Retail sector liberalisation has been revived and included in Prime Minister Manmohan Singh’s package of big-bang reforms announced recently. This was to be expected as an element of the package since the influential minister Jairam Ramesh, who has access to Sonia Gandhi and is identified with her NGO-dominated set of advisers whose knowledge of economics is outweighed by their enthusiasm, had already announced his conversion to retail sector liberalisation.
As expected, Mamta Banerjee has withdrawn her support to the UPA government over the issue. Equally, opposition parties, chiefly the BJP, have opposed the move. Interestingly, the BJP opposition, as that of advisers to Nitish Kumar, is nuanced. Their argument is that this is a high-risk strategy and that the Prime Minister could have chosen other ‘surer’ reforms, with a higher payoff-to-risks ratio, as part of his package: e.g., further trade liberalisation as we still have ways to go in that regard, and trade liberalisation since the early 1990s has been a great success.
We would argue that this argument is implausible. The economic gains from retail sector liberalisation are considerable indeed, as has been argued in many studies. Also, as we argue below, the liberalisation of the retail sector offers little risk: the risk to the small shopkeepers – the so-called mom-and-pop shops, a cultural misnomer since, in India, the old moms and pops are not seen in these small shops as much as middle-aged and younger family members – is limited.
Besides, we should have learnt by now that forgoing economic gains just because you are afraid of a possible downside is the wrong way to plan. Instead, we should embrace these gains and have a machinery set up to assist the small shopkeepers if and when they succumb to, instead of profiting from, the influx of the multi-brand retailers.
What is surprising, however, is that some economists have also expressed opposition to the proposed retail liberalisation. Chief among them are the economists Raghabendra Jha (who works in Australia) and Raghav Gaiha (who teaches management in Delhi University). Their recent arguments in ET that “not only will multi-brand retail FDI hurt kiranas, infrastructure and farmers too won’t gain” ( Wholesale Gaps in Retail FDI, October 4, 2012) are readily refuted.
Thus, they claim incorrectly that there is no evidence showing that FDI in multi-brand retailing will not affect the growth of kirana, i.e., small stores. In a forthcoming but long-available paper written in the Program on Indian Economic Policies at Columbia University in April 2011 – a shorter version based on it is in our article, Selling The Wrong Idea, Times of India, December 12, 2011 – we used the results of a time-series model to predict that retail sales can continue to grow at the post-2005 rates in the short run, and that unorganised (read: small) retailers should capture three-quarters of a projected $138 billion increase in real retail sales during 2009-16. The entry of multinational retailers may lower the sales increase for unorganised retailers, but it will not reverse their growth in the near future.
Second, we are free to learn from experience in other countries. In particular, we can draw on the Japanese experience where the mom-and-pop scare was raised when the US used gaiatsu (foreign pressure) to virtually eliminate restrictions on the expansion of large retail sector stores. Japanese experience, which we and others have studied, show that little of this happened. By contrast, Messrs Jha and Gaiha offer little more than assertions in embracing the usual fears of damage to the small shops.
Third, Jha and Gaiha claim there is no evidence to suggest that farmers will earn higher prices after the entry of multinational retailers. Instead, they expect these firms to act as monopsonies. Our research indicates that Indian farmers typically earn a third – instead of the international norm of two-thirds – of the final price of their produce because of greater waste and less efficient distribution, and because wholesalers operate as exclusive buyers by the state APMC Acts.
One aim of the required investments in storage and warehousing by multinational retailers is to reduce waste and improve supply-chain efficiency. Contrary to the claim that multinational retailers will become monopsonies, we have argued in our research that farmers should to able to sell to multiple (domestic and multinational) organised retailers as well as the existing wholesalers supplying unorganised retailers.
Fourth, Jha and Gaiha claim that there is no evidence to suggest that multinational retailers may create eight million jobs. We believe this claim is correct but misleading. While the figure has been attributed to an executive in a news story, we are unaware of any policymakers or researchers who have made such claims, which in any event make no sense in the absence of a time frame or knowledge about the entrants and their strategies.
Thus, Jha and Gaiha fail to make a case against retail sector liberalisation. In particular, their assertion that the measure has been adopted without serious argumentation and research cannot be sustained. It is a red herring.
The original article appeared in the Economic Times.