The matter of FDI (foreign direct investment) in retail is best understood in terms of economics, although the FDI policy is a matter of politics. When one is talking about anything that has to do with economics, it is helpful to use a bit of common sense and to stick to the basics, as we will now proceed to do.
FDI in multi-brand retail is being opposed by some, including the BJP. The question of whether FDI in retail is good or not is being hotly debated. To the extent that the debate is related to the economics of organised retail and foreign investment in it, the debate is pointless because it takes only a few minutes to get to the heart of the matter.
Consider these fun facts.
Therefore inflow of foreign investments in retail is good for India.
But what about the millions of small kirana store keepers? Some of those stores will no longer be viable. Some — not all. Some of the people currently in the unorganised retail sector will find employment in the organised retail sector. Consequently, fewer people will be needed for the same volume of retail — which is another way of saying that there will be labour efficiency gains. Increased efficiency also means higher wages in the retail sector. That is good news. But wait, there’s more.
A growing economy implies that the retail sector will also grow. Given sufficient growth in the economy — which follows naturally under easily obtainable conditions – employment in retailing will grow even with increased efficiency in retail.
It is a mistake to consider the economy a static game. Economies are dynamic structures and it is possible to have changes that benefit some without hurting others. In other words, Pareto improvements are possible. (A Pareto improvement is one by which at least someone becomes better off without making anyone else worse off.)
An example of the dynamic nature of the economy is the telecom sector. At one time, it was feared by some that increasing the efficiency of the sector will lead to unemployment among the telecom labour force. As it turned out, those fears were unfounded since the growth in the economy, and therefore growth of the sector, saw an increase in employment together with higher wages. Not just that, it also led to cost decreases which are reflected in the low prices of telecom services we all enjoy.
The cost of retail is a wedge between the consumer and producer prices. Reducing the size of the wedge is good for everyone with the possible exception of those who gain from the inefficiencies of the current system. The losers will have to find alternative ways of making a living. But that is another story.