Saturday, September 15, 2012

The Lie Behind FDI and What it Means for India

FDI stands for foreign direct investment. There was a recent article India has opened the doors for FDI. You can read the article from The Hindu here.

Basically what this means is that now foreign companies can purchase property in India and open businesses, etc. in a way they could not before. It opens the doors for big businesses to move into India.  The promises that this FDI scheme promises are:

  • Creating jobs
  • Providing better opportunities for the community
  • Making more types of goods available and more affordable

That's where the lie comes in. Yes, allowing in big businesses from foreign countries can certainly do these things. And in the short term it typically does. Everyone gets excited, they visit the store and delight in all the new things they can now find or the bargains they get shopping in the stores.

The store uses marketing tactics to hook shoppers into having positive happy feelings while they shop there and so they continue to come back. Everything seems great.

Then the reality starts to show. The promises these companies make become less important and then soon the companies don't live up to their promises at all. They find ways to hire less employees, they do less for the community and the quality of the goods they offer diminishes. Shoppers don't always realize this because they've become used to shopping at the store, now associate it with being easier/better and they dismiss the lack of quality.

Small businesses around the giant store start to fail and close down. After a few years there's nothing much left except for the big business. In India, that means the katana stores are in danger because of this new FDI agreement. They simply won't be able to compete with stores like this. While these massive retailers may not destroy larger cities like Mumbai or Delhi, they will devastate smaller cities like Jalahndar.

I've personally seen this happen. I remember life before Wal-Mart. (I hate Wal-Mart so yes they're going to be my prime example.) When I was growing up in what is the equivalent of a Tier 3 (or smaller) city in Virginia we thrived off going to grocery stores (like Reliance Fresh in India). When we needed bicycles or bicycle parts we went to the local bicycle shop. There were several clothing stores and auto repair shops. It was very similar to the way things are in India now.

Then Wal-Mart came. Everyone was so excited to have a store where you could do all of your shopping in once place. They advertised how they only sold items made in America and American brands. Americans got even more excited. Wal-Mart stores started popping up everywhere and their growth in popularity was overwhelming.

Then people started noticing that the items in the store started saying "Made in China" or other countries and there was a small uproar over that. It didn't last long and people still kept shopping there. Next thing you know, the smaller stores and grocery stores around it started closing up. Winn Dixie, a famous southern US grocery chain, disappeared and became a Wal-Mart victim even though Wal-Mart's produce section was noticeably inferior.

Less and less stores were available. Now, in that same city, the unemployment rate has shot up to well above the national average. Businesses are not moving into the town at the same speed they are moving out. The primary source of income for the town, a local textile mill, packed up their stuff and moved to Mexico to cut costs because Wal-Mart drove prices down low enough that being in the states was no longer cost-effective. (And this business in particular supplies high quality goods worldwide and is the top rated brand in its category.)

Jobs in the community were lost and not being replaced. Wal-Mart started going up on their prices and carrying even lower quality merchandise. This cycle is still spiraling and the more competition Wal-Mart drives out, the less quality you find in their stores. It's a vicious cycle that is showing no signs of improvement.

Big businesses can be good but they grow too fast and kill off thriving communities. They destroy more than they give back.

These stores also pay for specialized marketing techniques that small stores, like the katana shops, cannot afford. These techniques teach them just the right music to play or just where to place merchandise on the shelves so that you will buy more than you need without knowing you're doing it. They purposely place frequently purchased items in harder to find/get to locations so you have to browse through items you don't want for longer periods of time. This increases impulse buying and thus, customers spend more money.

This leaves less money for them to spend in their local bazaar in stores that are, IMO, much better. Indians are not immune. I know that spending habits are much different in India than the US now but these stores will change that. That's their only goal. They're not coming to India to help Indians save money and only buy the things they need. They're coming to exploit the middle class and increase spending.

What are your thoughts on this new FDI endeavor?
If you're American, how do you feel about what big businesses (retail) have done to America?
If you're Indian, what are your fears/concerns about what this could do to India?


  1. Couldn't agree more with you. I've been watching and reading this topic from afar for months now, sick that India's politicians would fall victim to the snow jobs American companies are promising. So it goes, Wal Mart and the like will come in and do exactly as you said. It happens in small US towns every year with outrage and then complacency. Memories are short, politicians are reelected and a piece of our culture continues to decline one big box at a time.

    The new India will slowly morph into a disingenuous homogenized corporate entity like the US. Look where that's gotten us. High unemployment, low wages, healthcare in shambles, and the biggest shift of wealth to another country (China) that has been seen possibly since the Brits invaded India. FDI QUIT INDIA!!

  2. Well, they've already let the 'Spar' chain & 'Marks & Spencer' into India so I suppose we knew the the really big behemoth chains like Walmart were coming.
    Supposedly IKEA is going to open several stores in India too.
    I agree with you that the small katana shops are going to disappear unless they offer 'credit', free delivery or some other special services.
    You know the last time I went to the US was December 2011- I visited my friends & relatives on a big 'road trip' in the 'South' from Miami to Austin.
    I was rather shocked during the trip the number of boarded up, closed shopping centers, locally owned stores & strip malls I continuously passed, also many gas stations were closed down.
    It was like every 20 miles from Miami to Austin (and that's a LONG way) there was ONLY a Walmart & some fast food restaurants and that was ALL there was.
    I think Publix was the only occasional 'quality' supermarket left. Even Kmart & Sears were gone!
    It will be interesting to see how Indians will respond to these large chain stores. Like you said they start off promising all these decent paying jobs & 'benefits' to the community and they usually end up with fewer and fewer crappy paying jobs with less and less benefits. I guess the world just can't get enough cheap Chinese crap- because that's what you see everywhere you go in the world today. I personally go out of my way to buy 'Indian made' products whenever possible. I'll proudly wear my hand made/ hand embroidered Indian kurtis, salwars, & chappals (even my Levis are Indian made) before I'll wear that generic mass made Chinese stuff.

  3. What about the backend logistics that would be created by the retail giants. Also there are caveats for the FDI in retail. Its not a free for all. They cant open in cities with less than 1 million population. They have to invest at least $100 million. Also 30% of their purchase should be locally.

    I have seen much better service from the local mon n pop stores here in India once the reliance fresh and vishal retail etc have opened near my home and also the number of shops have only doubled.

    no matter what happens, the big retail giants cant compete with the nimble footedness the small retail will provide not to mention home delivery which is not possible for the large retail giants. Also the Indian shopkeeper is much more innovative and am sure they will survive.

  4. You're right. We're going to have to watch India fall apart just like the US has. I have the misfortune in living in one of those small towns. We have a small Wal-Mart and a few farm supply type stores left (besides the major chain restaurants/fast food). Small businesses just aren't making it. It's so sad. It just angers me when I see people with Masters degrees taking on jobs that only require a Bachelor's because that's all that's available. It's as if their education is a complete waste and it's not going to get better any time soon.

  5. Yes! The south has been hit really hard. I know states like NC have been hurt too much with the loss of industry. The only thing opening up? Wal-Mart. And now they have Wal-Mart Express that is coming into even smaller areas where a full-sized Wal-Mart isn't deemed necessary. It's a slow and painful takeover of America.

  6. In the beginning this scheme will look good. While they can't open in small cities now as you mentioned, they will keep wearing down the government and bribing officials until they can. They will systematically destroy the Indian landscape just as they have done in other countries. It's not just the US.

    I'm glad to know that you saw better service when stores like Reliance Fresh opened. That is really good. This FDI bill though allows stores to come in that will crush Reliance and many others. If those larger stores can't survive, what do you think will happen to the katana shops? (I don't know, I'm speculating based on what I've seen personally.) Please also consider how high unemployment is in some Indian cities already. When these katana type stores close that is going to increase unemployment rates drastically. Consider the aunties and uncles who have ran small stores their whole lives and who don't have the education, experience, etc to go work at these new larger stores. Their children may and as such will bear the burden their parents no longer can. Middle class families will actually start to diminish and have less money available, it will effect the economy in a negative way. While FDI seems good, it will change the current retail landscape of India. Can we really be sure it's going to make things better? It hasn't made things better in other countries where FDI has been accepted.

    Also, consider that the Indian government only accepted this because of the pressure placed on them. Not because they thought it would be good. They avoided it as long as they could on purpose. Even a corrupt government who could have easily taken the money from these big corporations didn't want to.

    You're absolutely right that big business will never be as good as the katana type shops. It doesn't mean they won't still take over as they have in other countries. What it comes down to is if the katana shops sell a sari for 2000 INR and big retail sells it for 1800 then where will the aunties choose to go? Then once the aunties have it well set in their mind that sari's are cheaper at the big retail store, the katana shops start losing money and can't afford to stay open. Then the big retail raises their prices and start cutting jobs. That's how it has always worked with FDI. They use, abuse and destroy retail markets.

    I hope that the shop keepers do all they can to fight this. I hope word spreads about these big businesses and aunties and uncles avoid it. I pray what you say holds true. Tell everyone you know to avoid big businesses. Fight for your country and the beauty and history held in the katana type shops. Don't let FDI destroy your country like it has mine.