Why FDI in Multi brand should not
be allowed?
FDI‘ means investment by non-resident
entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange
Management (Transfer or Issue of Security by a Person Resident Outside India)
Regulations 2000.[1] Entry
into single brand retail is allowed in 2006 upto 51% that too is subject to
some pre conditions:- company should be the owner of the product and the
products should be branded during manufacturing[2].
There are many foreign companies that
have entered Indian retail sector through single brand like Reebok, nike.
Single brand deals with one particular line of product to be sold under the
single brand name to the end users for example reebok and nike sells shoes and
related products in India. Multi brand deals with different lines of products
to be sold to the end users. For example Indian company reliance is a multi
brand company dealing in Jewellery, food stuffs, petrol, mobile, cloths etc. There
are many reasons why FDI in multi brand should not be allowed at this time in
India:-
MONOPOLY
Being a multinational multi brand company, it can increase the
competition in the domestic market, which leads to closure of unorganised
sector which contributes 60% to the Indian retail sector. Unorganised sector is
not competent to deal with innovative techniques. While these marts will enjoy
economies of scale, domestic players will be forced to reduce the price and
thus bear losses. Within span of time they will be kicked out and exploited. A
similar instance has happened in US. Walmart in us follows a strategy of
acquisition. They acquire small traders and charges lower prices initially,
thereby reduces the competitors and creates dominance or monopoly and increases
the prices later on.
In case of Rodriguez cuervos v. Wal mart stores inc walmart tried to create monopoly in porto
rico
grocery chain in Puerto Rico by acquiring Supermercados
Amigo, Inc. (Amigo), the largest. The porto rico department of justice did not
accept this, as this will exploit the domestic retailers. Creation of monopoly
is against the rule of free trade.
The entry of such marts will violate
the Article 19(1)(g)[3]
of the Indian domestic retailers and it will violate article 14(Right to
equality), 39(b)(that the ownership and control of the material resources of
the community are so distributed as best to subserve the common good)
and 39(c)( that the operation of the economic
system does not result in the concentration of wealth and means of production
to the common detriment) of the constitution. No person shall be abridged of
it’s fundamental rights and fundamental rights are tools for implementing the
directive principles, specified in part IV of the constitution. Thus any policy
or decision or law or order abridging people of these rights in a justified
manner shall be deemed to be void. This was held in Kesavananda Bharati Sripadagalvaru and Ors. v. State
of Kerala and Anr. AIR 1973 SC
1461 Because
of monopoly the means of production shall vest in few hands this will create
unequal distribution of resources.
UNEMPLOYMENT
Indian retail sector contributes 13% to GDP and employs 6% of nation’s workforce. Indian retail is valued at US$450 million. Of this organised retail forms only 6.5%.[4] So the majority contribution is from the unorganised sector, the persons employed in unorganised sector are so incompetent that they cannot be employed in any other field. Efforts should be made to convert unorganised sector into organised sector then only it would be able to compete foreign entrants. But without putting any effort giving ticket to foreign players In multi brand retail will destroyed already imbalanced India’s retail sector. It is a violation of fundamental right of right to livelihood, defined under Article 21[5] of the constitution and violation of directive principle of article 39(a)( that the citizens, men and women equally, have the right to an adequate means to livelihood) of the constitution.In Balco Employees Union (Regd.) vs Union Of India & Ors on 10 December, 2001
Supreme
Court considered the complex questions relating to effect of disinvestment on
the employees and workers and whether the questions of policy and
administrative matters and decision can be heard by Supreme Court.
Balco was incorporated as a
government of India undertaking in 1965 under companies act 1956. In 1996
public sector disinvestment commission was established which in it’s 2nd
report submitted that balco should be privatised. The decision adversely
affected employees, who because of loss of employment filled the case. It was
held that the workers interest should be protected.In the similar passion Government should protect the Interest of
unorganised retail traders. Such multinational companies are equipped with
technological advancement and are mostly machine intensive and thus eliminates
manpower. They uses economies of scale for lowering the prices, which adversely
affects the profit margin of the domestic traders, who will be displaced
because of incompetency to compete. Small and unorganised retail traders will
be displaced and thus their right to livelihood should be protected.
In Olga Tellis &
Ors vs Bombay Municipal Corporation AIR 1985 Right to livelihood of
pavement and slum dwellers was protected against the forcible eviction and
removal of their hutments under Bombay municipal corporation act which deprived
them from their means of livelihood and consequently the right to life. Their
rights under article 21, 19(1)(e) and (g), Article 39(a) was protected through
this case.
In Radio House And Ors. vs Union Of India
(Uoi) And Anr. AIR 2007 the subject matter was corporatisation of the
retail sector by bringing Foreign Direct Investment ('FDI' for short). The
cause of the retail traders is focused in this petition. The petitioners'
grievance is that if the foreign companies are permitted to enter into the
field of retail trade, the business of retail traders in India would be
affected adversely; it results in the deprivation of their solitary source of
livelihood. It was held that it is for the Government to evolve a policy to
safeguard the interest of the retailers. It is trite position in law that the
Court should not substitute its wisdom for the wisdom of the Government in
policy matters.
All the matters
relating to FDI shall be dealt by Competition
commissions[6]. Competition
law believes in the premise that the unrestrained interaction of the competitive
forces in the market will yield the best allocation of economic resources, lower
prices, improve quality and maximum material progress for the citizens. Thus,
the principal objective of the Competition Law is to make the market economy work
better by stopping vested interests from obstructing markets. The purpose,
therefore, is to maintain and protect the competitive process and to ensure fair
and healthy competition in the market. Section 3[7]
of The Competition Act,2002. Section 3 of the Act prohibits any agreement with
respect to production, supply, distribution, storage, and acquisition or
control of goods or services which causes or is likely to cause an appreciable
adverse effect on competition within India. Under Section 3, any such agreement
is considered void. The term "agreement" is broadly defined and
includes any arrangement, understanding or concerted action, whether or not it
is formal, in writing or intended to be enforceable by legal proceedings. Section
4[8]
of the act prevents from abuse of dominant position. In case of Reliance Big Entertainment Limited etc.
etc.Vs.Respondent: Karnataka Film Chamber of Commerce and Ors. It was held
that no organization can abuse it’s dominant position. In
a study it was found that walmart in US has bribed the state Government on many
occasions[9],
and which was accepted because of it’s dominance, as 60% retail in Us is now
owned by Walmart. And there is a fear of the same in Indian market where, most
of the retail is in unorganized sector and who are unable to compete with such
big giants and thus it is obvious that these foreign entrants can gain a
dominant position to exploit India
ARGUMENTS AGAINST POLICY PERMITTING FDI
IN MULTIBRAND RETAIL:-STATE DISCREATION
Under
the policy It has been mentioned that India has a federal form of Governance
and FDI policy is an enabling framework and it remains the prerogative of the
states to adopt it. Under the policy state has been given discretion whether to
implement it or not.
In
Fatehchand Himmat lal(M/s) v. state of
Maharashtra AIR 1977 it was held that to defend weaker section from social
injustice and exploitation, the state under article 301 of the constitution can
derecognize certain economic activity as trade or business.
This
may to some extent may pacify the state Governments opposed to big retail.
However the industry knows that as per International trade norms, member
countries have to provide National treatment. Being a signatory to Bilateral Investment promotion and protection
agreement (BIPA)[10]
India has to provide National treatment to the investors. Agreements with
more than 70 countries have been signed by India. Industries will use the legal
action to force states to comply. Through a writ of mandamus anything can be
get done by Government.
In
case of Marbury v medison 5 US 137 (1803) The writ of Mandamus was issued. William
Marbury sought a judgment from the Supreme Court forcing the Secretary of
State, James Madison, to deliver a justice of the peace commission former
President Adams had awarded Marbury immediately leaving office. Delivery was to
be arranged by the Secretary of State's office, which, ironically, had been
under (Chief Justice) John Marshall's control at the time the commission was
signed. Due to time constraints, the task fell to the incoming Jefferson
administration, which refused to execute Adams' orders. Court opined that
Marbury was entitled to his commission because it had been properly approved,
signed and sealed by President Adams; however, the Court lacked jurisdiction to
order Madison deliver the commission. The case would have to be addressed in a
lower court first, then appealed if necessary (Marbury never pursued this
step).
BIG CITIES
The
argument that the Multi brand retail shall be allowed only to the cities having
population of more than 1 million is flawed. Virus of retail spread even if the
promise is to keep it confined to major cities. Recently new York times exposed
how walmart(World’s number 1 retail giant) had captured 50% of Mexico’s retail
market in 10 years. As per NYT walmart paid bribes and internal enquiry into
the matter was suppressed at corporate headquarters in Arkansa.[11]
30% FROM SMALL TRADERS
Policy
says that The
retailers (both single and multi-brand) shall mandatorily source at least 30%
of their goods from small and medium sized Indian suppliers(having capital
investment of not more than $ 1 million). This will cover only wholesalers,
retailers again would be sweeped out.
MIDDLEMAN AND STORAGE
Instead of reducing the number of
intermediaries big retailers brings in a new battery of middleman-quality
controllers, standarisers, certification agency, processor, packaging,
consultant etc. Middleman shall walk away with profits.
Also the argument that FDI in multi brand
will provide adequate scientific storage is again flawed as this will motivate
Hoarding. The FDI in storage is already allowed but such it has never provided
any safety to rotten food.[12]
[1]FEMA guidelines, Indian companies, http://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174
[2] FDI in single brand,
Department of industrial policy, http://dipp.nic.in/English/Policies/Policy.aspx
[3] Freedom to profess any trade
and profession, constitution of India,
Eastern book publishing
[4] A.T.Kearney, Global annual
retail development index
[5] Right to life, article
21, part III, Constitution of India,
eastern book publishing
[6] Consolidated FDI policy, Department of industrial policy and promotion, http://dipp.nic.in/English/Policies/FDI_Circular_01_2012.pdf
[7] Anti competitive agreement,
The Competition Act,2002, as amended by
The Competition (Amendment) Act,2007
[8] Abuse of dominant position, The competition act 2012, as amended by
the competition (Amendment) Act 2007.
[9] Andrew martin, Wal mart vows
to fix its control,The new York times, published on April 12 2012.
[10] Bilateral investment
promotion agreement(bipa), http://www.finmin.nic.in/bipa/bipa_index.asp
[11] Stacey mishell, The Walmart de Mexico Scandal: Here’s a Punishment that Befits the Crime
http://www.ilsr.org/walmart-de-mexico-scandal/
[12] agrarian crises,
http://agrariancrisis.in/2012/09/15/made-in-the-united-states/
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