There certainly has been a correlation between the opening of the Indian economy in 1991 and economic growth. Why ? The allowance of foreign firms to any previously closed market gives access to goods that did not exist previously. There were only three cars varieties in India in the 70's. Slowly as foreign firms were allowed, the consumer got greater variety. now he can buy a Hyundai, Toyota, Ford and so on. Similarly, entries of Foreign firms in other areas gives consumers better access to "wealth". Here I do not consider wealth as what it is commonly perceived as i.e. money. But as access to valuable resources.
Thanks to phone companies like Nokia and LG the average labourer who lives on 400-500 Rs. a day, can own a mobile phone. similarly Televisions with international channels like CNBC, National Geographic, etc. give him access to information and ideas that would have been difficult to come by previously. What foreign entrants bring to a previously closed economy is not only new technology, but also higher human capital, as well as investment capital.The same could be said of foreign entrants in multi-brand retail. The cap on FDI had created vast inefficiencies and monopolies within the retail industry. The existence of middle men within the supply chain in the agricultural industry who jack up prices of farm produce is well known. Farmers can sometimes be paid 20% of what the final consumer pays. Today, the spoilage of 20-30% food produce before it reaches it's final selling point is the norm. The reason is due to the lack of infrastructure such as cold storage units (to preserve food) and of barriers too trade, such as 'Nakas'.
But, there are gains to be made in other industries too. The entry of the Swedish Furniture giant, Ikea, would change the furniture industry in India. What does Ikea bring to the Indian furniture market ? Firstly, it would bring the technology of mass production at cheap prices. Secondly it would present itself as an important, and large scale consumer of raw materials, such as cloth, wood, plastic etc. from local producers, which it would require to manufacture it's products, hence giving more opportunities for local producers to grow, financially. Thirdly, it creates more job opportunities. According to a study by price water cooper (2011), every 50000 square feet of development leads to employment of 200 people on average (source:IIMB). This is certainly a plus for a country, 46.5% of whose people are below the age of 25.(CIA Factbook) and will soon be entering the job market. But it is also argued, especially by trade federations in India that entry by Foreign players will lead to the displacement of the so called mom-and pop stores that are so common-place in India, and subsequently cause the unemployment . Firstly, the potential of that happening will only occur if there is a sudden entry of such firms in a short period of time. In the short-term, there is certainly a potential of large levels of displacement. If, as discussed earlier, these firms make the overall supply chain more efficient, then some inefficiencies(including inefficient employees) might be discarded, But in the long term, employment levels might return to normal and in-fact increase even more. This is because of the multiplier effect. The multiplier effect is a concept used in economics which explains that an investment of say, x amount would lead to total gains greater than the initial x amount invested. At the ground-level in multi-brand retail, if a foreign firm were to set up stores, this initial investment would be complimented by investment by other firms(domestic and Foreign) in other avenues such as infrastructure, processing, transport etc. to secure the opportunities of business created by that initial firm, and subsequently opening up employment opportunities Including for those who might have been displaced by the entry of foreign competition. It must be noted that in discussing the "long-term", the human pain of sudden disruption is ignored. But it is highly unlikely that there will be sudden disruption. The underlying fact is that doing business is still hard in India. Special mention should be made of the GAAR in this regard. The looming fear of such a policy make's foreign businesses wary. They will enter cautiously, Even with relaxation of the FDI cap, major policies that hinder business still remain, the failure of the government to impose a uniform Goods and Services tax is one example. The relaxation of these barriers to trade will not come immediately but in the time span of years. Enough time for those who might get negatively affected by the entry of multinational retail brands, to prepare for change.
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