Posted by: John Elliott | December 1, 2011

Wal-Mart & Co fuel Indian political crisis

Wal-Mart & Co won’t have India supermarkets any time soon.

December 7: This morning, after opposition protests stopped parliament operating for two weeks, the government announced that the FDI plans are “suspended” till a “consensus” is reached by all political parties and state chief ministers. This surely means that it will not be introduced before the next general election – which is not due till 2014, but arguably should be much earlier, given the government’s appalling record.  

See later blog post – Is India’s problem too much democracy or a Soviet-style prime minister? wp.me/pieST-1ve

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Dec 1: I’ve never understood why India wants international supermarket chains like Wal-Mart (especially) and Tesco to trample across the country, supposedly providing consumers with a good deal while actually giving a far from good deal to employees and to farmers and other suppliers. But I guess one has to be relieved that the Indian government has at last come to a decision, after over 15 years of being pushed around by vested-interest opposition from existing retailers, traders and other distribution middle-men, plus leftist political parties, and relentless pressure to open up from the US and elsewhere.

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The decision to allow foreign direct investment (FDI) in supermarkets was however suddenly announced last week in such a cack-handed way – and at the start of the winter session of parliament – that it has caused a major political crisis. It is one of the very few major policy changes introduced by the government since the 2009 general election, and the crisis could easily have been avoided by waiting till the end of the month when the parliamentary session will be over. Instead, it has prevented parliament doing any business for eight of its 21-day winter session. Today there has been a nation-wide protest strike by retailers and wholesalers.
 
The reaction has been so strong that, taken together with the avoidable freezing of parliament’s business,  many politicians and commentators are suggesting that the government’s cack-handedness was intentional. They say it was at least partially aimed at deflecting attention from other crises and at preventing contentious anti-corruption Lok Pal legislation being debated quickly in parliament.
 
The protests have been basically driven by the Bharatiya Janata Party-led opposition that wants to seize on any issue to undermine the beleaguered Congress-led government’s weak leadership and fractured unity – especially ahead of state assembly elections next year. Conveniently, the BJP is also pandering to politically important traders’ and small shopkeepers’ lobbies that oppose retail FDI (though the party did briefly back the idea a few years ago) and which will be important in the state elections, especially in Uttar Pradesh.
 
The real fears however should stem from Wal-Mart’s appalling international record of treating suppliers harshly and employees shabbily. The latest opposition to its worldwide ambitions came in South Africa a few weeks ago, and there are frequent campaigns elsewhere against its expansion. Tesco is only a few shades better and its expansion around the UK is constantly opposed.

Any idea that Wal-Mart will treat farmers enormously better than the often crooked and corrupt traders and middlemen that they have to deal with currently is far-fetched, as are government claims that the advent of foreign investment will rapidly create jobs and bring down prices, helping to curb India’s currently high rate of inflation.

Contract farming

Experience has shown that farmers have problems with the bulk buying and contract farming that Wal-Mart and others will want because they find it difficult to sell below-standard produce that is rejected by their primary buyers. Anand Sharma, the commerce minister, was last week quoted saying 10m jobs would be created over three years, which is frankly ludicrous (maybe he was misquoted!). It will take three years at least for FDI to make any real impact on jobs and prices and it could be far longer, given regulatory and other hurdles that companies would have to tackle.

The retail sector’s restrictions on foreign investment began in 1997, six years after the start of India’s general economic liberalisation. It currently remains one of the most controlled areas, along with defence manufacturing and insurance. The 1997 change allowed 100% FDI in cash and carry (wholesale) stores, thereby effectively banning it from the rest of the sector. Almost a decade later, in 2006, it was allowed up to 51% for single-brand retail shops such as upmarket luxury brands (which had already been working as franchises), and that also facilitated Marks & Spencer. Multi-brand retail however was blocked to prevent FDI in supermarkets that sell farm produce.

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By the mid-2000s, India’s general consumer market was opening up and Indian businesses, led by Mukesh Ambani’s Reliance Industries (RIL) and by Kishore Biyani’s Future Group (Pantaloon stores), started developing supermarket chains and other retail outlets.

Fearing they were losing opportunities to enter India, foreign multi-brand supermarkets began to move in. Wal-Mart joined up with the Bharti group (which was diversifying from telecoms) and Tesco went with the Tata group, in both cases restricted to wholesale cash-and-carry stores that could provide Bharti and Tata shops with supplies.

But this was not enough for companies like Wal-Mart, Tesco – and Carrefour that has tiptoed into India (the opening of its second wholesale store – above - in Jaipur, was disrupted by demonstrations and a fire earlier this week). Such companies have continued to pressure the Indian government, backed by the US government and international agencies, and that led to last week’s decision to allow 51% FDI in multi-brand supermarkets and 100% in single-brand outlets.

So the question to be asked it why, if big Indian groups like Reliance, plus Wal-Mart and others from abroad, were expanding in what is known as the (wholesale) back-end, is it necessary to open the (retail) front-end up to FDI? The answer is that no Indian company has the will to tackle the politically-ridden areas of farming, produce trading and distribution – Reliance was driven out of some of its early attempts, and Bharti abandoned a farm-to-fork enterprise (which I wrote about in Fortune magazine over-optimistically in 2006).

It is the back end that urgently needs to be developed because India has few freezer-based chains and the other logistics needed to carry farm and other goods – over 40% of produce sent from farms to urban areas is wasted, which is appalling for a country that is the world’s second largest producer of fruit and vegetables. Reliance has done relatively little, as has multi-national Hindustan Unilever and other possible candidates.

Reluctant to invest

Wal-Mart and Tesco meanwhile have not wanted to commit heavy investment because they have not been able to invest in front-end retail shops, where the profits are, and because there have not been enough shops to justify a supply chain. The government hopes that the 51% FDI limit in retail and 100% in wholesale will give sufficient incentive for foreign companies to invest heavily, building the linkages that India undoubtedly needs, and maybe spurring Indian groups to do more.

In order to try to appease the opposition, the government is limiting the concessions to the 53 largest cities that have populations of over 1m. It will then be up to individual states to decide whether they want to allow the stores, and to draw up planning and other regulations restricting their operations. At least 30% of goods will also have to be sourced from Indian small firms (last week the announcement omitted the word “Indian”, which raised the spectre of supermarkets being swamped with cheap Chinese manufactured goods).

These safeguards look sufficient to limit the impact that the foreign firms might have, and they answer my original point of not knowing why India wants to let Wal-Mart trample across the country. India undoubtedly needs to smarten up its appalling logistics and farm-to-fork distribution, and tackle the mafia of middlemen and traders. Wal-Mart however has such an appalling international image that it is arouses instant opposition and makes it easy – and understandable – for those who want to block progress.

As I write, it remains to be seen whether prime minister Manmohan Singh will ride out this crisis and enforce the new policy, or whether he will be forced to shelve the plans by his Congress Party, led by Sonia Gandhi and her son Rahul Gandhi whose reputation hangs on the coming Uttar Pradesh state elections. Neither Gandhi has yet spoken in favour of the FDI.

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Responses

  1. [...] the United States’ desire to try to open the market to multi-brand retail” with Banerjee.  (Wal-Mart and other US companies are seeking this FDI access). They seemed to get on well for photos (above) before their talks, and they [...]

  2. gary carter
    Hey, fantastic post. You often have fantastic content material. Completely agree with anything you just posted. obama sings al green

  3. [...] the Indian government’s attempts to open up its supermarkets to foreign direct investment (FDI) - which I wrote about last week. That has coincided with a visit to Delhi by one of Asia’s most effective critics of too much [...]

  4. So the thesis is that international retailers have bad records as they seek to maximise profits, so we aren’t sure why India is allowing FDI into its own retail industry, which has not really changed very much in arguably thousands of years and works atrociously. So somehow more of the same which is what Banerjee et al are arguing for is the preferred alternative.

    Hmmmm I see

    Domestic retailers had the chance to develop a viable cold storage infrastructure, Neither Tata nor Reliance have shown much interest despite being protected all this time. Secondly the big business houses instead of using the time they had wisely, to build a supply chain and aggressively compete with each other for market share, chose instead to act as satisfied status quo oligopolies and have done almost nothing, carving rather than competing. Their retail offerings are poor. It would have been much more preferable for Indian businesses to build retail themselves, sadly the big business houses are spread to thin and don’t have the stomach to invest what is required and act as if there is some sort of unspoken arrangement as far as retail offerings go. In this industry, It is time for Indian business to compete in its domestic market on a level playing field with international rivals.

    In this day and age given the poor country that India is, losing as much as 40 per cent of food produce is criminal, and that needs to change immediately. No ifs, no buts, and no more of the same. Its not working

  5. This post is also on The Independent (UK) newspaper blog site – http://blogs.independent.co.uk/2011/12/01/tesco-and-wal-mart-fuel-indian-political-crisis/ . Here are some of the comments there……….

    dudesickle
    need this FDI to prop up the plummeting Rupee …

    a b
    i agree that foreign expertise in food handling can help. but i live in north america where i have seen how WALMART corner’S its small suppliers that they have no choice but to sell there business to bigger manufacturer which will follow after walmart into india on pretext that indian small suppliers are not able to supply goods etc etc . seems DEPOPULATION AGENDA OF planet cuz where ever capitalism goes POPULATION decreases search (GEORGIA GUIDE STONES ) VERY IMPORTANT

    The Reverend Peter M. Hawkins.
    I have normally visited West Bengal in the Cold Weather from time to time for Study Leave. The last time I was there, the harvest of potatoes was huge, and the local Cold Store had to refuse further deposits. What was needed was a plane to carry the surplus to Europe, or a bigger Cold Store. I fear that if there were large enough Cold Stores, there would not be enough Electricity, power cuts were common.
    Indians abroad achieve the highest distinctions, but the administration of West Bengal was very poor. The trading arrangements are primitive, and I can believe that a lot of food is wasted.
    Foreign expertise in sorting out these problems would help.

    Happeh
    “I’ve never understood why India wants international supermarket chains like Wal-Mart (especially) and Tesco to trample across the country”
    You are kidding right?
    It is called graft. Corruption. Bribery. Kickbacks.
    500 or so Indians in government sell out the millions in their country for a few zeroes in their bank account.
    Works the same way in India as it does here in the West.

    Essex Blur
    For a real eye-opener, go onto Gawker and search for Walmart.
    The insider reports of just how poorly they treat their employees beggars belief!

    pointingto
    Shopkeepers, shopkeepers and shopkeepers beware of the super marketers who pushes ‘own brand’ cheapies packed with locally grown produce they buy with huge discounts to devastate the local sellers.
    When shopkeepers from Britain came to India their foremost aim was to kill the master craftsmen famous world over for ornamental weaving the most expensive clothes for princes/maharajas/kings and queens; their fingers were chopped off to create consumerism for the Northern British clothing mills where men and women rolled the clothes for India earning slave wages.

    Firozali A.Mulla
    Where do you buy your bread Super market or grocery next door?

    bleachers
    Sainsbury’s, as Tesco p!ssed me off years ago with their dodgy sharp practices, poor quality and general attitude that not only can they take their customers for granted, they genuinely believe they can p!ss all over their suppliers too

  6. We do have Food Corporation of India ( a PSU ), which has provided food security to country inspite of mis-management. We also have IRCTC ( a railway PSU ) who has been dinied to provide catering in Railways and now is going to use their kitchens in NOIDA to serve in open market. The story of FCI will be different if Govt allows it to operate in international market, with little risk. And story of IRCTC may be path breaking if allowed to go abroad?

    I do not find any reason for stopping them and many other PSU ( like NTPC etc) by Govt to let them go out and try… But it will not give politicians a chance to make dirty money. And hence no such action.

    In case of Walmart, you have also not brought out that which politicians has benefited by such move and who are real players of game who are fooling others and are making good money. Its business after all !

  7. John

    I have different take, allow 100% and prevent crony capitalism. This bit by bit approach is nothing, but a ploy to benefit politicians and cahoots to cash out when value builds up after two to three years. The indian promoters would not commit capital after a while because of sweat equity resulting in increase form 51% to 74% and finally to 100%, do 100% right now call the bluff for both sides. regards, BKS

  8. a very one sided view of retail sector based on speculative propositions

  9. Every business wants to buy low and sell high. The more the lowerer and more the higher drives the entire market economy and they use all the dirty tricks to achieve.Bypassing rules and regulation for their interest is the habit of all profit making Nation or Individuals. Examples gallore-East India Company etc


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