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Acquisition of Flipkart by Walmart

A Process of Transforming Retail

Abhirup Sarkar (abhirupsarkar.sarkar@gmail.com) teaches at the Indian Statistical Institute, Kolkata.

The recent acquisition of Flipkart by Walmart will accelerate the process of transforming the retail sector in two important ways. It will bring in the know-how and capital of a retail giant, and will give a boost to online retail. While this helps transform the retail sector in India with clear long-run benefits, definite job losses in informal retail and probable rises in food prices in rural markets due to sourcing by big retailers are the short-run problems. If the government ignores the short-run problems, the transformation may become politically infeasible.

The recent acquisition of Flipkart by giant retailer Walmart is an important event for the Indian economic scenario for at least two reasons. First, it suggests a possible change in the structure of retail business in India, which, according to a Parliamentary Committee Report of 2009, constitutes 10% of the Indian national income. Second, entry of Walmart to e-commerce is likely to have an effect on retail trade through the net, a practice becoming increasingly popular among Indian consumers.

But, before we elaborate on these effects, it is necessary to look at the basic facts. Walmart, the United States (US) retail titan, has picked up a 77% stake in Flipkart, the largest online retailer in India. The deal was concluded for $16 billion and Walmart plans to put in $2 billion more as fresh investment. Through the acquisition, Walmart will not only make an entry to the Indian retail market but will enhance its position in the world market of multi-brand e-commerce as well.

FDI in Retail and e-Commerce

One may recall that at present quite a few restrictions exist on foreign companies wishing to do multi-brand retail business in India through brick-and-mortar stores. For one thing, foreign direct investment (FDI) in multi-brand retail has an upper limit of 51%. This means that a foreign retailer can operate only through tying a knot with a domestic company. But that too is not automatic and needs a prior clearance from the government. Moreover, the multinational intending to do business has to invest at least $100 million in the country, of which 50% has to be in back-end infrastructure. In addition, the company has to procure 30% of the value of its total procurements from small enterprises in India. Even the choice of locating the stores is limited. Retail outlets cannot be located in small towns or villages; they can be located only in cities with a population of 1 million or more. It is not surprising that with so many restrictions in place, foreign endeavour in multi-brand retail never took off in India.

There is an element of truth in the presumption that the acquisition of Flipkart by Walmart amounts to a back-door entry of the latter into the Indian retail market through online trade. Clearly, Walmart is taking advantage of the legal allowance of 100% FDI in e-commerce. But, that is not all. Equipped with the resources, expertise and experience of Flipkart, Walmart is augmenting its competitive position in the world market, especially vis-à-vis Amazon, its mammoth rival.

From the point of view of Walmart, this is a good move since consumers all over the world are increasingly switching to online retail and it is high time to shift one’s focus from traditional brick-and-mortar business to the internet. Again, for Flipkart, it is a boost to have access to the deep capital base of Walmart as well as its vast knowledge and the state-of-the-art technology in back-end storage. In other words, the acquisition is a classic example of synergy, a win-win tie-up for both companies. We are more concerned, however, with the effects of this acquisition on macroeconomic entities in India, like consumers, producers, and retailers, than merely with the future of two companies, however big they may be.

Domestic Retailers

Some of the concerns are well known and perhaps politically overemphasised. The main concern is for small domestic retailers. It is feared that these small agents are defenceless against competition from big retail outlets and are likely to lose their livelihood if giant multinationals enter the market. According to the Parliamentary Committee Report of 2009, there are 15 million retail outlets in India making the country number one in the world in terms of density of retail outlets. But most of these retail outlets are small. Only 4% of them has more than 500 square feet area, and 95% of retail activity belongs to the informal sector. Unorganised retail provides about 8% of total employment and is the largest employment provider in the country after agriculture. Evidently, any possible blow to this sector has to be taken seriously.

How real are the fears of destroying employment in informal retail? Different sources confirm that in India the retail sector is growing very fast. Though the estimated growth rates differ across different chronicles, it is generally agreed that organised retail is growing much faster than informal retail. This points to the distinct possibility that organised retail is slowly but surely crowding out small and informal kirana shops, street-side vendors, pushcart vegetable sellers, makeshift bazaars and the like. The fear of losing employment seems to be real. More so, after the Flipkart–Walmart tie-up.

Arbitrage Possibilities

There is another concern that is somewhat less articulated. It is about an adverse effect of FDI in multi-brand retail on income distribution and poverty. When a giant like Walmart enters the retail market, it undertakes both inter-regional and international trade. More specifically, it exploits arbitrage possibilities by buying from markets where a product is cheap and selling it where the product is dear. Goods can be bought in other countries and sold in India, or they can be bought in India and sold in other countries, or bought from one part of India and sold in another part. In India, most small producers of agricultural goods do not have direct access to distant markets. They can sell part of their produce to local traders who have limited capacity of storage. The remaining is wasted. As a result, prices of agricultural goods remain low in village markets, which help the rural poor to survive. When a big retailer enters this market to procure, the price goes up and this can become extremely distressing for the rural poor.

On the other hand, the same giant retailer is likely to procure manufacturing goods from other parts of the world and sell them to Indian urban markets at a price lower than that was prevailing before. But, this basically benefits urban consumers who are relatively affluent. In other words, natural comparative advantage will prompt the giant retailer to sell manufactured goods in India, and buy fruits, vegetables, and cereals from India. This has the effect of a redistribution in favour of the already affluent urban consumers and against poor rural consumers. The redistribution could become particularly painful for the poor who are helpless against the increases in food prices.

A New Opportunity

Do these concerns imply that tie-ups with and acquisitions by multinationals are economically undesirable? Quite the contrary. There are several advantages of Walmart entering the Indian online retail market. It will provide state-of-the art storage technology and the capital to build big warehouses. Armed with this infrastructure, it can procure fruits, vegetables and foodgrains from village markets, which will reduce waste and provide good prices to the sellers. Exactly which strata of sellers will benefit from this transaction will depend on whom the giant retailer is buying from.

Large producers and traders are more likely beneficiaries but medium farmers can also take advantage of the new opportunities by forming guilds and associations to become a part of the supply chain. Again for other consumer goods, especially low-cost apparels, toys and footwear, there are numerous small producers all over the country. Entry of a giant retailer like Walmart will open up the world market to these small entities.

On the demand side, consumers of online retail will benefit from a wider menu and lower prices. According to a recent study reported in the Times of India,1 the number of internet users in the country is likely to reach 500 million in June 2018. This is more than 37% of the total population. Some of these users live in remote areas that lie outside the outreach of the delivery chain of online retail. But, a significant proportion lies inside and all of them are potential consumers of e-commerce. The proportion will grow with urbanisation and increasing outreach of the physical delivery chain.

There are, in short, gainers and losers from the growing formalisation of retail in India as is always the case with any deep-rooted economic change. But from a broader point of view, it is well understood that the proportion of informal activity in a country is an indicator of its backwardness and increasing formalisation signals development. The losers from a development process are essentially short-run losers. The gains, on the other hand, are long term. There are ample instances in human history that would testify this. It may be worthwhile to look at a couple of them to illustrate the point.

Let us start with a recent example. In the 1980s, when computers were about to be introduced in a big way in banks and other organisations in India, there was an initial resistance. Those who were opposed to the use of computers argued that there will be a massive job-loss due to this automation. The degree of opposition varied across states; as a result, in some states computers were adopted early, while in others adoption was delayed. A number of things were evident from the subsequent course of events. First, though computers directly replaced human labour, it also created new jobs and new opportunities for people who were willing to learn and adopt. Second, adoption of computers enhanced overall efficiency. Third, states that were late adopters could not, in general, make up for their laggardness for the next two–three decades.

The second example is from the experience of the industrial revolution. The industrial revolution in England led to mechanisation, which displaced labour. The immediate effect was a reduction in labour demand as a result of which real wages remained stagnant for a very long time. The new technology increased efficiency and surplus from production but the surplus went mainly to profit earners, increasing profits by unprecedented amounts. Wages did not increase because, due to mechanisation, a situation of excess demand for labour prevailed in the labour market for decades. Gradually, however, the increased profits were reinvested. New production units were set up. At the same time, newly settled colonies opened up new channels of demand. All this, taken together, led to a slow but steady increase in demand for labour in 19th century England which, in turn, gradually but permanently changed the condition of the working class. Indeed, it was a change beyond recognition.

Minimising the Pain

Two separate lessons can be learnt from the two historical episodes. The first episode teaches us that new technological opportunities signifying progress should not be ignored. The second clearly illustrates that such opportunities may involve gainers and losers. Coming back to the present, it is necessary to realise that formalisation of retail, like formalisation of any other sector of the economy, is an essential part of development and should not be resisted. The same observation applies to the growth of online retail.

Acquisition of Flipkart by Walmart is only a small part of this big process, albeit an important one. In some quarters, there is an additional uneasiness because Walmart is a multinational. This uneasiness does not stand to reason. The pains of the losers would not be reduced if instead the acquisition were made by a giant domestic retailer. The major problem for the government is to minimise the pain of the losers and help ensure a smooth transformation of retail trade.

The problem is not merely economic, it has an overriding political overtone. We may recall that in England, men over 21 years and women over 30 years won the right to vote as late as 1918, and women over 21 years won the right to vote in 1928, resulting in universal adult suffrage. Before that the political environment was dominated by landlords, merchants, and clergies. As a consequence, British industrial revolution and its associated mechanisation of production took place essentially in an environment of non-democracy where people, adversely affected by mechanisation, could not get their voices heard. The situation is different in the present-day India.

However imperfect, we have a democracy. Governments at the centre or at the states can hardly risk public anger on account of job losses or rising food prices. This, in turn, has slowed down the process of inducting FDI in retail. Presumably, FDI in online retail is less politically vulnerable than brick-and-mortar outlets, and that is why a 100% infiltration of foreign capital is allowed in e-commerce while the share is restricted to 51% in case of brick-and-mortar stores. On that count, it is a good strategy to start with expanding online retail, which is already formal.

More importantly, the government should come up with specific rehabilitation strategies for job losers. The aim should be to provide training and skills to small retailers or their next generation so that they can be gainfully employed in the emerging big retail outlets as well as elsewhere. Similarly, any tendency of rising food prices, especially in the rural areas, due to procurement by giant retailers has to be handled either by subsidising the poor or by making them a part of the supply chain, which delivers the procured food items. In short, if safety nets for the losers are ignored, transformation to formal retail will become politically infeasible and the whole process of growth in retail trade will be jeopardised.

Note

1 https://timesofindia.indiatimes.com/business/india-business/number-india....

Updated On : 9th Jul, 2018

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