Rural welfare, not Walmart

By Ashutosh Varshney

We need retail reform as India’s farmers must be connected to its rising cities

Are the new big-bang reforms necessary for India? If yes, why is there so much political opposition? The first is a relatively straightforward economic question, the second requires complex political reasoning.

A general point first. If economic policy in India remains unchanged, there is a real danger that India’s investment rate will fall below 30 per cent of the GDP. That will be quite calamitous. It will, quite likely, lead to an annual economic growth rate of less than 6 per cent. With India’s youth entering the labour force in ever larger numbers, employment generation will not reach the necessary levels, and with tax revenues decelerating, there will be less available for welfare programmes — for education, health and public works. While India cannot easily get to a Chinese-style investment rate, touching 47-50 per cent of the GDP, a systematic attempt is needed to keep the investment rate above 35 per cent. Investment is critical to growth, employment generation and welfare programmes. Viewed from that perspective, the recently announced reforms are a step in the right direction.

Foreign direct investment (FDI) in multi-brand retail has become the centrepiece of the proposed new reforms. There are two ways to think about its implications — statistical and conceptual.

Since 1995, Indian agriculture has grown at roughly 2.5 per cent a year, whereas the overall economic growth rate in this period has been close to 7 per cent per annum. Depending on how one estimates the size of the non-agricultural part of the rural sector, the urban sector has grown at roughly 8-9 per cent per year. Thus, compared to the countryside, the growth in urban incomes is likely to have been three to four times higher. One could say that India’s cities have boomed at Chinese-style growth rates, whereas rural India is still stuck at the historical annual growth rate of 2.5 per cent.

This difference mattered less when India’s economy itself was growing at 3.5 per cent per annum, which was true for the period 1950-80. Essentially, urban incomes were not growing much faster than rural incomes in the first three decades of Indian independence. But the urban-rural gap is now huge. For their own good, India’s villages need to be better linked to the rising economic fortunes of the city.

That is what FDI in multi-brand retail — retail, for short — can easily achieve. In the fury of political debate, it is not often noted that FDI in retail will only be for cities with a population of more than a million. According to the 2011 census, there are 53 such cities in India. That means Kanpur, not Aligarh; Bangalore, not Bellary; Nagpur and Pune, not Wardha and Satara. Even if one assumes that neighbourhood stores will be hurt — an assumption that requires demonstration, not belief — we are not talking about Walmart all over urban India, only in million-plus cities.

We should, however, note that these bigger cities have been the engine of India’s economic transformation since 1991. Farmers can be more efficiently connected to the urban economy if the trade chains, for example, provide refrigerated storage and transport. Otherwise, the farmer is primarily dependent on the local mandi, the traditional marketplace which, in most of India, has not yet witnessed any significant modernisation. Has anyone seen refrigeration in many rural mandis of India? And how many farmers can afford refrigeration of their own products?

For my first book, which dealt with agriculture-industry linkages and urban-rural issues, I spent an enormous amount of time in villages, mandis, and agricultural universities in Punjab, Haryana, UP, Maharashtra and Karnataka. The rot and waste — especially in fruit and vegetables — could not escape the naked eye.

On the whole, farm incomes are better served if farmers move from low value-added foodgrains to high value-added fruit, vegetables, fishery, dairy and cash crops. Whatever else it achieves, FDI in retail will reduce the waste and rot that is a special affliction of the latter set of agricultural products. It connects farmers to the economic operations of modern times. Mandis and traditional traders just can’t do it.

Conceptually, too, it is a simple and undisputed principle of development theory that rural incomes simply cannot go up much if villages are not meaningfully connected to the city. No society has even been economically transformed without that link. Not connecting villages and cities in a mutually beneficial manner is a sure way to hurt the village. Trade and transport are two of the best ways known for creating urban-rural links.

In short, FDI in retail is not primarily about Walmart and Tesco. It is about bringing greater incomes to the countryside. Whatever its implications for the traditional trader, it can only benefit the farmer. A farmer left to the village trader and mandis a poor, or make-do, farmer. A farmer connected to booming urban economies and modern trade is a richer farmer.

Why, then, are so many political parties opposed?

For long years, I have been associated with an argument that divides the politics of economic reforms into two parts: mass politics and elite politics. That distinction is hugely relevant for the current developments. In the last version of the argument published in Foreign Affairs (March-April 2007), I argued: “It is helpful to think of India’s reform politics as following two tracks: what may be termed elite politics and mass politics. This distinction is absolutely crucial in understanding India’s reform dynamics. In India, the elite consists mainly of English-speaking upper-caste and urban citizens. Elite politics in India typically takes place in the upper realms of the public sphere: in the interactions between business and government and in the dealings between New Delhi and foreign governments and international financial institutions… The upper end of the public sphere includes English-language newspapers and television and the Internet… But India’s mass politics (deals with)… the plebeian social orders that make up (its) political constituency. Streets and the ballot box are the primary sites of the mass politics, and voting, demonstrations, and riots its major manifestations.”

I also wrote: “Three factors are typically critical in determining whether any particular policy enters the arena of mass politics: the number of people affected by the policy, how organised those people are, and whether the effect is direct and immediate or indirect and over a long time horizon. The more people affected by a policy choice, the more organised they are, and the more direct the policy’s effects, the more likely it is that a policy will generate mass concern.”

Consider now what has generated the greatest political fury — not FDI in civil aviation, broadcasting or the power sector, but FDI in retail and also reduction in fuel subsidies. The former sets of reforms are all in the elite sector. How many small farmers, after all, fly Kingfisher Airlines? And how many watch CNN-IBN? And how many can tell whether FDI in power will make electricity for their khet (farm) and ghar (home) cheaper and more plentiful?

In contrast, FDI in retail and reduction of fuel subsidy directly affect millions of people in the short run, whatever their long-term benefits. The inverse relationship between Walmart and the welfare of the small trader — or the fear, if not direct evidence, thereof — affects millions of kirana shopkeepers.

The connection I have drawn — between FDI in retail and rural welfare — is an indirect one. The fact that it is indirect does not mean it is not real, but its reality requires demonstration and political communication. It is the best way right now to lift the economic fortunes of India’s farmers. NREGA won’t do it, for it will only allow the digging of ditches, a not unworthy welfare operation, but NREGA cannot be the foundation for a long-term economic uplift. It is a holding operation.

India’s farmers need to be connected to the nation’s rising cities. The government should stick to the reforms it has announced. What it needs is better communication about how Walmart is not the main point of its retail reforms. Rural welfare is.

The writer is Sol Goldman Professor of International Studies and the Social Sciences at Brown University, where he also directs the India Initiative at the Watson Institute. His books include ‘Democracy, Development and the Countryside: Urban-Rural Struggles in India’. He is a contributing editor at ‘The Indian Express’

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