Thursday, November 24, 2011

Congress allows multi-brand FDI… what will the BJP do???!

The Congress finally took some decisive action. It finally gave an indication that it had the appetite for taking “bold” decisions. By opening up multi-brand FDI, it has shown that it can handle the opposition parties; it can also handle opposition from within its own allies. The move is bound to lift the sentiments in the business sector; hopefully this decision is indicative of a much larger resolve – to take other long-pending decisions and push itself forward and out of the pit.

But the politics around multi-brand retail has just started. The final decision about allowing the Walmarts and the Carrefours will remain with the state governments. So now the BJP will be tested. It was needlessly opposing the Congress’s proposal to allow multi-brand FDI. Now what will it do in its states? Will Modi not allow the global chains to open up in his state – a state that has perhaps the largest numbers of its citizens living in the western world – or atleast having relatives there? A state which has traditionally (since before Modi!) been pro-business. Will Modi disallow Walmart from entering even if it comes in with a plan entailing massive investments and job creation? Will there be no modern format stores in Bangalore – a city in which we saw the first “cash-and-carry” Metro store opening many years back when FDI was opened up in that format? Bangalore boasts of ambitions of being a global city – will its BJP government play petty politics and ruin the state’s reputation? My own view is that once the politics has died down, all BJP governments will all fall in line and allow – in fact, welcome – these stores in!

We have seen a lot of this kind of politics in center-state relations recently. When petrol prices are raised and the BJP rants against the central government, the Congress challenges the BJP states to lower their sales tax if they cared so much for the people. But the BJP governments do nothing! It is one thing to go to media and protest against something; totally different to convert such lip service to actual action.

There is a reason why the Congress has taken this so called bold action. Basically, the Congress acts only when it is pushed. In this case, the party realizes that passing new laws in Parliament is going to be difficult, if not impossible – what with the BJP and the Left in an intransigent mood. The Parliament was blocked for the 3rd day yesterday – largely because of the siege laid by the BJP and Left; 15% of the winter session has already been wasted. If new laws are not going to be passed by Parliament, at least the ones that can be passed by the Executive should be. Since politics in our country is likely to remain opportunistic in the future as well, I am happy that such contentious issues are proposed to be kept outside Parliament. Take the PFRDA bill for instance. Both the BJP and the Congress agree that FDI should be allowed; and that it should be presently kept at 26%. Knowing fully well that this limit may have to be raised in the future – and that Parliament may continue to remain a difficult way to get approvals – the Congress has decided to keep the FDI limit in the pension sector outside the PFRDA Act itself. The limits will be specified by the Executive; not the Legislature. If an increase is required, it can be taken without going to Parliament. For the same reasons, the BJP wants to have the FDI limit specified within the Act.

This is not a happy situation. When the government has to keep matters outside of Parliament, it cannot be a happy situation. But the politics of the times has led to such a situation. Take the Insurance sector for example. The present FDI limit is 26% and there is a serious need to enhance that to 51%. We need more insurance coverage in the country – and with every new policy issued, there is need for more capital to set aside by the insurance companies. Indian companies are not in a position to bring in the tens of billions of dollars that are required. Unfortunately, the FDI limit is specified in the Insurance Act itself and increasing the limit is proving to be impossible – given the opportunistic opposition of the BJP. Had the FDI limit not been specified inside the Insurance Act, but kept with the Executive, the limit would have been raised by now.

I have argued in the past that opening up FDI into multi-brand retail is a good move. Like many others, I used to believe earlier that the move could eat up jobs in the neighborhood kirana stores sector. But after talking to experts, I realized that this is not true. Multi-brand FDI must not be seen in isolation. It must be seen as a larger economic belief that the country needs more and more investments to be made. It would be silly of us to block investments – whether domestic or FDI. Of course, policies need to be carefully crafted so as not to cause harm to existing businesses.

In most cases, the fears of Indian businesses (and politicians) are unfounded. When the new economic policy was unveiled in 1991, most Indian businesses were worried that they would be edged out by international competition. Instead, what has happened is that local businesses have prospered. Those Indian businesses which were savvy have grown; those which could not modernize have floundered. A whole new breed of entrepreneurs has come about. In hindsight, the fears about opening up the economy were unfounded. I can still remember the days when politicians used to create panic about the impact that computerization would have on our economy! Today, we cannot live without computers. In fact, much of India’s economic revival has happened because India decided to embrace new technology. I think the same is going to happen with multi-brand FDI. There is an unnecessary worry about kirana shops shutting down. They won’t. Instead, they will modernize and cope. With the opening up of so many domestic large format stores – we have already seen a sea change in the way the neighborhood kirana stores operate. Their service levels have also improved; they give home deliveries; they offer credit if required; they have personal relations with their customers (none of this can be matched by the large format stores!).

Modern retail brings in a whole new kind of experience for consumers. Prices usually drop; there is more variety to choose from; there is time saving as most shopping can be finished off in one store; and the shopping experience is much more fun. It is this experience that has made millions of customers move at least part of their shopping budgets to the big stores. If one were to argue that this money could have stayed with the neighborhood shops – had large format stores not come in – that would be technically right. That money would indeed have been spent at the kirana store. But the point is that with the fast growth in retail spends that we are seeing in the country, even with so much money going away to the large format stores, the kirana stores are still growing. This is not an “either or” kind of decision; this is a case where both formats can grow side by side.

I am happy that riders have been put in the policy. The minimum investment specified is $100 million – but honestly this is a very small sum of money for global retail chains. That 50% of this investment will be in back-end is a good move – because it will help in infrastructure development. It remains to be seen whether the 50% condition is for the whole investment brought in – or only for the minimum 100 million specified. Also, sourcing a minimum 30% from small and medium enterprises will hopefully boost that sector. And lastly, allowing global stores to open up only in the 1 million plus is a good initial move. Over a period of time, I am sure this condition will be waived off. This is the way policy works in India – one step at a time!

The real truth is that we need many more reforms. I remember the Pepsi line: “Yeh Dil Maange More” in this context! I hope the government can continue down this path. My worry is that the BJP and the Left will use this policy announcement as another excuse to block Parliament. Let’s wait and see if that happens. If it does, we will know what the real agenda of the opposition is…..

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