“I sell gobhi [cauliflower] at Rs 5 and potato at Rs 1 per kg from my farm. If you guys want to pay what you pay, fight the FDI in retail,” tweeted, a retired Lieutenant-General of the Indian Army.

The BJP’s main support comes from the merchants in small towns who dominate commerce in the town’s economic life. They own the wholesale trade, dealerships, large shops, and a factory or two that may be around to process agricultural produce. Historically, the merchant class survived Muslim & British rule intact. Both had no interest in destabilising the local trade as long as taxes were received on time. Indeed the rulers were kind to them and did much to establish markets & trading infrastructure in order to facilitate trade & commerce. While there were some selective favours to Muslim traders under the Mughals, but by and large, the merchant class was not harassed on religious grounds except under Aurangzeb for the Islamic tax, called the “Jazya”. Under the British Raj, some created enough capital to transition into manufactures such as jute and cotton textiles etc. Thus while the merchant class survived the alien rule rather well, it was also highly nationalistic and was keen to see the British vacate business lines in their favour. The merchant class’ right-wing nationalistic credentials are well grounded in our historical experience.

Independence saw the class prosper as much of the cheap British imports that held profits down were eliminated. Further, exports at depressed prices were also gradually phased out. For the merchant class therefore, independence came as a big boon. Sadly, independence was quickly followed by Nehru’s Fabian socialism that imposed a excessive controls on trade and commerce, ranging from compulsory monopoly procurement to direct price setting and even food rationing. Much of this imposed onerous costs on trade and was seen as an unjustified imposition. The merchant class was always numerically small, though moneyed and powerful. So it took to the BJP as its protector against the ruling Congress party that was imposing the controls in the name of socialism. Hence, the BJP’s nexus with the merchant class has a valid historical reason grounded in economics. The BJP espoused their cause for liberalisation from controls. Hence, the party still carries the halo of a right-wing liberalising party. But is it right-wing and liberalising anymore?

Liberalisation by the Congress in the 1990s changed all the political equations, producing profound changes in the polity. Some of them have still not been recognised fully. With liberalisation, Congress became the party of economic reforms, although it remains home to some of the most ardent Marxists. Congress Marxists, exemplified by Sonia Gandhi and her National Advisory Council (NAC), still believe growth comes free on trees and all economics is about sharing out the goodies fairly and equitably. They have had the upper hand in UPA2. On the other hand, the need to trade, import oil, and the high level of indebtedness, both external and internal, mean that you have to create policies that generate sufficient growth to pay the bills and leave some over for distributive justice. India has some $ 100 billion in debt coming due in 2012. It is these constraints that drive economic reforms, not conviction. Now that agriculture growth has hit a wall, and inflation has surged, the constraints have an upper hand, thus bringing reformists to the fore. Foreign direct investment (FDI) in retail is a handy way of addressing agricultural reforms as well as stimulating FDI cash inflows. Hence the bugle for reforms is being trumpeted once again.

FDI in trade represents low-hanging fruit in the agricultural reform package. It is aimed at rationalising and streamlining the whole procurement, distribution and marketing chain for commodities, ranging from grains to vegetables. It includes warehousing, cold storage, agro-processing, standardisation of products and the like. Standards and seeding are two things whose impact on costs and price are profound but under-appreciated. The payoffs from investment in this area are so rich for the economy that a mere reduction in wastage estimated at 30 percent of total produce, is sufficient to pay for projected investment. If these investments have not been made it is because of the policy restrictions that are now being done away with. Why then is the BJP, as a party of reforms, opposed to the FDI and proposed reforms?

The merchant class had a harrowing time preserving their businesses under socialism. Ingenuity and pervasive corruption in the government helped mitigate some of the constraints. Over the years, the merchants created a near monopsony in agricultural procurement by restricting membership of the Agriculture Produce Marketing Committees (APMCs). FCI and others like the CCI that were supposed to compete with merchants were co-opted by subversion. Support price mechanisms provide some protection to farmers against excessive price manipulation but state intervention has other unintended consequences and is restricted to a few food staples and cash crops. Farmers prefer to grow what the state supports, leading to shortages in things like pulses, vegetables and poultry. Competition by the corporates in the agricultural markets and the backward linkages they create in farming (standard seeds, assured offtake, predetermined floor price, etc) will reduce the risk to the farmers of diversifying into multiple crops like vegetables and pulses. Since a major reason for the high food inflation is structural shortages in pulses, vegetables and the like, reforms have become imperative.

FDI in retail is a misnomer. Actually it is letting in the corporate sector into agriculture. Why should they be kept out? Let the big battle for business begin and may the best survive. How are they like the East India Company? And why should small merchants be protected against domestic competition? They are small but they are hardly poor. Then why is the FDI necessary? Two factors dictate that. The biggies too need competition and that the FDI can provide. The other is technical knowhow, best practices and branding. Some FDI investors may prefer majority control but most will opt for local tie-ups. So the FDI will bring technology and cash, including cash that otherwise may not return to India soon. There is this hugely false propaganda that kirana (retail) stores will suffer. Yes, there will be competitive pressure but they will compete, collaborate, complement. The effect will be initially more on the wholesale rather than retail shops. Mom & Pop stores who know their customers always survive. Merchant fears of competitive pressure are overblown.

More than the merchants, the BJP faces an existential crisis that cannot be wished away. India needs a strong Centre-Right party that champions reforms independently of the constraints that drive the Congress party to reforms. It needs to retain its merchant class base but is unable to protect its short-term interests. Who comes first? Its base or India? The fact is the BJP has not thought through and worked out its politics with a thorough understanding of what economic reforms entail. From being the party of reforms under socialism, it has become a party of the status quo, hunting with the communists and defending vested interests. Nor is the natural religious tilt of the BJP sufficient to cover its tattered reformist credentials. It needs to think hard and afresh whether it is the party that will lead India to reforms and liberalisation or march it backwards. If the latter, then it should not be surprised to see itself marching alone as the aspirational class desert it in droves.

If India does not have a party of economic reforms, then one must be invented. Reforms are too critical to be left to times when yawning fiscal deficits must be bridged after they have been allowed to balloon, funding ill thought out doles.

Support price mechanisms provide some protection to farmers against excessive price manipulation but state intervention has other unintended consequences and is restricted to a few food staples and cash crops