Finally! Some sensible economic policy movement!

26 NOVEMBER 2011

Why, oh why, does it take a crisis for our politicians to act?

It was in 1991 that a beleaguered ruling Congress party, faced with the possibility of default, got the political spine to open up the economy to the winds of liberalisation, paving the way for the nation's subsequent prosperity and lifting millions of poor Indians out of the quagmire of perpetual poverty which the old, statist, policies had confined them to.

Even then, there were doubts whether economic liberalisation would spell the end of Indian businesses. Whether opening up the doors to foreign brokerages and investment banks would spell the end of domestic, mom and pop brokerages.

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Instead, in some sectors such as telecom and two wheelers, India produced some fine companies. Instead of transnational companies swamping us, Indian companies such as Tata Steel, Bharti and Tata Motors made acquisitions abroad. The Bombay Club shut up and faded away. The entry of McDonald did not end the udipi restaurants; both co-exist, giving consumers choices.

Today India is once again in a self created mess. Corruption scandals erupt with alarming frequency, caused by the 'share-the-spoils' policy of coalition Governments. Big ticket purchases by Air India, now driven to bankruptcy requiring continuing dollops of tax payer's money, is one example. Sale of spectrum to a select few, who made windfall gains selling stakes in their companies, is another. The opposing political parties revel in competing to wash each others dirty laundry in public, neglecting, in so doing, the task for which they were elected viz. of running the country. There has been no business done in Parliament for the past three days! Why should MPs get paid anything?

In this state of policy paralysis the economy suffers, and the India story takes a beating. Foreign investors flee - (Foreign institutional investors) FIIs were net sellers all of last week. Interestingly, domestic mutual funds were net buyers all of last week! Sale by FIIs and their purchase of $ to repatriate home has resulted in the Indian Rupee being at its lowest ever level against the $. The only ones to benefit from the depreciation of the Rupee are those who are waiting to bring back money stashed abroad, where secrecy laws no longer provide them the comfort of anonymity.

Given such a scenario of slowing GDP growth leading to higher fiscal deficit, disinterest by foreign investors and a falling rupee, the decision by the Government to allow foreign direct investment (FDI) upto 51% in multi brand retail and 100 % (up from 51%) in single brand retail, is welcome.

The country loses over a third of its fruit and vegetable crop in transit, resulting in a hit to the farmer. The loss is due to poor roads and absence of a cold storage chain and appropriate transport facilities. The Government had got its priorities wrong in first connecting the four major metros through a 'golden quadrilateral' road network and later connecting the villages to this quadrilateral.

Perhaps it ought to have started branching out from the villages first, and simultaneously setting up the infrastructure for cold storage chains.

FDI in retail is thus expected to reduce this loss in transit and result in better prices for farmers. In other countries it has also resulted in lower prices for consumers, because of the buying power of the retailers. In short, it squeezes out the inefficiencies of the chain of middlemen between the farmer and the consumer, who have been taking a larger than deserved share of the value add. The Commerce Minister, Anand Sharma, expects 10 million jobs to be created.

So why the opposition? It is in fear of the loss to the mom and pop kirana, or grocery stores, which have efficiently served the neighbourhoods well. But who knows? Perhaps they will survive, and even thrive! Just as some companies, who got their act together, did, after the 1991 liberalisation! Companies or groups who did not get their acts together, faded away, there are many such. New entrepreneurs sprung up; without the liberalisation which permitted, for example, computers to be imported, we wouldn't have had an Infosys or even the success story of IT/ITES. This sector now creates millions of jobs every year!

Instead of debating this in Parliament, political parties shouted down proceedings in the house and conducted no business. Shame on them!

In this atmosphere of dirty linen washing, all agencies are getting into the act, and bureaucrats are afraid to take decisions for which they may later be questioned. Consider the disallowance by DGH (Director General of Hydrocarbons), of RIL's claim for recognition of six discoveries of gas in the KG6 block, on the ground that RIL had not, as required by the PSC (production sharing contract) conducted conventional tests. Reliance Industries (RIL) had, instead, conducted a more modern 'modular dynamic test' which is cheaper. Since the cost of such testing is borne by the Government, and hence the tax payer, it is strange that the DGH insists on a more expensive, and outdated test. It did so even for Oil and Natural Gas Corporation (ONGC). As per news reports, the ostensible reason is that DGH is scared of a CAG inquiry were it not to stick to the PSC agreement terms! If true, this is utterly irresponsible and a complete mockery of governance and a waste of money.

Similarly, the DoT (Department of Telecommunication) has disallowed a recommendation by TRAI (Telecom Regulatory Authority of India, the watchdog supposed to look after consumer interest) to make M&A easier in the sector. Given the large number of competitors in each telecom circle, a consolidation is both needed and inevitable, and anything that facilitates a consolidation without harming the national interest, is welcome. There is no sensible reason for DoT to oppose a TRAI recommendation. Another example of poor governance.

Perhaps the Government needs a younger, dynamic and bolder leadershihp capable of taking the necessary steps instead of pussyfooting around.

It should take a cue from the Tata group, which, last week, named 43 year old Cyrus Mistry as Chairman of the holding company, Tata Sons, after the retirement of Ratan Tata.

The BSE-Sensex fell 776 points last week to close at 15695, and the NSE-Nifty dropped 195 to end at 4710.

What next?

Private investors refused to buy German bonds, which are the safest, at the terms offered, asking for higher rates. Yields on Italian bonds are hovering at the danger mark of 7%, indicating it is next in line for a bailout package. Spain may be next. China, as mentioned in last week's column, is also distressed and its real estate market is about to collapse. ICICI's Chanda Kochhar expects global banks to freeze up, as they did post the Lehman crisis, and be chary of lending money. The longer term scenario thus looks awful.

In the immediate week, however, there may be a technical bounce.

Hopefully! The market seems oversold and a short bounce appears possible. But it would be a trading opportunity.

J Mulraj is a stock market columnist and observer of long standing. His weekly column on stock markets has run for over 27 years. An MBA from IIM Calcutta, he has been a member of the BSE. He is Conference Head - India, for Euromoney. A keen observer of events and trends, he writes in a lucid yet readable style and takes up issues on behalf of the individual investor. Nothing pleases him more than a reader who confesses having no interest in stock markets yet being a reader of his columns. His other interests include reading, both fiction and non-fiction, bridge, snooker and chess.

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8 Responses to "Finally! Some sensible economic policy movement!"


Dec 12, 2011

A well presented article by Mr. Mulraj. It is disgusting to see the responses of our politicians to such serious economic proposals in the Parliament and outside playing the emotional cards to achieve their narrow political ambitions. It appears that we have to pay heavy price, in the long run, to move forward economically.



Dec 4, 2011

A good article. But, there may be one or two Wallmart in a city in India. Do we have roads to go to Walmart in our cities? Can sufficient space be provided near the store?

There are millions of small traders,transporters,material handling people who may lose their livelihood.In USA one can cover 20 miles in 20 minutes and buy their weekly requirement and store. In India, will the climate permit us to store perishable items for a week.Let not the Indian & foreign MNCs get into this business. They may work in hi tech areas and improve the economy.In India more than 60% of the people get less than Rs100.00 per day. They can't even enter these big shops.Let the small vendors and poor workers get at least one meal a day.


Tikam Patni

Nov 28, 2011

Absolutely right. Why should the MP's be paid ? But they have paid themselves Rs 5 Crore each per year plus salary, and all the perks. All for doing nothing but just for shouting, chair throwing, and making emotional speeches.

Coalition politics and frequent elections round the year is the root cause.


Bharat Patel

Nov 28, 2011

Dear Mr.Mulraj,

The information given by you in nothing new and you stand with the decision of allowing FDI 51% in MBR.

But let me throw you some facts on the issues which will directly effect the health of the consumers:

* Min 50% investment shall be done in the back-end infrastructure i.e the cold storage:

Cold Storage of the vegetables, fruits etc.. is not good for health. It accounts for more than 80 diseases including diabetes, cancer etc.. which is in increase because of the Refrigerator which produces CFC gases. CFC stands for Chloro Floro Carbon which are harmful to our health.
This is at present limited as the big retailers like Reliance, Big Bazaar are keeping it only for 7-10 days in cold.
But when the back-end infrastructure will strengthen then the time the vegetables are kept in cold storage will increase to say 15-20 days (+) the time we, consumers will keep in our own Refrigerator say 7-10 days, so in total 22-30 days.
This is foolish on the part of the government as they are not saying this fact to the consumers. Google on the word "Effects of refrigerator" and you will get more information than what i provided.

* Providing employment opportunities to more than 10million (1crore) people:

Mr.Mulraj, you state that you have done your MBA from IIM Calcutta, good but here there is a hidden fact need to be discussed.
Note that this MBR will come at the cost of the small trader, kirana stores etc...
(Proof: Sales at modern stores grew 34% in 2009 whereas Traditional stores(Kirana) could increase sales only 15% in 2009)
Now let me say you that India has about more than 30 million people dependent directly on this trade, Kirana stores etc..
Hence if this MBR is expanded then these people will lose their earnings in short Govt will create 10 million employment taking away the bus. of 30 million people. So in net the unemployment of the country will raise by 20 million people.

Now the Problems are well defined here, based on this we can find the suggestions/solutions.

100% FDI in Single Brand Retail:

Single Brand Retailers will sell the rejected (2nd Quality) items in our Country as some co. are doing it at present (Audi, Ferrari, Tommy.H, Levis etc..) and take away all the 100% income to their country. This is harsh on us.

This is just a part of the issue i have raised and there are still many more issues relating to this.

I request all the young generation in our Country to wake up and act so that atleast we can save our country from being slave to USA.



Nov 27, 2011

FDI is good but 100% not 51%. Let there be competition indian mnc and foriegn mnc in organized sector. Right now Indian MNC's ( at the cost of small scale trader , not really a level paying field at any cost) will benefit tremendously with foreign Mncs paying up premium to them for getting policy done. Why can't Indian MNC's build the cold storage , transportation etc , they had access to cheap capital. Again middle man goes , the company employees will be doing that role , its not disappeared . Anyways Wal-mart at least in USA is not being in grocery but in general mechandise so why whole thing is directed at farmers as if its only coming in grocery store.

Anyways the model is pretty clear , indian tycoons and politicains decide one sector at a time, everybody enters in a horde , Policies are changed at expected , the tycoons gives up the operation control to foreign player( as expected) and get the premium of its service and pass politican's share.



Nov 27, 2011

Excellent, well researched article. Thanks Mr. Mulraj.


sundaravaradan S

Nov 26, 2011


As usual, I love these weekly articles by J Mulraj.
Reg FDI in retail: My view: The Major Loosing Party due to this change,wil be Intermediate TRADERS &Distributers. The Kirana stores CAN NOT be removed from India. (I am writing this note from my Son's Home in USA, where there is no way for Kirana Stores!).Now, we know who & why TRADERS are going on Strike on Dec-1st!
What is the Price of Onion, Tomato, Potato, Fruits, rice, Veggies... paid to the small farmers? How much more the ultimate consumer pays for the same? +10% or + 200%? Who gets the profit (excluding the cost of Storage & Transportation)?

FDI in retail, I think, is good for India, atleast for next 5Years!


manmohan khetan

Nov 26, 2011

Very gud article. One suggestion- pl elaborate more on what to expect going forward. Pl use simple words instead of jargons i.e. oversold,trading opportunity..

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