Revisting FDI in Retail - The Scam

I have been quiet for a long time now (on the blog, that is) and that is not because we did not have any issues to talk about. There are plenty and plenty more. Everything that has words "Modi" seems to be an issue these days. Or cutting up states for few votes has become a norm, or the "rates" have to be negotiated and bargained.

Lots of barbarianism and stupidity has passed through the stream in the days I was last active here. And hopefully I will take up some issues and be active, whenever I can find some time for it.

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So here goes the second of the many posts, first was an apology to Mr. Subba Rao. 

One of the issue that I hotly debated here was the FDI in retail. 

a) I was against it because of the way in which it was brought up. 

b) I had also predicted, if that is the word, that they ventures will fail and there is not enough space to succeed as it exists (i.e. when they are confined to specific cities.)

c) I had also alleged that typical of this government, lots of leniency would be given once the issue is out of front pages, they just had to get the bill through at that stage.

You can still read all those posts here: FDI in Retail

Unfortunately and almost sickly, all of these have come true. Critics do not allege so that things can go wrong, they only do so that the warnings are better heard. Though the bill has now gone through and by the looks of it failed to elicit any interest among the "saviors of our farmers," India is now reduced to begging at these retail giants store by giving them sops, all in the morphous hope that they will contribute to our growth and create jobs.

Can you find something more pathetic than that?

Anyway, the latest, here is that: government and supporters dangled lots of hypothetical carrots to get the bills through and most of that involved the investment limits and the local participation. I would like to know how the supporters of the bill feel when they come to know all that "promises to protect the local businesses" have been washed away?

No, I would really like to know. Are these supporters (probably many of them businessmen with a eye to become a Walmart/Tesco-vendors) really happy with how things have turned out? Did not expect these things to happen, eh? Or the guys who thought they could capture the Senior management pies in these company still dream of wiping out the only large source of employment in the country?

Or, will they even consider to fight that fallout, half as vociferously as they shouted for the support of these bills.

Anyway... to be frankly, I am still not worried that these giants will wipe out the small mom-pops. Yes, there will be substantial damage but many will survive. I am not worried because, most of these firms will ultimately fail in the end.

Here is the note from The Hindu:

The Cabinet Committee on Economic Affairs (CCEA) on Thursday approved “dilution” of certain safeguards including relaxing the 30 per cent sourcing norm and dropping the mandatory 50 per cent condition for backend infrastructure investment which were approved by Parliament while allowing 49 per cent foreign direct investment (FDI) in multibrand retail announced last year.

The move to dilute these conditions met with strong resistance from the Ministry of Micro, Small and Medium Enterprises (MSME) but they were overlooked by the CCEA while approving the new norms seeking to attract much needed FDI investments by global retail chains in multibrand retail trade (MBRT). At the time of granting approval to the 49 per cent MBRT policy last year, Parliament called for putting in place certain safeguards to protect the interests of the Indian industry especially small scale trade and also to ensure that investments are made in a big way in backend infrastructure.

The Cabinet also approved increasing the number of cities to be covered under the MBRT policy by amending the clause of permitting cities or States with less than 10 lakh population also to open front end stores with the permission of the States or Union Territories. The Hindu reported on July 31, the move by government to dilute the norms for entry of foreign retail giants under the MBRT policy.

The 30 per cent mandatory sourcing from small scale industries clause has been waived off. Under the new policy, medium scale industries with total investment not exceeding $2 million would also be made eligible for sourcing of manufactured/processed to products. The new policy proposes that this requirement would be reckoned only at the time of first engagement with the retailer and such industry shall continue to quality for this purpose even if it outgrows the investment of $2 million during the course of its relationship with the said retailer.

However, the MSME Ministry, in its comments, voted against the open-ended engagement of MSMEs with their retailer under provision of 30 per cent procurement even if they outgrow the investment limit. It was of the view that a three-year period from the day a MSME outgrows the investment limit of $2 million would provide the required space to equip itself independently to supply to the retailer without being covered under the 30 per cent procurement. Such a move would have allowed for a larger number of MSMEs being covered under the provision of 30 per cent procurement by the retailers in MBRT, the comments by MSME said.

In another big concession to global retail chains, the CCEA approved `dilution’ of the clause that make it mandatory for them to invest at least 50 per cent of total FDI brought in the backend infrastructure. Under the new policy, the 50 per cent of total FDI investment would only apply to the first tranche of $100 million to be invested in backend infrastructure within three years.

This also faced opposition from the MSME Ministry which stated that the investment in the backend infrastructure and the need for it was a primary reason for permitting FDI in MBRT. “Diluting this condition would strike at the very rationale of allowing FDI,” it protested in the Cabinet note.

Can you think of a more "free-pass" to these large retailers. All the so called promises and the safeguards are now down on the dirt.

And look at how pathetic the structure of sop is! Any Chartered Accountant worth his salt can give you hundred loop-holes to the open-ended MSME engagement. And sure enough, pretty soon, they will be all large companies ONLY, with hardly a few MSMEs.

The so called "Kisan savior" the investments in back-end, storage, logistics that supporters harped on is now a joke! By reducing the requirement to 50% of 100 million, or $50million / Rs300Crs, the back-end investment for a large retailer will be peanuts! Imagine a large retailer spending about 300Crs at least per outlet, across various locations across India, has an obligation of mere $50million. And, of course, who is to say, what constitutes as back-end investments?! 

Get real guys, the FDI in retail was hurried. The way it was done was a big scam. The retailers are not going to survive in long run, but they will kill lots of small retailers in medium run. Local businesses are not going to taste much success, unless you are among the select few. This is a lose-lose game. This is not a case of melting pots but more like alien resource invasion.

Now that these are irreversible, the maximum they can do is to pray for the smaller retailers. Good Luck.