Walmart entry: Red carpet for Chinese imports

One of the biggest debates of the UPA-1 period centered around the entry of giant big box retailers like Walmart and Carrefour into India.

The Manmohan Singh government was committed to allow the big-bang entry of Walmart into India, and its then global boss, Joe Menzer, even had a meeting with the then PM where he was personally pledged that the Walmart marquee would soon emblazon the Indian urban skyline.

At that time, despite being generally in favour of foreign investments, I strongly opposed the entry of FDI in retail. I felt it would destroy the small traders all over India, a sector that employs almost 50 million persons, and SMEs, who number about 42.50 million and are the mainstay of India’s export of manufactured goods, employing around 105 million.

I wrote in influential journals like Economic and Political Weekly (EPW) and Seminar, and made a presentation to Mr L.K. Advani, then Leader of the Opposition.

Mr Advani grasped the implications of such an entry immediately and gave the BJP instructions to make an issue of it. Other senior leaders like former Prime Minister Chandra Shekhar spoke out against this, and Chandra Shekhar forwarded my paper to all MPs and CMs.

The effort had its effect. FDI in retail was disallowed.

At that time, at a meeting called by Ficci’s then secretary-general Rajiv Kumar, now Niti Aayog vice-chairman, at the behest of America’s Brookings Institution, I laid out the reasons for my opposition.

I asked Strobe Talbott, former US deputy secretary of state who then headed Brookings, why he was lobbying for a company that mainly sells Chinese goods. Rajiv Kumar and Mr Talbott, and the usual suspects like Rajan Bharti of Bharti Enterprises, then Walmart’s Trojan horse to find a beachhead in India, argued about the good things that will happen because of Walmart.

I said I am aware of the benefits such investments will confer, but am more concerned about the destruction of SMEs employing millions here.

The via media that emerged, and I concurred, was that Walmart would give an assurance of being foreign exchange neutral. That is — it would export as much as it imports — mostly from China. But Walmart was not interested.

Now it has found a way into India, after the American lobbying with Prime Minister Narendra Modi to allow FDI in e-commerce retail paid off. Mr Modi himself generally supported the entry of Walmart, but his party was so opposed to it that even he dared not allow FDI in retail.

Walmart is America’s largest corporation. It had a global sales turnover in 2017 of $495 billion. Of this, its US sales was $317 billion. In America, estimates say that Chinese suppliers make up 70-80 per cent of Walmart’s merchandise, leaving less than 20 per cent for US-made products. It has grown hugely since then.

Walmart has begun competing with Amazon for the e-commerce space and about 10 per cent of its US sales are now by this.

Study after study in developed and developing nations alike have shown that big box retail, rather than creating jobs, destroy jobs. In fact, their utility in developed economies is due to the labour savings they achieve.  Classical economics was wary of the monopolistic producer who would charge “too much” from the poor working classes while producing the much-needed “bread”.

The single producer was the dread from which economists sought “perfect competition”, meaning many producers catering to many consumers, resulting in fair competition in a perfect market.

Adam Smith could never have conceived of a global operator with a huge hoard of cash and instant information becoming a “sole” consumer. The MIT Dictionary of Modern Economics defines a monopsonist as “the sole buyer of a factor of production”.

To the economists “monopsony” was a theoretical concept — to be defined as a construct before belabouring the dangers of a monopoly. The danger of monopsony, seldom thought of by economists as a threat, is now upon us.  In the last three decades the advents of giant retailers like Walmart (turnover $495 billion in year ended January 2017) and producers like Nestle  (turnover 105 billion euros year on year October 2017) have made monopsony a reality.

The bulk buying and the recourse to monopsonic practices result in pushing down producer prices, undoubtedly with resultant benefits to the consumer. Thus, the more of a commodity large retailers buy in bulk, the lower the prices growers of agricultural commodities obtain!

Studies by FAO and Oxfam attest to this. For instance, a decade ago, coffee growers earned $10 billion from a global market of over $30 billion, but now they receive less than $6 billion out of a global market $60 billion. The cocoa farmers of Ghana now receive only 3.9 per cent of the price of a typical milk chocolate bar, but the retail margin hovers around 34.1 per cent. A banana farmer in South America gets five per cent of the retail price of the banana while 34 per cent  goes to distribution and retail. Even well-established American clothing company Levi-Strauss had to bow to the asymmetrical power of the newly-empowered retail giant’s monopsonic hegemony. Levi-Strauss had 66 clothing plants in the US two decades ago and now has no functioning plants in the US. It supplies Walmart what it imports.

More than anything else, it is Walmart’s Chinese connection that should cause us to worry. While Walmart has 352 stores in 130 Chinese cities with a total turnover of $7.5 billion, Walmart directly buys via its procurement centres at Shenzhen and Dalian over $ 290 billion worth of goods from more than 20,000 Chinese suppliers, 60 per cent of its 2017 global turnover of $495 billion. If Walmart were a country, it would be the largest exporter to the US. With Flipkart now becoming Walmart, we can now expect Walmart to set up giant warehouses in port cities to receive huge imports of Chinese goods.  It is interesting to note that China is building giant warehouses in Gwadar, and in due course Chinese exports to Walmart could be sourced from a warehouse in the friendly country next door? Increase the trade deficit. The trade deficit with China last year was $54 billion and we have already transferred almost $350 billion this way to China in the last decade. It seems we must be prepared for more.

By keeping wages low without the protection of trade unions, China is in effect subsidising exports. What the flow of cheap Chinese goods through the Walmart direct pipeline from China into India will do to Indian companies, particularly SMEs, can well be imagined. Even without Walmart, Indian SMEs are being driven out in sector after sector by cheap Chinese imports. For instance, there is no light fittings industry left in India. The same for toys. One can well imagine what a Walmart pipeline will do to the hosiery and woollen goods manufacturers in Ludhiana and Tiruppur. The once prosperous clockmaking industry around Rajkot has almost entirely fled to China. Millions of jobs in the semi-organised sector now stand threatened.

Interestingly, in 1985, Walmart founder Sam Walton was forced to say: “Something must be done by all of us in the retailing and manufacturing areas to reverse this serious threat of overseas imports to our free enterprise system. Our company is firmly committed to the philosophy by buying everything possible from suppliers who manufacture their products in the United States.”

Despite that, Walmart is mainly an American retailer of Chinese goods. Its business model is quite unique. As Nick Robbins wrote in the context of the East India Company: “By controlling both ends of the chain, the company could buy cheap and sell dear.” In this case, it means profits for Americans, jobs for the Chinese. India loses. But that’s a common tale.