There are three kinds of lies: lies, damned lies and statistics. - Mark Twain
Here is a test. Read Himanshu's article in Mint about FDI in retail, and try to spot the multiple holes in his narrative.
Himanshu is an assistant professor at Jawaharlal Nehru University. He cleverly uses statistics to make his point that the benefits of retail FDI are non-existent/exaggerated. Does he succeed?
He lists all the alleged benefits of allowing FDI in retail in his third paragraph, and at the beginning of his fourth, he makes the sweeping claim:
'So why should one oppose FDI in retail? Primarily, because none of the above assertions (benefits of retail FDI) are based on facts and is nothing more than wishful thinking.'
Really? Not even a little?
But lets move on.
'The US is the best place to analyse the role of retail giants on farm produce prices (the prices received by the farmers) and retail prices (prices paid by the consumers).'
Why is the US the best place? There is no explanation here, so let's assume that reliable data to measure the effects of retail giants exists only in the US. By the way, is there no existing data on this in India? After all, (local) retail giants have existed here since many years.
Anyway, now is when Himanshu uses selected statistics from a US study to prove his point. The statistics themselves are not a problem, of course (assuming they are accurate). Himanshu's (sometimes implicit) interpretation of the data, however, is.
'The average value of farm share (the share of total retail price received by farmers) declined from 41% in the 1950s to around 35% in the 1970s, and then declined sharply after the 1980s to only 18.5% in 2006. That is, for every dollar worth of food bought by the consumers, only 18.5 cents were received by farmers. The rest was accounted for by advertisements, marketing, profits and so on. ....... For rice and wheat, the price received by farmers was only 19 cents for every dollar worth of these commodities sold in supermarkets. For the record, an Indian farmer gets anywhere between 60% and 70% of the retail price for rice and wheat.'
Reduction in the farm share percentage is very normal as an economy becomes more developed and urbanised. Note that the reduction in the US happened over decades, not over years. Marketing expenses and profits, which supposedly accounted for the difference, are apparently resented by Himanshu, who perhaps only cares for the farmers, and not the marketing industry people, or the shareholders of the retail giants. But when it comes to policy, should the government favour one class of people over the rest, or should it look at the overall benefit to the economy? The answer is obvious.
Even at the most fundamental level, Himanshu's narrative falls apart. According to Himanshu's stat about the declining farm share percentage, the giants are not adequately compensating the farmers for their produce (the alternative theory, that the giants are fleecing their customers with high prices, is obviously flawed [given that they are often competing with other retailers, both big and small] and can be safely discarded).
But is anyone forcing the farmers to sell to the giants? If the farmers are selling, it means that that is the best deal they are getting.
But, you argue, they have no alternative. The giants (note the plural) are the only buyers.
Even if that is true, it can only be because the giants are so efficient and competitive that they have forced the smaller stores out of business and have captured a large share of the market (again, this would happen over decades, if at all). If so, such efficiency should be celebrated. After all, at the most fundamental level, it is getting more for less that drives growth.
And remember, it is not the case that there isn't any competition between the giants, so there is no exploitative monopoly here. The farmers can hardly complain that they are forced to sell at non-remunerative prices to a monopoly buyer.
In the Indian context, a giant retailer won't be able to buy farm produce (wheat and rice in Himanshu's stat, for example) at a lower price than what the existing traders/wholesalers/kirana shops/local giants are paying the farmer. So what is Himanshu so worried about? What is there for farmers to lose if they have extra buyers for their goods in the market? Common sense tells us they only have to gain.
'In real 1982-84 dollars, the total spending by consumers on food increased by almost four times. But the total income received by farmers declined in real terms after reaching a peak in the mid-1970s. So where did the increased spending go? It went to the retail chains as profits.'
The last sentence is almost surely false. Surely not all of the difference was accounted for by profits at the retail giants. A lot of it must have gone towards higher expenditure.
After all, if easy, super-normal profits were on the table, what is to stop new stores (big or small) springing up (in the medium term) to take advantage of a highly profitable business and make easy money? Were there any regulatory barriers which disadvantaged new entrants? Note that small Mom N Pop stores were the first-movers in the industry, and if anyone was at an advantage, it was them. If the giants have eclipsed the smaller stores, they must have done something right.
And even if the retail chains did somehow enjoy super-normal profits in the US, why begrudge them their dues? Perhaps Himanshu would have a different view on the issue if he held Walmart shares.
'In those markets where the concentration of market power is very high among the retail giants, the markets also exhibit a trend of downward price stickiness (that is, prices adjust upwards, but do not come down even if farm prices come down). So what was the impact of such retail chains on inflation? Data from the Food and Agriculture Organization on food prices does not suggest any evidence that countries with higher penetration of retail giants did any better than those without it. Food prices rose in almost all countries, including the US and Europe.'
The study suggests that there is no evidence that countries with higher penetration of retail giants did any better than those without it, but we can also assume (since Himanshu is silent on this) they did not do any worse either. But remember, inflation is calculated on some recent base, usually year-on-year. So what if the base itself is lower (or higher) in countries with more retail giants? There is no mention of this very important point in Himashu's piece.
'What about their potential effect on employment in India? An ICRIER study in 2008 estimated the Indian retail market to be close to $409 billion. Compare that with Wal-Mart’s revenue of $405 billion. While for the same revenue, the Indian retail sector employed close to 40 million workers, Wal-Mart employed only 2.1 million workers. The total employment of the top five retail giants together was less than four million, close to 10% of the total employment in the retail sector in India. While it is sure that the total employment created by these retail giants will not be close to 10 million as the government has been claiming, it will certainly destroy livelihoods of millions of workers currently engaged in the sector.'
Firstly, retail giants entering the India market would definitely employ many more people per dollar of revenue than most other countries, because of cheaper labour. If our labour laws weren't so out-dated, they would employ even more.
Secondly, if the giants opt for more mechanization at the expense of labour, then (apart from the obvious productivity benefits) there would be more employment among people associated with manufacturing and servicing those machines, a fact Himanshu chooses to ignore. He also ignores other indirect/ancillary jobs that would be created. Also note that the direct jobs lost, if any, would be over decades, giving people time to find new jobs, and adjust to the newer, more efficient economy.
Thirdly, should policies be decided on how much employment is likely to be gained/lost? Isn't that only one of the many factors that go into making a decision? After all, if employment generation is the only agenda, the government should pay people to dig ditches and fill them up again. Or pay them to do nothing. Utopia!
Actually, I should just have quoted Tyler Cowen, who (very elegantly) wrote this in December:
'Fewer jobs are precisely the point. What India needs is fewer jobs; fewer jobs in retail, fewer jobs in apparel and, most of all, fewer jobs in farming. India cannot become even a middle income country if most of its workers, for example, are farmers. To improve its standard of living, India must use fewer people to produce more agricultural output.
Fewer workers in farming (or retail) means more workers producing more goods in other industries. The same basic lesson holds throughout an economy, it is the declining sectors that allow other sectors to advance. Instantaneously? Immediately? With higher wages for every worker? No. Transitions always involve some pain; creation always involves some destruction; growth always involves change. The alternative, however, is stagnation.
The politics of growth are difficult because those who lose from change are always present and are often more numerous and perhaps even more deserving than the present winners, the capitalists, the business people, the international mega corps; but today’s losses and gains are fleeting, the permanent winners are the workers and consumers of the future who will know only the benefits of productivity.'
There. Case closed. Perhaps Himanshu's column should be named 'Farm Half-truths'.
But wait, Himanshu has more:
'The evidence is hardly conclusive on the lofty promises made in favour of FDI in retail. But more than that, these claims seek to divert attention from real issues of reform required in the agricultural sector. The short cut to containing inflation is not in bringing FDI in retail but in our own existing policies of food-supply chains and archaic laws that govern our markets for agricultural products.'
This is where Himanshu begins to make sense. The benefits of FDI (at least the direct ones) in retail are probably over-stated, especially when you consider that retail giants already exist in our country. And he is right that smart agricultural reforms will benefit India far, far more than any foreign retailer ever could. Unfortunately, they are nowhere on the agenda at the moment. To make things worse (or is it better?), our agriculture minister goes missing right bang in the middle of an emerging drought.
Yikes!
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