Apparently, the government is again contemplating FDI in retail sector. Since the Left parties are opposed to it, it has become fashionable for the "young" and "progressive" to pooh pooh the concerns and recommend this as a measure of India's "opening up". Surprisingly, the proponents of liberalization (assuming such are in a majority) do not themselves seem to have confidence in the businesses they recommend - witness the abysmal (single digit) ownership of equity of Indian companies among the Indian public. The pity is, that most such free-market proponents are unknowingly acting as lobbyists - for free. The foreigners know better - atleast they demand a price to lobby! Remember Enron?
So what is at stake here? A Wal-mart is almost the size of Indian retail industry, yet employs only 5% of the people retailing in India supports. In a country where job creation significantly lags additions to the labour force, any sensible government (other than one bought out by lobbyists) will have to wonder as to the pay-off of this "liberal" policy.
Even assuming that we accept that law of the jungle should work and only the strong should survive - what exactly is the argument for "foreign" ownership? Do Indian entrepreneurs not have the skill or risk taking capability to set up and run retail businesses - there is after all no bar on them doing so. So why this shrill demand for opening up to foreign investors?
The few companies that have ventured into retail have yet to generate economic return on capital. Stripped of accounting shenanigans, no company in the business has generated a return that meets its cost of capital. On the other hand, many "innovations" of "organized retail" - extending credit, home delivery etc. are already offered by the friendly neighbourhood retailer. Clearly, the only way that "organized retail" will complete is by adopting competition destroying methods of discounting and taking upfront losses - leveraging their ability to raise "free capital" from the stock market. Consumers will suffer int the longer term as cartels forces prices up once the small retailer is driven out of business. Is this what "free markets" are supposed to foster?
4 comments:
With all due respect sir I don't think you have any knowledge of modern retail and supply chain principals. Lets look at social angle first, Current high inflation can be attributed to 2 reasons, a) Black marketing and local monopoly of unorganized wholesalers and b) Wastage of thousands of tons of food. Both of these can be controlled by organized retailing. In a country that has 30%+ food wastage due to lack of basic supply chain efficiency and modern warehouses; organized retail is a necessity. Now why does anyone want to reinvent the wheel of 50 years of learning when you can get easily modern tools and techniques? Fair competition is always good for consumers and is proven 100s of times across the world. Your point about labor force is also bogus. Backend operations of organized retailing will create lots of new jobs and front end store support can consume current local job losses easily.
Thanks,
Sunil (With a decade of Organized retailing experience)
Thanks for your comment Sunil. Unfortunately, I have to disagree.
First, food inflation in India has more to do with faulty government policies than with blackmarketing. Just as an example, the government determined MSP for foodgrains has witnessed a CAGR of between 15% and 6% for most categories (see my earlier presentation) - well ahead of the inflation index.
Second - on retail, you miss my point completely. Why has ownership got to be foreign before we set up a "modern" retail? Why can't Indian companies hire experts like yourself to fix the issues? What has that got to do with foreign companies.
Third - there is no restriction on foreign participation in supply-chain. If that is the attractive part of the business, surely there would be serious investors who would have invested. What I do know, is that despite over a decade in the business, ITC's e-choupal does not make economic returns. And this is when they have probably one of the best models thus far. Reliance, which started with a bang, has significantly scaled back.
Last - It is indeed competition that I think should be promoted, for which we have to ensure as a society that there is a level playing field and that larger players do not use their balance sheet to undercut existing retailers only to form cartels later.
On your point of back-end jobs - I assume that such jobs exist within Walmart as well, and even then, they employ barely 5% of the Indian market - with the same turnover.
I dont purport to be an expert on any one sector, but over twenty years, I have seen literally hundreds of companies and dozens of industries evolve. That does generate a sense of what will happen over time.
We can allow FDI in retail sector if the revenue generated(sales) is equal to revenue generated by Maquiladora of same group.
Maquila is concept often referred to an operation that involves manufacturing in a country that is not the client's and as such has an interesting duty or tariff treatment. It normally requires a factory, that may import materials and equipment on a duty-free and tariff-free basis for assembly or manufacturing and then "re-exports" the assembled or manufactured product, sometimes back to the originating country.
The term maquiladora, in the Spanish language, refers to the practice of millers charging a maquila, or "miller's portion" for processing other people's grain
Well let me try to answer the 3 points you mentioned,
1. We know 1000s of tons of food grains are rotting in govt warehouses, there have been multiple stories in media on this. That clearly gives a bad supply chain as 1 of the the culprit for inflation. Additionally we know local wholesale trade unions control wholesale prices and they don't want a free market solution for prices. Moreover they normally have local political backing.
2. Now the question comes why foreign? My question is why not? Why should we be protectionist here? Foreign players will bring investments as well as expertise. As you mentioned that Indian retailers have not been very successful in their endeavors. Biggest reason is lack of investments in backend operations and technology. There have been a mad rush of opening more stores pan India by Reliance, Subhiksha etc because that's what is visible competition and help boosting stocks. Backend operations are neglected. According to me that's the reason for the bad shape they are in. Let's look at this case - I know for a fact that Birla's MORE does route optimization manually for 100s of trucks. I don't know the exact reason but either people didn't know many transport management solutions and processes exist in the market or someone at the top did not think it is good investment when he/she can open 10 more stores in xyz city with the same money. I suspect later to be the reason. All I am saying is experience matters!
3. On job creation end, simple fact is any good investment always help in overall job creation. Wal-mart example is little misleading. Walmart goes many extra miles to save labor because it's costly in US. Many of mechanical/robotic technologies will not be needed in India. Secondly lots of new jobs will come in support functions. (Every IT job in India accounts for 5 support jobs) Thirdly large scale promotions and marketing will drive consumerism so size of whole sector will increase thereby helping overall wealth creation. Money rotation and velocity creates more money you see.
At the end of day, we may not agree but it's nice to interact with you. Have a nice day! :)
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