Today’s post is written by Sunny Gupta, a long-time Safal Niveshak tribesman from New Delhi.
Sunny posted this originally on the Forum, seeking answers from fellow tribesmen. I thought putting this as a post would bring in a greater amount of discussion.
The points Sunny has raised, plus the questions he has asked, are important points for us as ‘aam aadmi’, and also matter a lot for us as investors.
Over to you, Sunny.
While this may be a complicated topic, and renowned economists would discuss such things, I want to bring it up and see how such events affect us as investors.
The topic is related to policy paralysis of past several months, and the sudden burst of policy actions related to fuel subsidy reduction and FDI allowance in various sectors.
My take is this – If these policies are “implemented properly”, they should help reduce financial inefficiencies in the country.
On reduction of fuel subsidy
Take fuel subsidy for example – the world knows that energy is becoming costlier and this will not change for years to come, at least, maybe decades.
Then, why burden the government’s financials to subsidize fuel?
There’re several examples of “misuse” of these subsidies, notable being industrial use of diesel (running power back-up systems). Does industry really need subsidy in this form?
As per a recent report by World Bank, the benefit of fuel subsidy goes more to the rich than poor, and it is very clear that it is just a political drama and “cheating” the poor.
Imagine this – if you remove all subsidies on all fuels and make them market-linked, tax them at constant rates across states (so that you eliminate smuggling of fuel across state boundaries), it might increase inflation to some extent.
But let’s look at the consequences. The large amount of surplus funds with the government will allow introducing tax breaks to the poor – so that the “actual subsidy” is channelized properly.
The fuel will then be used in the right manner – those who can afford to burn fuel in their cars and power back-up systems, will need to pay tax, and they can pay tax.
On the other hand, those who feel the pinch from fuel price increase, should get the benefit in terms of lower or almost zero tax (any family of four with annual household income of Rs 8 lac in a metro city should NOT be taxed anything).
Hope the government gets the point, and this is NOT impossible to do – many developing nations have adopted this approach, most importantly, Indonesia.
On FDI in Retail
Ok, now that reduction of biggest subsidy and implementation of DTC & GST helps channelize the money to the ones who need, without impacting our fiscal deficits, let us target the next inefficiency in the system – too many middle-men.
Look at the agriculture and distribution system. As much as 30% of food gets wasted in distribution and transportation – reason, so many channels of middle men.
I agree that many people will possibly lose their jobs if Walmarts of the world start sourcing food directly from farmers. But just imagine the benefits to rest of the people.
Why do countries like the US and Australia have such efficient agriculture systems? It is because they have huge farms and farmers benefit from economies of scale – that’s what is needed in India as well.
Biggies like Walmart can come and help integrate micro-farms, help improve productivity, and help give consistent income to the farmers who are today facing burdens like uncertainty of rains, power supply, purchase price, transportation to “mandis” etc.
If the government can impose restriction on retail MNCs to provide jobs to poor farmers (either on the same fields, which they might lease or buy, or in other areas of their businesses like the distribution system, back-end, etc), FDI won’t hurt the poor farmers.
As far as the middle-men are concerned, yes I agree they’ll be severely impacted. But then, we have to sacrifice someone for the benefit of larger groups.
Possibly it won’t be so bad – what fraction of Indian population are these middle-men? Since they’re small, many of them can get absorbed within business chains of the retail MNCs.
Now what about the neighbourhood kirana store? I think they’ll stay here.
Even today, we have many departmental stores and we do visit them once a month or so. But for day to day groceries, we still call the kirana store and get stuff delivered to our homes – this model won’t change easily.
In all, here are my views on the benefits of FDI in retail:
- Poor farmers get a more certain job – the ones who want to pursue it, and it’ll help reduce the suicide rates due to extremely skewed micro-lending conditions.
- Food wastage drops, and this means more food for everyone – and due to competition (government must ensure healthy competition in this sector), market pricing mechanisms will help contain food inflation & bring down prices of essential food articles.
- Since the middle-men would have vanished, it’ll help avoid hoarding (again, we need a mechanism to ensure that retail MNCs don’t manipulate prices, and there should be financial obligation on these companies to ensure we don’t have conditions of food price bursts – why should it happen when we eliminate the root causes (middle-men)…if they occur in extreme conditions of drought, etc., the retail MNCs are liable to report to government and set nationwide price limits…not an impossible task to do).
- All this will mean taming a big menace of food inflation.
Phew! A long-long post! But, I’ll stop here and not discuss other items like FDI in aviation.
What do you think?
If these policies are implemented properly over years, could it be a big positive for India and help continue the growth story?
Conversely, what are the implications if we don’t do this clean up?
I believe there’s a big threat to widening the gap between the rich and poor even further, since the poor will keep struggling from paying taxes to fuel cars of the rich and the middle-men to pay for their food (and hence their lives).
Finally, based on these policy changes and their planned implementation, can it fuel a long bull run in the stock market (which I know none of us in acquisition phase want, right?)
About the Author: Sunny Gupta works as a Lead Analog/Mixed Signal Design Engineer at Freescale Semiconductor India Pvt. Ltd.. Apart from being an active learner of value investing, he takes interest in all subjects finance and economics.
The is brouhaha regarding FDI in retail.
It will basically help improve some supply chains and make life for some urban dwellers (especially working couples) more organised. Indian chains which have set up hyper marts or the likes are invariably trying to push their own brands vs what the consumer wants and are many a times out of stock, so the whole purpose of going there is lost ! Hopefully MNC chains will do a better job.
If they indeed do a better job, it would lead to productivity improvements. If you have traveled overseas where such stores are in place you would have witnessed it.
Subsidy of any form is a double edged sword and invariably defeats the purpose it is set up for.
true to a great extent, Sudhir.
My experience with the Big Bazar, Best Price, Metro, Vishal etc is similar. They start with common brands but gradually shift to their own brands, many things are out of stock or you have to keep going there regularly to get your choice brand. But then, these are confined mainly to large urban areas only. Lets see how chains like Walmart handle this.
Sunny .. nice One…
Thanks for the anaysis…
Diesel Rates-> No second thought on rise… But SIAM the industry bidy is strictly opposing Excise Hike… There should be some middle path..
LPG Limit – > well.. tricky path….But Six cylinders is really tough even for a normal family… may be 9.. which should suffice…
But the logic should apply to our politicians also…
FDI in Aviation–> well everybody knows the reason…
FDI in retail -> The trickiest… The normal arguments for the FDI is low prices,middleman elimination,cold storage blah blah…
When a cooperative like Amul and Aavin,Nandini from tamilnadu,Karnataka can make such impact on daory farming why not the same logic in retail also…
Tamilnadu has a history of such scheme called Farmers Market where farmers can sell their products .. I purchase all my vegetable requirements from there.. Quality is excellnt and price is dead cheap when compared to super markets… Let the government encourage such schemes and they can make cold storage facilities…
Why should we give our supply chain to some MNC’s who can circumvent any rules by their lobbying!!!
bhatia ji true.. Private labels offer better margins .. I have visited such stores ..even on weekends and first week the shops are empty.. Then how they r running… I have seen 4 supermarket stores close by 2 years in my area….
In US/other countries u have to travel certain distance to buy the goods ..
Here a single street will have 10 stores especially groceries stores. ..
Hi Sunny, thanks a lot for such an honest post. But I disagree with you. Though I buy your point of need of removal of middle-men in food chain and too much burden on fiscal deficit. My question is why Wal-Mart, why not us? Cannot Govt take bold steps towards removing middlemens, improving warehouses or cold storage and distributing the essential food items directly to consumers? Indian retail chains (Tata, Birla, Ambani, Biyani) are also no less powerful and are not cash-starved. Why we require a foreign retail giant to clean up our domestic mess? As per diesel subsidy goes, first right step in this direction could be removing any subsidy for diesel passenger cars and SUV. FDI in aviation sector is though welcome and will not impact each and every households.
Sandip not everybody can do everything. When you open up your doors the good, the bad and the ugly will come in and also go out. Indian cos. have also gone overseas and acquired many large businesses.
Retail is a difficult operation and there are few players globally who have a good handle on that.
All this debate about swadeshi vs videshi to my mind is irrelevant if you want the outcome to be “let the best win”. It is a increasingly open world and those who choose to remain closed can suffer more than those who open up.
I read somewhere both socialism and capitalism exploit, so lets be exploited and atleast die rich !
As regards subsidy it is easy to say charge on SUV but not on a tractor which is impractical and again middlemen will benefit. These are all facades which are created in the name of the so called poor but end up benefitting the rich. Look at the last 60 years if we were indeed so poor how come we are the 1st ro 2nd largest consumer of Gold ?
Yes there are poor who deserve benefits but I doubt how much of the intended benefits actually reach them.
Thanks Sudhir and Sandip
On why Indian giants can’t revamp retail, we, they can. They possibly also have a lot of money. But more than money, I think we need skill and experience of global giants. If anyone could do, we’d have WALMART versions of each country and WALMART won’t be so big. The fact that only a very few companies have been able to make it big across the globe tells that managing huge retail chains is NOT an easy job, and hence the push to bring it through FDI way. Otherwise, don’t you think Reliance Fresh or Big Bazaar etc would already have grown big?
And I agree with Sudhir – its very difficult to control “right use” of subsidized material, be it fuel or food grains or anything – better, remove all subsidies and give incentives the poor through other means, like no tax until a certain bracket, and for the very poor people, UID and other things will help – through UID, we can provide direct credit to bank account, or for example, have shops where UID instruments can be used to identify poor, and then give them food at discount (and discount to be collected by shopkeeper from government), etc…I mean such things can be worked out…we just need thorough analysis and will power…
another way to help the poor is to just give out “food coupons” which the poor can go and encash at any outlet (like Sodexho). I had heard some countries are doing it very effectively.
The issue is the will to do.
In many areas we have made huge progress like ebanking, pf going online, capital markets and what not.
Unfortunately some basic requirements like better law and order and administrative reforms have not taken place which are holding us back and costing us very dear.
Hi Sunny,
Thanks for your views they are though provoking. What made me write this message was those few lines about you at the end of the article of yours. As I see you are working as engineer and loves finance, how do you manage the time for both the activities? I’m also working (that too as embedded engineer 😉 ) and loves value investing.
—
Kind regards
Amit
Thanks Amit, well, you have to set priorities, and you can take some time out…it gets tough at times..but then, everyone else is also busy with their families and jobs…so, don’t think being an electronics or embedded engineer means we’re very busy…its more or less all the same 🙂
Thanks Sunny for the advice, I have those five books recommended by Vishal, I have already finished two, now started “One up on wall street”, do you have some recommendations for the beginners. The course “Value investing for smart people” is helping a lot, Thanks to Vishal for all this.
Sudhir, I agree to your point about Swadesi Vs Videshi. Why should I, as consumer, suffer just beacause the desi stores are not able to provide better services at better prices? If I get the benefit due to better handling, better procurement of MNCs, so be it.
Your point about Gold consumption is not valid though. This is a typical case where the statistics hide more than what they reveal. The gold consumption in India is purely due the social and psychological mindset and nothing else. The fascination of Indians with this otherwise useless commodity is well known and it is this only what imparts value to it. The world sees it as hedge and treats it as such. If we are, as you say, so rich, why does our worthy government says those who are able to spend Rs.32 per day on meals are not poor?
Gold is a safe bet or atleast perceived to be a safe bet. Why do I need a safe bet and why so much of it. The answer as per me is that I have mot yet developed enough faith in the monetary system and why not because today the reasons are very evident i.e. ability to print it is in some hand or set of hands who may not exercise their power in my interest.
Coming to Gold consumption last Diwali a friend who is a jeweler told me he could go to sleep only at 4 AM given the queue outside his shop to buy the metal or a piece of it. I found it hard to digest.
I am sure the number of people below poverty, used for justifying the largess (subsidies) are actually much lower than they are made out to be.
Ask any company or employer (and some of you may be employing people) they will invariably say they have a shortage of labour/ skilled staff. If there is poverty why arent enough people willing to work (I am not talking of exploitative or torturous work). Something does not add up or I am ill-informed.
I strongly agree to the points made in the post above. In fact, I had written on similar lines a few months back.
Very nicely written, Saket! Some very good points highlighted, indeed 🙂
I think QE3 will also play a big role. All that easy money from US will eventually land up on Indian shores.
It seems to have already started ! It is difficult to believe a few announcements have taken the index from 17,000 odd to 18,500. It is large measure due to liquidity sloshing yet again.
To my mind Gold prices would be a good indicator to look at as regards flooding due to QE3.
Let the Music Play !!!
What we are used to is fairy tales that give hope a new story to keep going. Direction was set long long ago and course corrections are in the form of lessons (mistakes) where individuals have shown they could outsmart a whole National outfit.
Basically we Indians are smart, so if someone wants to sing the same lullaby they sang in so called developed world world, sorry it may not work. We are so Diverse in all ways and so Big and wast that no one rule or logic may be applicable to all the Regions and Segments of People.
Imagine if one were to try and make India a better place one which could set an example to others. Do you think it would be possible to have the same tax structure for all, and then try to bait those who are evading tax by imposing indirect tax, this is like trying to catch fish in an aquarium the clever ones will always escape and hurt the poor weak ones and in the process what gets trapped in the net dead fish and shit, leaving so many weak injured good fish behind.
Sorry if some of you think I am wearing a red hat but I wish to convey that the matter has to addressed in the macro level and with the willingness of the Tax Payer concerned.
I am 48 and I am still hopeful that during my time I will at least get a glimpse of My Country where People are happy and will have time to enjoy with Family instead of worrying about Tax and Inflation and more importantly simply cribbing about Government and Corruption.
So Forget Warren Buffet or any Mart bring in the Harvesters and mechanised Farming what are we waiting for all the farmers I know of are contemplating on a BMW3 for their sons marriage or their Children are earning well in the IT and other Industry.
Let the Music Play !!!
Please No Shining and a Little more of others too not just Relyance…LOL
Thanks Sir for your views.
I’d simply say, that things may never become perfect, and many people will evade tax. But if you think anyone hardly paid tax, how would the development have happened? Hope you don’t say there hasn’t been any development in last 2 decades in India?
The ideal situation would be that of Singapore, but we need a huge deal of strong economic measures to reach a no income tax economy…till then, let the music play and let us honestly pay tax, and those who don’t, let’s put them behind the bars!
Every talk about MIDDLEMAN but anybody knows what an actual middleman do. I will say my exp what an MIDDLEMAN do atleast in procuring paddy. Here the MIDDLEMAN is not any third party. It’s the same farmer he will finalize some deal with a local ricemill for the output in his farm. At the same time he takes the paddy of other small villagers and sells to the same buyer or a different one. If he himself had money he will stock the oversupply which comes in season and sells them in period of unseason when the paddy cost will be more & max he makes is like a 2000 per lac like that if sells directly. So it is max 2%. and now welcome these corporate procurer. He had this ‘Sourcing Department’, ‘Grading dept’ etc and you thing he can manage all these everything in the 2% which this guy can do???? The salaries of these depts will eat into that 2%. & simply the aim of any corp entity is to maximize profit., so what will these guys sell to customer (although they procure at low prices) for less., they may do to only to OUTCOMPETE and competitor or drag him to bankruptancy. I had nothing against FDI, but only presenting a different point of view.
Hello Praveen
If its just 2%, I’d not bother. But what troubles me is vast difference between minimum procurement price v/s market price. Let me take an example:
Say, on an average, farmers spend Rs 5 / kg on producing a agro commodity, like onion. Add to it his margin of 15% (otherwise, why would he bother working as farmer). That sets the Minimum procurement price (I’m not aware of current method of calculating it, but I want to keep it fair for the farmer). So, it sets the minimum price at which farmer can sell to Rs 5.75 / kg. Add to it cost of transportation, etc, say at 30%. If a direct retailer like WALMART procures, this will set cost for WALMART to Rs 7.5 / kg. Being a INVESTOR in a big retail chain like WALMART, and assuming asset allocation ratio of 1, I’d at least expect 30% gross margin, so that WALMART can sell it for Rs 10 / kg in its retail stores, pay salaries to their employees (so that WALMART creates some jobs), and does justice to farmer also.
Now compare this to reality in India. If you go to a village and directly buy onions from a farmer, we’d be happy to sell it to you for Rs 7 or 8 a kg, but go and buy it from a shop in metro – it’ll not sell for less than 25 or 30! This is the difference that gets distributed b/w various middlemen. Can our country afford it? No! You can’t have so much inefficiency in prices of essential commodities.
As for the middle man, since he is skilled at arbitrage, why onl essential commodities? Why not something more lucrative, like luxury items? Or for that matters, why not some other job?
May be FDI is not so good…. the govt failed in Supply chain and delivery mechanism’s … technology with sole purpose of retaining wealth is disaster… American /Western companies simply have believed this for a long time … we may end up from frying pan to fire….
There is lot of opposition to walmar here in US as local mom /dad stored cant compete against huge walmarts. So basically local people end up loosing jobs, entire smaller communities are affected as these big stores sells everything. No doubt consumers will get it cheaper, few people will earn jobs, but what about those who will loose thier entire business. These stores have such high pricing powers, that they dont care about farmers or small suppliers. They always get squeezed. In the end its these corporations are the one who wins.
Dont get me wrong, I am not against big stores but its not that they will help farmers and local economy. So take this with pinch of salt. Someones gain is others loss – this is not panacea but lobbying work. You gotta see many small towns in US where entire towns economy was destroyed by one walmart store.
Hi Sorabh
Thanks for this view point. Can you pls share an example where big retailer destroyed the local economy?
Was there no replacement jobs for those who lost their employement? Did WALMART not hire any one of them? And, do you know how many, in absolute numbers lost their employment in a local town?
You may wanna see this documentary..Wal-Mart: The High Cost of Low Price
Yes, walmart will hire local people but again in the end its about maximising profits, so you cant compare own business to walmart salaries. Though I am not saying that walmart (or other big box retailer) is absolutely bad but you gotta take it pinch of salt. If its not super virus than its not panacea either. Also, I dont subsribe to thesis that big reltailers will help micro farmers, they will try to squeeze up margins as much as possible if they are last retailers standing with monopoly and and with all financial muscle to take losses, if they have to dry up competition. Big retailers will import rather than buying from local if that is cheaper. So offcourse there are pros/cons but you gotta decide which bad is worse for you.
And just to remind, when computers came, there was huge opposition that so many people will lose jobs. Did that really happen. Economics is weird. Its about efficiency, if you can make systems efficient, it’ll free up a lot of capital and people will spend it to create new markets and hence new jobs…
Imagine this, if through FDI in retail and elimination of MIDDLEMAN and the inefficiencies, the food bill for an average family in India comes down by 40 – 50%, these people will have surplus cash. Since food is the major spend for a large number of low income group people, they’ll be able to spend on education, shopping, entertainment, etc, and this will improve their lifestyle. Don’t you think this will create large new markets or much higher volumes in existing markets?
And such markets will absorb those who lost jobs as MIDDLE MAN. If someone is so adamant to not observe this trend change, this “disruptive self triggered innovation”, he’ll be killed by the law of “survival of the fittest”, there’s no doubt about it, but the flexible, agile and humble MIDDLE MAN will find his way…
Big changes cause big winds, its the rigid who perishes, and the humble who bows down, let the winds settle and then move along 🙂
I really fail to understand the hullo bullo behind the recent announcements as if suddenly through some magic wand all the problems are going to be solved overnight…. 🙂
If mere announcements were able to solve the problems, India’s problems would have been solved long ago since our leaders are more adept than I think anybody else in making tall claims and then delivering just the opposite.
We tend to really go overboard at rhetoric but fail to see the larger perspective.
* We are worried about the fiscal deficit but see ONLY subsidies as the culprit, be it fuel subsidy or cooking gas or anything else. Do we ever stop to see where the major part of deficit is coming from? It is coming from huge govt. expenditure and populist policies, Sir, which have never been addressed till date. and I don’t think they ever will be. Rather it is increasing by increasing DA in line with inflation. Till the govt.’s own expenditure is controlled, I don’t think we will really see some meaningful decline in deficit.
* I am willing to pay any amount of tax, and so will everybody else provided I see it being used effectively and in judicious ways. If I see my tax paid being utilised to bail out cronies like Mr. Mallya or forcing LIC to invest in hair-brained schemes or pushing banks to bail out farmers due to vote bank politics. If I see a road being built by local bodies at 8 times the cost of a private builder, I will be forced to rethink.
* If somebody thinks only by getting people like Walmart, the problems of our farmers are going to be solved, I would say, to the point of being labelled rude, that he is living in fools paradise. This is strictly business and nobody is worried about the lots of farmers. Either you don’t understand their working or you tend to look the other way. Every market survives on only checks and balances. In absence of any alternative source to market their produce due to sheer volume by these multinationals, the farmers will be left at the whims and fancies of these people only. I am not worried about the middlemen or their jobs. I am under no obligation to provide jobs to them. But if you think the farmers are going to be a much better lot, sorry sir, you need to rethink. There will be some marginal increase in prices being paid to farmers but the major part of profit will still go the Mart.
Let me give you an example. Here in Ludhiana, Hero Cycles is the largest manufacturer of Cycles and a whole lot of ancillary units depend on them. So many companies have developed volumes matching the procurement rates of Hero. But the sad part is, given the large volumes they are selling to Hero, if HERO reduces the rates, they don’t have any bargaining power. Hero just gives them 2% margin and 2% overhead costs on the cost calculated by Hero Engineers. And they get the payment after 3 months or more. They are TOTALLY DEPENDENT on Hero. If Hero sneezes, they get heart attack. I agree the transit efficiency will improve, lesser wastage due to improved warehousing and transportation methods, but the benefit WILL NOT go to farmers.
* The FDI flow INTO India is hailed, as it should be, since India desperately needs capital. But what about flow OUT of India in the form of profits? Ever wondered why hugely profitable companies like Cocacola, Pepsico, Macdonalds, KFC etc are not listed companies. They don’t intend to share their profit with anyone, pure and simple.
* I am not against the reforms or the measures announced per se, in fact they are most welcome. But the implementation part is what is going to determine the future ahead. The increasing disparity between the rich and the poor is a grave cause of concern, it will create such a law and order problem that even if you have crores, you will hesitate to spend. Till the progress is inclusive to all sections, the fate will be like India Shining Campaign. Already, the ground realities are way too different than what is being projected.
* I fail to see how suddenly the food bill is going to be reduced “by 40-50%”.
* I am not worried about the neighbourhood kirana stores etc. they will still survive, although the volumes will be much lesser. But end consumer will benefit, no doubt about it.
* I wish the Govt. could do something really fruitful for the EWS. Given the poor track record of implementation, where a PM admits that out of Rs.100 of grant, only Re.1 reaches those for whom it is meant, I will not be unduly optimistic about subsidies to poor in form of rations or food coupons and what nots. Had the things been managed in a better way, we wouldnot be having these problems in the first place.
I will wait to see how the Govt. is implementing all that has been announced and the intent shown. Till the intent is followed by good implementation and governance, all the rhetoric is just that, rhetoric.
Sorry for being blunt, but unfortunately there is much more to India than just Delhi. 🙁 Not being a cynic nor against the reforms, just trying to be more objective, maybe because what I see around me on ground level is too disturbing to be swept away by few announcements.
Thanks BhatiaJi… We have technological know how to send mission to Moon whereas we dont have the knowhow to sell items in kirana stores… Logic is Weird..
Hi Karthik
While I’m collating the replies to main topics, on this comment of yours, I’ll only say, that, we didn’t learn to build missiles n spacecrafts in a day right…it took us decades, huge amount of research…great minds like Bhabha ji and Kalam sir…and many failures too
Its hardly been 10-15 years that retail megastores have come up in India, and none of them has actually done the really big thing like WALMART…they still procure from middleman…and they’ll continue to do so until we think in terms or large scale…and hence in the initial beginning, they’re mostly failing…
Hence, FDI is a way to tap vicarious learning, and I agree, the price is outflow of profits…but I’ll address that in my bigger reply in a short while…
Good analysis Sanjeev…
On the walmart retail issue, as you said the farmers may not benifit from FDi but neither are they gaining anything in the current system.But one thing is for sure-consumers are going to benifit a lot if retail companies follow walmart business model.
I still think Walmart will not be successful in India even if they are allowed 100% FDI.I am betting on a person like Kishore Biyani to built a successful large scale retail model for India (much larger that the current setup) for the future.There will be lot of pain for future group in the next 4-6 years but I am hoping they would survive and come out strong building a great company like Walmart or Costco in America.
Why are you betting on a person who could not control debt and needs a bailout?
One understands that he and similar others got into it so that he/ they could sell out (their shares jumped on this announcement) as and when FDI is allowed. That much for your hopefuls.
In one of these companies 3 years back was a 900 cr hole which could not be explained.
Point is let efficient honest people flourish and you will see a difference. It has happened in many sectors where open fair competition has been allowed and ensured that it flourishes.
Thanks Sanjeev for your views, I’ll slowly assimilate and reply, but on your point about “where the major part of deficit is coming from”, I found the following report:
For FY2011-
Total Fuel subsidy = Rs 81000 cr
Total Fiscal deficit (@ 5.7% of GDP) = Rs. 509000 cr
So, fuel subsidy alone accounts for 15% of fiscal deficit
This report shows how govt spend on subsidies has increased from 3% to 17% in last 30 years.
13% of total govt spend is not small.
Without upgrading rating, you can’t bring down interest cost (24%) on bonds, which is again linked to fiscal deficit, higher the deficit, higher the borrowing and higher the interest cost.
Yes, I agree, govt is corrupt, they spend far more on their salaries, spend far more in development, again due to corruption….but then we have two alternatives
Either pay tax and pray corruption comes down…or, stop receiving subsidies and directly pay this amount, and this will help reduce taxes…
One effective way to reduce our fiscal deficit is to eliminate subsidy – no subsidy means govt has less to spend and less to expect in tax…they can’t win votes by eliminating subsidy and increasing tax – they have to bring tax down…then, since they don’t have extra money to “smuggle through corruption”, it’ll help reduce scams to some degree (who knows CAG will some day uncover another subsidy scam like “chara ghotala”?)
Then, since no spend on subsidy, it’ll reduce fiscal deficit and hence govt borrowing and hence reduce interest cost, and this effect will cascade to further reduce fiscal deficit…
Hope this point we agree on? I’ll come back on FDI and retail…
Hi Sunny,
I would like to bring up certain points which we have discussed in person.
Removal of subsidy to allow tax break to the poor:
It is to be noted that if a person is poor, it is well understood that he/she is not paying income tax. But, if we account for the tax on other consumables like soaps and shampoos then there are two fundamental flaws with it. (From now on he would mean he/she).
1. If somebody is poor he is least likely to consume processed goods and even if he does then the cost of raw materials would increase either because of transportation or because it is based on item like crude oil itself.
2. As somebody is poor his largest share of consumption is food items and the cost of which would invariably go higher because of increase in transportation cost. More importantly, for regions which are not getting adequate supply of electricity, agriculture is largely dependent on diesel run engines and thus, the cost would go high invariably.
Thus, prima facie the poor should benefit but a scratch below the surface suggests that not much benefit is expected for the poor.
Removal of middle man:
The constitution as per the ‘Directive Principles of State Policy’ guides the country to ensure economic and social democracy. In case, we remove the middle man how are we ensuring their livelihood. Are we saying, we are going to take away your livelihood and reduce you to an employee of a big firm which would decide on daily basis whether to keep you employed or not. Secondly, if we do farming the way it is done in USA with bigger farms which are definitely productive but we shall be reducing the farmer to a laborer the plight of which can only be understood by the people who would never read or comment on this article (apologize the hard words). So, make before break should be the policy rather breaking everything apart to create a new system.
If we create a system where a big entity can directly negotiate with the farmer, can we assume that there can be a fair trade between mighty and the weak. How are we ensuring that these big entities would not manipulate the prices to suit their needs by tactics like cartel formation or oligopoly?
Shailesh Kumar
My two cents. Removing middle man will not anyway going to reduce the prices. I live in UK and there is not much difference in prices between supermarkets and corner shops. The whole theory that big players will help farmers etc is again a nonsense. Tesco the biggest retailer simply bully suppliers. The debtor days gets unilaterally revised by Tesco. Many small suppliers cannot stand in business. Consolidation happens. Those who loose business are nowhere in picture. Hardly few people get job. Look at the unemployment numbers.
We need local solution not a global solution. Most of the developments happened in west are for their local needs and we simply miss this point. One of my friends who is a farmer told me once that Indian tractors have huge overcapacity. None is made for small farms. The farmer goes into huge debt, then either he rents it from big farmer and many are left without job. These people migrate to big cities and we have other issues. Many live in destitution. Most of them do not want to go back primarily because of cast issues and second there are not enough jobs left. Third most of them have small farms so they cannot compete with big ones. Then our politicians grab land by various other means. The big retailers will augment this consolidation even more. But once you are soaked with share price you cannot see these issues. Do you know how much these big retailers pay to their staff? How many can really afford a good lifestyle? Many jobs are low paying. I may be wrong about but this is my experience in Sainsbury’s, Tesco and ASDA in uk. I don’t think there will be any change in policies in India.
Interesting. So why did these large retail chains come up and why do they continue to be in business ? If there are no benefits to suppliers and no cost savings for consumers, I am intrigued why does the economic system not abandon them.
Sudhir, I do not the answer. let me give you another example. Near my home town pune, there are three major dams. Till today not 50% of them have been properly relocated. We know what happened with Narmada dam. Did we stop building big dams? Did we care about who were uprooted? I for sure did not anything till last year when I met one of the sufferer. Till this happens to us or to our near and dear ones we are not bothered. Once any idea is sold to middle class it becomes very difficult to change it. How many of those displaced can have a say in policy making? In the name of public good government can take any decision. We do not see enough public debate in our country.
Another example. UK converted main public enterprises such as water, electricity and railways to private ownership. This was done in the name of efficiency, lowering prices and against reckless unionism. But what’s the reality. All these essential services are extraordinarily costly. The railway is ridiculously costly affair. People are not happy but have no choice. many people I know use car instead of rail travel. But the proponents of free market overlook this. Can anyone change this? I don’t think so. Until another 2008 crisis happens nothing will happen.
Oops!! some words are missing. I am reposting the same.
Sudhir, I do not know the answer. let me give you another example. Near my home town pune, there are three major dams. Till today not 50% of them have properly been relocated. We know what happened with Narmada dam. Did we stop building big dams? Did we care about who were uprooted? I for sure did not know anything till last year when I met one of the sufferer. Till this happens to us or to our near and dear ones we are not bothered. Once any idea is sold to middle class it becomes very difficult to change it. How many of those displaced can have a say in policy making? In the name of public good government can take any decision. We do not see enough public debate in our country.
Another example. UK converted main public enterprises such as water, electricity and railways to private ownership. This was done in the name of efficiency, lowering prices and against reckless unionism. But what’s the reality. All these essential services are extraordinarily costly. The railway is ridiculously costly affair. People are not happy but have no choice. many people I know use car instead of rail travel. But the proponents of free market overlook this. Can anyone change this? I don’t think so. Until another 2008 crisis happens nothing will happen.
Today’s stint by Mamta Banerjee has put this blog statement into risk 🙂
However I am liking it if the market tanks to buy good businesses at great prices.
Thanks everyone for their feedbacks and criticism on this post. I’m trying to consolidate all the points raised here, and will soon post my reply.
As we’ll all agree, this is a long debate topic and its difficult to find a clear cut “yes / no” answer to whether these things are right or wrong…
Thanks again, and feedback is still welcome…I’ll try to reply at the earliest with my consolidated feedback 🙂
Go through the comments here.
Also calculate cost of packing grain, putting into Larry, carrying to mandi, getting it down from the larry, buying from middle man, his store and finally to local shop and us buying it. Hope you save all this and make farmer richer. I bet you will make walmart richer and nothing will change.
Hi Salil
I’ve mentioned some of the points and will repeat them again:
1. Govt is responsible to ensure fair pricing mechanism for farmers. Don’t you worry about 600 million farmers? We’re an agricultural nation by origin and we must lay down right framework to make their lives better.
2. As i mentioned, govt. should also ensure that WALMARTS must help integrate farms through leasing and other arrangements, and there must be fair mechanism to ensure rights of poor farmers.
I’m certainly against unqualified FDI in retail – but I’m strongly in support of govt to lay down fair policies, ensure through local vigilance to ensure that happens, and then let capitalist economy implement it. We have large number of examples where govts across the world have failed to “execute” large scale projects – they should only ensure laying down fair policies and providing a right framework for justice and ensuring the policies get implemented correctly by market players.
And finally, I won’t worry about 2% population of the country, provided the right framework benefits more than 70% of the population.
Thanks to all for posting their valuable comments and views, and sharing some interesting insight into specific instances – in support or against the topic of discussion. Here I try to club them all into various major issues or concerns and try to address each as per my view:
**** Fuel subsidy: As I already mentioned few reports indicate that as much as 50% of government spending is due to subsidy and interest burden (here and here). I’d say these are low hanging fruits and we should first target these. Reducing government spending is already happening to some extent, but in my opinion, the biggest way to reduce government spending is to remove a large number of benefits that government jobs have, and which people misuse. I’ll soon write on this topic as well, but for now, easiest is to remove subsidies, let rich pay for what they want to use, and provide incentives to the poor directly, instead of such an indirect manner. This all will bring down government spending at least by 15 – 20%, which is a great way to reduce fiscal deficit.
**** We all more or less agree that there’s inefficiency in supply chain, and if this is eliminated, the end consumers will benefit. As for the jobs of middle-men, I’m sorry, arbitrage opportunities occur due to inefficiency, and they can’t last forever.
As for the points mentioned by Shailesh, on the constitutional right for middle-men, I’m again sorry, but that ways, we become a socialist economy and we should rip off all of the capitalist activities in country. Let me take an example. Before internet, until ‘90s, travel bookings were either done by visiting booking counters, or via travel agents. Now, most people directly book tickets online, bypassing the travel agents. If you see, travel agents were benefiting from the inefficiency of manually going to book ticket, and when online booking removed that inefficiency, they had to find a different job, or adapt to the new system. This is called disruptive innovation. Something will get disrupted, and unfortunately in this case, it’s the middle-man’s profit which is the root cause of inefficiency and for the benefit for all other consumers and farmers, it has to go away. Yes, you can argue that we’re destroying chain of middlemen and replacing them with a single middle-man – the WALMART. But then, it’s not for free – it’ll bring reduction in inflation, better life for our farmers, which I believe is a large portion of the overall people related to this economic system.
**** There’re concerns if the farmers will really benefit or not. Well, as I mentioned, today, the poor farmers are under burden of uncertainty due to weather, water and electricity supply, and due to their small fields, their cost is high, and hence they probably don’t make money, or make very small money. Since they’re mostly uneducated, MFI’s fool them, and they can’t really do anything much about it. The right way to pass benefits to them is that government should form a framework where farmers will have a choice to either sell their land (and get compensation at market price) to the big firm and quit farming forever (not the preferred way unless they know really well what they’re doing), or, the retail MNC leases their land at market rentals, and guarantees them job for at least next 10 years (the farmer or their family members) on the same mega-farm that’s created by clubbing together various micro-farms. Retail MNC’s will be required to publish detailed financials on how did they arrive at the farm worker wages. The idea is, retail MNC will only do this if it makes sense (i.e. they’ll calculate if they can sell the food grains at a decent profit in market, after covering for lease cost, raw material, and farm worker wages, etc.). In any case, this farmer wage should at least be equal to the Minimum wages as per labour laws of the country.
Now, people may argue that due to all the violations of rules and regulations, farmers won’t get justice even if these policies are laid down. I’ll then ask – are they in a better position today? Not really, and having one big retail firm instead of large number of “saahookars” and other village mafias, is better since these retail firms can be audited and inspected in a better manner than the local village goons. So, it’s not just about bringing FDI, but about creating the right framework…and it’ll at least be better than the current situation, if not a dream come true for the poor farmers. In fact, if things happen correctly, it’ll help our fast declining farmer population to stabilize, as even Farmers Association says it’ll help farmers. See here.
Regarding an important point made by Salil, yes, we indeed need local solutions, and all we should do is leverage good things from the precedence of west and other markets where retail megastores exist, mold them in Indian context (possibly due to diversity, we may need different variants of policy for different regions, as was pointed by someone in the comments, citing example of north and south Indian eating styles), and then lay down framework for the businesses to execute.
**** Why Videshi, why not swadeshi: Well, it’s not a relevant question in today’s world economy. Imagine what will happen to our economy if major services customers close their economy, like US and EU? So many professionals (including me) in services industry, software and IT, banking and BPO, etc. will lose their jobs. This is more than 15% of India’s population, and most of the ‘spending middle class”. The ripple effect will be loss of jobs for all urban blue collar workers like service boys, watchmen, rikshaw and autowalas, drivers, etc., etc. We’re already suffering from a broadening trade deficit, and if we stop exporting our services, we’ll end up severely damaging the pricing power of rupee, and our import costs, which are already high with go cross the roof. When we can’t stop importing fuel and gold, we can’t think about “swadeshi naara”. When Gandhiji gave this thought, times were very different, and they’re now altogether different. So we can’t use the same thoughts. I have high respect for Bapuji, but then I’m sure, if he were around, as an intelligent being, he’d not have opposed exports and would have been more open to cross boundary economic trades.
Moreover, we should also not underestimate the benefits of tax collection here. Right now, a large amount of supply chain is infected by black marketing and only a very small amount of potential taxes are collected. With regulation in this segment, tax revenues for government will increase (yes, I’ll leave the issue of corruption for this post away…that’s a big menace and we need to eradicate it, but I’ll better write another post on that, it’s an even bigger topic of discussion…) and hence reduction in spending and increase in tax revenue will only help our fiscal deficit, and take us closer to the dream of “fiscal surplus” like Singapore, due to which they can eliminate income tax…we dream for such a regime, but it’ll take time to come, and it’ll need tough, bitter steps right now.
Finally on this point, since its 51% FDI, 49% of money is still from an Indian firm, so it’s not entirely a drain of profits from the country, at least half of it remains in India, actually more due to all the job creation, taxation, etc.
**** Success of WALMART in India: Well, yes, they might fail big time, but only time will tell that. The fact that WALMARTs of the world lobbied to US government to push retail FDI reforms in India recently (see here) suggests they’re damn serious and have done their homework. In fact they’re very much ready, as per their comment after FDI got notified (see here). So, I’ll leave it upto retail MNCs to prove if they’ll succeed or fail in India.
Finally, there’re concerns about how effectively can the “good policies” be implemented (and people gave examples of failures, but then, you don’t abandon ideas because they can’t be executed perfectly right?). Well, I agree to the concern, but then we have numerous examples where non-government businesses have done good execution of policies with honest intents, and the entire society has benefited from them. The best example I see if telecom industry. I was too young when this disruptive innovation occurred in our economy, but I’m sure people would have had similar apprehensions about how successful it’d be. So, let’s leave the success and failures for the time to tell us and follow Geeta, and just lay the right framework for the right execution to take place.
If some point did not get covered, pls let me know and I’ll try to address it.
Sunny…
Thanks for the answers….
Just went around some kirana stores/Super markets in my area…
To be frank.. the price difference is huge in unbranded goods …
If so called the super market chains are bringing low prices..
Why still nearby kirana stores are still cheap.. agreed -salary,tax,rent etc…
but still the logic eludes me….
As mentined above, the govt supported Farmers markets are providing vegetables at cheap prices… Why not provide cold storage to them…
There are margin free markets here .. It s really cheap to do ur purchase..Why not support them to improve spending…
Iam unable to connect the dots…
anyway sunny … Really u have summed up ur points nicely ..congrats
Thanks karthik
Yes, they certainly should. But as long as middle-men and retail mafia are strong and exist, its extremely difficult to support these margin free markets. Its much easier to manage 5-6 big retail companies across the country than managing thousands and lakhs of middle-men groups, and hope you’d agree.
So the idea is to make the current environment manageable, and then manage it efficiently. And I’ll strongly suggest that some form of RTI should be applicable on businesses which have such a large impact on our economy and lives, so that they’re under check and don’t do bad things by being greedy
Good job Sunny..:)
That was a wonderful post..:)
Thanks Shankar
Dear Sunny Gupta
I’m a subscriber to Taleb’s maxim that a lot of people are too serious about their knowledge capacity.
Take off your red, white, blue and rose coloured glasses.