Friday, September 28, 2012

Why FDI Should be Matched by Domestic Retail Investments, in India?

There is a simple solution for the FDI issue that will win all Indians’ applause, which is about offering the remaining 49% to not a domestic business house, but to affected parties like kirana store owners, its employees, land owners, small suppliers, and local producers.   This plan will more than compensate all affected parties. Yet our leaders and economists remain myopic to this obvious solution due to too much textbook thinking. It is pathetic that such win-win strategies are never attempted or even experimented with. Is it too much awe towards Walmart and its ilk, or is it a lack of self-confidence in what is really India?

Dr. Raghuram Rajan is in news for clarifying that FDI is what we really need and not FII funds. Though not an earth-shattering revelation, it is the kind of fundamental fact that need to be reinforced every now and then by economy’s top honchos. Dr. Rajan’s point was clear - some sections of the media - obviously due to bureaucratic cues - were unnecessarily glossing over the Rs. 9000 crore foreign funds that swiftly came in in September, as a reaction of the economic reforms like FDI in retail and aviation, as well as the diesel price hike. But as India’s new Chief Economic Advisor to Finance Ministry, added, FII funds were relatively unsafe for the economy, as they can be pulled back any moment. But strangely enough, Dr. Rajan entirely missed another equally relevant point - that we are neglecting the power of Domestic Retail Investments.

Why FDI Wants to Enter India?

Obviously, FDI is not coming with a mission to improve India holistically. Companies like Walmart have their eyes riveted on their topline and bottomline, and not much else. India with its huge population and steadily increasing purchasing power offers chances to improve both. But apart from such apparent reasons, there are many  other unique attractions about India. Unlike China, the Walmarts of this world don't have a forced nationalization risk in this democratic country. And Indian demographics beat most BRIC nations on two counts - as the most youth dominated economy as well as the fastest growing middleclass segment. In short, even though India might have taken its own sweet time in deciding on FDI in multi-brand retail and other sectors, companies like Walmart stand to make windfall profits from India now.

How Our People Can Benefit From It?

Montek Singh Ahluwalia says FDI in retail will create more high-quality jobs. Agreed. Walmart is likely to pay much better than the kirana store owner. But will Walmart create as many jobs as all the kirana stores it will replace? Looks highly unlikely, given the high degree of automation and the thin margins with which Walmart operates. And what about the thousands of kirana stores that Walmart will cause to shut down? Wish Montek had mentioned more consumption of cement, steel, and other construction consumables rather than his silly direct job creation theory. So, what it boils down to is that, if Walmart is going to benefit immensely, and if we want our people too to benefit from it, we need to be doing what Walmart is doing, that is investing in multi-brand retail in this country.

Why Domestic Retail Investments Should Participate?

Today, FDI comes with a rider that 49% should be Indian owned. But that is not enough. If at all Walmart and its ilk are forced to take Indian partners, it will be from the Top-100 families, whom we call by names like Ambani, Tata, Birla, Mahindra, Mittal, Godrej, or Biyani. The rider is a great move to win the applause of these 100 families who dominate India Inc, but not from the vast Indian public. There is only one way for wider applause, which is to ensure social justice. Why is Walmart being opposed? Precisely because it will create tens of thousands of affected parties in the form of kirana store owners, vegetable stores, its employees, land owners, small suppliers, and local producers. So, what the government should be doing is not give 49% in a platter to the Ambanis or Biyanis, but ensure that this 49% is offered for investment to all the affected parties. Equity shares should be offered at par to these affected parties, as well as to local people, wherever the stores are coming, with both of them enjoying a privilege for first refusal. This is not an entirely new idea, but a modification of what renowned economist Dr. Vijay Kelkar proposed in 2010 for the disinvestment and privatization process, in which he demonstrated why strategic sale to an established business house is inferior to distributed ownership by retail investors coupled with professional management. Also, those who are being evicted off their land for such stores or projects, against their wishes, should be issued shares in such companies at reasonable discounts or free.

Is There a Catch?:

Of course there is. Most economists will cry hoarse that such a move will further weaken India’s attractiveness as an investment destination. Walmart too may cry, as they are notorious for entering countries only on their terms. Agreed that India is not a very attractive investment destination compared with Singapore, China, or Brazil. But that is comparing apples with oranges. For instance, with 40% of our citizens living in abject poverty, we have much more at stake. Also, we are no Singapore, where government runs on dictatorial-style executive decisions. At the same time, we are much more attractive than all these countries due to our vibrant democracy, anti-nationalization guarantees, youthful population, exploding middleclass, and of course, as the second largest people on this globe. If our people and their leaders have a will, we can also transform ourselves on the transparency front, which will be an added attraction.

Walmart India Stock will Do a Reliance or Infosys:

Maybe that is an understatement. If Walmart India is listed, its stock may zoom more than any other stock in any other nation in any other time. Let the affected parties have the chance to invest in such a venture. Such is the potential of this nation’s people and the potential for such businesses in this nation. Too bad if Walmart doesn’t want to participate through such a structure. That is, too bad for Walmart. Because, the dynamic nature of international market economics would ensure that if Walmart doesn’t, somebody else will. A Tier-2 player or a Tier-3 player. Or a new player. Or a domestic player. Let us learn to attract investments on our terms, fair enough terms. Because, this is about our home.

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