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.