FDI is a mirage

Foreign Direct Investment (FDI) is the process of bringing equity or funding from abroad. FDI is used for investment into ventures in the country. It is not the same as franchising of McDonald’s, Dominos, Pizza hut or TGIF etc, where the foreign company is entitled to a limited return, called the franchisee fee. When direct investment is made, the stakes and risks are high and the investor naturally looks for personalized control and management of the venture. For him, this is the only way to ensure profits and returns on investment.

Agenda behind FDI

FDI may be called in for many reasons such as technology transfer or funding etc, but we cannot overlook the fact that the investor is attracted primarily by the return on his investment; all other sermons are only for superficial consumption. When Bill Gates incorporates high tech institutes in India, it is not for uplifting the quality of education in India but for putting a hold on the best intellectuals for use in Microsoft. And when Wal-Mart or IKEA like multinational conglomerates make an offer for FDI in India, they are primarily expanding their business.

How much we give in, or what all we accept in terms of FDI is a political-economic decision, and this is why some political parties favor and others oppose it. The timing of such proposals is vital and it indicates some interests. It is obvious that arguments and counter arguments are innovated in the context of FDI, in order to promote individual agenda. It is also said that Indian money stacked up in foreign banks finds return through the FDI route.

FDI-in-Retail Fiasco of the Year 2012

One such initiative came into limelight in the year 2012. FDI in retail, which was lying dormant for months for various reasons, suddenly erupted into public eye when the ruling party pushed it on the pretext of economic reforms.

FDI in retail would allow global chains like Wal-Mart[1], IKEA, Carrefour and others to set up superstores for various items required by the citizens, including food items. The proposed policy envisaged permitting 51 percent equity in multi-brand items, and 100 percent equity in single-brand items, by the foreign investors. According to some estimates, the money turned around in FDI might touch USD 500 billion (Rs 250,000 Crores) in a few years. Technically, introduction of this policy involved changing some rules in FEMA (Foreign Exchange Management Act) for which parliament’s approval was required.

The proposal was flipping flopping from rejection to acceptance many times, and every time the arguments propounded were different. In 2012 winter session of the parliament, the proposal was heavily debated and the following arguments were put forward.

  • States would be free to permit or refuse FDI in retail. This implied that congress led states would permit FDIs in retail and the other states might wait to see the results before committing to this decision. If the promulgation of the policy was left to the decision of states, it obviously meant that the aggregate numbers and statistics that the central government was floating around were not real.
  • That the BJP government in their 2004 manifesto proposed allowing FDI in retail but opposed it in 2012, was ridiculed by the ruling party. But this did not merit discussion because a similar U-turn reversal was also done by the congress led UPA government in the past. While they had opposed the BJP move in 2004, they seemed to be in some unexplained urgency in 2012. Sushma Swaraj, during her parliamentary debate on the issue on 5th December 2012, even remarked that some bribes were involved and Wal-Mart officials had been placed under the scanner. It was also disputed by BJP that such a proposal was ever approved by them.
  • Arun Jaitley, leader of the opposition in the upper house, remarked that foreign investors were interested in India only because they saw a huge consumer market. They had no interest in the welfare of the Indian manufacturing industry. Naturally, they would procure goods at the cheapest available price from anywhere in the world (China, Taiwan, Korea and Malaysia) and sell them in India. He claimed that the Indian manufacturing industry was ill prepared to compete on quality and pricing terms with these countries, and therefore would erode further. He blamed the government policies for bringing the industry to that low a status.
  • If up to 70 percent imports become permissible, import of goods would take precedence over local manufacture, and indirectly, FDI in retail would promote the Chinese, Taiwanese or Malaysian industry at the cost of Indian manufacturing. India would be converted to the status of a trader or a service provider.
  • FDI in retail may increase employment (sales people or labor) a little bit in the supermarkets, and increase the number of acquiring agencies or dealers, but this would be neutralized by gross unemployment generated by the closure of small-scale businesses and reduced manufacturing. It will be foolish to presume that FDI will encourage Indian farmers, entrepreneurs or even traders.
  • Large supermarkets have always been traditionally blamed for choking the mall businesses by their monopolistic policies, in most of the countries. It is strange to think that the foreign companies would go directly to the farmers, without the intermediaries! No wonder that the developed countries are now going back to promoting small-scale businesses.
  • All comments such as ‘the changed circumstances’, ‘country like India’, ‘reforms in economic policies’ etc are all encompassing terms that are meaningless unless backed up by facts and figures. And unfortunately, these terms are used by all spokespersons.
  • In the agriculture sector too, the foreign companies may choose to buy items at lower costs, from local farmers or from abroad. They may indulge in local contract farming, which means acquiring land on long-term lease, employing the landowners for a few years and then replacing them by machinery imported from abroad. In the long term, this will adversely affect the farmer with an added disadvantage that the land would be under the ownership of foreign companies, not very different from colonization.

Other Apprehensions about FDI

Those favoring the increase in equity holding of foreign companies in retail, argue that these companies are planning to utilize local talent or domestic resources. That only the foreign companies can build or improve the end-to-end distribution chain is a fallacy highlighted by those who are lazy to push Indian expertise in this arena. There is nothing, that the foreign companies can do and the Indian companies cannot. It should not be forgotten that improvement of these distribution chains requires not only infrastructure augmentation but also land, legal and social reforms. Mere implementation of the SAP software is not enough. Processes need to be streamlined. Our software engineers and management consultants have been conducting business process reengineering (BPR) for others abroad, why cannot they do it for their own country.

The administration of retail, and infrastructure or distribution network associated with this application, requires other associated initiatives as well. Policies on irrigation, energy, water management, seeds, fertilizers and cultivation techniques, are a few of the areas to be looked at. Probably FDI in retail should be replaced by the joint venture paradigm.

 

[1] The Wal-Mart Story

  • Wal-Mart is the largest company in the history of the world. It is bigger than Home Depot + Kroger + Target +Sears + Costco + K-Mart combined
  • Wal-Mart has approx 3,900 stores in the USA of which 1,906 are Super Centres; this is 1,000 more than it had five years ago
  • Wal-Mart employs 1.6 million people. It is the world’s largest private employer
  • Americans spend $36,000,000 at Wal-Mart every hour of every day. This works out to $20,928 profit every minute!
  • In 15 years of Wal-Mart operations, 31 big supermarket chains sought bankruptcy

 

 

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