Archive for February, 2014

Trying to make sense of “FDI in Retail” discussion

I have been inundated with debates about allowing FDI in multibrand retail over past few days. Most of these started with a political anchor with criticism of AAP, but soon enough BJP’s withdrawal in Rajasthan has confused me and many friends about what is going on. I had requested for analysis on this subject and some friends were kind enough to point me to some. As someone who is quite ignorant about the merits and demerits of the same, it has been helpful to read this material. Again, with the handicap of my ignorance, I will make some observations. Before I do that, let me list out the few documents that present the case (for and against) well:

Now, few rhetorics that I would like to distance from on this debate (one on each side):

  • The discussion perhaps is more about organized versus unorganized retail, rather than FDI or no FDI. Most of the discussion in references above revolves around merits/demerits of organized retail. The FDI discussion seems to have what I believe are unfounded fears – Walmart could start controlling India politically (East India Co!), and so on. Kishore Biyani of Future group would like FDI in retail – that is as Indian an entrepreneur as you can get. Why deprive him of legitimate sources of capital? There is also an argument that foreign companies will make money from Indians – I think that train has left the station. It is entirely valid for us to define what we want in return, but restricting capital flows because “otherwise foreigners will make money of us” is ridiculous. If at all, RBI should allow Indians to make money off foreigners by easing investments in markets abroad!
  • From several friends, I heard the other argument of “Its a global world, how can you restrict FDI!” A friend also exclaimed at “A VC like you arguing against FDI!” IMHO, both of these are bogus arguments. I believe India has done a better-than-average job of opening up its economy in a calibrated manner, as is evidenced by its relatively better tolerance of the 90s asian currency crisis, as well as 2008 financial crisis. There is no reason why we should abandon that calibrated approach for sake of a rhetoric. The discussion has to get oriented towards whats better for us collectively as a nation.
  • Again, other arguments “for” have included issues like increasing competition (do any of us believe there is lack of competition in Indian retail!?), increasing innovation, and near non-acknowledgement of predatory pricing (for all of us who have seen ecommerce develop in India, it should be clear that disproportionate access to capital encourages predatory pricing to an extent where that can become the determinant of success, rather than innovation itself.) Of course, those predatory pricing mechanisms will last only as long as the competition dissipates.

Now, some observations on my understanding so far:

  • One key issue here seems to be perceived loss of jobs. As the PRS summary points out, this is not a settled debate. I do think that policy decisions can not be driven purely by what is economically more efficient – jobs are an integral element of discussion, and jobs and entrepreneurship (even of the small scale variety) are the best known mechanism of income redistribution. Especially in the short term, large disruptions in jobs market are undesirable. Indian retail and logistics sector employs 40 million people, and a large scale threat to any significant piece of that can be detrimental to our interests. Some reports on Walmart’s effect on employment points out a net positive effect on retail employment, but “net job declines in food stores and apparel & accessory stores”, as well as “that Wal-Mart seems to displace other retail establishments”. Whether we ready for that displacement is an important part of the debate, that unfortunately has not happened in the public space.
  • An even more compelling argument for organized retail has been to support supply chain investments – that large scale supply chain investments will not happen unless access to retail is allowed, because retail is the way returns on those investments can be made (alternately, presence of organized retail makes it viable to make supply chain investments). The need for supply chain investments is well documented, so I will not go into that. However, are there other models of enabling supply chain investments, without necessarily disrupting the retail trade in potentially a short period of time? Such as the cash and carry model that has been permitted for a long time now at 100% FDI levels. Or by guiding multibrand investments towards desired segments and geos. If investments in supply chain is really what we need as a country, should we introduce incentives to make that happen?

The argument above is not to oppose FDI in retail, or organized retail per se. It is to try and understand the concerns that underlie this opposition, and to motivate a discussion to address those. While we may blame political parties for the flip flop and irrational behavior, I believe they are smart entities, and ultimately represent a section of people (who are your and my uncles and aunts.) One thing that I do have growing conviction is that the first principle questions must be asked, rather than be taken for granted, because “it seems to have worked elsewhere.” There has to be a reason why an intelligent party like BJP initially champions FDI in multibrand retail, but then gets uncomfortable (presumably) with the lack of checks and balances. Their constituents are telling them something, which is equally important for you and me to hear. If its all false perceptions and fear, then those need to be alleviated.

As a grade 1 student of this topic, would love to be educated by perspectives from others, as well as any more research you may be able to point me to. Thanks!