FDI........

By coincidence, I got to read two sets of trade numbers (more specifically trade deficit numbers) of India and of USA for the month of October 2012.  Trade deficit is a very simple statistic = (Exports - Imports). Trade deficit numbers tend to be volatile depending on the month of the year etc and to compare only one month’s number could be wrong analysis but still what caught my eye was the scale of India’s trade deficit (relative to India’s GDP) versus United States.  So India had a trade deficit of c.$20 billion on a GDP of c.$2 trillion, while US had a trade deficit of $42.2 billion on a GDP of c.$14 trillion i.e. so US runs twice India’s trade deficit per month on a GDP that is 7 times bigger. And more importantly US is the supplier of world’s reserve currency i.e. USD while India is not

In many ways this simple data point reflects the scale of problem Indian economy faces. First, how do we bridge this gap i.e. how do we pay for more imports while exporting less: a)   what national accountants call – invisibles – which don’t get captured in trade data i.e. services (such as IT services, BPOs etc) and remittances (which India is the largest recipient of approx. $65 billion a year for 2011). Still this doesn’t bridge the gap of our trade deficit b)  depend on foreign capital i.e. via debt, equity investments(both FII and FDI) that foreigners invest in India and what happens when a)+b) still can’t bridge the gap, either one stops importing (which India can’t with oil/crude accounting for 70% of the import bill) or the currency goes for a sharp fall in value (as happened to Rupee in 2011) to correct for the imbalance. Given currently there is this huge uninformed debate in India’s parliament particularly by the likes of BJP, BSP, BJD and the Left etc.- about how India can live without FDI in retail. Any sensible Indian with basic math skills should give it back to these opposition politicians in tandem with what once Nehru had suggested for non-performing elected representatives.

India badly needs any form of foreign capital (be it FDI or FII) just to keep its ship afloat as the trade data shows. But strangely the reformists, particularly the party spokespersons entrusted by the party which I am affiliated with (Congress party), have somewhat not done such a good job of properly explaining it to the electorate, that there has never been a wider buy-in to the need of foreign capital in India. It has seen reform by stealth than by conviction. To take the particular instance of FDI in retail, this is where the benefits will be felt most where it is needed i.e.a)improved farming techniques (these retailers want those exactly similar tomatoes that can stand journey to their stores while still looking fresh red!) b) improved logistics/cold chain c)customers get cheaper price i.e. the economy improves as the money saved is spent in other hopefully productive activities that boosts economic growth/is saved again helping India’s economy d)the smaller Kirana stores can source their requirements from these large format retailers for a cheaper price while providing the convenience to their customers.

So who loses? The losers are the layers of middlemen across India who source from the farmers / manufacturers and supply them to the small scale retailers in the least efficient way, at high very costs. And also the other losers will be the Indian bulk retailers owned by Ambanis, Birlas, Goenkas and the like who will face more competition. And this is the bunch which India’s opposition parties are bent upon protecting. On a more philosophical level, yes as it will be another push towards homogenization of India’s diversity. What makes India unique compared to most other large countries is our diversity of ethnicities, languages, food, culture and traditions…but then Hindi television soap operas, Bollywood movies are anyway already taking India fast paced towards homogenization. So the diversity of rice, wheat, vegetables, spices and the like that is available across India and each region of the country with its own specific likings / disliking will possibly wilt at some point particularly in the larger urban areas as these large format retailers eschew variety for price and scale. So one will get one variety of tomato, one variety of banana (Cavendish is the species), 3 varieties of rice where one is used to seeing 3 varieties of tomatoes, 3 varieties of bananas and 10 varieties of rice in today’s small shops and mandis. As P’s mother keeps mentioning how the cauliflower available in winter in Indian shops is way better in taste and freshness than the cauliflower that is available year round in the supermarkets of Hong Kong or Singapore. But it is also a sign of India’s poor cold chain / logistics, that one gets to see a vegetable / fruit only in its season of production as we can’t store it and transport it at other times. Numerous statistics are bandied around about how India wastes nearly a third of its production of fruits and vegetables due to rotting & poor storage. And this is something again an economic cost that falls usually on the farmer and the consumer.

So in economic terms there is a net benefit to the customer and the farmer, as every Rupee saved by an average Indian goes to some other productive use in a country that still ranks at the bottom end of per capita income scale. So having variety is a luxury India can barely afford. And perhaps who knows it might be a good idea to keep a diverse country of billion people united at least in what they eat if not anything else ! And I can think of numerous ways how it can transform India’s economy. Take for instance taxes, neither most farmers (even the richest ones) pay any taxes and nor do the  middlemen. As the retailing, logistics and procurement becomes more institutionalized, it would be difficult for most of such people to remain tax evaders, as large MNC retailers won’t pay cash to their large vendors. But as a nation that loves to tap dance two steps back for every step forward means we continue to play second fiddle to China and its spectacular trajectory of growth and prosperity of its citizens. But then a nation that has elected a fairly good number of intellectually challenged politicians, we can hardly expect better...

(With inputs from my very close childhood friend, who has insisted on me, not to name him and  to refer to him as ‘P’ on public domain such as this blog of mine.)