Sunday, December 11, 2011

When democracy won but the people lost

The past two weeks witnessed a remarkable spectacle in which India’s democracy won but India’s people lost. On November 24, the government announced a bold reform to allow 51% foreign stake in retail. It triggered off a storm of protest across the political spectrum, and eventually forced the government to back down and suspend the reform. During the entire debate no one asked why China and dozens of countries welcome foreign investment in retail. The defeat of the government means that Indian consumers have lost a chance for lower prices, India’s farmers have lost the prospect of higher returns, a third to half of India’s food will continue to rot, and millions of unemployed rural youth have been denied jobs and careers in the modern economy. It is also a severe blow to the future of reforms in India.

It does seem odd that democracy should win and people lose. But democracy’s great flaw is that it is easily captured by vested interests. In the 1980s, labour unions captured it to ban computers in government offices, banks and insurance companies. Today the powerful kirana trade has succeeded by funding opposition to a policy that was patently in the nation’s interest. The kirana lobby created an atmosphere of fear. The same fears were expressed during the 1991 reforms. If the government had given in then, India would not have lifted 200 million people out of poverty; not raised 300 million into the middle class and not made India the second fastest growing major economy.

Indians today are victims of the primitive “mandi system” which escalates food prices by 1:2:3:4, resulting in the world’s highest gap between the price a housewife pays and what the farmer receives. What a farmer sells for 1 is sold at the mandi for 2, which becomes 3 at the kirana store and 4 to the consumer. When you pay Rs 20 per kilo for tomatoes, the farmer gets only Rs 5. As tomatoes travel from the farm to the mandi to the bania, each middleman gets his cut. The price spread varies by commodity and season, but studies show that the gap is less in countries with modern retail. This is because large foreign retailers usually buy directly from farmers without middlemen. Thus, they can pay Rs 8-10 to farmers for the same tomatoes and sell them for Rs 15-17 to consumers, and still make a profit. Some middlemen will lose out but P Chengal Reddy, secretary-general of Consortium of Indian Farmers Associations says, "India has 60 crore farmers, 120 crore consumers and half a crore traders. Obviously, government should support farmers and consumers. FDI in retail will bring down inflation.”

It will also save food from rotting. Global retailers have perfected a cold distribution system. By investing in thousands of cold storages and air-conditioned trucks, they will reduce farm wastage, and bring a revolution in transport, warehousing, and logistics, as they have done in major countries like Argentina, Brazil, Chile, China, Indonesia, Malaysia, Russia, and Thailand, which have allowed 100 per cent FDI in multi-brand retail since the 1990s.

In none of these countries have small stores been wiped out; nor are there complaints of predatory pricing by supermarkets—the two fears expressed in the past two weeks. According to a recent study, small outlets have grown by 600,000 in China since 2004. “In Indonesia, after ten years of opening FDI in multi-brand retail, 90 per cent of the business remains with small traders, while employment in the retail and wholesale sectors grew from 28 million to 54 million from 1992 to 2001”. Kirana stores continue to succeed because they offer personalized service, give credit and deliver to the house.

This issue goes beyond shops and supply chains to whether India’s democracy can throw up the sort of leaders who can reach out and persuade opponents about much needed reforms. This was a test for the Prime Minister. He made a bold decision to usher in a retail revolution. He gave a choice to the states to opt out of the reform. He may have failed this time but if he is courageous he will persist and win the next time because he is doing the right thing for the nation.


Unknown said...

Mr. Das
Thank you for the post. You've very well highlighted some of the things we are going to lose by not allowing FDI in the retail sector- more jobs, prosperity for farmers, better supply chain networks, more investment in infrastructure, inflation control etc. to name a few.

I guess one of the things the retail lobby is missing here is finding a more inclusive growth model for the kirana traders. Almost everywhere in the world, people are resistant to change - not a surprise if a change of this magnitude was dealt with so much of opposition. ITC was probably in a similar situation few years back when they were procuring wheat for their Aashirwaad brand aata. When they thought of the e-choupal project, the devised a model where they maintained all the key intermediary players and convinced them they won't really be worse off. ITC assigned them different roles- somewhat similar and somewhat different to their existing roles. For example some of them were made sanchalaks and samyojaks (coordinators & collaborators) who handled the physical transportation of the goods and provided other logistical support in exchange for a commission.And those who worked hard were eventually much better off than their current circumstances. Here again, ITC like other modern retailers,counted on the distribution and operational efficiencies for better outcomes for everyone involved.
I feel that if the supporters of retail FDI had come up with some such brilliant idea, some of the folks from opposition could have been converted to give it a try. And once it had taken off, the rest would have just followed.
P.S. I am these days reading your book - The art of being good; Quite liked it so far.

Ankur said...

I have a very fundamental question here. Why can't Indian Retail giants do this? Why is FDI so important to build modern retail in India Companies like Reliance, FutureGroup, etc are well placed to do in India what Walmart did in USA. Is the cold storage technology as rare as nuclear technology? Are the retail business processes as much a trade secret as Coca-cola's formula? Why can't Indian companies do this?

Vijay Mohan said...

Dear Ankur ,

Sorry , If you find it rude.

Why don't you follow your own suggestions!

Why to instruct and expect from others.

Let people do what they want to do and suffer from results.

Don't forget , Competition fosters innovations.

Vijay Mohan

Vijay Mohan said...

Dear Rajneesh,

If I run some business , then Please let me follow my way .

Profits are rewards. If I don't serve people well , I wont get rewards/Profits

Let consumer be the judge .

Similarly , let the retailers decide there own ways to maximize the profit.

IN competitive environment , Profit is Good .. SHUBH LAABH

I dont want any instructions/Rules.

Some very limited regulations which enforces accountability

Thats all , what we need.


Anonymous said...

What about manufacturing? Even with one third of population that of India, USA is suffering due to flight of manufacturing. In any society every body can not be smart enough to be employed in High Tech Service Industry. Big retailers just gets goods from world's factory ( China) and dump cheap. Just visit at any Big Retailer in USA or Europe and see your self.

Why not Indian retailers can bring cold storage and better supply chain management practices in India. Are Indian business houses are so dumb? Or they just want to cash the opportunity (just like Parle and others did in soft drink industry)?

Why we always think that some thing is good for western world ( low population, high education, wealthy - due to historic reasons, high living standard) is good for India (Huge population, low education level, very high skewed wealth distribution)?

Anonymous said...

Mr. Das, your version is at odds with some facts brought up by Sreenivasan Jain in "Truth vs Hype" on NDTV:

The cold storage sector is already open, but no one has entered it. (Why?)

The existing players say that the consumer would not be able/willing to pay the cost of refrigeration.

The kirana shop-owners he interviewed are NOT worried about loss of business.

The much-hyped creation of new jobs has not happened earlier (the actual jobs were far lesser in number.)

Most of the retail chains are running at a loss; even without having to run costly back-end operations. (Their hope was a foreign buy-out; and that's why they may be disappointed today with the freeze on FDI.) So adding the burden of back-end operations would add to the losses.

So even if the FDI is allowed, the industry would be soon talking about a bailout; like the private airlines do today.

So a familiar pattern is, start a non-viable scheme by making unrealizable projections. Later, give large concessions to stem its losses and sustain it; thus wiping out all the projected benefits.

For example, take the UDI scheme (mammoth budget, clash with existing rural database); Stadia in Delhi built for Conmen-wealth Games (no one owns them now; need a few thousand crores more to make them functional).

The entire chain EXCEPT retail was open, but only Metro entered (probably with the hope that they will "manage" to get the retail later). Clearly the retail outlet part of the entire chain is the only attractive stage.

BTW it would be too much to expect that the "for FDI" side too was not funded by interested parties.

Harmeet Kochhar said...

For my son's birth day party I did online shopping on the internet and was amazed at the results. I got fascinating return gifts at really low prices from a seller in China. Even after including shipping charges, I got a very good deal as compared to local shops. Thanks to logistics advancements, the shipments arrived in less than a fortnight.

That's a kind of freedom of choice I want in my buying experience. And if there are forieng sellers who can provide such options then we shall welcome them. Few years ago I could not have imagined to buy different items from different countries merely for a birth day party. And if these choices are made available in local shops with the help of FDI, then why not?

Similarly, I see a variety of options these days in malls on range of items from packaged juices to nappies and so on. Having juice of an exotic fruit or Brazillian coffee is like buying a local product. Most of such items have been imported by some traders in metro cities. Obviously, it generates trading business and provides more choices to end users. Why not increase such choices by opening up for more sellers.

I remember around a decade and a half ago there was very similar discussion on whether India shall sign GATT/WTO. And almost same concerns over job loss and safety of local industry were up in the political air. I am assuming that the variety of choices I experience today in market is somewhere possible because of our signing of GATT. And there does not seem to be much loss of jobs or otherwise because of GATT. In fact, political and social class have even forgotten the topic of GATT. It makes me believe that we can still go ahead with FDI in Retail, it will do good for the end-users and for serious business houses. And just like GATT, our political class will forget about FDI investment in retail also.

The political class that does not bother much about starving farmers committing suicides, they are not going to bother much about kirana store owners as well. I hope India will not loose good socio-economic opportunity for a political gimmick.

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Anonymous said...

Dear Mr. Das,
You wrote an article in Daink Bhaskar in support of FDI in retail. It was totally in support for the MNCs; ignoring to the genuine concerns of the people in general. I wrote you an e-mail & raised some 18 points against your view. I was expecting your response but even my frequent reminders couldn't draw your attention. you could not leave people confused. Please read my e-mail and answer me.
Abhishek Vaishnav

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shwetank sharma said...

Mr. Das
I am not convinced with the reasoning you have given for sustainability of Kirana Business. First, if you contend that Kirana shops will not shut because they offer customized services(home delivery,credit) then i think we are missing a link here. Kirana provides the customized services because the kirana owner anticipates the monthly 'sauda' (monthly bulk purchase of all the grocery items) from the customers. That's why they compromise on their profitability while providing such customized services. In case foreign companies throng the market place, it will definitely affect Kirana business and prove detrimental to their high revenue monthly purchases.

Therefore, i do not support the reasoning provided for FDI in retail not affecting the Kirana.

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