THE UPA Government is cashing in on media criticism over its failure to tame food inflation and economic reforms slowdown. The criticism is being used as an opportunity to lift the ban on Foreign Direct Investment (FDI) in Multi-Brand or Multi-Product Retail (MBR/MPR), which is an euphemism for swanky shopping malls.
Within less than four months of Finance Minister assuring Lok Sabha that the Government would tread cautiously on this issue, UPA is chanting MBR FDI mantra as the key to controlling inflation.
An Inter-Ministerial Group (IMG) on inflation chaired by Dr Kaushik Basu, Chief Economic Adviser, Finance Ministry, has concluded that allowing FDI in MPR can serve as “effective inflation busting measure”.
The mainstream media is flooded with stories about different ministries welcoming FDI in their comments appended to a note prepared by the Department of Industrial Promotion(DIPP) for consideration of the Committee of Secretaries(COS).
Experience shows a decision taken by COS is normally cleared by the Cabinet or the relevant Cabinet Committee.
Before analysing complex issue of food inflation and impact of FDI on traders and consumers, let us see how briskly the Government has shifted gears from status quo to ‘FDI must in MPR’.
On March 25, Gurudas Dasgupta piloted a calling attention motion ‘Move of Government to Liberalise FDI in Retail Sector’. Dasgupta raised “a serious concern of about eight crore small businessmen, peddlers, pavement sellers in this country, who are mostly self-employed and who are living by the proceeds of the sale of their goods in the open market. They are all very consumer-friendly.”
He continued: “While there are a number of issues on the national agenda, which requires urgent attention of the Government, and there is consensus on that, like food for all, agricultural reforms, setting up of infrastructure for agriculture, why suddenly the Government has thought it so important as to pick it up for immediate discussion in the country? What is the hurry?
Referring to the discussion paper on the subjected issued by the Department of Industrial Policy and Promotion (DIPP) in July 2010, he pointed out that two-thirds of the respondents have given their opinion in the negative, which means that most of the people who are asked to give the opinion have said, no, there should not be any FDI in the retail.
Responding to the motion, the Finance Minister Pranab Mukherjee disclosed that the feedback on DIPP paper was studied by an Inter-Ministerial Committee(IMC) headed by Senior Economic Advisor, Department of Consumer Affairs.
He stated IMC “has not made any recommendation relating to FDI in Multi-Brand Retail Trading. It has analysed the responses received to the discussion paper, collated and summarised them. The Government has not taken any decision in this regard.”
The Minister stated that IMC itself has stated that those who interacted with the Committee and those who were respondents, 73 out of 109 opponents belong to one category, it was a substantial number and it was sharply divided – there were farmers, small traders, villagers, Self-Help Groups. These categories of the persons stated that retail should not be introduced in multi-brand.
Mukherjee assured Lok Sabha that “The State Governments will also have to be taken into confidence. Their views also will have to be ascertained. It may be necessary to build up the larger consensus to have FDI in retail trade. That decision Government would surely not like to take off the cuff without having larger consensus and having very widespread consultations.”
Has the Government secured the comments of the States? If so, does the COS note reflect their views? What additional public consultations has the Government organised since the calling attention motion?
The least that the Government could have done was to make public the report of IMC. Instead of doing that, it has made public a few days back IMG’s maiden position paper that focuses on food inflation.
The position paper states: “The IMG deems that it is time for India to allow Foreign Direct Investment (FDI) in multi product retail and proposes that the Government considers this at the earliest.”
The existing policy provides for 51 per cent FDI in single-brand retailing and 100 per cent FDI in cash-and-carry whole sale retailing of multiple products. Such wholesalers are not supposed to sell to retail consumers.
IMG contends India’s retail sector continues to be primitive and there is evidence that there are large losses that occur as products pass through the supply chain from farm to the retail customer. Because of dated technology and managerial methods used to move products from one part to another there is excessive value erosion that occurs all the way. This, in turn, raises the price that consumers have to pay.
“The IMG believes that reform in this sector can be an effective inflation busting measure,” it adds.
IMG did not factor in the undisputable fact that provision of all-weather roads to all villages can help farmers reduce loss of farm produce by at least 10 per cent during the transit. Does it know that 277,215 lakh villages are crying for such roads?
The position paper has not said a word about rural roads, leave aside paying heed to official studies that show that rural roads help farmers diversify into vegetables and fruits cultivation. The roads also facilitate increase in crop yields and help the farmers fetch higher prices by going to the right mandi or selling it directly to consumers.
Rural roads not only help farmers, they help all rural people and are the most potent means to reduce poverty and to facilitate access education, health-care, etc.
If the objective is to fight food inflation, then the first priority has to be building rural roads.
That the food inflation is a highly complex issue which requires deep investigation is evident from a research proposal that Agriculture Ministry discussed on May 24 this year.
The proposal conceived by RBI affiliate, Indira Gandhi Institute of Development Research (IGIDR), has called for a three-year field study to improve the “understanding of agricultural output, agricultural markets and price formation in the context of food security.”
Noting that agricultural prices change over time and space, it calls for understanding of the reasons for imperfect transmission of prices from farm gate to wholesale and to retail. It calls for understanding the reasons for the time lag in price adjustments between respective stages in the supply chain and asymmetric reaction to positive and negative changes. Such a study becomes difficult due to the fact that farm-gate price data is not readily available.
IGIDR analysis implies that the complex issue cannot just be solved by bringing FDI in MPR. If opening of more MPR outlets or shopping malls is the best way to fight inflation, then what stops the Government from encouraging Indian entrepreneurs to invest in this sector.
Why has the Government not issued a discussion paper on reforms in both organised and unorganised retail including street vending? What prevents the Government from drafting a model retail law and seeking a national consensus on the issue? Why has the Government not enacted a model Shopping Mall Regulation Act to reduce the cobweb of regulations that has constrained domestic retailers all these years?
It is here pertinent to quote the Planning Commission-constituted Group on Services Sector(GSS). In its report submitted in March 2008, GSS noted: “one of the most important State Level Acts governing retail trade is the Shops & Establishment Act. In many States, the Acts in force today were enacted over 50 years ago and is outdated and the group recommends that the Government of India should set up a committee consisting of representatives of Government, Trade Associations and the Unions to review the provisions and propose changes that take into account today’s realities in terms of workplace practices, use of technology etc.”
One can marshal plenty of facts and data to drive home the urgency for agricultural and retail reforms.
In any case, the Government owes an explanation to the public for sudden shift from a mere discussion paper to a position paper that straightaway plugs for FDI in MPR.