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!

To FDI or not to FDI (in retail)?

With its decision on allowing 51% FDI in multi-brand retail, the cabinet has set loose the cat amongst the pigeons. Everyone, from those for it and those against it have been running helter-skelter to justify their stand. Now, I do not know if FDI in retail is a good option or not, because opinions of both sides have left me confused. But here are a few things that I would like to throw open to the readers of this blog. Readers are free to make their own decision on FDI in retail.

1. The Prime Minister said that FDI in retail would bring in modern technology and investment in back-end storage and logistics. This would help prevent damage to produce and thereby give a better price to farmers. But such technology isn't exactly any rocket science, that cannot be developed locally. More so, with Indian retail firms being there for long, why haven't they been able to invest in such technologies? Was it reluctance on their part or did government policies prevent them from  making such large-scale investments? Moreover, storage and transportation of fresh produce requires massive investments in infrastructure and streamlining of procedures. E.g., good roads that can endure heavy traffic, transparency in functioning of various toll nakas and R.T.O. check points, a reliable supply of electricity in small towns and villages, where farms are located. Why wasn't such investment made before? If India can develop technologies to send a spacecraft to the moon, such things should definitely be simpler.
2. Better prices of farmers and producers is also touted as another benefit. But then, if retailers were giving good prices to farmers, why is the US and EU continuously subsidising agricultural products? In effect, the taxpayers of the US and EU are collectively paying for the produce indirectly, when such money can be used for the benefit of the society at large.
3. Before bringing in FDI in retail, what has been done by the government to reduce wastage of food produce due to poor logistics and/or storage facilities? Everybody (at least the government) knows that farmers have to compulsorily sell their produce at the mandis or nearest APMC. All the wholesalers in these mandis are generally affiliated to some political party or the other. Even the workers at these mandis have unions which are affiliated to a particular political party. The elections to the office of these mandis is hard fought by political parties and used to show case their control over the local politics. This makes it quite clear as to why have these mandis not modernised. They never feared competition, because they patronised all those who were in power. They use their muscle in the legislature to see to it that nothing forces them to make investments and reduce cash flow. The wholesalers in these mandis have been responsible for loss of produce as well as its inefficient handling, leading to unnaturally high prices. Even if the government changes this law and allows the farmers to sell the produce to someone who offers them the best price, it would help the farmers, without the need for FDI. I have a suspicion here. With most mandis being dominated by regional parties, is the Congress trying to strike at their base by weakening their clout through the mandis?
4. While FDI in retail will generate jobs for many, how many would be lost? We need to consider the worst case scenarios in both cases, i.e. the minimum number of jobs that can be generated and the maximum that could be lost. Once we have that picture in front of us, then we can make an informed decision about whether there would be a positive employment or negative one.
5. The Amul model of co-operative involvement has been extremely successful in Gujarat and areas where Amul is operational. This means that Amul definitely has a lot of expertise in the areas of logistics and food processing, storage, transportation, etc. Why wasn't Amul called upon to provide their expertise to other agricultural areas as well? And can't others learn from Amul about the intricacies of logistics, storage, etc.? What prevents such learning, apart from no fear of competition? (Thanks, Dwaipayan Dasgupta for pointing this out)
6. Back in the early nineties, when the Indian economy was being liberalised, there was a group of people, basically owners of various companies, which was called the "Bombay Club". They lobbied with the government against liberalisation, stating that it would spell doom for Indian companies. But, the government went ahead and many of those belonging to the Bombay Club now have companies which are successfully competing with foreign giants and giving them a run for their money. Why? Because these companies were left with no choice, but to adapt the global standards. Will the similar analogy hold for the current retailers and wholesalers?
7. Despite the presence of many Indian retail giants such as Reliance Fresh, Big Bazaar, More, etc. my mother still prefers buying wheat and rice from her trusted aadatiya. At home, we still get our flour ground from the neighbourhood flour mill. And our family still buys fruits and vegetables from the vendor on the street or in the mandi. How difficult would it be for the big retailers to change this mind-set of the Indian consumer? Remember, Reliance Fresh, with perhaps the deepest pockets amongst the Indian retail giants, hasn't been able to shave off too much business from the small retailers.
8. Can we afford to become a country, where people drive 10-15 km (one way), just to get their weekly/fortnightly supplies? This, at a time when petrol prices are going through the roof with every passing day! The small retailer saves us a lot of fuel when we walk down to his shop and buy stuff from there. So, will the saving on food prices be enough to compensate for this long drive?
9. They say, a picture is worth a thousand words. I saw this picture at the Rumtek monastery near Gangtok. We need to learn a lot from this picture. It perhaps sums up the fact that we need to take a holistic approach on the issue of FDI in retail and not just look at it being able to provide more money to farmers and cost less to end consumers!!

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.

New business/employment opportunities spawned by social networking websites

When Mark Zuckerberg launched Facebook, or when Twitter was launched, the founders were sure that they are launching a revolution in the way people connect to each other and dispense information. But, what they did not know, is that they this would also lead to opening of new entrepreneurial and employment avenues for those who could cash on this innovation. And it is surprising for us too, to see such avenues opening up. Of course, now there are companies which develop apps that can enhance the visibility of your products and service on social networking websites, but the fact that such an arena has opened up is astonishing. Let's see a few examples

1. Twitter analysers: Various news dispensing websites now have twitter analysers. Some of it is automated, e.g. tracing the hash-tags  or twitter handles and displaying them on the website. But there are people employed to collate tweets from various sources and then display the most interesting ones. Almost every website or newspaper has a section dedicated to celebrity tweets. These can be movie personalities, sports-persons, politicians, social workers or anybody who is a "celebrity". Because there is a section of people who would devoutly consume the news generated by these tweets.
   
   Customer-care departments of various organisations have started keeping a look-out on twitter feeds to identify adverse comments and see if they can be addressed. So, you can either have a person who does this work, or write a piece of app or software that can do this job for you. Infact, the app can perhaps sort out complaints based on the product and forward it to the customer-care of that handling the particular product.
   
   Insurance companies too have begun using twitter and facebook analysers. These analysers try to see what were upto, during the time the incident, for which you have filed an insurance claim, occurred. A case in Bengaluru was reported, when the insurance company denied accident claim to a driver because he was DUI. And they traced it to his tweets, when he had posted about being at a friends place and enjoying the alcohol. The timeline of the tweets matched with the time of the accident. And insurance generally doesn't cover for claims if the driver was DUI at the time of the accident.
   
2. Facebook: XYZ likes "This person should be killed for what he did to the girl". I bet you do not want to "like" such frivolous pages. So, what do you do? Try and search whether that link is available elsewhere. And invariably you would find it on bypassfanpages.com. This website has spun a business around Facebook users' dislike to "like" frivolous pages and yet see their content.
   
   Now, companies that design and maintain websites also have a Facebook arm, which designs the clients' content on a Facebook page. So, there is a need for personnel who can design content on the Facebook pages for the clients.
   
3. Thieves and burglars: Thieves and burglars have now begun to hunt through facebook status messages and tweets when they plan for their next heist. So, be careful, when scream on your page "Offfffff for a week to Maldives". Information is being mined for such potentially dangerous use too.

Have you come across any such interesting leverage of twitter, facebook or any other social networking sites to build a business around it?

What happened, honey?

What happened to you? How could you change so much? I always believed that I could blindly trust you, because you were the most pure in the entire world. If anything went wrong with you, it could be easily detected. We would take corrective steps, so that you maintain that pure and pious nature of yours. So pure, I thought, you were that man's best friend stayed away from you and did not dare to cross your path. For the past seven years, my day has begun with you only!!

But then, this greedy and ignorant world overcame you. You got pulled in its drive to derive the maximum benefit in shortest possible time. I was so naive, that I couldn't realise that someone as pure as you could be dragged into this trap. It was a bolt out of the blue for me. A, rude jolt, a wakeup call, that none in this world is untouched by its character.

The Indian society's ecological guardian, Centre for Science and Environment, and its director, Sunita Narain, announced to the nation about your adultery. Yes, my dear honey, their extensive survey and tests declared most of the honey being sold in India is laden with antibiotics. A further jolt was that these antibiotics have been banned in most of the developed world. Those who trade you as a product, injected the innocent bees with such antibiotics, so that they do not fall ill and continue producing.

Sunita Narain says that your downfall began when a few ill-informed people thought that imported bees are a better proposition, as they can produce more of your ilk. But, those imported bees were not familiar with the Indian conditions. They started falling ill and dying. To avoid this, they were injected with antibiotics and over generations they still continue to consume such stuff. Perhaps, not realising that they are spoiling (and have now already spoilt) our relationship. These antibiotics have now percolated into my body and have probably caused irreparable damages. You were supposed to keep me healthy by detoxifying my body. But, you have contaminated it.

Dear honey, with a heavy heart, I would like to tell you that I am ending our relationship with immediate effect. It can only be restored if you restore back to your former self. Pressurise your masters to reform and to restore you back. Only then, come to me. I will welcome you with open arms.

R.I.P. cyber cafes

The year 1996, saw the internet coming to India. In the initial stages, Videsh Sanchar Nigam Limited (VSNL) was the only entity allowed to function as an ISP. And like all those things that came from the west, the accessibility of the internet was restricted to a privileged few, as the cost were tremendously high. Then, came competition. With private sector ISPs roped in to provide services, the cost of acquiring an internet connection dropped, but was still very high, compared to today. There was another problem, though. The cost of owning a PC was still prohibitively high. So, penetration of the internet into homes still wasn't that great. To own a PC with an internet connection was a status symbol in those days.

This situation presented a unique opportunity for business. People bought or leased out PCs, got an internet connection and started providing access to others who couldn't afford. These entities were termed as cyber cafes. Depending on the location, speed and ambiance, they charged anywhere between Rs. 20 to Rs. 45/- per hour. They were a boon for the teens (who were the first to latch on to the internet wave), who couldn't afford to own a computer at home. And it was convenient, because you could access the internet from anywhere in the city, without too much worry.

Then, the inevitable happened. Sensing business opportunity, cyber cafes started springing up like mushrooms in the monsoon. There was a time when two or three cyber cafes would be located within a distance of half a kilometre. The good thing was that rates dropped to Rs. 10- Rs. 20 per hour. This caused a reduction in margins and business was more dependent on volumes. Prices of hardware too dropped, thereby allowing scale-up of business easily.

Then came the second inevitable thing. Beginning somewhere in 2003, prices of hardware dropped drastically. Computers were now more affordable to individuals. From 2005, internet connectivity improved, with broadband access becoming available at a very less premium over dial-up access.  In big cities, this dried up the flow of people to cyber cafes. People started accessing the net from the cosiness and security of their homes. Slowly, cyber cafes started closing down, giving way to other booming businesses like mobile phone handsets, restaurants and retail stores. From two-three cafes in half a kilometre radius, the number came down to one every one kilometre or more. They too are struggling for business and have to keep up the revenue by providing other services such as gaming, or selling pre-paid phone refills, computer accessories like CD/DVD pen-drives, etc.

I too didn't seem to miss the cyber cafes too much. Till, the internet at home was down and there was no chance of the technician visiting home for rectification and restoring of the connection, as there were three days of holidays. Grudgingly, I trudged down the familiar lanes around my house, searching for a cyber cafe, so that I could check my e-mail and reply to the ones that needed urgent action. But alas, where there existed five cafes three years ago, only one was left and that too, tucked away to the extreme end of the lane. The cyber cafes have played an important part in familiarising the internet to lakhs of people in the country. In small towns, they still do that. All, we can say is, R.I.P., cyber cafes!