FDI in Indian Retail: Policy or Politics?

A headline in the International Business Times questions, "Cracks in UPA government?" 

The issue of whether India should allow Foreign Direct Investment (FDI) in the retail sector has been the newest topic of contention between the two Indian coalitions, the UPA (United Progressive Alliance) and NDA (National Democratic Alliance). Indian Economics for Dummieswould explain the policy as – allowing big retail companies like Carrefour and Wal-Mart to set up retail chains in tier 1 and tier 2 Indian cities. The amount of negative attention this issue has gotten is staggering, and this article aims to assess why.

FDI has proved to be beneficial to developing countries like Mexico, Thailand and Brazil. Even China has been seeing positive benefits since it opened its doors to FDI in retail in 1992. Cumulative FDI flows to the retail sector in the 20 largest developing countries in the last decade amounted to 7% of the total flow and has led to positive growth, according to a World Bank report. It is difficult to understand why India has remained closed to FDI in retail for so long, and now that the government is taking a stance, why it is facing so much opposition.

The fears expressed in the Indian parliament by the opposing parties include; the death of small family-run retail shops and the related unemployment it will create as well as the competition being oligopolistic, crowded by a few buyers and therefore the ability to exploit the supplier or farmer. While they may be exaggerated, they aren’t incorrect; every economic policy comes with its burden. But that’s when it’s important to draw two columns and run a simple cost-benefit analysis. History and studies have shown that it does more good than bad. Among other things (like international standards of quality), allowing FDI in retail will solve one of the biggest problems in the rural economy in India, that of the exploitative middleman. Profit realisation for farmers is almost 60% higher when they sell to retailers, than to the middleman, as is the situation currently.

The truth is the opposition is protesting the FDI in retail issue less because they care about it and more because they are looking for issues to protest. This stems from a combination of Indian political parties just simply being opportunistic (a chance to say that the government doesn’t care about the poor farmers, and grab their votes); and genuine frustration with how Prime Minister Manmohan Singh’s administration has been handling a whole slew of massive policy issues.

What started with corruption scandals, nation-wide protests, and a failure to deliver on a promise to launch an anti-corruption bill, has now proceeded to incredibly high levels of inflation and low rates of growth. While there is no doubt that the ruling government has made their policy errors, the way in which this frustration has manifested itself with respect to this policy of FDI in retail, is almost laughable.

Even more ironic is that "rolling back" the FDI proposal is the first time in years that an issue has gathered so much consensus in parliament (among the opposition, the NDA, and even some factions of the ruling coalition, the UPA). There is no doubt that the insistence on FDI in retail has been a politically and economically expensive decision. It has received so much undue attention, that almost half of the Winter Session of the Indian Parliament has been spent discussing it, costing the exchequer close to 20 M rupees daily. But it is less about the decision and more about the timing of it. As a particularly vehement article in the Economic Times said, “FDI reforms cannot be juxtaposed with our rage against corruption (and used as) a battering ram. That is entirely another battle.”

While allowing FDI in retail can have some negative repercussions, it’s clear to most experts that its benefits outweigh its costs. The opposition needs to realise that as their name may suggest, they need not oppose every issue brought forward in session, and the ruling government needs to be careful to take a stronger stance on issues, instead of constantly fearing the loss of their vote-bank.

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