Regulating organized sectors in retail trade has been a matter of great controversy in India over the years. The UPA government, from its neo-liberal stand point, is ready to welcome FDI in retail trade. The left parties, on the other hand, have been demanding for laws to license and regulate the entry of corporates in retail sector. Let us first analyse the possible dangers of the corporatisation of the retail sector.
Let us take the example of Wal-Mart, the big retail chain in USA. Recently Wal-Mart signed a deal with Bharti Enterprise to have a joint venture to create India's first modern wholesale distribution system. But what is the operating system of this company in its own country?
There is strong evidence that rural communities in the United States have been more adversely impacted by the discount mass merchandisers (sometimes referred to as the Wal-Mart phenomenon) than by any other factors in recent times. Studies in Iowa have shown that some small towns lose up to 47 percent of their retail trade after 10 years of Wal-Mart stores nearby. A paper by Kenneth A Stone [Iowa State University], ‘Impact of the Wal-Mart Phenomenon on Rural Communities’ showed that the leakage of retail trade from small towns has accelerated in the last two decades with the rapid proliferation of discount mass merchandiser stores in the larger towns and cities. Studies in Iowa have shown that some towns below 5,000 populations have lost nearly half their retail trade in the last 13 years. The study looked at 34 towns in Iowa that had Wal-Mart stores for at least 10 years. The retail performance of these towns was compared to 15 towns of the same 5 population group that did not have Wal-Mart stores. The study shows that the general merchandise stores in the non Wal-Mart towns began declining immediately after the Wal-Mart stores opened. Their sales declined by two percent after the first year and continued declining to a cumulative 34 percent after 10 years. A few of these towns had a K Mart store (typically an older, smaller store), and all of them had one or more regional discount store, such as Pamida, Alco or Place's. It is believed that people in the towns without Wal-Mart stores migrated to the towns with Wal-Mart stores to shop for general merchandise. "Almost every dollar rung up by a new Wal-Mart supercenter is a dollar that it has taken away from a rival grocer or pharmacy," writes Anthony Bianco, a senior Business Week writer and author of "The Bully of Bentonville: How the High Cost of Wal-Mart's Everyday Low Prices Is Hurting America.” One study of superstores and their potential impact on grocery industry employees found that the entry of such stores into the Southern California regional grocery business was expected to depress industry wages and benefits at an estimated range from a low of $500 million to a high of almost $1.4 billion annually, potentially affecting 250,000 grocery industry employees .The full impact of lost wages and benefits throughout Southern California could approach $2.8 billion per year.
So, what will be the effect when such big corporates invade Indian retail sector? What will happen to the small retailers in neighboring areas? They could not escape the dire effect in USA, with all their retail security policies. How could they survive in India?
Second, comes the question of predatory pricing and monopsony. It is a common practice of big corporates to intentionally sell a product at low cost in order to drive competitors out of the market. When it opens a new store in a town, its first target always is to drive away the farmers' cooperative and unorganized retailers, because most of the retail sales and raw food are made through them, especially in small towns. The use of monopsony power comes along this. Let us again look at the practice of Wal-Mart. Barry C. Lynn, a senior fellow at the New America Foundation, argued that Wal-Mart's constant demand for lower prices caused Kraft Foods to "shut down thirty-nine plants, to let go [of] 13,500 workers, and to eliminate a quarter of its products." Never before in the business history of USA, had an industrial house bowed down to the demands of a retail firm. And now it happened in the surprising recent tribulations of two iconic American firms—Coca-Cola and Kraft. Coca-Cola is the quintessential seller of a product based on a "secret formula."
Recently, though, Wal-Mart decided that it did not approve of the artificial sweetener Coca-Cola planned to use in a new line of diet colas. In a response that would have been unthinkable just a few years ago, Coca-Cola yielded to the will of an outside firm and designed a second product to meet Wal-Mart's decree. Kraft, meanwhile, is a producer that only four years ago was celebrated by Forbes for "leading the charge" in a "brutal industry." Yet since 2004, Kraft has announced plans to shut thirty-nine plants, to let go 13,500 workers, and to eliminate a quarter of its products. Most reports blame soaring prices of energy and raw materials, but in a truly free market Kraft could have pushed at least some of these higher costs on to the consumer. This, however, is no longer possible. Even as costs rise, Wal-Mart and other discounters continue to demand that Kraft lower its prices further. Kraft has found itself with no other choice than to swallow the costs, and hence to tear itself to pieces.
Also, the proliferation of large format retail outlets reshapes the urban landscape in myriad ways. Land use patterns change drastically, often in violation of city plans. Given the unplanned and chaotic path of urban development witnessed in India over the past decade and a half, and the pathetic state of urban infrastructure, the proliferation of large format retailers will only accelerate the undesirable trends of predatory real estate development and unsustainable pressures on urban infrastructure and the environment. Rather than enhancing choices for the consumers, especially the lower income groups, proliferation of large format retail stores would kill competition, lead to closure of neighbourhood markets and make consumers solely dependent upon the organized retailers.
Not only Wal-Mart, each big corporate behaves the same way when it enters the retail sector. Tesco in UK is no different than Wal-Mart. Even Indian companies, like Reliance, when they get a scope to have a free hand in retail, act the same. Ultimately the market boils down to a monopolistic meadowland suitable for the galloping of big industries and their mentor, Uncle Sam!
The Left Parties have been strongly opposed to the entry of MNCs in Retail Trade. Meanwhile several Indian corporate houses have entered the retail sector and are expanding their operations aggressively. These developments in the retail sector are having an adverse impact on the livelihoods of a large section of people who are engaged in unorganized retail across the country.
Retail trade contributes around 10-11% of India’s GDP and currently employs over 4 crore people. Within this, unorganized retailing accounts for 97% of the total retail trade.
Traditional forms of low-cost retail trade, from the owner operated local shops and general stores to the handcart and pavement vendors together form the bulk of this sector. In the absence of any significant growth in organized sector employment in India in the manufacturing or services sector, millions are forced to seek their livelihood in the informal sector. Retail trade, which has been a relatively easy business to enter with low capital and infrastructure needs, has acted as a refuge source of income for the unemployed. How is FDI in retail trade beneficial when it will lead to the loss of livelihood for millions of shopkeepers and traders?
But at the same time, it is not possible to put a strict ‘NO’ to organized retailing as it has become popular in some parts of the country. A recent KPMG survey report prepared for the FICCI states that organized retail, estimated as a $ 6.4 billion industry in 2006, is projected to reach $ 23 billion by 2010. The share of organized retail in overall retail sales is projected to jump from around 3% currently to around 9-10% in the next three years. A number of large domestic business groups have entered the retail trade sector and are expanding their operations aggressively. Several formats of organized retailing like hypermarkets, supermarkets and discount stores are being set up by big business groups besides the ongoing proliferation of shopping malls in the metros and other large cities. So, the left parties demand some laws to be regulated that can control the activities of big corporates.
In this situation, CPIM has drafted a national policy proposal on Regulation of Organised Sector in Retail Trade. The basic demands might be summarised as follows:
• A system of licensing should be introduced for organized retail. Any retail outlet with floor area over an appropriate minimum floor area should require prior license from local authorities (city corporations or municipalities).
• A dedicated committee/board/department should be set up by the urban local bodies, with representation from street vendors and small retailer associations, which should be empowered to grant licenses to organized retailers.
• Licenses should be given on the basis of a population criterion, i.e. not more than X number of large format retail stores per Y population. The criteria may vary between states and cities depending upon the nature of the retail sector and needs of consumers.
• Besides a system of licensing for organized retailers, a number of steps need to be taken by the Government to prevent the emergence of private monopolies in Retail Trade. A single large format retailer should not be allowed to capture a large market share. For this it is important to restrict the number of retail outlets that a single private entity can open in a city, state as well as region.
• The State Governments or urban local bodies should levy a cess on the VAT on all goods sold by large format retail outlets (including those in the public sector) in order to create a level playing field between the organized and unorganized retailers. Revenues generated from the cess can be used to create a dedicated fund to provide infrastructure support, financial assistance or cheap credit for unorganized retailers to improve and upgrade their operations.
• In order to prevent the development of big private monopolies it is also important for the Government to ensure its presence in the market. Several Government marketing agencies exist, both at the Central as well as State levels, which need to be revived and made to reinvest in modernising infrastructure. Partnerships between existing Government marketing agencies and cooperatives can also be considered, especially in food retail where synergies exist
• It has to be ensured that a single corporate retailer does not monopolize procurement operations in a district or area. It is therefore absolutely critical that both public procurement agencies and cooperatives are given support, incentives and freedom to compete with the corporate retailers. This would require special initiatives from the State Governments to reinvigorate the Government agencies. The Central Government should also provide adequate funds required for the purpose.
• Food retailers or other agribusiness companies should not be allowed to corner and hoard foodgrains stocks under any circumstances. To prevent cornering of stocks by private players with the associated potential for speculation, there should be rules for public disclosure of stock holding levels. Public agencies should be empowered to purchase foodgrains from the private holders at pre-specified prices if their stocks exceed a specified level
• A host of measures to regulate and monitor contract farming have been suggested in order to protect the interests of the farmers. The CPI (M) demands that necessary changes need to be made in the Model APMC Act of the Centre as well as the new APMC Acts adopted by several State Governments to incorporate the regulations suggested.
The left parties don’t want foreign direct investment (FDI) in retail. In short, Walmart is a strict ‘NO’. There is no logic in allowing foreign companies like Wal-Mart and Tesco in India’s retail sector as the world has already seen their devastating impact and reports of dissent keep pouring in from the countries where they operate. If FDI comes in collaboration with Indian companies, there is need for a serious thought to this challenge.
Regulations are needed, a list of dos and don’ts for big retail companies to protect the interest of the small traders and shop-owners. However we must understand that we do need better mechanism for developing modern marketing infrastructure and cold chain for perishable goods. The Centre should formulate guidelines and till such time left governments should vest municipal corporations and/or panchayets with the powers to regulate retail players. We end this article by quoting from the Left Parties’ Note on FDI in Retail Trade that they submitted on October 24, 2005 to the UPA-Left Coordination Committee.
“It needs to be underscored that FDI in retail is fundamentally different from greenfield foreign investment in manufacturing. While the latter enhances the economy’s productive base, enhances technological capability and generates employment in most cases, entry of multinational retail chains has few positive spin-offs. In fact the negative effects in terms of job loss and the displacement of small retailers and traditional supply chains by the monopoly/monopsony power of the multinational retailers far outweigh the supposed benefits accruing to the organised retail sector in terms of increased “efficiency”.
Moreover, India does not have any prior commitments vis-à-vis the WTO to open up the retail sector. Therefore, the case for opening up of the retail sector to FDI does not seem to be justifiable. “