Obama lobbies for Wal-Mart, will PM lobby for our economic model? – I
by M R Venkatesh on 03 Nov 2010 9 Comments
Wal-Mart is crucial for America and India is crucial for Wal-Mart” – said the head of a consulting firm. And why not? American President Barack Obama is expected to raise the contentious issue of allowing foreign direct investment in multi-brand retail (FDI) during his visit later this week. As a prelude, Wal-Mart CEO Mike Duke has already arrived in India to set the stage with a strong pitch for liberalizing this industry.


Duke is reported to have stated that 100% FDI in the Indian retail sector would “help contain inflation in India.” Duke added that FDI in retail would contain inflation by reducing wastage of farm output, as 30% to 40% of the produce does not reach the end-consumer and, “In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer.”

If that was supposed to be an incentive to the consumer, Duke offered palliatives for Indian manufacturers too. According to Duke, allowing FDI into this sector “will also enable Wal-Mart to increase sourcing of products from India by developing more vendors here.” Well, Duke is partially right. But what he says is substantially voodoo economics. 


For the uninitiated, this media blitzkrieg on the subject just days before the arrival of the American President may be baffling. But those who have been following developments in the past few years know that Wal-Mart alone must have spent (read paid out) millions of dollars in India for lobbying with the Government to open up the retail sector for FDI. Obama is the last lobbyist.


There is an interesting twist to this tale. According to Wikipedia, US Secretary of State Hillary Clinton was on the Board of Wal-Mart between 1986 and 1992. In a remarkable coincidence, the Clintons are Arkansas-based, as is Wal-Mart, the global retail giant. What is even more intriguing, in 1979 Hillary became the first woman to be made a full partner of Rose Law Firm, whose clientele includes – you guessed it right – Wal-Mart. Wheels within deals and deals within wheels?


But first the crucial question – why is India crucial for Wal-Mart? Why is Wal-Mart anxious to enter India? What should be our response? What are the possible benefits and costs? Crucially, why should it use the President of America to lobby for its entry into India?


India a prized destination


The answers to these questions are quite easy – provided one understands India, her economy and its growth trajectory. According to various estimates, the size of the retail markets in India in 2010 are estimated at approximately USD 400 billion with the share of organized retailing accounting for a mere 5% only. Analysts expect this could rise to USD 650 billions by 2015. Organized retailing by then is expected to have a much larger share. That makes India an inviting business prospect, especially for multinational retail giants who till date have not been allowed to operate in India.


But that is looking at opportunities in India through a narrow prism. There is a larger subset to this entire story. China and India are perhaps the only two countries in the world to record robust growth for the past decade or so. What makes India’s story particularly spectacular is the fact that India’s savings rate has increased from approximately 23 per cent a decade ago to well in excess of thirty-seven per cent of GDP in 2008-09. This gargantuan domestic saving by and large funds domestic investments. In short, India unlike several other countries does not entirely depend on FDI. Rather, FDI is a marginal player in the Indian context.


In this connection, the RBI annual report for 2008-09 states, “Domestic savings financed more than 95 per cent of investment, and the remaining, by capital flows. Domestic investment rate reached 39 per cent of the GDP in 2007-08 from 37 per cent in 2006-07.” That makes India’s growth story extremely impressive and sustainable. India’s savings ensure that India need not significantly depend on global capital flows for her investment requirement. Yet to this date our fixation with FDI continues. Crucially, that insulates India from the gyrations witnessed in global capital flows.


Post-2008 economic crisis, multinational giants have come to realize that China and India are the destinations of the present and future. China and India, which had a quick economic turnaround, consequently rank high up in several surveys on global investment destination. With increased urbanization and per-capita income, surveys conducted by global consulting firms indicate that food-expenses as a percentage of total household expenses is gradually declining whereas expenses on clothing, appliances and leisure activities are increasing.


Further, global retail giants are seeking to relocate a part of their production in India as labour costs rose 5 to 15% on average this year in China. In the Guangdong province, the Global Retail Newsletter – a monthly magazine published from France - dealing exclusively on this subject in its July 2010 issue, estimates that the “monthly minimum wage jumped by more than 20% as of May 1st.” Consequently, the newsletter concludes, “Retailers are looking for new ways to cut their produc­tion costs. In case of failure, they will have to absorb this growth hence a pressure on margins while just coming out of recession. They also could pass it to consumers, which are risky as they have the appetite to spend again.” Citing the example of C. P enney, the newsletter points out as to how its manufacturers had left China for India in the past few years in search of low cost labour. All these make India an exiting investment destination for global retail giants. That rationalizes why Wal-Mart has hired the services of Obama to lobby for it.


Job loss – And that is the crux of the issue


What is crucial and uniform in all such studies is the fact that while the experts comment on the potentiality and size of the Indian markets, they are uniformly silent about its negative fallout in the job market. Given India’s prime concern in providing employment opportunities to its vast population, surely the opening of this sector has multi-dimensional consequences. It is in this backdrop that the decision to open up the Retail sector needs to be analyzed.


Before we analyse the implications of opening up of this sector let us look at some salient features of the Indian retail sector as it stands today:

-        Highest outlet density in world – around 12 mn outlets. However it is estimated that 95% of the 12 million stores are less than 500 square feet (average annual turnover Rs 200,000) and can be classified as un-organized sector.

-        Extraordinary growth rate forecast – well above GDP growth - for the retailing industry. More importantly it is estimated by some experts that sales from large format stores would rise by an astounding 25-50%! 

-        Formal and organized retailing would enjoy rapid growth – with less than 5% of retail trade in the organized format, organized competition is virtually absent to challenge the entry of multinationals.

-        Least saturated of all global markets studied - Implies lower barriers of entry and lack of any competition for global players


This means that Indian retail is scattered, extremely small by global standards and widely dispersed. In contrast, for the fiscal year ending Jan. 31, 2009, the largest retailer in the world, Wal-Mart, reported a turnover in excess of USD 400 Billions and a net income of USD 13.6 billions. Each week, about 100 million customers, nearly one-third of the US population, visit Wal-Mart. Its international operations currently comprise 8,500 stores and 660,000 workers (yes just 660,000 workers) in 15 countries outside the US.


What is worrying analysts is the fact that let even an Indian retailer in the organized sector, leave alone in the un-organized sector, would be incapable on taking on such giants as Wal-Mart and compete against them, if and when government allows such foreign players entry. India’s largest retail players viz., Bata, Shoppers Stop or Big Bazaar are mere specks in the international retailing chain.


With incredibly deep pockets, it is feared that these multinational mega-stores will be able to sustain losses for many years till competition is fully wiped out. This is a normal and time-tested predatory strategy used by large players from the developed world to drive out small and dispersed competition in developing countries.


Should India open her retail to FDI, the probable job-loss is estimated in millions while gains could be minimal - a classical case of committing policy hara-kiri. Probably for every employment generated through this FDI policy, there could be several people who may lose jobs. Yet, the government, media and economists within the establishments are selling the idea of allowing FDI into retail and profiting from it. That is when Wal-Mart has employed a mere 660,000 people outside India – a number that would be employed in retail trade in any major Indian city.


Does the Government of India realize the negative implications of opening the sector? Crucially, is the loss of job opportunities the only issue that needs to be factored in our debate on this crucial issue? Whatever be it, for gaining market access and increasing its profits, Wal-Mart has converted President Obama into a lobbyist. Remember, Wal-Mart is crucial for the corporates that own Wal-Mart. And how much is India crucial for Wal-Mart? We will look into this issue in greater detail tomorrow.


(To be continued…)


The author is a Chennai-based Chartered Accountant; his email is mrv@mrv.net.in

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