The multi brand retailing story

The scene at the Indian parliament was very chaotic - even by its own standards - in the first nine days of winter session last year. The reason was to block one of the far reaching reforms; allowing 51% FDI investment in multi brand retailing. The government had to give up this proposal due to vociferous demonstration by the opposition in the parliament. It was hard to believe the same BJP led NDA government, that opposes the current reform, accelerated the pace of economic liberalisation between 1998 and 2004. It looked as though the opposition would oppose anything that comes to debate.

Some of the comments and observations were absolutely stupid. Some parties claimed that it would accelerate farmer suicide. Anna Haraze compared these international companies such as Wal-Mart and Tesco to the East India Company. He also spoke about how they would rule our country if we let them in.

To understand economic liberalisation, we must go back to 1991. Preceding this period, brands like Nike, Pepsi, and Sony etc were unheard of. On a normal weekend, an average Indian living in cities would watch a regional movie on a Doordarshan channel in a Solidaire TV sipping a bottle of gold spot purchased from local kirana shop. Maruti 800 was considered a luxury car. The richest had telephone. However, the usage is limited as not a lot had telephones at their homes.

Fast forward to current times. An average Indian living in cities goes to a mall, watches ESPN on a Sony television, sipping a Coke and talking on a Samsung mobile using Vodafone spectrum. Such is the quantum of change due to the liberalisation. Some people still say that the pace of liberalisation is too slow and more reforms need to be done to maintain or enhance the growth rate.

In the late eighties, there was a severe strain in the Indian balance of payments. India almost went bankrupt and was expecting IMF to bail out by providing soft loans. India had to pledge several tonnes of gold. IMF also enforced some economic reforms in exchange for the bail out. Indian politicians were so reluctant to make changes to the economic policies until this time. A lot of people in India believe that economic liberalisation is one of the biggest achievements of the congress government. That is not true. The changes were enforced on India in exchange for money. Indian politicians never had the will to reform in a large scale until a deep crisis hit normal life.

The fruits of liberalisation is still can be seen in India. The average GDP growth rate more than doubled and almost 300 million Indians (More than the population of USA) came out of deep poverty. However, one big problem remains. Managing food supply chain. For the most part of previous year the food inflation was well into double figures. India has a few inherent problems in terms of infrastructure and technology. More than 20% of fruits and vegetables rot before it even reaches the market, which puts a lot of pressure on the supply side of economics.

The retailers and middlemen that serve India do not have the money to invest in technologies and infrastructure to move fruits and vegetables to market before it rots. Food value chain in India is one of the worst in the world. From farmland to household, the value chain is long. In such a scenario, the farmer is unable to sell the products directly to the market and hence was paid lesser by one of the bigger middlemen who are a part of the value chain. Almost all the middlemen in the value chain do not add any value to the product. These middlemen do not have the expertise and technology to preserve the food items from rotting. Most of the food inflation in India is due to these structural inefficiencies. Without addressing these inefficiencies, manipulating supply and demand would only give temporary relief. For most of last year, RBI was using monetary policy tools to contain inflation rather than reform the food value chain structure.

This is exactly why the entry of multi brand retailer is essential. They have the money to create infrastructure and the technical expertise to preserve the food until it reaches the market. Multi brand retailers deal directly with the farmers and hence time to market reduces and structural efficiency increases. Therefore, the accessibility of food items to common man at affordable prices increase.

In rich countries, such as UK and EU, multi brand retailers play a crucial role. Also, many small retailers also co-exist. Hence the fear of Wal-Mart and Tesco trashing all small retailers is not true. Multi brand retailers increase the efficiency of food value chain, provide more jobs, provides technology and better price for farmers, and most importantly reduce the cost to end customers. The only people to lose out is the middlemen who made a lot of money without adding any value.

The government of India must decide whether they support shoppers and farmers or they support the middlemen who have served the country and its people poorly over the past decades. Or, they should wait for another deep crisis to push more reforms.