DELHI -- This week, angry protests rocked India over tough reforms that could resuscitate the flailing economy. Economic growth has dropped from over 8.2 percent to around 5.4 percent.
The reforms include more foreign investment in aviation and the multi-brand retail sector. But many people fear the entry of huge American corporations like Walmart will cause the destruction of millions of mom-and-pop stores called kirana stores here.
The move caused a key regional ally to withdraw support from the Congress Party-led coalition government – almost toppling it.
People are also angry about the rise in the price of diesel fuel as well as capping subsidies for cooking gas. The ferocity of public attack against the reforms forced Prime Minister Manmohan Singh to address the nation on these reforms. Read his full address here.
“We are at a point where we can reverse the slowdown in our growth. We need a revival in investor confidence domestically and globally,” Singh said on Friday. “The decisions we have taken recently are necessary for this purpose.”
“I promise you that I will do everything necessary to put our country back on the path of high and inclusive growth. But I need your support. Please do not be misled by those who want to confuse you by spreading fear and false information,” he told Indians.
On Foreign Direct Investment (FDI), he said, “In a growing economy, there is enough space for big and small to grow. The fear that small retailers will be wiped out is completely baseless.”
But criticism against FDI continues. Senior opposition leader LK Advani mocked the government for rolling out the “red carpet” for Walmart when the store faced strikes in New York City, Washington, D.C. and Los Angeles this year. Read his blog post here.
SmartPlanet spoke with Professor Manoj Pant who teaches Trade Theory at the Jawaharlal Nehru University in Delhi. He has written “Foreign Direct Investment in India: Issues Involved.”
An expert on the issue, Pant finds that FDI in the retail sector is neither the boon nor the bane it’s made out to be by supporters and detractors respectively.
SP: Why is the government pushing for FDI in the retail sector?
MP: It seems to me the main idea is to dispel the notion that we do not welcome FDI. It is probably a signal that the reforms process includes an open door policy on FDI.
SP: What are the benefits or risks involved?
MP: The main benefits perceived are two. One, that the foreign investors will buy directly from farmers, eliminate the intermediaries and thus allow a greater part of the final price to remain with farmers. Second, that the present 40 percent wastage of fruits and vegetables due to lack of proper cold storage facilities will be overcome as foreign investors invest in these storage facilities.
SP: Is FDI going to help reduce inflation?
MP: The presumption is that the 40 percent will create a greater supply in the market and hence reduce inflation.
SP: Will Indian farmers get a better deal with FDI?
MP: I personally don’t see that happening by FDI alone. For what we need is removing major restrictions on farmers' ability to sell their products freely beyond their own region and state borders. This is due to what are known as Agricultural Produce Market Committees (APMC). To allow big investors -- foreign and domestic -- to bargain freely with farmers and not allow farmers to be free to sell anywhere they want is to me an unfair situation. The Acts that set up these APMCs must be amended.
SP: Will small store owners suffer because of big companies like Walmart coming in?
MP: No. In fact, small stores bring convenience to consumers via free home delivery and interest free credit. Given their much lower labor costs I don't thing large retailers will be able to compete. The high labor cost motive for organized retail does not exist in most of India.
SP: Will FDI cause unemployment? Or will jobs be generated? How will it balance out?
MP: There will be a shift in jobs in large urban areas from unorganized sector to organized sector. But this shift requires some retraining of the workers. In the interim I think some limited job losses may take place. In the long run I do not think any job loss will happen.
SP: Is FDI going to help put India back on the growth trajectory?
MP: I do not think lack of FDI in multi-brand retail is the main constraint to growth. Growth will depend on far more important reforms of land laws and the long delayed Goods and Services Tax.
SP: What has happened in other developing countries that have allowed big corporations to enter the market?
MP: In developing countries with low labor costs this has only led to segmented markets with the upper end consumers shifting to organized retail but the majority of consumers will remain with the lower cost retailers. One should say that probability of job losses are greater than of job gains at least in the short run.
SP: What did you make of the Prime Minister’s speech?
MP: Long overdue. But it is still to be seen if more important reforms will move forward. The reduction in some subsidies on fuel and gas is a fiscal measure long overdue and not a major policy reform. So the speech gave no clear indication of reforms like a general deregulation of oil prices.
As I have said as an economic reform like FDI in multi-brand retail is a damp squid and hardly worth a major address to the nation. So given that this is only his second major address to the public, the issues raised were relatively minor.