The west will wait....

For all the hoopla around the entrance in FDI in retail and other sectors, we Indians have not fully comprehended the reasons the west is in such a hurry to set up shop in our country. Like us, the western countries are just as protective and just as concerned about their own economies. The protective nature of the west might be hidden behind their investments and technological advances but the fact is the east is no longer just important to sustain western economies and their way of life but a necessity without which they will no longer be able to sustain their rising expectations and popular demands.

The capitalistic economic model sustained for so long has been based on growth and rising demand. An expectation the slowing growth rate of the west has not been able to sustain. This model of investment by taking up huge credit in order to grow requires that companies need to keep growing at a certain rate or they will implode. Be it growth in terms of GDP, population growth or growth in consumer demand, the developed world has reached a saturation point. The economic crisis we see today are just manifestations of this saturation. Manufacturers need to produce more, retailers need to sell more, banks need to invest more. But where will the demand, the raw materials and the labor required come from? The developing world can provide all this and more. But unlike the earlier centuries the west can no longer grab what they want by sheer force, they will have to participate in the development.

To the west India and China represent opportunities to keep their domestic population satisfied by giving them opportunities to grow. The sheer numbers in terms of potential purchasing power that these two economies together have is what drags them to us. That is why even though domestic incomes are dropping and unemployment is rising, multinationals are encouraged to invest in India and invest heavily. Companies know that if they can successfully leverage their international experience while at the same time adjust to local conditions India and China can rescue them from stagnation or even decline in their home markets.

Every sector in the country is in a nascent stage with potential for new entrants and ideas. While there are latent inadequacies in Indian infrastructure and decision making processes, the gradual opening up of the economy has given foreign companies time to study the market and the Indian customer. The young, upwardly mobile population ensures a market receptive to new ideas and brands. Unlike China, India has a stable political and social structure and have democratic institutions similar to the west. Thus engaging India makes not only economic sense but also strategic sense. The Chinese economy might be attractive for its size and efficiency but come inherent with risk. The Chinese model of huge investments in infrastructure and a controlled currency is untested and is considered unsustainable by many leading economists. India meanwhile follows a tried and tested model of organic growth both in infrastructure and in supply-demand growth.

If the Indian government can ensure continuity and consistency in reforms, there will always be companies willing to invest in Indian no matter how slow or regulated the reform process is. India represents a long term strategic investment to them. Thus it remains imperative that we take a slow and steady path to opening up the economy ensuring growth without effecting local industries. The opportunities globalization and the world economic system has thrown at us need to be utilized to solve our internal deficiencies. Corruption and infrastructure bottlenecks will have to be addressed.

They need us more than we need them. Something we would do well not to forget.

The politics of retail

The Indian government is today a minority. It's one major ally short of a simple majority in parliament. Two years into it's term, it didn't take any huge scandal or crisis to make this happen,  though there were no shortage of both,  but just allowing FDI in organized retail. How the times have changed.

True,  retail is an indispensable part of civil society and accounts for 11% of our GDP but it has never been a part of any five year plan or government scheme.  With 95% in the unorganised sector,  retail has been growing happily without any government intervention.  If there is demand, whatever it might be for, there's will be someone ready to sell it for a profit. Retail as an institution is easily far older than governments themselves.

When big Indian corporations came out with organized retail chains, there were but whimpers of protests. When full FDI was allowed in the back end, it barely made the papers. Why now this hue and cry against foreign investment.

Let us consider the various stakeholders involved one by one, the farmer, the shopkeeper, the retail employee, the customer, the country and the politician. Let us try to remove the hype created by the media and other political instruments and concentrate purely on the normal man's understanding of what is going on around him.

The common small farmer lives in a very micro level society.  Tell any farmer in India about any government initiative and his initial questioning will be limited to four basic questions. Will I lose my land?  Will I get more money for my produce? Will I get loans easily? Will I be able to work less? A positive answer to these questions and the farmer and family are happy. FDI as such will not be able to bring any change that Indian retailers haven't had the opportunity to provide.  The farmer really doesn't care if it's an Indian or a foreign company. Why should he?

The shopkeepers are the ones the media portray as the biggest losers. But are they themselves so worried? A normal kirana owner has the pulse of his customers. He has with him the best of CRM techniques in person to person interaction which no large retailer can compete with.  He understands that his share of the pie is large and growing enough to sustain him.  While the big players cater to the top 20-25 percent of the income pyramid,  he is the owner of rest of it.  While his customers might grow up to visit the nearest Big Bazaar,  there are enough growing up from below to sustain his shop.  McDonalds hasn't exactly destroyed the local tikki-waala has it. Growing congestion and rising real estate prices have already taken the rich metro customers out of his reach. It's again the politician and the trade unions that are doing his worrying for him.

The employee is happy. The unemployment is growing and the job market is not keeping pace.  Any new job opportunities are welcomed with open arms. The country has too many young skilled and  semi-skilled laborers to sustain everyday.  Foreign players are looked upon as saviors providing better pay and better working conditions. But considering the track record of major retailers like WalMart, they may be in for a shock.  Under more liberal labor laws,  retailers are notorious in the west for their treatment of employees. Expecting them to do any better here would be foolish.

The customer is ecstatic.  Rising competition and rising assortments can only lead to cheaper products and more variety.  The monthly grocery purchase now entails more than one option while products all over the world are available through multiple channels. Retailers are beginning to get more customers centric and customer satisfaction and retention are the new buzzwords. Foreign retailers used to serving highly demanding customers will surely bring something new to the table. The customer will remain the king.

The country really needs the confidence of investors. Terrible fiscal management and growing infrastructure needs has left the economy in dire need of foreign capital. FDI will increase FIIs boosting up the stock market as well as bringing much needed investment in infrastructure. More competition and efficient practices might drive down inflation giving the RBI more freedom to control our growing current account deficit. As the Kelkar report has put so explicitly,  growth is no longer an achievement,  it is a necessity our country needs to not collapse on the weight of its growing population. FDI across the board in all sectors previously protected is the need of the hour. We have a huge market. Now is the time to leverage it to fulfill the potential our country holds.

Last and unfortunately not the least are our politicians,  the policy makers.  The ones supporting FDI as well as the ones opposing it seem to have similar reasons and similar arguments.  In the game of politics it is easy to take a stand or raise one's swords on issues whose gestation periods are long and the benefits or losses immeasurable. Thus corruption or price hikes get sidetracked as they might fall prey to immediate action which no politician wants. FDI will be seen as a boon or a bane depending on which side of parliament you sit while larger issues can be swept under the carpet across the board. Sufficient loopholes have been kept for manipulations and the numbers game in parliament has got a safe issue to hedge its bets on. What else do politicians want.

Thus neither is FDI in retail going to usher in any golden age in the country nor will it cause any catastrophic collapse.  But as long as it makes economic sense,  it could benefit the population.  Whatever be the end result,  the politicians rest smug in the knowledge that the Indian will move on and survive come what may. 

Government v/s FDI: Who will win the battle??

“Govt notifies 100%FDI in single brand retail”- Economics Times, January 10, 2012.

This day shall be marked in the history of the Indian Retail Industry as the Golden day that promised to bring a swarm of dream luxury brands, which every individual yearns for. It brought a reason for the retailers to smile about with the opportunities bundled with the investment.

Then one fine day IKEA placed the “IDEA” on the back burner and Zara faced a road block. FIPB played a villain shattering the dreams of many “retailers to be”.  Government’s policy tantrums yet again disrupted the incoming beatitude.

                         

A lot has been said and nothing has been done so far. To sum it up, it’s just empty words and a huge outcry. The negative impact of FDI in retail on small retailers has been the major concern while rest everything has been neglected. The future retailers have been out casted from the entire picture. From a student’s perspective, its positive effects have been sidelined as FDI is supposed to bring a throng of job opportunities and a chance to work with the international biggies.

India needs to be investor friendly. It must find a middle ground for this issue. It is disheartening to see the blindfolded attitude of the Govt towards the positive outcomes that could be derived from the successful implementation of FDI in the sector. FIPB has refused to accept the Scandinavian furniture giant IKEA’s plea regarding relaxation of the 30% sourcing norm. China has been exporting to India in huge numbers. These imports have already killed millions of small enterprises across the country, and they don't bring FDI. In such a case IKEA which is making a legal entry into the country is not allowed to do so. FIPB has also rejected the Netherland based ZARA’s proposal to enter India with the brand name “Massimo Dutti” saying that the investment for opening the stores is being made by Zara Holding rather than Inditex, the owner of the brand while according to the FIPP rules the investment has to be made by the owner of the brand.

Multi brand retail chains like Walmart are waiting with their eyes wide open in hope and anticipation. With the approval from 11 states & Union territories, UPA Government still failed to gain the support and cooperation of its own allies.

Undeniably, the government is now seriously considering tweaking the definition of small and medium enterprises (SMEs) for giving a boost to single brand retail in the country. Aiming at bringing in more foreign investments in the country, the government wants to remove hurdles in way of such investments from across the sectors, including single brand retail. As per the present definition, all entities having investment of $1 million in plant and machinery would fall under the ambit of SMEs for the purpose of single brand retail. However, as the sector thrives, SMEs would grow and the $1 million definition would need tweaking.

As far as local retailers are concerned, breaking even has not been a challenge for them despite of the presence of the Indian retail giants like Big Bazaar, Reliance, ABRL etc. It is just a hype created by the government along with the opposition playing a spoilt sport. As for them, making a mountain out of a molehill and chanting a chorus of negativity has become a common phenomenon. But by doing this the Govt is subduing the advantages to be derived from the FDIs in the retail sector like the elimination of/reduction in the intermediaries’ cost, the benefit of which will not only be availed by the farmer but will also be passed down to the end consumer, more employment generation, growth opportunities etc. Also, The Economic Survey has pitched for allowing FDI in multi-brand retail, stating it could help tame food inflation and improve agri-commodity management.

The retailer’s cry for FDI and their longing to outshine others still remains unfulfilled. How long the lacklustre attitude of the Govt will last, is not known. But considering the current economic conditions with regards to the impact of the euro zone crisis, falling value of rupee and policy paralysis, one thing is for sure that FDI has become the Holy Grail for the Retail Fraternity. The hunt for which is on!!

ZARA: Trend Setter Turned Down

Zara, the flagship company of Inditex Group based in Spain has the famed story of successfully replicating the hot trends of the fashion industry and reaching the wardrobes of its customers in just 15 days. It is not an innovator which believes in creating fashion rather it is an early adopters. It prides itself in manufacturing 11,000 distinct SKU’s annually in about 4-5 weeks against the industry average of 6 months and bravely discontinuing it, if it fails to become the “HOT SELLING ITEM” in the pilot week.

“Government rejects Zara’s holding position in single brand retail” screamed a national daily, which stated the Indian government rejecting its proposal to set up a joint venture company holding 51% stake with foreign equity participation for single-brand retail trading of Massimo Dutti brand which incidentally is a subsidiary of the Inditex group. The reason given was the violation of a rule framed by the Department of Industrial Policy and Promotion (DIPP) under which an investor must own the brand it proposes to bring to India.

The news is surely giving sleepless nights to not only Zara officials, but also IKEA’s top management which is all buckled up to inject 10,500 crores INR in “Third world” countries like India. Can this mayhem be blamed on blurred policies of the Indian government, not only concerning FDI norms but multi layered taxes and nuclear policies as well? In the 2012 Union Budget, Pranab Mukherjee stated that foreign single brand and multi brand retailers have to source 30% and 75% respectively of their goods locally. But the Foreign Investment Promotion Board (FIPB) fails to realise that it is the policies of these globally renowned companies which have made them efficient. Zara buys its fabric in advance in prediction of forecasting trends. Much of its fabric is in greige form which is printed or colored to the desired effect, as when it’s needed. In a country where the lead time for the fabric to reach its factories is 30-60 days, it takes another 10-30 days to create the desired garment which would ultimately defeat Zara’s 15 day theory. Again, it has quality standards to adhere to for which Zara has a vertically integrated organisational structure.

The Indian government should clearly convey to these foreign companies that they have to change their vision, mission and corporate strategies to suit the Indian scenarios if it cannot change or clarify the policies it comes up with. But there is still a flicker of hope that Zara can convince the Indian government to bend its policies and continue to stick to its image of “THE TREND SETTER”.

The world retail industry is counting on it.