Smoke and mirrors

JOB LOSS FROM FDI

At the centre of the storm of protest that arose over the cabinet’s decision to allow FDI in multi-brand retailing, lay one question: will it cause a loss of employment, not to mention the investment made in about 15 million stores and kiosks by the petty bourgeoisie?

The government knew this would arise. For in  2004 the Delhi-based Centre for Policy Analysis had estimated that if FDI were to take over 20 per cent of retail trade in India, around 8 million people could lose their livelihoods. It, therefore heralded  the lifting of the ban with an unprecedented  blast of propaganda.

The Union commerce minister Anand Sharma, tried his best to reassure the people that far from destroying jobs FDI in retail  would create 10 million jobs in three years, 4 million on the shop floor and another 5 to 6 million in production, procurement and processing.

In a spate of briefings various officials asserted that farmers would receive more for their produce, that consumers would, at the same time, have to pay less for their purchases, and  that 30 to 40 per cent  of the fruit and vegetable crop, which currently goes waste, would miraculously be saved. But in the end the government failed to convince the people that jobs --and that too in millions -- would not be endangered. That was why it was forced to rescind its decision.

For reasons that are explained below, the CPA’s estimate is greatly exaggerated. But the threat of a loss of employment is real. It arises from the fact that organised retailing whether Indian or foreign is vastly more efficient than the neighbourhood stores. The challenge before the government was therefore to explain how it intended to minimise the job loss, while maximising the gain in efficiency and growth.

The key to doing this is to slow it down. The government’s sudden removal of constraints on FDI in retailing threatened to do the opposite.

The Indian retail sector employs 40 million people and has a turnover of  $450 billion. The turnover per employee is therefore a little over $11,000 per year. After adjusting for differences in the purchasing power of the rupee versus the dollar this is probably equivalent to $ 14,000 per employee in American terms.  By contrast, the turnover per employee in Walmart is $275,000 per employee worldwide, and $165,500 per employee in its stores outside the US. If organised retailing were to take over the whole of the retail trade in India instantaneously and attain  the average efficiency of Walmart stores abroad,  it could  throw 10 out of every  12 present day employees, i.e  upto 32 million people, out of work. 

Actual loss
But this would happen only if the takeover were instantaneous. That is what is implicit in the CPAS’ model. But the actual loss will depend upon a host of other factors. To begin with, so long as foreign retailers stick to the 53 cities that presently have more than a million inhabitants, only half of the total trade will be affected. This brings the number of jobs that will be endangered down to 16  million, and possible job loss to somewhat over 14 million.

Second, given the present urban congestion, the lack of mechanised transport and the capacity of the kirana and other neighbourhood stores to fight back even if organised retailers like Walmart and Carrefour open neighbourhood stores, it is doubtful if the share of organised retailing will rise  beyond 60 per cent —about the present  share in Europe -- in the foreseeable future

. Organised retailing already accounts for around 15 per cent of retail sales in the million-plus cities. So it is the additional 45 per cent that  will displace jobs in traditional retailing. This brings the tally of endangered jobs down to below 8 million.

 How many livelihoods are actually lost, or whether any will be lost at all, will depend upon two variables: the rate of growth of the economy and therefore  the retail sector, and the speed of penetration by organised retailers into that sector. If the economy grows  at 7 per cent per annum, GDP will double in ten years.

The volume of urban retail trade will therefore at least double and may even treble. But  the same arithmetic also shows that if organised retailing takes over 60 per cent of the total urban trade in five instead of  ten, years, when the GDP has grown by only 40 per cent, traditional retailing will contract by a little under a third  and shed  between four and  five million jobs. This is the danger that the sudden descent of FDI into retail trade poses.

Finally, it needs to be pointed out that the above model holds true only for a closed economy. If the entry of FDI replaces  indigenous with imported consumer goods, then we will need to add the loss of employment in manufacturing and agriculture to the loss of employment in retailing. It will then become difficult to assess what the final tally of employment loss will be.

The modernisation of retail trade must eventually happen, but it must  happen at a  pace that allows those who are thrown out of work to find alternate, preferably better paying and more secure,  employment. This is a responsibility that the government cannot ignore, and most certainly cannot leave to the market.

The Tudors and early Stuarts fought to prevent, and succeeded in slowing down, the enclosure movement because they understood and feared the destructive power of the market. In 1649 King Charles I lost his head because of the policies that he and his predecessors had espoused. But they saved England and allowed it to rise to the pinnacle of power.