Walmart’s Flipkart takeover: 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 assured that the Walmart marquee would soon emblazon the Indian urban skyline. At that time, despite being generally in favor of foreign investments, I strongly opposed the entry of FDI in Retail. I felt that it would destroy the small traders all over India, a sector that employs almost 50 million persons and the SMEs who number about 42.50 million and who are the mainstay of India’s export of manufactured goods, employ about 105 million.

I wrote in journals like Economic and Political Weekly (EPW) and Seminar, and made a presentation to LK Advani, the then Leader of the Opposition. 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, Chandrashekhar, spoke out against this and Chandrashekhar 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, called by Rajiv Kumar, now the Niti Ayog Vice Chairman, at the behest of Brookings Institution of the USA, I laid out the reasons for my opposition. I asked Strobe Talbott, then heading Brookings as to why he was lobbying for a company that mainly sells Chinese goods? Rajiv Kumar and 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 SME’s employing millions here. The via media that emerged was, and I concurred, was that Walmart give an assurance of being foreign exchange neutral. That it will export as much as it imports – mostly from China. But Walmart was not interested.

Now it has found a way into India, after US lobbying with Narendra Modi to allow FDI in E-Commerce retail paid off. Modi himself generally supported entry of Walmart, but his party was so opposed to it that even he dared not allow FDI in Retail.

Study after study in developed and developing countries alike have shown that big box retail rather than creating jobs, destroy jobs. In fact their utility in developed economies is due to the labor 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 belaboring 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 purchase 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% of the price of a typical milk chocolate bar but the retail margin hovers around 34.1%. A banana farmer in South America gets 5% of the retail price of the banana while 34% accrues to distribution and retail. Even the 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.

If Walmart were a country it would be the largest exporter to the USA. 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 subsidizing exports. What the flow of cheap Chinese goods through the Walmart direct pipeline from China into India will do to Indian companies, particularly the SME’s can well be imagined. Even without Walmart, Indian SME’s are being driven out in sector after sector by cheap Chinese imports. For instance there is no light fittings industry left in India. Same for toys. One can well imagine what a Walmart pipeline will do to the hosiery and woolen goods manufacturers in Ludhiana and Tiruppur. The once prosperous clock making industry around Rajkot has almost entirely fled to China. Millions of jobs in the semi-organised sector now stand threatened.

Interestingly in 1985 Sam Walton, the founder of Walmart 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 the Americans, jobs for the Chinese. India loses. But that’s a common tale.