Thursday, December 22, 2011

Why the Lokpak Bill will not work

I would like to use a a scenario familiar in the Computer Software industry to explain why I think the Lokpal Bill is not the solution to the problem of corruption.

A project was initiated with two incompetent programmers. Soon enough, the project was in trouble and in order to fix the problems, a Lead was drafted in. The problems continued and so an Architect was brought in as well. But despite bringing in the Architect, the problems persisted, so finally an external consultant was brought in. But alas, the problems did not go away.

Finally, someone in the organization decided to replace the programmers. The replacement programmers were competent. Within days, the problems were fixed, and the project was taken to its logical conclusion.

Now replace "incompetent" with "corrupt", "programmers" with "govt officials", "Lead" with "CBI/CVC/CAG", "Architect" with "Judiciary" and "External Consultant' with "Lokpal" and you see why this is not going to work.

No matter what we do, as long as the incompetent programmers are there churning out junk, the project will continue to have problems. So next time we vote, let us select a "competent developer".

It is also true there may not be many or any "competent developers". It will need several generations of sacrifice before India gets them. Question is, are you and I ready for that sacrifice?

Tuesday, December 6, 2011

Remembering Dev Anand

It is easy to mimic those that set themselves apart. Perhaps few have been mimicked, caricatured and parodied as much as Dev Anand and that too over several generations. It is testimony to the longevity of the man, the actor, the writer, director, and producer. To be considered as one the triumvirate of the Indian film industry in the 50s and 60s along with Raj Kapoor and Dilip Kumar speaks volumes of his popularity and contribution.

Dev Anand's career spread over three innings. The first innings was pre-70s and defined him really and catapulted him as one of the three superstars. I have little re-collection of this period, except for a few movies I saw much later in life.

His second innings, started with a bang with "Johnny Mera Naam" in 1970. Some film historians also claim it was this movie that made Hema Malini famous. If Rajesh Khanna had teenage girls and married woman swooning over him, Dev Anand had his fair share too. And then were guys like Amar, my next door neighbour, who would insist on wearing these ghastly yellow bell-bottom trousers that Dev Anand wore and made famous in one of his movies.

1971 saw the release of the cult movie "Hare Rama Hare Krishna". I recall being on a boat ride at the "Gateway of India" with my family on a dark Sunday evening and they were playing "Dum Maro Dum" the famous song from the movie during the ride. It was a surreal experience. A very topical film (showcased hippie culture), based on a terrific and moving storyline, backed by excellent acting and music that achieved instant cult status, it also gave the Indian film industry its first glamour girl - Zeenat Aman. I dare say, I consider this to be one of my personal favourites.

Dev Anand continued to make several movies through rest of the 70s, but the one that I enjoyed was the 1978 Des Pardes. Again, highly topical, the movie was based on illegal immigration and exploitation of labour from Punjab to the UK, the movie had everything that one came to expect from a Navketan starrer (the name of his production banner). Above all, it shot to fame Rajesh Roshan, the music director, and introduced Tina Munim.

Dev Anand's third innings that I place in the 80s and onwards is pretty much forgetable. True to his production banner - Navketan, which means newness, he continued to make movies that had different and topical storylines, but somehow he seemed to have lost his ability to connect with the audience. Some of the movies were so bad, I could not sit through its entire length. When asked on his reaction to repeated box office failures and criticism, he would often respond that he did not care as such and would continue to make movies based on his convictions. An artist that does not care for audience feedback is a narcissist, but I dont think Dev saab was one. I think his sheer passion for film making overshadowed everything else, and he just had to go on and go on till death stopped him.

It was on a Shivrathri night, that my college hostel gang and I were watching Guide at a theatre in Vadodara. The song "Aaj phir jeene ki tamanna hai" burst forth on the screen. In unison, most of us were out of our seats, throwing coins at the screen - it was the first and only time, I did such a thing, but now, looking back it perhaps was a good way of paying tribute to this evergreen entertainer.

Saturday, December 3, 2011

Impact of Organized Retailing on the Unorganized Sector - May 2008 study conducted by ICRIER

I have produced an extract of the study published by the ICRIER in May 2008. The study does not distinguish between foreign and domestic players and rightly so. Readers may draw their own conclusions and inferences from the findings listed below. A link to the detailed report is included at the end of this post.

The real GDP is expected to grow at 8-10 per cent per annum in the next five years. As a result, the consuming class with annual household incomes above Rs. 90,000 is expected to rise from about 370 million in 2006-07 to 620 million in 2011-12. Consequently, the retail business in India is estimated to grow at 13 per cent annually from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12. The study shows:

  • The unorganized retail sector is expected to grow at about 10 per cent per annum with sales rising from US$ 309 billion in 2006-07 to US$ 496 billion in 2011-12.
  • Given the relatively weak financial state of unorganized retailers, and the physical space constraints on their expansion prospects, this sector alone will not be able to meet the growing demand for retail.
  • Hence, organized retail which now constitutes a small four per cent of total retail sector is likely to grow at a much faster pace of 45-50 per cent per annum and quadruple its share in total retail trade to 16 per cent by 2011-12.
  • This represents a positive sum game in which both unorganized and organized retail not only coexist but also grow substantially in size.
  • The majority of unorganized retailers surveyed in this study, indicated their preference to continue in the business and compete rather than exit.
 The Empirical Basis

The study comprises the largest ever survey of all segments of the economy that could be affected by the entry of large corporates in the retail business. The findings are based on a survey of 2020 unorganized small retailers across 10 major cities; 1318 consumers shopping at both organized and unorganized retail outlets; 100 intermediaries; and 197 farmers. In addition, a “control sample” survey was done of 805 unorganized retailers who are not in the vicinity of organized retail outlets in four metro cities.

Detailed interviews were also carried out for 12 large manufacturers, 20 small manufacturers and six established modern retailers.

The study contains an extensive review of international retail experience, particularly from the major emerging market economies.

Main Findings

Impact on Unorganized Retailers

  • Unorganized retailers in the vicinity of organized retailers experienced a decline in their volume of business and profit in the initial years after the entry of large organized retailers.
  • The adverse impact on sales and profit weakens over time.
  • There was no evidence of a decline in overall employment in the unorganized sector as a result of the entry of organized retailers.
  • There is some decline in employment in the North and West regions which, however, also weakens over time.
  • The rate of closure of unorganized retail shops in gross terms is found to be 4.2 per cent per annum which is much lower than the international rate of closure of small businesses.
  • The rate of closure on account of competition from organized retail is lower still at 1.7 per cent per annum.
  • There is competitive response from traditional retailers through improved business practices and technology upgradation.
  • A majority of unorganized retailers is keen to stay in the business and compete, while also wanting the next generation to continue likewise.
  • Small retailers have been extending more credit to attract and retain customers.
  • However, only 12 per cent of unorganized retailers have access to institutional credit and 37 per cent felt the need for better access to commercial bank credit.
  • Most unorganized retailers are committed to remaining independent and barely 10 per cent preferred to become franchisees of organized retailers.

  Impact on Consumers
  • Consumers have definitely gained from organized retail on multiple counts.
  • Overall consumer spending has increased with the entry of the organized retail.
  • While all income groups saved through organized retail purchases, the survey revealed that lower income consumers saved more. Thus, organized retail is relatively more beneficial to the less well-off consumers.
  • Proximity is a major comparative advantage of unorganized outlets.
  • Unorganized retailers have significant competitive strengths that include consumer goodwill, credit sales, amenability to bargaining, ability to sell loose items, convenient timings, and home delivery.
Impact on Intermediaries
  • The study did not find any evidence so far of adverse impact of organized retail on intermediaries.
  • There is, however, some adverse impact on turnover and profit of intermediaries dealing in products such as, fruit, vegetables, and apparel.
  • Over two-thirds of the intermediaries plan to expand their businesses in response to increased business opportunities opened by the expansion of retail.
  • Only 22 per cent do not want the next generation to enter the same business.
Impact on Farmers
  • Farmers benefit significantly from the option of direct sales to organized retailers.
  • Average price realization for cauliflower farmers selling directly to organized retail is about 25 per cent higher than their proceeds from sale to regulated government mandi (market).
  • Profit realization for farmers selling directly to organized retailers is about 60 per cent higher than that received from selling in the mandi
  • The difference is even larger when the amount charged by the commission agent (usually 10 per cent of sale price) in the mandi is taken into account.
 Impact on Manufacturers
  • Large manufacturers have started feeling the competitive impact of organized retail through price and payment pressures.
  • Manufacturers have responded through building and reinforcing their brand strength, increasing their own retail presence, ‘adopting’ small retailers, and setting up dedicated teams to deal with modern retailers.
  • Entry of organized retail is transforming the logistics industry. This will create significant positive externalities across the economy.
  • Small manufacturers did not report any significant impact of organized retail.

Link to the pdf version of the detailed report of the study

Thursday, December 1, 2011

Traders protest FDI in retail - not entirely justified

The internet, tablets and book readers such as Kindle are driving newspapers and book publishers out of business. Gmail and other electronic mail are driving postal office workers out of their jobs. These are just two areas that modern technology advances are driving people out of work. So how come, there are no protests? Is it because they are too small a group to organize themselves and create pressure groups? That they are so small in numbers that they do not constitute a vote bank? But is their job not a job and their livelihood not a concern for the rest of us? The march of commerce and technology cannot be stopped, it can be delayed, it can be controlled and manipulated but not stopped.

Instead of worrying about what Walmart and Tesco will do to us, this nation of 1 billion plus should be thinking of how we can use them to our advantage, NOT THE OTHER WAY AROUND. And that mode of thinking is exactly the difference between the Chinese and we Indians.

Tuesday, November 29, 2011

Why FDI in retail is good for India

Poor Manmohan Singh. Dammed if he does not, dammed if he does. A few weeks ago, several captains of Indian industry along with political opponents for chorus, slammed Manmohan Singh for complete paralysis in government. Last week saw the introduction of several key policies related to economic reform, in particular to FDI (Foreign Direct Investment) in the aviation and retail sectors. The political opponents this time joined by some of Manmohan Singh’s UPA government’s key allies slammed him yet again.

The opposition came from the usual suspects and along expected lines. The communists opposed as they do anything that has even the most remote US connection. Several regional parties (with the exception of the Akali Dal in Punjab), mostly allies of the UPA, opposed. So did the BJP, which is the main opposition party.

Fundamentally, the opposition is based on two issues – first, that allowing FDI in retail would result in local small stores (known as kiranas) being driven out of business and their owners (kiranawalas) will be driven out of jobs and livelihood. Second, the manner in which the government introduced the policy – by pushing for its approval directly by the cabinet and not first introducing it on the floor of the house, was not right.

I am going to ignore the second issue and focus solely on the first one. For my starting arguments, I need to go back in time.

It was in the mid to late eighties that desktop computers were making their presence felt in India. The then government had decided to go in for massive computerization in the banking and government sectors. Employees, threatened by the prospect of losing their jobs, took to the streets. In hindsight, it was a good thing to happen. Those employees that decide to adopt, flourished. The others decided to opt for fat VRS (voluntary retirement schemes) and flourished as well. I do not recall distressed bank employees from that time with shattered lives, at least not in large numbers and on account of computerization.

So should we have not gone in for computerization because of a perceived loss of jobs? Today’s generation of bank and government employees would most likely take to the streets if we were to suggest that we go back to the pre-computer era. Not to mention the total collapse of our financial systems.

In those very same years and before, ready-made garments were the preserve of the well to do. Most middle income families, such as mine, bought cloth and got our shirts and trousers stitched from the local tailor. The branded apparel industry has come a long way since those days of the 70’s and early 80’s. I don’t think my sons will ever visit a tailor’s shop in their lifetime, but Shantaram Tailors still stands firm on the prime LJ Road, Shivaji Park, Mumbai. How come? For even though, families such as mine, have moved up in the economic strata, a new set of families from lower down have come to replace us. Shantaram Tailors will continue to have a clientele; it is more likely his children will dis-own the business before the clientele do so.

Both the examples I have citied are relevant examples of what impact FDI will have in the retail sector. We also need to acknowledge that single brand or multi-brand retail is not a new phenomenon in India. Big Bazaar, Reliance Fresh, More, etc are well established players and now recognizable brands in these sectors. They have been around for several years and have not driven the kiranas out of business. Infact most of these continue to struggle with their operations and profitability due to lack of efficiencies. And this is where the FDI comes in. What the sector needs is not more store fronts, but better infrastructure, especially in the area of what is referred to as the “cold chain” (distribution and storage of perishables). Better infrastructure will result in:

a)    Better prices for produce. Farmers and SME’s will be the direct beneficiaries.
b)    Significant reduction in wastage, especially of perishables, infact there will now be a better chance of perishables reaching remote store fronts.
c)    Increase in quality of goods for the consumer – fresher produce
d)    Decrease in prices for the consumer

Note, I have not listed the clich├ęd “elimination of vested interests and middle-men”. To my mind, vested interests are never eliminated, they are just replaced.

So, all this is fine, but what about the jobs? Or kiranas going bust? Here is a mental exercise. Try transplanting a Walmart store in any locality of a major Indian city that you live in or know of. Try Mumbai as an extreme. Doesn’t fit, does it? Not going to happen. The typical large Walmart store is just not going to come up in Indian cities due to sheer space constraints or due to the cost of land and construction. The chances, that a large store, which will suck all the kirana stores in its vicinity out of business, is hypothetical. Or try calling them for your regular fix of thepla, dhokla, bhakarwadi et al. There will still be housewives from Lajpat Nagar colony in Delhi, who will lower a basket using rope from the second or third floor and have it filled with their choice of vegetables from the local vendor. Consumer habits are so entrenched, that not everyone is going to queue up if and when a Walmart store opens in Lajpat Nagar.

It is my contention, that by the time such a threat of job losses or business going bust, if at all it materializes, children belonging to kirana families will on their own accord opt for newer and better paying career opportunities.

Let us not be blind to the benefit that this policy will bring and kill it on a presumption. And for the nay-sayers who drop the example of how mom and pop shops went bust in the US, I would like to point them to corner shops that still adorn much of the US: 7-Eleven. Food for thought?

For an impartial reading of the impact of Organized Retailing on the Unorganized Sector, refer to this post.

Friday, October 21, 2011

The Unlearning Imperative

True learning as a process must include constant unlearning...

I remember sitting perplexed in Class XI and XII as NS Ganesh, our Chemistry teacher, went about demolishing most of what we had learnt about the atom in previous years. From JJ Thompson’s plum model to the current quantum model, the history of the atom is a story of constant unlearning. The story does have its share of conflicts between opposing schools of thought, however each of them in turn were bold enough to unlearn what had been discovered by their predecessors and peers and ultimately reconcile with fact and evidence.

Indeed Science and Cosmology in particular have seen momentous phases of unlearning over several hundred years. Theories and laws put forth by giants such as Newton and Einstein were challenged. It is simply not possible to comprehend the world of the small – quantum mechanics – without unlearning everything one has learnt from Newton’s laws and Einstein’s theory of relativity.

The Universe is full of surprises and anyone incapable of or unwilling to unlearn is best advised to stay away from the domain of Cosmology. First the big bang, then the notion of an accelerating expansion of the universe, dark matter, dark energy…We are not done yet, there is so much more to unlearn about the Universe.

It is ironic that Einstein, in his later years, was reluctant to unlearn. He was unwilling to reconcile to the world of quantum mechanics and hence is supposed to have stated “God does not play dice with the Universe”.

Modern day technology is propelled by innovation. Innovation, not accompanied by unlearning, results in the desktop computer becoming faster, smaller and cheaper. But disruptive innovation, that accompanied by unlearning, results in devices like the iPod and iPad. Changes that will forever change the way we live.

During the Axial Age – latter half of the 1st millennium BC – thinkers from Greece, Middle East, India and China, abandoned and disowned prevalent social practices and religious beliefs. From that tumultuous period rose the Vedanta, Buddhism, Jainism, Confucianism, Platonism and Zoroastrianism.

Alas, even in this age of scientific temper, our religions and social practices are stifled by dogma and intolerance. Instead of looking inward and correcting that which is so obviously wrong, everyone is expected to accept and not question as this will offend the millions who belong to the particular faith that is being questioned.

A second Axial Age is long overdue, however in the current political climate the world over, I do not see the spark being ignited any time soon.

Modern day economy has its share of unlearning too, but from completely unexpected quarters. I point you in the direction of China (and not America). No doubt, stung by the crisis of Tiananmen Square, China (then) under Deng Xiaoping initiated a gradual process of unlearning staunch communism and incorporating their brand of capitalism. Even as this unfolds, America lurches from one economic crisis to another. America is today a victim of its belief systems. And unless its people and politicians summon the courage to question their current belief systems, including the hallowed capitalism and democracy (their versions), things are unlikely to change.

A true indicator of freedom is the ability of individuals and society to question without fear. And in that environment of true freedom will come true learning. I despair, that today, there is no country in this world, including America, where one is truly free. But, as they say, hope is eternal. The movements in the Arabic world rekindle that hope. The great nations of the world must show the way. And I wish that India would be one of them. May I die in a land where the mind is without fear….

Sunday, October 16, 2011

Made in USA

As a child in the late 60’s, some of my most precious possessions were “Made in USA” toys. As a family we were lucky and privileged to own many “Made in USA” artifacts and were proud of it. Adult conversations often included crass jokes around “Made in Japan” and anything with that label was looked down upon. There were no “Made in China” goods at all then and we reluctantly accepted goods made in India.

During my college years, I listened to Neil Diamond’s song “America” ad-nauseam.

On the boats and on the planes
They're coming to America
Never looking back again
They're coming to America

Everywhere around the world
They're coming to America

Got a dream to take them there
They're coming to America
Got a dream they've come to share
They're coming to America

Though the song did not inspire me enough to leave India and settle in the US, it pretty much summed up how people world over thought of America – as the land of opportunity and liberty.

On my first visit to the US in the early 90’s I went on the mandatory rounds of shopping for gifts. Mall after mall, shop after shop were filled with items that had a variety of labels – “Made in China” being the dominant. There were even “Made in Bangladesh” items in the shops, but finding “Made in USA” was rare and only on very unique types of items. Indian families that I met in Houston, often panned US made cars and almost all of them owned Toyota’s or Honda’s.

Sixteen years later, I visited the US once again. On 16th September, 2008 to be precise, the day Wall Street imploded. Lehman Brothers had filed for Chapter 11 bankruptcy protection a day earlier. Through desperate overnight negotiations, the Fed had asked Goldman Sachs and J P Morgan Chase, two of Wall Street’s remaining big banks, to head a USD 75 billion emergency package to keep AIG afloat. Merrill Lynch another of US capitalism's biggest institutions, was to be swallowed by Bank of America in a USD 50 billion takeover to save it from collapse.

America today is in trouble – big trouble. So, what the hell went wrong?

Explanations abound on how America got to this point. Almost all are long, complicated and even intriguing. Here is an abridged version of the one I am most inclined towards.

It has its origins in the great depression of ’29. Down and out, America had only one way to go and it did so through nation building. America built on a massive scale – roads, bridges, buildings, factories and more. WW II further fueled this process and even added more patriotic fervor. America invented, created and built better and more than any other country in the world. Made in USA was respected and sought world over. This made a lot of Americans rich. Successive governments taxed the very rich and used these funds into ever more nation building. Corporate America took the cue and built themselves too creating a huge population of skilled labor and well to do single income middle class families.

As corporate America took a greater role in creation of wealth and prosperity, government started to step back. A new school of thought was beginning to emerge and re-define roles and responsibilities of business and government. Neoliberalism thinking, which stresses the efficiency of private enterprise, liberalized trade and relatively open markets, set in motion a process which has steadily increased the role of the private sector. In the late sixties and early seventies, it emboldened corporate America to think of unbridled expansion and profit.

From here on, the explanation becomes intriguing. For almost a hundred and fifty years, until the end of the 70’s, labor wages rose every decade. As the wages rose, so did the standard of living and the power to buy. The American consumer had arrived.

All that changed in the 80’s though, and labor wages have stagnated since then. Immigration laws were constantly being loosened. Envious people from around the world, set forth in boats and planes to the land of opportunity, plenty and liberty. Corporate America was getting constant access to cheaper and plentiful labor which meant, wages would never turn north again.

So how did Americans cope with this stagnation? First, by working more hours and sending more people from the household  to work and then by borrowing. Americans work on an average 20% more than they did 30 years ago and for the same period of comparison, Europe and other developed countries have seen a negative trend. Americans borrowed by using their homes as collateral and then on their credit cards. The total mortgage debt in 1985 was USD 1000 billion and rose to USD 2000 billion in 1990 and is now in excess of USD 10,000 billion. The total credit card debt in 1985 was USD 500 billion and rose to USD 1100 billion in 1990 and is now in excess of USD 4000 billion.

As the limits of labor capacity and consumption were being reached, new ways had to be found – globalization. The first problem was solved – how? Made in China, Made in Philippines, even Made in Bangladesh. How was the second problem solved? Even more intrigue…

During the same period of stagnant worker wages, increasing productivity, and increasing debt, corporates were making a lot of profit. The total profits corporate America made in 1985 was USD 200 billion and rose to USD 410 billion in 1990 and is now in excess of USD 1600 billion. Most of these profits were given to banks (and some paid as obscene bonuses to top executives). The banks, flush with funds, had to find new ways to lend and they did.

And they lent with total disregard to the credit worthiness of the borrowers. One of the consequences of the availability of easy credit was the housing bubble which eventually lead to the financial melt-down as I reached America on the 16th of September, 2008.

Disclaimers, and many of them. First, this is but an extremely simplistic explanation of how America finds itself in this mess over a period of 40 years. A detailed explanation would require several books. Second, if this explanation has the makings of a Marxist conspiracy theory, then that is not the intention and third, I am not a Marxist. I do admire capitalism and most of what we take for granted today would not have been possible without it.

But surely, America needs to rethink the neoliberal capitalism strain it practices. Surely, there is something wrong. Today, those that deal with America find themselves in one or more of four categories: Financed by USA, Fought against USA, Forced by USA, F#$%^& by USA.

As I watch Shoan, my six year old son, play with a reasonably well preserved Made In USA toy (thanks to his grandmother), I am convinced that US policy makers need to figure out how the rest of the world can once again respect and seek “Made in USA”.

Key References:
David Harvey: The Crisis of Capitalism
Michael Moore: Capitalism - A Love Story
Richard Wollfe: (several lectures and articles)