Goodbye 2011 - The D Year

|   Debt   |   Default   |   Downgrades   |   Demonstrations   |

|   Drama   |   Destruction   |   Death   |   Disasters    |

 

2011 has been a busy year for news agencies with the incessant newswire keeping the staff over-worked and printing press running overtime. The year brought hope and marked new beginnings for some, but for many others it brought destruction and loss. So it was no surprise that as the New Year dawned upon us, some of us drown ourselves in celebrations, while others lament the loss of their loved ones. I wanted to do a piece before the 2011 finished, looking back at the year’s major events. But then halfway through it, I noticed that TV channels, newspapers, magazines, etc were all doing it anyways. So I scraped that draft and decided to look at the bigger picture instead. I wanted to reflect on the broader themes instead of looking at individual events in isolation. After all, what’s the point if we cannot connect the dots right?

Looking back, one of the 1^st things that comes to mind is the frenzy of protests all round the world, throughout the year. The seeds were sown in Tunisia in December 2010 with the suicide of Mohamed Bouazizi, a jobless graduate turned vegetable vendor. This germinated into a revolutionary wave of pro-reform protests led mostly by youth demanding an end to autocracy and seeking political freedom across the Arab World. The movement, known as the Arab Spring, toppled governments in Tunisia, Egypt, Libya and Yemen and saw dictators ousted and killed. But the Arab World wasn’t the only region shaken by such civil uprising. Sick of grave unemployment, welfare cuts, economic inequality and political corruption, citizens took to the streets and resorted to violent protests in the UK, Italy, Spain and Greece too when the governments of the debt-strapped European countries announced their the austerity plans to tackle the economic slump. The uprisings in the Middle East and Europe inspired Canadian activist group Adbusters to initiate Occupy Wall Street (OWS), a movement against corporate greed and targeting primarily the financial sector. In less than a month, ‘Occupy’ protests had taken place in more than 80 countries worldwide using the slogan “We are the 99%” referring to the inequality in wealth distribution between the top 1% income earners and the other 99%, and indicating that most people end up paying the price for mistakes made by a small minority of people.

A similar sense of indignation had also swept other parts of the world. In India, thousands of demonstrators turned out to support the India Against Corruption campaign, led by social activist Anna Hazare. Their mighty neighbors China too saw public demonstrations as well as online protests sparked by a factory accident, and a high-speed-train crash. Meanwhile in Chile, students and trade unions marched the streets demanding higher social spending from their governments. Israel too saw protests against higher cost of living. If those weren’t enough, Russians too were seen protesting for political reforms, irked by corruption, election fraud, and political opacity.

While the year 2011 will be remembered, much like 1989 (Think: Berlin Wall and Tiananmen Square Massacre) for civil disobedience, it also ought to be remembered for its share of natural calamities. The year’s devastation started in Australia, Brazil and New Zealand. Come March, Earth’s fury was directed towards Japan as a magnitude 8.9 M_L earthquake triggered a 23-foot tsunami in the Pacific coast of Tohoku. What’s worse, it caused the cooling systems at the Fukushima Daiichi Nuclear Power Station to fail, thereby causing an explosion in 2 reactors. With 16,541 people dead, thousands still missing, and more than 1,200 aftershocks, the quake practically destroyed Japan and left behind a damage repair bill of over $300bn (excluding nuclear plant damage estimates). This was by far the single biggest natural calamity of the year, and an event that would not be forgotten for a long time. I have compiled a list of some of these calamities so that you get an idea of what Mother Nature was telling us throughout 2011.

1. 4000 people still missing
 2. Estimates exclude Nuclear Plant damages
 3. 133 critically injured
 4. Over 100million Yuan was allocated for repairs and relief efforts by government 
     agencies, but exact cost of damages unknown.
 5. Burma, Thailand, Laos, China and Vietnam
 6. 30 people still missing
 7. Philippines, China, Vietnam, Laos, Thailand
 8. Micronesia, Philippines, China, Japan, North Korea. South Korea
 9. Philippines, Taiwan & China 
10. East coast of USA, Canada, Bahamas, Dominican Republic, Haiti, Puerto Rico
11. USA, Lesser Antilles, Canada, Europe
12. Combined deaths and damages
13. Expected to cross 2,000 as more than 376,000 people have been displaced in 
      the evacuation process.
14. Additional Damages post the Sept-Oct Typhoons
15. Damage Cost estimates not available yet

All in all, the 2011 Atlantic hurricane season, which lasted from June to November, produced 20 tropical cyclones, 19 tropical storms, 7 hurricanes, (3 major Category 3+hurricanes). Killing more than 100 people, the total damages exceeded $1.2 billion. Meanwhile, the 2011 Pacific Typhoon season (April-December) caused 21 major storms, 8 typhoons, killed almost 1800 people, and left a damage repair bill of over $ 5 billion. Similarly, 2011 Pacific Hurricane season (June – November) saw 11 storms and 10 hurricanes, killing 42 people, and cost about $ 200 million. It’s astonishing that these numbers are only representing seasonal calamities. Instances such as those in Japan’s Tsunami and Thailand’s monsoon floods are non-seasonal. One can only guess the estimates of losses arising due to supply disruptions in, for example, Hard Drives (Thailand) or Car Parts or Electronics (Japan). Another event was a volcanic eruption in Chile (June), which caused an Ash-cloud in South America, and disrupted aviation across the Southern Hemisphere. While no fatalities were reported, estimates of notional losses, to airlines, to tourism and business dealings have been in the billions too. Other notable mentions include floods in Cambodia – 250 casualties, economic cost of $150 million – and Vietnam – 120 casualties; economic cost of $130 million – and finally, multiple earthquakes in Turkey, which killed 650 people, and caused about $ 80 million worth of damage.

Apart from mass Dissent, Demonstrations and natural Disasters, 2011 will also be marked for some notable Deaths. So I made a collage of the 9 personalities whose deaths made headlines, not only in their respective countries, but also across the globe. This includes names of 2 geniuses from the computing world Steve Jobs, the co-founder of Apple and Dennis Ritchie, the creator of computer programming language “C”, and the “Unix” OS. Also in the list were a couple of villains of the world, Osama Bin Laden, leader of the terror group Al-Qaeda, and Libyan Dictator Muammar Gaddafi. Among the national leaders who died in 2011, two that would stand out are North Korea’s Supreme Leader Kim Jong Il, and Czech Republic’s 1^st President, Vaclav Havel. In the world of entertainment and showbiz, notable personalities that left us included actress Elizabeth Taylor, and singer Amy Winehouse. Distinguished Indian spiritual leader, Sathya Sai Baba also demised this year.

 

The year 2011 also saw some other important events unfold. But instead of writing more ‘briefs’ about them (do you really want to read more?), I thought I’d made some more collages and make this post a bit more pictorial. These included events such as:

• British Royal Wedding
• The Bunga-Bunga Parties
• News of the World Hacking Scandal
• Cricket World Cup (Winners: India)
• Rugby World Cup (Winners: New Zealand All Blacks)
• Terror Attacks in Norway (July) & India (Mumbai in July and Delhi in September)
• Worsening of the European Debt Crisis
• S&P Downgraded USA's Credit Rating from AAA to AA+ 
• Bankruptcy of MF Global 
• Legal battle against Extradition of Wikileaks' Founder, Julian Assange to Sweden (Accusation: Sexual Assault)
• 1^st ever Donor-less Organ Transplant using Stem-Cells (Sweden – synthetic windpipe transplant) 
• The World Population Reaches 7 Billion
• Spain's Basque Separatist militant organization, the ETA declares end to 43 years of violence 
•  Formal End of the Iraq War

I think it would be fair to say that 2011 was undoubtedly an eventful year. Considering that the year precedes the apparently apocalyptic 2012, the events would hardly come as a surprise for those who advocate Mayanisms, or any other Doomsday Theories or Pseudosciences for that matter.

Christmas at Wall Street

Here is a lovely piece by a Forbes reporter, Chris Barth. 

I loved it and thought I'd share it with you all. I hope you all like it too. 

The link to the actual page is at the bottom of the post.

Twas the night before Christmas, when all through Wall Street,

Not a guru was stirring, ‘mongst the trading elite.

The stocks were all laid on the exchange floor with care,

In hopes that a bull market soon would be there.

The brokers were nestled all snug in their beds,

While visions of stock gains danced in their heads.
Readers in ‘kerchiefs, and I in my cap,

We all settled our brains for a long winter’s nap.

When out on the Street there arose such a clatter,

I sprang from the bed to see what was the matter.

Away to the window I flew like a flash,

Tore open the shutters and threw up the sash.

The moon on the marble of the NYSE,

Gave the lustre of mid-day to the powers that be.

When, what with my wondering eyes should I spy,

But a mischievous stockbroker yelling, “Sell!” and, “Buy!”

With his sly little grin, he looked quite like trouble,

I knew in a moment it must be a bubble.

More rapid than eagles his stock picks they came,

And he whistled, and shouted, and called them by name!

“Now Groupon! Now, Zynga! Pandora and LinkedIn!

Someday maybe Facebook for money to be sinked in!

To the top of the market! To the top of the Wall!

Now buy them up! Buy them up! Buy them up all!”

As dry leaves that before the wild hurricane fly,

When they meet with an obstacle, mount to the sky.

So up to IPOs the troubled stocks flew,

Into portfolios of junk bonds and ETFs too.

Just then, in a twinkling, I heard in the dark,

People shouting and drumming in Zucotti Park.

As I drew in my head, and was turning around,

Down the chimney a Stock Market Santa did bound!

He was dressed all in red, from his head to his foot,

And his clothes weren’t tarnished with ashes and soot.

A bundle of optimism he had flung on his back,

And he looked like a peddler, just opening his pack.

His eyes-how they twinkled! his dimples how merry!

His cheeks were like roses, his nose like a cherry!

He started to share his good will and cheer,

Predicting a happy and healthy new year!

“The stocks will go up, with very few laggards,

You’ll probably land a few dozen ten-baggers!

Diversify, study, and keep your course steady,

Within a few years, retirement funds will be ready!”

His prediction was sweeter than fresh maple syrup,

No hard landing in China! Forget about Europe!

I was so filled with cheer I was nearly immobile,

We could recoup our losses from trusting MF Global!

He spoke these few words, then went straight to his work,

And picked all the winners, then turned with a jerk.

Laying his finger aside of his nose,

And giving a nod, up the chimney he rose!

He sprang to his sleigh, to his team gave a whistle,

And away they all flew like the down of a thistle.

But I heard him exclaim, to his sidekicks, the elves,

“Here’s to happy portfolios in 2012!”

Here is the link to the original article.

FDI in Indian Retail II

In my previous post on FDI in Retail, I kept the focus limited to numbers & stats, mostly formulated by consultancy firms. The people behind those projections happen to be some of the best brains in our country (handpicked by their employers at IIMs or Ivy League universities). So their analysis in my opinion carries more reliability than most government officials, who are either uneducated (I did not use the word illiterate because the definition of a ‘literate’ in this country is laughable) or too ignorant, or have vested interests (the most probable case). If questioned about their stance on FDI, or asked to explain that stance, they get agitated but fail to provide even one plausible implication of their stance. Sad but true!

So far, the critics of FDI have given reasons along the lines of the following:

• Kirana shops will close. International sourcing will destroy Indian MSMEs too. This will cause unemployment.
• Farmers will get exploited.
• International firms (with deep pockets) will form monopolies and manipulate prices. Hence, the consumers will also be exploited.
• The Gandhi family wants to bring in FDI to benefit their “foreign cronies”
• The manner of the policy announcement was “inappropriate” since the Congress did not do adequate “consultations” with the allies and opposition parties. 

However, if anything, these claims have been nothing but populist in nature and their ruckus so far has gained them hefty support from the poorly educated vote-bank, which is not expected to know any better. Some political parties and their supporters seem to be too preoccupied with the Luddite Fallacy, which simply put, is a belief that labor-saving technologies will cause unemployment. As you can tell, the problem with this is that nobody (neither individual nor nation) can progress, let alone innovate, holding such a premise as core value. So it comes as little surprise that when the Prime Minister made an executive decision, the opposition created a pandemonium, both in parliament and on the streets, and forced the government to suspend the proposal in the name of democracy.

Now then, I doubt I need to remind you of how Protectionism hurts the economy of the country that imposes it. Not only does it disincentivize competitiveness and specialization, thereby deterring potential exports, but it also supports incompetent businesses. One does not need to look too far to validate this as our own history offers enough pointers. Businesses that were protected from foreign competition eventually got complacent and did not bother to innovate to stay competitive. Such complacency sets in to all businesses that are protected as they do not feel threatened by competition and hence they become exploitative in nature themselves. I’m sure you can think of a few such businesses yourself. Personally, I am an advocate of the notion that competition brings out the best of any business, and those that get wiped out were obviously not competent enough. Organized retail – though currently only 6% of the total retail market – is here to stay and is expected to rise to 21% over the coming years. This means that the Kirana shops will not be facing competition for the 1^st time.

In fact, judging by the VAT collections of the kirana stores between 2000 and 2010, which increased from Rs 3300 Cr to Rs 8300 Cr, one can only say that they have done well to hold their place despite the emergence of organized retailers (See graph). If anything, this would be another opportunity for them to cement their place in their neighborhoods. How? Consider this example of this shopkeeper in Delhi :

In 2009:

• 500 sq feet store with typical kirana layout and design, open 16 hours daily
• Had 4 employees (2 sons and 2 hired), and total of 448 employee hours every week (4 employees x 16 hours x 7 days)

In 2010, it was time to innovate (& renovate) :

• Repainted walls, added 3 shelf racks, 2 fridges, and 1 air-conditioner
• From Kirana format, it migrated to the self-service format
• Renovation Cost = Rs 90,000 & Time = 45 days

In 2011, post renovation results:

• 80% growth in sales
• Employee hours reduced by 25% to 336 hours per week (2 employees could now work part-time 8 hour shifts)

This is a true story of a kirana shop embracing change, modernizing, and as a result, enjoying higher sales and lower costs, which translated to better profit margins. An average kirana shopkeeper (working in meager conditions) does not take home more than Rs 10,000 – 12,000 per month. So when his sales nearly doubled (for the sake of simplicity, let’s assume that the decline in wage-bill was equal to the rise in his electricity bill), his improved profits (and work environment) could go a long way in improving his livelihood. He could potentially scale up his purchases and hence improve his bargaining power; perhaps he could eliminate an intermediary, thereby further lowering his costs. What he actually does with that extra income could be anybody’s guess, but the key takeaway here is that competition brought the best out of him. Had there been no pressure from bigger and fancier stores opening around Delhi, he might never have bothered doing what he did.

Next, I want to draw your attention to the graph. It is a comparison of the rise in CPI (Consumer Price Index) in 6 cities between 2000 and 2010. As you can see, cities with more organized retail – Mumbai, Hyderabad and Delhi – had faced less inflation (measured by change in CPI) compared to other cities – Amritsar, Kanpur and Nagpur – where retail is relatively less organized. This is essentially because organized retailers have bargaining power that individual small shops don’t. And while the scale of our domestic organized retailers is not very large, it still managed to keep inflation significantly low. Now, if, or when, the government’s better sense prevails and FDI is finally permitted, the inflation will be even lower.

In my last post, I already highlighted how organized retail (with FDI) would bring superior scalability, eliminate unnecessary intermediaries, and establish a high quality back-end infrastructure of international benchmarks. One thing I would like to add to that list is that it would lower Shrinkage Cost, which is the cost of slippages such as employee thefts, vendor faults, administrative errors, shoplifting, etc. This, in case of India is as high as 4% of total sales (read: losses) compared to a benchmark of only 1.5% globally. Furthermore, According to Technopak, while Indian retailers currently hold their inventory for an average of 128 days, their foreign counterparts hold their inventory only for 38 days because of their ability to source directly from the producers. That statistic alone shows that their efficiency in inventory management is 300% higher. Statistics aside, foreign retailers will also instill professionalism in their dealings (paying the suppliers on time, no worker exploitation), and inculcate a strong work culture benchmarking best practices.

According to the DIPP, India produces about 180 million tons of fruits and vegetables, but has a cold storage capacity of only 23.6 million tons (5,386 standalone units). That is a deficit of about 87%, and according to CRICIL causes losses worth a whopping Rs 10,000 Cr annually. What’s worse is that more than 80% of that cold storage capacity is wasted on potatoes alone. Sadly, the fact of the matter is that currently, India is relying on infrastructure that is outdated by decades. It does not have a proper logistics network, but just a number of warehouses and transport offices scattered across the country. As the country (and its citizens) develops, it is going to need adequate infrastructure in place to facilitate its growth ambitions. The Planning Commission of India estimates that India needs an investment of Rs 60,000 Cr (about $13 billion) in its agricultural infrastructure alone. Only way that this is possible is if the government puts its politics aside and allows FDI in multi-brand retail.

Let me give a scenario where the Indian retail industry is protected and FDI is not permitted. The outcomes of this would be actually very undesirable. Lets take a look:

• No Foreign Capital Inflow – With no inflow of foreign capital, the Rupee will remain weak for the foreseeable future and our expensive imports will continue to exert inflationary pressures.
• No Technological Breakthrough – This, in my opinion, is more important that inflows of capital. I already spoke about these so I will not repeat myself, but I will remind you that the value that the likes of Wal-Mart and Tesco will bring in technological knowhow would be priceless. While we tout about our software exports, it is crucial to realize that we lag far behind the world in actually adopting some of those technologies.
• Slower Job Creation – Since there will be no FDI, the growth in organized retail will come from our incumbent companies. But with business confidence so low, corporate balance so leveraged and the cost of credit (interest rates) so high, the growth is going to be much slower. This means that fewer jobs will be created than otherwise.
• No Infrastructure Development – I think it’s about time we smell the coffee and admit that the Government lacks the ability (and perhaps political will too) to eliminate infrastructure bottlenecks that cost us over 2% of our GDP every year. For those who think I’m being over-cynical in this regard, just compare the quality of roads that have been built in the last decade (try to focus on the damage) with the quality of infrastructure built over 60 years ago and is now probably declared heritage property (compare the damage). The potholes, the railway accidents, the filthy streets, and the overall neglect speak for themselves.

By now, I’m sure you get the picture. However, before I conclude, I would like to make one suggestion on this policy. That is to increase the 30% local MSMEs sourcing requirement to 50%. This is because giant organized retailers source about 30-40 percent locally anyway in order to achieve cost-efficiency. Furthermore, it makes little business sense in trying to sell grainy Chinese rice to an Indian basmati-loving consumer base. Hence, by imposing a local sourcing target of only 30%, the government is not doing any favors for Indian MSMEs. Secondly, I hope the Indian government doubles the definition of MSMEs from an asset base of Rs 5cr ($1million) to Rs 10Cr as overtime, in order to be able to meet the large demands of the retailers, the MSMEs will need to increase capacity and will then no longer remain in that MSME category since their asset base might exceed Rs 5 Cr. Moreover, opening up the multi-brand retail markets to foreign firms will also require India to rethink about the legal infrastructure – something else that India needs desperately since our legal system is very outdated. Issues such as taxation, labor laws, procurement laws, and food and safety standards will all have to be revisited. A nation with an economy developing at such rate needs a legal system progressive enough to match it strides.

Finally, the Indian economy grew at an aggregate of 105% between 2005 and 2011. Today, rural income is rising, and consequentially rural spending (demand) is rising. The rural demands in the same period (2005-11) grew by 35% for milk, 70% for vegetables, and another 70% for packaged and processed food items. This further shows that not only are kirana shops going to stay, but also that removal of intermediaries will give the farmers and other rural communities more disposable income will then improve the standard of living, and hence the social fabric of those communities (a positive externality). This however has one more implication. As these rural incomes rise, and the villages and rural areas are developed, new towns will be formed. Furthermore, there is already intense migrating from villages to big cities already. This will then make the procurement and logistics of food across the country a very complex process. Hence, in order to avoid chaos, adequate investments and careful planning needs to be put in place before it gets too late. FDI will bring in both the resources needed (capital and expertise) to do just that, and should therefore be seen as a boon to our supply chain, and hence, to our infrastructure thus the entire economy.

Concluding this post, I would only say that FDI in retail is something that India needs (almost desperately) and hence should embraced with both arms instead of resisting. It could add about 4-5% to our GDP every year. Take a look at the chart above. It shows the breakdown of the costs a consumer pays for tomatoes. The farmer gets only 30% of the final price, the retailer takes 21%, and the remaining 49% is distributed among other intermediaries. Considering that organized retailers could source directly from the farmers, how much value do you now think the intermediaries add?

A study by ICRIER (Indian Council for Research on International Economic Relations) came up with some interesting insight.

• The average distance from a consumer is 1.1km for a kirana store, but 2.6km for an organized retailer. In fact, 64% of the smaller kirana stores well less than 500 meters away.
• 35% of the kirana stores recognize their regular customers and give them credit. In fact, credit sales are makeup 22% of their total sales. These kiranas also know their customers’ tastes and can follow the changing tastes.  

Take a look at the graph below. It shows what FDI Liberation in the Retail Sector did for China. Why China? Because of the similar population size, and traditional agricultural economic roots. But the similarities end there. Anyways, the India-China comparison can be left for another day. For now, I've only brought this up to raise a simple question. Can liberating FDI do the same for Indian Retail sector? 

Let me give you an example. You realize that you are out of bread or eggs one morning. How would you make that purchase? Would you go to the big retailer in your city, or just downstairs to the nearest kirana store? What if you realized you did not have change? Or were crunched on time? In case you didn’t realize where I am going with this, I’m only trying to remind you that your neighborhood kiranas have a place of their own in the Indian retail landscape and the likes of Wal-Mart, Tesco, Carrrefour SA, etc. cannot take their place. If anything, it is 7-eleven that we should be worried about!

FDI in Indian Retail I

After 2 decades of procrastination, it seemed that India was finally opening up its underdeveloped retail market to Foreign Direct Investment (FDI). The landmark announcement  was  made  on Nov 24^th, when  the  Union  Cabinet  cleared the bill allowing 100% FDI in Single-brand retail (think: IKEA, LV, Apple, etc.), up  from 51% as it was until now. The announcement also  included a controversial  decision to allow 51% FDI in Multi-brand retail (think: Wal-Mart, Tesco, Carrefour, etc.).

While FDI in Single-brand retail segment has been welcomed, Multi-brand segment has caused hysteria in the Parliament, and cascaded on to the streets with retail stores across the country closing down for a day in protest against FDI (protesting seems to be the biggest trend of the year 2011). These strikes were organized by wholesale traders’ unions and other middlemen in the retail supply-chain, the biggest losers if the likes of Wal-Mart & Tesco come in. The non-functioning parliament cost the nation Rs. 1.5 Cr (15 million) per day, but the opportunity cost of loss of productivity & the cost of impairment of India’s reputation are anybody’s guess. The Prime Minister’s executive authority has now been questioned too. As his Congress Party pitched the idea to other MPs and citizens citing benefits like job creation and modernization of Indian retail, they did not get any support even from their own allies, let alone the opposition parties. The naysayers’ argument was that FDI in Multi-brand retail would put millions out of smaller shopkeepers (kirana shops) out of business, and also that international giants will form monopolies and exploit farmers.

Why would anyone in their right minds participate in such folly? Is it confusion caused by political noise? Or is it ignorance that’s fueling such dissent? Don’t people know better? Do they lack independent judgment? I think it’s absurd that people protest against something that they would actually benefit from. So in this post, I will share my views on the matter. As you can probably tell already, I not only support it, but also encourage it to be rolled out ASAP. I do think that a few tweaks should be made to the finer print. But before l share my views, let me list down some of the features of what the Government’s proposal says.

Salient features of the Multi-brand Retail FDI :

1. There has to be a minimum investment of $ 100 million.
2. 50% of the total investment has to be in back-end infrastructure.
3. Stores are permitted to open only in cities with a population of at least 1 million (10 Lac) people.
4. At least 30% of manufactured / processed products must be sourced from Indian MSMEs.
5. The government retains the right to be the first to source agricultural produce.
6. The Bill is just an enabler; it is essentially up to individual states to allow or disallow the retailers to open shop.

Salient features of the Single-brand Retail FDI :

1. Brand must already have presence in other countries too.
2. 30% mandatory sourcing from Indian MSMEs.
3. Must be branded during manufacturing.
4. Investor must be Brand Owner, and not a franchisee or a regional license holder.

At this point, allow me to throw some light on the situation. The backdrop has been that of a global slowdown, with Indian government being in the news for all the wrong reasons, ranging from scams to policy paralysis. With painfully high inflation, stunting economic growth and a weakened Rupee, permitting FDI was the Indian government’s stimulus package. Here’s how. Firstly, it attracts long-term capital into India which is both, less speculative and more productive in nature. Such capital investments in India (by both, international and domestic businesses) had declined recently. Secondly, this move would have brought technological knowhow and spur backward integration in organized retail in India. This would lead to drastic improvements in supply-chain infrastructure, especially in the domain of perishable goods, by replacing intermediaries who do not add any value with those who do. Before you jump to conclude that intermediaries are not being removed, but just replaced, let me explain what I mean. Consider the following numbers:

• Currently, there are about 5-7 intermediaries between the farmers and the retailers. This causes the price of vegetables and fruits to increase multiple folds. For instance, potatoes cost only Rs. 2/Kg in Nasik, Maharashtra (closer to the farms) but by the time it reaches New Delhi, consumers pay Rs. 18/Kg for it. That is a 9-fold price difference, and neither the farmers, nor the customers benefit from it.
• About 40-45 % of the perishable food produce gets perishes before even making it to the marketplace. This shows the value-destruction of the current intermediaries.
• According to rating agency CRICIL, India’s organized retail loses Rs. 10,000 Cr ($ 2 bn) annually due to wastage, mostly of perishable products like fruits, vegetables, fish, meat & poultry. While 15% of these losses occur at the farmland itself, another 25% is lost during transportation.
• The ratio of traders to actual retailers is 0.001. This means that for every 1000 retailers, there is only 1 trader. So the argument that single stores, or (Kiranas) will shut is flawed, and the number of traders who lose jobs is overhyped too. The intermediaries (about 15,000 currently) won’t be left unemployed; instead, they will get new jobs that actually add value in the supply-chain. Direct sourcing from the farmers can reduce supply-chain costs by 10-15%.
• About 85% of all farmers own only about 2.5 hectares of land or less. This gives then no bargaining power, and they end up getting exploited by the agents. Also, they are not working on a contract-basis, but on a contact-basis. Hence, they have no defense against current exploitation either. On the other hand, for example, Tata Chemicals helps the farmers working with Trent (contractually of-course) in assessing their land, and recommending the most suitable fertilizers and other technologies that could help farmers get a higher output from their land.
• According to consultancy firm A.T. Kearney, organized retail is currently only 7% of the $435 billion (approx Rs. 21 Lac Crore) Indian retail market but is expected to rise to 21% within the next few years. Food accounts for 70-80% of this. This is led by a consumption class of 400 million people with rising disposable incomes, and a steady rate of urbanization. 

Considering the above numbers, the case for organized retail is self-imposing. Indian conglomerates such as the Tatas, AV Birla, Reliance, etc have already been trying to strengthen their foothold in the Indian organized retail market. While they and other domestic players like Bharti, Future Group, etc. are already trying to eliminate the intermediaries, their scale of operations is not significant enough to bring about a substantial change in the condition of the farmers, or curb prices on a national scale. Furthermore, they lack adequate experience and technical knowhow in the retail domain to introduce any breakthrough innovations. The international players, on the other hand, can leverage their experience to bring the much needed reforms in the Indian supply-chain network by innovating logistics, introducing cold-storage systems, food-processing, IT systems, etc. 

Thirdly, Micro & Small-Scale Enterprises (MSMEs) will have a direct market to sell to and therefore will reap benefit similar to the farmers. In fact, the challenge for them will be to scale up their operations to meet the demand of these organized retailers. In such a scenario, they too will ramp up production scale and hire more workers. Some might even innovate and adopt newer technologies, thereby generating a larger positive spillover effect in their community.

The fourth benefit of FDI in retail will come in the form of a positive externality of making our workforce more employable. At present, several employers often complain of India’s current workforce lacking several key skills and hence being unemployable. Many workers in the current retail sector will not lose jobs like the politicians have been suggesting, but instead, be hired for their experience & understanding of the Indian consumer, and get trained for the new retail landscape. According to reports from the consultancy firm Boston Consulting Group (BCG), organized retail could right away create about 10 million jobs – 4 million direct and another 6 million indirect jobs. It would generate additional incomes of Rs. 73,000 Cr (approx $14.6 billion), and consumers would save about 1.5 Lac Crore (approx $31.25 billion) annually in their shopping bill. However this is only possible if significant scale is achieved and technology is applied, which is only achievable by allowing FDI in Multi-brand retail. The illustration below shows the current employment generated by Retail trade in some cities. These numbers will only grow post FDI reforms.   

These are just some of the more obvious benefits that we can foresee already, and I am sure there are more too. But there’s more to the retail FDI story than just the numbers I presented. I will do a follow-up post on this topic highlighting the bigger picture, and state my case as to why I feel FDI is going to benefit India. Until then, I leave you with this Illustration which appeared in Hindustan Times, showing how some other countries have opened their doors to FDI in their Retail Industry.