Is (retail) FDI really necessary for India’s Growth?

Summary: FDI in retail is not the solution to the policy paralysis that we are seeing in this country. On contrary, it is symptomatic of the fact that we believe that we have the biggest rug in the world under which we will shove all our dirt and that we will never have to smell the consequences of that action. 

In the last few days, the elected leaders of this country have repeatedly made their case for bringing FDI into the retail sector. We, the people of this country, have been repeatedly told that we cannot go back to the Nehruvian socialism era or roll back the years of progress we have made on or economic front. Depending on who is debating with them on this issue, the government has given one of the three arguments:

  1. Indian customer too deserves the best that the world has to offer
  2. As things stand now, additional FDI is critical for the growth of this country.
  3. Bringing FDI in retail will help our Indian producers integrate with the global supply chain across the world. It is a wining deal for them too.

To support the government’s view, the industry analysts and those who matter have been constantly talking about the policy paralysis in the present government, and how opening up the retail sector to FDI is the key way to address that problem.

Personally, I believe that the first point was valid a decade and a half ago but in today’s India it is an emotive issue and not an economic issue. The consumers in India, at least to me, are now already well served and have the variety of options depending on the experience they seek. If there are some gaps, our existing Indian retailers are already capable to address them.

The key points are the second and third points. Basically, by saying that if we have to grow we have to have FDI our leaders are telling us that internally our country has exhausted all the avenues of growth and has reached its maximum level of efficiency, and so any improvement can happen only when we import the best practices from across the world. Also, they are telling that there is absolutely no other way India can integrate its produce with the world.

Below are the questions which I am trying to address in this article

Why am I arguing against FDI in retail?

Let me take the example of Walmart, the favorite punching bag of socialists and nationalists the world over. I believe their opposition is more jingoistic in nature. Our country, is actually not an exception.

In my MBA, Walmart was a great case study. We were taught that here was a company that was all about efficiency and no non-sense. In my job I had opportunities to closely observe Walmart. I have worked with the leadership of the teams that have implemented IT projects for Walmart and I have studied what sort of initiatives Walmart wants and how that integrates with its profitability. What I have learnt is that what they taught me in MBA is true. To the T.

Walmart stands for everything that is good in world retail. It has a single point aim of removing each inefficiency in each area of each link in its overall value chain. Whenever it removes any inefficiency it saves money and then it passes a part of that savings to customer making the eventual product cheaper. The core of its strategy is local sourcing through local vendors. If it believes that any product can be produced by its vendor in 100 Rs., then it will not pay 101 Rs. to the vendor. It will have all the data points for its vendor on how a price of 100 Rs. is justified and how the vendor can improve its own processes to meet that price point. If it has to refuse a thousand vendors, it will do so in the hope of finding one that fits the bill. More often than not, the same vendor that is refused earlier comes down to the same price point by improving its own processes.

Once Walmart buys from a small vendor, the vendor has 100% visibility of how much of its product is being consumed and how much is needed in the coming days and how it should plan its production. That is a message from heaven, ask any small entrepreneur. The payments are guaranteed and there is no issue. All you have to do is play fairly.

So where is the problem?

I humbly fold my hands and bow in admission that I believe India is not ready for this level of efficiency. Personally, I find a certain degree of romance in the fact that we celebrate our inefficiencies and our inadequacies. Even if one is not willing to buy my notions of romance here, one cannot shy away from the fact that we are hopelessly unprepared with respect to providing employment to our people. Blame it on corruption, blame it on lack of quality education, blame it on lack of manufacturing capability or blame it on any combination of any no of factors. The fact is that we are unprepared. And due to that unpreparedness, for every one success story of a small investor with Walmart, we will have a thousand failures. With every rupee that Walmart saves for its customers, a lot many more rupees will be lost for many more small retailers.

I earn well and am willing to pay extra for the same quality of product if I am paying to a small vendor. Alternatively, I am willing to pay the lesser cost for a sub standard product, if I am paying to a small vendor. My concern is that despite my magnanimity, I will not have a small vendor to pay to!

This is where my opposition to FDI in retail in India lies. Philosophically I don’t believe that pursuit of excellence is the only aim left for all of us as individuals, managers, investors and business owners. Economically it does not make any sense in talking opening the core of our economy to a foreign player when there are hundreds of lower hanging fruits that we can address.

Have we exhausted all the avenues of growth?

Growth is a function of the amount of money reinvested in the business and the quality of that investment.  In our personal lives, when we get a job this translates to how much of our free time and free earnings do we invest in improving our skills how relevant those skills are to our own jobs. The better this combination, the better are our own growth prospects.

Similarly, in case of a company, at its core the amount of growth in company’s earnings is directly proportional to the amount of money the company reinvests in the areas it believes are important to it and the quality of that investment. For e.g., in case of a Pharma company dealing in non-generics, this means that the growth in earnings is dependent on how much the company invests in R&D and what is the quality of that investment. With no reinvestment, there will be no growth. At the same time, for every rupee invested, the growth will be better if the quality of R&D is better as compared to when it is not. For a manufacturing company, this translates to the combination of amount of money invested in capacity building and the quality of that eventual facility that is thus built. Basically,

Growth in free cash flows = Amount of money retained for reinvestment needs * Return on equity

The above equation is the core growth equation that defines how a company’s free cash flows will continue to grow in the future. Depending on whether the company is a stable company or a growing company the above equation changes with some additional variables that can be brought on. However, the principle remains the same.

If one thinks of India as a large growing company, then it becomes clear that the amount of growth this country can obtain is directly dependent on the amount of reinvestments we need to do in areas that matter and the quality of those investments. So what are these specifics?

The things that matter for growth in any country are infrastructure and governance. In India, we have made a policy decision that the government will only be the agency to enable various industries achieve excellence, and not be a part of those industries themselves. That is well and good and perfectly logical. However, that also means that as a key enabler the government has to continuously invest into infrastructure projects and that is where we have been lacking. If we are serious about growth in this country, we have to be serious about investing in infrastructure. Without that we won’t be able to enable various industries, and hence won’t help them achieve excellence. Is that happening? Unfortunately no!

Secondly, the issue is about the return on equity. That translates to how good the quality of investment is. For an ordinary entrepreneur, it is the question of how good is the quality of investment that is made, how good is the road, how easily and how continuously the energy is available etc. That is where we get to the whole idea of corruption and mis-governance due to gross incompetence. In India, due to the corruption in each activity that government has laid its hands in, the quality of outcome that we have seen as citizen is dismal. In other words, we out to have seen better results on the same investments we are asking if we had lesser corruption and if we had relatively more competent folks governing us. Did that happen? Is that happening? Will that happen give what we know today? Unfortunately, NO, NO and NO.

I am not an expert on anti corruption and on better governance. That is a case more competent folks are fighting in the public domain. However, I believe I have successfully made a case for improving the growth prospects of India by attacking the joint issues of investing in infrastructure and removing corruption. If that happens, an ordinary entrepreneur will be able to really focus on the challenges of his business and not on how to fight the battle of no power/bad roads/corruption on a daily basis and that will mean a good life for his/her business as well.

So to answer the question I posed earlier:

NO, IF WE HAVE TO IMPROVE GROWTH PROSPECTS OF INDIAN ECONOMY, WE HAVE TO INVEST IN INFRASTRUCTURE AND REDUCE CORRUPTION. BRINGING IN FDI IS NOT THE ONLY WAY.

Is bringing FDI the only way to incorporate the global best practices in the Indian retail market?

It is not. Another way is to bring in talent. We have a situation where we live in a country that comprises a little over one sixth’s of humanity living in an area that is one of the poorest and despite that has had one of the highest growth rate consistently over the last few years. No matter how you slice it or dice it, we have to accept that we have a HUGE bargaining power on our hands. If any one else was in our situation, he/she would have taken advantage of that.

An alternative to bringing FDI to improve the business efficiency is to bring in managers who can implement improvements in our markets. When Japanese manufacturing was battling quality issues they did not bring in companies from all over the world to set up shop in their land. They brought in Deming who implemented the quality processed in Japanese manufacturing and today TQM/JIT/Kanban are worldwide best practices. Why can we not do that? We can Indianize anything… absolutely everything…  By that logic, we should be able to internalize and subsequently Indianize each best practice that is getting followed in any part of the world. We can open our managements to FDI and have global citizens governing Indian companies. If that does not help, we have Gartners of th world who do a very decent job of documenting what is working and what is not. We can read that and implement that.

 Allowing foreign players on the pretext of bringing the world experience to the Indian customer is akin to saying there is no way we could have done that ourselves. I am sorry, but that is incorrect and an insult to the intelligence of common man, let alone to that of the managers governing the Indian companies.

Is there no other way for our producers to integrate with the global supply chains?

Absolutely there is! Even though there is an apples to oranges comparison here, but let us see how the Indian IT has integrated itself to the global IT supply chain. We have had folks who relied on Indian education, went abroad and learnt the global best practices and then came back to India to serve global customers. We can do the same in retail.

Here is what I propose. We invest in education in even a bigger way and emphasize on the spirit of engineering. That has to be especially done in agriculture. This also ties directly to the idea of investment as related to growth that I mentioned earlier. We increase the no. of touch points our educational institutions have with the small entrepreneur (incl. farmer). We develop a proper ecosystem where a small entrepreneur is able to take risks and get rewarded. That is not hard to do. After all, some of that is already happening. For e.g., We hardly educated our producers on what is trending in the world of retail. But already the folks who have travelled abroad know that no matter how high-end an apparel chain is, the clothes are nearly always made in India/Bangladesh.

Once we are able to do above, we go big on showcasing the Indian produce to the rest of the world. Again, when one sixth of humanity will want to sell one half of world’s food produce to the remaining five sixth of humanity at best prices and better quality, it will be an easy sell. Our farmers and small vendors will be handily rewarded.

If we want, we can do it.

Was there a policy paralysis?

Yes, we have had policy paralysis in this country. But unfortunately the government does not understand what the exact type of that paralysis is. We have had policy decisions on manufacturing/services/IT/Minerals/Telecom in the past and all of them have yielded varying degrees of success. Our present paralysis is that we are not willing to look in the mirror and say that the reason we have not had the success we deserve because we have either been corrupt in implementing the decisions (for e.g. mining) or have been incompetent in taking the right decisions on the areas that matter (for e.g. ignorance of manufacturing/infrastructure). If we address those problems, we will automatically be the best performing economy in the world.

The way I see it, we are operating the patient for the wrong problem. That is only going to create complications later.