Multinational retail firms in India

Jayati Ghosh

The Indian government’s sudden decision to allow hitherto prohibited foreign direct investment in multi-brand retail as well as full ownership in single-brand retail generated huge public outcry, to the extent that the government was forced to pause. One important ally of the government, fearing for her own popularity in the state of West Bengal where she is currently Chief Minister, declared that the policy is temporarily “on hold”, to be greeted only awkward silence from the government. Finally the government was forced to announce that the policy is to be kept on hold until “consensus” is achieved, which certainly seems unlikely at present.

What this episode does show clearly is that this is a highly contentious and potentially very unpopular policy, and that politicians are now getting more aware of this. So despite the raucous support from corporatised media and more subtle but possibly more influential lobbying by big multinational business, this policy could not be easily forced down in the face of massive public outcry.

The Indian debate provides an opportunity to consider the actual impact of large corporate retail, and especially multinational retail chains, in developing countries in general. Proponents of such corporate retailing make several claims: that they “modernize” distribution by bringing in more efficient techniques that also reduce wastage and costs of storage and distribution; that they provide more choice to consumers; that they lower distribution margins and provide goods more cheaply; that they are better for direct producers, such as farmers, because they reduce the number of intermediaries in the distribution chain; that they provide more employment opportunities.

In fact, all of these claims are suspect, and several are completely false. This is particularly so in the case of employment generation: experience across the world makes it incontrovertible that large retail companies displace many more jobs of petty traders, than they create in the form of employees. This has been true of all countries that have opened up to such companies, from Turkey in the 1990s to South Africa. Large retail chains typically use much more capital intensive techniques, and have much more floor space, goods and sales turnover per worker.

One estimate suggests that for every job Walmart (the largest global retail chain) creates in India, it would displace 17 to 18 local small traders and their employees. In a country like India, this is of major significance, since around 44 million people are now involved in retail trade (26 million in urban areas) and they are overwhelmingly in small shops or self-employed. Since other organized activities in India create hardly any additional net employment, and overall there has been a severe slowdown in job growth in the past five years, this is obviously a matter that simply cannot be ignored.

The argument that such large retail benefits direct producers like farmers is also very problematic. Greater market power of these large intermediaries has been associated in many other countries with higher marketing margins and exploitation of small producers. This is even true of the developed world, with more organized and vocal farmers protesting against giant retailers squeezing the prices paid to the farmers for their products, in some instances forcing them to sell at below cost prices. The European Parliament in 2008 actually adopted a declaration in February 2008 stating: “throughout the EU, retailing is increasingly dominated by a small number of supermarket chains…evidence from across the EU suggests large supermarkets are abusing their buying power to force down prices paid to suppliers (based both within and outside the EU) to unsustainable levels and impose unfair conditions upon them”. In the United States, marketing margins for major food items increased rapidly in the 1990s, a period when there was significant concentration of food retail.

The idea that cold storage and other facilities can only be developed by large private corporates involved in retail food distribution is foolish: proactive public intervention can (and has, in several countries) ensured better cold storage and other facilities through various incentives and promotion of more farmers’ co-operatives. The argument is also made that corporate retail will encourage more corporate production, which in turn supposedly involves more efficient and less ‘wasteful” use of the production.  But calculations of efficiency based only on marketed output really miss the mark, because they do not include the varied uses of by-products by farmers. Biomass is used extensively and very scrupulously by most small cultivators, but industrial style farming tends to negate it and does not even measure it. Biodiversity, use of biomass and interdependence that create resilient and adaptive farming systems are all threatened by the shift to more corporate control of agriculture.

There is another crucial implication that is all too often ignored in discussions of corporate retail. Corporate involvement in the process of food distribution causes changes in eating habits and farming patterns, which create not just unsustainable forms of production that are ecologically devastating, but also unhealthy consumption choices. In the developed world, this has been effectively documented by books like Eric Schlosser’s “Fast Food Nation” and Michael Pollan’s “The Omnivore’s Dilemma”.

In the Baltic countries, this has led to a striking breakdown of any real link between local production and the supply of food. The global supply chain has become the source of most food and the European market has become the destination of food production: all mediated by large chains that deal in buying from farmers (often in contract farming arrangements that specify inputs and crops beforehand) and in food distribution down to retail outlets. Anecdotal evidence suggests that farmers have not gained from this even in a period of rising food prices, as they are powerless relative to the large traders who now control the market. And consumers complain about the rising prices of food, which the supposedly more “efficient” supermarkets have not prevented at all.

As affluent western markets reach saturation point, global food and drink firms have been seeking entry into developing country markets, often targeting poor families ad changing food consumption habits. Such highly processed food and drink is also a major cause of increased incidence of lifestyle diseases like such as obesity, diabetes, heart disease and alcoholism, all of which have been rising rapidly in the developing world. The recent experience of South Africa is especially telling: around one-fourth of schoolchildren are now obese or overweight, as are 60% of women and 31% of men. Diabetes rates are soaring. Yet, nearly 20% of children aged one to nine have stunted growth, having suffered the kind of long-term malnutrition that leaves irreversible damage. And it has been found that obesity and malnutrition often occur in the same household.

These considerations – which are at least being noticed in the fierce debate now raging in India around this issue – surely deserve greater public attention across the world.

2 Responses to “Multinational retail firms in India”

  1. Gyan Vikas says:

    Nicely put up thoughts. FDI is retail is just another corporate gimmick in our government – corporation nexus. All the arguments given by government just address the symptoms, in stead of addressing the disease. They say that food prices are increasing, so we will bring FDI and this will bring down the inflation. I don’t understand this idea of controlling inflation by inviting corporate sectors because to my understanding inflation can be handled by only one way — by bridging demand supply gap. Probably, this is high time when we should raise our voices against such arguments even because, unfortunately I don’t see any political leader who opposes such arguments.

  2. Karthik says:

    Its shocking that you are an econ prof! Go read, and more importantly, understand ‘Economics in One Lesson’ by Henry Hazlitt. A shorter version of that lesson from real economists is here: