When one is talking about anything that has to do with economics, I think it is best to use a bit of common sense and to stick to the basics. Recently, the government has moved to allow up to 51 percent foreign direct investment in “multi-brand” retail in India (and single brand retail is allowed 100 percent FDI.) Some people (and some parties such as the BJP) oppose FDI in retail. The question whether FDI in retail is good or not is being hotly debated. The debate is pointless because it takes only a few minutes to get to the heart of the matter. Here’s my take on the matter.
The fun facts.
1. Retail is an essential service in any economy.
2. Organized retail is a good thing in any sufficiently large economy.
3. Organized retail requires investment, in terms of capital and human resources.
4. Foreign investment augments domestic investments and is good for the economy.
5. India needs an efficient retail sector.
6. India’s domestic resources are insufficient for creating an efficient retail sector.
Therefore inflow of foreign investments in retail is good.
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 unorganized retail sector will find employment in the organized retail sector. Fewer people will be needed for the same volume of retail — which is another way of saying that there will be labor 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, it could even be that the number employed in retail grows even with increased efficiency in retail.
It is a mistake to consider the economy as 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.
An example of this 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 current labor force. As it turned out, those fears were unfounded, since the growth in the economy, and therefore 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.