Consumer is King

In days following the announcement of intent to allow FDI in retail, there has been an extensive debate offering multiple perspectives here, even if the debate in the corridors of power has been shrill. Many informed voices have reasoned and provided figures in defence of and against this proposal.This is my attempt at providing another perspective with my opinions and ideas.

With due apologies to Abraham Lincoln, an Economy is a system of the consumers, by the consumers and for the consumers.The goal of any economy is to facilitate consumption, be it essentials like food, clothing, shelter or luxuries like cars. As the goal of employment is to earn enough to meet your needs, consumption, not employment is central to any economic policy making. The simplistic model that divides participants in an economy into “producers” and “consumers” therefore needs a revision.

It can be argued that if the state of affairs were such that there was automated production, consumers would need no employment (or that there is no need for producers). However, if there were no needs, the producer is redundant. Therefore, in a trade-off between the welfare of a producer and the welfare of a consumer, I would always side with the latter. That is not to diminish our roles as producers in the economy. After all, sustainable consumption does require continued supply of goods and services.

 In spite of differing opinions on various facets of the proposed plan, consensus is that FDI in retail will increase competition to retail service providers. Whether the effects of such competition lead to the displacement of small retailers (as some have feared), or not is moot. Competition results in lower prices for the consumer and there is net gain for the economy in looking after its consumers. Even if it does, such displacement only signifies economies of scale at work, and ensures higher efficiency in the market.

 If the large retailers sell at a loss to gain a foothold, good for us. Given the low purchasing power of a big chunk of our economy, such subsidies out of private pockets are quite welcome. And, as long as the entry barriers to the market are not artificially raised by our government later on, these large scale retailers can not raise the prices beyond competitive market rates. If these retailers try to increase their margins beyond current margins, they become vulnerable to sniping from unorganized, small-scale retailers like the present kirana stores.

 Similarly, some of the fears expressed that such large retailers may pressurize small scale farmers is also misplaced. Small-scale farming is a highly inefficient sector for employment and the sooner we provide opportunities to such farmers to seek alternative employment, the better for all. Providing false incentives to keep farmers tied to such unproductive work has only prolonged their misery, and with it ours too. That said, FDI in retail will only increase the number of buyers a farmer can sell his produce to, and therefore will be able to negotiate a better price.

Some concerns have also been raised that this would mean outsourcing our retail service, and thereby losing revenue to another country. Such concerns would be allayed, if we realize that corporations are private entities and not countries to be beholden to.At the same time, it is wrong to equate buying a service to incurring losses. If a worker was being paid 100rs/day and had the skills to do a minor repair in her backyard which would also take up an entire day of her work, It does not make sense for her to do the repair herself as long as the cost of repair is less than 100rs. Buying that service, even at 99rs means that she has earned a profit of 1Re.

The greatest danger from this sudden decision to permit FDI in retail comes from crony capitalism of the sort that saw us create instant billionaires in 2008. Of course, public-fund sponsored bailouts and arbitrary legislation leading to reduced competition for such retailers is always a possibility. On the other hand, as some have argued, the effect of FDI on retail may be minuscule, there may be policies that yield a much higher pay-off than, and we will still be staring down a double-digit inflation for the next few years. The urgency shown in trying to shove this policy down our throats also reeks of ulterior motives and the absence of a parliamentary debate on this issue is undemocratic.

 Yet, in spite of all this, I see merit in supporting this bill. The majority of us seem to like the general idea of reforms but not reforms themselves. To be more specific, most of us like the general idea of lower prices, but without the increased competition. It is no secret that, as economic conservatives (classical liberals), we are a fractured minority. In a democracy such as ours, the only way to achieve more economic freedom is by convincing more people that liberalisation is a faster path to progress rather than sops. Thanks to the modicum of liberalisation seen in 90s, we no longer need to take part in the socialist charade claiming that only the government can serve the poor where as the private players are out to fleece them. It is my hope that FDI in retail provides further proof that free markets are beneficial to all, and strengthens our case for greater economic freedom.

(Opinions expressed in this post belong to the author. However, the author highly doubts the originality of these thoughts. Someone somewhere is bound to have expressed these thoughts and done a much better job at it.)