Indian liberalisation worth buying

The opening was widely acclaimed by commentators and free-trade junkies and widely attacked in India by the small-business sector, workers and a large number of retail players.

For the Indian prime minister, it was a major gamble because the retail sector is dominated by literally millions of small local shops, many of which will almost certainly be wiped out by the move, causing a considerable political headache. Many of the parties in his own ruling coalition have loudly opposed the liberalisation move and, under India’s federal system, most states have chosen to opt out of it.

Why would any politician choose to introduce a measure that will bring unemployment to potentially millions of his own citizens? The small retail sector has been one of the backbones of the Indian middle class and it is this class that has paid for the education of its children to become mathematicians, engineers and computer specialists, a move that has fuelled much of the economic miracle that has transformed India over the past two decades. So, why kill off a middle class?

Destroying granny’s business
There are a number of reasons that are best explained by way of an anecdote. My own family arrived in post-war Australia before there were supermarkets. My grandmother opened a corner store that would be immediately recognisable to any African or Indian today. Within a decade, my grandmother was bankrupt because she could not compete with the new large supermarkets and she never opened another business.

She was destroyed in the same way as Singh’s liberalisation will destroy millions of Indian dukhawallas (shopkeepers). But her two sons who worked in her shop over the decade learned how to run businesses. My uncle learned quickly that the supermarkets, with their economies of scale, were the wave of the future and bought himself a franchise and then two and then eight. My father eventually went into construction and prospered. With the money they made, they educated their children in various specialisations.

This intergenerational journey is replicated in many places by many millions of people and is at the very heart of the problem that confronts the Indian prime minister: When is the right time to kill off granny’s business?

If Australia had a prime minister in the 1950s who merely wanted to protect small business, I would probably be working in her shop today. Instead, market capitalism works on what the great economist Joseph Schumpeter called “creative ­destruction”. The market destroyed my granny’s shop and in some ways it destroyed her as well, but it created opportunities and unleashed energies in her sons that were better used in other sectors. Like it or not, this is the way of the market in all its productivity and cruelty. Singh must have calculated that it is probably the right time in India’s history to release the creative talents of the children of the dukhawallas into other areas, but the dukhawallas themselves will not readily forgive him.

A wise leader?
Singh is probably both a wise leader and a clever politician. But only time will tell whether he is just a dead man walking. He has liberalised the Indian retail sector in a way that stands a chance of keeping his fragile coalition in place by allowing opt–out provisions for the various states in which opposition exists.

But it is the other conditions of the liberalisation that are the real eye-openers for those seeking policy direction for Africa:

Retail outlets can be opened only in cities that have a population of one million or more. According to the Indian census data of 2011, only 53 cities meet this criteria, accounting for only 12% of India’s total population and about 43% of its urban population;

Foreign investors should invest a minimum of $100-million in the venture, 50% of which has to be invested in back-end infrastructure; and

Thirty percent of the goods must be procured from what are called “small-scale industries” that have invested not more than $1-million in plant and infrastructure.  

For those who recall the great brouhaha over the acquisition by Walmart of Massmart last year, the conditions imposed on it to enter South Africa and Namibia were weak and mealy-mouthed in comparison to what Singh has demanded of precisely the same companies, for example Walmart and Tesco, in India.

In 2011 Massmart and Walmart committed to spending R100-million to develop South African suppliers over three years.

Ironically, in India the supermarket chains, which operate at wholesale level, have welcomed Singh’s retail sector liberalisation, but would have called the Indian conditions draconian in a Southern African context.

We should learn from our friends in India and stop the process of automatically granting licences to  supermarkets that do nothing to develop local production capacity and the supply chain in the region. Quantitative obligations, which require supermarkets to purchase a percentage of their products locally from small businesses and not their own companies and develop the supply chain as a condition of doing business, are the only way small African producers and firms can ­benefit from the destruction of the indigenous retail sector.

These conditions are imposed in many countries, including India and Malaysia, despite what may be World Trade Organisation obligations to the contrary. South African Development Community countries need to develop similar procurement rules.

These are the views of ­Professor Roman Grynberg and not ­necessarily those of the Botswana Institute for Development Policy Analysis where he is employed

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