The Indian Tempest Sep19


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The Indian Tempest

  1. India’s retail sector needs shaking up. In a free market economy, creative destruction ensures that only the most efficient businesses that add most value to the economy survive and prosper. As yet India is decidedly not a free market economy, but the UPA took tentative steps towards introducing much needed competition in the retail sector with the announcement allowing 51% FDI in retail (though this step was greeted by uniform hostility by all other parties). This move will basically allow foreign giants such as Walmart and Carrefour to enter India in a big way and shake up the supply chain. Lack of investment and disguised unemployment in the retail sector and the agricultural supply chain have rendered India with some of the world’s poorest farmers and highest food inflation rates despite producing (on paper) more than enough food to sustain not just our nation but several others.
  2. Why has this happened?
  3. Why  have Indian farmers never got the complete benefit of their toil and why does the Indian consumer have to pay some of the highest ‘food expenditure to salary’ ratios in the world? Disguised unemployment is a problem that has been the bane of rural India. A messed up education system and a over-regulated industrial sector (still over-regulated) ensured that rural India never gained substantial employable skills that would lead to a higher level of value addition. India completely skipped over the “industrial revolution” step that any economy must undertake before it becomes rich and prosperous. So while the agricultural revolution came about and pulled millions of Indians out of poverty, it was directly followed by a boom in the services sector which mainly favoured workers with established employable skills and training. Therefore millions of rural youth were left with no viable option for employment (this is where the manufacturing sector should have stepped in). Realising that an increasing number of family members could not depend on the same plot of land, the rural population began migrating to urban centres. This definitely reduced the pressure on the actual farms. Sadly, in this process of migration and unemployment an increasing number became a part of the retail sector – one of the few service sectors capable of accommodating untrained individuals. With an increasing number of participants in the retail sector, the efficiency of the “farm to market” journey reduced. The value added to the economy was the same, yet an increasing number of participants were contributing an increasingly tiny fragment of this value. The retail sector in India is highly fragmented. There are millions of small participants that are unable to make the basic investments essential for the business to prosper and add actual value. The government’s investments in the agricultural sector have been inadequate and unable to attain full efficiency due to cronyism, corruption and inefficiency. What India needs are retail giants that are able to surpass the government’s limitations and set up the infrastructure themselves. India’s million small traders will never be able to gather the financial fire-power to setup an infrastructural setup that can efficiently transport India’s food to its cities without wastage and price inflation. Allowing FDI will allow foreign giants to setup the infrastructure that India desperately needs and will basically slash the fat in the supply chain. What we could ideally see is a chain that involves only the farmer, the retailer and the consumers. Cutting away the flab in the supply chain will benefit all parties save one – the million small retailers that previously used to do the job of transporting India’s food produce to its cities. Essentially, a major portion of them could be rendered jobless if giant retailers are able to do a better job (which they definitely will) of making fresher, higher quality and cheaper produce available to the consumers.
  4. Is it a bad thing that they will be rendered jobless? Certainly not. Why? In a prosperous free market economy, creative destruction ensures that industries and individuals that are unable to contribute  enough value to the economy will be rendered jobless and will be forced to gain skills that allow them add value in different sectors. Yes, so we may see a few million workers with simply basic skills being forced to re-enter the labour market to look for job opportunities. The government response should be (and should always have been) to set up skill addition centres. In a previous article I have already pointed out that the problem fundamentally lies with our education system that never adds enough employable skills to an individual for such individual to get a good-paying job. So the government’s response must be to setup an increased number of vocational training centres on the the lines of the Industrial Training Institutes (ITIs) already existing in the national educational framework. Thus the government’s aim must be to equip the labour force with value added skills that allow them to earn more in fields that are able to remain competitive despite liberalisation. Those having doubts over the government’s renewed enthusiasm for liberalising key industries must consult the newspapers of 1991 and 1992 and realise that their ideas are along the same lines as those doubters. Liberal economics will always be the key to prosperity for a nation. Capitalism is a much maligned term but empirical evidence has clearly shown that countries (when divided into quartiles based on economic freedom) with the most economic freedom have the richest populations, not only a the the upper end but even at the lower ends of the scale. Comparisons of the bottom 20% of the countries along the economic freedom scale show that the incomes of the bottom 20%  in the most economically free countries is several multiples higher than the incomes of the bottom 20% in the less economically free countries. Capitalism essentially increases the size of the national income pie allowing each member of such economy to earn more, even his fraction of earnings in the national GDP remains the same.
  5. Moreover if we look at the FDI issue from a political angle, it is clear that special interest groups hold a sway over the political decisions of other parties. Higher gains for farmers and lower food prices for consumers would positively affect the entire population of a 120 crore, but the constituents of the retail sector are highly organised and form a solidified vote bank that also contributes massively to party funds. Thus opposition political parties allow themselves to be swayed by these special interest groups that form a tiny minority while compared to the section of the population that will benefit from the liberalisation of the retail sector. Therefore the need of the hour is for the government to communicate clearly with its citizens and explain to electorate the need, rationale and benefits behind every move. This is Manmohan Singh’s second opportunity to cement his place as an economic legend in the annals of Indian history. Can he hold his nerve?