TCS Daily


Organized Retail in India

By Arjun Swarup - September 9, 2008 12:00 AM

In 1984, Arthur Hailey wrote a novel called Strong Medicine, which described the American pharmaceutical industry. Two-thirds through the book, the main protagonist, along with her family, goes on a round-the-world trip, and over a page or two describes her experiences and impressions of the different places. These descriptions obviously mirror Hailey's own impressions, so the Middle East is described as oil rich, Greece is described as idyllic, and India is described as "the giant subcontinent, the land of savage contrasts, pictures of wealth and beauty contrasted with scenes of appalling filth and degradation."

22 years on, that probably remains the most apt description of the sub continent ever written.

In 2005, India had more billionaires than anywhere else in Asia, and yet at the same time, 1 in 5 children did not have access to clean drinking water. The economy grew at 8% during the year, yet 380 million Indians continue to live on less than a dollar per day.

Since India opened up in 1991, the GDP has doubled to $745 billion, and per capita income has touched $728. Today, the Indian economy is poised on the threshold of a spectacular take-off. Yet, despite this, the issues of taking the benefits of growth out into the hinterlands, to create mass employment, and to create a number of international standard second-tier cities, remain significant and pressing challenges.

Organized retailing is India's best opportunity in decades to aggressively tackle these problems, and really broad-base India's development.

India's economic boom over the past 15 years or so has been restricted to a few cities across the country, driven mainly by IT, services and, to a limited extent, manufacturing. Three factors have been driving this - the talent and expertise within the country in these sectors, the global demand for these from India, and the relative lack of regulation in these sunrise industries.

Put differently: in these pockets, India took rapid strides towards a market economy, but in the much larger, rural sections of India, the presence -- and benefits -- of a market economy are non-existent.

The key towards creating a market economy in rural India lies in creating a demand for the products of rural India. 28,000 crores (approximately US $7 billion) worth of fruit and vegetable produce from rural India is wasted every year. This is largely on account of a lack of cold infrastructure in the country and the inability of the farmer to get the product to the market place in time, and get remunerative prices for their products.

Allowing investment in retail would address this problem to a great measure and has the potential to substantially change the face of rural India. Major international retailers such as Wal-Mart, Metro and Carrefour derive a large portion of their sales from agricultural value-added products such as jams, sauces, and packaged soups. In the case of Wal-Mart, the share of such products is especially high, with estimates ranging from 40% to 60%. If retailers can enter into contracts with farmers for sourcing agricultural produce, the Indian farmer, the bulk of whose output is currently wasted, would be assured of a buyer for his product at stable prices. He would not be subjected to the vagaries of seasonality and the volatility of market prices as he is at present. He would also be able to obtain access to cold infrastructure, thereby reducing wastage through better storage facilities.

In addition, given India's large industrial manufacturing base, and high levels of technology and manufacturing, the value-addition industry will be based, for the most part, out of India. The ancillary benefits for India would be tremendous.

Growth in the retail sector would create wealth in Rural India, thereby broad-basing India's growth and creating huge job opportunities in our villages. IT and services can only take India up to a point, and if India is to be a prosperous society, a wealthy hinterland is an absolute must.

But what happens to the Indian consumer? If a Wal-Mart feels that there is more to be gained from exporting the value-added products outside, India could be faced with a situation where its own people are deprived of cheap, high-quality products. Considering the huge wastage at present, this is not a justifiable fear.

Moreover, the Indian middle class, which now matches international standards in terms of consumption levels, is already at 400 million, and is growing by 40 million every year. To put that in perspective, the current size of the middle class equals the combined population of the United States and Japan, and yearly addition of 40 million equals the population of Argentina. Thus, for most retailers, India would continue to be the primary market.

Organized retailing can lead to lower prices, greater availability of goods, and trigger a massive cycle of consumption and creation. India's biggest strength lies in the fact that the bulk of our markets are domestic, and consumption from India alone can drive rural growth. A facilitator is needed to connect the buying power of urban India with the selling power of rural India, and organized retail could be the facilitator.

Worldwide, organized retailing is big business. Four out of ten of America's richest people are from the Wal-Mart family. Wal-Mart is as much a symbol of the American landscape as the chai-walla and the sabzi wala dots are of the Indian landscape. Organized retailing can do for India what electronics did for Japan, low-cost manufacturing did (or claims to have done) for China, and what gold and oil did for the Middle East. It can help the weaker and poorer sections of society leapfrog years of conventional development, and create large amounts of wealth.

Challenges remain but we as Indians must harness the power of free trade.

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32 Comments

Services and Manufacturing
It has been demonstrated throughout history that service-oriented societies become wealthier than just product-oriented (agricultural commodities/non-ag commodities and manufacturing) societies do. Their economies are also much more resilient and sustainable, too.

Both India and China will become more dependent upon domestic trade -- especially for material goods -- as you say. And, as you say, that is a good thing. It shows their coming economic maturity and, as the author states, it shows that they are utilizing all of their citizen's productivity more and more and getting higher value for it. Such positive feedback mechanisms is what happens when a society gets wealthier.

As for the US, did you know that US manufacturing output has been INCREASING all of this time that the media bemoans the 'hallowing/offshoring out of the nation's manufacturing'? People fall into the trap (especially Roy) of believing that just because US manufacturing JOBS are being eliminated, then manufacturing itself must be.

That's like saying that just because 50% of the US population is no longer involved in agriculture (as it was circa 1900), we're all going to starve.

Yes I know, unlike with the offshoring of manufacturing, we didn't stop making corn or wheat and imported them instead. But, if we could find an alternate source of wheat a whole lot cheaper than what could be grown here, it would make the same economic sense to stop growing it as it does to simply import plastic forks instead of manufacturing them here.

And, if we had to, we could build newer, highly automated factories to start making plastic forks again. In a very short time frame, too.

We have the means of making robots that can do metal finishing, after all. And that capability keeps getting better and better. In fact, it is automation -- not cheap labor abroad -- that causes more losses in manufacturing here. You just don't see the news media covering union protesters outside a plant that is installing robots. At least, not yet.





Skill loss
yes, the nuclear power industry is facing the same problems as scores of nuclear engineers retire right when an upswing in demand for Gen-III+ reactors is coming into play.

But, if the rewards are great enough, people will train for such positions. I'm not worried for the long term.

Transportation
What drove the economy of the undeveloped USA was rail, and then roads.

The famous cattle drives were made to get cattle to the meat packers.

Farm roads in the midwest easily got the crops to the rail head.

Even better, now factories are being constructed to produce the value added product instead of shipping off the raw product.

A soybean processing plant was built in Volga, SD to produce oil and meal. Ethanol plants are scattered all about the Dakotas and Minnesota.

That is a real challenge to places like India where the weather must make road building a real challenge. The famous rice terraces in the Philippines are deteriorating as no one wants to do the physical labor to maintain them. Philippine transportation is poor also.

Technology
So many new technologies can benefit countries like India.

They don't need to lay cable for a phone system and can use satellites for TV and computer.

With solar, they don't need massive power plants and miles of high power wires. With small, contained nuclear reactors, they can power a self contained factory to process ag output at the source. ( How do you like those freeze dried strawberries?)

With new technology, a bit of capital and ingenuity, India will become quite wealthy.

Still have the nuclear Navy.
They have been the mainstay for personnel for quite some time.

All that is fine, but India must FORGET about VILLAGES and instead, THINK of its VILLAGERS
With around 65% of India’s population in about half a million villages – which translates to an average of just 1400 people per village - it is very uneconomical to provide infrastructure services, barring telecommunication services (thanks to the cell phone).

India needs to move its villagers into (newly constructed) towns and villages.

5,000 new towns and cities with an average of 140,000 people per town would surely afford economies of scale. The very creation of these new towns and cities leads to lot of beneficial economic activity.

Mr. Atanu Dey writes extensively about this topic (the urgent need for new towns and cities in India) at his blog (http://www.deeshaa.org/) and there is a good video just on this topic there today.

Just for the record, I do NOT subscribe to MANY of Mr Dey’s views. But I whole heartedly endorse his thoughts on urbanization of India.

One way to achieve this is by encouraging corporate farming where the current adjacent marginal land holders become share holders of a corporation and get shares denominated in land area and are legally PROMISED a certain amount of produce (not MONEY, but produce). This amount can be based on the average yield of the past few years. This would immediately free a huge army of people from agriculture WITHOUT reducing the quantity of food grains produced.

And, as has been proven in many societies, the path to a wealthy society is through the reduction of the percentage of people dependent on agriculture.

Are India's political leaders upto the task?

How did you read that I am advocating that GOVERNMENT should herd people inti towns?
Please show me where in my post it is implied that GOVERNMENT should herd people into new towns?

OT : Biden says HRC would have been a better choice for VP
http://blogs.abcnews.com/politicalradar/2008/09/biden-hillary-a.html

Then let me clarify. When I said India, I didn't mean its Government. I meant its people
But I can understand how that sentence can be misconstrued.

But then, the sentence

"One way to achieve this is by encouraging corporate farming where the current adjacent marginal land holders become share holders of a corporation"

should have given you a pause.

That was to be expected...
...since many have predicted that Obambi would be under immense pressure to throw Biden under the bus...and soon.

And, the liberals out here in the SF Bay Area are becoming positively unhinged. I've had limit the topics of conversation with my friends in order to keep being friends (that bad, not kidding). That also gives me a strong signal that they are extremely worried, though.

Obambi might try to replace Biden with a woman -- preferably before the Oct 2 VP debates. Else, Palin will clean Biden's clock. Biden's little 'gaffe' you mention really was a trial balloon purposely floated for this, I think.

Of course, why on earth Hillary would accept the role of 'sloppy seconds' as the Veep pick is beyond me. I would think that would be even more insulting. But hey -- I only partially understand the Liberal mind. So, I think Obambi will ask someone like Kansas governor Kathleen Sebelius instead.

She's from the 'heartland' can even bring her own Kansas farm-raised pig to the campaign for everyone to put lipstick on!

If Obambi does this though, it will make his desperation look extremely transparent to even the dumbest of voters. I mean, it would be difficult for even Roy or Bob to defend that stunt, I think.

But then again, we are talking about Liberals here. They tend to over-rationalize the most brain-dead of ideas to the most absurd conclusions even more so when scared. So, watch and see if Sebilius or someone else with an XX chromosome pair winds up debating Palin on Oct 2 instead of Biden.

As for Biden, they'll make up some lame excuse or even he will throw himself under the bus ("Waaah! I'm not good enough like Hillary! So, UNLIKE Palin, I'm admitting that and stepping down for the good of the country...blah, blah, blah"). I wouldn't be surprised if a certain numbered bank account in the Caymans gets a multimillion $ transfer from Obambi HQ that same day too, but I will never be able to prove that.

I gotta save the link to this thread so I can claim Prescience bragging rights later on if everything plays out like - or even close to - what I just described. :)

Even more OT: Reps DID learn from Bill Clinton after all
This says it all: http://www.poorandstupid.com/images/20080910intern.gif

Oh yes...no gain w/o the pain fully applies to this situation
I didn't mean to infer any flippancy about that, either.

America went through an even rougher time of it during the War of 1812, when we were cut off from British imported manufactures. It was though such boon for domestic industrial development that historians describe that war as 'the war where America won its economic independence from Britain'.

Expectations
>"I've had limit the topics of conversation with my friends in order to keep being friends."

Boy, ain't that the truth. I learned quite some time ago not to even broach the topic of politics in any way with my left-leaning acquaintances; it's the surest way to turn friends into ex-friends (just ask Norman Podhoretz -- he wrote an entire book about the subject).

Of course, that doesn't stop my left-leaning friends from prattling on about things socio-political in my presence anyway . . .

Oh yeah
The ones that really rip into me and get all defensive (and very delusional, I might add), have been the females.

All three of the ones in question said, "You're smarter than this, dude" as well. Notice how they have to re-cast me as a stupid person that they consider conservatives-at-large to be?

Only one of them hasn't over-reacted and even arrived at many of the same determinations that I did.

Remember McCain?
Remember it is McCain who is the candidate for president?

I would like to recommend a book: "P.O.W.: A Definitive History of the American Prisoner-Of-War Experience in Vietnam, 1964-1973"

http://www.amazon.com/P-O-W-Definitive-Prisoner-War-Experience/dp/0070308314

I read this book in ~1979.

CDR Stockdale is most prominent as he was senior officer.

This is the same Stockdale that Perot asked to be his running mate. It was shameful how the country ridiculed such a fine man during that election (Stockdale and Perot, both USNA graduates.)

McCain is briefly mentioned.

Remember McCain? Not really...
He's just a future President von Hindenberg, waiting to conveniently die so Adolf Palin can take over. :)

Some Lib told me that today. Instead of laughing my head off, I just looked at him with a dead-pan face and said, "That's true. But we're counting on not only trailer-trash America but even most Libs like you to not figure that out. At least not until it is too late."

I can't even describe in words what his body language reaction was like. There was a lot of purple and red skin color changes going on, for starters.

You don't want to know how he reacted when I followed up by saying, "And, as long as Obambi goes after Palin, he's not out there instead actively convincing enough whites that he's not (a) some Black Panther out to get revenge on whites for slavery and (b) a 'Manchurian Muslim' who will take his Oath on a Koran."

Once you realize just how insecure Libs really are, its easy to push their buttons.

Button Pushing
>"I followed up by saying, "And, as long as Obambi goes after Palin, he's not out there instead actively convincing enough whites that he's not (a) some Black Panther out to get revenge on whites for slavery and (b) a 'Manchurian Muslim' who will take his Oath on a Koran."

Ouch! -- I like it. I don't have the temperment to swat my annoying leftist acquaintances with such rejoinders -- I'd never hear the end of it, as they take it so personally.

>"Once you realize just how insecure Libs really are, its easy to push their buttons."

With that I fully agree -- their EQ (Emotion Quotient) is so dangerously high that it's not difficult to goad them into full-on eruption. However, the fallout is a result I'm not comfortable experiencing whenever I'm in their company in the future.

Such 'tolerant' liberals!
"With that I fully agree -- their EQ (Emotion Quotient) is so dangerously high that it's not difficult to goad them into full-on eruption. However, the fallout is a result I'm not comfortable experiencing whenever I'm in their company in the future."

It's amazing how childish the MSM and the Dems are acting.

He was a jerk at work...
...who loves to unprofessionally rip into me in the middle of meetings. I finally had enough -- and in front of about eight other people in the conference room -- let those zingers fly.

childish acting
Its a sign of how infantile a lot of boomers (sorry folks, but what is the overwhelming demographic these 'tards tend to be in?) really are.

Basically, about a solid third of the entire baby boom generation never 'grew up' and are emotionally stunted for life.

Here is an extreme example (notice Roy in the background?):

http://www.linkognito.com/b.php?b=1399

I got a real kick at the end with the girl who seemed to be trying out for a role in a Klingon funeral ritual on Star Trek.

Yeah...the comments content mostly mentioned tree cutting
So it follows that AdSense would pick up on that.

Required Reading
>"Its a sign of how infantile a lot of boomers (sorry folks, but what is the overwhelming demographic these 'tards tend to be in?) really are."

If you want a hillarious skewering of the Baby Boom generation and the ugliness they've wrought on our culture, I highly recommend Joe Queenan's "Balsamic Dreams: A Short But Self-Important History of the Baby Boomer Generation."

http://www.amazon.com/Balsamic-Dreams-Self-Important-History-Generation/dp/031242082X/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1221248000&sr=1-1

(Ignore the low-star Amazon customer ratings -- the book is terrific.)

His trademark snideness and cynicism are appropriately wicked for the topic.

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