Author Archives: satish.n

Should India open its arms to FDI in Retail?

The Indian government has made several attempts to pass the bill on Foreign Direct Investment (FDI) in retail in the past. Each time, there has been an uproar in the parliament with the opposition and its allies bringing the parliamentary sessions to a halt. Finally, it was on December 7, 2012, that the government successfully passed the bill with a few amendments while specifying that 30% of sourcing for retail has to happen domestically from the SMEs. The bill would be applicable in the 53 cities with population of more than a million. The individual state governments can decide if they want to participate or not. Although FDI in the retail sector opens a huge opportunity for India, somehow it has not convinced all the stakeholders.

Why this huge opposition and parliament logjam?

According to some sections of the society, the entry of trans-national retail chains in India will cause more than 40 million people to become unemployed. Some think that the retail chains would slowly eliminate the ‘mom and pop’ stores and establish a monopoly in trade. On the flip side, the government argues that these large retail chains would improve the supply chain infrastructure and eliminate food wastages and middlemen, which would eventually work to keep inflation under control. Undeniably, inflation has been a major cause of concern for the Indian government and the Reserve Bank of India (RBI), which have been struggling hard to maintain fiscal discipline since the past 3- 4 years.

The Pros and Cons of FDI in retail in India:

The Pros:

  • Farmers are one of the biggest beneficiaries of this bill. These retail chains source directly from farmers, eliminating middlemen and paying the farmers better prices for their output.
  • These chains would take initiative in educating farmers on better agricultural practices. Currently, India is among those countries that record the lowest yields of agricultural produce in the world.
  • Studies indicate that the annual wastage of agricultural produce is around 30%. The wastage is attributed to non-availability of cold storage or processing plants. Trans-national companies with good financial muscle would invest in supply chain infrastructure that would minimize agricultural waste.
  • Consumers will benefit from better quality goods, better weights (due to world class governance and practices), better discounts and better shopping experiences.
  • The government would also benefit in terms of tax revenues. Currently, around 90% of the sector is unorganized and the cash transactions that prevail in the trade make it impossible to be transparent. This also promotes the parallel economy or the infamous “Black Market”. Some studies forecast that the government coffers may swell by around US$ 25 billion by 2020, by implementing this bill.
  • Creation of backend supply chain infrastructure and establishment of front-end stores would generate a lot of employment opportunities within the country. Researchers predict that FDI will increase the total employment within the retail sector from the current figure of  23 million to 35 million by 2021.

The Cons:

  • It is estimated that the independent mom and pop stores contribute to around 15 million points of sales. Elimination of middlemen and these smaller shops would put 20 million jobs at risk.
  • Transnational retail chains source their products from countries such as China where the cost of production is far lower compared to what businesses can offer in India.  This might impact the domestic industry in a negative way.
  • There is also a possibility that over a period of time, these large retail chains would monopolize the market and control the entire supply chain mechanism.

Conclusion:

Any change would bring in advantages to certain sections and disadvantages to the other sections of the society. The present scenario looks bright as the advantages that would benefit the larger audience outweigh the disadvantages. Middlemen may lose their source of income, but consequences witnessed by other countries such as Thailand, Indonesia, Brazil and China show that these people would be absorbed in new jobs created due to improvements in supply chain infrastructure and would be upgraded with new skills and this is definitely a desirable future. Though there could be few setbacks initially, bringing FDI into the retail sector is a welcome move and would benefit the larger sections of the society and keep inflation under check in the long run.

References:

  1. Munich Personal RePEc Archive, March 2013
  2. Business Standard, December 2012
  3. International Journal of Engineering and Management Research, January 2012

Devaluation of INR, Is it good or Bad?

The devaluation of the rupee or INR is the latest point of debate in many news broadcasts on television today. Some blame it on the Current Account Deficit (CAD) and some blame it on the strengthening US dollar (USD) as the Fed from the US hinted of a gradual withdrawal of Quant Easing. Nevertheless, the INR has lost more than 15% in value against the USD in the recent past. As of date, the INR was trading at 59.6 per USD. Last week it reached an all-time high of 60.73 per USD. So, is this good or bad?

Well, that depends on who you are and what you do as a country, individual, or as a company. China was and is under tremendous pressure from the US to revalue its currency. But the Chinese government was reluctant to act according to the US’s wishes and kept the Chinese Yuan relatively stable. The Japanese Yen is trading at around 100 Yen per USD. Would this mean that the Indian economy is better than the Japanese economy?

INR-Devaluvation

How does it happen?

It’s a simple law of economics called the Demand and Supply. In reality, it is much more complex with lots of other variables at play. However, for this conversation, let us try to keep it simple. The currency exchange rates are dependent on the trade volume and flow that a country has with its trading partners.

For instance, China as an economy is export driven market. It makes more exports than it imports as a country. So, it attracts more dollars into the country than it spend on the imports. This makes China to have surplus dollars and the demand for Yuan exceeds the demand for dollar.

On the other hand, import driven economies like India import more goods and services than exports. This creates a greater demand for dollars as you buy imports by paying in dollars. The increase in demand for dollars increases the exchange rate and hence the devaluation of INR.

To summarize, Import driven economies have devalued currencies whereas export driven economies have relatively stronger currencies. Hence, the Chinese currency is relatively stronger than the Indian or the Japanese currencies.

Is devaluation good or bad?

As an individual, it pinches me if I am a frequent traveler or a student, as my travelling costs and living costs in another country increase in line with the currency devaluation. If I am an NRI, I would have more net savings when my savings abroad are converted to INR.

From a country’s perspective, it creates an imbalance on the Balance of Payments especially for import driven economies. A country like India which imports majority of essential commodities like Oil, pays much more in terms of the value in INR than opposed to what it previously would have paid. The imports get expensive thereby increasing the CAD. This will further devaluate the currency which becomes a vicious cycle until the imports are reduced.

This is a welcome change for a company which is into the export of goods or services. For example, let us consider the IT/ITeS companies in India, the currency devaluation has come as a blessing in disguise as this industry was battered with slow growth due to global economic slowdown. From a healthy growth of high teens (around 18%) in the past, the NASSCOM has estimated that this year the industry would grow around 10-14% most likely on the lower side of the range. The currency devaluation at this point of time is more than welcome for these service providers as it contributes directly to the bottom line. For example, a contract worth $100 was worth INR 5,000 a while back when the exchange rate of $ to INR was 50. Now at the current exchange rates, the same project is worth more than INR 6,000.

Most prominent companies like Infosys, Wipro, TCS and the likes are actively involved in currency hedging. This would bring down the positive effects of the devaluation.