FDI in retail

For whom is this Foreign Direct Investment



The recent decision of Government to allow FDI in retail has come under sharp criticism from various circles and rightly so, given the inappropriate timing and the apprehensions associated with it. India followed an import substitution policy from the first five year plan to the end of seventh five year plan when Indian economy was at the verge of crisis which was averted by prudential economic reforms commonly known as LPG (Liberalisation, Privatisation and Globalisation). Integrating Indian economy with the world economy was one of the major steps to avert future crisis of the sort India was facing at that time. Export sector was given priority; policy of import substitution was replaced by export oriented production to ensure inflow of foreign exchange in India. That was 1991 and this is 2012 (2013 in less than a month), Government thinks that there is need to allow FDI in retail sector. There are two routes through which foreign investment enters a country, Foreign Institutional Investment (FII) and Foreign Direct Investment (FDI). FII is investment by foreigners in the financial and capital market purely based on gains from the market. It is very volatile in nature hence referred as hot money and causes capital flight. FDI, on the other hand, is the creation of fixed capital in other country like factory, installing machinery etc. and is relatively stable. One of the main benefits of FDI is inflow of state of art, modern technology without the need for government to buy it from other countries. To allow FDI in retail sector does not fit this logic.
No inflow of technology will take place as retail trade is not capital intensive sector. Investors are guided by profit motives. No doubt, there may be some inflow of foreign exchange in the country when the retail giants like Walmart enter India but the continuous drain of foreign exchange which will follow is many times more compared to the initial inflow. All profits will be remitted back to their home country which is obviously greater than the initial investment; otherwise it will defy the logic of prudent investment where you invest more than you get in return. Therefore government needs to analyse the prudence of its decision to allow FDI in retail saying that it will lead to inflow of foreign exchange. Government should not deceive aam aadmi by saying that it is allowing FDI in retail to help him lead a better life. To reduce fiscal deficit, FDI will be other option and hence will ensure India a good rating by the global credit rating agencies, therefore easy loans for industrialists and easy borrowing for government from abroad. This will happen in response to reduced ‘Risks’ associated with investment in India. The burden to reduce fiscal deficit is wholly on the shoulders of aam aadmi while as stimulus package and tax cuts of government, which increased the fiscal deficit, after the global financial crisis was for big industrialists and rich people. The concerns of farmers about allowing FDI in retail are genuine and justified given the experience of retail chains world over where they will buy output of specific standard and quality. If the output meets their grading standard, only then will it find place in their stores otherwise they don’t care. The concern of Congress about aam admi is to be looked at. If the best produce of the farmers will be bought by retail giants, what will be left for rural folk to consume! the left over which retail chains think won’t be demanded by the urbanites or which is below standard as put up by retail giants. The huge opposition to FDI motion, both in Rajya Sabha and Lok Sabha, should be considered by UPA as clear mandate of about  half of Indian population who are represented by those MP’s against it and shouldn’t be ignored at any cost!

(Malik Altaf Hussain is M.A.(Development Economics) from South Asian University (SAARC), New Delhi)

Lastupdate on : Fri, 14 Dec 2012 21:30:00 Makkah time
Lastupdate on : Fri, 14 Dec 2012 18:30:00 GMT
Lastupdate on : Sat, 15 Dec 2012 00:00:00 IST

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