Across Asia, including China, foreign retailers have proved a blessing, providing consumers with cheaper wares, and upgrading the technology of local producers to make them globally competitive. Only in India do opposition parties want to protect the aam bania against the aam admi.
The worst argument against foreign retailers is that they will flood India with cheap Chinese goods, squeezing domestic producers and causing mass unemployment. The existing Wal-Mart-Bharti retail chain imports only 3% of its goods, sourcing 97% indigenously. Import duties, countervailing duties and shipping costs make imports uneconomic save for a fraction of supermarket goods, such as plastic toys. Indian shopkeepers can already import Chinese items freely. Yet they import only a small fraction of their wares, such as plastic toys. This is not because they are great patriots, boycotting Chinese goods. They are profit-seekers, and don\’t find enough profit in most Chinese goods.
So, the arrival of foreign retailers will not produce a massive import surge of cheap goods. But even if did, would that be a tragedy? Not at all.
Many Indian politicians believe that self-sufficiency is the Holy Grail, and all imports are bad. In fact, India\’s economic success since 1991 has been spurred by steadily reducing the standard import duty from 300% to 10%. Has this made imported goods cheaper? Of course. Has it decimated Indian industry? Absolutely not. Has it led to slower economic growth or falling wages? On the contrary, it has led to record economic and wage growth.
Earlier, from the 1950s to 1991, the government steadily increased import duties from very low levels to 300%. Did that ensure rapid growth or prosperity? No, India suffered just 3.5% GDP growth, while the number of poor people actually doubled. The great experiment in self-sufficiency failed.
Why have falling import barriers now produced prosperity? Because this encourages specialisation in areas where India is competitive, and discourages wasteful investment in uncompetitive areas. The self-sufficiency philosophy ignored the high cost of trying to produce everything-it deliberately shifted India\’s energies from high-productivity areas to low-productivity ones, a monumental waste.
Second, some inputs will always be imported, and high import duties converted India into a high-cost production centre, hitting consumers as well as the competitiveness of Indian producers. High import duties on equipment ensured a permanently high-cost structure that made goods uncompetitive even when labour was dirt cheap.
This led to dismal export performance during the licence-permit raj. Liberalisation in 1991 drastically reduced tariff and non-tariff barriers to imports. This enabled Indian companies to combine the best of imported inputs with the best of indigenous inputs. That created world-class industries. That has been the secret of high growth since 1991.
In the import substitution era, computers cost three times the world price. This held back software and BPO development. India\’s software and BPO exports accelerated only when computer costs came down, thanks to new technology and lower duties. When import duties were first slashed in the 1990s, critics claimed that Indian industry would be killed. In fact, industry thrived as never before, both in domestic and export production. Merchandise exports rose from 5% of GDP in 1991 to around 15% today. Opening the gates to cheap imports did not kill Indian producers, but helped make them more competitive than ever before.
Critics have another argument: why allow Wal-Mart and Carrefour to come in when Indian companies can do just as well? Why allow foreign investment that will crowd out Indian business and make profits at the expense of Indian consumers? For an answer, look at the auto industry. Till1991, it was dominated by indigenous Ambassador and Premier cars. These have been replaced by a cavalcade of new brands, some Indian but mostly international. Yet it would be moronic to mourn for the heyday of the Ambassador and Premier as a golden era when foreigners were kept out and all profits were retained in India. On the contrary, it was a veritable kalyug.
Today, by freely allowing foreign investment and reducing import duties on inputs, we have created a world-class auto industry that exports massively and constantly innovates. Interaction with Suzuki, Ford, Honda, Hyundai, and General Motors has helped create hundreds of globally competitive auto parts producers.
Wal-Mart, Carrefour, Ikea and other retail giants will do the same. They too will interact with Indian suppliers-farmers and industries-and make them world-class exporters. Foreign retail chains will devise ways for their suppliers to combine cheap imported inputs with domestic ones to produce world-class goods. And competing with them will enable Indian retailers to do something similar.