[Viewpoint] The Wal-Mart battle in India

India has a Wal-Mart problem. This may not sound remarkable, considering that China and the United States do as well.

China’s preference for sweatshops to supply the Arkansas-based behemoth impedes the creation of a vibrant domestic market. America’s addiction to cheap goods made in China helped kill a once-prosperous manufacturing sector.

India’s challenge in allowing Wal-Mart to enter its market is more complicated. It’s a question of whether the ninth-biggest economy moves forward or backward and a defining issue for the legacy of economist-turned-prime-minister Manmohan Singh.

Criticism of Singh’s move to open India’s $400 billion retail market to overseas companies has been rapid and harsh - there’s already talk of it being shelved. The worry is that allowing 51 percent ownership by foreign retailers will harm small merchants that employ millions.

That’s just the point, though. The arrival of Wal-Mart Stores Inc. and Carrefour SA would have an invigorating effect like few events in the 20 years that Singh has been modernizing India’s economy. As finance minister in the early 1990s, he introduced free-market measures that cut red tape, removed caps on steel and cement makers and allowed overseas names like Ford Motor Co. to do business locally. These changes deserve as much credit for India’s 7 percent growth as anything.

Glass ceiling

India has hit an economic wall in recent years. Although it has produced healthy growth rates since the financial crisis of 2008, policies to increase efficiency have stalled. Political paralysis in the world’s biggest democracy is hindering the process of democratizing the spoils of India’s rapid growth. It’s still not getting to those who need it most.

Corruption is partly to blame. A growing number of India’s 1.2 billion people are fed up with how institutionalized graft squanders national wealth, a dynamic underlined by activist Anna Hazare’s potent protests this year.

The sheer size of the government bureaucracy is another growth-killer. So are the inefficiencies inherent in India’s private sector, retail being an obvious case in point. A labyrinthine distribution system involves myriad middlemen and helps inflate prices in a nation where hundreds of millions live in, or on the cusp, of extreme poverty - the $1-a-day kind. Yes, this system employs millions, but at a very high cost.

By investing in neglected supply chains and infrastructure and applying more modern techniques, foreigners could reduce waste in India’s huge agricultural industry, get farmers better prices for their produce and offer shoppers greater choice.

Singh’s reforms

If you really think India’s economic structure works well as is, by all means, keep it. But if you think there’s a different approach, one that fosters greater competition, quality, service and cost savings, then Singh’s retail-industry reforms are the right ones.

Although China has been the big draw for foreign direct investment, India is beginning to gain some appeal. Kishore Biyani, founder of Pantaloon Retail India Ltd., India’s largest chain by market value, predicts that the retail industry will gain $8 billion to $10 billion in investment in the next five to 10 years as competitors abroad enter and local companies try to keep pace.

India’s historical laggard status reflects a longstanding romance with Karl Marx and too little familiarity with Joseph Schumpeter. There’s still an excess of Marx and the German philosopher’s statist solutions in Asia’s No. 3 economy and not enough of Austrian Schumpeter’s creative destruction.

Kolkata’s communism

If you want to see where the status quo leads, look to Kolkata, the capital of West Bengal formerly known as Calcutta. Six months ago, Singh ended 34 years of Communist rule there, pledging to turn it into an Indian version of London. Instead, Chief Minister Mamata Banerjee is putting the interests of local farmers first, backing laws that make it harder for companies to acquire land and, in the process, deterring investors like Tata Motors Ltd., which moved a planned car plant to the western state of Gujarat. Not surprisingly, Kolkata is neither attracting investment nor creating jobs.

This column isn’t pro-Wal-Mart. Such multinational companies all too often flout environmental laws, undermine labor unions and represent an economic race to the bottom. Yet Wal-Mart isn’t the problem. The culprit is leadership that clings to the failed policies of yesterday to the detriment of tomorrow.

If my travels in Asia, Africa and Latin America have taught me anything, it’s this: The real failing of free trade and globalization is that the parts of the world that need them most get short shrift. The anti-globalization movement, however well-intentioned, should turn its energy to extending the benefits of free trade and capital flows to the world’s neediest people.

India can’t turn back the clock on where the world economy finds itself. Opening the retail industry isn’t some out-of-the- blue act of economic radicals; it has been debated for 15 years now and is an essential part of India’s growth story in the long run.

Modern India has a choice. The first, for all its painful bumps, leads toward greater openness, competition and prosperity. The second goes backward and means India will fall further behind China and other Asian upstarts. Which will it be, Prime Minister Singh?

*The writer is a Bloomberg View columnist.

By William Pesek