My Disappointments with Budget 2016

Is this Really an NDA Government?

Prime Minister Modi was decisively voted to office on the basis of his promise of 'Acche Din Aanewaale Hai' credo (Good Days are around the corner), and in a manner of speaking, to take up from where Prime Minister Vajpayee had left off. Big Bang Reforms, Job Creation, Wealth Creation and Robust GDP Growth were supposed to be a given, and a departure from the regressive Left of Center politics of the ungainly UPA Coalition Governments of the past was supposed to be a reasonable expectation. However, on several counts, Finance Minister Arun Jaitley disappointed me with his Budget for 2016. The large outlays for Rural Development without creating urban wealth and Jobs, makes this look like just another UPA-X Budget.

Direct Taxes - A Historical Anomaly

I cannot profess to be an expert on all aspects of the Economy and Union Budget preparation but I do understand this. We have been "Robbing Peter to pay Paul" since the past 65 years. The salaried class continues to bear an inordinate burden of the Direct Taxes and nothing is being done in every Budget to widen the tax base.

Why cannot the Government consider bringing all Aadhar Card holders (a known and verified database, with the yet un-enrolled eager to enroll, to enjoy the benefits of subsidies) into the IT net with a voluntary low rate of tax, say 5% with compulsory filing of Returns? 

There must be hundreds of million people in India, who are self employed, earning handsome incomes but not paying a rupee in tax and thus contributing nothing to Nation Building. If the Govt. brings all earning folk into a benign tax net and expands the Direct Tax Revenue, Salaried Class Income Tax rates can be cut and their disproportionate burden towards the nation reduced. Nothing done, disappointed. 

Reduce and Simplify Direct Taxes

Ideally, a simplified Tax Compliance mechanism where all the Salaried Class pays 10% Flat Tax Rate on income with no Exceptions and Rebates is something we need to work towards. No move towards implementation of the recommendations of the Direct Tax Code, which has been gathering dust for years. Disappointed.

A Harebrained Scheme to Tax Provident Fund Savings

So instead of rationalization of taxes to reduce the burden on the Salaried Middle Classes, we have a completely incomprehensible move to tax even their savings. The Provident Fund Saving is the only nest egg that a Private Sector Employee has to retire on. To want to tax that too is akin to twisting the knife in the back a couple more times, as though bleeding them dry was not enough. One day after I wrote my piece, The Times of India had pretty much the same thing to say.

Where is the much publicized Disinvestment?

The NDA from the Vajpayee days had a stated principle that the Government's job is to Govern and not to manufacture Soap, Operate Hotels or Run Airlines. The huge financial package for the loss making Public Sector every year could be used to build hospitals, schools, roads and other infrastructure, and the reticence of Modi to boldly take a position on the same is baffling. His early political learning seem to be very Left of Center, and perhaps, he still carries some baggage of Nehruvian Economics where all things were supposed to be Government run or controlled. In this one aspect, Prime Minister Modi is more old fashioned than his much senior NDA predecessor, who had a Disinvestment Ministry and wanted the Government to exit all non-critical ventures and unlock the wealth held in these properties and businesses. 

One was hoping that the Government would make some significant announcement in connection with 100% Disinvestment in a few Public Sector Undertakings and stop the continuous bleeding of tax payer money by supporting inefficiency and sloth that constitutes the sector today. Instead, we see some spineless Stake Sale of marginal significance. This is not a reflection of the 'Government should not manufacture soap' policy. Disappointed again.

I was hoping to see genuine investment in Farm Infrastructure

One is deeply distressed that the state of our farmers has not materially improved over the past 65 years. Surely, everyone should strive to ensure a situation where this noble profession would be a safe and remunerative one on which a farmer and his family could depend on? I believe every patriotic Indian should be deeply concerned about them and use their knowledge to help better their situation. 

I support a Farm infrastructure impetus. 

I have previously written on this subject to Agriculture Ministers, Food & Civil Supplies Ministers, Secretaries of Agriculture, even to FCI and Warehouse Corporation, but not one of them have responded to either initiate action, or to rule out the idea as un-viable. I appeal to the Government to constitute a Preliminary Study to check the feasibility of my suggestion, and provide some direction and hopefully later to obtain some commitments from the Government in the Budgets.

All Governments, regardless of their political persuasion since independence, have done nothing substantive to modernize the Farming Sector and tragically, the average Indian farmer even today remains stuck in the medieval age using cultivation methods which were developed thousands of years ago. True, a lot of progress has been made in the creation on a large talent pool of Agricultural Scientists and Graduates who are working to change the sector in terms of providing a Knowledge Base on Cultivation Methods, Crop Rotation and Soil Management, but the vast majority of the millions of farmers have no access to this expertise and have to come a long way just to catch up to subsistence. One is particularly concerned about the state of post cultivation collection, processing and storage of produce, which is in a 'rotten situation’ in more ways than one, fraught with corruption, leakages and unscientific methods, but no efforts or thoughts are being extended to remedy this.

Successive Governments have thus far, spent Thousands of Lakhs of Crores of Rupees in promising Remunerative Prices in the form of MSP, providing Free Power, Pushing (sometimes controversial) Seeds, Promoting Unsafe (and sometimes banned) Insecticide and offering Fertilizer Subsidy which have just kept the farmer dependent on the Monsoon, on Usury and his produce slowly turning Pesticide-Ridden and Non-Prime over the years. In addition to such upstream efforts, the government needs to invest in downstream capabilities, in the form of contemporary farm infrastructure and help the farmer modernize the entire chain of activity from soil preparation to the ultimate storage of grain. The Government is expecting Modern Retail Trade to make these investments, but has made the Retail Industry a minefield of regulations, deterring investment (more on this later).

I have recommended exploring the need to invest in farm infrastructure in addition to subsidy, which I have tried to bring to the attention of many of the powers that be, but have found no success. No one it seems, is interested in pursuing an alternate path. I sincerely believe that this has the potential of changing the landscape of rural India and will go a long way in improving the Food Security situation of our nation. No Capital Expenditure proposed for Farm Modernization in the Budget, a further disappointment.

Our Cities are decaying due to a step-motherly treatment

Touching on an co-related matter, for 65 years, we have been repeatedly told that releasing funds for Urban Infrastructure was 'frivolous expenditure' as India is a rural agrarian economy, and thus, a lion’s share of the past Budgets were allocated to Rural Initiatives. Consequently, due to neglect and sheer non-investment in our urban centers and poorly managed investment in our villages, we are now facing a situation of both urban decay where the worlds most polluted and grid-locked cities are Indian – on the edge of collapse, while on the other hand, the farmer is still killing himself for his inability to repay a loan of a few thousand Rupees, or curiously, abandoning his farmlands to move to decaying cities. In this connection, we see however some positive action, and investments are planned for Smart Cities and improvement of the creaking infrastructure of our major urban centers. However, far more targeted and aggressive investments are required to overcome the lag imposed on our cities for 65 years. So, yes, disappointed!

Finally, my pet peeve. No clarity on Retail Trade continues to stifle it.

Mr. Amitabh Kant, Secretary DIPP, had recently accepted that the Government may not have all the answers, especially when it comes to Sunrise Industry, and hence, it was more than willing to solicit the views of the Domain Experts in assisting in the formulation of policy. While Minister for Commerce and Industry, Ms. Nirmala Sitharaman stressed that the primary aim and immediate concern of the Government was the creation of millions of jobs for our young adults, who are just entering the Economic Contributory Stage. Both spoke during the events organized for the promotion of Start Ups in India. In the background of the above, the one Sunrise Industry that has the ability to create, and absorb millions of fresh High School (Class X and XII) graduates i.e. Modern Retail Trade, is unfortunately mired in so much confusion and politics. If it is harnessed properly, Retail is a low hanging fruit that can change the outlook of the nation while contributing immensely to job creation.

• At the outset, it is no secret that India was perceived as the ‘Most Desirable’ Retail market for investors for over a decade and a half, but is now considered as a ‘High Risk’ market.
• The policies governing Retail in India have not been enablers, perhaps due to the political sensitivity to the adverse effect unbridled Retail expansion may have on the Kirana Stores, and they have been made very complex and confusing.
• The primary problem was the classification of Retail proposed by the UPA Government, i.e. Single Brand and Multi Brand Retail.
• This is a classification that is not natural in Retail, as the Activity Chain / Processes depends on type of Merchandise, and not whether they bear a single brand name or not.
• Retail Business Models are generally not amenable to the above classification and hence the Back-End Investment mandates and Sourcing Criteria do not make fiscal sense to most Retailers.
• This has resulted in no significant investment in Retail since the policy was announced by the previous Government, when it actually has the potential to be one of the best Forex earners for the country.

The Government refuses to take the advice of Retail Experts

Despite Mr. Amitabh Kant's statement of consultative process to be followed for Start Up's, when it comes to Retail Trade, he obstinately refuses to engage with Retail Experts to help formulate enabling policy. 

To ensure that the artificial barriers to investment in Retail are dismantled and the country becomes the most desirable destination for Retail Businesses the world over, while still keeping a tight watch on the deleterious effect Retail can have on the Kirana’s, the following approach that has been endorsed by the Retailers Association of India, may be worth considering.

• The entire policy framework governing retail needs to be re-looked into, and the same aligned with the business processes of the industry.
• The new suggested classification could be ‘Food Retail’ and ‘Non-Food Retail’.
• Non Food Retail which can be anything from Car Showrooms to Apparel and Consumer Durables to Jewelry Retail should be permitted as freely as possible. 
• Whether we permit 100% or 76% or even 51% FDI it is immaterial, as most retailers will be able to find Indian partners without much problem. It is critical however, to have minimal restrictive rules and regulations governing this segment.
• Thus, without even impacting the Kirana in any manner, we can open our market to literally thousands of Retail Chains and create a large number of Entry Level Jobs.
• To ensure that investment in Food Retail like Supermarkets and Fresh Chains is done in a very planned and controlled manner, this category can have reasonable restrictions to minimize their impact on the Kiranas while at the same time, encouraging them to invest in upstream infrastructure like Grain Elevators, Cold Storages and Logistics.
• Retail creates jobs for young people with Minimal Higher Education, and Short-Term Training (could even be On-The-Job Training), hence the benefits to the economy and the politics of the issue can be had within a very short gestation period.

Thus, in addition to creating a large number of jobs, the freeing up of Retail (or simply clarifying the classification) will improve our grade in the Ease of Doing Business Rating, improve our Currency Valuation and contribute to a Feel-Good Business Climate, as investors in other more Critical Sectors will be comforted when they see Retail Brands from their own countries flourish in this market. Needless to say, the influx of Retail will also have a positive spin-off on the IT, Malls, Manufacturing, Construction, Apparel and Consumables industries, and support a vast number of indirect jobs in addition to the direct ones.

We in India deserve to have a fully enabling environment for Retail, and permit us to reap the benefits of the low entry barrier investment it can bring even while protecting our Kirana heritage and jobs. No move towards clearing the logjam of Retail. Disappointed? No, distraught, actually.

Selection Criteria for Retail Properties in India

I recently got an opportunity to consult with a small retail chain, thanks to a consortium I’m a part of and I was asked to write a small piece on the important points to be considered while selecting properties for retail. I promised to revert with “8 to 10 Bullet Points” in a few minutes and ultimately churned out this report that runs into six pages! As it is compressing some 22 years of experience gained by leasing and or project managing close to a million square feet of space, I thought it would be a good idea to share it with others who may find the information useful, or for students of retail who could understand the dynamic of site selection based totally on personal experience.

Opening Remarks

Please note that these points are generic points and hence are not placed according to any priority, but sometimes, depending on the Format, Size, and Target Audience, some of these points may attain a higher level of importance or even a criticality, which needs to be established subsequent to a detailed study.

Further, the criticality of Property selection is heightened when one is choosing a High-street location, as the costs are generally high and the foot traffic is not always assured. Thus, the following considerations would be most relevant for the selection of High-street locations.

Mall location considerations are entirely different and will depend on the success of the mall to attract the appropriate footfall in sufficient numbers, together with the design of the mall, the traffic flow and store design. Thus, mall locations will require a detailed and separate study.

Considerations

Property Identification can be clubbed into four main considerations:

A.      Format / Business Considerations

B.      Commercial Considerations

C.      Technical Considerations

D.     Hygiene Considerations

A.     FORMAT / BUSINESS CONSIDERATIONS

Depending on the merchandise being sold, location would be ideally located in certain markets in the city where similar merchandise is sold or is famous for. Thus, taking on the traditional or established players in the city and offering a differentiated experience or merchandise to be considered.

Audience Classification

•          Luxury
•          Premium
•          Budget

The network plan will need to be defined. Under each of the above classifications, one needs to clearly define whether one is targeting the following groups:

•          Impulse /
•          Daily Needs

Thus, an Impulse Luxury item will need to be located in the middle of a high income shopping district that hosts sufficient footfall of the audience who can afford the merchandise, on the other hand, Luxury Daily Needs products can be a little less exacting in choice of location as one hopes to promote premium and budget customers to try the merchandise. Similarly, Premium Impulse merchandise needs to be very aptly located on High Street / Malls / Luxury Destinations.

Work Place / Residence Locations of Audience

Studies have shown that a large percentage of customers prefer to stop by and shop for their requirements while driving on the way home from work. Thus, being located on a street that connects a popular work district to a high end residential district is always a good idea. However, it is critical to be located on the left side of the road (Indian driving characteristics).

High Street Considerations

When a High Street Location is being considered, one has to primarily determine whether the street is a One Way or not. If it is a one-way and does not funnel people from a work district to a residential district, it will not be an ideal choice.

Distance of Storefront from the Street

Most retail formats require vast amounts of visibility into the store to encourage passersby to promote themselves to visitors after being enticed by the displays in the store. Thus, if the storefront is too far setback from the pavement, the impact of the display is minimized.

Availability of Storefront Parking

Most formats that have some parking facilities in front, are seen to perform better than those on high-streets that do not have parking. Thus, properties that have some parking in front of the store, subject to the point about the distance of storefront from the street, will be desirable.

Store size

The size of the store shall be as per the requirements of the business, and shall be able to carry the entire assortment of merchandise correctly and efficiently. The added requirements of the space for the Stock Cycle and the Staff Cycle need to be provisioned for. If the space is too less, this will result in the assortment getting pruned, and if the space is too large, it will be inefficient and result in higher costs.

Width of Frontage

Based on the format under consideration, the site being selected shall offer a minimum credible width to achieve a defined Entrance, offer Good Visibility and ensure an Attractive display.

Site Aspect Ratio

This is the ratio of width to the depth of the site. Depending on the format, rectilinear spaces would be ideal, where the width is not too large and the depth consequently too shallow. On the other hand a narrow frontage with a very long throw for the depth is not desirable.

Signage Space

One of the most important aspects that need to be considered. Buildings that are intelligently built will have made specific and sufficient planned spaces provided for signage. The store will require adequate signage length to make a good impact and further, the width of the signage shall have a minimum such that a standard width of material can be used for the signage without wastage.

Visual Clutter

Storefronts that have clean signage and ensuring that the width and specification adopted by all the tenants of a building follow the same guidelines, the visual presentation will be orderly and impactful. If everyone follows their own standards, this will result in visual clutter and nobody’s signage will be effective. Thus, poorly designed buildings that have not specifically planned for sufficient signage needs to be avoided.

B.      COMMERCIAL CONSIDERATIONS

Cost of Rent

The monthly cost of rent outflow shall be based on the profitability analysis for that neighborhood. The potential of the location to support its rental shall ideally be judged on the basis of the expected turnover at that location. Based on analysis, rent outflow shall be pegged at an Allowable Percentage of the Expected Turnover, say 10%. Thus, if the required turnover level cannot be achieved within the time frame agreed, the site would be under severe strain.

Rent Escalation

All landlords will expect the rent to escalate at a particular rate each year, and would typically expect an escalation rate that covers for inflation. This can be bunched together and charged once in 3 years to ensure that the store gets a chance to stabilize before suffering a higher rental.

Cost of CAM (Common Area Maintenance) or Utilities

In some cities, Commercial properties are required to pay higher costs towards Water and Power Utilities. Thus it is important to understand the cost of utilities fully before committing to a property. In managed properties like malls, this is a shared expense and depending on the professionalism and efficiency of the mall, the costs can vary between 20% to 50% of rent outflow. Thus, it is as important as the rent, and similar to rent suffers from some escalation too.

Cost of Signage

Municipalities of several cities charge a license fee for the signage f a store, beyond a particular size or area. This could be of sizable value and hence it is important to peg the cost of this license as part of the input Operating Costs.

C.      TECHNICAL CONSIDERATIONS

Availability of Power

It is important to correctly determine and establish the amount of Connected Load that one will require. Typically, all buildings would have been designed on some assumptions and the power connection available would be a finite defined limit. If the formats requirements exceed the permitted load / available connection, the enhancement costs are quite prohibitive and due to the shortage of power in most Indian states, quite long in lead time.

Use of Generator

Generators are used when the connection is of lower capacity or is not available to the store at the time of launch. However, captive power generated using fossil fuels typically costs about 2.5 times public utility power, and hence quite unaffordable in most instances. Even when the connected load of sufficient capacity is available, generators are used when there are power failures and due to the cost consideration mentioned before, the absence of mains power for extended periods of time could have serious financial impact on the store. It will not be out of place to mention here that power generated by use of fossil fuels is highly polluting in nature and it will be necessary to minimize the use of such devices.

Space for Air Conditioners – ODU’s

The building shall have sufficient setbacks and locations that can take the mounting of the required number of air conditioning units. As these generate considerable heat and also a fair amount of noise, they may be objected to by neighbors; hence it is critical to locate them appropriately. Conversely the length of the piping permitted between the ODU and the IDU is finite and has to be taken into consideration while deciding if it is feasible to have cost-effective air conditioning in the site.

Ceiling Height

Most retail formats have some standard fixtures that they need to display and stock their merchandise, and hence the services need to be placed above that height. Thus the ceiling height or more accurately, the clear height below the lowest beam of the site shall be sufficient to house the fixtures and also have remaining height in which false ceilings, lighting, ducting and other services can be comfortably run and efficiently maintained.

Columns

While columns are an integral part of any building, it must be noted that modern and well designed buildings have a minimal number of columns, ensuring that the space utilization is of a higher efficiency. Multiple and closely spaced columns result in the racking not being laid out in the most useful manner resulting in low efficiency.

D.     HYGIENE CONSIDERATIONS

Handicapped / Wheelchair Access

Some municipalities insist that certain types of public buildings provide for free and unrestricted handicapped access. This needs to be evaluated, and checked if the building under consideration requires the same, and whether it meets the criteria.

Toilets

Availability of clean and safe toilets for staff and customers.

Safety and Security

The site that typically has staff working till late hours, stores high value merchandise or stores cash collections overnight shall have sufficient evaluation of the safety and security aspect for all the three store cycles, i.e. The Stock, Staff and Customer Cycles.

Presence of Pavement, absence of Electrical Infrastructure

Other aspects that need to be looked into are whether the pavement / footpath in front of the store is sufficiently wide and safe for customers to use, and whether there are any obstructions from Transformers, Telephone Junction Boxes, etc that can adversely affect the visibility of the store and also render the pavement unsafe for pedestrians. Particularly, the presence of un-cleared garbage and badly broken down pavements and roads in front of the stores needs to be avoided.

Traffic Conditions

To permit customers to cross the road with ease and safety, the traffic shall be sufficiently light and well regulated, or if the traffic is very dense, safe Zebra Crossings and or Subways / Skywalks shall be available at a reasonable distance.

Legal Documentation and Ownership

Properties need to be leased from people who are the rightful owners and sufficiently rigorous due diligence needs to be carried out by an expert law firm to establish the same. The Lease Document shall be drafted in a scientific and totally legal manner that can stand to scrutiny by any public office. Finally, properties that are taken on lease for commercial activities shall be declared Commercial and documented as such. Residential premises shall not be leased for commercial activities as this is a contravention of the law.

Concluding Remarks

While the above list is a comprehensive list of Look-Out-For items for a person entrusted with property search, each format will have its own specific and specialized requirements that need to be studied in detail and locations appropriate for the business identified. In the event that a more specific study is required to define the requirements of a specific store format, the same can be provided subsequent to a detailed study of the format, the assortment, the profitability and the catchment analysis.

Ideally, for a chain store a detailed Net Work Plan shall be drawn up in consultation with Operations and Marketing, reflecting the market potential of the city and the desirable locations that one would like to be present in, and based on the same the site search should be initiated. Please do contact the undersigned for more detailed support.

Thank you.

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

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