December 1, 2011

FDI in retail: You think it's for farmers? Stupid! Get real, it's all about realty

By R Jagannathan

The god-awful political scrap we are witnessing over allowing foreign direct investment (FDI) in retail is, of course, a load of bull.

Barring perhaps the Left (who are congenitally opposed to all ‘neo-liberal’ policies) and the BJP (which was originally a party of petty traders and kirana merchants before it came to power in Delhi in 1998), nobody is actually opposed to FDI in retail.

In fact, politicians as a class are all for it (of which, more later). This is why the Manmohan Singh government, which has been petrified about implementing any kind of reform, actually went ahead with the announcement and is still sticking to its guns on the issue.

There are four reasons why allowing FDI in retail makes huge political sense to the Congress-led UPA.

First, there is the nothing to lose argument. The fact is the economy is in a mess, and prices are not going to stabilise easily in the foreseeable future. No matter what the government does in the short term, prices will rise as all energy prices are currently understated (coal, power, oil, etc). These will have to be raised sooner or later – giving inflation another push.

Food prices will not fall because of the expensive Food Security Bill that the UPA is about to unwrap. The rupee has been weak, and tumbling, as foreigners are reluctant to bring in capital when they need more of it back home (in Europe, US and elsewhere). A weak rupee means more imported inflation. Pranab Mukherjee’s budget arithmetic has been shot to pieces and the fiscal deficit is soaring – which puts further demand pressure on prices.

So the prime political calculation behind allowing FDI in retain is that things will anyway get worse – so why shy away from unpopular decisions now? Who knows, it might even do some good over two years – and bring in dividends by 2014.

Second, more importantly, politicians smell money in retail FDI. This is because retail is primarily about real estate. The real estate market is currently in a mess as the affordability factor has disappeared. Realty sales everywhere – especially commercial realty — are crashing, even if prices aren’t. Most listed realty companies are heavily into debt, and they need more equity to reduce debt.

But here’s why politicians are keen on FDI. Most of them hold their ill-gotten wealth in real estate. With elections approaching — UP, Gujarat, many more states in 2013 and the grand finale in 2014 — politicians need a lift in land values to encash their wealth and pay for re-election. This is the prime reason why every landed politician secretly wants FDI in retail – only the Wal-Marts can help raise unaffordable realty prices even more. Real estate analysts like Liases Foras are, in fact, predicting a fall in prices, and this is something politicians cannot afford.

An aside: the real reason why the Telangana issue is not going to be solved soon is that many Andhra politicians hold benami land in Hyderabad – which will have to go to Telangana once the new state is formed. If Telangana happens too quickly, they cannot encash their Hyderabad land – or may even suffer a loss. The delay in announcing statehood — prematurely announced by P Chidambaram on 9 December last year, and retracted two weeks later when Andhra politicians went ballistic – is primarily to force Telangana politicians to protect Andhra politicians’ landed wealth, or at least give them enough time to sell out before the state is divided.

Third, it’s about the farmer and the middle class – the rural and urban vote. The key benefit from creating a strong organised retail sector is that it will cut out the middleman and give farmers higher prices and the urban consumer cheaper products. The problem for the UPA is that the government runs an inefficient food security and public distribution system, which is not only busting the budget through higher and higher subsidies, but also raising food prices overall. The UPA is hoping that FDI in retail will make this chain efficient – at the cost of the BJP-loving kirana shopowners – and take some of the procurement load off the public sector.

That, of course, remains to be the seen, but the objective is clear: if FDI delivers, it would be easier to dismantle the public distribution system in urban India and focus the subsidy system largely on the rural poor.

The BJP’s schizophrenic attitude to FDI in retail comes from the fact that it wants its kirana constituency and the middle class urban voter. Not an easy act to follow.

The fourth point is that our kirana guys are not exactly babes in the wood. Even with the rise of organised Indian retail chains – the Big Bazaars and Reliance Freshes of the world – they have held their own. But they will have some big guns rooting for them as well: consumer goods manufacturers like Hindustan Unilever and Procter and Gamble.

Reason: when the Wal-Marts, Carrefours, Metros and Tescos come, the Unilevers and P&Gs will get squeezed for margins due to the former’s big buying clout. The latter also introduce private labels and shop brands, which commoditises their own premium brands. This is why the Unilevers and P&Gs have a vested interest in backing the kirana shops over big retail – in order to retain bargaining power.

So, it’s not as if the big whales of retailing will overawe and overwhelm the little fish of the kirana world.

For the Congress, FDI in retail is ultimately win-win. It should be able to ride out the current political storm if it makes soft noises and sticks to its basic decision to open up the sector.

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