The FDI threat?

The Prime Minister, Dr. Manmohan Singh, finally 'bit the bullet' and announced a slew of economic reform measures. When cornered, even a cat puts up a fight. The government definitely was cornered by a lots of issues. The biggest being fiscal deficits. Now, there may be a big, big controversy and disagreement over how oil companies compute their losses made on sale of diesel, petrol, kerosene and LPG below market prices. But, the point is that these are auditor-approved losses and hence, the government has to compensate for these losses, as they do not allow the oil companies to freely set these. And hence, the government had to raise the price of diesel, as crude price was rising through the summer and almost through the entire year. But, that is not the point of discussion here.

The second, which we would all agree with is the aspect of foods getting destroyed due to lack of adequate storage and distribution infrastructure. Hence, an artificial inflation, when harvest quantities at farms are not drastically short. The government, on its part, failed to erect cold storage facilities, store houses and a flexible policy on farm harvest procurements. For decades, the wholesalers in the agriculture produce market committees (APMCs) have ruled the roost and enjoyed a monopoly in procuring farm produce. The monopoly extended to labour that could be used to load and unload the produce. The farmer was forced to pay for labour to unload his produce. He couldn't get cheaper labour of his own to do the work. These two monopolies- the wholesalers and the APMC labourers- have never worked in favour of the farmers. What more, they are such a strong political force, that very few have dared to take them on. These people have never invested or enabled anybody to invest in infrastructure that will prevent loss of food products between the farm and the fork. The government's monopoly too, has hurt the cause. We keep on hearing about how grains are rotting in granaries and not effectively reaching those who need them. But, will FDI solve this particular problem? I do not think so.

A set of people who would be affected by entry of Wal-Mart, etc. are the kirana shop owners and people whom they employ. But, they have been weathering the heat from players like Big Bazaar, Reliance Fresh, More, etc. Why would they suddenly wilt if Wal-Mart arrives on the scene? As I have said in a previous post, big retail shops tend to sell products in large packaging. E.g. a toothpaste of 200 gm., or three soap-bars together. But, when a city like Mumbai has more than 50% of its population living in slums, are they going to buy from the big retailers? Mind you, many of them are not poor in the perceived sense, but just that they can barely make their ends meet. Most of them, have a monthly credit with the local kirana store. And they buy stuff in small packages. A bar of soap, half-a-kilo of sugar at a time, etc. FDI in retail, if implemented as seen in North America and Europe, is not going to help these marginal families.

A bigger issue that should be of worry to many, is the accounting practices of many of the wholesalers and kirana store owners. Never, do we get a receipt, with its sales tax and VAT numbers. Most of the sales accounting is done on a piece of newsprint quality paper. So, many of us, of the salaried class, whose income taxes are routinely cut even before we get to see our pay-check should be definitely worried if these kirana stores are paying the taxes that are due. Will the big-box retailers be honest enough to pay their taxes? May be not 100%, but compliance would be way better than the kirana stores. If you haven't noticed, do check the receipts you get from stores like Big Bazaar, D'Mart, etc. They do carry a CST/BST number and VAT registration number and the sales do get recorded into their accounting system. Kirana stores have, for long, not modernised their business practices. If they do not, then they would definitely lose business to the big-box retailers, whether Indian or foreign.

Finally, is the government in a looking-London-talking-Tokyo mode? There was a time when the unions of employees of leading national banks went on strike, refusing computerisation in banks. They feared that this would lead to job losses. They pressurised the banks into agreeing on a fixed pace of computerisation, which was so slow that banks would never have achieved computerisation in a reasonable time-frame. To get over this, the government allowed private banks into the market. These had completely new labour, free from the union tactics of nationalised banks' employees. They introduced a slew of computerisation and digitisation in their working, which made banking easy. People flocked to them in large numbers. This scenario made the unions of public banks realise that if their branches are not computerised fast enough, they would any way lose business and customers. And after two decades of allowing private banks, government banks are still competing and flourishing, only because their employees chose to adapt. Similarly, is the government forcing the wholesalers and kirana owners into modernising their business practices through another way? Ghee seedhi ungali se nahi nikal raha, to ungali tedhi karni hi padati hai.

Finally, is FDI in retail going to benefit anybody? It is definitely a double-edged sword. Consumers may get better quality stuff at cheaper rates. Producers may get better deals. But all depends on how honestly is the policy implemented and how honestly is the implementation tracked to achieve its stated goals.

What is better: FDI or FII?

For now, the debate on foreign direct investment (FDI) in retail has been put on the back-burner. But, there is a raging debate on whether to allow FDI in the airline industry. As of now, foreign institutional investment (FII) in airlines is allowed. So, what is the difference between FDI and FII? And which is more beneficial?

In FII, there are investment banks or financial institutions based on foreign soil, which invest their money in shares of various companies in India. While there are complex rules and regulations that govern in what and how much they can invest, they are basically like stock brokers. They invest in stocks, which they feel will fetch them good returns. They are betting on the good financial performance of the company. And since they can invest anywhere in the world, they will always invest money, when they feel there is an environment for good growth in the particular business. And, once they feel that the environment is going bad and not conducive for growth, they will begin pulling out. Remember, this money after being pulled out of the stocks, gets repatriated out of the country. Domestic institutions, even if they withdraw from the stock market, keep the money within the country. In short, on a phone call or at the click of a mouse, billions of rupees can either flow into the country or flow out of the country.

On the other hand, FDI implies that the foreign entity comes to India, either on its own or in partnership with a local company, and invests in the permitted sector by putting in manufacturing, logistics, marketing facilities and helping set up a host of ancillary units. This leads to creation of assets in the country, using foreign currency. Of course, the investment is going to be recovered over time, and some portion of the profits are going to move to the parent company's country, but then a large portion of the revenue gets spent within the country itself. Moreover, it is not difficult to dispose of these created assets overnight. The procedure is tedious. Thus, only those companies who can stay invested through the thick and thin times, will think of investing. Moreover, if the foreign partner wants to exit, they have to sell off the assets to some person. Again, while the profits might go out of the country, the principal amount invested, does stay back. Thus, FDI always allows for a substantial portion of the capital to remain invested within the country. Of course, businesses might not be amenable to FDI. The foreign partner may obviously want some control over business decisions and directions. They might also decide what technology to bring in and what not to. Moreover, if the foreign company opens a wholly owned subsidiary here, then with their deep pockets, they can resort to predatory pricing and give the domestic ones a tough time. But, in the bigger picture, it is FDI which brings in technology, assets and some of the best global practices in business.

In India, we wouldn't have been driving cars manufactured by Honda, Toyota, etc. without FDI. Nor, could we have seen the impressive returns on stock investments, without some contribution from FII. On the flip side, cold-drinks like Gold Spot vanished from the Indian market, once Parle sold their soft-drink companies to Coca-Cola. And the swings that one witnesses in stock markets or the price of the dollar, is partly induced by FIIs moving their money in and out of the country. An increase of both, though, signifies confidence in the government's policies, the ability of various government bodies to execute these policies and the capability of the local market to, at least partly, absorb their products. So, to sum it up, FDI is essential for bringing in foreign companies and allowing them to create assets, which will stay in the country forever. FIIs are essential to provide the money required for investment, without having to rope in a partner in the assets. Which one is better? Up to you to make a decision!

The disadvantages of Big Brand retail shops

No, I do not intend to make a socialist case here, which is best left to political parties and activists. Here, I intend to spell the disadvantages that big brand retail shops have for me as a consumer. This is in the back-drop of the Indian government approving 51% foreign direct investment in multi-brand retail or hypermarts, as they are known in the west. This will bring in the big guys like Wal-Mart, Carrefour, etc. The benefits are being touted as big for consumers. They will bring in money, their expertise with supply chain management, etc. to sell goods to consumers at the lowest prices.

But for this, they need infrastructure, which the government would have to provide. Large warehouses would necessitate a smooth supply of electricity, well connected roadways to connect the warehouses to manufacturing centres and the stores, etc. This is woefully missing in India, where outside big cities, a minimum 6-8 hours of load-shedding is considered normal. The success of such retail firms relies big time on the availability of such first class infrastructure. But, whether they succeed or not, they have many disadvantages for consumers.

We may not realise this, but in the quest for selling things at cheaper rates to us, these retail outlets rely more on volumes of business, compared to per unit margins. So, the brand that sells most is the one they will stock. Of course, there are a number of subtle tricks they use to entice us into buying certain brands or products, but then, that is a completely different topic. So, if you like a particular brand and fragrance of incense sticks, you might not find it in the supermarket, because they do not get good volumes on it. And you are stuck to buying from the ones available in the store. So, you tend to lose your favourite brands, if they do not fit in the strategy of the supermarket. The small shopkeeper, though, will keep a fairly diverse number of products. Smaller quantities of the less popular ones may be stocked, but nevertheless, you have a fairly high chance of finding your choice there, than the supermarket.

If a certain product is out-of-stock in the supermarket, you have no way of knowing when it will arrive. The mom-and-pop shopkeeper around the corner, will not only give you an idea of when the product will arrive but also keep it aside for you, once it is in. This personalisation of service is out of question for supermarkets! Their business model just does not have this feature.

Thirdly, the supermarkets stock only big sized products. E.g. shampoos in large bottles, toothpastes are available only in 400 gm. size or detergents in min. 1 kg stocks or buy-3-get-4th-free soaps and many more such things. A very huge number of India's people live on frugal income. For them, to spend Rs. 100 (for a shampoo) in one go is extremely difficult. That is why most of India's FMCG manufacturers have come up with small sized packs (sachets for shampoos, detergents, 50 gm. toothpastes, etc.) which cost very less and are affordable to that population. Such small sizes are not stocked by the supermarkets, as the margin is too low and their rate of sale unpredictable to justify the efforts required to stock them. So, (even if you have a high salaried job but) if you live alone, you won't be able to purchase these things. If staying alone, I wouldn't want to buy a pack of 4 soaps and be stuck with them for 6 odd months. I would rather buy a single cake of soap, which would last for well over a month and be free to choose a different soap every time. Plus, I would be left with liquid cash, free to spend it as I like, instead of being tied up in three soap cakes, which would be useful only after a month.

Such mass stocking of products also hampers the variety available and this is especially visible in the clothing sections. They will not stock premium products. E.g., here in Edmonton, people advise to get winter jackets from special shops, not from Walmart, as it doesn't stock those. These supermarkets won't stock out-of-season stuff too. E.g. no chappals or floaters are available in the supermarkets during winter. For that, you have to look out in the footwear shops only. 

This is a very simplistic analysis of what would happen to us as consumers, if big supermarkets are allowed to dominate the retail business scene. Most of it is my personal experience. In India, there is a certain social aspect associated with shopping, which will not be available in supermarkets. The shopkeeper and the shop is where the local news is exchanged. Moreover, the personal relation developed with the shopkeeper help us in many other ways. His/her network helps us access various other services. E.g., some of his relative or acquaintance might be running a travel agency, from where we would be able to rent a car. Or contract a plumber's services at discounted rates. These informal channels will not be available with supermarkets. Economic and social analyses tend to indicate contrary views, but as a consumer, will we get all that we want? I have my doubts. We might end up getting what the supermarket wants to sell to us and when they want to sell it. As consumers, if we would like to have wider choices, I think supermarkets should not have a free run in the Indian economy.