Monday, May 30, 2011

Panel recommends FDI in retail as inflation-buster

Part of this report had appeared in DNA on May 28, 2011

Economic advisor Kaushik Basu predicts downward revision of growth rate


New Delhi: The inter-ministerial group (IMG) on inflation that the UPA government had formed in February this year has come up with its first position paper.

Announcing the conclusions, Kaushik Basu, the Cornell don who is now the chief economic advisor in the finance ministry, announced on Friday that allowing in foreign direct investment (FDI) in multi-brand retail would be one of the ways of containing food inflation, along with the reform of agricultural produce markets committee (APMC).

The recommendations have been sent to the prime minister and the finance minister, he said. He cautioned that these were just recommendations at the moment and it is for the government to take the call.

The reform of APMC would allow free movement of grains across the country, and FDI in retail would speed up large scale and efficient movement of food grains from the farmers to consumers, and these two measures would considerably reduce food inflation.

Basu, the economist, displaying disarming candour expressed surprise over the rise in year-on-year food price inflation which stood at 8.66 per cent in April. “We were taken unawares,” he said and attributed it partly to the global economic volatility, especially in the oil prices. He felt that there are things that the government can do at home, and that pertained to APMC reform and opening up retail to FDI.

Saying that organised retail was only 4 per cent compared to a higher figure of more than 20 per cent in comparable emergent eocnomies like China and Malaysia, he assured that entry entry big retail players would not crowd in any way the small players in India. “There will be competition and it will benefit farmers and consumers because of improved efficiencies.”

He has emphasised that there is need to set up a regulatory framework before allowing FDI in retail.

Basu suggested that more than one foreign player should be allowed into the country as that would prevent oliogoplistic practice. He is also optimistic that there would be a healthy compeition between the small Indian retailers and the big foreign ones.

He argued that FDI in retail would give the small Indian farmer access to world markets as well because the foreign retailers would buy from the farmers and take the produce to global markets.

He agreed that agricultural productivity remains a challenge as emphasised by prime minister Manmohan Singh, but that is seen as a long-term solution. Asked whether FDI in retail would also facilitate food imports, he clarified that the import restrictions should remain in place.

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