FDI in Retail

[brihaspati]

Have a feeling that I am entering a minefield: a survey of the last few pages piques my curioisty again. What do experts and nerds think on the following

(1) Do you think FDI will be value-addition because it introduces new "technologies" both as hardware as well as software, for example such "advances" in hitherto unknown stuff like "supply chain management" - which Indians were and are unaware of?

(2) Do you think the the FDI investors have experience in a certain universally applicable "supply chain management" tech that applies to all situations and all economies, that will definitely increase efficiency for the Indian reatil system?

(3) If bringing as much of a market and production process as possible under a single firm control connected to higher efficiency, is it not true that a monopoly should be the best solution? After all more aggregation of more processes under single managemnt and ownership is tantamount to supreme efficiency.

(4) The argument for market forces being allowed to control exchange and clearing processes, is that it allows for maximum possible efficiency [provable onlee under a theoretical utopia, with such things as specialized auctions, complete information, perfect non-cooperative competitive foundations of macro cooperation etc].

Accepting the excuse accepted for every real markets ever studied - that real markets are imperfect, is not the existing method of sequential exchanges between n-number of middle-agents - reaching an exchange equilibrium - also the result of a market process, that subject to imperfection limits - is justified on the same "market forces == efficiceny" argument?

(5) Is the FDI investor used "supply chain management" that we hope to see that different from a decentralized linked market system than we imagine them to be? I am curious, some of the case studies people have to teach include Walmart and Ikea for example and must be well-known. Do they represent a tightly centrally managed and planned mini-economy that plans and allocates all resources and signaling decisions centrally replacing market forces in between the stages?

How is that very different from the 180 X 180 celled 1024 sector linear model tried by the Soviets?

Efficiency considerations are formally studied and research under operations research. Maybe Indians have onlee recently begun to be exposed to the subject. If not, then in spite of knowledge, what prevented use of such knowledge? If so - those other factors should be seen to.

Do note that the middle men also take risk in their hoarding and pricing, and as is typical of all risky processes - the corresponding risk-attenuation costs/interests reflect a huge volatility. When a single firm replaces the intermediaries - the risks do not reduce, but they onlee get hedged. The firm will cover the implied risk one way or the other, thus the long term risk coverage will show up as excess profit extraction over an iterative horizon. I will not even wonder about the robustness considerations for overly adaptive efficient processes.

Having said that, I guess back in the days when a law-draft-enthusiast frequented the forum, I had a lively exchange with him about some of the specific cases I had studied during active pol days. One such example was the pulses trade. Practically speaking 12 men controlled it then over India - and as far as I know - their descendants still control it.

The real opposition is coming from such syndicates. This is tricky. Its a fight for meat by two schools of sharks. Some sharks appear to be more lovely, fair and deep than others - thats all.

[chiragAS]

It's not in India's interest to allow FDI in retail in the Present form. Even with 100 percent sourcing from India, I don't think any Walmart will source from ordinary farmer who makes 10 kg of Banana, das kilo of tomato.

I guess it's too much to ask for data to back up this assertion.

However, I would like to leave you with a thought. India has become the world's largest producer of milk within a decade without having huge and highly automated dairy farms that abound in the US, Europe and Australasia. You know why? That's because many small producers of milk - you know guys who have a couple of milch cows that produce less than 20 litres of milk - band together and provide their supply to cooperatives all over the country.

Why is this relevant here? That's because if you keep this model in mind and then look up how models such as ITC's e-Choupal works or even look at the annectode about Reliance and Arambarg (in West Bengal) potato farmers in my last post you'll understand what I mean. Walmart (gosh Sam Walton is a much remembered man, even though his company's international operations' performance has been under whelming to say the least!) or any other international and national organised retailer is not going to knocking on the doors of every marginal farmer who produces 10 kg of bananas or 10 kg of tomato. What they would probably do - and this is a model used all around the world - is link up a 100 (or more) of such farmers and tell them that they would buy their entire produce for, say three years. That then comes to 1,000 kg of bananas and 1,000 kg of tomatoes.

And you know what is happening now? Out of these hypothetical 100 farmers, maybe 50 are able to sell their entire produce with a marginal profit and maybe another 40 is able to sell a part of their produce while the rest 10 can't sell at all for various reasons like being too far from the mandi or not having the money to go all the way to the mandi etc. And the produce that can't be sold within a few days of being produced is thrown away because there is no cold storage facilities or if there are these small farmers don't have the money to store the produce. [That IMO is the main reason we have a criminal 30 per cent wastage in our agri sector]. OTOH, a three year contract (again see the Reliance example in Ashok Mallik's article, to see that this is standard) would in effect allow them to sell their produce even before its grown and it would become the responsibility of the organised retailer to pick up the produce, store it and ensure smooth delivery to the shop front.

Sorry boss, you can't be convince me that organised retail is NOT the way to go in India, unless you can provide empirical evidence to the contrary. I've said this to other posters here as well. I'm too cynical to take anyone's word for it. Organised retail is a must and FDI in retail is a logical step forward.

It's useful to remember that India's favourite car, Maruti, is made by a 100 per cent owned multinational, which effectively put out of business a 100 per cent Indian owned company Hindustan Motors. Now has that been a bad deal for Indians and the auto industry in general? Do Indian consumers get shortchanged because HM no longer has monopoly to build a tin can of a car whose price is fixed by the government? Are workers in the auto industry worse off, with less pay? Has the total employment in the industry slumped?

Or is it that FDI in auto brought about a transformational change which broke the cornyism and businessmen-political nexus and turned the industry into a worldclass sector and a major export earner.

What makes you and other think the same thing wouldn't happen in our retail sector which contributes 33 per cent to our GDP?

So it's loss loss of the nation and win win for corporates and the one who is investing.

I hope you realise how this point of yours contradicts your previous point. Given that a majority of Indian farmers fall in the 10 kg banana, 10 kg tomato producing category, if the corporates don't buy from them, just who would they buy from? I hope you're not scared that big brand retail is going to import veggies from China while incurring the transportation cost, while the same veggies rot in fields within a 100 km radius of the shops? That would take conspiracy theories to a new level.

it's jut the companies and the politicans who are into agri business. That's all. No one else will gain.

In a way you're partly right about the political angle. The rich (I mean stinking rich) but minuscule trader class which controls agri distribution in India (I call them mandi thekedars) are a smart bunch and politically very well connected. Which is why you see such diverse groups joining together to kill the proposal. Even BJP which proposed FDI in retail in 2004 is now voting against it. The same trader class is behind the opposition to GST. They protect their turf very efficiently.

We'll just be opening up another way to import while killing the Indian economy.

I call this East India Company syndrome.

^^^ +1
So well put!!!!
How true BJP and others who are concerned about filthy rich traders say 5 crore traders will be affected. But they don't see the majority farmer class who are forced to suicide as they cannot pay back thier loans.

[chiragAS]

As for non agro products are concerned. everyone talks about 51% FDI but they forget 49% will be directly or indirectly indian owned. once indian companies grow then they can increase their stake. offcourse foreign companies will earn. but its idiotic to think they will invest without they getting any returns.

[Nihat]

Exactly true , 51% is just an ownership tag. More and more Indian firms will gain exposure on how to manage organized retail and we are not even discussing the aspect of Tax collection. Most of these small traders make decent money but when it comes to paying taxes they leave a LOT to be desired. FDI in multi brand retail is just a means to an end.

[nakul]

I hope what you say is right and the profit stays in India. Regarding tax, a kirana store paying 0% tax will recirculate his money within the country boosting the economy. Compared to WalMArt whose profits will move abroad apart from taxes & local salaries.

[amit]

You guys should also have a look at the employment generation potential of organised retail. And mind you these jobs are not the Yum Bee AA types. Folks who would work in these stores would in previous generation join as lower division clerks in the Government or Railways. Since these avenues are gone they get another chance.

But all this stuff have been discussed on this thread itself. Allow me to x-post one of my earlier posts:

amit ji:

++1

This is exactly what I thought when I went to one of these outlets.

Thank you Kakkaji.

I think the employment generation potential of organised retail is something that is totally overlooked. As far as I know, as a rule of thumb more people work behind the shop front in the supply chain than those in the shop.

As regards employment generation, according to WiKi chacha outside the US, our favourite store Walmart [ ] has 4,263 stores and 660,000 workers in 15 countries outside the United States. A back of the envelope calculation shows that's 155 workers per store. WiKi chacha also says that Walmart is the largest private employer in the US and Mexico, and one of the largest in Canada.

In 2010, Walmart was the world's biggest company in terms of revenue with $422 billion. Exxon Mobile was No2 with $370 billion. Now worldwide Walmart has around 2.1 million employees. Exxon mobile with just 12 per cent less revenue than Walmart has around 84,000 employees. The point to note is that Walmart employs around 25 times more people than Exxon. I'll come to this point a bit later in my post. [Oh incidentally all this data is from WiKi chacha].

Why am I writing all this trivia? It is to show just how labor intensive organised retail is - be in global chains like Walmart, Tesco, Carrefoure or Indian ones like Big Bazar, Spencers, Reliance etc. The nature of the beast is such.

Now coming back to the Exxon Mobile-Walmart comparison. In 2011 Exxon's net income was in the region US$30 billion. Walmart net income was around US$15.5 billion. There's two ways of looking at this number. One, from a shareholder point of view, Exxon is a far more profitable company than Walmart. And their respective share prices reflect that.

However, I'd urge folks reading this to look at these numbers from different perspective.

Despite employing 25 times more people than Exxon, in sheer dollar terms (econ gurus note this point and don't question my balance sheet reading! ) Walmart made as much as half the profits that Exxon made.

Again what does that tell us? It tells us many things at many levels but I'm just interested in one point. It tells us that the average income of a plain vanilla Walmart employee is much less than that of a vanilla Exxon employee. From this we can certainly deduce that the qualification levels of the Walmart employee is much less than that of the Exxon employee.

All this verbal diarrhea on my part (please excuse!) leads to the one point that I want to reiterate. Organised retail is a very good avenue for employment of India's undereducated lower middle class generation who are desperate for jobs. Their earlier generations used to work as lower division clerks and peons in Govt offices, now that avenue is virtually closed, largescale organised retail can provide an alternate avenue for employment.

FDI in retail is a sure fire way of achieving scale in a much shorter time span.

This is in addition to the other benefits which I feel can accrue from this move.

JMT

Link here

[nakul]

It is not job generation. But more of job relocation. The bunch of 4-5 guys handling a kirana shop will be hired by the big guys.

[Singha]

New York: Walmart Stores Inc has said it is capable of opening stores within 12 to 18 months in India, a media report says.
"The company is capable of opening stores within 12 to 18 months and would be seeking permission to do so from states that have already indicated their willingness to have the US retailer set up shop" Walmart Stores President and CEO for Asia Scott Price said in an interview to The Wall Street Journal.
"Two years would be a reasonable time frame in total," he added.

Price, however, said the company has not yet decided where or how many stores it would like to have in India. But he said the company expects to continue in retail its current partnership with Bharti Enterprises in a chain of 17 cash and carry stores.
Walmart Stores Inc is not in discussions with any other company for a potential retail partnership at present, Price was quoted as saying in the report.
Price told WSJ that he was confident that the reform would be permanent and said the company is committed to India's long-term future.

[Lalmohan]

a global company or even multinational company does not necessarily physically repatriate its profits back to the country of origin or of registration. the company's wealth is given to its shareholders, who may be from anywhere. if we are that worried, then we should see how much of Reliance's shares are held overseas and what %age of profits ends up with them as dividends in other countries

[nakul]

The majority stakeholders (Walton family, Ambani) would repatriate their profits in other business. The locations & area of interests depict a picture of the likely areas that profits will move to. The little guys (few shares) might also get profit but the company usually acts to profit the bigger fish.

[Singha]

in the US there is a big scandal that a lot of cos are not repatriating their profits to be taxed in US, instead cos like csco and google have parked billions overseas.
HP is in the news today for giving "loans" from overseas units to home unit and skirting taxes.

they will keep the spare money wherever they can avoid tax outgos. and thats not Khan - khan is looking to beef up empty coffers by squeezing for taxes.

[Aditya_V]

Quite Frankly, I think this FDI- Walmart issue is overhyped, I think it is more about Marutious Based Pvt Equity Investing in Companies in Retail. Who owns those Marituious based funds - that is an open question

[Lalmohan]

if someone makes a substantial investment that builds value and adds to GDP/head then it is reasonable to expect them to make some profit for their troubles

[nakul]

PM inviting Walmart to India even as US shuts it out: Advani

“On the same Friday Prime Minister Manmohan Singh rolled out the red carpet for Walmart, New York City, America’s largest, shut Walmart out,” Advani wrote in his blog Sunday.

He also wrote, that on the same day the UPA government “handed the FDI bouquet to Walmart and lobbyists assured us that small retailers are safe, Atlanticcities, a web-newspaper from the stable of the famous Foreign Affairs magazine, carried a devastating headline news: ‘Radiating Death: How Walmart Displaces Nearby Small Businesses’.”

“Weeks ago, on 30 June, over 10,000 people, shouting “Walmart Poverty”, marched through Los Angeles, America’s richest city, against Walmart stores,” Advani added.

“On 1 June, hundreds protested in Washington DC against Walmart. “Say-No-To-Walmart” is an ongoing movement all over the United States,” he added.

[vishvak]

quote="nakul"
PM inviting Walmart to India even as US shuts it out: Advani

“Weeks ago, on 30 June, over 10,000 people, shouting “Walmart Poverty”, marched through Los Angeles, America’s richest city, against Walmart stores,” Advani added.

“On 1 June, hundreds protested in Washington DC against Walmart. “Say-No-To-Walmart” is an ongoing movement all over the United States,” he added.

=quote]
How can this happen in first world super power country like USA? Protest against Walmart in the only super power, when Walmart itself is a symbol of first world and perhaps more! Or is the symbolism of Walmart created explicitly only for external consumption?

[kmc_chacko]

FDI should be allowed only if they buy material within India and that should be 100% Made In India only

[nakul]

Modi links FDI decision with Sonia’s US visit

The politician in Modi readily recognised what would go down best with his supporters, and he didn’t disappoint them. To thunderous applause he went on with his UPA bashing. “The country wants to know why he gets active only when there are elections in the US,” he said.

He then followed the PM-bashing up with suggestions that it was not just Singh, but Sonia Gandhi herself, who was busy cosying up to the US. “The decision to allow FDI in retail was taken they very day after Sonia returned to India from the US. This raises several questions,” he said, possibly choosing to overlook the fact that the Congress general secretary and head of media, Janardan Dwivedi, had already issued a statement saying Sonia Gandhi would be going abroad for medical check-up.

The Sonia-bashing did not stop at the FDI issue only. She was dragged into the Coalgate controversy too. “What does the Congress have to say about the pictures of Sonia ji published with coal scam accused Jayaswal and Ahmed Patel in the background?” he demanded.

[Avinash R]

Apparel maker Hackett sees India as potential sourcing hub
Sep 28, 2012

[Kakkaji]

MNCs replicate India retail model; empower kiranawallahs, spread sales network in other emerging markets

Indian units of consumer goods firms, such as Unilever, Danone, Kraft, Coca-Cola and GlaxoSmithKline, all plan to take some of the learnings from Indian grocers to other marketswhere their products are mostly available only in well-lit, spotlessly clean modern retail outlets. Interestingly, this move to empower kiranawallahs in other markets comes at a time when Opposition leaders in India have taken to the streets saying the government's decision to allow foreign investment in multi-brand retail sounds the death knell for corner shops.

French food giant Danone says people in Europe now buy more from small shops than before. "In Europe, proximity trade is increasing significantly. People don't want to spend two hours for shopping anymore and are starting to buy again from small stores from their neighbourhood," says Eric Soubeiran, Danone's bottom-of-the-pyramid director. "What we can learn from India by serving efficiently proximity trade can be applied to developed country," he says.

[pradeepe]

Modi links FDI decision with Sonia’s US visit

The politician in Modi readily recognised what would go down best with his supporters, and he didn’t disappoint them. To thunderous applause he went on with his UPA bashing. “The country wants to know why he gets active only when there are elections in the US,” he said.

He then followed the PM-bashing up with suggestions that it was not just Singh, but Sonia Gandhi herself, who was busy cosying up to the US. “The decision to allow FDI in retail was taken they very day after Sonia returned to India from the US. This raises several questions,” he said, possibly choosing to overlook the fact that the Congress general secretary and head of media, Janardan Dwivedi, had already issued a statement saying Sonia Gandhi would be going abroad for medical check-up.

The Sonia-bashing did not stop at the FDI issue only. She was dragged into the Coalgate controversy too. “What does the Congress have to say about the pictures of Sonia ji published with coal scam accused Jayaswal and Ahmed Patel in the background?” he demanded.

Its tough for Modi to have a clear go at oiled up PM who stays khamosh most of the time(MMS's chankianness or his failing will be written by the victors), but he'll lose the plot in the long term if for the sake of having a go at MMS he latches on to the few things that actually benefit India. History will not judge him well. Hallmark of able stellar beaurocrats and politicians who have made their mark on either sides of the bench have been that even amidst the bloody political battles, they elicit a sense of respect in wispers for being a nationalist first and foremost.

The Nuclear deal(energy security) and this FDI in retail (pure good economics-money coming in and efficiency improvements in our distribution process and associated infra) have been the two best things this govt has fought for and were worth fighting for as well.

[member_20292]

FDI should be allowed only if they buy material within India and that should be 100% Made In India only

I wonder why the US does not put similiar restraints on infosys and HCL?

On the iphone-foxconn manufacturers?

On Indian entering the US ?

As Indians, we no longer have to be acting like a virgin on her first night. 49% onlee. 51% Indian partner onlee..This onlee..that onlee. Strategic sectors no FDI...Power no FDI.

That is napunsak wadi takneek.

We have basically gotta "khol ke khade ho jao" and be an alpha male tfta mard and go around subjugating markets to our will, as business people.

Total free market technique. Basically realize that we are competing with the USA, in terms of the "freedom" that we allow our own citizens and businesspeople.

Agar roads railways and delivery network, administration main nahin compete kar sakthe ho....tho at least compete on being the "most free" business system around. All this takes is a simple rule change at the central govt level.

The education that foreign companies will give India, will allow Indian companies to do so.

Why are we so scared of the goras?

We have to invite them in, and allow them to be Indians and compete with Indians in India. They in turn will open up our minds with new ideas and education.

We must welcome the foreigner. We compete with the USA...in terms of the most attractive place to go to , to do business, to live, to work, to make money, to be free.

So apart from the right to bear arms, we better start giving our citizens and other foreigners as well..more freedom to do as they feel. They WILL contribute positively.

[SaiK]

I think these type of policy based voting should be encouraged more and more.. and and should be viewable by all politicians, and aam. This is important.. and BR can be a starting point for the billion populations. More websites should take up policy based voting, and spread it like wild fire.. until, we change our constitution to accept policy based voting at higher levels.

2 thumbs up for this thread, and similar threads.

[ArmenT]

Here's one viewpoint on the reason that Manmohan Singh decided to allow FDI in India
http://www.bbc.co.uk/news/world-asia-india-19725880

Many believe Mr Singh's reforms rush is an attempt to refurbish his image and energise his colleagues.

Others say it was to give a forceful answer to his critics in the foreign media, and divert attention from corruption charges against his government.

However, in his address to the nation on 21 September, the prime minister hinted at the real reason why the government opted for these contentious decisions.

If we had not acted, he said, it would have meant "a loss of confidence in our economy".

What he left unsaid was that this would indeed have happened if the global rating agencies like Standard & Poor's (S&P), had downgraded India's investment status to "junk".

In April S&P threatened that it could downgrade the country's sovereign rating to "below-investment" grade within 24 months.

A "junk status" would have implied a huge crisis on the external front.

In his speech, Mr Singh outlined its contours, saying it would lead to a higher fiscal deficit, and a further steep rise in prices.

He added that in such a situation "both domestic as well as foreign investors would be reluctant to invest in our economy", and Indian companies would not be able to borrow abroad.

Mr Singh was the finance minister during the 1991 crisis
The result: dismal economic growth and high unemployment.
...
...
This year there were enough signals that the Indian economic situation could return to the 1990-91 days.

S&P in its April report, suggested India needed to act immediately to find answers to its economic problems, which included low growth, high inflation, huge debt, a looming fiscal deficit and a lack of reforms.

By May, another rating firm, Fitch, was keeping a close eye on the developments in India.

During its meetings with S&P and Fitch in those months, government officials said that the country's future outlook was not as bad as was painted by these agencies.

They told S&P that several reform measures were in the offing; critical bills pending in parliament would be passed in its monsoon session throughout August and September, and new important bills, including land acquisition, would be introduced.

Attempts were made to convince Fitch that inflows from foreign investors were still robust, signalling there was global optimism about India.

Unfortunately, by the second week of September, both these arguments sounded hollow.

The parliament's monsoon session ended in a deadlock; there was a complete logjam as opposition parties stalled both the houses because of opposition charges against the prime minister in a scandal involving allocation of coalfields to private companies.

In the first quarter of 2012-13 (April-June 2012), gross foreign direct investment (FDI) inflows were more than 50% lower than in the same period in the previous year.

The growing evidence before the government by mid-September was that S&P would have no option but to downgrade India, and much sooner than its two-year deadline.

[SaiK]

It matters junk for whom?

[Bharath.Subramanyam]

Bji & others:

See the below article (op-ed) by Ashok Malik :

http://timesofindia.indiatimes.com/home ... 532051.cms

"Retail FDI will transform agriculture by integrating Indian farmers in the global supply chain"


what do you think?

[vishvak]

Will it also mean that it will 'integrate' buyers from India to the same?

[nakul]

Bji & others:

See the below article (op-ed) by Ashok Malik :

http://timesofindia.indiatimes.com/home ... 532051.cms

"Retail FDI will transform agriculture by integrating Indian farmers in the global supply chain"


what do you think?

India is already supplying fruits to the globe. FDI in retail is meant to allow imports not exports. That is WalMart was so hell bent in softening the local procurement clause.

[Viv S]

FDI should be allowed only if they buy material within India and that should be 100% Made In India only

People can then get their vegetables, cereals, toiletries and clothes at Walmart-like supermarkets and get their electronic products from kirana stores. That would be ... interesting.

[brihaspati]

Bji & others:
See the below article (op-ed) by Ashok Malik :

http://timesofindia.indiatimes.com/home ... 532051.cms

"Retail FDI will transform agriculture by integrating Indian farmers in the global supply chain"

what do you think?

The fear of the foreigner; the disinclination to permit a modern market economy in Indian agriculture; the obsession with small-scale enterprise; and the dogged refusal to recognise the benefits of an economy of scale: all of these have been apparent in the past few days. It is crucial to interrogate these concerns and ask what the arrival of international retail chains can mean for India's farmers as well as consumers and for the economy generally.

It never ceases to surprise me how uncannily capitalism and communism reflect each other. Both want "globalization", both support "markets" [yes even Stalin did in his second of only two theoretical works], both want "economies of scale" and absolutely detest the "small scale" enterprise or entrepreneur. It is interesting to note that many self-appointed "free market/free investment/free international flows" gurus charmingly bat for "economies of scale" and concentration of production processes into ever-more monopolizing entities - while they loudly denounce similar monopolization of political power under dictatorships. If concentration of economic decisions into single corporate entities == efficiency, dictatorships should be the most efficient systems in society.

As is well known some 33% of fruit and vegetables in India is wasted and perishes in the journey from the farm to the fridge. The comparative figure for Australia, which has the world's best record in this area, is less than 1%. There is a logistics experience here that India needs to tap. India has only 5,300 cold storages, a figure that sits uneasily when placed against the 12 million small and medium retail outlets in the country.

It can be argued building cold storages is not rocket science and can be done by domestic companies and businesses as well. Well, to be fair local companies can also make cars - and there is no real need for a Suzuki or a Nissan to be here. Where these MNCs score is not just in the technology available to them - which can be sourced, to be fair - but in their distribution and marketing muscle, which will take years and decades to replicate.

So building cold-storage is not really the main problem? Is it about bringing in the Suzuki-Nissan version of cold-storage then? Perhaps, according to Malik. But a bad example. How many Suzuki-Nissans are on Indian roads? How many Indians own them in proportion to the population? That is, what part of the transportation needs of Indian population are being met by them? The Suzuki-Nissan cold-storage being MNC sooper-tech, and by implication and Malik's own sarcasm, beyond desi-brains, needs to be maintained by MNC sooper-infrastructure, imported lock stock and barrel together with the sooper brains needed to run them, and the sooper-parts to replace them. Actually, Malik provides an important glimpse into the so-called mark-up effect on the skills-premium which contributes to increased income inequality in less-tech economies. Okay so lets quickly shift the goalposts to "distribution and marketing muscle"!

Why is this distribution and marketing muscle - which translates to deep supply chains in the case of giant retail companies - important? It is necessary if the Indian farmer is to get a better deal and ultimately become part of the global economy, and not remain a marginal economic actor confined to his district. Today, an Indian farmer gets only a third of what the end-consumer pays for his produce. In times of bumper harvests and distress selling, he gets just a sixth. The windfall gains are for a series of intermediaries.

Actually the "deep" part is the most disconcerting. Malik forgets completely to mention anything about the lack of competition laws in India. In the absence of competition laws, a deeply muscled distributor and marketeer, can use his muscle initially to drive smaller competitors out of the market [in fact Malikian economies of scale necessitates such driving out] and then after deeply penetrating both ends of the supply chain, use that penetration to reverse the price motions to source cheaply and sell dearly. Its about a larger capital having the power to wait out the price wars until the smaller gets swallowed by economies of scale and then recoup the virtual losses [due to undercutting] by price monopolies. If Malik has done his homework, he will find studies of Walmart, Tesco, etc dating from 2001-2011 that track this phenomenon. In EU for example, the Chinese low-quality products have practically been used to kill off the much lambasted "inefficient" small-scale, with a temporary stabilization [not always lowering] of prices, and then increasing again. Now people have to buy the trash for the same old price.

Organised retail provides the farmer greater security. As a 2008 ICRIER study of the impact of organised (but Indian-owned) retail found, "Average price realisation for cauliflower farmers selling directly to organised retail is about 25% higher than their proceeds from sale to [the] regulated government mandi". Bharti Walmart's direct purchase from farmers in Punjab is also believed to have augmented incomes by 7 to 10%.

This is ingenuous at the minimum. There are two deep problems with this premature joy. One is about seizing on temporary price movements as indicative of long term trends, and the other is about growth of binding mechanisms that fix production processes, relations and market dependence. Something that Malik sort of sarcastically handwaves in the following:

Admittedly, there is the other side of the story. Again, take an Australian example. Woolworths and Coles are the two biggest retail chains down under. Together, they sell 60% of the wine consumed by Australians. Essentially, this means they determine the price and type of wine that producers will find useful to bring to the market. Admittedly, this has wine farmers complaining. The stranglehold of big retail will ensure farmers cannot dictate prices and tastes. However, the certainty of purchase by the big retail chains also protects farmers (and consumers) from shocks.

Naturally, Malik waves his hand over Oz wine. There are pretty good studies of that industry, and how the "deep supply chain" mechanisms have produced concentration of land ownership, and financial control of production processes increasingly away from the producers. But eventually - the Malikian "economies of scale" argument means that farmers long term gains will zero out. There is no arbitrage in efficient markets. Malik surely knows that.

In the end, when they build their long-term relationships with farmers and set up a network of warehouses and cold chains, international retail companies will begin to look beyond selling to merely Indian consumers. They will have to integrate the Indian farmer with their global supply lines. India's comparative advantage in the world economic system is cheap labour. This results in Indian car manufacturers making vehicles at a cost lower than that in, say, Detroit or Turin. India's IT-enabled services industry has benefited from a similar principle. The question is: Can this wage arbitrage advantage be used in Indian agriculture?

It is really charming to see the naivete of Malik. Integration is a two way process. If India's "cheapness of labour" is its competitive advantage, then market laws imply that a net export from Indian farmers through "deeply muscled supply chain" owners will increase cost of labour [by increasing wages] and hence soon nullify the so-called advantage. If they don't nullify, it means non-modern-non-free-market techniques to artificially keep wages low will have to be undertaken, which would mean the deeply-muscled system actually does not have to increase the portion of profits it leaves back in India in the form of wages. Globally it pushes wages further down in competition, and in this third way also the Indian farmer eventually loses his advantage.

The wage arbitrage is a mirage. It has not worked in the biggest such experiment - China.

If New Zealand farmers can sell apples to consumers in Hong Kong what stops Indian farmers selling apples to supermarkets in Britain? Obviously, the lower wage of the Indian farm worker alone will not be enough. Retail chains will have to work with agricultural scientists and farming communities and determine the type and quality of produce that will be appropriate for their markets. There will be a process of mutual learning. In Gujarat the sourcing of certain types of potatoes by McCain Foods, using contract-farming arrangements, is an indicator of opportunities.

Sure, Indian apples should appear in Brit markets. But it can only compete with Hong Kong by either mechanizing on a large scale, with attendant concentration or production processes into commercial orchards or by pauperizing the agrarian labour. The problems of such concentration is that it typically leads to mono-culture - a huge problem in agriculture in many countries, and a depedence due to investments in infrastructure that crashes financially when the consumer market crashes for some reason.

Multi-brand retail is not only about the agriculturist. Equally, it is about the consu-mer. Forty per cent of India's GDP is made up of household consumption. An informal, empirical assessment made by this writer suggests cheap, everyday stainless steel cutlery, imported from Vietnam or China, is three times more expensive in Indian-owned retail chains than at multinational retail stores in the United States and Australia. Of course, it would be wonderful if this cutlery was made in India, but the Indian consumer cannot determine the regulatory changes needed to make India a manufacturing power. Neither can he be blamed for looking forward to exploiting the economies of scale that international retail chains will bring to him.

Here is the great dilemma - something that is biting back on the Chinese now. The huge Indian household consumption is a cycle that needs to be understood carefully. First, a huge proportion of the service sector jobs is dependent on this small-scale "inefficient" chaotic supply chains. These jobs in turn fuel consumption. Malik does not say where the people who lose their jobs in the "inefficient" sector will go. They cannot go back to farming as many dont own land, and even if they go back - theyw ill only drive down agrarian wage further down making it less feasible for them to sustain livelihoods. The loss of their purchasing power from the market lowers the consumption demand. Even if we assume that this section will find high-skilled high-tech IT jobs - it means at least a generation gap - for the next gen to even have a chance of taking advantage of any massive investment in education [not coming anyway]. What happens to this section in that mid-term range - when the daddies/mummies go back to pauperized status [which will reduce benefits of hightech edu as income status affects potential for educational success] - and the kids are yet to become zooper-IT professionals?

What happens to those farmers who will inevitably succumb to the "economies of scale" by yielding their land to better connected and capital-owning farmers or agri-corporates? They go out of the consumption markets too.

Malik does not refer to the known phenomenon of increasing skills-premiums effects of FDI's with attendant increasing income inequality effects - whicha re more marked in the lower-tech country than in the higher tech one.

Malik does not cite any stats on the experience of transfer of profits for super chains. Surely he has come across them? Does the political elite think it will fund a mega NREGA to bridge the gen-gap of skills acquirement and retraining by the corporate taxation of MNC's? Has that math been worked out properly?

[brihaspati]

By the way, I do think the FDI in retail should go ahead. It has political consequence on the internal power distributions of the elite network that is too tempting not to explore. The dependence of the system will be more on the MNC and its network interface to the desi counterpart will weaken. BY a standard observation of most parallels, it is expected that the younger firms will be more dependent on the MNC's than the older/larger desi ones. So the chasm between this section and the rest of the people will grow.

[kmkraoind]

There are two types of retail stores and farmers in India.
1. All pop and mom retail stores are not of same format. There are big stores, where households hand over their monthly list of groceries and get delivered them to their home and these stores will steadily loose their customer patronage, once customers are adopted to MNC style retail outlets. Regarding the small stores, where occasionally households buys 1/2-2 kg or some small items will not be affected.
2. Regarding farmers, small farmers whose land holdings are small will not benefit, because it will be impossible for MNC retailers to set up warehousing or collecting points at small towns or at country side. The big farmers, may benefit in the short term, because they can haul their goods to nearest collecting point. Since they own big farmlands, they can benefit immensely if they implement advanced farm techniques. But in the long run, when all small farm land disappears or consolidated, the farmers will not be benefited monetarily, because it will be highly commoditized and have to survive on thin margins. One thing is sure, farming is going to revolutionize, leading to a second green revolution.

For indigenizationMNCs need to adopt a model of
1. A big central warehouse/retail outlet at city outskirts, with many specialized satellite stores in city.
2. Effective home-delivery model.

[harbans]

Giant Retail corps in developed countries and developing countries will behave differently. It's about creating efficiencies not enforcing some obscure ideal. Between the consumer and producer there must be the most efficient process. In a developed nation it might make economic sense to source torches to toothbrush from China. In India it will not. Whatever an organized retailer brings in from outside will be subject to custom duty. Whatever an 'unorganized' retailer will most probably in India will not be. Many Chinese goods including Ganesha statues and umbrellas sold in Kirana's have been imported without an iota of taxation or duty. The big retailers inthe organized sector cannot do so. Thus it makes complete economic sense to start leveraging local manufacturing and technological inputs into quality manufactured products. That brings about a qualitative and quantitave change to quality and volume of manufacture, increased effiencies emerge and many enterpreneurs emerge that are bold enough to say yes i can compete. And the best thing that can happen is the best do manage to integrate into organized sectors worldwide. China's GDP is 3x India's solely because it took the plunge into these sectors and got noticed and int3egrated into markets that were capable of absorbing those products. Manufacturing industries that were created with liberalization and reforming of sectors led to the boom and consequent infrastructure.

[Bharath.Subramanyam]

RETAIL 101
http://centreright.in/2012/09/retail-101/#.UHtN5sXR7rk


Excellent article in Centreright India on FDI in Retail.


Gurus, your comments please

[brihaspati]

Giant Retail corps in developed countries and developing countries will behave differently. It's about creating efficiencies not enforcing some obscure ideal. Between the consumer and producer there must be the most efficient process. In a developed nation it might make economic sense to source torches to toothbrush from China. In India it will not. Whatever an organized retailer brings in from outside will be subject to custom duty. Whatever an 'unorganized' retailer will most probably in India will not be. Many Chinese goods including Ganesha statues and umbrellas sold in Kirana's have been imported without an iota of taxation or duty. The big retailers inthe organized sector cannot do so. Thus it makes complete economic sense to start leveraging local manufacturing and technological inputs into quality manufactured products. That brings about a qualitative and quantitave change to quality and volume of manufacture, increased effiencies emerge and many enterpreneurs emerge that are bold enough to say yes i can compete. And the best thing that can happen is the best do manage to integrate into organized sectors worldwide. China's GDP is 3x India's solely because it took the plunge into these sectors and got noticed and int3egrated into markets that were capable of absorbing those products. Manufacturing industries that were created with liberalization and reforming of sectors led to the boom and consequent infrastructure.

Chinese economic realities should also be introduced then - such as completley controlled labour market, no "unions", a completely non-market driven banking system where it concerns investments. Artifical control of the exchange rate, and other financial wizardry also needs to be permitted over and above centrally determined and artifically low wage rates.

Having said that - do you have data on the "service" and manufacturing reality of China - and how integrated they are actually into regional internal markets at all?

[Bharath.Subramanyam]

http://business-standard.com/india/news ... es/488149/

Question mark on govt fruit & vegetable wastage figures
Experts and traders argue data are not based on any scientific research or study
Dilasha Seth / New Delhi Oct 01, 2012, 01:05 IST

[pradeepe]

Impressed with Jaitleys debate. He makes a lot of good points.

fdi debate in rajya sabha

[RamaY]

In today's debate in RS, BJP leader Venkaiah Naidu made an interesting threat to congress.


"Why didn't you put FDI in retail in your election manifesto in 2004, when we put 26% FDI in retail. We lost the elections in 2004 and now with this FDI in retail you too will lose elections

This is the guy BJP/RSS want to make the party president? What do these guys think? Don't they come prepared for key legislation debates?

What a disappointment.

[krishnan]

Thats what happens when you wake up when something is being debated and dunno what to say

[SaiK]

so, 18% is > 53%. I think this thread failed!

[SBajwa]

"Retail FDI will transform agriculture by integrating Indian farmers in the global supply chain"

I agree but before that Agriculture ministry must realize that by growing Rice and Wheat year after year on very fertile Indian Peninsula they are turning it into Arabian desert.

Indian land mass is 100% suited for cash crops Fruits and Vegetables. Most of India should be growing Fruits and Vegetables and barter these for Grains (grown in USA or other places).

Nehru policies have not only weaken our agriculture sector but made our villagers to stop thinking outside of Guaranteed support price. Villagers who use to make money by selling cash crops in previous centuries before British are now down to grain growers.

India invented Cotton and all related industries (clothing, coloring of these clothes, etc)
India realize the medicinal qualities of products like Neem, Haldi, Kesar, etc.
India provided the spice to rest of the world (pepper, cardemom, cloves, etc).

so!! if we want to do something about farmers

1. Give them 3 years to be away from Rice and Wheat cycle after which they will get the market price instead of Government price.

2. Education, Incentives and subsidies for cash crops and fruits for 5 years only for poor farmers. They must prove themselves.

3. The line between producer and consumer needs to be reduced and all middle men must add a value to the product. (for example, A middle man that buys apples must clean, wash and package them, or turn apples into processed foods, otherwise if they just buy from farmer and sell it to another middle man they needs to be put behind bars).