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Thu 8 Dec 2011 01:14 PM

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Wal-Mart battles with Karl Marx’s ghost in India

India must open up to foreign firms or risk lagging China, other Asian upstarts

Wal-Mart battles with Karl Marx’s ghost in India

India has a Wal-Mart problem. This may not sound remarkable, considering that China and the US do as well.

China’s preference for sweatshops to supply the Arkansas-based behemoth impedes the creation of a vibrant domestic market. America’s addiction to cheap goods made in China helped kill a once-prosperous manufacturing sector.

India’s challenge in allowing Wal-Mart to enter its market is more complicated. It’s a question of whether the ninth- biggest economy moves forward or backward and a defining issue for the legacy of economist-turned-prime-minister Manmohan Singh.

Criticism of Singh’s move to open India’s $400bn retail market to overseas companies has been so intense that this week the government suspended it until a political consensus is reached. Opponents say allowing 51 percent ownership by foreign retailers will harm small merchants that employ millions.

That’s just the point, though. The arrival of Wal-Mart Stores and Carrefour would have an invigorating effect like few events in the 20 years that Singh has been modernising India’s economy. As finance minister in the early 1990s, he introduced free-market measures that cut red tape, removed caps on steel and cement makers and allowed overseas names like Ford Motor Co to do business locally. These changes deserve as much credit for India’s 7 percent growth as anything.

India has hit an economic wall in recent years. Although it has produced healthy growth rates since the financial crisis of 2008, policies to increase efficiency have stalled. Political paralysis in the world’s biggest democracy is hindering the process of democratising the spoils of India’s rapid growth. It’s still not getting to those who need it most.

Corruption is partly to blame. A growing number of India’s 1.2 billion people are fed up with how institutionalised graft squanders national wealth, a dynamic underlined by activist Anna Hazare’s potent protests this year.

The sheer size of the government bureaucracy is another growth-killer. So are the inefficiencies inherent in India’s private sector, retail being an obvious case in point. A labyrinthine distribution system involves myriad middlemen and helps inflate prices in a nation where hundreds of millions live in, or on the cusp, of extreme poverty - the $1-a-day kind. Yes, this system employs millions, but at a very high cost.

By investing in neglected supply chains and infrastructure and applying more modern techniques, foreigners could reduce waste in India’s huge agricultural industry, get farmers better prices for their produce and offer shoppers greater choice.

Article continues on next page…

If you really think India’s economic structure works well as is, that it reasonably serves the needs and desires of a critical mass of consumers, by all means, keep it. But if you think there’s a different approach, one that fosters greater competition, quality, service and cost savings, then Singh’s retail-industry reforms are the right ones.

Although China has been the big draw for foreign direct investment, India is beginning to gain some appeal. Kishore Biyani, founder of Pantaloon Retail India, India’s largest chain by market value, predicts that the retail industry will gain $8bn to $10bn in investment in the next five to 10 years as competitors abroad enter and local companies try to keep pace.

India’s historical laggard status reflects a longstanding romance with Karl Marx and too little familiarity with Joseph Schumpeter. There’s still an excess of Marx and the German philosopher’s statist solutions in Asia’s No. 3 economy and not enough of Austrian Schumpeter’s creative destruction.

If you want to see where the status quo leads, look to Kolkata, the capital of West Bengal formerly known as Calcutta. Six months ago, Singh’s ally ended 34 years of Communist rule there, pledging to turn it into an Indian version of London. Instead, chief minister Mamata Banerjee is putting the interests of local farmers first, backing laws that make it harder for companies to acquire land and, in the process, deterring investors.

Banerjee’s protests as opposition leader of the state prompted Tata Motors Ltd to move a planned car plant to the western state of Gujarat in 2008. Not surprisingly, Kolkata is neither attracting investment nor creating jobs.

This column isn’t pro-Wal-Mart. Such multinational companies all too often flout environmental laws, undermine labour unions and represent an economic race to the bottom. Yet Wal-Mart isn’t the problem. The culprit is leadership that clings to the failed policies of yesterday to the detriment of tomorrow.

If my travels in Asia, Africa and Latin America have taught me anything, it’s this: the real failing of free trade and globalisation is that the parts of the world that need them most get short shrift. The anti-globalisation movement, however well- intentioned, should turn its energy to extending the benefits of free trade and capital flows to the world’s neediest people.

India can’t turn back the clock on where the world economy finds itself. Opening the retail industry isn’t some out-of-the- blue act of economic radicals; it has been debated for 15 years now and is an essential part of India’s growth story in the long run.

Modern India has a choice. The first, for all its painful bumps, leads toward greater openness, competition and prosperity. The second goes backward and means India will fall further behind China and other Asian upstarts. Which will it be, prime minister Singh?

(William Pesek is a Bloomberg View columnist. The opinions expressed are his own.)

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CSS 8 years ago

Why worry, as they say to everything in India - "Ho Jayega"

saher 8 years ago

India has done great by not allowing Wallmart to bust small businesses and destroy local shops, that is wonderful, thank you India, I love you, I wish other countries do the same to stop that dreadfull sound of transnationals sucking the blood of local communities, globalisation my cat.

Telcoguy 8 years ago

Are you sure Indian shoppers share your feelings?
Do you think they really enjoy poor choice, high prices, and merchandise that often shows the effect of poor distribution networks?
It is really funny how from the outside it looks like the Indian government has fallen (again) in the hands of a small, well organized constituency (intermediaries mostly). Of course taking the interest of Indian people first, as they have shown in so many occasions (3G licenses anyone?)
This is a good decision for a few, a bad one for many, and probably a very profitable one for a small selected group.

saher 8 years ago

Are you sure it is "Karl Marx’s ghost"? just google -why i hate wallmarts- and get your non-karl -Marx reasons . There are 129,000,000 reasons/results that would make a nice summer time rading for you. Top among these is it wipes out the smaller, more local competition. And why with it it wipes distinctiveness of local cultures.'and who benefits? Not the small business, not the small town, not the individual - only a few guys pretty high up in the chain's food chain. Consider: Wal-Mart's annual sales are larger than the entire Gross Domestic Product of 161 countries! Do the Wal-Math: They are bigger than most nations, yet they have no government that answers to the people it affects. They are unaccountable to anyone"

Jai Prakash Tolani 8 years ago

William needs to understand the Indian retail market before putting up any article. Surely entering of big retailers like Walmart and Carrefour will kill the small players and at present Indian business tycoon like Kishor Biyani and Tata are supporting FDI to get joint venture with them and make more n more money. They don't consider the common Indian peoples. It's good that FDI approval is on hold now and in fact it should cancel for the sake of Indian retailers and small kirana players.

Tim 8 years ago

Won't the bigger chain stores help lower prices - precisely benefiting the "common Indian people" you claim to speak on behalf of ? Or maybe you belong to the already wealthy merchant class that will be threatened by the entry of new competetion ?

Telcoguy 8 years ago

@saher, what is exactly wrong with getting rid of inefficient providers?
Again, plenty of people seem to enjoy the lower prices offered by the large distribution companies.
Truth is most people do not appreciate the "diversity" and "locality" of providers as much as you do.
Yes, there are downsides, .but the brutal effectiveness they bring to distribution translates into much lower prices for consumers
I personally never bought in Walmart while in the US. It is not my cup of tea, but then I do not need to feed a family with 800 euros/month, as some people in Europe need to do.

Tony 8 years ago

In India,every product sold has a Max.Retail Price (MRP) wherin retail outlets are not allowed to sell beyond that price.However,almost every Indian city has margin free shops where prices are well below the MRP upto an extent of 10-15%.How further can the retail giants cut down.Some analyts might say that the opening up of the retail sector will create jobs but again hiring a large number of people will surely add up to the operating costs and will not bring down prices down.Also it will just be another strategy to dump cheap chinese goods.But on the bright side I am sure people will have more choices.

Calvin Pinto 8 years ago

I find that most of the critics need to get their facts right with regards to the Indian retail scene:
1.Firstly it is 51% and remaining 49% will be us Indians. We have many local "Single brand retailers & Businesses" who have done well and haven't driven the farmers out of business. The same hue and cry was done before with regards to mom and pop stores. Eg. Amul, Future Group etc.
2. Its common knowledge that that around 30% of India's fod production goes to waste due to pathetic infrastructure. We basically need FDI to boost this.
3.I am an Indian who is bothered to feed myself and my family, not give a damn about rich-middlemen who are commonly backed by big political parties(like the BJP) who will loose their earning due to their inefficiency.
4.It's been 20 years since India has opened its economy and we have the highest GDP growth next to China and Qatar at 6-10% fr the past 10 years, all this because of FDI.

So all you critics, get your facts right.

Kohinoor 8 years ago

Are we able to control LOCAL petroleum companies after gifting out the right to control the market? How can you control foreign players after they invest and argue in dollars?

They are not running a charity to develop Indian infrastructure. If congress already taken their deal, it is better return back without any fuss.

Ignorance cannot be an excuse, pls read a book "confession of economic hit-men".