#India- How FDI in retail affects the “Mango Man”


 

MATHEW THOMAS | 07/12/2012 02:29 PM , MOneylife.com

FDI in retail is an example of deregulation, devoid of any safety net for its after-effects. Would the government consider the Parliament Committee report or treat Parliament with disdain? 

Here is a simplified explanation, sans economic jargon, to help understand FDI (foreign direct investment) in retail and what it has in store for the aam aadmi—“The Mango Man”. Let us start with an analogy.When a falling stone hits the ground its energy is converted and dissipated as heat. However, if the same stone lying on the ground is heated, it does not take off. What is the relevance of the falling stone to FDI in retail?
What is FDI in retail? It means “Foreign Direct Investment” of 51%, a controlling stake is permitted to any foreign company to set up retail trade in India. Simply put, a number of foreign-owned supermarkets would sprout all over the country. At a political party rally in Delhi, the leaders extolled the virtues of FDI in retail as symbolic of the party’s reforms agenda. The phrase, “economic reform” has many different meanings depending on ideological and political leanings.
One view is that between 1875 and 1975 it meant more government and since then it means less government intervention or free run for market forces. A Wall Street view says that it means, “Change for the better as a result of correcting (economic) abuses”. “Better for whom?” and “whose abuses would the reforms correct?” Did the post 1975-reforms in USA correct the abuses by financial wizards that led to the 2007–08 meltdown? A third view holds that economic reform refers to policies directed to achieve improvements in economic efficiency. Which of these did the rally leaders have in mind when they toasted the FDI reform push?
Those in favour of FDI in retail painted rosy pictures of benefits such as better prices for farmers, more jobs, better shopping experience and so forth. Those against it predicted the opposite. Few had hard facts to back their arguments. It is strange that neither the government nor the opposition referred to the report of the Parliament Committee which examined FDI in retail. The Committee seems to have done a comprehensive study, examining a number of witnesses, individuals, NGOs and trade bodies, travelling around the country, studying reports and experiences of other nations and asking questions of government departments. The Committee concluded that more people would lose jobs that the number that would find work. They said that FDI in retail would destroy large numbers of small and marginal farmers. They cautioned against the probable monopolistic behaviour, predatory pricing and attendant consequences. The Committee found that unorganized retail provides livelihoods for 40 million people, that is, for about 8% of the country’s workforce. Referring to the projection of FDI in retail creating 2 million jobs, the Committee said that this was exaggerated and that this ignores 200 million people who depended on retail trade for a living. The Committee was not only critical of FDI in retail, but also of any large corporate in retail business. The Committee drew a dismal picture of the effect of FDI in retail on the “Mango Man”.
With FDI in retail, shops like this will disappear. How sad.
ICRIER (Indian Council for Research on International Economic Relations) carried out two studies, one in 2008 and the other in 2011. The 2011 study predicts a great shopping experience for consumers. ICRIER surveyed 300 consumers, in high and middle income groups. Evidently, the government relied on the ICRIER recommendations, rather than on the Parliament Committee report. Does the reliance on a private organisation’s recommendations in opposition to Parliament, have anything to do with the chairperson of ICRIER bearing the same surname as the Deputy Chairperson of the Planning Commission?
ICRIER’s sample of 300, from high and middle income brackets, for a population of 1.2 billion with over 40% poor, for recommending foreign investment, is questionable. In reply to a RTI (Right to Information) query on whether the government had done any study on FDI in retail, the commerce ministry replied that it had not done any such study. The reply referred to the ICRIER report and not the Parliament Committee report. The Committee’s report was not discussed in Parliament. Rejecting the Parliamentary panel study and accepting a private study report, does not augur well for Parliamentary democracy. ICRIER says consumerism promotes economic growth. The earlier study (2008) surveyed 2020 unorganized small retailers out of 6 million shops. None of the studies addressed the issue “why India requires FDI in retail?” Would it lead to a net increase in foreign currency earnings, improve India’s balance of trade? Stiglitz’s views on FDI in retail are significant. He asks, “Why India needs foreign entrepreneurs in any sector, particularly the retail?” He then talks of the power of Wal-Mart to drive down prices and suggests that they will use that power to have Chinese goods displace Indian goods. Next, he draws attention to Wal-Mart’s abusive labour practices. He asks, “Why would you want to import such practices into India?” Why indeed? The foreign retail lobby reportedly spent over Rs52 crore in India. Could that be the reason why? He also talked about increasing inequality that Indian reforms are ushering in, accompanied by corruption.
It is appropriate to now look at the falling stone analogy. To see the relevance of it look at two economic philosophies prevalent today. One is the “Trickle-down” variety. Subscribers to this believe in less and less of government. The market would correct itself. De-regulation is the key. Concessions to the rich would lead to investments and economic growth. This would trickle down to the poor. The second view holds that left to itself, unregulated market economies, would become so disorderly that the human costs would be enormous. FDI in retail is integral to “Trickle-down” economics. It is part of the reforms’ cry for deregulation.
No lessons have been learned from the deregulation induced meltdown. That is why the government and proponents of FDI in retail do not bother about its effect on 6 million small shop-owners or the 50% of the farming-dependent population who would lose their livelihoods. Some of these dispossessed may find jobs in the retail supermarkets, as shop assistants or labourers. Does deregulation help them? The stone does not take off when heated because heating causes disorder. The heat energy is random, disorderly; the stone’s molecules jostle each other randomly. Hence, they cannot lead to orderly motion of the stone. The natural propensity of things is to move towards chaos. Markets are no exception. Without regulation the result is disorder. FDI in retail is an example ofderegulation—thinking devoid of any safety net for its after-effects. Would the government consider the Parliament Committee report or treat Parliament with disdain?

EXCLUSIVE – How Wal-Mart got a foot in the door of India’s retail market


Wed, Dec 05

By Nandita Bose

MUMBAI (Reuters) – Wal-Mart Stores Inc (WMT.N) prepared its entry into India‘s supermarket sector in 2010 with a $100 million investment into a consultancy with no employees, no profits and a scant $14,000 in revenue.

The company, called Cedar Support Services, might have been a more obvious selection four months earlier: it began its corporate life as Bharti Retail Holdings Ltd, according to documents filed with India’s Registrar of Companies.

The Cedar investment is now the focus of an investigation by India’s financial crimes watchdog into whether Wal-Mart broke foreign direct investment rules by putting money into a retailer before the government threw open the sector to global players.

Wal-Mart said it was in compliance with India’s FDI guidelines, and had followed all procedures. It said the central government had sought “information and clarification”, which Wal-Mart has provided.

However, several lawyers said the transaction appeared to violate at least the spirit of India’s long-standing ban on foreign investment in supermarkets, which it only lifted in September 2012. When Wal-Mart made the investment in 2010, it was legal for foreigners to own consultants but not retailers, so the shift in Cedar’s business description raised eyebrows.

“This is a complete camouflage,” said Hitesh Jain, a senior partner at ALMT Legal in Mumbai who advises retailers but is not involved with Wal-Mart. “It can be looked at as a violation of FDI rules because Cedar also operates supermarkets, which was a restricted sector back then.”

Graphic on Wal-Mart’s investment http://link.reuters.com/myp44t

Graphic on India’s retail market http://r.reuters.com/cuh79s

The law, however, is murky.

Others stressed that the way Wal-Mart structured the transaction might make it legal. According to the documents filed with India’s registrar, the investment was in the form of debt that was convertible into equity. That clouds the issue of whether Wal-Mart took a stake in Cedar or provided financing.

Bharti and Wal-Mart both declined to provide additional details on how the transaction was structured.

Senior government officials told Reuters that the RBI had asked the Enforcement Directorate, which investigates financial crimes, to look into whether Wal-Mart violated the law by investing in a supermarket retailer before foreign investment rules were relaxed.

If Wal-Mart did break the law, it could face a penalty of up to three times its initial $100 million investment, they said.

That would not only be a setback for Wal-Mart, it would also weaken consensus-building efforts by India’s minority government, led by the Congress party. The party is desperate for more support from across the political spectrum after its decision to let foreign players into India’s retail market came under fire from the opposition and even some of its own allies.

Wal-Mart and other retailers lobbied for years to gain access to India’s market, lured by the promise of a middle class that will one day rival China’s. But local opposition has been fierce because of concern that Wal-Mart and its peers will knock millions of mom-and-pop stores out of business.

COMPLEX WEB

Reuters pieced together details of Wal-Mart’s investment in Cedar by examining records from India’s Registrar of Companies and through interviews with government officials involved with the matter, as well as several lawyers who work with retailers.

The documents reveal a web of companies set up under the Bharti umbrella, which runs India’s largest telecom operator, Bharti Airtel (BRTI.NS). The group, which also has retail interests, signed a joint venture with Wal-Mart to run wholesale stores in 2007, shortly after India allowed full foreign ownership of wholesale retail operations.

That same year, the Bharti group formed Bharti Retail Holdings Ltd, which in turn owned a subsidiary called Bharti Retail Ltd which operated supermarkets and hypermarkets.

In December 2009, Bharti Retail Holdings changed its business description to consulting services from retail, the documents filed with India’s Registrar show. A month later, the company changed its name to Cedar.

The timing of the change in name and business is significant because when Wal-Mart invested in Cedar in March 2010, foreign companies could legally own 100 percent of an Indian consulting firm but not a supermarket retailer.

Cedar issued “compulsorily convertible debentures” to Wal-Mart Mauritius Holdings Co Ltd, which would be exchanged for 49 percent equity 18 months after the issue date. The conversion date has since been pushed back twice, to September 2013, which would be after India’s relaxation of rules on retail investment.

Cedar’s cash flow statement for 2010 shows that the funds raised from the debentures were used to finance activities and an attached schedule to the balance sheet shows a transfer of 1.75 billion rupees to its retail unit, raising questions over whether Wal-Mart’s money went into the retail business.

M.P. Achuthan, a communist member of India’s parliament, has accused Wal-Mart of breaking the foreign direct investment law and said he wanted the company to be penalised. Achuthan also wants India to scrap its foreign retail investment policy.

“I am surprised and shocked that the government didn’t see this. This kind of an investment could not have happened without the government’s knowledge,” Achuthan said. “It is impossible.”

Wal-Mart’s Indian partner, Bharti Enterprises, said it had followed the rules but did not address specific questions emailed by Reuters.

“We are in complete compliance of all regulations. All details have been shared with the relevant authorities,” a Bharti Enterprises spokesman said.

Two senior government officials said there had been an initial round of communication between the Reserve Bank of India and the Enforcement Directorate. The RBI asked the law enforcement agency to conduct the investigation.

“RBI believes there is a need to investigate,” said a senior government official, who spoke on condition of anonymity because of the sensitivity of the matter. He said both Wal-Mart and Bharti were being investigated because “Wal-Mart allegedly made the investment and Bharti allegedly received it”.

Separately, Wal-Mart said last month it was looking into bribery allegations in several countries including India, Brazil and China. It conducted an earlier probe in Mexico.

DEBT OR EQUITY?

Prime Minister Manmohan Singh is under intense pressure to roll back the decision to permit foreign retailers. Parliament ground to a halt on November 22 over opposition to the reforms until the government agreed to a vote, set for Wednesday.

A year ago, political pressure forced the government to make a U-turn after it first approved foreign investment into supermarkets, an abrupt shift that brought into question India’s ability to build consensus behind long-awaited reforms.

When Wal-Mart made the investment in Cedar in 2010, Indian law permitted foreigners to own “cash-and-carry” wholesale stores, but they were barred from owning what India calls multi-brand retailers, or stores like Wal-Mart’s namesake supermarkets that sell a wide array of products and brands.

Whether the investment in Cedar violated India’s law depends on two issues, according to the lawyers: if Cedar was in fact a retailer rather than a consultancy, and how the investment was structured.

Cedar’s articles of association filed with the Registrar show it called itself a consultancy, but a few pages later it describes a “competing business” as one involved in retail and operates supermarkets, hypermarkets and discount stores.

Even if investigators determine Cedar was a retailer, lawyers said Wal-Mart’s investment may still be legal if the transaction is deemed to be debt. Wal-Mart could then argue that it did not acquire a stake but instead extended a loan.

But according to RBI guidelines set in 2007, compulsorily convertible debentures are considered equity. That would mean Wal-Mart jumped the gun, said Alok Dhir, managing partner Dhir & Dhir Associates.

Dhir said there may be one way around that problem. If Wal-Mart and Bharti included a “put” option on the debentures, it could be considered debt because Wal-Mart would no longer be required to convert the debt to equity.

It is not clear whether this transaction included such a clause, and Wal-Mart and Bharti declined to comment.

LOOPHOLES

Under Indian law, Wal-Mart can be found in violation even if each step it took was within bounds. If the combination of those actions led to a result that circumvented the law, a court can consider the bigger picture, four lawyers said, citing a 1985 Supreme Court of India decision.

However, there are numerous grey areas.

For example, the RBI does not require Indian companies to declare what they do with money they receive from foreign investment.

“Even if the investigation is able to prove that funds were invested into the retail business, the companies can say they are not legally bound to declare it and present an argument,” said Ravi Singhania, managing partner at law firm Singhania & Partners.

The fact that Wal-Mart’s investment was capped at 49 percent and would not give it majority control of Cedar after the debt is converted could also help the companies build a case that the investment was legal.

The rules allow Indian-owned and controlled companies to use foreign capital to fund businesses which their subsidiaries operate. However, lawyers said there is no clarity on whether it is a breach if the unit of the Indian entity operates in a restricted sector, which supermarkets were until September. (Additional reporting by Satarupa Bhattacharjya in New Delhi and Jessica Wohl in Chicago; Editing by Emily Kaiser and Mark Bendeich)


“To those who believe in resistance, who live between hope and impatience and have learned the perils of being unreasonable. To those who understand enough
to be afraid and yet retain their fury.”

 

From Pepsico To Wal-mart: Selling A Fake Dream #sundayreading


 

By Devinder Sharma

29 September, 2012
Ground Reality

In the mid-1980s, Pepsico came up with a proposal to bring in a 2nd horticultural revolution in Punjab. It was hailed as a path-breaking initiative that would put an end to the continuing distress on the farm. It was expected to usher in the latest technology, improve farm research and extension, create supply-chain infrastructure, and provide marketing linkages from farm to the fork. I remember the kind of excitement that prevailed all around. Politicians, bureaucrats, economists, agricultural scientists and even the Bhartiya Kisan Union (BKU) joined the chorus. All my efforts to reason out the hollowness of the claims, based on Pepsico’s own studies, were simply lost in the din and noise created by the drum-beaters.

Some 15 years after the project was approved, Pepsico’s horticultural revolution is all but forgotten. Agriculture has gone from bad to worse. The food bowl of the country has also become a major hot spot for farmer suicides. While the soft drink giant remains busy marketing its colas, Pepsico has not been held accountable for its failed promises. It will never be punished for selling a fake dream to the beleaguered farming community.

It is now the turn of Wal-Mart and other big retail giants. FDI in retail is once again being projected as a panacea for all the ills plaguing Indian agriculture. FDI in retail will lay out backend infrastructure, bring in a chain of cold storages and improved transportation thereby reducing crop losses; remove middlemen which rob the farmers of profits, and thereby provide him higher prices; bring in improved technology to help in crop diversification; and of course create millions of jobs. The cheerleaders are once again on the road. This time, it is the corporate controlled electronic media that is drumming up the hype.

Having spent Rs 52-crore in two years for lobbying alone, and after the recent New York Times exposure showing how Wal-Mart bribed its way to control 50 per cent of the retail market in Mexico, the Union Cabinet finally allowed big retail to set shop. If Wal-mart could bribe its way in Mexico, what makes us think they have not been able to do so in India?

We are being told that Wal-Mart, Tesco, Sainsbury, Carrefour and a host of other big retail players are expected to increase farm income. In the US, where Wal-Mart has completed 50 years, if farmers were getting a better income, there was no reason why the farming population should plummet to less than one per cent of the population. Farmers in US survive on the farm not because of Wal-Mart but the massive subsidy support, which includes direct farm income. Between 1997 and 2008, Rs 12.60 lakh crore was provided as income support to farmers. A UNCTAD-India study shows that if these subsidies, classified as Green Box in WTO parlance, are removed, the American agriculture collapses.

In Europe, despite the dominance of big retail, every minute one farmer quits agriculture. Europe provides the highest amount of subsidies, including direct income support. But because 74 per cent of these subsidies are cornered by Corporations and big farmers, small farmers are quitting farming. In France, farm income has come down by 39 per cent in 2009, down from 22 per cent in 2008. In OECD, the richest trading block comprising 30 countries, Rs 14 lakh crore was the farm subsidy support in 2009 alone. It is not big retail, but direct income support that keeps farmers in agriculture.

These subsidies also bring down the domestic and international prices as a result of which big retail sells cheap. Empirical studies show big retail charging 20-30 per cent higher than open market in Latin America and Southeast Asia. In India, organised domestic retail has not been able to sell cheaper. A NABARD study for Hyderabad shows Reliance Fresh and other charging 15-20 per cent higher prices. Even at the peak of inflation in India, these domestic organised retailers did not reduce prices. So where is the advantage to consumers?

Studies show in America, before 1950, when farmers would sell their produce for one dollar, 70 cents was his income. In 2005, it had fallen to 4 per cent. With the middlemen wiped out, I thought the farmer’s income should have gone up. No, it is the new battery of middlemen – quality controller, standardiser, certification agency, processor et c—who walk away with farmer’s profits. Number of middlemen, operating under the same hub, actually increases. Let us not forget, Wal-mart is a big middleman, it eats away the smaller middlemen.

There is no evidence that big retail creates backend infrastructure. In US and Europe, rural infrastructure has been created through government support which came in the form of agricultural subsidies. To say that 40 per cent agricultural food that goes waste in India will be drastically reduced is also an illusion. In US also, 40 per cent food is wasted and much of it is after processing where Wal-Mart’s should have played a much important role.

Regarding employment generation and poverty alleviation, lessons need to be drawn from a 2004 study of Pennsylvania State University by Stephen Goetz and Hema Swaminathan, which showed how higher poverty prevailed in areas where Wal-Mart stores had come up compared to those states where big retail was absent. In any case, for a $450 billion turnover, Wal-Mart employs only 2.1 million people. Whereas for an estimated $460 billion market, Indian retail employs 44 million people. Let us not forget, Pepsico had also promised to create 50,000 jobs. As per a question in Parliament, it became known that Pepsico had created less than 500 jobs, including 250 unskilled workers. Moreover, last month, massive demonstrations rocked US by Wal-Mart workers complaining of poor working conditions and exploitative salaries. Who creates employment, and also provides better working conditions, therefore is all evident.

Yes, there is a need to improve rural infrastructure, provide a sophisticated supply chain, and provide better income to farmers. The milkman of India, late Dr Verghese Kurien, had shown us the way. The cooperative dairy structure, which led to the evolution of the Amul brand, is the right approach. If he could do it for milk, which is a highly perishable commodity, there is no reason why it can’t be replicated in fruits, vegetables and other agricultural commodities. From a milk importer, India has now become world’s biggest producer of milk. It is therefore obvious that solutions to the plethora of problems on Indian farms does not lie in the west, but in our own backyard. We need to look inwards. Otherwise we will go on committing the same mistakes, and in the process turn farms into killing fields.

Devinder Sharma is a food and agriculture policy analyst. His writings focus on the links between biotechnology, intellectual property rights, food trade and poverty. His blog is Ground Realityhttp://devinder-sharma.blogspot.in

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