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Nandan Nelkeni On FDI in Retailing

In the early nineties an unusual window of opportunity opened up for India. As western companies kept increasing their dependence on information technology, they began to look at India and its large pool of technically qualified human capital. Advances in communication technology made it possible to connect remotely to computers in New York and San Francisco using satellites and fibre optic cables.

This external opportunity coincided with the opening up the Indian economy. The reduction in tariffs, freeing up of the rupee, abolishing of licences, and reforms in the capital markets unleashed enormous entrepreneurial energy. Most important was the serendipitous coalition that emerged that freed up the software industry from the clutches of regulation. It was a motley crowd of far-seeing politicians, risk-taking bureaucrats and a bunch of maverick entrepreneurs who, while tiny at the time, were fully prepared to face global competition.

This led to policies that allowed free flow of foreign capital, massive investment in broadband capabilities, zero tariffs on imported software and a favourable tax regime. Surprisingly, rather than the much touted technology companies from the West, it was a set of indigenous companies who soon took the leadership position.

The rest is history. An industry that was US$50 million dollars in 1991 is well on its way to be over US$50 billion by 2011. And India went from being perceived as an economic basket case to teaming up with China for the leadership of the Asian Century.

Most importantly, it has and will further create millions of jobs for all the young educated men and women that pour out of our colleges. India’s first middle class was created by the jobs in government, PSUs, banks, and the railways. Their children got to work in the air-conditioned offices of IT and BPO companies.

A similar opportunity awaits us today. In a low inflation, low-interest rate global environment, with tremendous over-capacity in many industries, it is very difficult to raise prices. In fully optimised economies, it is difficult to get volume growth either. The only way for companies to grow their earnings is to reduce their costs by operating and procurement leverage. That is why they scour the world looking for cheaper and high quality products to stock the shelves of department stores and supermarkets. In this world the retailers who directly reach the consumer are our best allies to take our produce to market.

What are the areas that retailers are looking at to source from India? They are apparel, home furnishings, consumer durables and agricultural products. Today the volume of products procured from India is estimated to be about US$4 billion. Wal-Mart alone is estimated to source about US$20 billion from China.

It is reasonable to assume that if we hook up our manufacturing and agriculture to global consumers through the gigantic retailers, we can generate annual exports of US$50 billion over the next 20 years. A friend from Fortune magazine once told me that what the submarine cable is to India (a gigantic pipe to ship knowledge services to the West), Wal-Mart is to China (a gigantic pipe to ship manufactured products to the West)!

Moreover, it is a great opportunity to kickstart the agricultural sector. Today the US spends about US$100 billion on agricultural subsidies. In Europe the subsidies under the Common Agricultural Policy are around Euro 40 billion. In the US, the subsidies are under threat due to the humungous budgets deficits. In Europe, the increasing cost of providing benefits to an aging population combined with the burden of EU enlargement will put enormous stress on the CAP.

Agricultural subsidies will disappear in the next ten years, not because of the Doha round of the WTO but because of the oldest reason in the world, that they will become unaffordable. And it will take us that much time to get our agricultural act together to exploit this opportunity. Moreover, 100 per cent FDI in retail satisfies all the conditions for FDI considered as politically correct today.

First, the retail industry is amongst the most sophisticated users of technology. The growth of Wal-Mart and Dell is simply because they manage the best global supply chains on the planet. To get the right product at the lowest price to the right consumer at the right time at the right location, when you are dealing with thousands of products, many of which are perishable or have short fashion windows, and to still make a profit, is the most difficult job in the world.

The huge advances in technology today, whether it is RFID for tracking products, data warehouses for understanding customer behaviour, or IP-addressable refrigerated trucks, are all about improving distribution. Our supply chains will get upgraded with technology dramatically, reducing waste and intermediation costs. This will lead to lower prices for consumers and higher prices for producers.

Secondly, it will significantly augment our productive capacity. The US$50 billion in exports, combined with another, say, US$10 billion of organised retail domestic will create the need for thousands of factories, to make jeans, curtains, fans, cans, bottle caps, and what have you. It will be the catalyst to manufacturing and agriculture what IT was to services.

And finally, it will create millions of jobs in the factories, the fields and the transportation companies. In an economy growing at 7-8 per cent it will be additional jobs as the expanded domestic capacity caters to urban areas which will grow from 30 per cent to 50 per cent of our population in the next 20 years.

And, who knows, like in the software, the telecom and the airline industry, the ultimate winners may not be the foreign companies but our own homegrown entrepreneurs who time and time again have shown what they can do when they have been unshackled and exposed to global competition.

Over a decade ago, we did some far-reaching things that put the sparkle back in the eyes of our educated urban youngsters. What right do we have to deny to the millions of kids growing up today, the same opportunity in our fields, factories and stores? The only way not to let them down is to create the supply chain pipes that will connect our farms and factories to the consumers of the world. For that we need 100 per cent foreign direct investment in the Indian retail sector. There is not a minute to lose. We should just do it!

Nandan Nelkeni, EX president and managing director, Infosys

This is an earlier article by Nandan Nelkeni, i donot have the source but a copy of the article.

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