Does US President Barack Obama have the foot-in-the-mouth disease or is India just overreacting?
In an interview to PTI, Obama said, “In too many sectors, such as retail, India limits or prohibits the foreign investment that is necessary to create jobs in both our countries, and which is necessary for India to continue to grow.” He also cited concerns over the deteriorating investment climate in India and endorsed another ‘wave’ of economic reforms.
Predictably, this has led to a series of terse reactions from across the political spectrum in India. Indian politicians have gotten together and asked Obama to mind his own business. “If Obama wants FDI in retail and India does not want it, then it won’t come just because he is demanding it,” said former finance minister and senior BJP leader Yashwant Sinha. The left parties were equally critical of Obama’s statement.
Veerappa Moily, the minister for corporate affairs, said: “Certain international lobbies like Vodafone are spreading this kind of a story and Obama was not properly informed about the things that are happening, particularly when India’s economic fundamentals are strong.” Moily clearly wasn’t joking. The corporates were also quick to criticise Obama’s statement.
But for a moment let’s keep aside the fact that India does not need any advice from the president of the biggest economy in the world and try and understand Obama’s statement in a little more detail.
What did Obama essentially mean by what he said? He was basically pitching for Wal-Mart, the biggest retailer in the world, to be allowed to do business in India. Wal-Mart is headquartered out of Bentonville in the American state of Arkansas. It currently has a marginal presence in India through a joint venture with Bharti.
Such is the fear of Wal-Mart entering India and destroying other businesses, both small and large, that politicians from across the political spectrum have used it as an excuse for not allowing foreign direct investment in the retail sector in India. This fear comes from the Wal-Mart experience in the United States.
As Anthony Bianco writes in The Bully of Bentonville – How the High Cost of Wal-Mart’s Everyday Low Prices is Hurting America: “It (Wal-Mart) grows by wrestling businesses away from other retailers large and small. In hundreds of towns and cities, Wal-Mart’s entry put ailing …shopping districts into intensive care and then ripped out the life-support-system.”
But that’s just one part of the story. The question to ask here is, whether what is true for America is also true for the rest of the world? And the answer is no.
Pankaj Ghemawat, who has the distinction of becoming the youngest full professor at the Harvard Business School, in his book Redefining Global Strategy, points out a very interesting story. “When CEO Lee Scott (who was the CEO of Wal-Mart from 2000 to 2009) was asked a few years ago about why he thought Wal-Mart could expand successfully overseas, his response was that naysayers had also questioned the company’s ability to move successfully from its home state of Arkansas to Alabama…such trivialisation of international differences greases the rails for competing exactly the same way overseas at home. This has turned out to be a recipe for losing money in markets very different from the United States: as the former head of the company’s German operations, now shut down, plaintively observed, ‘We didn’t realise that pillowcases are a different size in Germany.’ ”
Given this, the countries that Wal-Mart has achieved success in are countries which are the closest to the United States. As Ghemawat writes, “Unsurprisingly, the foreign markets in which Wal-Mart has achieved profitability – Canada, Mexico and the United Kingdom – are the ones culturally, administratively and geographically closest to the United States.”
Wal-Mart and other big retailers have had a tough time in emerging markets. As Rajiv Lal, a professor at the Harvard Business School told me in an interview I did for the Daily News and Analysis(DNA), “There is not even a single emerging market that I know where a foreign entrant is the number one retailer. In Brazil it is Pão de Açúcar, in China you have the local Beijing Bailian. In most markets, even when there are foreign entrants, the dominant retailer in the organised sector is still the local retailer.”
And there are several reasons for the same. The local retailers are very price competitive. “If Wal-Mart is operating in Brazil there is nothing that Wal-Mart can do in Brazil that the local Brazilian guy cannot do. If you want to procure supplies from China, you can procure supplies from China as much as Wal-Mart can procure supplies,” said Lal.
Also the local guys understand the market better. This is because they have a better understanding of the customers. “On top of that they have local merchants that they know they can source from and Wal-Mart may not,” said Lal.
The other big fear about the likes of Wal-Mart being allowed into India is that it will destroy the business of the local kirana store. This is a highly specious argument at best because it is not easy to compete with kirana stores. As Lal explained, “Just because you are a big guy with a lot of money, it doesn’t mean that you can compete. Kirana stores have a lot of benefits that established retailers don’t have. First of all location. What rents do they pay versus what established companies have to pay? Employees, same story. On the consumer side they can deliver services… if somebody calls them and asks, can you deliver six eggs? The guy runs and delivers six eggs. That’s not something that the big established firms can provide.”
A Wal-Mart in the US is typically established outside the city where rents are low. But such a strategy may not work in India. “It’s not easy to open a 1,50,000 square feet store in India. That kind of space is not available. They can’t open these stores 50 miles away from where the population lives. People in India don’t have the conveyance to go and buy bulk goods, bring it and store it. They don’t have the conveyance and they don’t have the big houses. So it doesn’t work,” explained Lal.
The kirana stores also provide goods on interest-free credit to their customers something that no big retailer can afford to do. Also, as the economy grows, the chances are that the kirana stores will grow faster than big retailers. “So think about it in five years, where will organised retailing be as a market share? Maybe it’s less than 1 percent now, and maybe it will become 3-5 percent of total retailing. It will not be more than that. In five years organised retail grows from one percent to five percent, the economy would have grown by another 50 percent. If they grow from one to five percent and the economy grows by 50 percent, virtually it means that the number of kirana stores and mom and pop stores are actually growing. They are not reducing by any means,” said Lal.
Allowing foreign investment in the retail sector is also expected to bring down food inflation. As Satish Y Deodhar writes in Day to Day Economics, “Allowing private players – including multi-brand retailers who bring in foreign direct investment – to deal in retail and wholesale markets will reduce trader margins. An empirical study on domestic and imported apples sold in India shows that there are a number of middlemen in the farm-to-finger supply chain: out of the final rupee spent by a consumer on apples, about 50 percent goes for trader margins…More competition through private players will reduce the margins for the middlemen and lower the prices for consumers.”
Allowing foreign retailers into India is thus likely to bring down food inflation. Also, as explained earlier, the kirana store has not much to fear from the likes of Wal-Mart and other foreign retailers. But the same cannot be said about the companies which are in the organised retail sector. Wal-Mart does take time to get its act right, but eventually it does. As Lal put it “The people who should be more afraid should be people who are in the organised retailing sector and not the mom and pop stores.”
And that’s where the real story about all the opposition in allowing foreign retailers entering the country might lie. But even here, it may not be the whole story. Many big retailers may be looking to a Wal-Mart entry to sell their stakes.
Vivek Kaul is a writer and can be reached at firstname.lastname@example.org