The Hindu : Opinion / Open Page : FDI in retail? say a big NO

The Hindu : Opinion / Open Page : FDI in retail? say a big NO

FDI is a debt inflow or liability foreign exchange because the profits or returns it generates will have to be repatriated. Will FDI in retail, single brand, banking or insurance enhance our foreign exchange earning capacity? Do they bring technology to the economy?

There is so much of talk going around in all circles regarding FDI. Politicians, for obvious reasons, speak a language of their own, driven by ulterior motives. Most of the times, they are not even knowledgeable to understand the long term consequences of the populist measures and policies they adopt. It would be in the fitness of things if the whole thing is explained in simple and elementary terms.

FDI is Foreign Direct Investment. Direct Investment is of two types: Domestic Direct Investment (DDI) and Foreign Direct Investment. DDI is done in domestic currency (rupee in India) and FDI brings in foreign exchange.

Now, the question arises why FDI. The need for FDI is justified only in two situations – (1) when DDI is inadequate or (2) when foreign exchange is required. On the DDI front, the position as obtained in our country is fairly sound. Banks are flush with funds; the domestic savings rate is one of the highest in the world; market capitalisation, constantly on the rise, makes available investible funds; and DFIs have huge unutilised funds waiting to be deployed in feasible projects. It is gung-ho all around. Therefore, domestically speaking, there is no shortfall of funds for investment.

As for foreign exchange, it is either an asset or liability, depending upon its repatriability. If it is repatriable (i.e., to be returned or repaid in the form of foreign exchange itself), it is a liability. If not, it is an asset. This way, only three sources of foreign exchange – (1) exports of goods and services, (2) NRO accounts in banks and (3) Foreign Aid — qualify as assets. The rest are liabilities like FCNR & NRE deposits of NRIs; FDIs; FIIs and foreign exchange loans from foreign governments and agencies. For convenience, let’s call one asset foreign exchange and the other liability foreign exchange. Some people choose to call them non-debt and debt inflows respectively.

FDI is a debt inflow or liability foreign exchange. Why? Simple, because the profits or returns it generates will have to be repatriated in foreign exchange. Secondly, all the men, material and merchandise imported in the years to come will have to be paid in foreign exchange. Finally, at the time of winding up/selling off, the proceeds will flow out of the country in foreign exchange. And, it is noteworthy here, all this will end up in the outflow of foreign exchange, many times more than the initial inflow. So, every FDI is a clear-cut case of liability foreign exchange.

All the above is about the supply-side of foreign exchange. Now, let’s examine the demand side. The question is – why is foreign exchange needed at all? Based on long-term benefits to the economy, the demand for it can be classified into consumption and construction. Consumption demand is the demand for foreign exchange to import consumption items like gold, oil, tourism and FMCG — all those areas where funds are just blown. On the contrary, ‘construction’ stands for all those areas which promote exports, substitute imports, strengthen the infrastructure of the country and make it more competitive globally.

So, we have the demand for foreign exchange classified into two and its supply also into two. This can be neatly depicted graphically in a Foreign Exchange Desirability Matrix.

The table makes it amply clear that Asset Foreign Exchange casts no negative impact on the economy, regardless of whether it is used for construction or consumption purposes. However, liability foreign exchange needs to be restricted to ‘construction’ purposes, as the consequences of putting it to consumption needs are grave.

Now, why should we go in for liability foreign exchange, like FDI, at all, if it is not for any export promotion, import substitution or any capacity construction purpose? Well, if we indulge in the luxury of blowing liability foreign exchange on non-developmental consumption items, we’ll end up worsening our foreign exchange debt position (we are already in the doldrums with mounting pressure on our capital account of balance of payments, owing to increasing deficits in our balance of trade account year by year).

In fact, until we have any project/avenue in hand which will, in times to come, yield foreign exchange more than its repayment schedule warrants, the inflow of liability foreign exchange should be outrightly avoided.

The service sector is comprised of marketing (wholesale and retail), banking, insurance, civil aviation, education, tourism, medical & health, telecommunication and software, etc. All these fall either in the construction category like education, medical and health, telecommunication and Software or consumption like marketing, insurance, banking and tourism.

Incidentally, in marketing, there is nothing like technology. It’s all about consumption, where the sole elements are Brand and Supply Chain Management; again nothing basic or infrastructural or technology enhancing. Further, the question arises — will FDI in sectors like retail, single brand, banking or insurance enhance our foreign exchange earning capacity? A big NO. Do they bring technology to the economy? Again, a big NO. Hence, FDI in ‘consumption’ sectors deserves to be outrightly rejected. If it is not, it would simply mean the government is not working in the interest of the economy, but is unscrupulously catering to vested interests.

IMPORTING TECHNOLOGY

They say, had FDI not come in, our automobile, telecommunication, aviation, banking and many other industries would not have reached global standards. I would say that instead of allowing foreign capital to set up shop here, the country should have used foreign exchange to just import technology, if needed; and set up the same industries with domestic capital. No liability foreign exchange; no profits going out of the country; domestic consumers getting the same products; and the fruits of exports being reaped by domestic firms and not foreign — all the way a win-win situation for us.

But, being blind to the undercurrents, we instead allowed foreign firms to set up bases here, milk the domestic market and carry back huge profits. The foreign exchange that flowed in by way of FDI was blown in consumption areas like gold and oil.

In the ensuing debate, lots of comparisons are being made with the U.S., the U.K., China and Japan. The question is: are we at the same level of development to indulge in the luxury of comparing ourselves with them?

With no apparent gain for the economy in the long-run on the table, there cannot be a more foolish act for any country than inviting foreigners to set up shop on its own territory. First, it is a clear signal of allowing them to reap profits here and take them back. Second, it is telling the world, loud and clear, that we, by ourselves, are incompetent and inefficient. If a foreign entity pushes for entry in the economy, it will still make sense. It wants to expand its market and reap profits. But what is the compulsion for a host country to insist that a foreign entity come and set up shop here?

Historically, no economy has ever developed on foreign capital. In the industrial revolutions of various nations, the crucial factors that have been instrumental are (1) indigenous mobilisation of resources, (2) domestic technological development and application (3) strategic management and (4) support from the governments, mostly to ward off external pressures. Cases of foreign investment are few and far between.

Let us keep in mind that foreign exchange is both a boon and bane, to determine which each of its inflow needs to be individually assessed for its costs and benefits, before allowing it.

(Professor Anupam Bhargava, a PhD in Management, is a former AGM of SBI. He is now Adviser and Research Guide at Rajasthan Vidyapeeth (Deemed University), Udaipur. Email: anupambhargava58@gmail.com)

OPINIONS FROM THE HINDU READERS:

FDI in retail will eventually lead to most national resources being
owned by foreign entities and the locals getting relegated to a
permanent status as low wage employees, a situation that obtains in many
South American countries and elsewhere. Costa Rica is a classic example
where all banana plantations are now owned by American multinationals
and the Costa Rican slaves as a day laborer. The Indian politicians
should stop selling the country for personal profit and for the profit
of the few at the top.

from:  V. Ramaswami

The foreign retail chains will also impose their food culture and life style on us through advertising.Cola,burgers,preserved foods,baby foods will all adorn the supermarket shelves and we will start
consuming them more and more.Cancer,kidney-heart ailments will all increase when we move away from our natural food habits to these preserved and formulated foods!And of course the beneficery will be again the multinational drug industry!The retail chain's slogan would be spend more, when actualy it should be spend less and conserve more! Look at the small retail businesses in countries like US and UK, they are almost nonexistent now. And also the goods that these retail businesses purchase are from around the globe to get competitive prices. Hence the local businesses die very quickly. Ask the US people about WalMart and they will agree that WalMart makes more profit for itself and the Chinese economy because most of its goods are imported from China. Or ask the farmers of UK, where the retail stores import even ginger and garlic from China or bananas from South America or Africa.
 The question of OWNERSHIP. The problem is that companies like carefour, wal-mart etc. will OWN the real estate, the warehouses, the cold storage, the supply vehicles, even the employees. Employees, including store managers, will be simply working at the places without having any OWNERSHIP of anything. They will have salaries just sufficient to make them happy.
Currently our system is excellent because the Kirana store is OWNED by the manager, the vehicles are OWNED by either driver or a delivery services company, the food is OWNED and sold at competitive local prices by the farmer, etc. We dont want a system where everything is OWNED by the multinational and everyone else is a employee.

from:  RVishwanath

TheUPA government has gone in for big bang reforms only to satisfy the rating agencies and the international finance capital. Our economy was saved from crumbling during the recent crisis only because we have restricted FDI in key sectors. The entry of global retailers like Walmart will have a devastating impact on employment. Experience has shown that the MNCs have a greater monopolistic power over both farmers and consumers and they manipulate the prices.

V.V.K. Suresh,
FDI in retail will affect not only small retailers but also wholesalers. Retail giants have two formats — the Easy Day format (retail) and the Cash & Carry format (wholesale). The Cash & Carry format is dangerous for the wholesalers because MNCs bargain and buy stocks in huge quantities and sell them on very narrow margins. They manage to profit from these margins because they have a huge product line. The Cash & Carry store in Punjab attracts a large number of wholesalers from Delhi and adjoining areas. If New Delhi’s market can be disturbed by these giants, we can imagine the situation in the rest of the country.

Farhan Alam,