Crony capitalism shuts India's doors to Wal-Mart


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  • India government passes valuable opportunity to energize its retail market and create millions of jobs #Walmart

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  • Walmart deal would have generated more than 10 million jobs over the next three years in #India

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  • 20% of India's food products go to waste every year due to hoarding and coercion

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India's Prime Minister Manmohan Singh and his Congress Party recently capitulated to political pressure and reversed their earlier decision to expand foreign direct investment in India's nearly $400 billion retail sector, which would have bolstered a slowing domestic economy and created millions of new jobs.

Call it India's version of America's recent "Keystone XL pipeline cop-out" — and an illustration that it's not just America's political leaders who talk about creating jobs but then frequently defer to favored special-interest groups and leave jobs on the table.

The Singh government had previously agreed to allow major multibrand retailers, like Wal-Mart and France's Carrefour SA, to open superstores in India and allow the companies to maintain 51% ownership of a joint venture (like single-brand retailers are presently allowed) — as long as they agree to:

•  Invest at least $100 million (with 50% of this investment in developing Indian infrastructure).

•  Source at least 30% of their products from local suppliers.

•  Confine their operations to India's 53 cities with populations exceeding one million. Presently, these multibrand retailers are restricted to operating only wholesale joint ventures in India.

Although the government did not need Parliament's approval for its decision, the prime minister recently announced that it is suspending its earlier decision until a political consensus is reached, as those opposed have argued that millions of small shopkeepers would be left unemployed by the policy change.

"The exploitative middlemen in India's current retail supply chain are those most threatened by retail foreign direct investment and the entry of retail giants."

In contrast, Anand Sharma, commerce and industry minister, forecast that this new influx of retail foreign direct investment would generate more than 10 million new domestic jobs (with 5 million to 6 million in logistics) over the next three years. However, this policy inaction casts a mask on the face of a far greater human tragedy.

The largest fraction of India's retail business is in the food sector (63% of the total), where retail stores and employment are merely the tip of the iceberg. The entire retail supply chain rests in a state of morbid inefficiency, with disastrous economic and humanitarian consequences.

Whereas the media frequently quote "retail employment figures" at 40 million, the total figure is closer to 500 million when the entire supply chain is considered. Most importantly, India's population of 500 million living on small-scale farms have been exploited for generations by the lack of infrastructure, and the dominance of feudal landlords, money lenders and various middlemen and wholesalers.

Roughly 20% of India's food products (and 40% of fruits and vegetables) go to waste every year due to the hoarding and coercion in the food supply chain and the lack of planning and poor storage infrastructure.

These supply-chain inefficiencies often drive individual farmers into "distress selling" of produce at discounts up to 60% of the market prices and trap many of them in vicious cycles of debt and poverty that have driven a quarter million Indian farmers to suicide in the last 16 years.

Not surprisingly, the exploitative middlemen in India's current retail supply chain are those most threatened by retail foreign direct investment and the entry of retail giants.

Although bashing multinational enterprises is fashionable in India, Wal-Mart and Pepsi have demonstrated international success in directly connecting to small-scale farmers as suppliers, organizing bank loans, improving the quality storage infrastructure and stabilizing produce prices in countries like Guatemala and Peru, as well as India.

By delaying retail foreign direct investment, the Indian government has protected the intermediary status quo, and ignored the plight of 500 million desperately poor Indians living on farms who have publicly voiced their support of allowing retail giants to enter the Indian market.

For decades, the intermediaries and middlemen of social and financial status have formed a powerful political force that now perpetuates a humanitarian tragedy by continuing to be protected from foreign competition.

By delaying the decision that would allow multibrand retailers like Wal-Mart to enter India's booming retail sector, the Indian government is passing on a valuable opportunity to energize the retail market, create millions of new jobs and break the supply chain cartel that has impoverished India's small farmers.

Mark J. Perry is a visiting scholar at AEI. Sy Banerjee and Thomas A. Hemphill are professors in the School of Management at the Flint campus of the University of Michigan

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Mark J.
  • Mark J. Perry is concurrently a scholar at AEI and a professor of economics and finance at the University of Michigan's Flint campus. He is best known as the creator and editor of the popular economics blog Carpe Diem. At AEI, Perry writes about economic and financial issues for and the AEIdeas blog.

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