In a show of audacity, the United Progressive Alliance government has decided to further open up the retail trade sector to foreign investment. Foreign investors will be permitted to enter the hitherto prohibited multi-brand retail segment and hold equity of up to 51 per cent in the units established. That there is widespread political opposition to this change in policy was known for long. Hence, the move is nothing short of a declaration that UPA II would proceed with implementing its agenda of economic reform, irrespective of whether there is majority support for, let alone a consensus on, that agenda. The opposition to foreign direct investment in the retail sector stems from a number of well-grounded fears. FDI in retail would introduce competition from large players with deep pockets and international sourcing capabilities who would be able to exploit economies in procurement, storage, and distribution to out-compete smaller traders and subordinate myriad small suppliers. The immediate and direct effect would be a significant loss of employment in the small and unorganised retail trade displaced by the big retail firms. The government's claims to the contrary are questionable. They exaggerate the direct and indirect employment that large retail would create and ignore the number of jobs they would displace. Conditions on foreign investors, such as the requirement of a minimum investment of $100 million and entry permission only for cities with populations exceeding one million are not material. They do not change the source of the competition — giants like Walmart, Tesco, and Carrefour — nor the locations in which such competition is most likely to be faced. And the requirement that 30 per cent of manufactured or processed products sold should be sourced from small and medium enterprises would be impossible to implement, especially because it applies to such producers from anywhere in the world.
An erosion of the incomes earned by petty producers is likely to accompany the loss of employment. Prices paid to and returns earned by small suppliers, especially in agriculture, would be depressed because a few oligopolistic buyers dominate the retail trade. This would shift the distribution of the margin above production costs implicit in the retail price away from the producers to the retailers. Given the precarious viability of crop production even at present, that shift could severely damage livelihoods. Moreover, once the retail trade is concentrated in a few firms, retail margins themselves could rise, with implications for prices paid by the consumer, especially in years when domestic supply falls short. None but the Manmohan Singh government believes that FDI in retail is a remedy for the relentless inflation the country faces. All things considered, it would be best advised to focus on improving public distribution and enhancing agricultural productivity — and not court more controversy pursuing a misplaced obsession.