Big Bang Reforms: Why Now and for Whom

September 20, 2012

Deepankar Basu and Debarshi Das

Introduction

On 14 September, 2012, the Indian government announced a slew of measures to revive the process of “economic reforms” that was initiated in the early 1990s. Quite understandably, the international and Indian financial press has given the announcements an ecstatic reception. Commentators have gone overboard terming it the “big bang reforms” that will finally boost the sagging growth rate of the Indian economy.

Ever since the early 1990s, the thrust of the “economic reforms” process has been to facilitate a closer integration of the Indian economy with global capitalism and increase the weight of the private corporate sector within the domestic economy. The measures announced on September 14, 2012 continue and deepen this process significantly.

What are the key policy changes?

To understand the logic of the government’s announcements, it would be useful to divide the key components of the policy changes into two categories, those that primarily relate to the interests of foreign capital, and those that relate primarily to the interests of domestic big capital.

The policy changes that would be of direct and primary relevance to foreign capital are the following:

1. The government has finally decided to allow up to 51 percent foreign direct investment (FDI) in multi brand retail. This means that now foreign capital will be allowed to hold a majority stake in the multi brand retail sector, a move that will no doubt seem very agreeable to the likes of international retail giants Walmart, and Carrefour. The government has thrown in a largely meaningless caveat that States (and large cities) have the option of opting out if they choose to do so. In the current political and economic climate, the caveat is meaningless because the Central government’s push for foreign capital in multi brand retail (by allowing majority stake) will only unleash a destructive competition between State governments to attract a larger share of the foreign capital that actually comes in. It seems extremely unlikely that any State government will utilize this caveat to stall the further entry of foreign capital into the retail sector in its cities. Indian big capital that is looking to cash in on the basis of this measure by tying up with large foreign firms like Walmart seem to think that this is precisely what will happen: all states will welcome (read: will not be able to oppose) the entry of foreign capital in the retail sector.

2. The government has decided to allow up to 100 percent FDI in single brand retail with the requirement of 30 percent sourcing from local MSMEs (micro, small and medium enterprises). This move will allow international firms like Swedish retailer IKEA and British footwear company Pavers England to set up shop in India with a local partner and directly access the Indian consumer. This was not enough for the big players. After pressure tactics and lobbying the clause regarding mandatory 30 percent sourcing from local MSMEs has been diluted: the foreign firm is no longer required to source from local MSMEs, it should “preferably” do so.

3. The government has decided to allow foreign airlines to buy up to 49 percent stake in domestic carriers. This move will allow international operators like British Airways and Emirates to invest and own substantial stake in the Indian airlines industry.

4. The government has decided to allow up to 74 percent FDI in many components of the broadcast sector including direct-to-home, head-end in the sky, multi-service operators and cable television.

The policy changes that would directly affect Indian big capital are the following:

1. The government has made a renewed push for disinvestment of public sector unit, apparently to raise revenue of up to Rs. 15000 crore. In this respect, the Cabinet Committee on Economic Affairs (CCEA) has decided to sell its minority stake in 4 public sector units. The CCEA has approved the sale of 9.5 percent stake in Hindustan Copper Limited, 12.15 percent stake in National Aluminum Co. Ltd., 9.33 percent stake in the trading company MMTC Ltd., and 10 percent stake in Oil India Ltd.

2. The government has decided to increase the price of diesel by Rs. 5.62 per liter, the biggest one-time hike ever announced by the Indian government. Along the same lines, it has also decided to put limits on the supply of LPG cylinders at 6 cylinders per household at the government-regulated price. To buy additional cylinders households will have to pay prices determined by the market.

The government is touting this policy initiative as the set of measures that will finally revive “animal spirits” of Indian capitalists, attract foreign investment and take the economy back on to the high growth path that was witnessed over the recent past, especially since 2004-05. But after Coalgate, perhaps we know better than to take the government’s claims at face value. Let us delve a little deeper.

Why Now?

International capital and the domestic corporate sector has been pushing for these and other related reforms for a long time. When the Indian economy hit a bad patch in the early part of 2011 – with the growth rate of national income slowing down, inflation remaining stubbornly high, the budget and trade deficits widening and the rupee sliding with respect to the US dollar – and some of these problems persisted, the call for more reforms became increasingly strident. The argument that the “second generation” of economic reforms (which includes, among other measures, liberalizing the financial sector and insurance, easing the entry of foreign capital into and out of the country, privatizing infrastructure like ports, highways, railways, airports, allowing the entry of foreign capital into the huge retail sector, dismantling “the subsidies[1]” on diesel, fertilizer, petrol, selling off profitable public sector units, etc.) were needed to kick start growth quickly gained currency among policy makers, business commentators and savvy politicians. With international institutions like the IMF and World Bank calling for more reforms, credit rating agencies threatening to downgrade the status of India’s sovereign debt, and the chorus of semi-ignorant pundits becoming a din, it was really a matter of time before these reforms would be pushed through absent strong resistance by people’s movements.

Though these reforms were clearly on the cards for the last few months (and possibly years), three more specific factors nail down the timing pretty closely. First, pushing these economic reform measures now might be one of the ways in which the Government wants to divert attention away from the coal block allocation scandal (not to speak of the Commonwealth Games scam, 2G spectrum allocation scam and other sundry skeletons which are being pushed back to the cupboard with varying degrees of success). As the business press falls head over heels congratulating the government on the timeliness and boldness of its actions; as the opposition parties and some opportunist supporters go through the motions of routine “protests” and defiance; as academics and analysts get busy dissecting the hidden meaning of the policy changes, the public might after all forget that State-assisted corporate loot that is underway in Coalgate. Big bang reforms is meant to take the heat off Coalgate, and it looks like it is already working.

Second, the next Lok Sabha elections are two years away. So, there is no immediate danger of having to face the general population of India and explain the logic of different policy changes made at the Central level. A two year period seems like a long enough time period to aggressively push for pro-corporate policies (like pushing for the whole gamut of “second generation” reforms) and yet have enough time to don the “inclusive growth” hat to prepare for the hustings. Presumably the latter would entail throwing crumbs of increased budgetary allocation for MGNREGS, farmer loan waiver, just like the last time.

Third, the continuing stagnation in the advanced capitalist countries since late 2007 has increased the pressure on developing economies like India to open up their markets to international firms. With growth in consumer spending still slow in the US, Japan and Europe, international retailers like Walmart, Mark & Spencers and Carrefour would find it extremely agreeable to its falling bottom lines if the growing purchasing power of the Indian middle class could be allowed to come to their rescue[2]. By some reckoning the Indian retail sector is close to 450 billion US dollar in size. What better way to counter the Great Recession in the advanced capitalist countries than to increase penetration in Indian and Chinese and Brazilian markets. Of late there have been some persistent goading too. No doubt this ruffled quite a few feathers in the seat of power of the self-confident, emerging superpower. And so Big Bang reforms is the way in which the “underachiever” Prime Minister announces to the international business community that he is back in the driver’s seat, he has found a cure for policy paralysis. It all fits into place!

For Whom the Bells Toll?

Who will benefit from these reform measures? The first and foremost beneficiary will be segments of international capital, especially in sectors like retail, aviation and broadcasting. Walmart, Carrefour and other similar corporations will finally get access to the growing Indian retail market. But along with these segments of international capital are intertwined the interests of various fractions of Indian capital.

For instance, big Indian capital that is operating in the real estate business will stand to gain from the entry of the likes of Walmart and Carrefour. Indian big capital, represented by firms like DLF, that has invested heavily in commercial real estate stand to gain enormously from the entry of international brands. When these international giant retailers buy up spaces in the half empty malls built by DLF and others, and draw in throngs of middle class shoppers by advertising coveted brands, a large segment of big Indian capital gains. Similarly, Indian capital that is stuck with huge losses and debt burdens in the aviation sector, like Kingfisher Airlines, will gain if foreign capital buys out their loss making firms. While it is not clear that foreign capital will actually buy equity in a loss making unit, Kingfisher Airlines fervently hopes so. Examples could be multiplied but the point should be clear: segments of Indian big capital stand to gain by these, and other such, reforms; thus, a coalition of foreign and corporate Indian capital gains from these economic reforms.

And who loses? Clearly, the entry of corporate capital into the retail sector will spell havoc for a very large section of India’s footloose informal labour force. They are plagued by uncertain and low paying jobs and often have to rely on petty production and/or trade to supplement their abysmally low incomes from agriculture and wage work outside agriculture. They are the small traders, the hawkers, the vegetable sellers. And they will lose their livelihood when the likes of Bharti and Walmart tie up to swoop down on the retail sector.

In aam aadmi-India, retail business is largely seen as a default option. People with education but without employment, or those without either, open a modest shop on borrowed wares and capital. The sector is immensely labour intensive. The meagre livelihood of these bottom-of-the-heap citizens is at stake now, after the State has abdicated its responsibility of providing them with education or gainful livelihood.

The second set of people who are likely to lose out due to the entry of multinational corporate capital in the retail sector are the low-income buyers. As the big malls weed out Mom and Pop shops, small buyers would be left with little choice but to travel kilometres to find the nearest mall, where the choice of products would be dictated by a few giant retailers. In these fancy shops, they would not be able to buy goods on credit to be settled at the beginning of the month, the common practice among low-income consumers in India.

The entry of retail sector giants would also lead to weeding out of competition among entities that purchase goods from the farmers and other small-scale producers. The farmers would find fewer options in terms of wholesale traders or retailers that they could sell their products to. It is not difficult to see what will happen once the smaller traders have been wiped out: the big players will be able to dictate terms in the market. For instance, once a giant purchaser refuses to buy from any farmer, she will be left with unsold crops. There will be no other option because the other traders would have already been competed out of the market. Thus there is a real apprehension of arm-twisting that comes with interaction between unequals. In short, entry of corporate capital in the retail sector would lead to the growth of monopoly in the selling and monopsony in the buying markets. Growth of monopoly and monopsony profit-maximising enterprises harms consumers and producers respectively.

The counter argument one often hears is that big retailers will telescope long supply chains. By cutting through the layers of middlemen, big retailers would be able to sell at a low price even while protecting their profit margins. This, according to supporters of foreign capital in retail, will benefit the buyer. On the other end, the farmer will also find an assured buyer who will provide them supply chain logistics such as cold storage facilities. Thus, goes the argument, uncertainties will be reduced, benefiting one and all.

Several worrisome points about this oft-repeated argument needs to be brought to the fore. First, what guarantees that the big retailers will not corner the commissions which were earned by middlemen in the earlier arrangement? How can we rule out collusion between big players? Second, in this era of outsourcing why should the big retail sector firms manage the supply chain themselves and not outsource the operation, in which case the middleman and his commission makes a rapid comeback? Third, from the macroeconomic point of view one needs to ask: what happens to the middlemen, who compensates them for their loss of livelihood? Fourth, will the middlemen and Mom and Pop shop owners and their employees be absorbed in the big retail stores? Fifth, what prevents the government from encouraging and facilitating the development of farmers’ cooperatives that can directly sell to the consumer and remove middlemen from the picture? Sixth, what prevents the government from managing the procurement operation efficiently, buying from farmers at an assured price (which it does for a few crops and in selected regions) and building adequate cold storage and transportation facilities?

From the experience of many other countries one finds many cases where the community milieu was devastated by the invasion of big retailers. One also finds the adoption of many precautionary measures like zoning, for instance, to mitigate the harmful effects of corporate retailing. One wonders if the Indian government ever cared for an in-depth study of the impact of big retail on society at large before it rushed in where even angels fear to tread. One also wonders why there is less hullabaloo, even from progressive quarters, over the operation of Indian big retailers whose deleterious impacts on Indian society would be no less pronounced than their foreign counterparts, although on a lesser scale perhaps.

Finally, it would be interesting to question the basic logic working behind the “big ticket reforms”. The main principle in operation here seems to be that higher foreign capital investment is better for economic growth. Even if we leave aside the obvious question, “okay growth, but then what?”, which does not seem to be asked at all these despair-ridden growth-fundamentalist days, one is still left with the question, “will these measures actually lead to growth?”. The moot point, as we have argued elsewhere, is that the kind of growth which has to be propped up by policies that harm so many of India’s poorest sections is neither desirable nor sustainable.

(We would like to thank Shiv Sethi and Taki Manolakos for useful comments on this article.)

End-notes

1. These subsidies are notional, they are not actual subsidies. To begin with, both state and central governments impose high taxes on petro-products (like diesel, petrol, LPG). Then it asks the oil marketing companies to sell at a price that is less than the tax-added price. The shortfall of the final price from the tax-added price are termed underrecoveries. The terminology is instructive: the shortfall is not called as losses but as underrecoveries. Then underrecoveries of oil marketing companies are compensated by the government, and this payment is touted around as subsidies. In short, the government first taxes petro-products, then shows part of the taxes as subsidies, and then slashes them. The net result of the exercise is to pass on higher tax burdens onto the consumers and forcing them to buy essential petro-products at high prices even as the profits of the oil market companies are protected or increased.

2. Data available in the Annual Reports of Walmart (various years) show that annual growth rate of net sales declined from 11.6% in 2007 to 1% in 2010; similarly, annual growth rate of operating income declined from 9.7% in 2007 to 5.1% in 2010.

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