FDI in Retail - A Consultative process at last

I'm really happy to mention here that the Government is finally taking some concrete steps to solve the FDI in Retail imbroglio. On realizing that despite several clarification notes released by the Department of Industrial Policy and Promotion, the list of doubts and clarifications sought by the retailers grew ever longer and precious little in terms of investment came into the country on this platform.

Now, with a view to fully understanding the concerns of the industry, the Government has decided to have an interactive session with the head Honchos of the Retail Industry on the 27th of this month, and hopefully, this consultative process will result in some of the bottlenecks being eased. I hope we will see some investment finally coming in after this meeting.

In the background of the above meeting, I have written to the Secretary DIPP, giving a couple of suggestions on how one can approach retail policy in India, from the perspective of a Retailer. I do hope Mr. Chandra will read my mail and it will help in putting some of the aspects in perspective.

http://m.business-standard.com/wapnew/storypage1.php?id=5&autono=113062400091

From: "Hemanth Sharma" <sharma.hemanth@gmail.com>
Date: 19 June 2013 7:51:30 IST
To: <chandras@nic.in>
Subject: FDI policy for Retail

To,

Mr. Saurabh Chandra,

Secretary

Department of Industrial Policy and Promotion,

Government of India.

Dear Mr. Chandra,

I write this mail in the background of the article in the Economic Times, stating that the “Government may further simplify FDI norms in multi-brand retail” (please see link), and several other recent press reports and comments that discuss the policy and the poor response received to the policy from the Retail industry.

http://articles.economictimes.indiatimes.com/2013-06-17/news/40027734_1_investment-guidelines-dipp-clarifications

Permit me to introduce myself. I currently work with a very large Indian retailer as a General Manager (however, I write this mail solely in my personal capacity), and have been in organized retail in India and abroad since its infancy in 1996. I have been a keen student of retail, its market dynamics and policy for many years, and hence I have acquired a certain level of expertise in this industry and I would like to offer a couple of suggestions. May I also add that just before moving back to India, I was working with a Far East Asian Retailer, who was very keen on entering India through the FDI route, and I was privy to several discussions that took place in this connection, and hence I possess a certain level of familiarity with the concerns that my then employer (and no doubt many others like him) have with our FDI policy.

A senior official of my far East employer had mentioned that they are able to carry out their retail business in some 20 countries from the very liberal, to highly controlled economies of Eastern Europe, but none were as attractive or as challenging to enter in as India. He also made a remark that they would be happy to even work with just 26% FDI, but would require the rules governing the same to be highly relevant to retail, and be simple, transparent and permit them to make a reasonable return on investment in return for the job creation, infusion of Foreign Exchange, generation of Tax revenues and the general positive rub-off that retail can bring to the economy. In this scenario, our current policy unfortunately does not lend itself to a conducive investment climate, particularly with all political opposition that retail faces in India. I would like to make a couple of suggestions for your consideration.

While retail essentially means buy-store-move-sell when viewed for a very broad perspective, this paradigm has to be constantly modified depending on the type of products, method of acquisition, shelf life, market cycle, pricing, buying pattern and other dynamics. Thus, the need for investments in the chain, or determining the quantum of investment required for the front end and the back end, and other such decisions are based on the products sold and not whether they are of a single brand or of multiple brands. For instance, a multi-brand electronics superstore will require virtually no back end investment, while a single brand gourmet food chain will require huge investments in the back end. Thus, if one is to align the policy to the way retail works, the current classification of Single Brand Retail and Multi Brand Retail needs to be replaced with “Non-Food Retail” and “Food Retail” classifications.

Non Food Retail should be made as free and uncontrolled as possible, as this type of retail is not expected to have any impact on the Kirana stores, it should also be permitted to be propagated as freely as possible. Such a move will improve the investment climate for retail in India virtually immediately, and open up the country for a vast number of brands. However, I do agree that as India needs to protect the millions of Kirana stores selling food and FMCG, we can make the policy for Food Retail as strict as the politics of the issue demands. Food retailing will also need large investments in the back end in the form of infrastructure that the country does not possess (Harvest collection points, Grain Elevators, Cold Storages etc.), and insisting that 50% of the FDI goes towards the creation of the same is totally justified. I’m sure you will agree that this is not the case in Non-Food Retail.

One other rule that most international retailers have difficulty in conforming to, is the rule mandating local SME sourcing to the extent of 30% by value of goods sold. – One would like to submit that it is not feasible for some retailers to achieve this, for instance technology retailers (Laptops, Cameras Televisions etc.) to source any of their products locally as their product line follows global sourcing, where the best factories provide world class quality products, or even retailers who sell products that are GI marked (Swiss Cheese, Belgian Chocolate, Italian sauce etc). Thus, this rule has become a stumbling block to investment. If it is possible, the following easing of the norms for this rule could be considered:

·         Make compliance voluntary, but incentivize its acceptance by introducing ‘bragging rights’ like “Products Sourced from India” stamp.

·         Another incentive could be to offer some temporary tax sops to retailers who meet the 30% sourcing by value norm.

·         The rule should also permit sourcing from any Indian manufactured source and not restricted to SME’s. My former employer who wanted to get manufactured, his Private Label Skin Care, Hair Care and Cosmetics products, will not be able to work with anyone less competent than an ITC, Godrej or similar. Going to an SME would risk liability particularly when the heath of the customer is in question, and no retailer will be willing to do that.

·         Those who choose to go to a capable SME should be encouraged. However, an SME who grows to become a large scale industry on the strength of his supplies to a retail chain should not be dis-incentivized for his success.

·         Lastly, the sourcing rule of achieving 30% from day one is a very major challenge, as any retail chain will need to have some critical mass in terms of establishing themselves as a high-recall brand as well as in achieving a number of stores before being in a position to absorb such quantities of merchandise procured locally. Please consider introducing a window period of 5 years from launch, before which this norm of selling 30% of the merchandise sourced from India, needs to be conformed to.

In addition to the above two suggestions, any other easing of the rules will surely go a long way in bringing the much needed investment into the Country. I also understand that you are planning to meet industry representatives on the 27^th of June to seek their inputs. I congratulate you for adopting this consultative process and for your promise of hand-holding the investors during the startup phase. My best wishes are with you in this regard.

Thanks & Regards,

Hemanth Sharma

Drought and Cloudbursts, Manmade Monsoon Fury

The past week, has been quite a dramatic one - if one is a viewer of any of the 24x7 Television News Channels. We have been constantly bombarded with images that one normally saw only on viral YouTube videos prior to this. Two and Three storied buildings just collapsing like a pack of cards, cars floating furiously away along in the current, dashing into other cars, bludgeoning buildings and bridges along the way, and dramatic pictures of mudslides having decimated holy towns on the banks of the Ganga, after they having stood strong for over a hundred years.

Officialdom is as usual, wringing its hands and begging us to appreciate the fact this is a natural calamity of gigantic proportions, and hence their sorry and uncoordinated rescue attempts need to be seen as brave and heroic by all patriotic Indians. Only the Armed Forces seem to be doing anything credible or worth appreciation in the search and rescue efforts. On the other hand, News reporters have already alleged that this is a 'manmade disaster' and have started pointing out that most of the buildings that were damaged, were illegal or permitted to be built on the river banks in contravention of Environment Ministry norms, and ignoring even the basics of engineering design. Focusing on the illegal structures alone seems to indicate that the reporters too are willing to accept the view that the cloudbursts are indeed natural disasters, and only the consequences thereof were manmade. It is depressing to observe that no one is studying this from a continental perspective, as I sincerely believe that this problem is entirely manmade, including the cloudbursts and feel that nature is wrecking her revenge on us for having raped and pillaged her incessantly for the past 40 odd years. What follows is my perspective as to the causes of the sudden cloud bursts and consequently, the still unknown number of lives lost and immense loss to property.

I’m sure everyone who was a child of the ‘70’s and the ‘80’s will remember the Weather Reports on the Doordarshan channel, in which, the progress of the monsoon used to be tracked from the 1^st of June onwards, by showing a Monsoon Front Line moving in slowly over the sub-continent until it was shown to cover the entire Indian landmass by the first week of July or thereabouts, when it finally became a spent force while battling the might of the Himalayas. One could see the front moving faster over the sea due to the absence of obstruction, and lagging over the land by a few days. The terms used the news readers are still fresh in my mind “The Monsoon front has progressed to cover Lakshadweep and Andaman & Nicobar Islands, Costal Kerala, South Interior Karnataka, North Interior Karnataka, Rayalseema and the Konkan regions. It is expected to further progress over the Deccan Plateau, Goa and Coastal Orissa in the next two days. The Monsoon is also expected to reach Delhi and Rajasthan which are currently reeling under heat-wave conditions, by the 30^th of June”, or something to that effect.  Thus, an entire month of rains starting from the 1^st of June had to first drench the rest of India before it could even reach the foothills of the Himalayas. This time, it took just about 10 days, and like it has done over the past few years, it has entirely skipped Karnataka and Maharashtra, and reached Delhi and the foothills. Why could this be happening?

In a similar vein, I am also quite irritated whenever a discussion on climate takes place on TV for instance, where residents of Bangalore mention that they never saw temperatures in the high 30’s back when they were kids, and the ‘Experts’ will be quick to point out that in some obscure date in May of 1937 or 1928 or whatever, Bangalore had recorded a temperature of 38.7 Deg. C, and hence there was no truth in the alarmist theories of Global Warming. The so called experts are also quick to point out that the 'Average Temperature of Bangalore has remained more or less constant over the past 100 years'. This needs to be debunked in the strongest possible terms, as I have personally seen the change in the temperatures in Bangalore, and never before was it as hot as it is in summer or as cold as it is in winter now. Thus, it seems that nature has a way of ensuring that the average is maintained – warmer summers are compensated by colder winters and thus, when the average temperature is mapped for the entire year, it will seemingly remain same as the average recorded in the ‘70’s. What this average hides is the earlier maximum – minimum range and what change that has undergone over the past 40 years. Similarly, showing us a record of some extreme temperature when our Grandparents were kids in Bangalore misses the fact that back then, such high temperatures were an absolute rarity, and may have appeared on a couple of days due to some global phenomenon like the El Nino effect, while these days, we see Bangalore suffering temperatures of mid-to-high 30’s for over 45 days in April and May, which was unheard of back then. For a city that needed no ceiling fans when we were kids, this is tragic. Nowadays, an Air Conditioner is the ubiquitous adornment for most bedrooms, adding to the environmental impact and climate change, making them more and more inevitable each season.

So, getting back to why the monsoon traversed the sub-continent so rapidly, I think it basically boils down to this – Deforestation. The monsoon front used to traverse very slowly over the peninsula landmass due to the very extensive forest and tree cover over the Malnad region of Karnataka, and the greenery of the North Karnataka and South West Andhra regions. This green cover not only slowed down the movement of the front, but also divested of it a major portion of the water content in the monsoon clouds by forcing copious yet gentle precipitation for weeks. This helped to not only slow down the movement of the front, but also resulted in controlling the amount of precipitation they retained when the winds finally hit the Himalayas, as the mountains seemingly possess the ability to extract every last drop from the clouds. Now, with the forest cover in Karnataka reducing each year, and the whole of Hyderabad Karnataka and Andhra a veritable gaping wound due to the open cast mining rampant there, means that the clouds are able to just pass over the entire landmass virtually unchallenged, and hence arrive still swollen with rain at the foothills of the Himalayas. This leads to cloudbursts, simple. Thus, this extreme weather phenomenon has been caused in part due to the greed of man, and of course, corruption. Greased palms have never possessed the ability to protect our forests, and much like the rain bearing clouds, they slip through the rules, and lay bare larger and larger swathes of forest land.

Touching upon the aspect of how the Himalayan region has been managed, and why the raging rivers have managed to wreck so much havoc, one only needs to look at the flood waters to understand that even in the Himalayas, the greed of man and the lucre of money has apparently laid bare the timeless hills. The water is a deep chocolate brown due to the millions of tons of precious topsoil that has been washed off the hills due to the absence of a tree root network that once bound it together. Further, it must be understood that this is pretty much a one-way street - as water that is mixed with soil and moving at a fast rate becomes virtually an unstoppable force, as the density of the mixture rises, so does its destructive power, eroding away more and more soil to feed the frenzy. Add to this a million trees, a few hundred thousand boulders, several houses and an assortment of cars to the mixture, it will be no different than a weapon of mass destruction, and nothing will stand in its way, especially not the shoddily constructed illegal guesthouses and cheap hotels that sully the banks of the Ganga all along its course.

I do hope that the Experts will wake up and instead of just rationalizing the problem, do something about it. We need to revert Karnataka to the earlier forest cover, ensure that the bald wounds inflicted by the iron ore mining are all greened over, and the forest cover of Maharashtra and Madhya Pradesh are similarly improved to form an effective monsoon barrier or sponge, that traps the rain in a gentle and sustained manner. In the hills themselves, the pressure of human settlement has to be eased and extensive reforestation taken up to prevent topsoil runoff. All along the banks of the rivers, a respectful buffer zone or Ecological Zone needs to be created and the course of the rivers and their flood plains kept unpopulated. Finally, all buildings on the hills have to be restricted to a single level only, so that the pressure on the inclined soil plane is minimized. The officials tasked with the maintenance of ecologically sensitive zones need to faithfully perform their duty and preserve our nation and its precious ecosystem for our children.

Lastly, India as a nation – every single man, woman and child will have to abhor corruption. As long as we are willing to pay a bribe as speed money for our own selfish reasons, the officials will see no reason to reform themselves. Ultimately, it seems that any disaster, natural or manmade can be connected tenuously or otherwise to acts of corruption. This has got to stop!

The story of India's Politics, Policy and GDP growth

Background

I have always been intrigued by the effect that politics has on the economies of nations, and decided that I should study the effect of this on India, in a little depth. I was really surprised as to how much I was able to learn from this simple exercise and how much fun one could have while doing it! The cause-and-effect of a political party’s economic leanings and the decisions they make is seen to be quite significant, hence establishing very clearly that the middleclass apathy towards voting is actually undermining the economic performance of the nation, and hurting them in more ways than one. While I am not an expert on either the Economy or Politics, the readings of the simple exercise should be very clear and evident to all.

Method adopted

What I did was to research the Percentage change in the GDP of India since the days of the first Economic Reforms initiated by Prime Minister Narasimha Rao, right up until today, i.e. the performance of UPA II, and found the data presented by the Ministry of Statistics and Program Implementation in the form of a line graph (source www.tradingeconomics.com). On this graph, which was plotted chronologically, I overlaid colored bands to indicate the various political regimes that were in power at the time, and the effect their economic decisions had on the economy suddenly became very evident. Please see the picture reproduced above.

Some basics about reading such graphs.

The Terminology used of course, is mine and will not be found in any text books, perhaps!

Ascendant Line. A graph line that is very sharply ascendant indicates very robust economic growth. The inference is that the Government of the day had taken apt decisions to encourage such a growth or initiated appropriate actions including the making of public announcements that improve investor confidence. Of course, it is an oversimplification as both these will have some lead or lag time to effect the economy, and no action or statement will have an immediate influence, on the GDP. The Stock Market however, is a different story altogether!

Descendant Line. Further, a graph line that is very sharply descendent indicates on the other hand, influences that have depressed the rate of growth. This may be due to both external impetus as well as policy decisions taken internally. Growth which is following a negative trend will have to be corrected by taking quick and appropriate decisions that improve the economic environment and counter the falling trend. As this fall is mapped against time, a sharply falling growth rate that is arrested and turned around into a growing one is an indication of quick and incisive action. On the other hand, a drop that is occurring over several months without getting reversed indicates a slow response in the monitoring of the economic indicators.

Regime Trend Line. Another indicator is the Regime Trend Line. This is a study of the GDP Rate at the time a new regime took over and the GDP Rate at the time it handed over charge to the successor regime. If this is an ascending line, it means that the regime in question left the GDP in a better condition than it received it in. On the other hand, if the trend is falling, this means that the regime in question has failed to keep the momentum going and has adversely affected the growth rate, either due to its inability or its unwillingness to take the required decisions. Please note that this trend line is not to be confused with the Average GDP Growth Rate for a period. This only shows what kind of an economy a particular Government took over and in what condition they let it when handing over power. Thus, a regime that has taken a growing economy and caused it to drop or a regime that has taken a falling economy and turned it around will be evident by looking at the trend line.

Upward Squiggle. A squiggle line moving generally upwards but with a lot of minor falls indicates that while the GDP is growing perhaps due to external factors, it is constantly being tripped up and made to fall. This can happen both due to poor Government policy as well as changing external conditions. When we see the issue in an over-simplified manner, it indicates a growing economy ‘in spite’ of the Government. I wonder perhaps, do the pushes and pulls of coalition politics cause such dribbles? Constant minor problems caused by internal and external factors that have been solved in a constant but adhoc manner, and whose effects last only a few weeks, before allowing the GDP to drop again. However, if the Trend Line is still a growing one, one can assume that the politics was good for the economy or a case when economics overcame the politics – an eternal struggle in the Indian context.

Downward Squiggle. Obviously, a squiggle line that is moving downwards indicates that the GDP is constantly dropping, and all the intervention that the Government has been making to reverse this trend has not resulted in any substantial change, except for a temporary growth for a few weeks before dropping off again. If the drop is occurring due to adverse international conditions, it indicates that the Government is taking ineffectual steps to counter this, perhaps being unable to take bold decisions due to coalition pressures. If the drop is occurring due to internal issues caused by the politics itself and the Government being unable or unwilling to take corrective action, it shows that the Government is in a state of policy paralysis, and its ability to manage the economy is questionable.

Interpretations: I must mention again here, that I am no Economics Expert, and what follows is generally a layman’s perspective on the issue. While I have done some research on the causative effects, these are my interpretations alone, and presented to entertain rather than educate, nor to enter into a serious debate on economic theory. If however, any of my readers who are more knowledgeable about this subject, would like to write in with their perspective or correct any of my conclusions, I welcome that. Please leave your comments at the end of the article.  Let me now; attempt to make some fun interpretations.

The regime of Narasimha Rao, 1991 to 1996 – This period is the star performer when it comes to the economy. The regime inherited a very precarious situation, and I understand that the country was on the verge of getting into a Balance of Payments crises and the Government had to pledge their gold stocks with international banks to raise the required foreign exchange bail-out from the IMF. I also understand that the IMF mandated some economic reforms in our country, which was then, one of the most closed and pre-historic economies in the world. It is beautiful to see how boldly the line skyrockets upwards in 1992 and continues to climb at a more sensible rate each year, until it reaches to about 7% in 1996, when the regime was voted out of power. While one must admit that the Narasimha Rao Government achieved a formidable growth in percentage terms, it was on a very low base, and hence needs to be viewed in perspective. However, since this was the regime that shook off the chains that bound us to crushing poverty for about 50 years, it was a Pioneer reaching out boldly into uncharted territory and hence gets my vote as the Star Regime. Narasimha Rao also deserves a greater place in our history books instead of a passing mention as it is now. Unfortunately, he did not possess the correct surname, apparently.

NDA # 1 led by Atal Behari Vajpayee, 1996 – which lasted for just 13 days has been ignored for this study, as the politics would not have had enough time to begin having an impact on the growth rate. However, to the credit of the previous regime, it can be seen that the growth trend continues unchanged well into the Deve Gowda regime. This is perhaps due to the momentum the GDP indicators had gathered by then, and was unaffected by the actions of the new regime, which has a certain lag time to make an impact.

The ‘United Front’ regimes of H. D. Deve Gowda and I. K. Gugral, 1996 to 1998 – have been clubbed together as they were regimes that were formed from within the same political alliance (more or less). It must be said that perhaps this was the worst period for the economy of India, as the Government of the day virtually insisted that they would cater only to the needs of ‘the poor and the underprivileged’, and hence willy-nilly ignored the reforms process, nixing them in the bud. As mentioned earlier, some growth is seen in the first six months of the Deve Gowda regime, but perhaps, this was in spite of Mr. Gowda and not because of him! The free-fall commenced soon after and reached down to about 4% from a high of 8%, all in one year. Since these regimes were more worried about staying in power, they may have taken politically good decisions but perhaps, those that were disastrous for the economy, the business climate or even the general sentiment. However, to their credit, it seems like better sense had prevailed in the last 4 months or so of the regimes’ dispensation, where some measures seem to have been put in place to reverse the free-fall and move the GDP growth up a bit. Either that, or my banding accuracy is a little bit off, and the growth phase started only with the NDA Government. However giving the United Front the benefit of the doubt, if it were not for this face-saver, the Trend Line would have been a sharp downward line falling into the darkness with an extrapolation beyond. I’m not sure of the politics of the Third Front, whether they were good for the Country in posterity or not, but this regime was a disaster for the economy and I pray that our country will not experiment with such political alignments ever again, if one considers economic health to be important to the nation!

NDA # 2 led by Atal Behari Vajpayee 1998 to 1999 – which lasted for 13 months in 1998 was the first non-Congress non-Janata regime, and they faced a lot of problems in the Parliament due to their very slim majority. Thus, before they lost the Trust Vote in 1999 by one vote, what little effect they could have on the economy should well have been negative, but to their credit, they took on an economy that was in low ebb, just after it had turned around, post a historic fall by the previous regime, and converted it into a growing economy. They managed to grow the GDP from about 4.5% to 6.5% before they were voted out. If one were to consider the fact that they were managing the fall-out of international sanctions imposed due to the nuclear tests at the same time, this growth is creditable.

NDA # 3 again led by Atal Behari Vajpayee 1999 to 2004 – rode back to power in the aftermath of the Kargil War with Pakistan and the surge of National pride this incident had generated. This time, the NDA held 303 seats – a comfortable majority that permitted them to take some very bold steps in bolstering the economy. Some of the measures that I personally feel were turning points in the India Growth Story include the Golden Quadrilateral & North-South / East-West Corridors, investment in Infrastructure like the Gram Sadak Yojana and Disinvestment initiatives. This coupled with some other bold economic reforms saw the country growing at a rapid pace and the GDP hitting upwards of 7%. We do see a few downward trends in the GDP growth where the figures had hit sub-5%, but suitable corrective measures seem to have been initiated and the growth trajectory corrected upwards. The last year of the NDA # 3 regime seems to have been their best year, where the growth is seen to have occurred from sub-5% to a dizzying high of +8%. However, even when the ‘India Shining’ campaign was hammering this into our consciousness day in and day out, NDA was unexpectedly voted out of power. The Regime Trend Line has been taken across NDA # 2 and NDA # 3, and indicates that the regime took on a weak GDP rate and left it healthier than before.

The UPA # 1 regime, headed by Manmohan Singh, 2004 to 2009, who was the Finance Minister in the earlier Star-Rated Narasimha Rao regime, was expected to deliver this country into the realm of the developed world. He had inherited an economy that was skyrocketing during the last year of the previous regime, but it can be seen that as soon as he took over, perhaps due to sentiment, we see that the growth rate drop right from day one, where it peters off from the dizzying rate to a more sedentary growth rate. As I have written before, this is perhaps still on account of the honeymoon phase, where the policies of the previous regime leave some momentum to push the GDP along the same trajectory, except for a reduction due to sentiment as mentioned. Soon after, for the first few months after the honeymoon phase, we see that the GDP goes into a minor free-fall, before it is corrected and is seen to grow again. Post this growth phase, kindly note the ‘Upward Squiggle’ that I was talking about earlier, where the Government seems to take a lot of small measures, and tentative corrective steps without any bold initiatives to oversee the GDP growth to almost 10%. While this is creditable, I believe that bold and path breaking initiatives could have pushed the growth rate to double digits, an opportunity the Government seems to have missed. It must also be noted that a sharply ascendant GDP Growth seems to have some lag momentum, while the Squiggle perhaps has none. The last year of this government was quite a disaster. They were punished by The BSP for investigating its supremo, Mayawati in the Taj Corridor corruption case, and later by the Left Front for signing the Indo-US Nuclear Deal, which had the potential to erase the Power Deficit of the nation. Thus, self-interest and hollow ideology tripped up the Government which seemingly went into a state of shock, leading the GDP growth rate to drop to about 6%, after tantalizingly going near the double digit mark. The Regime Trend Line is a depressing descending line – an indication that a lot of opportunities were missed, and the Government had forsaken its place in Economic History from a would-be ‘Star’ to an ‘Honorable Mention’.

The UPA # 2 regime, again headed by Manmohan Singh, 2009 to date, which has been studied separately from UPA # 1, on account of the Left Parties being in opposition this time and the BSP being a fence-sitter. Despite another couple more of ‘Withdrawals of Support’ from its constituents, the Government does well with the economy and the GDP is seen to dramatically rise close to 9% in 2010, but after the exit of the Trinamool Congress, Jharkand Vikas Morcha and Dravida Munnetra Kazhagam in quick succession starting from end 2012, the GDP rate is seen to be in constant decline. The gentle slope downwards indicates that perhaps this is largely on account of internal conflict and not external factors, which usually bring about sharper drops. The fact that this gentle ‘death-slide’ continues to this day (mid 2013) is an indication that no substantive corrective measures have been put in place, and the GDP has once again reached the rates prevalent at the time that the Narasimha Rao regime took over, effectively wiping out all the gains made over the past 20 years. In the remaining year of this regime, I do hope that bold and decisive decisions are taken to bring the economy back on track.

Concluding remarks. The news these days however, on the contrary is quite depressing, with all indications pointing towards more difficult days ahead. The Rupee has hit its lowest ever exchange rate against the US Dollar, the Inflation rate is still in sub-5% range, but every purchase has somehow become more expensive, the Interest Rates are manageable at 7.5%, but lending is low and when they do, consumers get loans at much higher rates, the private sector is apparently sitting on cash, but are unwilling to invest in expansion leading to stagnation in the job market, and finally my pet topic, Big Ticket reforms like FDI in Retail has been opened out, but has brought in virtually no investment  – all indications of a faltering economy, charioted by an ineffective and weak dispensation.

References:

http://www.tradingeconomics.com/india/inflation-cpi

http://economictimes.indiatimes.com/news/economy/finance/rupee-suffering-from-ill-effects-of-cosmetic-surgery/articleshow/20546722.cms

http://economictimes.indiatimes.com/news/economy/indicators/industrial-output-growth-sputters-at-2-rate-cut-likely-on-july-30/articleshow/20564332.cms

Where is the promised FDI in Retail?

This is the reproduction of an article written about FDI in response to a request by Mr. Shreekumar, Editor of the Trade Briefs magazine.

It is about six months since the Central Government passed the Law permitting Foreign Direct Investment in Multi Brand Retail. This happened after a long and very hard-fought intellectual, political and very personal battle, taking close on 10 years for this decision to come through, and the expectation was that the Worlds’ finest retailers will be queuing at the door begging to be allowed to invest in the sector. Sadly instead, it seems to have just left the retail industry in utter confusion. Let us try to understand why…

Retail Politics – is this really justified?

Currently the biggest stumbling block to Retail in India is the politics of the issue. One wonders why Retail in India has become the unfortunate victim of a completely unjustified political focus, as it is highly undeserving of it. What ought to have been a simple technical decision based on sound economics has unfortunately become an unexpected high decibel all-stakes-on-the-table battleground, pushing the Government to adopt a forced hawkish position while drafting out the notifications. These notifications, over the past few months, have churned out some very investor-unfriendly guidelines while grudgingly permitting investments under two broad sub-divisions – Single Brand Retail and Multi Brand Retail, and added with the absence of clarity in those notifications, has rendered the entire environment muddied and seemingly fraught with risk. Thus, no major Multi Brand Retailer is queuing up at the Ministry’s doors begging or otherwise – not till date, anyway, leaving just a handful of Single Brand Retailers for the Government to showcase as successes of the policy.

So, why has Indian Retail become so embroiled in politics? I really do not have the answer to that. It will take a more diligent student of Indian Politics and apparently even of Indian Retail than I to answer that one. I can say only this. Retail is a very ordinary, low-tech, basic but capital (both fiscal and human) intensive industry and it is only the implementation of globally tested best practices, intelligently adapted to suit the Indian market, together with the investment of virtually unlimited resources in the form of promoters equity that could make retail work in India. Thus, the shrillness of the political debate that retail has attracted is quite unexpected. The NDA Government, in 2004 had the opening up of this sector in their Manifesto, but chose to 'U turn' on it in 2009. The UPA Opposition in 2004, who was then the shrillest opponent of FDI in Retail, is now the one who is saying it is the panacea for the nation in 2012. Neither position is entirely justified, as Retail is neither a bed of roses nor an instrument of destruction, but a simple, down to earth and an exceedingly tough business. The NDA opposition has even vowed never to permit this notification in States ruled by them and is even ready to bring down the Central Government for this law, despite it being promulgated at least 10 years too late by their own reckoning.

Thus, it is evident that both political alliances have been working only for their own short-term benefit than to formulate policy for the good of the industry and the nation for the long term. Poor politics has been killing good economics for over a generation now, and this has been proved true in the case of Retail in India too. Will politicians ever change and see the big picture? Will the UPA Government ever have the sagacity to seek the NDA’s support for a slightly modified bill and end this atrocious debate once and for all? Will the NDA show the required bipartisanship that would be necessary? Ultimately, can they agree to share the credit (or the blame), as the case may be? My expectations are unfortunately abysmal on that count.

Confusion in Single Brand Retail

Instead of the promised flood, investments in Single Brand Retailing have been dribbling in principally due to the rule that mandates 30% local sourcing from launch of business. Any retailer would find that a challenge, and virtually every one of the current applicants have requested a clarification on this rule. Even a cursory internet search on this subject throws up a number of stories that speculate that the rule will be diluted soon and an equal number that disdainfully insist that that will never happen. One is appalled that we as a nation have the gall to invite investment in this cloak and dagger manner, and one is equally amazed that the world’s finest retailers are still taking us seriously after all this! In my view, ‘Single Brand Retail’ is not even a genuine and cogent classification (more on this later), and if it were to exist, this rule that defines the quantum of local sourcing must be enforced in a phased manner over a 5-year period in the least. While the silly season on this rule is not in a hurry to end anytime soon, some sense needs to prevail and the Government must not insist that the sourcing should be made only from SME’s, and should be extended to cover any Indian manufacturer, regardless of size, as it would be difficult enough to launch with some quantum of local sourcing, and the larger corporates may be better placed than SME’s to match the specification requirements.

Further, as the rule currently reads, an SME who would be trained and developed with much effort to supply quality merchandise by a global retailer has to be dropped as soon as his turnover crosses USD 1.0 Million as he then becomes ineligible. The retailer, who spends a lot of time and effort in developing a reliable resource and enriches him in the bargain by sourcing from him, has to dump this supplier and search for a new one. Does this mean that we intend to punish success, or perhaps encourage subterfuge as vendors will open an unlimited number of new companies each having a turnover of less than a USD 1.0 Million to skirt around the silly law? Is this desirable?

The odd-ball rules of Multi Brand Retail

Multi Brand Retailing is in an even worse bind if that were possible. Apparently, this Government, which has been accused of policy paralysis for too long has decided that it is best to promulgate any ‘paralyzed policy’ with a view to just ducking some heat from the WTO and investor lobby groups! That is perhaps why a major policy reform announced by the Center requires the separate endorsement of every State Government. This is preposterous. This is perhaps the first Central Government economic policy that is not applicable by law all over the country automatically. Thus, this policy, which leaves the adoption of the rule or of dropping it to the States, is a very confusing and spineless one, and is scaring off even the most pioneering of foreign investors, as they have to ensure that all the States that they intend to operate in has adopted their version of the law, before doing business there.

Perhaps, a new retail entrant into the country will have a somewhat lesser cloud of confusion hanging over their heads, as they can in theory; pick and choose to enter only those States that have adopted the new rules. While this is possible in theory, it is highly unlikely for a major retailer to agree to invest in the country if he is not even sure of how many states he can operate in, and how many stores he can ultimately build in his chain. If one is not sure of one’s operational scale in the medium term, one is sure of nothing, how will the investment come in?

On the other hand, for an international Multi Brand Retailer who is interested in buying into an existing Indian chain the situation is simply hilarious. For instance, Future Retail* will have to perhaps split into multiple business entities each registered in various State Capitals and the investor can own 51% of only those entities that are registered in States that have adopted the new rules. Assuming this is done, what happens to the Brand name of the retail chains in question? You cannot have a 100% Future Group entity and a 49% Future Group entity both owning the same Brand Name, so the Brand Name cannot be sold off. Thus, without the ownership of the Brand Name and the goodwill it carries, what would be the use of investing in that chain?

Even if all the above is somehow navigated, the ever-present problem of multiple Taxation Circles and Entry Tax Rules continue to exist and complicate any investment proposal. The adoption of a uniform Tax Code and the GST Act will also be a pre-requisite for a retailer who aspires a pan-India footprint.

The politics of the Multi Brand Retail has also mandated that all retailers will have to invest a minimum sum of USD 100 Million, of which 50% will have to be deployed in the development of back-end processes. Where is the logic in this? Which retailer, other than a Food / Fresh Produce retailer requires any substantial back-end set up? Will an Electronics and IT Equipment Retailer ever require the investment of USD 50 Million worth in his back-end operation? Will that investment not be a millstone around his neck, dooming him from profitability in a low-margin business? Judging from this and other ham-handed rules, it is quite clear that the understanding of the sector by the Government bureaucrats is very poor and they have been guided largely by political dividend.

Debate on the relevance of the classification – Single and Multi Brand Retail

Another aspect of the debate that has befuddled me no end is the seemingly senseless and unnatural segregation of Retail into ‘Single Brand Retail’ and ‘Multi Brand Retail’. The business approach, the investment requirements, the mode of operation and products being sold in retail do not fall under the above classification and vast overlaps are seen. My reading is that this classification was conjured by the Government, on the premise that it expected less resistance to Single Brand Retail, and hence perhaps hoped that it could manage to get at least some investment through the back door. Obviously, the ploy has not worked, and one has learnt that less than ten 'Single Brand Retailers' of repute have made a formal application at the time that this was written. Many others would adopt a wait-and-watch approach and wait the situation out.

Looking at the minefield that the rules of Multi Brand Retail are, I do not expect even a single serious Retailer to put his money here, considering the serious risks involved. One has even heard the NDA politicians say that they will rescind the notification if they capture power in the next Lok Sabha. Investment will come only when there is complete clarity, and the investor is sure that his estate is safe. I have personally heard from a prospective investor that, even in a restrictive 26% FDI regime, that has a clearly framed rule structure, he would be tempted invest in India, considering the innate attractiveness of the Indian market, but with all the confusion hanging over our 51% and 100% regimes, he would be wary of putting in any money. Thus, it is clear that for both Single Brand and Multi Brand Retail, one would not expect the investment flood gates to open anytime soon. The Government will need to actively work with the industry and revise their approach to the regulation of FDI.

Food Retail and Non-Food Retail makes more sense as a Classification

A more logical and cogent classification of Retail in India would be one that is split along the lines of ‘Food Retailing’ and ‘Non Food Retailing’ which would be more appropriate for the Indian scenario. The back-end investments and Farm-to-fork initiatives are very relevant to Food Retailing, and insisting on investments in this sector would not be misplaced. State Governments would then be able look at the Retail industry from this paradigm and formulate the rules as required of them by the Central Government, keeping in mind all the local sensitivities to Food Retailing.

One can readily understand the political sensitivity of food retailing, as millions of small retailers’ livelihoods are apparently in danger by the advent of modern retail and hence requiring of some protection, but why do we have all kinds of retail clubbed together? What are the risks in permitting retail of let us say, Apparel, Accessories, Books, Stationery, Consumer Durables, Cosmetics, Jewelry and a host of other FMCG and Lifestyle goods and services by Multi-national Retailers? Why should we insist that they invest USD 50 Million in infrastructure? Would that huge investment be justified and pay for itself financially?

This artificial Clubbing together of all types of Retail regardless of the type of business structure or product cycle is ham-handed and ill-conceived as it would surely be counterproductive - both to the politics of the issue and for the retail industry, not to mention – to the nation as a whole too. While one can understand the social context of Food Retail needing to be restricted to ensure that the political agenda is adequately addressed, one firmly believes that Non-Food Retail should be simply removed from all unnecessary controls and allowed to propagate freely.

Retailers need access to the traditionally developed markets in India

Retailers also need to be assured that they can freely operate in all the developed markets of India, where modern trade has been in vogue for about 20 years like Tamil Nadu, Karnataka, Andhra Pradesh, Maharashtra, Gujarat and NCR. Without a presence in all these key markets, one would not want to venture into new and untried markets that have welcomed FDI in retail. One hopes that perhaps when provided with this new perspective, State Governments that are politically adversarial to the Central Government, but possessing an otherwise progressive outlook, may be more inclined to notify their own versions of the Retail rules and perhaps choose to closely monitor Food Retail while permitting Non Food Retail to proliferate as that poses no political concerns to be addressed.

For most International Retailers however, the markets of Tamil Nadu, Karnataka and Andhra Pradesh would be the most attractive, as modern Retail (FMCG, Food) has been extensively tried and tested here since the mid 1990’s, due to which the customers are expected to be more welcoming of the USP of Modern Retail. Further, as they are also progressive States, their denizens possess good purchasing power, while also enjoying a relatively politically stable and generally peaceful business oriented atmosphere. I wouldn’t be very surprised if many International Brands choose to postpone their entry into India until these crucial States notify their version of the rules. Sadly, currently only Andhra Pradesh has fallen in line.

This would be particularly critical for Karnataka, and it needs to look at this very closely and very seriously as many international retailers would be keen to be headquartered in Bangalore, considering the fact that it is the most preferred city to live in for expat managers. Thus, if Karnataka continues to choose political exigency over sound policy and economics, they will stand to lose a huge opportunity in the form of being the repository for all the investment and being the beneficiary of the tax revenues accruing out of such business entities.

In conclusion

Business and politics aside, I for one, truly believe from the bottom of my heart that modern retail will genuinely and substantially benefit India, especially with the rules mandating a 50% quantum of investment in the setting up of Retail Backend Infrastructure, if that is focused towards Food Retail. I draw attention to another article of mine, where I have written about the need for the betterment of the agricultural infrastructure (please see link below), which I feel large retailers would be most willing to undertake, if the rest of the rules are more investor friendly. I do hope that someone out there is listening….

Note.

* The Retail Entity has been named only for illustration purposes and not with any other intent. However, the scenarios mentioned above would be equally true for virtually all other Indian promoted retail chains too, and many of which are on the edge of financial ruin and a few of them may be open to an equity infusion at this point in time.

Additional reading.

http://sharmahemanth.blogspot.com/2012/02/grain-elevators-are-needed-in-india.html

http://dipp.nic.in/English/acts_rules/Press_Notes/pn1_2012.pdf

http://economictimes.indiatimes.com/news/economy/policy/fdi-in-multi-brand-retail-full-text-of-goverment-policy-approval/opinions/16398474.cms

http://articles.timesofindia.indiatimes.com/2011-11-29/india/30454303_1_multi-brand-retail-trade-retail-sector

http://ksbpartnersnewsletter.com/FileName/News_FE_a_Sep2012.html