India not alone on reforms slowdown
By Benjamin Shobert
India's parliament voted on Wednesday to suspend the pending legislation that
would have reformed the country's rules on foreign direct investment (FDI),
thereby allowing foreign retailers to have 51% ownership of what the government
calls "multi-brand retail". This move would have opened the door to foreign
retailers like Carrefour, Tesco and Walmart, and allowed them to move forward
with their own operations within India.
On Thursday, two of India's troubled domestic air carriers, Air India and
Kingfisher, had their bank accounts frozen by the government because each was
unable to make the necessary tax payments to authorities. To those unfamiliar
with what has been happening inside of India over the past month, the two
events
might seem unrelated, but in fact one is a contributing factor in the
other's difficulties.
Wednesday's move was largely about domestic political forces in India. On one
hand, Prime Minister Manmohan Singh's forces have long advocated for additional
economic reforms that would begin in the much-debated retail market but would
ultimately force open the country's infrastructure and transportation spaces as
well.
On the other hand, India's more regressive political forces believe the
potential impact of these reforms would be to drive out of business the many
neighborhood kinara shops and likely displace Indian-owned businesses in
other sectors like logistics and infrastructure with stronger international
competitors.
At danger of being lost in this exchange is whether the proposed reforms would
benefit the average Indian consumer or address existing problems in the
country's economy. While many of the transportation sector's problems are
self-imposed, they would also be easily remedied if they were forced to either
change or die in the face of foreign competition, a realization that no doubt
animates much of the popular political resistance against precisely such
reforms.
A report issued this week by the Vale Columbia University Center on Sustainable
Investment, one of the world's leading academic institutions which studies
international FDI trends, related India's growing food inflation problem with
its unwillingness to open the country's retail market to foreign investment. As
Columbia's analysis shows, there is a direct linkage between the two.
Written by Nandita Dasgupta, the report notes that over the last year,
"vegetables have become costlier by 18%, pulses by 14%, milk by 10%, and eggs,
meat and fish by 12%". These are not only major inflationary pressures for the
average Indian consumer to absorb, but the magnitude of the numbers points
towards deeper structural problems inside of India's food distribution network.
As Dasgupta puts it, the problems indicate "an inefficient supply chain in
agriculture". How bad is the problem? Her study suggests,"around 50% of fresh
produce in India rots and goes to waste between the farm gate and the market
because of inadequate cold storage facilities and a poor distribution network."
A highly fragmented retail market might mean the allure and political clout of
the neighborhood kinara shop is protected; however, the fragmentation
also accommodates a level of inefficiency that does disservice to the Indian
consumer.
When companies such as Carrefour enter an emerging economy, they bring with
them the logistical backbone that ensures food wastage is minimized and output
is maximized. While these practices have led some in the West to be critical of
the industrialized agriculture and denatured foodstuffs that can sometimes be
created as a result of these practices, these criticisms seem to be a luxury
for developed economies where they represent a necessity for emerging
economies.
Dasgupta's analysis points towards seven issues she believes foreign retailers
would drive resolution for inside of India if they could be allowed to enter:
Poor
agricultural productivity, lack of corporate involvement in agriculture,
ceilings on landholding size, existence of middlemen, hoarding, and, more
importantly, insufficient cold storage facilities and transportation
infrastructure.
Many who agree with the potential benefits
Dasgupta identifies point instead towards the economic damage done by allowing
these foreign retail chains to enter and consolidate market share, likely by
driving out of business the neighborhood market.
India's reform-minded leaders have every reason to acknowledge this fear, but
point towards China's experience. There, since the country opened to foreign
investment in retail during 2005, both China's neighborhood markets and foreign
big-box retailers have been able to co-exist. During this period, the number of
private retail establishments in China actually increased by over 500,000, and
employment similarly increased.
China's experience is not alone, Indonesia - another emerging economy with a
vibrant merchant class characterized by a fragmented retail market - opened to
foreign investment in 2001 yet, according to Dasgupta "90% of the business
remains with small traders".
What will likely dislodge the matter is one of two things. The first would be
new elections in India during 2012 which given additional political clout to
the economic reformers within India's parliament. This would likely be the best
outcome, as it would reflect wider support for these moves from India's growing
middle class.
The second possible way this issue could get resolved is if India's food
inflation continues unabated and the government needs to act forcefully to try
and either control prices or somehow suppress demand. In the face of what most
governments find to be some short-term benefit when enacted, these policies
would likely become increasingly ineffective and then be rescinded in favor of
finally allowing foreign investment into the retail market.
India's internal struggle over these questions comes at a point in time when
the world's other major emerging economy, China, is also sending mixed messages
about the direction of its economic reform process. New limits on which
industries foreigners can invest in within China and new tax policies, both
designed to further strengthen the country's state owned enterprises (SOEs) run
counter to China's most recent history of economic reform.
The larger question both China and India's recent changes begs is whether
emerging economies as a whole have reached a point where they feel their
domestic interests no longer align with those of their trading partners.
Nations have always needed to maintain a balancing act between their domestic
needs and those asked of them by outside partners. The prevailing notion that
has driven globalization forward over the last 20 years has been that the rule
set as embodied by the World Trade Organization in particular would protect the
needs of both sides, and facilitate commerce benefiting everyone. The
productive tension that has always existed on these matters is now becoming
increasingly unproductive and politically toxic, not just in countries like
China and India but also in the United States.
The rules that brought countries together can equally become sources of
friction and resentment. Whether in the midst of profound economic turmoil in
the West and uncertainty in the developing East, countries can find the
leadership to recommit to what has brought the world peacefully thus far
remains to be seen, but actions like those in India this week remind everyone
that we cannot take for granted the good of globalization nor the certainty
that it will continue unchallenged forever.
Benjamin A Shobert is the Managing Director of Rubicon Strategy Group, a
consulting firm specialized in strategy analysis for companies looking to enter
emerging economies. He is the author of the upcoming book Blame China and
can be followed at www.CrossTheRubiconBlog.com.
(Copyright 2011 Asia Times Online (Holdings) Ltd. All rights reserved. Please
contact us about sales, syndication and republishing.)
Head
Office: Unit B, 16/F, Li Dong Building, No. 9 Li Yuen Street East,
Central, Hong Kong Thailand Bureau:
11/13 Petchkasem Road, Hua Hin, Prachuab Kirikhan, Thailand 77110
