Opinion » Lead

Updated: October 2, 2012 02:24 IST

Let’s not overrate foreign investment

Pulapre Balakrishnan
Comment (10)   ·   print   ·   T  T  

The government’s claim that it will dampen inflation, bring higher prices for farmers and lower prices for customers may be somewhat exaggerated

With the intention of signalling a strong commitment to reforms, the UPA government has announced a hike in the price of diesel and liberalisation of foreign direct investment (FDI) in multi-brand retail, justifying the measures as growth-enhancing and inflation-dampening. They have been termed bold by India’s corporate sector and burdensome by an Opposition united across the ideological spectrum. In his speech to the nation on September 20, the Prime Minister stated that the government’s move is motivated by concern for the ordinary Indian. Given the conflicting responses, there is room here for analysis.

Strengthen infrastructure

The interesting thing about public sector pricing, in this case of diesel, is that keeping prices steady as input costs rise would be as political in content as raising them is. As stated in an editorial in this newspaper some days ago, the government need not have waited so long to raise the price. It would seem that the government had no intention of doing so while Parliament was in session. Be that as it may, there is a strong case for eliminating the subsidy on all fossil fuels and transferring the saving thus made into public infrastructure. Apart from the symbolism of soaking the SUV-driving rich, the building and maintenance of public infrastructure are more likely to help the poor — presumably the PM’s aam aadmi — than the current regime of subsidies.

The creation of infrastructure employs the poor directly as it is they who build it. Secondly, the provision of the producer services afforded by the infrastructure sustains private economic activity which generates employment. The idea that the poor would benefit more from public investment than the present subsidy regime, described by some as welfare state for the rich, has not really been sufficiently debated. For India’s political class, subsidies are the easiest path to being seen as benefactors while being relieved of the task of managing the process of building and maintaining infrastructure, arguably a non-negotiable aspect of governance in a democracy. So, even a small hike in the price of diesel can be the beginning of a realignment of government expenditure from consumption subsidies to investment in infrastructure, and the poor may be expected to gain from this. Finally, the gains from macroeconomic stability cannot be legitimately ignored when evaluating the prospects for the poor. Macroeconomic instability spares nobody, and India’s current account deficit by now exceeds the figure for 1991. Fuel subsidies have enormous consequences for the balance of payments, as 80 per cent of our oil consumption is imported.

When it comes to FDI in retail, the beneficial impact on the aam aadmi is altogether less obvious than in the case of lowering the diesel subsidy. What FDI in this sector may be expected to do is to take the shopping experience in India to the next level. Surely, cavernous supermarkets make it easier to shop for those with deeper pockets. Precisely because the supplier caters to this cohort the quality of the groceries may be expected to rise. In fact, we have already seen this happening, even without FDI, with organised retail spreading in India. But those on a daily wage and no ready cash are unlikely to patronise these suburban behemoths. They may be expected to prop up the kirana with its infinite capacity for apportioning their stuff to suit the customer’s purse and willingness to extend her credit. So the Opposition may well be crying wolf over the imminent disappearance of the corner store.

But the government’s claim of a ‘win-win’ with higher prices for farmers and lower prices for customers with the advent of FDI may be somewhat exaggerated. For precisely because the large retailer must cut through the supply chain to deliver this outcome, there would be some displacement in the middle. The government counters this reasoning by pointing to investment at the backend, in cold storage and such. This is possible of course, but we would want to wait and see the full combined effect once all effects have worked their way through the economy. Some part of the corner-store complex will survive purely because there are too many poor people in this country yet, generating a substantial demand for low quality food with lower mark-ups. But the position that a policy is only as good as its direct impact on employment is surely untenable. To reject outright a move on the grounds that it does not directly put the poor to work would be folly. Productivity growth is often first employment displacing but it also lowers prices and raises demand. The point is that it not only raises demand for the good in question but for all other goods in the economy, as real income is higher following the rise in productivity. Overall employment in the economy may be expected to expand.

Little to offer

It is when it comes to inflation though that the present round of announcements by the government has little or nothing to offer. The suggestion, first made when the proposal was mooted some months ago, that FDI in retail would dampen inflation is difficult to fathom. The source of the current inflation is a veritable excess demand for vegetables and a manufactured excess demand for the principal foodgrains. The latter stems from the government’s procurement and storage policy. By mopping up almost the entire marketed surplus of grain as it comes into the wholesale markets and then allowing it to rot by unaccountable stock management, the Government of India abets hunger in the name of supporting the farmer. The entire political class is united in not calling attention to this travesty.

The RBI’s argument that the fiscal deficit is the source of the inflation may deflect attention from its own incapacity in the present context, but does not do much to enhance our understanding of policy options. The Central government’s fiscal deficit is lower today than it was when the present bout of inflation commenced about two years ago. Thus the hike in the price of diesel would have to be justified on counts other than its presumed impact on inflation via a lower fiscal deficit. The current inflation is rooted less in macroeconomic imbalances than in structural ones emanating, as explained above, in the market for food. As a corollary, macroeconomic intervention via fiscal or monetary policy can have only a limited impact. As an aside, they can only compress output, a sequence of events playing out in the guise of a slowing manufacturing sector. It is by now clear that only microeconomic policy intervention can make a difference to the food situation and thus inflation. In India the cost of producing food is high in relation to per capita income. FDI in retail can make no difference here. It can at best only deliver more efficiently what has been produced at cost. The government can hardly be accused of not knowing of the importance of micro interventions.

For instance, it has been observed that vast sums of money spent by the government on irrigation were not showing up as increase in irrigated area. This was at least five years ago. Now there are reports of an irrigation scam involving Rs 20, 000 crore in Maharashtra, a State for all purposes governed by the UPA. It is quite extraordinary that the current food-price led inflation has been in existence for over two years now and the government has not been able to come up with a single measure addressing it, even if its impact may be felt only in the medium term. When it is not actually stoking inflation by raising the procurement price of grain it comes up with window dressing in the form of FDI in retail.

It would be appropriate to conclude by asking whether the government makes too much of foreign investment, desirable as it is. With respect to its heroic recent announcement, there is the issue of the suppliers’ response. Walmart’s Asia President Scott Price is reported to have already stated “we are not in any rush” to enter India. But there is a query more general than the likely response of foreign investors to the overtures being made presently. In the two decades since 1991, India has not attracted much FDI, giving us an idea of what may be expected in a future with or without FDI in retail. Some perspective is to be had from looking at the Chinese experience. For an idea of the relative roles of FDI and domestic investment in generating growth in that country, note that FDI as a share on the domestic product had peaked in 1993. It was only 6 per cent even then, and has declined progressively since to a figure less than half that. This suggests that China’s double-digit growth cannot be explained by alluding to the FDI it attracts. Is our own government overrating the power of foreign investment to transform India’s economy?

(The author is on the faculty of Economics at the Centre for Development Studies, Thiruvananthapuram. He may be reached at


Irrational exuberanceSeptember 17, 2012

Unfazed, government moves ahead on FDI September 20, 2012

Don't fear FDI: PMSeptember 21, 2012

More In: Lead | Opinion

All these measures taken by the government seems good to quote but they appear to be nothing more than window dressing.The major reason for this the level of corruption that exists in each and every bit of our administration.
Thousands of crores invested in irrigation projects in maharsahtra could have surely brought a change in the sorry state of farmers there if it would have been actually implemented and not gulped down by the corruption endorsing government departments.

from:  Gaurav Jain
Posted on: Oct 4, 2012 at 10:31 IST

Can Congress without ally support & just 28% vote share in 2009, force"FDI retail"on nation without even a debate in parliament?
What kind of democracy or parliamentary democracy is this ?

Doesnt the voice of allies , opposition , media , public , civil society and proven statistics from countries that previously opened FDI in retail not matter ?

Posted on: Oct 4, 2012 at 09:54 IST

Internal resources should be garnered o use it for manufacturing and
even for retail trade. Dependence on FDI is unreliable. Like
investment in stock market, if their country is in need of money like european economic recession and withdrawal recently, it can happen to
fDI on retail. Quick solution to accelerate growth will not be
lasting. There is some sense in opposing FDI in retail by entire
opposition including some coalition partners of UpA like Trinamool
congress and DMK.UPA should go slow instead of rushing through.

from:  E.Sivasankaran
Posted on: Oct 3, 2012 at 19:47 IST

sir, FDI in retail as approved by the union government does not need
any discussion or criticism. people are unnecessarily trying to create
a controversy. the permission has been given with riders of heavy
investment in cities with minimum population of one million after the
state government concerned grants licence. now maximum 200 stores will
be opened in about 45 cities of the ten states which are agreeable to
fdi in retail and that too after about two years. we are the second
biggest nation population wise and will not be affected adversely by
such investments. this argument can be expanded in a book but
intelligent people should not waste their time in reading or talking
about this needless controversy. this can be used for entertainment.
remember controversy about globalization. some people are still
serious about opposing globalization which is actually a stage in the
development of human civilization which nobody can stop. so one should
try to enjoy such needless controversies.

from:  R. Pandya
Posted on: Oct 3, 2012 at 10:15 IST

Agriculture in India employs, even in the perilous state it is in today, about fifty percent of
those employed in the country. If it is developed using scientific,technological, and monetary
inputs available in India, a large percentage of our population can find employment. What
have successive governments done in the field of agricultural development in the country?
All this idle talk about FDI idoing this job for the country is hogwash. If the people want to
earn their livelihood, " learn to writer software "seems to be the government's advice to them!

from:  K.Vijayakumar
Posted on: Oct 2, 2012 at 19:15 IST

The Government's advocacy of FDI as a panacea is suspicious indeed.
Knowing that there is indeed no "free lunch" it goes against common
sense to think that foreign financial institutions would commit money
for infrastructure development in India out of the goodness of their
hearts. The reality is that foreign financial institutions that invest
money in India do so with the intention of earning a better profit
here than elsewhere. So why would foreign investment that would
presumably involve repatriation of funds overseas in foreign currency
be better than domestic investment? After all there is plenty of black
money floating around in India. Perhaps the Government should think
about giving a tax holiday and exemption from disclosure of source of
income for investment in priority sector infrastructure. To my mind
the Government thinks of FDI as an easy solution to its vexed failure
in collecting taxes from the unorganized retail sector.

from:  Nripinder
Posted on: Oct 2, 2012 at 18:40 IST

The UPA has displayed its intransigence to push through FDI in retail, unmindful of the impact it may have on the livelihood of crores of small traders,who are wholly dependent on retail trade.None will disagree that it was a god sent reprieve for the centre,which was in the midst of storm of scams,more so,the coalgate leaving PMO defenseless. As expected, the votaries of reforms shower accolades for government. Most of the allies of UPA have parted ways apprehending wrath of common man who faces the brunt of price rise and soaring inflation. We have witnessed earlier that the coffin of Indian soft drinks was nailed by giants like Coke and Pepsi. We also notice that kirana shops gasp to battle aggressive marketing of Maals in metros. Indian economy hinges more on the domestic trade as the humble earning is recycled into market unlike that of the profit of MNCs that is exported out.

from:  C.Chandrasekaran
Posted on: Oct 2, 2012 at 17:53 IST

Clearly, this model presupposes ‘aam adami’ as in consumers and
marginal and small farmers as major weak spots that survive on
government subsidy. Thus it makes irrational economic sense to FDI
induced retail chain players to milk the government subsidy in
addition to the bounty reaped through ‘margin above production costs
implicit in the retail price shifts in favour of the retailers at the
expense of producers and consumers’. Walmart did this in US and so
have other major players across the globe. The UN Special Rapporteur
on the right to food did point this out very forcefully in December
2010. In this ridiculous milieu we have fully forgotten the desi
alternative spearheaded by the Milkman. We know for the dairy segment
in our country now what happens when any variant of FDI –virus
infects the food supply chain. Our policy makers could have been
smarter and wiser as well. Indeed the micro-foundation of these
ridiculous heights was laid in 2009 economic survey chapter 2.6.

from:  Prof. J. George
Posted on: Oct 2, 2012 at 17:07 IST

The article is an excellent companion to the 17th September editorial
(Irrational exuberance) and indeed commendable. The PM chooses to be
silent on the rural infrastructure flagship programme- ‘Bharat Nirman’
or the National Rainfed authority in skillfully addressing the
grassroots development concerns cannot be forgotten in a hurry. The
other area getting obscured in this irrational exuberance is the
profit making growth trajectory of all food processing industry
promoters on the one side and the liberal tax incentives given to them
since 2004 in each budget announcements. The retail chain’s dependence
on the food processing segment is the bedrock of the supply chain
model across the global food retail trade models.

from:  Prof. J. George
Posted on: Oct 2, 2012 at 16:59 IST

Good analysis. FDI in retail is indeed window-dressing the structural problems inherent in our economy. Let us not fool ourselves; mass poverty is here to stay for several decades yet. The only way to buck the trend is to be disciplined about our investment in people (i.e. education and training), and our investment in infrastructure (i.e. power, roads, railways, communication). There are associated requirements vis-a-vis the farmer and the delivery of his/her produce to the consumer in an efficient way.

from:  Samir Mody
Posted on: Oct 2, 2012 at 16:07 IST
Show all comments
This article is closed for comments.
Please Email the Editor



Recent Article in Lead

For a renaissance in Indian S&T

The apathy of successive Central governments towards science and technology continues in numerous ways. The premier national scientific agencies have been made to languish, and no effort has been made either to formulate a national S&T policy »