Is foreign invetment in India GOOD or BAD?

On FB Piyush Jain from Kota showed a very good concern on FDI in India.

His Q: AAryan Rao, I say some thing, that foreign companies are coming in India that is very bad bcoz now again India is servant of foreigners.

My reply: Piyush,

There are two ways to look at it.

  1. It is good that the foreign companies considered putting their money in India. This shows that these companies have studied the economic scenario well and sees that there is potential for high growth and good return on their investments. On the other hand it will also help to increase employment in these sectors. They also need to treat and pay good to their employees as they need to meet certain standards (reduction in exploitation).
  2. It is also good in disguise as these companies have to produce good quality products to compete with their counterparts in India. Why and how it will benefit the Indian consumers?
    1. Take a classic case of the fake medicines which got busted recently. The companies who are involved in making fake products want to make quick money and take no ownership of liability. These foreign companies have to stay away from these kinds of practices as one can sue them for such malpractices.
    2. Secondly, they will educate the consumers about how to recognize the fake products widely, as they need to stay in competition, and develop new technologies for the consumers to identify the fake products as well.
    3. Lastly, the consumers need to keep up their pace with these new trends and technologies, which will put pressure on education system for better educational support. This will in turn help to raise the bar of the current educational system and in return will help to improve the quality of Life.

I forgot to mention one more thing. There is one more opportunity for India. It can utilise its intellect resources in developing high-end technologies and make more money by selling it to other countries. Thus the highly intellect people does not have to work for low-end technologies. This way India can focus on utilising the existing resources wisely.

The only measures India need to take is to keep an eye on them  when these companies tries to take-over the existing companies. Indian Govt. need to develop a policy, in Technology and Human development, to help the local Indian companies to compete with them. The Indian companies need to get better and develop their ability to export and compete these companies on their home turf.

Image Source: http://www.tribuneindia.com/2004/20040526/biz.htm

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UPDATE: On Facebook dated 14-Nov, 2012, Mr. Murali Kumar had repeated the same questions and requested to speak to the data provided in the articles published in THE HINDU. The links are attached below.

http://www.thehindu.com/opinion/op-ed/article3897906.ece

http://www.thehindu.com/opinion/columns/Chandrasekhar/the-food-crisis-and-india/article3853840.ece

http://www.thehindu.com/opinion/columns/Chandrasekhar/the-role-of-the-small-retailer/article3968191.ece

I have extracted the data from these articles and providing my view here.

Data from article “Made in the United States” The Hindu:

The Indian retail market is estimated to be around $400 billion with more than 12 million retailers employing 40 million people. Ironically, Wal-Mart’s turnover is also around $420 billion, but it employs only 2.1 million people.

Recently, a New York Times expose showed how Wal-Mart had captured nearly 50 per cent of Mexico’s retail market in 10 years. What is important here is that as per the NYTdisclosure “the Mexican subsidiary of Wal-Mart, which opened 431 stores in 2011, had paid bribes and an internal enquiry into the matter has been suppressed at corporate headquarters in Arkansas”.

My view: Indian retail market is adding value worth $10 000/employee (400 000 000 000/40 000 000) where as Wal-Mart alone is adding value worth $200 000/employee (420 000 000 000/2 100 000) which is 20X. This clearly shows that Indian retailers are pocketing more money and underpaying their employees, else there is no way that these Indian retailers can survive.

Regarding taking over the market, like Mexico, we need proper checks and balances. This is the downside of allowing big fish into the pond of small fish.

Data from article “The food crisis and India” The Hindu:

India is not a major food-importing nation and is currently sitting on stocks adequate to meet demand even if the current close to 20 per cent deficit in the Southwest monsoon persists. In April 2012, rice and wheat stocks at 333.5 lakh tonnes and 199.5 lakh tonnes respectively were much higher than the prescribed minimum buffer limits of 142 and 70 lakh tonnes for that time of the year. A consequence has been that the Food Corporation of India has run out of appropriate storage for the stocks it has been able to procure and needs to hold.

My view: This raises serious questions.

  1. Why India is not able to feed its poor, even though they have surplus production? If you say this is due to price inflation, then who is inflating this price?
  2. Why Indian labour market is so poor, and who is keeping them poor?

The answer is clearly evident – the culprit is wage and price control; it is the Indian retailers, who are not even bothered about the future and taking shortcuts to survive at the cost of the employees and consumers.

Data from article The role of the small retailer, The Hindu:

What emerges from these data sources is that the unorganised sector in trade accounts for more than three-fourths (78.1 per cent) of employment in the sector as a whole in the country. On the other hand, gross value added in the unorganised enterprises engaged in trade amounts to just 22 per cent of the value added in the trading sector as a whole in the country. Thus, the unorganised trading sector does indeed provide for employment for a substantial majority engaged in the sector, though with net earnings that are clearly very much lower than in the organised sector.

My view: This is very dangerous. The country’s economy cannot survive longer if it is labour intensive. This clearly shows that we are not encouraging the special skills and utilising other resources. History is evident, fall of Gurjar and Satvahana’s economic prosperity due to their lack of naval and defense technological improvements, that Indian economy has doomed whenever it didn’t adapted to new technology and resources for business and trading. A labour intensive country will not stay healthy for long and becomes an easy prey for foreign invasion.

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9 Responses to Is foreign invetment in India GOOD or BAD?

  1. AAryan says:

    —– The discussion on FB —-
    Piyush Jain इस कदम से 1 करोड़ लोगो को रोजगार मिलेगा और साथ ही किसानो को उनकी फसल का अच्छा मूल्य मिलेगा .यह सरकार 1 करोड़ लोगो को रोजगार मिलने की बात तो दिखा रही हे लेकिन इनके इस कदम से जो 1.5 करोड़ लोग बेरोजगार होंगे वो नहीं दिखा रही हे और इस देश में अनुबंध खेती से किसानो का शोषण ही हुआ है और देश में महंगाई की मूल जड़ यही हे लेकिन इनके समझ में नहीं आ रही क्योकि इनके समझ में तो थप्पड़ और जूतों की ही भाषा आती हे .
    23 hours ago · Like.

    AAryan Rao
    Can you tell me how 1.5Cr will loose their jobs? Secondly, Agriculture is a whole different industry and the Farmers need to take the responsibility and reduce dependency on the Govt. Currently Govt. in India is doing only short term planning, where the Agriculture sector requires short and long term planing like, R&D, Education, hi-tech pilot projects, Agro-bio technology, alternative irrigation, natural resource optimization etc.

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  2. Sameer says:

    One of the primary benefits of FDI, apart from the obvious monetary inflow, is the introduction of technology & know-how. While FDI by itself is highly desirable, there’s another perspective that merits a look in this specific case (FDI in retail).

    Retail, as an industry, is one that occupies the middleman slot in the supply chain. So, apart from processes, there isn’t much in terms of know-how that comes into the system by way of FDI. So, the end result of this move would be that the foreign companies would be garnering profits without having put in anything but the money.

    The case becomes curious because the players benefiting from this move are primarily the bigger players in the market (Bharti, specifically?) who have both the financial resources as well as the wherewithal to develop processes based on industry best practices. Homegrown giants in the retail sector like Future Group have tasted success without FDI and are well-poised to enter the same league as the Walmarts & the Macys. Effectively, this is a case where the likes of Bharti are getting to resort to shortcuts at the cost of massive profits that would eventually be channelled out to overseas companies.

    While I’m not against FDI in any industry as a matter of principle, I view this as a case of misplaced priorities. There are several other sectors where the government should’ve opened the doors to FDI before doing so in the retail sector.

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  3. AAryan says:

    Sameer, you have valid concern, that in Retail sector these companies might not bring new technology but just investment and garnering profits.
    The other side of this is they put indirect pressure on the suppliers to get better technologies to make their product competetive.
    For example: Potato chips in North America: Initially they offered what they had, but slowly the consumers demanded better quality with 0% trans fat. It put the pressure on the farmers to develop technologies to grow better quality potatoes which can have provide better taste and less saturated fats. Also, incidentally the demand increased but supply is limited. India is the second largest potato producer but the productivity per hectare (16.4) is less compared to Europe or North America (44.6 max).
    Retail sector partly works on what they can offer and partly on satisfying consumer demand. This demands competition and the winners are those who wins the trust of those consumers. To win the trust these retail giants has to give back to community as sponsoring sports, educational scholarships and social charities.
    Now the question is how the small players can survive. The answer lies in custom market. The rich and wealthy go for the unique products. Thus the small players need to shift their focus on the products which can be customized and requires best skills like jewelery, furniture, and modification business.

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  4. “Take a classic case of the fake medicines which got busted recently. The companies who are involved in making fake products want to make quick money and take no ownership of liability…..”

    This is an advantage, but with when they came (MNC in pharma sector), they made sure that the patent laws are changed. After that monopoly was established, as MNCs had filed patents even before the law was introduced because they knew the patent law will change, because they had their men in the parliament. Many companies that pioneered in drugs shut down. The prices raised like hell. India was the biggest exporter in pharaceutical sector….. MNC introduced 80,000 non-essential, untested drugs to stay in market. Many of these have many side effects. They pushed new medicines because new medicines would mean monopoly again for the time because of patent. I think untested drugs are as dangerous as fake medicines, did we gain or lose.

    These companies take loan from their ofshore branches in tax heaves at artifically inflated rates so that they can transfer all profits to their parent company in a tax heaven and pay no tax. So many countries are trying to make laws, example Denmark to stop Pfizer from doing this. They will loot every penny you can give. Destroy competition, push untested drugs, inflate prices, not pay taxes, acquire all domestic companies.

    Do I sound pessimistic, such hear the same from the cheif economist of world bank at a conferene arranged by google “Making globalization work – Joseph Stiglitz”

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  5. AAryan says:

    @ Sashank: This is an excellent overview on Pharma industry. This is where Govt. need to put proper checks and balances. Hope our Govt. have time to open their eyes and act quickly.

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  6. AAryan says:

    There have been many issues raised regarding the FDI in India.
    Herewith I am summarizing the overview of the FDI and why it is not a threat to the society.

    Let us look at the picture at the basic level first, then the macro level (which has already been covered above).
    • Any entity (Foreign companies) invests money to make dividends (profits). So the main outcome of the investment is to make money. How much? The answer depends on the demand and supply of the market (when there are many options available) or necessity (when the supply is short).
    • The income, in the retail, is the difference of sales less purchase costs and expenses. Big retails have big expenses. So how these big retail makes their profits – with bulk discounts and reduced cycle time (sales).
    • The biggest expense is the shelf time. The product costs more if it sits on the shelf for longer time. How the big retails overcome this issue – clearance sale and returns insurance. They claim the returns from the suppliers.
    • Where do all these big retails focus on – Of course on the largest sect. of consumers, who are mostly “middle income – class”. What does the middle class buy from these big retails – basic necessities, short term supplies, consumable goods and mid-range household items.
    • Small retail cannot have the advantages of the big retail thus their business model need to differentiate from the big retail – one of the answers is custom market or niche market.

    So let’s consider that from now onwards only big retails will be allowed. What will happen to small retails and their entrepreneurship skills? They end up either working for big retails, or become suppliers to big retails. Does this affect the employment? None, as it just got shifted.
    Now let’s consider that from now onwards only good quality goods are allowed to be sold. Consumers devise the norms for the goods and their value. Small retails will lose their edge. The small retail cannot procure the goods at the price of big retailers. Why – the big retails have negotiation power in the international market and can find the quality products to satisfy the consumers. Why can’t we make the same quality goods in local market? The short answer – it depends on the Govt. policies and subsidies and the cost of resources and distribution.
    The basic fundamental of the Economic policy is to generate income resources and ensure that it improves the quality of life (QoL) of its citizens. Does FDI fulfill this agenda?
    • Firstly, it is bringing in the investment in. The capital investment stays in India.
    • Secondly, they will be paying taxes, build and support infrastructure. Why they will support infrastructure – the reason is they cannot operate without proper infrastructure, especially the cold chains, warehousing, utilities etc.
    • Thirdly, they will be investing in the training and other human development activities to stay ahead in the competition.
    • Fourthly, the manual laborers will get better wages. Thus the QoL of manual labor will improve.

    Now, the issue about the profits – Govt. can develop a policy of taxation in such a way that they can deduct charities and other upliftment programs.
    Lastly the issue of exploitation can be tackled by co-operative societies and setting up direct completion to these retailers.

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  7. AAryan says:

    The only issue is about the Entrepreneurship of the small retailers. If they still want to stay in the small retail industry and do not want to enter into the niche market, which big retailers cannot cater, is to provide best return or exchange policy, quality goods and best customised customer service.

    Secondly, they need to get together and establish the technical, testing and research centers where the small entrepreneur can get his products tested and get quality approved at the minimal cost.

    Thirdly, consumer protection needs to get tighter. Consumers need to avail their rights and should not allow the crappy goods business and demand quality audits and certification from the retailer.

    If the above three steps are taken then soon the big retailers gets wiped out.

    Then the vicious cycle begins again. The small retailers will take-over these big retailers and the retail industry is back to square one. OR The market will differentiate as the consumers will be more aware and the industry shifts into new gear.

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  8. AAryan says:

    If the cards are played well then it can be blessing in disguise. The govt. need to revise policies to improve the socio-economic structure so the citizens can take the maximum benefit of this move.
    The minimum should be
    1. Provide educational support to the local small and medium business owners to compete internationally.
    2. Subsidize small and medium business owners, initially for 3 years, seeking in importing or developing high end technology and mandatory participation in giving back to educational institutions.
    3. Revise and incorporate employment insurance policies, social assistance and continuing educational support.
    4. Raise the standards of the vocational institutions and mandatory internship for the vocational students.
    5. The Baccalaureates and higher graduates entering into work force need to be licensed.

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  9. Sethuraman R says:

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    Like

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