Wednesday, June 29, 2005

FDI in Retail - In a great Hurry

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at the snap of my fingers...

As anticipated and predicted in earlier articles, the Government, headed by Prime Minister Manmohan Singh, is acting according to a script already written and finalized, as far as FDI in Retail sector is concerned.

After going through a mock drill and motions of a sham debate with various sections, the Government has made it known that FDI in Retail up to 51% would be allowed within a period of two weeks - when the Parliament is not in session. In announcing this decision, it has amply demonstrated that it brooks no objections on the subject and is prepared to ride roughshod over the interests of the stakeholders within the country. Its task is made easier by a direction-less opposition, abject acquiescence even by parties like NCP and RJD in the UPA formation and deliberately feeble protests by the Left parties. Perhaps, for all those who are not voicing their dissent, there is some political quid pro quo somewhere or other compulsions.

Various justifications advanced for the Government’s largesse in allowing foreign entities to have a share in a retail market worth at least $ 300 billion virtually for free are not convincing. China, which has only just opened up the Retail Sector, has done it as part of the obligations accepted by it under WTO, albeit somewhat ahead of the agreed timetable. But then, China has had a clear start ahead of India in putting its earlier inflows of FDI to good use to strengthen its economy.

In its efforts to ‘dress up’ the proposal and show a modicum of concern for the interests of the Indian stakeholders, it is said to be thinking of various riders, exactly as was foreseen in an earlier article. For example, it might prescribe a minimum equity capital of Rs. 50 crores. Will this be a one time, upfront investment? If not, over how long a period should the investment be made and if the investment is not made, would or could the foreign entity be told to pack up and go? The Government is also said to be thinking of geographical restrictions. It is said that retailers like Wal-mart and Tesco would not be allowed to set up outlets in city centers. As every one living in large cities knows, city centers just do not have enough space for new large retail outlets and the growth is taking place mostly in the suburban areas in any case. Further, under the proposed riders, large stores may not be allowed in small towns and cities below a certain population. This means that they would be allowed only in large cities. The large Global Retailers could not ask for a better restriction where they are forced by Government into the most lucrative areas and proscribed from entering non-lucrative areas. Moreover, how would large retailers be defined? It is also stated that a fixed commitment to source raw food products locally will be imposed. Would the commitment be in absolute terms or in some proportion to the total? If the local procurement were not of the prescribed level, would the Retailer be asked to pack up and go? Note, that the Government prescription would be to procure 'raw food products' locally. What about the much touted value added products, then? Such contradictions arise purely because such convoluted conditions are meant only to superficially take care of Indian interests while the real benefits are reaped by the Global Retailers.

Taking all these riders at face value, they appear to be just to placate and hoodwink the aggrieved local retailers and the country's entrepreneurs who will have to compete with world giants. In practice, they may not be feasible to implement or to even legally enforce.

The undue and unseemly haste, with which the Government is determined to open up the Retail market in India, particularly the all-important Grocery and Food Retail to outsiders, is inexplicable. It is also difficult to imagine that those who are parties to this decision are so naïve as not to know that, the real beneficiaries of this decision will be those who get to enter the lucrative Indian market virtually for free. The claims of benefits that might accrue to the country by way of relatively small amounts of FDI or by way of higher employment, benefits to farmers due to value addition etc. will, more likely than not, turn out to be exaggerated or imaginary. In particular, there is absolutely no difficulty in finding capital to invest in the Retail sector within the country and consequently, no need to look for foreign capital for this low priority area.

The Government is acting with great alacrity on a subject which does not deserve the focus of its attention when critical areas for FDI and pressing priorities that demand actions are relegated on the backburner. All this once again raises the vital question, which should exercise everyone’s mind:
Cui Bono – for whose benefit is this decision and what and where is the quid pro quo.

It is useful to recall the recent statement by a senior executive of Wal-mart to that company’s shareholders:

“In our six government meetings, we created a very positive image [of Wal-Mart] in what we think is a very important future market," Menzer said. "We've energized the FDI lobby and preempted the anti-FDI lobby in India. I believe we've told our story."

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Thursday, June 23, 2005

Telecommunications - To Unshackle the Mind

In the background of economic thought that prevailed for the better part of 50 years following Independence, those running the reins of Government got accustomed to taking a very narrow, often timid, and self-serving view of the way Government should function.

Independence seemed to have paradoxically brought in a mentality of Control rather than Freedom.

The making of 21st Century India requires making a clean break from such myopic ideas and the ability to think out of the box on the part of those who run the Government.

Telecom is one sector where, a paradigm shift took place in the last 5 years from the time of the previous Government and it has brought spectacular changes in this area, which could hardly be visualized in the earlier years.

The present Minister for Communications and IT has just moved a step further in breaking one more barrier of the mind. He has made everyone realize, what should have been apparent all along, that as far as Telecommunications are concerned, DISTANCES DO NOT MATTER. So basic a fact and yet, the mindset of not only the Government but also the people all along accepted that telephone charges ought to be levied on the basis of distance. The Minister highlighted the fact by likening Telecom with the Post. As the postal charges are no different through the length and breadth of the country, why should Telecom charges be?

To take a charitable view of our narrow vision in the past, would be to say that the distance-based charges were established for reasons of revenue. The more plausible explanation, however, is simply that no one thought about it before in the context of telecom tariffs and the Minister deserves all credit for bringing to light what was not realized before.

Mr. Maran deserves these compliments, not just for this new and practical approach in his own sphere, but also for showing others how vital it is to ‘free the mind’ to move forward.

Tuesday, June 14, 2005

FDI in Retail - Conclusion: Let the People give the Mandate

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Centuries ago, the then ruler of India, pleased by the gifts and sweet talk brought him by an Englishman, was generous enough to grant Concessions to the East India Company to set up shop in this Country. That led to India becoming the Jewel in the Crown of the British Empire.

In the 21st Century, in a different time and context, History may be about to be repeated in some ways. The consequences of granting Trading Concessions to the East India Companies of today, looking for Jewels in their own Crowns, will last for long - whether good or bad.

Having taken an overall perspective, the following conclusions can be reached and it is hoped that the Government would recognize the need to tread with caution in this matter:

  1. Allowing foreign entities in Retail is a fundamental issue of Policy with ramifications and implications of a permanent nature. Therefore, it would be desirable to ensure that such a move has the support of the People, who are the real stakeholders.
  2. It would be premature to allow foreign entities to establish Retail operations in the Country at this point of time except in the manner already permitted at present.
  3. In particular, entry of foreign entities in the Retail sector of Food and Groceries WOULD NOT BE IN PUBLIC INTEREST at this stage and may not be allowed.
  4. The Indian Entrepreneur is capable of making the Retail structure responsive to present day needs, due to his innate abilities and intimate knowledge of the Indian market and it is desirable to allow him to fully benefit from the new opportunities.
  5. If there are any impediments in obtaining latest technology and management skills for creating a modern Retail structure, the Government may remove such impediments to help Indian Enterprise.
  6. The existing Guidelines for entry of foreign entities in the country as regards trading activities may be retained at this stage. On the other hand, Press Note No. 18 needs to be restored.
  7. While entry of Foreign entities in Retail may be considered after careful study in future considering the overall global developments, the Indian Entrepreneur should be allowed a head start of at least 5 years before such liberalization.

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Monday, June 13, 2005

FDI in Retail - Ignoring Indian Enterprise

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What is wrong with our own Entrepreneurs?

For the better part of half a century after our Independence, the economic environment was stifled with the License Raj and the intensely restrictive policies of the Government with the result that the innate business acumen, enterprise and risk taking abilities of our Entrepreneurs could not be utilized adequately. Indian Entrepreneurs have done well for themselves in other parts of the world against heavy odds. Indian businessmen, who found success in distant lands but were at one time driven out of the host countries penniless, once again achieved success due to sheer grit.

During the decades after independence, had the Indian Entrepreneurs been given the required freedom to seize the opportunities in this vast market that is Bharat, there is no doubt that they would be competing successfully with the world.

That was not to be, and it is only in the last few years that they are enabled to use the newfound opportunities. Even in this short period, they have done well for themselves. The number of Super brands that are growing and the number of sophisticated Retail outlets that are being established, are proof of our own abilities. All this is being done, largely, based on our own strengths. If the Government prefers Organized Retail, we are already seeing Organized Retail growing fast, WITHOUT foreign players. Supermarket Format, Hypermarket Format, Department Store Format, fully stocked shelves with ever-increasing choice of goods, modern Merchandising and displays, sophisticated Mall and Shop designs, modern packaging, bar-coded labels, …everything seems to be there. As far as the Supply Chain is concerned, most of the larger stores already work closely with their suppliers, developing products that the customer wants and improving logistics. The number of Suppliers is also growing; many amongst the suppliers are even involved in international selling and aware of the need to adapt to market needs. The Retailers also now have access to imported specialty products. Those who establish and manage these new Retail Trade formats - whether Shopping Malls or Supermarkets or Department Stores - are successful and savvy businessmen, young entrepreneurs and qualified managers, of whom there is no dearth in the country. They are well-travelled abroad and understand the new Retail concepts. What they lack in knowledge of orgnization and management can well be acquired. The country also boasts of an Institution of Retail Management where the managers of the future can be trained.

And, what would be the fate of the thousands of consumers’ co-operatives and the Superbazars? Also not to be forgotten are the millions of small shops which have served the country well over the years. Can the Government not show some original thinking and encourage the Indian Retailers to develop alternative Retail Formats e.g. an Indian version of a Souk in the Middle East?

As the economy is growing, the Retail Trade is growing in tandem too, keeping pace. Retail Trade is one area where, whether it is the rather dismissively referred to as ‘Mom and Pop’ store or the more organized store Format, the country seems to already have what is needed. To invite foreign entities in this field is, by implication, to downplay the efforts of our homegrown entrepreneurs and to have no faith in their ability to deliver. To invite foreign entities at this stage is to deny the Indian talents, the opportunity to grow to a level where some day, they could challenge the very global players, which the Government so eagerly wants to welcome.

It would be only fair to finally give the Indian Entrepreneur, a chance to prove his mettle. Having struggled and survived in this country, it is the Indian businessperson who deserves a chance to partake in the growing Pie. The Indian Entrepreneur needs to be given some time and space to develop the Retail Sector into a vibrant and thriving Sector to meet the new challenges of Global competition which will certainly have to be faced eventually. That is his just due and to deprive him of the same by allowing, at this stage, Global players who have not faced the tough past in this country as he has, would be most unfair. And, lest it be forgotten, when the Global players are here, this country would become a new battleground amongst them and the Indian Entrepreneur would be the first to suffer – on his own turf.

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Sunday, June 12, 2005

FDI in Retail – A share in the Pie

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Having dealt with some of the facile arguments, it is necessary to bear in mind some other equally important points:

Demand – supply imbalances on Real Estate:

Real Estate for shops in the main consuming centres viz. Metros and A category cities is at a premium. The supply is extremely slow and the real battle for business really begins with acquiring the shop space in the right size at a reasonable price. These are the very areas where the Global players, with their deep pockets, would like to make a splash, gobbling up premium shopping locations. In this game, the local players, howsoever big, do not stand a chance at this point of time. To allow entry of the Global players at this point of time would, in many ways, strike at the root of having a level playing field between the domestic and the foreign entities.

It is also submitted that as the issue of real Estate is primarily the domain of the State and the concerned Municipalities, sufficient consultations ought to take place with them before this major decision is taken.

Urban Sprawl:

Experience of other countries shows the creation of urban sprawls around the mega stores creates a lot of undesirable problems for State and City administrators and for this reason as well, the concerned administrations need to be consulted beforehand.

Threat from Imports:

It is true that the imports of consumer products have virtually been freed of restrictions. In recent years, the country has seen an increase in imports especially cheaper products from China, which is already affecting the local industry. It is true that this type of global competition is a fact in today’s world. However, when the Global Players establish shop, the imports can take the shape of a more determined and organised effort in order for them to become increasingly competitive in the Indian market. It should also be borne in mind that as of today, there is talk only of the Western Giants like Wal-Mart, Carrefour, Tesco and Casino setting foot. In the future, however, as even Chinese Retailers gain status, their entry into India would be a matter of time. We could then see the real Chinese competition with greater force.

A word about Wal-mart:

Wal-Mart is the largest Retailer in the world. Its turnover at US $ 285 bn. is 40% larger than the TOTAL RETAIL MARKET OF INDIA AS A COUNTRY, placed at US $ 200 bn. Inviting or allowing such a giant in the country is in itself and by itself a major decision for the entire Country, for the brute power that such a large company can wield.

While on the one hand, it is a much admired company for the growth that it has been achieving, there are many issues on which it has been criticized and a sampling of what many perceive as the negative side of the company and the way it does business, can be found on various websites listed in a previous article.

Inter alia, the company record as an employer has been consistently receiving adverse comments and these bear reading while assessing the argument that it is a model employer.

In the market place at the micro level, if Global players like Wal-mart are allowed entry in the key grocery and food retail, they will certainly be able to draw customers in large numbers to their other product lines. As anyone connected with modern retailing knows, it is the Grocery and Foods section that primarily draws the customer to the store who eventually ends up making purchases of other products in the store. A global player like Wal-mart, if allowed entry into the sensitive Grocery and Foods Sector, will certainly use predatory prices for these products to lure customers to the store and thereby gain customers for their other products as well. For a global player, offering low prices to gain market share is a normal strategem and the initial cost/loss, if any, is taken as cost of market entry. Such predatory pricing practices would be enough to result in loss of customers as well as financial loss for the much smaller competitors.

In allowing a company of the size of Wal-Mart in the Retail sector, the country also needs to be aware of the inherent risk and danger that such strong retailers can lead to corporate control of the food chain. Opposing such corporate control of the food chain should be a policy objective of the Government.

A share of the Pie for Free? :

As stated earlier, the Indian Retail market is going to reach a level of US $ 300 bn. in a few years’ time. Even the share of Organised Retail is going to be US $ 30 bn., if not more.

As any novice involved in International Business knows, “Market” is what every company wants and any Multinational would go through great lengths to get an entry into such a huge market with enormous potential as India. This is precisely the reason why MNCs look to establish joint ventures with or buy out existing players in the market and pay huge amounts to achieve their objectives. Typically, these MNCs promise the sky and the moon to get an entry and once this is done, such illusory benefits quickly disappear. The history of modern business, even in India, is replete with instances where the company who agreed to take a MNC partner was forced to sell its share in the business for a pittance in a short time. Every housewife in the Indian cities and villages knows about the conman who promises that the precious jewellery that one has would be doubled because of the supernatural properties the conman possesses. The gullible housewife who parts with the jewellery only wakes up to find that even what she had, is already gone. There is a moral in this story somewhere.

The Government seems to be ready to grant a share in the enormously huge and profitable Indian market to the Global players for the vague and nebulous promises held out by them and the Government’s own imagination running wild about the benefits such a move will bring. It would mean granting entry into a potentially huge market for FDI which may not be more than just a few billion dollars.

If the Government sees reason and does not change the existing rules of the game as far as entry in the Retail sector is concerned, would the Global players not come? For sure, they will find a way to enter the market even accepting the existing restrictions, for India is too important a market for them to keep away, as the growing number of franchises for foreign brands shows.

And finally, on FDI:

The country certainly does need large doses of FDI; of this, there is no doubt. However, FDI is warranted primarily in areas:

a. Where the requirements for finance are very high such as infrastructure and heavy industry

b. Where FDI is linked with critical technology to improve the capabilities of the Manufacturing Industry in terms of quantity, quality, production efficiency or new products

c. Of critical services such as Banking, Insurance, Transportation, Health, Construction, etc.

Even China, with all the large inflows of FDI it received in the earlier years, is becoming selective and planning to obtain more ‘quality’ FDI, in the context of their needs. see

As far as India is concerned, there are many areas that are more basic, in Infrastructure, Manufacturing and critical services where there is imminent need to boost the FDI inflow. The Government would do well to focus its attention on such areas.

Saturday, June 11, 2005

FDI in Retail – Contrived Justifications

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The fact that an official of Wal-Mart, the largest retailer in the World, succeeded in having a Meeting with the Prime Minister of the country, also seen in the context of a flurry of carefully orchestrated utterings of those in authority and the media coverage, indicates that the Government has MADE UP ITS MIND.

While the Government is going through the motions of consultations and debate, the decision seems to be a fait accompli, and it would not be surprising if the Wal-Mart official was already given enough indication of the mind of the Government. The following excerpt from Cnn.Money news item is interesting:


June 6, 2005: 1:27 PM EDT

By Parija Bhatnagar, CNN/Money staff writer

NEW YORK (CNN/Money) - Has Wal-Mart tapped India, the second most-populous and fourth largest retail market in the world, to some day become the jewel of its corporate crown?

Maybe, or at least that's the impression John Menzer gave last week when the president and CEO of Wal-Mart's international operations dedicated a substantial portion of his presentation to analysts talking exclusively about his recent trip to India -- charts and photos included.
… …
"But it appears that a number of factors may change that," Menzer said. Citing his talks with leading Indian government officials, including Prime Minister Manmohan Singh, he said the government was considering opening up foreign direct investment (FDI) to retailers.

At the same time, if the FDI regulations aren't lifted any time soon, Menzer said Wal-Mart is no longer prepared to wait but is prepared to make its foray into India with an Indian joint-venture partner to "take advantage of this market while it's still developing."


More revealing are the following comments attributed to him in the same report:

“In our six government meetings, we created a very positive image [of Wal-Mart] in what we think is a very important future market," Menzer said. "We've energized the FDI lobby and preempted the anti-FDI lobby in India. I believe we've told our story."

(That is the modern day Sir Thomas Roe for you!)

News items about the interest of other majors like Carrefour and Tesco have also started floating in the media.

Even if the Government’s decision – awaiting only a formal nod from the Cabinet – is made known to the Beneficiaries first and the Sufferers - the country’s retailers and the general public - later, the matter is too important to be treated as a ‘done deal’ as yet. Even if the Government seems to think that the people of the country have no privilege to be informed of the decision before others are informed, they are the ultimate stakeholders.

Even as the Government seems to be unmindful of the voices of dissent in the country, it is worthwhile at this juncture to dwell upon some of the issues connected with FDI in Retail sector, review the flip-flops on the side of the Government and take a perspective of various voices of caution in this matter.

At the outset, it has to be said that granting trading concessions and opening up the retail sector is not merely a question of securing more Foreign Direct Investments and Investments in Retail Trade being one of the ways in which FDI could flow. Although the Government would like to confine its emphasis on the FDI aspect, the fact is that there are much wider issues involved with deeper implications. The policy change in the garb of FDI is in reality a significant shift and deepening of liberalization and is primarily to do with trade policy than finance. The Finance Minister deftly ducked the hot potato by declaring in one of his recent speeches that it was primarily a Trade issue, saying, “FDI in Retail was first mooted by the Commerce and Industry Minister”. Apart from the fact that the entry of such large retailers, especially in the food and grocery sectors, will lead to profound changes in the Retail Trade Structure, it will also greatly accelerate the forces of Consumerism. In the last few years, there has been a shift towards increased consumer spending because of a wider choice of goods in the market and increased incomes, easy access to plastic money and other direct borrowing. This trend is likely to continue. However, the entry of the large Global Retailers who consciously try to lead customers to spend more and more with their aggressive marketing would significantly accelerate this trend. Allowing Foreign Direct Investment in this specific sector pre-supposes, therefore, that the Government has consciously accepted the policy of encouraging rampant consumerism that is inevitable with the entry of the global players and their methods of increasing consumption. This is a serious question involving fundamental philosophy of our economic development. It implies pushing up and accelerating consumption to much higher levels than the overall economic growth, as a means to develop our economy.

For a country with such a large population, people can possibly realize sustainable development by adopting thrift as a strategy and avoid the heavy depletion of resources resulting from high consumption rates achieved by aggressive promotion and credit card economy. Is high consumption society an approved objective of the state policy? The impact of such a philosophy would be far-reaching indeed and the people of this country ought to be taken into confidence before the same is adopted, even by implication.

The second macro level issue is the role and impact of the large trans-nationals on the businesses and economies of countries around the globe, an issue that continues to be intensively studied and intensely debated all over the world. Countries around the world, at various times and in different situations, have experienced the ill-effects of the activities of the Global Corporations working to serve their own narrow interests and greed for profits and sales growth and the way in which they trample upon the competitors and work against the interests of the consumers as well. Allowing Global players in Retail trading will have Policy Impacts, Economic Impacts, Environmental Impacts, Impacts on the entire Retail Trade, Impacts on the Public as consumers and employees, Social Impacts as a concomitant, and last but not the least and very important, Impacts on Farmers. Even in the USA, the great champion of private enterprise and free trade, realization is dawning upon the public as well as thinkers, on the negative effect of market concentration due to the strengthening of the large Global entities, especially in the Retail Trade that caters to Basic Consumption (food and grocery) and affects agriculture.

The Indian economy has opened up only of late and the country just does not have enough exposure to or experience of the cut-throat world of Global Competition. The Government cannot claim to know enough about the devious and many ways in which Global Corporations work to achieve their own ends. Without a full grasp of the issues that may be faced and the confidence of dealing with such issues as they arise, it would be foolhardy to simply open up all the way and Retail Trade is the core area where great caution needs to be applied. The Government, in its enthusiasm to prove its liberal approach to the world, is completely turning the opening up of the Retail sector on its head. It is proposing to actually begin first with the Food and Grocery sector. If at all FDI in retail is found to be desired objective, the beginning should be with high value branded products rather than basic products.

There is plenty of literature in the public domain and empirical evidence that demonstrates the various undesirable aspects of Food Retailing with reference to large players and it is doubtful if the Government has had a chance to study the subject and all its ramifications in as much depth as is required before taking such a major decision. A lot has been said elsewhere in the world about the great influence the Global players involved in food manufacturing and marketing eventually wield over the market and the economy. Following is just one excerpt:


During the 1980-2000 era market concentration in food manufacturing and retailing accelerated to high levels (Rogers, 2000).
Curiously vertical integration between the two stages declined dramatically, especially for food retailers. This polarization or specialization, however, was accompanied by a rise in retailer-controlled brands produced under contract in a tightly coordinated fashion by manufacturers. In Europe control of the supply chain is clearly lodged at the retail level (Bell 2000). Given the lack of commercial TV advertising, and consequently weak, more fragmented brands in each county, retail brands and channel control has always tended to be stronger in Europe.

In the U.S. supermarket retailers during this period rapidly moved towards superstores and even larger combination food-drug emporiums, and super centers - full scale supermarkets combined with a discount mass merchandise operation that sells everything from lawn and garden to car repair, to home fixtures and clothing. The top six supermarket retailers (Kroger, Safeway, Albertsons, Royal Ahold, WalMart and Del Haize) now control over 50% of supermarket sales, up from 32% as recent as 1992 (Cotterill 2000). This increase in buyer concentration and increased focus on retail labels has clearly shifted control of supply channels towards retailers.

(Dynamic explanations of Industry Structure and Performance, Cotterill.R.)

Read further:


Multinational agro-food companies spend millions of dollars on marketing and public relations. Beyond increasing their sales of individual products and services, they also want to be seen as generous global citizens who can continually improve the menu of food choices for wealthier consumers, while at the same time solving the problem of hunger in poor countries through new technologies and free trade agreements.

But behind such benign and carefully-crafted slogans as "supermarket to the world" lies a more complex reality. From seed and fertilizer firms to processing and food-manufacturing companies to large-scale retailers, corporations understand that the larger their market share, the greater their ability to influence the world in which they operate.

The trend toward consolidation at every stage along the food production chain has dramatically impacted the global economy and distribution of income and wealth. Corporate spending on lobbying and campaign finance ensures that food companies and their trade associations will have far more influence on trade and regulatory policy than most voters realize.

Corporate political influence has direct consequences for the public, as industry groups shape nutrition guidelines, food safety regulations, and rules for labeling and content disclosure. Meanwhile, farmers, processing and retail workers are all squeezed by the monopoly power of food conglomerates so large that they can set farm workers’ and others' wages and farmgate prices substantially below levels that would ensure a decent standard of living.

Unfortunately, the food companies' inflated profit margins also come at the expense of the environment: pesticide residues, soil erosion, air and water pollution, loss of biodiversity and inhumane treatment of animals are all exacerbated by the industrial approach to agriculture favored by the major food companies.


“There are many obstacles in the way to global consolidation and the mode of market entry strategy retailers adopt is very much dependent on institutional constraints, such as governmental regulation of retail and service activity and restrictions on land. This has led retailers, such as Wal-Mart, Carrefour, Marks & Spencer and Ahold, to turn to their governments to push for the deregulatory agenda. Wal-Mart is, for example, a key adviser to the US government on trade policy”.

The USA, the biggest businessman in the world, continues on its path to establish its dominance in the economic world. (“The Politics of United States Free Trade Agreements”). On a different scale, similar efforts are being made under the auspices of WTO, binding the developing countries in knots, which cannot be cut.

He began by a brilliant opening statement to put the minds of the listeners at ease: “ If any of you have come here to hear from me whether or not the Government is about to announce FDI in the retail sector, you are going to be disappointed. The nature of the retail sector in India is too complex for a hasty decision to be taken in this regard.” He also ended up with another such statement: “The government has an open mind and would like to do what is best for the country.” In between these two statements, however, he went on to read out a script, which, while ostensibly projecting arguments pro and contra, left little doubt as to which way the Government’s mind was working – towards allowing FDI in retail.

Various arguments, contrived at best in today’s situation, are being bandied about to prove the desirability of FDI in retail. For example:

China has opened up the Retail market fully:

It is true that China has opened up the Retail market to outsiders fully. But one should not forget that this has been done only some months ago and after China has had a head start in terms of economic development. It has managed to secure huge amounts of FDI to the tune of over US $ 500 bn. in FDI since 1979 and has been the biggest recipient of FDI amongst the developing countries since it opening up in the late 1970s. For a long time, most of the FDI flows have gone into the infrastructure and manufacturing sectors, areas where the Investments in India – whether domestic or FDI – are nowhere near what is needed. In all these years, China has had a chance, due to the increased economic activity, to have a reasonable domestic organized retail sector. The opening up has also been accelerated following its entry into WTO. It is not possible to compare what China is doing on a selective basis to justify pre-determined decisions.

In China, the organized retail is 20% whereas in India it is only 2%:

This again is a fallacious argument. As stated earlier, China has had a head start over India and not only because of huge FDI, but also because of its massive exports (leaving India far behind), the people’s incomes and consumption have been surging. The argument further assumes that Organized Retail is per se, preferable. Even if this assumption is accepted, the question is not whether it is desirable or not. The question is, whether FDI is the right means to increase the share of Organized Retail and whether the local entrepreneurs cannot achieve the same objective. It is interesting to note that China already has several large Retail Groups like Wumart, Suogo, Lianhua and Hualian (the last two having merged recently into Shanghai Bailian Group).

Restaurants and Dhabawalas co-exist, and organised retail and mom and pop stores can also co-exist:

This argument shows the confusion that the protagonists(lobbysits) seem to be creating. No one doubts that organized retail can and will co-exist with the small shops. No one even says that there is no place for Organized Retail. The debate is about the entry of FDI in Retail, which is sought to be equated with Organized Retail.

Potential spin-offs on large scale job creation, increased economic activity:

This is a generalized argument, which can be used to justify any large economic endeavor. On this basis, FDI in any sector where a significant activity is taking place on an incremental basis can be justified. Using the words ‘potential spin-offs’ lends sufficient vagueness to this oft-repeated argument and what actually happens may not be what was held out to be. This is not to say that there are no positive effects on job creation and increased economic activity. However, this is bound to happen as the economy grows and consumption levels rise. The same result will ensue even if the demand is met by the domestic players.

International experience has demonstrated that the only way that farmers can get better prices for their products is through improvement of the value added food chain:

This is true in a general sense and value addition in agriculture products is a desired objective. However, to link it specifically to FDI in retail is not strictly appropriate. As the country has seen in the last few years, there is a demand from the customers for value added food products and the retailers and manufacturers are responding to the same. The need for FDI, however, in this situation is more for improving the processed foods Manufacturing sector. The other aspect not mentioned while advancing this argument is that International Experience has equally shown that the consolidation of food retail business is leading to lower and lower prices for the farmers. Therefore, rather than the farmers getting more, they may actually end up remaining in an exploitative situation. It is reiterated that there is no dispute, in principle, with the argument that “it is only when food processing and packaging takes off in a big way that we can hope to give the agriculturist his due”. For this to happen, large investments need to take place in the manufacturing and infrastructure area and the ‘taking off of processing and packaging sector’ is not a result which depends upon FDI in Retail being allowed. This is clear from the fact that China, the country oft cited, already has a large processing and packaging sector driven by local and export demand without a large contribution of FDI in Retail. Yes, mass marketing in the shape of Organised retail will certainly help but not necessarily a foreign entity. Indeed, there are many foreign entities who have been operating in India for a long time, many of whom dealing with consumer products with extraordinary marketing networks. Yet, they are not known to have contributed towards achieving the objective of mass marketing of processed foods except in a marginal sense.

FDI in Retail will increase purchases from the entities for their global needs:

This again is a misconceived argument. If Wal-mart, for example, sources products worth nearly $ 1.5 bn. from India for its world-wide stores, it does so for pure commercial reasons. There is no reason to believe that just because they are allowed to operate, will they significantly increase their sourcing for other areas. They would do so only if it makes business sense as separate transactions.

The foreign entities will participate only in incremental activity, they must not substitute ongoing activity or replace or displace what we have:

This is again a misleading argument. The Retail market is projected to grow 50% in the next five years, it would definitely mean that the foreign entities would participate in this activity. In actual fact, once they are in, they are participants in the entire Retail Market volume whether existing or incremental.There is no way to ensure and assure that they create their own economic activity distinct from the general market growth. It can only mean that they would take away a share from the domestic players. Protagonists of the FDI in Retail often refer to the unorganised retail operations, the shops, rather disparagingly and dismissively as ‘mom and pop’ stores. They should, however, do well to remember that these are the very shops who have amidst great hardships, served the Indian Public well over the years and plan to continue doing so. Often, with the primitive infrastructure and logistics that the country had to suffer because of wrong policies, these ‘mom and pop’ stores have managed to keep the consumer supplied with their daily needs, something which the Global players would certainly not want or be able to do in similar circumstances. That there is ‘no empirical evidence of any adverse impact of the growth of organized retailing on small retailers’ is only an argument proposed by those who are keen to enter the Indian market. Phrases like ‘there is (or there is not) empirical evidence’ ‘our studies have shown’ , ‘our experience has shown’ etc. are normally used when there is no hard data or there is equally strong opposing data with regard to a proposition.

FDI in Retail may not pose a threat to domestic industry, the reason being that FDI in retail would initially be concentrating on the high income consumers. (Planning Commission):

That the public is sought to be confused is apparent from the fact that exactly the opposite argument is also used to justify the global players’ entry. Viz. The large organised retailers can offer cheaper prices due to their mass purchases and, therefore, enable the poor customers to buy their products.

It may be mentioned that it is true that the mass purchases lead to better prices, but it should be evident that the benefit of the lower prices is moving only from one sector viz. the Indian manufacturer to another viz. the consumer. The benefit to the customer is certainly not at the cost of the Global player’s profits but at the cost of the supplier.

Reduced Tax Evasion

A Bharatiya Bank that jumped onto the bandwagon to extol the virtues of FDI in retail asserted in a presentation under "Benefits to the Government' that it would result in increased tax revenue and reduced tax evasion. It is unfortunate that the Indian Bank - with a 'firang' approach? - chose to implicitly state that the domestic players, or at least, the unorganised sector would be indulging in tax evasion and, therefore, the entry of the 'honest' foreign entities would be preferable. This argument shows the extent to which the protagonists have gone to convince the Government of the need to allow FDI in Retail.

Government could also think of putting geographical restrictions on the large (foreign) retailers:

A fantastic proposition! Is the Government, for example, proposing that they should only establish their business in rural areas? Or is it proposing that they cannot go to rural areas? The latter would, of course, reveal the extent of our comprehension of business realities. Would the Government really mandate them to remain only in the large urban markets, which is where the cream is? Would it like to put fetters on them from entering the rural areas and thus enable them to happily claim that they are prevented from serving the tough markets, something which they would not be keen to do anyway?

The foreign entities will bring technologies and management skills:

In reality, the only technologies and skills they bring will be for serving their own business needs and would be related to their own Retail operation. As far as technologies on the supply side are concerned, these would, in any case, have to be acquired from the respective providers of such technology, independently of the global retailer who sets up shop.

Vague talk about the Retailer bringing in high-end technology etc. need not be given too much weightage in the context of the Supply side.

Conditionalities may be attached to the permissions:

This is the classic bureaucratic way of getting around the objections. The Government may place certain conditionalities in return for allowing the foreign entity. However, as ‘experience has shown’ most of these conditionalities would have no meaning or importance once the entity sets up shop. Once the business is established there is no way that the conditions – which would prescribe actions subsequent to the establishment of the business – can be enforced. The cases of conditionalities of exports etc. placed on companies like Pepsi are well-known. In the end, such conditions remain only on paper, placed to hood-wink and by-pass objectors.

The entry of Global players (read Walmart) would only help small players to grow faster:

The meaning of this can only be provided by the originator, the CEO of Walmart’s international operations.

next post

updated 170605

Wednesday, June 08, 2005

The National Airline Carriers - a sense of shame

on horseback in the 21st Century?

whitherward and when.........

The results of various surveys related to the world of Civil Aviation conducted by Skytrax, a well-regarded consultancy, bring no cheers to our National Carriers. In fact, they only serve to highlight the dismal showing of the two National Carriers and to deepen our sense of shame as a nation. For, neither Air India nor Indian Airlines find a place anywhere amongst the Best Airlines Internationally or Regionally, judged by ANY of the criteria used for the surveys.

The results are based on over 12 million responses during the course of a year from passengers who are nationals of 94 countries.

The Airlines of much smaller countries like Malaysia, Singapore, Thailand and UAE find their place in the Roll of Honors while India, the largest Democracy in the world, earns no credit. To their merit, two Indian private carriers Jet and Sahara do find place as two of the first three Best Airlines India/South Asia region, the third being Sri Lankan Airlines.

The details that follow highlight the 'no-show' of the National Carriers in every poll for the Awards for the year 2005.

10 Best Overall

1. Cathay Pacific 6. Malaysia Airlines
2. Qantas Airways 7. Thai Airways
3. Emirates 8. Qatar Airways
4. Singapore Airlines 9. Asiana Airlines
5. British Airways 10. ANA All Nippon Airways

3 Best By Class of Service (Intercontinental)

First Class Business Class Economy Class
1. Cathay Pacific 1. British Airways 1. Malaysia Airlines
2. Singapore Airlines 2. South African Airways 2. Emirates
3. Malaysia Airlines 3. Virgin Atlantic 3. Singapore Airlines

7 Best Cabin Staff

1. Asiana Airlines 5. Qatar Airways
2. Thai Airways 6. China Airlines
3. Malaysia Airlines 7. Air Tahiti Nui
4. Singapore Airlines

3 Best Catering (Intercontinental)

First Class Business Class Economy Class
1. Gulf Air 1.Gulf Air 1. Thai Airways
2. Cathay Pacific 2. Continental 2. Austrian
3. Swiss 3. bmi British Midland 3. Saudi Arabian

5 Best Inflight Entertainment

1. Emirates 4. Cathay Pacific
2. Singapore Airlines 5. Malaysia Airlines
3. Virgin Atlantic

If proof was needed, the above provides ample proof of the fact that the managements and the employees of the National Carriers continue to sit like lame ducks and the Government continues with its dithering over augmenting the fleet while even the truly small airlines overtake us in performance in every sphere.

It will require more than any single Minister's determination to bring up the National Carriers to a level where every Indian can be proud of these national assets on which over the years, the tax payers' hard-earned billions have been spent. It will require the entire Government's determination to achieve this. The faceless mandarins of the concerned ministry also need to start doing what they should be doing, instead of interfering in the managements of the Airlines.

And finally, unless the EMPLOYEES of these Airlines to the last person, are also prepared to give their best and commit themselves to the tasks ahead, it will not be long before the Airlines will disappear in the oblivion. If they do not wake up, they can expect no sympathy or succor from any source. Let them show their mettle, which has not been in sight so far!

(previous article)

Tuesday, June 07, 2005

FDI in Retail - Of East India Company

Coat of Arms of the East India Company, sometimes also known as the "John Company"

Logo of the largest retailer in the World

By a pure coincidence, the name of the President and CEO of Wal-mart's International Operations is John Menzer.

Wal-mart is knocking at the doors intending to set up shop in India, as East India Company, the other 'John Company' did, over 375 years ago.

There, the similarity seems to end.... or begin......

The Dream Merchants are here again.

Wal-mart News


Monday, June 06, 2005

FDI in Retail - Successors to Jahangir and East India Company

previous post

Continuing with the perceptions on permitting FDI in Retail, it is tempting to read the contents of a letter written by Jahangir, the then Ruler of India, that is Bharat:

The Great Moghul Jahangir: Letter to James I, King of England,1617 A.D.


When your Majesty shall open this letter let your royal heart be as fresh as a sweet garden. Let all people make reverence at your gate; let your throne be advanced higher; amongst the greatness of the kings of the prophet Jesus, let your Majesty be the greatest, and all monarchies derive their counsel and wisdom from your breast as from a fountain, that the law of the majesty of Jesus may revive and flourish under your protection.

The letter of love and friendship which you sent and the presents, tokens of your good affections toward me, I have received by the hands of your ambassador, Sir Thomas Roe (who well deserves to be your trusted servant), delivered to me in an acceptable and happy hour; upon which mine eyes were so fixed that I could not easily remove them to any other object, and have accepted them with great joy and delight.

Upon which assurance of your royal love I have given my general command to all the kingdoms and ports of my dominions to receive all the merchants of the English nation as the subjects of my friend; that in what place soever they choose to live, they may have free liberty without any restraint; and at what port soever they shall arrive, that neither Portugal nor any other shall dare to molest their quiet; and in what city soever they shall have residence, I have commanded all my governors and captains to give them freedom answerable to their own desires; to sell, buy, and to transport into their country at their pleasure.

For confirmation of our love and friendship, I desire your Majesty to command your merchants to bring in their ships of all sorts of rarities and rich goods fit for my palace; and that you be pleased to send me your royal letters by every opportunity, that I may rejoice in your health and prosperous affairs; that our friendship may be interchanged and eternal.

Your Majesty is learned and quick-sighted as a prophet, and can conceive so much by few words that I need write no more.

The God of heaven give you and us increase of honor.


History is a great Teacher, yet no one learns from History except repeating the follies of the past...

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