The Indian Retail Economy: Foreigners, Keep Out!

More than three years have passed since the Lehman Brothers collapse shoved the United States economy to the brink of a second Great Depression. And today, with unemployment and home foreclosure rates still high, it’s easy to understand why Americans remain glum about their economic futures.

Indeed, the conventional wisdom stipulates that the BRIC nations of Brazil, Russia, India, and China collectively represent the rising economic powers of the 21st century. India, in particular, has been praised by many economists for its combination of political democracy, economic capitalism, and English-fluent western culture.

Before Americans permit themselves to feel too threatened by the Indian economy, though, they may wish to consider a watershed decision that was announced by government officials in New Delhi last week. Apparently, India is not as prepared to embrace the principles of free-market global capitalism as its government previously led us to believe. And as a result, India’s economic competitiveness may well suffer the consequences of domestic protectionism.

A Nation Of Shop Owners

Throughout history, the structure of India’s retail economy has remained rooted in community tradition. As was the case in the pre-industrial era of the United States, the vast majority of Indian citizens purchase merchandise from the owners of tiny, privately owned kirana shops.

Some Americans still bemoan the loss of traditional self-employed shop keepers; nevertheless, they have continually flocked to successively larger and more efficient retailers. Indeed, American shoppers themselves have accelerated the modernization of the consumer economy by gravitating from urban department stores (like Wanamaker’s and Macy’s) to suburban mall-based chains (like Sears and J.C. Penney), and then on to warehouse style superstores (like Walmart and Costco).

Late last month, Indian government representatives finally announced that they would permit foreign retailers to operate majority-owned supermarkets within their national borders. In fact, they explicitly acknowledged that they hoped this decision would trigger the modernization of their retail industry. However, after just a few weeks of protest by protectionist domestic forces, the Indian government suddenly decided to reverse course last week.

Economic Impact

Why does it matter whether consumers purchase merchandise from tiny shops or gigantic super-stores? How does it affect the economy of a nation?

To be sure, many pundits bewail the loss of traditional American downtowns, with their tiny privately owned shops, to large-scale suburban developments. To such traditionalists, American society would be far more prosperous if citizens shun the automobile culture and embrace “livable” communities, residing in homes that are located within walking distance of human scale business districts.

Although towns in states such as Oregon and Vermont have indeed prospered within such urban planning environments, the modern American economy has nevertheless reaped the benefits of expanding economies of scale. Walmart, for instance, has grown to become the largest employer in the United States, selling merchandise to American consumers at prices far cheaper than any one could possibly find at smaller stores.

Why Competition Matters

It is important to note that the Indian government hasn’t simply limited the size of newly proposed domestic retail projects. It also continues to protect Indian-owned businesses by prohibiting any retail projects, of any size, that are majority owned by foreign firms.

Such a decision clearly limits the amount of competition that can occur in the retail industry, a limitation that profoundly affects the market itself. That’s because competition, by its very nature, drives innovation in product characteristics, customer service, and other functions.

Consider, for instance, whether Microsoft would have been driven to improve its Windows software if not for the competitive challenges of firms like Apple and Google. And consider whether American, Delta, and United Airlines would have been similarly driven without competition from rivals like Southwest and JetBlue.

Does any one doubt that product and service innovation would slow if such competitive forces were to suddenly disappear? In the Indian retail industry, though, such forces have never been present at all.

Protectionism, American Style

The United States, of course, is hardly a pure bastion of free market capitalism. Insurance companies, for instance, are still restricted from selling certain types of policies across state lines. And many American farmers are still paid subsidies to help protect them from market price fluctuations.

The American retail industry, though, is continually challenged by foreign store chains at both ends of the economic spectrum. The Swedish mass market “fast fashion” retailer Hennes & Mauritz (H&M), for instance, has expanded from a single American location to almost two hundred in slightly over a decade. And in the automobile sector, numerous European and Asian manufacturers compete with America’s “Big Three” in the United States.

So despite its continuing economic doldrums, the American economy still maintains competitive advantages that do not exist in other nations. Such advantages may yet succeed in generating levels of economic activity that can return the nation to prosperity.