FDI in Retail: Through the Broken Window

by Subash Viswanathan

Like every “premier business school graduate” whose fortunes revolve around capitalism, my arguments would always be in favour of FDI in retail. Facts have been presented both in favour (that consumers will enjoy lower prices after FDI in retail) and against (with the advent of the Sachin endorsed Pepsi and Aamir Khan acknowledged Coke, more than five lakh labourers involved in the local cool drinks industry went jobless). I really don’t know which facts are right – probably nobody has the full picture and media figures are also often guess work and tweaked to suit the viewpoint of the writer. However, through this article I am trying to put across the fundamentals of good policy and governance, which luckily for me, does not have to be backed by facts, as facts do not exist without fiction in India (we can’t even get the toll rate for malaria right). Because we will never know, clearly, where in the journey from the farm to our fork, the 1 kg of rice dwindles to 0.5 kg – is it en route as the bad roads elongate the time taken for it to reach my plate or, is it because it is not stored well? Chances are both are contributing substantially to losses on the way – so I will stick to why FDI in retail, if implemented well, with checks and balances, can still work.

Capitalism is not a bad thing – well-regulated capitalism can benefit everybody. The 2G scam and the sub-prime fiasco were examples of unfettered capitalism and the only place where greed is good is in Michael Douglas movie. Meaningless, inefficient employment (like the guy in the immigration department at Chennai airport (which is probably the worst tier-I city airport in India) who is employed to check if the immigration officer, standing no more than 20 ft away, who just stamped your passport indeed stamped it correctly less than 15 sec back) is needless and a public wastage. In India, where every worker from a plumber to a software systems architect to a board director is in short supply despite our favourable demographics, it is important to employ the right number of people for the right job.

That such inefficiencies are bad for the economy is based on sound economic theory propounded from the 19th century, through the parable of the broken window, introduced by Frédéric Bastiat in his 1850 essay Ce qu’on voit et ce qu’on ne voit pas (That Which Is Seen and That Which Is Unseen) to illustrate why destruction, and the money spent to recover from destruction, is actually not a net-benefit to society (source: Wikipedia and my b-school macroeconomics professor). This essentially means that if a boy playing cricket on the streets broke your window, your spending the additional Rs.500 on the carpenter and the broken glass, is not a worthy spend for the economy even though it resulted in additional consumption and employment to the carpenter. If the window had not been broken, you could have deployed the same Rs.500 on other causes, including buying an additional book or visiting a cinema nearby (I am assuming the cinema runs non-Mausam movies).

The same theory can be applied to FDI in retail. If FDI in retail looms with the threat of reducing employment, it also shines with the opportunity of reallocating this workforce in other sectors needing labour, of which there are many. You can dig a trench with a machine or with 10 employing shovels or even 10,000 employing spoons. Does that mean we should ban shovels from the industry and use only spoons?

When a power plant is constructed in a rural area, the common criticism is that people need to get displaced and they cannot find jobs because they are not skilled to be employed in the power plant that will be built in the land that housed not just them, but their ancestors as well. But good capitalism, will firstly buy the land from these workers at market value and not cheat them, and secondly, will provide for a way to train them. India has an organisation called the National Skills Development Corporation, entrusted with the function of skilling / up-skilling 150 million people in India (which my previous employer, a pre-eminent management consulting firm, helped the PMO conceive and design), which should do this job. If you complain of tribal lands being snatched away from them for power plants (snatching it from them at throwaway prices is a crime and I am not a proponent to those practices) and also complain about the nuclear deal being tailored to favour western companies though your country has 25% of the world’s thorium reserves, you better not complain about long power cuts.

Just as a C++ programmer used his knowledge to learn Java and thus be more employable, the workforce needs to upgrade their skill levels and adapt at all times. I run a start-up close to where the biggies TCS, Infosys and Wipro run far more plush offices with beautiful landscaping, employing tens of thousands of workers, with a lot of them having bright onsite / overseas travel prospects. But I still manage to find people – the trick is to figure out your niche, and work around that. My niche is very challenging assignments on the latest technology, at 10% higher than market pay. I have happy colleagues.

The same holds true for smaller, fringe players who may feel threatened. A Jyoti store, which sells the same Bingo chips as Spencer’s and at the same price, is less crowded, is a stone’s throw away from my house, has a more friendly owner who can do home delivery at a phone call. Why would I go to a bigger Spencer’s Daily and spend 15 min in a queue? The Waitroses and Marks and Spencers of the English world have not completely replaced the mom-and-pop stores in England – my little town in England had a fruits stall just near a Waitrose store and it is surviving.

There are threats to the local industry through FDI in retail – but a good policy can address that. Make local purchase a must for agro-foods. Mandate that the foreign player make an investment in infrastructure through an infrastructure sovereign fund. Strengthen anti-competitive laws. Unfortunately, all this needs a strong and well-functioning government, which is seen only in Shankar’s movies until now.