Monday, 19 December 2011

Simon, Come back!

On October 30, 1928, a group of protesters led by Lala Lajpat Rai waved black flags and shouted 'Simon, Go Back' to protest the arrival of the Simon Commission. What started then still seems to go on as we blindly shout on the top of our voices to brush aside heavy money investors from the west. FDI in retail has been a hugely debated topic on the news and print media for more than a fortnight now and the age old attitude of sending all Simons back isn't perceived too well in the current scheme of things.

Why don't we have Harrods in Delhi? A simple question for a four year old who asked her dad while they came out of a shopping center in London. Though the question might seem simple, the answer to it is a tough nut for the dad to crack as he gapes for reasons. In my opinion, FDI in retail makes a lot of sense especially with a 51% limit to overseas stake. Here are the reasons:

1. With FDI in retail, we are attempting to organize and put in order one of the most unorganized and deeply corrupted sectors in the country.

2. Against a production of 180 million mt a year of fruits, vegetables and perishables, India has a capacity of storing only 23.6 million mt in 5,386 cold storages across the country. With overseas investment, we are moving towards a regime of optimal cold storage and superior logistic capability.

3. India has 1.2 billion consumers, 600 million farmers and 5 million traders. Should we save the penny for the 1.2 billion consumers and improve lifestyles of 600 million farmers by affecting the margins of 5 million traders? YES

4. Cauliflower is sold at the mandi Rs 5. a kg. After travelling a few miles to the vendor, the price goes up by 400% to Rs 25. per kg and what the farmer gets from the sale at the mandi is a meagre Rs. 3. There is something wrong with this system and it has to be addressed at any cost.

5. Naysayers say that FDI capital in multi brand retail has a tendency to multiply itself and could lead to an unthinkable application of 'capital for profit' and in the process deepen the gap between the rich and the poor. But how flawed is that argument? The government promises to keep an eye on the prices and hypermarkets would be introduced in only those cities which have a population of more than 10 lakhs. As of now only 53 cities qualify the aforementioned criteria. With a rural population of 70%, the 53 cities (a fraction of the remaining 30%) cannot contribute as much to a deep divide.

6. The proposal states – 51% stake in multi-brand retail with a minimum investment of $100 million of which about 50% has to be spent on back-end infrastructure.That translates to a good amount of job generation in unprecedented quarters especially in the supply chain arena. 

With so much to speak for the introduction of this long awaited reform, there is only one thing that is worrisome in my opinion. With the amount of capital and the power of foreign investors, it is possible that the ultimate aim of the game is defeated. The hypermarkets could hypothetically beat all competition from small traders and reach a stage of monopoly. With that they could fix prices for all commodities as they wish and book higher profits as they establish themselves in the long run. But as I have already mentioned, even that possibility arises from a hypothetical standpoint. More importantly, as per the proposal, the government promises to keep an eye on the prices.

What stops the reform from being implemented when it has the capability of addressing one of the biggest problems of our economy viz. food wastage? The reason is two pronged : Politics and Corruption. Opposition parties want to make a clear political issue out of this debate in an attempt to derail a government that is already in shambles. Also, the distance between the mandi and the vendor is filled by a well connected gang of goondas who inflate the prices and make undue profits. These goondas don't standalone, they are strongly backed by a nexus of political heavyweights. These political big names (un names) are not ready to forgo their illogical profits for the good of their voters.

Another reason why we are not able to debate this and enforce the reform is the fact that the people who argue against FDI in retail are a well organized group of traders. According to rough data released by the Ministry of Labor, trade unions had a combined membership of 24,601,589 in 2002. Contrastingly, there are too few organized farmer unions in the country that they are not able to raise their voices and stage successful protests.

All said and done, there is one thing to lift our spirits. Amidst complaints of parliament dysfunction and neglect of responsibility by politicians, our prime minister remains confident and positive about implementing this trend-setter bill. At the time of this writing, the Prime Minister spoke to the media from his private aircraft and expressed strong opinions about FDI in retail. He feels that we need to evolve a broad based consensus and he is committed towards it. His strategy is to wait until the elections to state assemblies (in the offing) get over and I believe that his very intent is a positive sign of things to come. I wish the proposal goes through when the time is right as it would help us lay the platform for many more reforms akin to the 1991 globalization.

Tuesday, 13 December 2011

We can sub-sell better

The major difference between a totally developed country like the United States and a country with large number of people below poverty line like India is that, in the former, almost everyone has access to products and services alike including but not restricted to healthcare, education, movies, taxes etc. According to 2007 estimates, India has about 25% population below the dreaded poverty line. Let's label that part of India as the "subsistence category". These people have money only for daily subsistence and not more.

In the recent past, India has been witnessing a swell in the number of people choosing the entrepreneurial path. In contrast to its definition in an empowered economic platform, the term entrepreneurship in the subsistence marketplace has a totally different definition. These entrepreneurs are not the usual literates with sharp business sense and superior technical prowess. They are local vegetable sellers, goods traders and petty shopkeepers. They are the people who can drive business in the aforementioned resource constrained contexts.

Knowing that, what stops these little "enter-preneurs" from growing and creating sustainable businesses? They face a heavy lack of resources that would enable them to sustain and expand. These resources include deep understanding of the market, cognizance of consumer behavior patterns, specialized and unique management techniques required for such scenarios and of course free flowing capital. When they ventured out, micro finance institutions resolved to address one part of this problem. They aimed at making capital easily available to small sellers in villages and towns. But that has not led to a success story of sorts in the few years of their operation. The reason for that is pretty much intuitive. Only one of the problems viz. availability of capital has been addressed and the rest of them still loom at large.In the process, these NBFCs (Non Banking Financial Corporations) have shown creativity and have invented as they increased their presence in various rural parts of the country. They provided highly interlinked and innovative insurance products with their micro loans. But they did not enable the consumers to innovate.

After witnessing repeated failures in the private microfinance sector led by SKC, government has come out with a new credit risk guarantee fund to enable established banks to lend to the poor. This, if implemented is definitely a step towards inclusive growth accompanied by the upliftment of a sizable number of people below poverty line. But, the other problems of market literacy and business strategy for subsistence marketplaces are being overlooked. Helping women to be part of this improvement cycle is a good strategy and many NGOs and microfinance institutions like IFMR have been exploring those options. It has yielded commendable results. But it has not created any sort of revolution per se.

The solution is to make these small businessmen understand the way in which low income households access and use the finances that are available to them. The bottom line is that besides providing capital, it is important to provide the awareness and teach the rural business people strategies and ways to use the capital in the best possible way so as to suit resource constrained markets and societies. Also, bigger businesses need to look at subsistence marketplaces as areas of possible growth. They should not only expand to such areas but also implement and teach selling techniques as they go about expanding. That would be an innovative version of a bottom-up approach in enabling growth and would teach consumers and sellers in the economically challenged geographies to buck up and be at par with the country's growth rate.