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Mainstream, VOL L, No 40, September 22, 2012

The Growing Divide between Economics and Politics in India

Friday 28 September 2012, by Arun Kumar

The Union Government has gone for a slew of ‘reforms’ and drawn strong protests from people and the political parties both in the UPA and outside it. The package consists of raising the price of diesel, restricting the LPG cylinder supply at subsidised prices to six per annum per family and allowing FDI in the aviation sector and multi-brand retail trading (MBRT). The first step is inflationary since it will immediately impact all prices through the cascading effect. In the current scenario of high inflation it can only further damage the ruling political party. According to the government, liberalisation of foreign investment will boost investments and raise the rate of growth of the economy. Quarter after quarter the rate of industrial growth has not only been falling but even been negative in some of the quarters.

Foreign investment, hardly a few per cent of the total investment in the economy, cannot change this trend. Even if it rises, that will take time to materialise and, therefore, cannot have any immediate impact on the economic growth rate. Further, it is barely a panacea for the ills of the industrial sector which is suffering from uncertainty due to corruption and declining exports. The stock markets have reacted positively but that cannot spur growth. Thus, the government is unlikely to derive any short-term benefit from this policy. There will be 
the cosmetic effect that the charge of policy paralysis may no more stick to UPA-II and the foreign press can no more criticise the PM of inaction.

There is no disagreement on the inflationary impact of the steps taken to reduce under recoveries in petro-goods. This is justified on grounds of the need to control the fiscal deficit and the health of the petroleum sector. However, there is a sharp divide on the issue of allowing FDI in multi-brand retail trade. The government had proposed it in November 2011 but withheld implementation due to the widespread opposition to it. It had said that it would consult everyone before implementing this policy. The current reaction suggests that there was inadequate consultation and that the step has been taken for some other reason.

The government claims that FDI in retail will boost the economy, provide large scale employment to the youth, lead to lowering of consumer prices, better prices to the farmers, reduction in wastage in the farm produce, improvements in technology and creation of infrastructure. It has been presented as a win-win situation for the nation. It is only supposed to be anti-middlemen in the supply chain who squeeze both the far-mers and consumers. Traders are labelled as the vested interests who oppose this step. It is argued that the MNCs would not displace the neighbourhood stores which will continue to flourish. Finally, it is said that the Indian corporates are already operating in this sector and they have not wiped out the local stores.

Walmart, the largest multi-brand retailer in the world, has been itching to enter the Indian markets and has had a tie-up with the Mittals. Its global sales were over $ 400 billion in 2009 and it employed 2.1 million workers. In India, if the turnover of the retail trade is taken to be the personal consumption, it would be $ 650 billion in 2009 and this sector offered employment to at least 30 million. If companies like Walmart were to enter India and displace the existing retail stores, they would only employ three million workers for India’s current level of sales. This would not happen suddenly but the trend would be clear.

The small stores would not disappear immediately. To begin with, their growth in sales volume would slow down as the sales of the big retailers rises. That is already the effect of the emergence of the malls and the coming of the Indian big retailers like Reliance and Big Bazaar. The crowds in these stores are at the expense of what could have been the clientele in the small stores. Does one see the poor in these stores? No. A huge segregation is taking place.

The government is touting an increase in investments in the retail sector to spur growth. But, as small stores begin to suffer, their rather substantial investments would slow down. One needs to go to any market in India, even in small towns, and see how the neighbourhood stores have grown. The sleepy Khan Market has turned into a fancy shopping centre (mall without a common roof) in the heart of Delhi. Has all this happened without investment?

The government claims that the companies with FDI will have to source 30 per cent from the MSME sector which will help the growth of this sector. But does the Indian retail sector, which is likely to be displaced, not source more than 30 per cent of its supplies from the MSMEs? Further, given the global linkages of the MNCs, they are likely to buy more from outside the country than the Indian small retailers do and this will adversely affect demand.

Thus, whether it is employment generation or the amount of investment or the impact on the MSME sector, one has to see the net effect of the entry of the MNCs in multi-brand retail trade. In the case of employment and MSMEs, there would be an adverse effect and in the case of investment the net effect, even if positive, would be too small to boost growth.


THE expected positive impact of elimination of middlemen for farmers will be illusory given that India has a large number of very small farmers (unlike in the USA) and big business would not be able to deal with them. Further, given the deep pockets of the MNCs, speculation in food prices in India would only increase. The States are being given the freedom whether to implement the policy or not. But once the MNCs are ensconced in Delhi would State capitals be able to resist? It has to be a national policy either way.

The proponents argue that there would be backward linkages with the setting up of infrastructure that is presently lacking and that new technology would be introduced in India. Did Amul not set up infrastructure for milk marketing? Have the Indian organised sector in retail not been creating infrastructure? What is the high technology that Indian retailers cannot set up or evolve in India? If Indian big business has not found it profitable to set up more infrastructure and supply chains, then would MNCs find it profitable to do so?

Consider the entry of Pepsi Cola in India in 1988. It promised revolution in tomato and potato farming in India to produce potato chips and tomato ketchup. By 1992 it had invested Rs 80 crores and was buying from 80 farmers only. When Coca Cola was allowed to enter India without any conditionalities, then Pepsi also demanded that it be exempted from its promises. The lesson is that promises made to gain entry are hardly implemented.

Today, the USA and Europe face massive unemployment. How far have the MNCs in retail, which dominate these markets, helped in reducing it? Walmart is growing but wherever it has gone, employment has declined. In India, where under-employment in the unorganised sector is massive, the entry of organised sector firms can only aggravate the situation. They will not employ the poor and ill-educated labour working in the small neighbourhood retail stores. Thus, they may create some employment for the middle class, public school-educated youth; but what of the others?

Given all these imponderables for the Indian economy, why is the government pushing ahead with this policy in spite of the disquiet in the public? Indian big business in retail has been tieing up with the MNCs through various means like Private Equity (PE), FII and PN route. The black funds of the Indian big business and politicians (some of whom are big businessmen) have been ‘round tripped’ into India. Thus, the Indian political class and big business are interested in the entry of FDI so that they can bring their funds back. To them the threat of the MNCs is secondary.

Genuine Indian big business will not be able to survive the competition because FDI will come via tax havens like Mauritius and be exempt from taxes. The former would have to sell out to the latter whether of Indian or foreign hue. Is another potential scam brewing? In brief, the ruling class is acting on its own behalf while overlooking the larger interest of the Indian people—this is the growing divide between politics and economics in India.

Dr Arun Kumar is Chairperson and Sukhamoy Chakravarty Chair Professor, Centre for Economic Studies and Planning, School of Social Sciences, Jawaharlal Nehru University, New Delhi. He can be contacted at e-mail:

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