But there is a fatal flaw in the negotiations being carried on under the Doha Round. Developing countries realized the developed countries short-charged them in the Uruguay Round Negotiations. Naturally, the political response to the Doha Round was sharper, stronger and collective. The net result is that development was placed at the heart of the Doha Round of Negotiations. This, experts point out, made western powers, notably US, lose interest in the Doha Round Negotiations. Western powers are concerned about gaining market access for their corporates. In the process if the development agenda of the Doha Round is damned, so be it.  

Development agenda is a euphemism for stalling further trade liberalization. In the process, developing countries realize that unless they collectively deny further market access to Western corporates, they cannot gain substantially through trade liberalization. No wonder, developing countries now seek to undo the skew in the Uruguay Round in the Doha Round. That explains why western countries have lost interest in the Doha Round and why the Negotiations seem to go round and round.

Sensing a collective roadblock, the US seems to have hit a new idea. It has realized that it stands to lose in bargaining at a multilateral level. Now it is negotiating at a bi-lateral level. That explains why the Americans are pushing for opening up our services sector, importantly the retail sector, even as these discussions are still presumed to be in an embryonic stage within the WTO.

That means India would be seen unilaterally liberalizing its services sector (retail trade falls within the services sector) far ahead of the WTO negotiations. That could be acceptable provided US grants unilateral market access for some of our commercial interests. But US is booting out our software engineers just as we seem to grant market access to its retail giants.

Absurd idea – dangerous fallouts – meticulous preparation

No wonder, bureaucracy and media seem to mislead the nation with the absurd idea that we can become a services-driven economy bypassing the industrial revolution. This is despite the fact that the organized sector only employs less than 10% of the total work force of approximately 400 millions (including the farm sector), with the balance employed in what is euphemistically called the unorganised sector. We will revert to this issue shortly.

What is absurd in this liberalization policy is that it presumes increased sourcing from domestic manufacturers. Recall the comments of the Wal-Mart CEO as to how allowing Wal-Mart to operate in India would benefit our domestic manufacturers. These arguments were analyzed in a two-part article authored by Kamal Sharma and Jeevan Prakash Mohanty titled FDI in retail - A question of jobs, not ownership in retail (Business Line, Sept. 29, 2005.)

The authors brilliantly put forth their views: “The primary task of the government is still providing livelihoods and not create so-called efficiencies of scale by creating redundancies. If we assume 40 million adults in the retail sector, it would translate into around 160 million dependents. Opening retailing to FDI means dislocating millions from their occupation and pushing vast number of families under the poverty line. The western concept of efficiency is maximising output while minimising the number of workers involved. This will only increase social tensions in a developing country like India, where tens of millions are still seeking gainful employment. Companies such as Wal-Mart boast about how they give the consumer better value.”

It is feared that under the WTO regime, India has removed quantitative restrictions – implying unrestricted imports of virtually any manufactured goods. With superior logistic management, these global giants would be able to procure anything – from farm products to manufacturing from any corner of the world, putting extraordinary pressure on domestic suppliers. Even when they source from India, their track record in squeezing smaller players is well-known. Given this paradigm, where is the question of our manufacturing sector profiting from their entry? And should our manufacturing sector not yield, Wal-Mart will begin to source products from some other countries.

Despite knowing all this, our establishment seems to be in denial mode. In order to condition the mind of the Indian public, the Department of Industrial Policy and Promotion (DIPP) invited “comments” (as if it was having an open mind on the subject) from the public on allowing FDI in this sector in middle of 2010. Taking its cue, the Planning Commission approvingly stated “FDI in multi-brand retail trading should be permitted, since it will have both a positive direct and indirect effect, that are of value to the national economy.” It was a hint to media and analysts to bend; as is their wont, they crawled.

Simultaneously as these events were unfolding at rapid pace in India, the Indian Ambassador to the US, Ms Meera Shankar and Mr. Vinay Kwatra (an officer in our embassy) reportedly made a (secret?) visit to the Wal-Mart Headquarters, Bentonville, Arkansas on 23 July 2010. One is not certain whether service rules permit such visits, especially when the company in question is at the centre of a policy conundrum back home in India. Anyway, the preparations of the Indian establishment seem to be truly meticulous. With such a plaint administration, it would be sacrilege to allege corruption. Where is the question of corruption when our establishment is ideologically a convert and is ready to commit sati for the US Government?

India’s growth model is unorganized. Or is it?

There is an entirely different dimension to this debate, probably escaping the attention of most analysts. Since Indian economy, unlike its western counterparts is not controlled by corporates, experts term it an unorganized economy. That is simply bizarre. Prof. R. Vaidyanathan of the Indian Institute of Bangalore has a better term – an unincorporated economy, not unorganized. 

He argues that what is missed in the melee is that the Indian economy has its own method of organizing itself. It is organized on the basis of castes and communities. For instance, the World Bank conducted a study a few years ago on the Gounder community, many of whom were not even matriculates. It is often said that the Bumble Bee as per established laws of Physics should never fly. Yet it flies. The only possible explanation for this is that the Bumble Bee does not understand the laws of Physics, or it would be too burdened by the laws of Physics and explanations of physicists to dare to fly!

Likewise the lack of formal education in within this community was a blessing in disguise as it turned employees, for want of clerical opportunities, into employers. And such employers, because of caste and community affiliations, turned their factories, not only to produce goods, but into an open air university which would endlessly produce entrepreneurs. It is here that the World Bank analysis becomes crucial. Pointing to the emerging frontiers of economies that are able to develop, regulate and sustain themselves, the World Bank suggests that the rise of Gounder community in Tamil Nadu was because of its ability to manage its affairs by itself, raise capital from within and inspire others within the community to become entrepreneurs. This is the remarkable success story of this community.

The World Bank’s conclusion was stunning: “The needed capital was raised within the Gounder community, a caste relegated to land-based activities, relying on community and family network. Those with capital in the Gounder community transfer it to the others in the community through long-established informal credit institutions and rotating savings and credit associations. These networks were viewed as more reliable in transmitting information and enforcing contracts than the banking and legal systems that offered weak protection of creditor rights.” This ability to organise a society without state intervention is unique to evolved societies and is now termed as social capital by economists. The study of social capital is the emerging frontier of modern economics.

While one is not sure of any similar study conducted by any institution on retail trade in Tamil Nadu, empirical studies conducted by several analysts show a similar success story amongst the Nadar community in retail trade in Tamil Nadu. And what was predominantly an economically backward community a few decades back stands as a prosperous community virtually controlling the entire retail trade now. Possibly this story is repeated across several states of our country involving other communities.

What is practiced by these communities is capitalism, but not corporate capitalism of the west that indiscriminately favours large corporates, allows them to take extraordinary risks and when they go bust, the state intervenes to bail them out. Rather, it is based on tradition, ethics, family values and has its own unique dimensions. It has competition but does not cannibalise competitors. This eliminates bankruptcies. It allows employees to become entrepreneurs and allows employees to empathise with employers. Naturally there is virtually no labour unrest in this model. In a way it mirrors the harmonious construct of our society. And that in short is the manner in which the Indian economy is organised (pun unintended).

Allowing FDI in retail trade can destroy this economic model. Let us not forget that this economic model is a creation of evolution and product of our experience of several millennia. This is our social capital. What is creating consternation amongst well-meaning analysts is the fact that while governments are intrinsically incapable of creating social capital, they are eminently capable of destroying it.

Central to the debate is that every government study has pointed to the benefits of allowing FDI into retail, the potential for attracting foreign capital and the incremental jobs such investments could generate. But laws of economics are not as simple as government agencies and economists want us to believe. Every “study” sponsored by the government or its agencies have scrupulously avoided commenting on the destruction of social capital, employment opportunities and livelihood amongst our people. Are they suggesting FDI in retail is pure unmixed blessing? If that were the case, why delay FDI in retail for so long? Surely economists within the establishment have not heard of the idea of social capital. Or are they simply on the payroll of some retail giant that they chose to ignore the same? Your guess is as good as mine.

Western economy is fashioned on Abrahamic religion - organised, controlled and structured. Abrahamic faiths are monotheistic and eliminated pagan religions as “unorganised” or “primitive”. Western corporates seek to operate as monopolies, which by definition eliminate competition. This is the anti-thesis of our idea of capitalism, where multiple players proliferate, compete and succeed. What is fascinating is that communism too operates through large corporations and functions on similar lines, with perhaps ownership being the only point of contention. While capitalism allows ownership of large corporates by people, in effect it is controlled by a few persons through the Board of the company. Similarly, in the name of the people, a few from the government control large business units under the guise of communism. It is two sides of the same coin with some minor differences.

The west does not have a third alternative. For us in India, economy is integrated to our lifestyle – where capitalism functions but with absolute responsibility. And this model is the functional alternative. It is organised and unlike the west is perhaps organised in a far superior fashion. Liberalising FDI in retail trade falls in the long list of policy initiatives that seem oblivious of this distinction between our economic model and the west.

Surely, at the fag end of his long career, our PM faces a fundamental yet crucial test – does he understand India and recognise her unique economic model? Does he understand the soft underbelly of western economic models? Does he realise the negative impact of allowing FDI in retail in the Indian economy and particularly society? Does he realise western economic models of both capitalism and communism (both of which operate through large corporations) ultimately turn profitable only in the absence of competition? One is not sure. Given his track record, as Obama the lobbyist stands up for the US (corporate) economy, will Dr Manmohan Singh stand up for the Indian economy? One is not sure.

(Concluded)

The author is a Chennai-based Chartered Accountant; his email is mrv@mrv.net.in