Inflation and the Case for FDI in Retail

As the debate opens up again for FDI in retail, it is interesting to examine the contours of the issue.

As things go,only 51% investment is allowed in single brand retail and 100% is allowed in wholesale operations.Almost no one, not even the opponents of FDI have any argument against the economic benefits of FDI. The reasons are political. The ICRIER in its report had strongly and staunchly enunciated the benefits of FDI and the fact that it has had manageable adverse impacts in emerging countries. The reasons for opposition are political and it is good fodder for the press.

But the question is can any country manage without a large organized retail and can any emerging country do it without FDI?

The Government has woken up to the fact that inflation is a monster that can be tackled only by efficiency and productivity. With the world economy likely to remain vulnerable for some time, sustaining fiscal deficits is not the answer. The Indian interest rates are also high enough to make the economy uncompetitive. A key source of inflation in India is the wastages and inefficiencies between the farm and the fork.

The story of FDI in the world economy makes for some astonishing reading. The world annual GDP is around $67 tr and the total FDI in the world is $ 16 tr.USA has cumulative FDI of $ 2.3 tr and UK and France have more than $1 tr FDI. The FDI in China is close to 800bn and even Srilanka has $250bn. India’s cumulative aggregate FDI in all sectors is barely $150 bn and we keep raising enough hue and cry to ensure that each additional billion is fiercely resisted. The single brand FDI in retail till Sept 09 is barely $48mn.

The following extract from a GOI site mentions retail along with gambling and lottery where FDI is not allowed.

The extant policy does not permit FDI in the following cases:

i. Gambling and betting
ii. Lottery Business
iii. Atomic Energy
iv. Retail Trading
v. Agricultural or plantation activities of Agriculture (excluding Floriculture, Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and Cultivation of Vegetables, Mushrooms etc., under controlled conditions and services related to agro and allied sectors) and Plantations (other than Tea Plantations)

For a 20% slice of the $450bn total retail market, we need to invest $15 to $20 bn and it is in the country’s interest to allow this for unleashing a cascading effect on the retail sector, inflation management and the economy.

Roots of Denial

In a recent discussion on TV after Mamata’s triumph in the municipal elections, the Trinamool spokesman Deerk O’Brien kept on saying to several points the CPM spokesman raised that the communist were living in denial. We see denial every time when seemingly intelligent people refuse to see the truth. The latest scientific studies suggest that denial has its origins in power play and emotions.

1. Most denialists deny anything that they cannot see. Their vested interest survive because of this denial. For example, the society has denied global warming (as long as it did not see it directly),keeps denying evolution and earlier denied harmful effects of smoking. These denials serve to perpetuate the old mindsets preserving established interests.

2. Most denials are based on emotions and anecdotal evidence. So there is no rational study or assessment of evidence but the mere occurrence of event is touted as causality. Human beings also tend to react to emotions and thus it is fertile ground to deny the truth if it happens to elicit the right emotions. We also tend to feel safe in the stability of regular thinking.

3. Most denialists also suffer from ‘paranoid personality disorders’ with anger, intolerance and a sense of disproportionate self-importance. Their distorted sense of reality brooks no opposition.
However denials in the face of evidence extract terrible prices. Bengal is a classic example where the party doctrines have not changed and a once proud and prosperous state has gone into serious decline blighting the lives of millions. The denial of the hazards of smoking destroyed millions of lives again. It was first proved in 1951 that smoking can cause cancer and only in the 1990s, it became part of the mainstream thought.

Artificial Life

Dr. Craig Venter, Dr.Hamilton and their team have achieved something which will profoundly alter human life. This is arguably one of the most important milestones ever in human history. They have created a piece of DNA with about 1000 genes with laboratory chemicals. This is artificial, conceived through a computer programme and this organism can replicate on its own.

There is exciting research in biology happening in several other laboratories and this breakthrough will only accelerate the process of creating synthetic living organisms. A day when artificial large animals can be created may not be very far. This also challenges our conventional notions of life and religion.


The experiments on recreating ‘Big Bang’ in Geneva are also likely to unravel the mysteries about the origins of the universe. That will be another giant step for science and make our understanding and interpretation of life more complete.


But the most fascinating thing in this is the fact that Man, a product of evolution, has reached a stage where it is able to understand the complexity behind its own creation and will be soon able to replicate its own evolution in some way !

Lessons from HDFC and Bharti for Retailers

The beleaguered retail sector in India needs to look no further than the story of mobile telephony and housing finance for inspiration. India’s retail sector is still listless and its people frightened even after several industries have revived and the economy sizzles back to a 8.5% plus growth rate.

HDFC started in 1977-78 when the concept of housing finance was well-established in western countries but barely understood in India. It found it difficult to raise funds, had a disastrous IPO and lost money for a few years. The share quoted below the offer price for a long time. But it stayed on in the game and slowly the tide turned, first due to the underlying demand and then the liberalization in the financial sector. Today, it has a balance sheet size of more than two lac crores with its housing finance, mutual funds, insurance and banking businesses.

Bharti had difficult initial years, there were losses but it persisted. In just more than a decade of being in the game, it is a true success. It is highly profitable, a top employer, large and now setting out with global ambitions. Out of the twenty-five players who entered telecom, only three have survived.

Both these companies focused on a simple formula for success in new industries – vision, people and continuous learning. Survival in the new sectors also needs robust strategic thinking by the promoters or the top management.

The retail players can look at these giants and use the lessons effectively.