Renowned American economist
Famous American statesman and economist, John Kenneth Galbraith once quoted that ‘in economics, it is a far, far wiser thing to be right than to be consistent.’ And, this exactly describes what is missing from the present economic condition of the state of Assam. We may crunch all the Gross State Domestic Product (GSDP) and draw a picture to suit the perception. But, will that be a right step to be counted as a wiser thing to do? Are we questioning the macro policy framework of the state and its course of direction? It is a crucial time for an honest self introspection given the scenario that the state is planning to open up to foreign direct investments in retail sector in to the state. As the debate on the ethics, sense and logic of FDI in retail rages on across the country, it is time to ask ourselves, the people of the state, to reason and debate about the implications of this scheme in the milieu of our economic reality.
The Economic Survey of Assam for year 2010-11 states that the state’s GSDP grew at 7.4% as against 8.1% in the previous year. The Survey further points out that the secondary sector is expected to remain low as against 2.9% in 2009-2010. The tertiary sector that comprises of ‘trade, hotels & restaurant, transport by other means & storage, real estate & business service and communications, banking & insurance, social & personal services’ is set to grow slower at 10% in 2010-11 as against 12.2% in 2009-2010. The primary sector was expected to grow faster at 6.1% in 2010-11 as against 4.2% of the previous year. Now, without further dissecting in to the definitions of the various sectors as identified by the state, we can summarily conclude that except for the primary sector, the other two important cogs of state income, secondary and tertiary sectors, are facing pressure to sustain a positively increasing rate of growth.
Now, there have been debates and deliberation on the model of growth for the state. As we can understand from the statistics, the largest chunk of the growth pie comes from the tertiary sector. If we dissect it, it will be clear that most of the items included in this segment are demand oriented. That means it grows when demand is there. However, to maintain a demand at the right spot, there is an enormous need to sustain a favourable supply side. For an equilibrium matrix of market stability, it is pertinent that the effective demand is maintained to ensure effective supply and vice-versa. The challenge that the Assam is facing today is it’s over dependence on demand side economics and much lesser importance towards supply side of economics. This puts the state economy in a skewed or lopsided form which is never ideal.
The supply of side of economics would mean creating assets in the economy that would generate income for the state. For example, the state production of oil and tea, state’s primary capital goods for decades, and its trade with rest of the world fetches the state income, making the state rich. However, of late, the demand side of the economy, for example real estate, hotels & restaurants, large retail outlets etc; has overshadowed it so much that we are now dependent heavily on import of goods & services. Since we have not created enough assets for meeting the demand of the local economy, the rising demand is met by produce from outside of the state. Quintessentially, because of poor foresightedness or lethargy in drafting a policy model to diversify the economy, we remain vulnerable to outside support & trade and sitting at the risk of becoming a dumping zone.
Why is this discussion necessary in the wake of the state government decision to open up to FDI in retail in the state? Because, FDI in retail in the state won’t set up manufacturing units that will produce products here, generating employment and sustained income stream for the state, but will bring it from outside and sell it here. In terms of employment, we will have a few persons buying and selling those products rather than a few farmers, engineers, doctors, entrepreneurs, economists, social scientists along with backward linkage employment working towards creation of wealth of the state. Due to their strong logistical prowess, it makes much more economic sense to this Global Multi Brand Retail Outlets (GMBRO). The proceeds of this will fly out of the country. FDI in retail is a liability of foreign exchange as the profit or returns it generates will have to be repatriated. It’s simple business. You invest in something to earn returns. The arguments that such retail FDI will generate employment and wipe out middleman from the system is again questionable. The Indian retail market is estimated at US$ 400 billion that provides employment to 20 million people. For a GMBRO like Wal-Mart, the company turnover is US$410 billion but it employs 2.1 million people.
Market consolidation by GMBRO
The concerns raised by many over the fate of small traders are well founded. A New York Times report has exposed as how Wal-Mart has captured nearly 50% of Mexico’s retail market in a period of 10 years. The business model of these stores involve waging a price war, aggressive pricing to destroy the local market, at heavy losses for a few years. Once the local competition is annihilated, it will consolidate the market and bring in a monopolistic power ensuring predatory pricing. The present set of middlemen in the market will be replaced by a fancy and systematic set of well oiled professionals like quality controller, standardiser, certification agency, packaging consultants etc.
There are strong arguments that the primary producer and end users will benefit from such scheme. The agriculture in US got government support worth US$ 307 billion for next five years. Another US study has showed that the net income of farmers in US have come down from 70% in early 20th century to less than 4% in 2005. It is true that these GMBRO will work on a razor sharp pricing model, essentially basing their pricing on their sophisticated and supra efficient logistics management. However, the argument that the agriculture will be standardized with such logistical management minimizing the loss of perishable goods and bring in efficiency in crop management.
The point where it fails to make an impression is the fact that FDI in storage is already allowed and hardly any foreign money has come in. This also validates the fact that technology benefit that is hoped out of this policy is highly susceptible. What is interesting is that every minute, a farmer in Europe quits farming. It is quite well known that some of the biggest GMBRO like Tesco from UK, Carrefour from France and Metro from Germany etc. have strong presence in the European continent. Ironically, Wal-Mart struggled recently to open up its store in Brooklyn, New York in USA due to popular protest against setting up such shop.
Protesters in New York take to the streets against US retail giant Walmart
The inflation will be checked, it has been argued, if FDI in retail is allowed. In the short run, yes, they will go for aggressive pricing to kill the local competition. It may incur huge losses in the process. However, why would a commercial enterprise incur such huge losses? The answer lies in their model whereby they will start a monopolistic predatory pricing in the long run. It will slowly leech from its customers which will have no other stores to turn to.
FDI in Retail
A kind of veiled Monopoly will be in place and monopoly by a commercial enterprise is never a good idea. Similarly, these GMBROs will weed out smaller buyers of agricultural produce from buying from the farmers initially. Once the network is established, they will act as a Monopsony (a market situation of one buyer against many sellers) and the situation is not ideal for sellers. With such powers, the sellers will lose their bargaining power in front of their monopsonist.
If they remain true to their business model that they have followed in other parts of the world, then the state of economy of Assam may stand vulnerable given the fact that we are not a strong supply economy. What essentially it means, that they will bring in goods from cheaper destination with a set logistical management process like China; sell it here, earn their money, pay up to keep the Chinese industries running, rake in the profit to the coffers of these GMBRO. Recently, a British Member of Parliament, David Amess was quoted in the media, to have said, FDI in retail “literally change the fabric of life in India.”
Assam is one of the poorest states in the country.
Out of cash!?
The performance of indicators of agriculture and allied sectors as well as manufacturing sectors has been dismal when compared to other developing states from eastern India like Bihar, Chattisgarh or Jharkhand. According to Planning Commission data, growth rate of GSDP in agriculture sector for 2005-06 to 2011-12 for Assam is 3.99% as against 17.07% in Bihar, 10.85% in Mizoram, 9.55% in Arunachal Pradesh, 8.69% in Chattisgarh and 8.94% in Jharkhand. Similarly, the growth rate of GSDP of Assam in Industry sector for 2005-06 to 2011-12 stood at 2.67% as against 16.73% in Bihar, 13.07% in Mizoram, 10.14% in Arunachal Pradesh and 9.37% in Chhattisgarh. Assam has only edged Jharkhand in this segment at 0.69%. The states that are opposing FDI in retail are some of the best growing states in the country like Bihar, Gujarat, Tamil Nadu, and Karnataka among others.
Rework economic model of Assam
Assam needs a serious re-look at its economic model of growth. It should understand its long term implication of a certain policy before jumping guns to join the bandwagon. It has been long time when we took serious steps to set up new industries to prop up the supply side. The aging tea industry, which is struggling with flagging global market, and a state run hugely loss making oil industry are the only two core sectors. We have missed the IT revolution due to our frail education system at that time, we missed auto revolution, we missed green revolution, we missed white revolution, and we missed opportunities to augment other manufacturing or service sector growth stories. And, this has impacted immensely on our economy.
Right now, the focus of the government should be to create assets like roads, power projects, accelerating on the strong points and build capacity on the weaker points of the economic assets. The initial boost to this has to come from the government and once some capability is established, the private sector investments will follow. History is a great teacher and, if we care, we must learn from it. Industrial revolutions of various nations used the same model. They developed their resources by mobilizing resources, invested in the technological advancement & application and then strategizing their management practice for maximum benefit with active government support. For example, England, during it’s hey days, developed its industrial base, e.g. textiles of Manchester, captured markets like colonies in India and America, and then established trade with them without letting the domestic industries to grow.
By allowing GMBROs in poor states like Assam, the state is allowing foreign shops to come to reap profits and take it back, crush any local entrepreneurial venture and killing the local industry, undermining the aspirations of local sons & daughters of the soils to think beyond a 9 to 6 run-of-the-mill job, and exposing our economic sovereignty to a foreign commercial entity, and thinking aloud, that may conjure to lurk for political mileage and sovereignty eventually. One cannot rule out as history has examples that are not that old to forget. Whither Assam thinks beyond and ahead, and dare to dream more, it should not brush aside such stark objections. It should rather concentrate on building competency and muscle to outwit the global competition by not becoming a dumping ground and bring in consistency between supply side and demand side of the economy.
(The article was published in The Assam Tribune on 24th December, 2012. Please visit this link to view the published work: http://www.assamtribune.com/scripts/showpage.asp?id=dec2412%2C6%2C420%2C111%2C993%2C933)
FDI in retail & Assam: Published in The Assam Tribune on 24th December, 2012