the subsidies given by the government (12.5 lakh crore US$ subsidy for a period of 1995 to 2005). A report published by the Organisation for Economic Cooperation and Development for the year 2010 show a rise in farm subsidies from 21 per cent in 2008 to 22 per cent in 2009 clearly indicating that the situation is more or less similar in Europe.

When FDI in other sectors creates employment, FDI in multi-brand retailing will have an adverse effect on employment. One of the principal reasons behind the explosion of retail in India is the fact that retailing is probably the primary form of disguised unemployment and underemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means and capital. And thus, a retailer is born, seemingly out of circumstance rather than choice. This phenomenon quite aptly explains the millions of kirana shops and small stores. The explosion of retail outlets in the more busy streets of Indian villages and towns is a visible testimony to this.

Stephan J. Goetz on his paper2 ‘Wal-Mart and country wide poverty in US’, found that the counties which had Wal-mart stores initially in 1987, with more additions of stores between 1987 and 1998 experienced greater increases (or smaller decreases) in family poverty rates during the 1990s economic boom period (after accounting for other factors determining changes in the poverty rate over time), he points out possible reasons for the same. The first and perhaps most direct effect is the demise of existing mom-and-pop-type operations that is caused by the arrival of Wal-Mart in a community.

Poverty rates will rise if retail workers displaced from existing mom-and-pop type operations work for Wal-Mart at lower wages because they have no alternatives. Arrival of the chain also forces other local retailers to reduce wages in order to remain competitive. Wal-Mart jobs may be part-time as opposed to full-time, leading to lower family incomes, all else equal. demise of mom-and-pop stores leads to the closing of local businesses that previously supplied those stores: wholesalers, transporters, logistics.

In a paper by David Neumark 3, Junfu Zhang 4, and Stephen Ciccarella 5, the effects of walmart on local labour market had been studied. On average, Wal-Mart store openings reduce retail employment by about 2.7 percent, implying that each Wal-Mart employee replaces about 1.4 employees in the rest of the retail sector. Driven in part by the employment declines, retail earnings at the county level also decline as a result of Wal-Mart entry, by about 1.5 percent. It is harder to draw any firm conclusions regarding the effects of Wal-Mart on wages, as the data does not provide any indication that retail earnings per worker have been affected by Wal-Mart openings. Note that the estimated adverse effects on retail employment do not imply that the growth of Wal-Mart has resulted in lower absolute levels of retail employment. Like in all studies of this type, the estimates are relative to a counter-factual of what would have happened to retail employment in the absence without the effects of Wal-Mart.

In US the displaced people from retail sector could be accommodated in other sectors like manufacturing and other service sector. But in a country like India where retail sector is the livelihood option for a large section of people, and the manufacturing sector and agriculture sector is not in a position to absorb the displaced people, the decline in employment will be huge and there can be an absolute decrease in employment.

The author is pursuing his dual degree B.Tech/M.Tech at IIT Madras in Civil Engineering discipline.