India’s consumers are the biggest losers in the battle over FDI

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Following the recent cancellation of 122 2G licences and rejection of plans to liberalize the retail sector, India is again earning its reputation as being a capricious place to do business for foreign companies. Although politicians and journalist attempt to justify the lack of greater reform as benefiting small and medium enterprises, the real losers are consumers. Despite 13 interest rate hikes since March, 2010 headline inflation remains 7.47% as of December, 2011. Food prices on the other hand actually declined by (1.03%) on a y-o-y basis for the week ending January 14th, 2012. Although consumers are enjoying a brief respite, food prices at the end of 2011 were 1.4x higher than they were at the end of 2008 according to data provided by the Ministry of Commerce. Think about that increase for a minute. I doubt the salary of the average Indian is up by 1.4x over the same period. Inflation surreptitiously takes away your purchasing power and impoverishes individuals living on fixed incomes. If foreign retailers had been allowed to enter the market, it would have resulted in more efficient supply-chains, less bottlenecks and most importantly lower food prices. By protecting the middle-men along the entire food supply-chain, India’s politicians have sacrificed consumers. Similarly, the cancellation of 122 2G licences will disproportionately impact foreign companies and reduce competition in the telecommunications sector. Fortunately, given the already competitive nature of the industry, consumers will not be significantly impacted due to the ease of number portability. However, the bigger issue remains that foreign companies will increasingly view the Indian regulatory environment as being unstable and will continue to pull back their investment plans. Decreasing competition always negatively impacts consumers, while benefiting incumbent companies . As a consumer, I want increased competition because it means that I’m getting a better deal. In the short-run domestic companies benefit as foreign companies are prevented from entering the market but in the long-run it’s the Indian consumer who loses out.

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