By Ramesh Sethuraman, Contributing Editor

For the past two weeks, Foreign Direct Investment in Retail (FDI) is the topic occupying the front page of every Indian newspaper, and it’s also dominating every prime time discussion on Indian television news channels. The Indian Government has decided to allow 100% FDI in single-brand retail and 51% in multi-brand retail.

From airports to railway stations to bus stops, FDI has become one of the hottest topics among public discussions. While most of the pro-government media was seriously batting for the government’s decision, there is another group which supported the opposition’s stance against FDI. In fact, debate on this topic has stalled a week long productivity of the Indian Parliament’s 2011 winter session.

Most interestingly, Trinamool Congress, a leading party from the West Bengal state, is supporting and participating in the current coalition government of United Progress Alliance (or UPA) This group, led by the Indian National Congress Party, has decided to vote against its FDI decision. Finance Ministers’ attempts to pacify the Trinamool Congress Party leader Miss. Mamata Banerjee didn’t wor,k and the government was forced to bow down and defer its FDI decision.

Market Background

With a population over 1.21 billion, the Indian retail market size currently equates to $28 billion US, and is expected to rise nearly ten-fold by 2020 to $260 billion US. Seeing this as an unparalleled opportunity, almost all major business houses in India have jumped onto the retail bandwagon, including world renowned brands such as TATA, Birla, Ambani and Godrej. Also other leading groups like Future Group, Landmark Group and K.Raheja Group have also gotten into multi-brand retailing. Western culture’s influence in Indian citizens’ lifestyles, the vast amount of urban job growth, a booming real estate market and rise in mall-based retailing has triggered the growth of new retail brands and their outlets.

Many of these retailers have acquired prime real-estates, yet have built their store operations with the least amount of infrastructure and technology required in an anticipation of selling their operations to foreign retailers for a huge profit as soon as 100% FDI has been announced. Unfortunately, the government has been dragging its decision due to other major political and economic issues including inflation, scams and growth slowdown.

In the meantime, every retail business house continued to expand by opening up their own versions of non-related retail segments (grocery/apparel/footwear/electronics). Due to this, they started to feel the pinch as their debt started piling up to staggering amounts. Almost all leading retail houses are posting losses every quarter and are hoping to become profitable only after year 2013!! (Maybe they would have expected to sell their retail operations to foreign retailers by then.)

Some global retailers were allowed to establish their operations in India during the last decade, as long as they were limited to the Cash & Carry segment. Most of them are operating in a joint-venture model with Indian firms. Carrefour, Metro and Walmart have already started such operations, and been running them for quite few years. Unfortunately, they haven’t expanded their business as aggressively as they initially publicized.

Why People and Small Businesses Oppose FDI

While part of the upper and upper-middle classes, which are often inclined towards western culture, is inviting the FDI decision, major parts of the public (the lower-middle class and below) oppose it vehemently, seeing it as a threat to their livelihood. With less than 10% of the retail business in the country being organized, most peoples’ livelihood is dependent on the unorganized retail sector. The government’s promise of creating about 400,000 jobs — against a loss of 36 million jobs – has not fared well among the public.

While loan interest rates for Indian companies are above 10%, foreign companies get the same loans for less than one third of the rate. This unlevel playing field gives foreign companies a huge advantage, and is seen as a governmental betrayal by the existing business community.

The government’s justifications for these actions includes the protection of farmers’ interests (as well as taking steps to reduce food wastage), but the reality is that these measures have had a reverse effect. Indian people have started to ask why the government (or existing large players) can’t provide the infrastructure required to operate a refrigeration-capable supply chain. Moreover, all efforts to-date by existing large retailers to set up supply chain and logistics infrastructure has failed miserably as they couldn’t get rid of the middlemen involved in the procurement of fresh produce.

For the government, allowing international retailers through FDI is all about offering consumers a hedge against rising costs. The government’s argument was that when the cost of procurement increases, local mom & pop stores (a.k.a Kirana stores) raise prices. But large retailers can take a hit on margins and put pressure on the procurement channel instead. This was countered by the farmers and groups against FDI — saying that in the end, farmers will ultimately be bearing the loss.

The Big W of the Debate

Instead of using the word global retailers, most media sources have been directly referring to Walmart, the capital W of global retail. While this has been transpiring, President Obama’s following tweet on 11/26 has fuelled people’s debate further:

“@BarackObama : Today, support small businesses in your community by shopping at your favorite local stores. #SmallBusiness “

People were arguing that while the US government looks to small businesses as an avenue to uplift it own economy, the Indian government’s mulling position on FDI isn’t good for India in the long term. Further, people started publicizing Walmart’s anti-union activities, not-so-employee friendly policies, and how they control and put pressure on their manufacturers and farmers.

Conspiracy

People have started to believe that corruption has increased multi-fold under current government rule. Anti-graft crusaders wanted Jan-Lokpal, a powerful anti-corruption bill, to be passed in the current parliament session. Similarly, opposition parties wanted a debate on a recently discovered 2G spectrum allocation scam in the telecom sector. Many believe that the Indian government consciously brought FDI into the picture to divert attention of the public from the other key issues haunting them.

Bigger Fear

While government says that 100% FDI is all about protecting the interests of farmers, those involved see it the other way around. The government’s inefficiency in regulating micro-lending and agriculture loans has created for massive amounts of farm debt, and as a result, there has been a significant spike in farmer suicides. As you can imagine, this has only added to the public debate.

With countries like the US opposing subsidies to farmers and encouraging corporate farming, it is seen as a major threat in India, an economy (and livelihood of its 60+ % it population) relying on agriculture. Further, the government has faced opposition in importing genetically-modified food into the country — seen as a major threat to bio-diversity. People also fear that this would lead to uncontrollable dominance of giants like Monsanto in India.

Even small retailers from non-food & grocery segment oppose the FDI, as they see an influx of Chinese goods as a major threat to their livelihood.

Conclusion (For the Moment)

In short, the Indian government was trying to push FDI in a fast-and-furious manner, without doing their proper homework. They brought this about during a time when inflation is high, the currency is at an all-time low against leading global currencies (including the USD and the EUR), and finally government’s image is wretched due to scams and graft charges.

While the Prime Minister and Finance Minister were debating on FDI and trying to convince the parliament and public, there was no participation from the real control center of the government, Mrs. Sonia Gandhi, in any of the debates both inside and outside parliament. A group of citizens speculate that US Secretary of State Hillary Clinton’s visit to India was to convince and push the government to allow US retail giants to get into Indian retail market through 100% FDI.

All the above factors have left the government and its supporters’ business case unconvincing to people of the country. Unless the Prime Minister (who is also an economist) and the Finance Minister of India work on the above mentioned issues in the interest of the country, their attempts towards FDI will continue to haunt them.