FDI in Retail-Impacts on Trade Deficit and Employment

Sun, Aug 4, 2013

Biz Arena

When we try to look at the impact on employment because of the coming of big retailers, the first thing which comes in the mind is the disposition of small and medium retailers which will surely not be able to compete with the price and variety, the big retailers provide. This is indeed true but the question is -Is this the only impact?

The answer is definitely NO. Let’s try to first understand the present economic condition of India.

The International Monetary Fund (IMF) survey of global economy has found that- Among BRIC countries, India’s government debt is found to be highest at 67.57% of its GDP, followed by the Brazilian government debt at 65.09%. On the other side, debt levels in Russia and China are comfortably fixed at around 8.37% and 22.03% respectively.

The exports from India reduced for the fifth straight month in September while imports rose, pushing up the trade deficit to an 11 month high of 18.1billion $exports decreased 10.8% from a year ago to 23.7 billion $ while import increased 5.1% to 41.8 billion$. Exports have decreased sharply this fiscal due to reducing demand from west, a major market for Indian goods and other markets like Korea and Japan. The sectors affected most include petroleum products, engineering goods, gems, jewellery, drugs and ready made garments.

Overall we can say our trade deficit is increasing year after year. The manufacturing sector is a major contributor for the existing trade deficit. The information above indicates that we are continuously losing our edge on manufacturing sector because of the presence of cheaper Chinese goods. This might have a serious implication on the employment condition in India. Now let’s see how big retailers widens this import export gap particularly in manufacturing sector in countries like India whose markets are already flooding up with cheaper goods of China which ultimately leads to unemployment.

Let’s consider an example of Wal-Mart, started its business in China. The total value of the goods and services traded between US and China is $539 billion in 2011.Exports totalled $128 billion; Imports totalled $411 billion. The US goods and services trade deficit with China is $282 billion. China is currently the largest supplier of goods for US. The value of US goods imports from china is $399.3 billion in 2011, 9.4% increase from 2010, and up 299% since 2000.The major import categories in 2011 were Electrical machinery, Machinery, Toys and Sports Equipment, Furniture and Bedding, and Footwear.

As per the report of Economic Policy Institute, The United States is accumulating foreign debt and losing its expertise in export, and the growing trade deficit with China has been a major contributor to the employment crisis in U.S. particularly in manufacturing sector. Between 2001 and 2011, the trade deficit with China displaced more than 2.7 million U.S. jobs, 76.9 percent of which were in manufacturing sector.

Some critics say China has achieved its rapidly growing trade surpluses by devaluing of its currency artificially and have used various tactics like repressing the labour rights, suppressing their wages, subsidizing their products and thus making their product cheaper. China thus gives a conducive environment to big retailers like Wal-Mart to increase their profits while exporting from China and selling it across the globe.

We are nowhere different from America in this case whose manufacturing sector is struggling because of the presence of cheaper Chinese goods. We need to reduce the government debt and at the same time we need to decrease the trade deficit to improve the employment condition in India. To reduce the debt we need serious reforms which can inject money in to our market. For this allowing FDI in retail is not at all a bad option. This will indeed inject surplus money in to Indian market. But then question comes how to reduce the trade deficit.

The answer is definitely ‘30% rule’

The rule says:
At least 30% of their goods and product must be procured from local source.The rule is definitely the trump card thrown by GOI considering Indian framework and priorities in mind. This might help in reducing the trade deficit and at the same point small enterprises producing intermediary goods and ancillary items will benefit.
This 30% rule will help in balancing the trade deficit caused because of downsizing of manufacturing sector. As the retailers who wants to expand their business must procure 30% of their goods from local companies and industries, will help small retailers and dealers to sustain their profits and also it will provide new market opportunities to small enterprises, local companies and industries.Some 20-40% of all fruits and vegetables grown in the country go waste due to poor storage, transportation and handling infrastructure. As per govt regulation- At least 50% of total investment will be made on back-end infrastructure. Therefore foreign companies will invest huge capital in India. As a result, refrigeration technology, infrastructure facilities, transportation, etc. will be re innovated. That will boost exports and also lead to low-inflation rate.

-Shashank Shivhare

-Batch 2012-14

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