Saturday, September 22, 2012

My Newspaper Vendor and FDI in Retail...

Today I again got to see my Newspaper vendor of over three years, after more than six months gap!

He has got used to being my vendor so much so that he doesn’t even consider it necessary to visit me and collect the payments on a regular basis.  That always created a problem for me since I have to keep the amount in cash with me all the weekends, expecting him to come for collection.  He of course, wouldn’t accept cheque payments.  I was however, willing to bear this inconvenience because I am generally a loyal customer who hardly changes his suppliers or brands unless I have compelling reasons to do so!

Of late, he has been giving me a rather very compelling reason to change him! He used to supply the newspapers at around 8.00 am on all days. I adjust all my morning chores so as to be ready by that time so that I get at least 50 minutes to read my papers.  But for the last one month, he started supplying the papers at around 8.30 and some days it was only supplied after I left home at 9.00.

Two things I hate in my life are getting up in the morning even one minute earlier than what is really necessary and stepping out of home without having read the day’s newspapers!  In this world of instant messages and live news, who wants to sit and read a newspaper in the evening? By then the entire focus of attention would have changed to new breaking news.

Finally, I decided enough is enough and prodded our security staff to find me another supplier.  They found a guy who was willing to supply the papers by 7.00 in the morning.  It was too tempting an offer to which I immediately latched on to. He began supplying from the very next day and I requested the security to inform my existing vendor to discontinue.  I got two sets of papers for a week, before the old guy was finally conveyed with the message to discontinue! 

He met me in the morning today and tried to promise to mend his ways.  I conveyed my helplessness now that the other person is supplying too.  Finally, he grudgingly agreed to discontinue the supply and also promised to give the account and collect his dues in couple of days! Meanwhile, I got to know that the new vendor is now supplying to many more houses in our society, who were equally miffed with the existing vendor!

Have I done a mistake by changing the vendor? Have I taken away the right to livelihood of that vendor when I brought another vendor in his place?  The fact that this new vendor has not only got my order but also orders from many others in my housing society, since his timing of supply is more suitable to them as well, aggravated the loss of the previous vendor. 

My need to get the service on terms suitable to me, or his right to continue getting his business- which one should get preference over the other?  To me the answer was obvious!  And to my simple mind, same logic applies to all other businesses including multi brand retail as well!

All these years, this vendor has enjoyed monopoly in distributing newspapers within our Housing Society and has become complacent in the absence of any competition. When it was not convenient to him to supply the papers by usual time, he just changed the time of his supply, not making any effort to meet the requirements of his customers!  Now that there is a competition, he is willing to make that extra effort to meet his customers, find their needs and adjust to that.

This has been the situation in almost all businesses in India prior to the liberalisation and globalisation measures initiated in 1991.  We needed licenses from Government to commence any business.  Licenses were refused on the ground of increasing competition and capacity! Businesses thrived under the protection of government and politicians without any competition whatsoever.  There was no need to adjust to market conditions or innovate or increase efficiency in operations.  However, with opening up of the economy and the partial removal of the License Raj, competition began affecting the existing businesses.  We heard loud protests from Left and Right wings of political spectrum in the name of ‘Anti- neo colonialism’ and ‘Swadeshi’ respectively.  In short, they all wanted to continue the protection enjoyed by Indian businesses at the cost of economic growth and efficiency.

We all know what followed. At least those who are beyond their teenage must know the revolutionary changes and growth those simple (half-hearted) measures brought to India, that India came to be discussed as the new economic super power.

Even if they don’t agree to the economic growth etc, at least they would know the difference in terms of availability of choices, be it in TV channels, mobile phone services, airlines, shopping malls, eateries or many other such areas that affect their everyday life! 

The competition and infusion of foreign capital has not weakened Indian economy or Industries.  It only weeded out unfits and made rest of the players stronger

In continuation of the liberalisation measures, India had opened up its multi brand wholesale sector for foreign investment.  As a result, multinational companies like Walmart, Carrefour, Metro etc have already registered their presence in many Indian cities by way of wholesale Cash & Carry operations.  However, efforts by successive governments (which included both NDA and UPA) to open up multi brand retail sector was always resisted by the political parties, keeping in mind the protection of nearly 40 million people working in these neighbourhood shops, also known as Kirana shops.

As a result, these the retail trade in India, which account for nearly 15% of GDP, has failed to change according to the time by taking full advantage of the growth of economy.   Except for a minute portion of new generation enterprising traders, most of the shops remained in the age old mould, making it a very inefficient sector.

Have you ever considered, why we have high inflation (significantly contributed by fruits, vegetables and other food items) on the one hand and farmer suicides on the other? It simply means, the high prices that consumers are forced to pay for these products are not reaching the producers, i.e., farmers.  A lot of it is being sucked out by the long chain of middlemen who thrive in the absence of organised markets for agricultural produce.

FDI or Foreign Direct Investment (which is in fact different from the entry of multinational retail chains) in multi brand retail sector or even entry of the Walmarts of the world is not going to make any significant change in the sector, at least for many years in the beginning; much in the same way as the super malls have hardly affected any small shops in the neighbourhood.  

No existing shopkeeper is likely to lose his business for the simple reason that he will be catering to a different set of consumer needs like proximity, small quantities, credit, home delivery etc.  So long as they provide these niche value add, not much diversion of customers will take place from neighbourhood store to large retails shops.   As an aside, if all the supporters of the political parties who are now opposing the FDI policy, remain true to their ideology and keep away from the ‘MNC chains’, the small shop owners have nothing  to fear!

The new large stores or chains will only partly absorb the growth opportunities provided by an estimated 12 to 15% year on year growth! At least for now, not more than 53 large cities (with more than one million of population) and 5 or 10 other cities that may be notified by states and UTs with no city having more than one million population will be eligible to have these stores!

What these chains will make, in my opinion is a cultural shift.  Trading will shift from a caste and family based activity to more professional activity over the years.  The choice available to the consumers (even if limited), will force the service providers to change, like the Newspaper vendor!  In order to retain the business he will innovate and make it competitive and niche.  They will be forced to find ways to eliminate multi-layer middlemen and reduce the gap between farm/factory prices and retail prices.

As for the loss of job for middlemen and the traders who are not willing to adapt to new changes, well, there will always be some collateral damage to any change.  In every business some failure do occur. No one has a right to remain in a business that he is not capable of running efficiently and competitively.  Adapt or perish is the only survival mantra for any service provider; traders being no exception. 

To conclude, the new retail chains or FDI in retail (much same as my new newspaper vendor) is neither a panacea nor a livelihood shattering evil step.   It is merely a small part of overall reforms of our economy to ensure its growth and efficiency so as to meet the demands of an every growing and demanding population. 

PS: For a more serious and technical discussion on FDI in retail please read my post 'Foreign Direct Investment in Multi Brand Retail Trading- Some Basics'

Sunday, September 16, 2012

Foreign Direct Investment in Multi Brand Retail Trading- Some Basics

When the so called ‘big bang’ reforms were announced by the Government of India the term Foreign Direct Investment (FDI) gained prominence. The fact that these announcements were only minor steps to reverse the perceptions and nothing earth shattering was lost in the propaganda blitzkrieg that followed!

What caught the imagination of politicians as well as common people was the 51% FDI allowed into multi-brand retail trade.  This was projected as something that will eliminate the entire neighbourhood (kirana) shops and also the very livelihood of entire Indians.  Both Left and the Right wings of economic divide are planning to force those very same Kirana shops to remain closed on a Bharat Bandh, to protest the entry of FDI into the sector!

The debate that followed brought out the fact that, like any other major decisions in India, even this was being seen only through politically coloured eyes.  Many of the arguments did not show even a basic understanding of the related concepts.  Let us look at some of the basic of the FDI and its impact in the multi-brand retail trade sector.

Legal framework
The power to regulate FDI is derived from the powers granted to the Government under the Foreign Exchange Management Act, 1999, to regulate in flow and out flow of foreign exchange.  Under these powers GoI can prescribe conditions for entry of foreign capital into any of the sectors.  These conditions or framework comes under the category of subordinate legislation promulgated through Cabinet or Ministerial decisions under the delegated powers, in the main Act.  Therefore, a Government need not seek Parliament’s approval for making any changes in such frameworks.

In order to ensure that the policy framework on FDI is made ‘transparent, predictable and easily comprehensible’ for all the potential foreign investors and the Indian parties who want to receive such investments, the Department of Industry Policy and Promotion, under the Ministry of Commerce and Industry of Govt of India, publishes a consolidated FDI Policy.  This policy document is updated every year, with changes, if any, issued during the preceding year.

Foreign Investment
Inflow of foreign capital happens through many modes of which the following are important:

Foreign Direct Investments
For Persons resident outside India 
Foreign Portfolio Investments
For foreign institutional investors (FIIs), Non Resident Indians (NRIs) and Persons of Indian Origin (PIOs)
Foreign Venture Capital Investments
For Foreign Venture Capital Institutions through Venture Capital Funds or Indian venture capital Undertakings
Other Investments (G0Sec, NCD etc)
For FIIS , NRIs and PIOs
Investments on non-repatriable basis (cannot be taken back from India)
For NRIs and PIOs
Issue of shares by Indian Companies under FCCB/ADR/GDR
For Persons resident outside India 
FDI in Limited Liability Partnerships
For Persons resident outside India , subject to prescribed additional conditions for LLPs
External Commercial Borrowings (ECB)
For International lenders , subject to extant RBI regulations on ECBs

What is FDI and Why FDI?
While we saw that there are many modes for entry of foreign capital, here let us restrict ourselves to the FDI alone.  FDI means direct equity investment into a domestic company with the objective profit earning/sharing, with or without acquiring management control.  FDI is distinct from External Commercial Borrowing (ECB). ECB is debt funding sourced from foreign lenders and is required to be repaid with interest.  However, in FDI there is no obligation to repay.  Only the profit is shared by way of dividends and the exit is only by way of selling the equity shares to any third party or the Indian partners.

After the opening up of Indian economy as part of the Liberalisation and Globalisation, it is now the stated objective of Govt of India to attract and promote FDI in order to ‘supplement domestic capital, technology and skills, for accelerated economic growth’.   It is widely accepted that the capital required for growth of Indian economy to meet the aspirations of its growing population is just not available domestically (even if you point out those presumptive zeros of CAG to counter this, please note that even those zeros will have to come from somewhere!).

FDI is preferred to Portfolio investments for the simple reason that unlike portfolio investments, FDI establishes a lasting interest in the recipient enterprise and therefore greater stability to foreign exchange reserves.  Portfolio investments get invested in listed shares through stock exchanges and are likely to flow out as soon as markets show any downward trends.  But for FDI, to make an exit, it takes much more time and efforts and even the valuation at which domestic investors can buy out the foreign investors is regulated by the Reserve Bank of India.  Hence, FDI investors have much more stake in making the Indian enterprise a success by providing it all the necessary managerial and technical support.

Prohibition of FDI in some sectors
Foreign investment in any form is prohibited in a company or a partnership firm or a proprietary concern or any entity, whether incorporated or not (such as, Trusts) which is engaged or proposes to engage in the following activities:
  •  Business of chit fund, or
  • Nidhi company, or
  • Agricultural or plantation activities, or
  • Real estate business, or construction of farm houses, or 
  • Trading in Transferable Development Rights (TDRs)

 Apart from the above general prohibitions on Foreign Investment in any form, FDI is also specifically prohibited in certain sectors such as: 
  • Atomic Energy
  • Lottery Business including Government / private lottery, online lotteries, etc. 
  • Gambling and Betting including casinos, etc
  • Business of chit fund
  • Nidhi company    
  • Trading in Transferable Development Rights (TDRs) 
  • Activities / sectors not opened to private sector investment
  • Agriculture (excluding Floriculture, Horticulture, Development of  seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)
  • Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes              

Till the recent decision announced by the Govt, Multi Brand Retail Trading (except single brand product retailing) was also a part of the above list.  In short it is the removal of MBRT from the above list of prohibited sectors that has caused all the commotion.

Restriction on FDI in some sectors
Further, the Govt has also prescribed conditions on FDI into certain sectors.  They are listed in the table provided in the consolidated FDI Policy (pages from 42 to 78).  The entries in the Table may permit FDI in a specific sector under the automatic route or under the approval route where prior sanction from the Government (FIPB) will have to be obtained.

In sectors/activities not listed in this Table, FDI is permitted up to 100% on the automatic route, subject to applicable laws and regulations, if any, and security and other conditions that may be prescribed from time to time.  The Retail Trading will now become another entry in this Table with FDI Cap/Equity of 51%.

Implications of FDI in Retail Trading                
Many a commentators has opined that the permitted 51% FDI into retail trading will sound the death knell for crores of retail traders or the kirana shops in India. But how far is it true?  One look at the safeguards will clearly tell us that it is a very humble beginning into organised retail trading with hardly any potential to threaten existing retail traders!

The following safe guards are being incorporated in the policy in order to provide a level playing field to existing traders: 
  • FDI capped at 51%
  • Retail sales outlets may be set up only in those States which have agreed or agree in future to allow FDI in Multi Brand Retail Trade.
  • Retail sales locations may be set up only in cities with a population of more than 10 lakh (As per 2011 census, there are only 53 such cities whereas there are 7935 towns and cities in India)
  • In States/ Union Territories not having cities with population of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the largest city and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities.
  • Establishment of the retail sales outlets will be in compliance of applicable State laws/ regulations, such as the Shops and Establishments Act etc
  • Retail locations will be restricted to conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be made for requisite facilities such as transport connectivity and parking.
  • At least 30 per cent of the procurement of manufactured processed products shall be sourced from small industries, in the country, that have total investment in plant and machinery not exceeding $100 million.
  • Minimum size of FDI will be $100Million
  • At least 50 per cent of the total FDI brought in shall be invested in back-end infrastructure, within three years of induction of FDI. Back end infrastructure includes investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce, infrastructure, etc.  Expenditure on land cost and rental, if any, will not be counted for purposes of back-end infrastructure
  • A high-level group under the Minister of Consumer Affairs will be constituted to examine various issues concerning internal trade and make recommendations for internal trade reforms.
  • A strong legal framework in the form of Competition Commission is available to deal with any anti competitive practices including predatory pricing.

From the above restrictions, it is clear that the proposed investments will be made through Indian companies where at least 49% of the holding will remain with Indian equity holders and the retails outlets by these companies will be set up in very large cities where the growing demands can easily absorb the additional supply outlets. If at all, this will only increase the choice for consumers, thereby forcing the existing kirana shops to innovate and value add to their existing services.  These retail traders will also be benefited by sourcing their goods from the larger chains, thereby eliminating the series of middlemen who do not add any value in the supply chain but cause huge price increase through their commissions. In a growing country like India, there is enough scope for additional investment in these sectors.

In the words of the Govt of India, “The decision would benefit stakeholders across the entire span of the supply chain. Farmers stand to benefit from the significant reduction in post-harvest losses, expected to result from the strengthening of the backend infrastructure and enable the farmers to obtain a remunerative price for their produce. Small manufacturers will benefit from the conditionality requiring at least 30% procurement from Indian small industries, as this would enable them to get integrated with global retail chains. This, in turn, will enhance their capacity to export products from India. As far as small retailers are concerned, it is evident that organized retail already co-exists with small traders and the unorganized retail sector. Studies indicate that there has been a strong competitive response from the traditional retailers to these organized retailers, through improved business practices and technological upgradation. Global experience also indicates that organized and unorganized retail co-exist and grow. The young people joining the workforce will benefit from the creation of employment opportunities. Consumers stand to gain the most, firstly, from the lowering of prices that would result from supply chain efficiencies and secondly, through improvement in product quality, which would come about as a combined result of technological upgradation; efficient grading, sorting and packaging; testing and quality control and product standardization.”

“Implementation of the policy will facilitate greater FDI inflows, additional and quality employment, global best practices and benefit consumers and farmers in the long run, in terms of quality, price, greater supply chain efficiencies in the agricultural sector and development of critical backend infrastructure.”

In India, all the changes are opposed as a rule. We have before us the examples of mindless opposition to the opening up of Indian economy in 1991, introduction of computers, and introduction of VAT etc where the decisions turned out to be the game changers in the positive sense.  Each time we are told that the country’s sovereignty is being surrendered, the country only gains further in its stature and economic power!

The government is well placed to assess the needs for making policy changes.  Let us have faith in them. If they don’t live up to that faith, we have the option to replace them in the next elections.  But to prevent Government from making policies is to hold up the Indian economy and the development of its people.

Friday, September 7, 2012

Finding What We Want to Do, While Doing What We Need to Do!

Last week one of my friends, holding a senior position in the investment banking industry, quit his job and joined a start up company, in an entrepreneurial role.  He was considered a star performer, with a bright future in the industry. Therefore, naturally, his decision to take up such a risky endeavour in this uncertain period, that too in an untested field of sports management for educational institutions, surprised all his friends and peers.

To all those who advised him to reconsider his decision, he was emphatic in his reply.  He said he decided to do something that is close to his heart, after being influenced by two movies, namely, ‘Zindagi Na Milegi Dobaara’ and ‘3 Idiots’.  According to him, these movies made him want to work in an area where his passion lies.

Whether his decision was right in the conventional sense, i.e., whether the new role is as remunerative as his previous job, in the long run, is yet to be seen.  However, he is happy even though for the first time in his life he is spending his own money instead of earning a salary!

This incidence reminded me of those advertisements that used to show misfits, struggling at jobs that were of least interest to them while still dreaming about their passion.  It also made me to introspect whether I am doing what I am passionate about or not.   I realised that even at this age, I am yet to find my passionate job!

My first earnings came from manual labour.  Even while I was studying for my Pre-Degree course I used to work on holidays and earn money to meet my expenses.  But when a chance came my way to join Indian Air Force even before I celebrated by 18th Birthday, it was like a dream come true.  At that age, serving one’s country as a solider gave an idealistic flavour and made me proud. 

However, it did not take much time for me to realise there is nothing romantic or idealistic about a soldier’s life.  It was like any other work, with its own successes and hardships and its own boredom and ecstasies.  The concept of idealistic soldier was lost very soon as I realised soldiers are like any other human beings, with all its variety- both good and bad, and the romanticisation is nothing but society’s way of motivating people to join a job that otherwise no one else wants to do!

However, not all was lost as it may seem from the above.  I enjoyed the work (never got an assessment below ‘Excellent’ / ‘Superior’ after my training, is testimony to that fact) and also used the facilities provided by Air Force to undertake further studies.  During my studies, I picked up a liking for law.  I thought here is another ideal profession for me to be able to serve the society.  After all, what better thing than being able to ensure justice to the needy!

So it was a foregone conclusion that when I finally left Air Force after 19 years of service, I had to end up as a lawyer.  But this time, the let down happened much faster.  Soon I realised that this too was not something that I aspired for, though I reserve my experiences as a lawyer for a more detailed post.

It took only 17 months for me to give up legal practise and move into corporate world as a Legal & HR Manager.  During the last 7 years, I moved through various roles, different capacities and more than one industry. The journey has been very rewarding in terms of career growth and economic benefits.  But am I doing what I want to do? Am I doing something that I am passionate about? I think the answer is in the negative.  I know, what I really want to do is something that will impact many more people, in much more direct manner, though I am yet to decide what it really is!

But then what keeps me going? Simple... what I ‘need to do’ is what keeps me going.  My passion alone can’t decide what I do.  My various responsibilities and material needs demand that I continue working in a position that is adequately remunerative, at least until I have made enough reserves to take care of those needs and responsibilities. 

We have two types of works. First, the ones we want to do and the second, the ones we need to do.  Indeed, there are some lucky people for whom both the want and the need coincide in the same work.  But for most people, these are different.  The want is decided by one’s passion and the need is decided by one’s social pressures and commitments.  Therefore, a person who wants to be a writer may end up doing the work of a clerk and another aspiring to be an artist may end up working as a policeman, merely to meet their economic needs and social responsibilities.

For these unlucky people, the choice is limited.  Accepting what they want to do might bring them greater satisfaction and happiness.  But it is what they need to do that usually brings them economic success.  The option of taking a risk to see if they can combine both is beyond most people!  In my opinion, blessed are those who can earn their livelihood from their passion! 

In life, choices are never simple and straight forward. Even in this choice, there is a twist.  Lets us see what that twist is.  In order to make the choice between ‘want to do’ and ‘need to do’, one must know what is that one wants to do.  What one ‘needs to do’ is often a function of external variables.  Often the family and social pressures, available options etc force the choice upon an individual, as fait accompli.

But as far as what is that one ‘wants to do’, one has to find it within own self.  No other person can be of much help here.  For example, even if a person can sing very well, he may not want to be a singer. Whole world will tell him to be a singer but his heart might be elsewhere.  People like me might spend their entire lives looking for that one thing that we want to do.

Often we are so sure of having found the answer and therefore we make all efforts to achieve that.  Yet soon after attaining it, we again realise that it was not the one we really wanted. The dilemma and the search continue.

That brings up another question- how do we make the most of what we got rather than what we wanted?  It is only by giving our best to whatever we do, irrespective of whether we are doing it out of our wants or our needs, that we can make it a positive outcome for ourselves and the employer.  

Irrespective of how much we aspire for something, there is no guarantee that we will feel happy or satisfied after achieving the same.  So, instead of leading our entire life unhappy and dissatisfied, we must learn to make the best out of available options.  A bird in hand is always tastier than the one in the bush

But that does not mean that we should give up our quest for finding what we really want.  Keep searching for it and meanwhile keep making the circumstances conducive to take the plunge whenever we finally manage to find it.   Also, even after taking that plunge, if we realise that we have made a mistake, we must be willing and able to move on to some other thing that might catch our fancy.

To conclude, we must learn to be a real rolling stone to be able to enjoy and get better and better throughout our journey, irrespective of the path that we are forced to take.   Change the path towards wherever we want, whenever we can, but don’t ever stop enjoying or slowing down the journey itself.