The Indian Economy Blog

December 6, 2006

Wal-Mart and India

Filed under: Business — Edward @ 7:20 pm

This is just a short piece to follow-up on Gaurav’s very to the point post last week on this topic (and the interesting debate in comments). Now Prashant sent round this link to a WSJ article by Salil Tripathi which I think bears reading and thinking about.

We are presently having something of an ongoing debate here about how high trend growth might be in India at this point.  Now quite simply one part of this argument depends on demographics, and another on productivity. Productivity in India obviously needs to rise, and there are basically two ways that this can happen, have better human capital and accelerate technology transfer.

It is this latter point that really starts to get me interested about the Wal-Mart agreement, since as is relatively well-known, Wal-Mart shot to prominence due to the extremely effective way it leveraged IT to organize logistics.  So the deal with Wal-Mart is obviously going to lead to an inflow of management and technical know how, which will be extremely beneficial across the Indian economy as and when the practices to be introduced spread. Ditto really the nuclear deal that Nanubhai just posted about. Now I realize that this deal was largely about access to uranium, but any project which facilitates a technology flow has to be interesting from India’s point of view, whatever the ‘steering’ difficulties of handling the issue of those who may be displaced by the arrival of the new, and more efficient version, of any given technology.

At the present time the big debate about growth in India is one of just how rapidly the investment rate can rise. Now as the rate rises only one part of the new investment will be funded by foreign direct investment. The lions share will be raised and spent in India (or on importing machinery and equipment). But let no-one lose sight of the strategic importance of the FDI share in development investment, since it is FDI which normally facilitates the technology flow, and this is really the big lesson which comes from the Chinese development experience. It is this nettle that India must now grasp, and without too many ifs or buts.

21 Comments »

  1. I am post a large extract from the WSJ article here in comments, since in the fullness of time the original article may disappear. I do however thoroughly encourage all readers to visit the original site to read the full context, bla, bla, bla.

    Edward

    Wal-Mart in India
    By SALIL TRIPATHI
    December 5, 2006

    India’s first Wal-Mart store isn’t slated to open until next August. Yet the battlelines are already being drawn.

    India’s middle class sees the arrival of the world’s biggest retailer as another sign of the country’s growing economic clout. Now antiglobalization activists are weighing in, saying Wal-Mart will squeeze out India’s poverty-stricken farmers.

    Activists in India seem to oppose Wal-Mart because it’s fashionable to do so, with little consideration for economic implications. In the West, unions, activists and influential U.S. senators don’t like the company. So India’s me-too antiglobalizers, not wanting to be left behind, join what is, ironically, a global bandwagon.

    Why should activists claiming to represent farmers oppose Wal-Mart, for which groceries represent a small part of operations, and which is known to sell products ranging from tiny kitchen gadgets to big-screen plasma televisions at low prices? The reason is size.

    Wal-Mart capitalizes on economies of scale. It uses its strength to drive down costs internally and gets hard bargains from suppliers, to live up to its promise of keeping prices low everyday, becoming a formidable inflation-buster.

    That’s good for consumers. But if Wal-Mart deploys its legendary cost-squeezing skills in India, activists fear that India’s hard-pressed farmers will go under.

    Cost squeezing is only one part of a successful supermarket chain. They also set quality standards, establish warehouses, minimize spoilage, set up cold chains to ensure reliability and maintain inventory control to reduce waste. While the Indian agriculture sector is large — India produces more milk, grains, and vegetables than any other country — its distribution network is abysmal, with tons of food rotting in state-run warehouses, if not consumed by rodents, or spoiling before it reaches markets. The Confederation of Indian Industry argues that India can be the world’s breadbasket. It’s failing to do so because most of its farms are small, inefficiently run, and don’t use modern technology.

    Large players like Wal-Mart can change that. Once allowed to invest, they will have more incentives to buy domestically and to build productivity-enhancing infrastructure. That’s great for ambitious Indian farmers.

    Nobody denies that the Indian farmer has a hard life. Lacking capital, many farmers are forced to borrow. Indian banks, meanwhile, have reduced rural credit to curb their exposure to Indian farmers’ annual gamble with the monsoon. Unable to find an alternate livelihood, many poor farmers continue to cultivate their land, taking unsupportable loans from rural moneylenders at high interest rates. Some buy expensive seeds, but some use the money to pay for their daughters’ marriages. Then, if the crop fails, they can’t repay the loan.

    One horrendous consequence has been farmers committing suicide. That tragic narrative has been hijacked by the Left in blaming “neoliberal” economic reforms. Nationwide figures suggest that some 17,000 farmers took their lives in 2003.

    Earlier this year the otherwise economically-rational Prime Minister Manmohan Singh promised an aid package (including debt relief) of $156 million for “suicide-prone” districts. P. Sainath, a liberalization critic and rural affairs editor for the Hindu — India’s leading left-leaning newspaper — has extensively reported from rural India and has called the package “a sham,” as it includes existing projects and does not address the causes of farm decline.

    The solution is not to pour more good money after bad. There are simply too many people in agriculture — nearly 60% of Indians call themselves farmers, although 40% told government surveyors they’d like to do something else. Agriculture’s contribution to India’s gross domestic product has now shrunk to 20%. This decline precedes the post-1991 economic reforms.

    Since the 1970s there has been migration from drought-prone countryside to cities for jobs. Economic theory would describe this sort of “farming” as disguised unemployment.

    But there is a way out: Town and village enterprises (TVEs), which spawned the Chinese miracle in the 1980s, can absorb surplus labor.

    Where would Wal-Mart fit in? It could buy goods from Indian TVEs. The certainty of a large buyer setting quality standards and demanding new products would prompt farmers to form co-operatives — and India knows how to run good ones — or work as employees of agribusinesses, increasing their wages.

    Competition too would rise: Many farmers today sell their crops to the state at prices set by the state. With many global players likely to enter the market, following the lead of India’s corporate giant Reliance, farmers won’t be beholden to only one buyer.

    Wal-Mart should be viewed as part of the solution. And academic research has suggested that once a supermarket enters a developing country, its farming sector modernizes rapidly, ending stagnation.

    Antediluvian ideas glorifying the small farmer and maintaining his uneconomic activities as “sustainable farming,” opposing agribusiness and modern retail, will only prolong India’s rural crisis.

    Mr. Tripathi, a former Far Eastern Economic Review correspondent, is a writer based in London.

    Comment by Edward — December 6, 2006 @ 7:25 pm

  2. I didn’t quote the following extract in the main post, because I wanted to be short and sweet, and I didn’t want to get sidetracked, but this is the heart of the problem:

    “There are simply too many people in agriculture — nearly 60% of Indians call themselves farmers, although 40% told government surveyors they’d like to do something else. Agriculture’s contribution to India’s gross domestic product has now shrunk to 20%.”

    The answer is for most of these people to go and work in low-value industry (they simple don’t have the skill-set for higher value work) and in low-value urban services. But to be able to achieve this the Indian economy needs to grow, grow and grow. I this sense Wal-Mart is part of the solution, not part of the problem, whatever the wages and working conditions they offer in the short term. Pragmatism rules, OK.

    Comment by Edward — December 6, 2006 @ 7:30 pm

  3. With regard to the importance of FDI, Surjit Bhalla made the interesting point that if you at foreign institutional/portfolio investment (FII) + FDI as a % of GDP, then India and China are approximately similar.

    Of course FIIs don’t bring any (or, at most, very minimal) technology transfers (bc they’re just hedge fund guys sitting in Stamford/NYC/Bermuda moving money at a keystroke). But one could also make a case that outward FDI brings in the same (or more) tech transfers that inward FDI does – and as we noted in the Corus post + comments, India’s outward FDI is almost as large as FDI coming in… so that should be taken into account I think as a way to raise domestic corporate productivity.

    Personally, judging from the Western media’s incessant focus on whether China is overheating, I don’t think this capacity debate will go away until either growth slows to 6.5% – 7%, or inflation comes down to the 3% range (or both). Maybe I’m reading it wrong, but even Ajay Shah seems to have softened his view a bit on whether trend growth can accelerate further.

    Comment by Nanubhai — December 6, 2006 @ 8:34 pm

  4. Typo: In the first line of my comment above, “at” should be “look at”

    Comment by Nanubhai — December 6, 2006 @ 8:37 pm

  5. Yes, FDI is crucial. But, the recent developments suggest that the Indian Govt would like more of investment through the FII’s.

    This kind of FII infused growth is harmful for the economy as it is not sustainable. To sustain it, India is paying a huge prize. The SEZ imbroglio is proof to that.

    Comment by Alex M Thomas — December 6, 2006 @ 10:21 pm

  6. In my view, it is good that global giants are entering the retail sector. This will bring a huge deal of organization in a sector that is highly disorganized.
    One big qualm I have against the kirana walahs is their potential for huge tax evasion. The entry of global companies might force even some of these kiranawalahs to adopt modern technology over a period of time decreasing the potential for blatant tax evasion, although I guess this is a very far fetched thought and most transactions are still plain cash transactions.

    Comment by Vinod — December 7, 2006 @ 1:01 am

  7. The few remaining farmers that live in my little bubble of American prosperity are now selling their land to developers for around $3 million an acre. I hope the farmers in India lucky enough to own the land they work are leasing it instead of selling it when global corporations come knocking.

    Timing is the key to America’s success.

    Timing will also decide whether India is a success.

    It’s not if Wal Mart is a good idea…but when will it or a similar firm be a good idea.

    Comment by alphie — December 7, 2006 @ 2:18 am

  8. I don’t know how Wal-mart is going to be any different from the home grown retailers we already have. And we have quite a few in Central, Pantaloons, Food World, Subeeksha to mention only a few. I don’t see the model in which the home grown ones operate to cause much of a difference to the common man. Keeping the technology transfer and other expected benefits aside for a while, I don’t see Wal-mart grabbing a big chunk of the cash if they don’t come up with a new model. And hence I don’t see how they will have any mentionable impact here.

    Comment by Abhishek — December 7, 2006 @ 10:05 am

  9. “The SEZ imbroglio is proof to that.”

    I’ve been hearing quite a lot of this since the new SEZ policy has been created.

    Here is another paraphrase by Rajiv Gandhi

    “Of every rupee expended by government only 15 paisa reach the poor”

    so don’t people think that this new SEZ policy will serve to minizmize corruption. The new congress government after four years of 8% growth, and the addition of the VAT has already shown that the more money you give the goverment the more they will spend (and with the rural employment garruntee, they’ve shown how inefficient they can be). These SEZ’s will create corrouption free enclaves. Most people bring up the fact that the small size of these SEZ’s will simply divert investments from the regular economy. Why is this so bad? From my experience, its shown that the less the indian government does the better. As long as the government sticks to its fiscal responsibility act lower tax revenues are a good thing, and if it doesn’t its even better.

    Comment by Patel — December 7, 2006 @ 5:08 pm

  10. Patel says
    “As long as the government sticks to its fiscal responsibility act lower tax revenues are a good thing, and if it doesn’t its even better”
    I agree with this statement to a great extent. However that doesnt relieve us from the responsibility of paying taxes sincerely. The biggest reason why there is inefficiency in the government is the lack of oversight. The reason why there is not oversight is because there is not a lot of people with actual stake as to how government spends the nation’s money. Imagine in a nation of 1.1 billion people, the tax payer base is a few million, definitely way less than 100 million. When we can have a higher tax payer base, there is more stake and then people demand more oversight, which in turn leads to better performance and fiscal responsibility in addition to giving more funds for government to work with for infrastructure projects

    Comment by Vinod — December 7, 2006 @ 7:47 pm

  11. Wal-Mart’s operation is different from the current Indian retailers, as they can completely take the entire supply chain from the field and factory to the customer. That kind of scale and loggistics support is not found in the Indian retailers who just focus on the front end operations. If guys like Wal-Mart-Bharti, Reliance Retail, Tesco-Tata take a big chunk of the market, their collective muscle will enable infrastructure investment and either by lobbying the govt or investing themselves they will build more roads, increase port and air-cargo capacities, etc as they cannot grow without fixing the infrastructure. By cutting down the middleman, decreasing wastage and increasing productivly, they can potentially bring stunning growth to Agriculture.

    To me the retail growth is just a small part of the equation. What is at the forefront is goin to be the long awaited Agricultural revolution and Infrastructual growth than can result as a side-effect of the organized retail explosion.

    Comment by Balaji Viswanathan — December 8, 2006 @ 4:11 am

  12. Balaji:

    “Wal-Mart’s operation is different from the current Indian retailers, as they can completely take the entire supply chain from the field and factory to the customer.”

    I entirely agree. This is what it is all about. An then the others will be forced to learn from them. This is what has happened to a large extent in Europe where WalMart has not had great success, but the likes of Carrefour have simply adopted the model. In a certain sense it just isn’t true that Europe hasn’t seen the benefits of the ICT revolution. It came later, that is all, and there is a thing called ‘second mover advantage’ as well as the better know ‘first mover’ one. In India Wal-Mart are just giving things a mighty push.

    “To me the retail growth is just a small part of the equation. What is at the forefront is goin to be the long awaited Agricultural revolution and Infrastructual growth than can result as a side-effect of the organized retail explosion.”

    Yes, this is also the point, which is why the whole debate about trend growth and the investment rate in 2007 onwards is so important, since you now need to up the job-creation rate to soak up all the people who are going to be displaced from agriculture.

    “Personally, judging from the Western media’s incessant focus on whether China is overheating…..”

    Quite. The whole over-heating debate is misleading. Obviously there can be some overheating in areas like urban property (and only in some cities) and some areas of middle class indebtedness, but this is only a question of timing. With time property prices will rise and rise, and current debt levels (ex the farmers which is of course another issue) are sustainable if there are high levels of growth (Tobin called this the ’tilt’ effect, as the level of living standards rises in the future pushing up anticipated incomes by multiples of current ones on a 20 to 30 year time horizon looking forward).

    So all this is one big circle which either feeds of itself or collapses back on itself. Personally I think what we are looking at is the former.This is why separating trend from cyclical fluctuation is so important.

    “What is at the forefront is goin to be the long awaited Agricultural revolution and Infrastructual growth than can result as a side-effect of the organized retail explosion.”

    Comment by Edward — December 8, 2006 @ 1:07 pm

  13. “Productivity in India obviously needs to rise,and there are basically two ways that this can happen,have better human capital and accelerate technology transfer”
    With 60% of people engaged in agriculture, India is the largest producer of milk and live stock,second largest producer of fruits & vegetables,third largest of food grains and fifth largest in egg production.But how much of this is processed?Processing level in the fruit & vegetables sector is 2%,in milk it is 14%,meat and poultry 2% and foodgrains 7%.As a result there is no value addition.Entry of global retailers like Wal-Mart and big industrial houses like Reliance,A.V.Birla group into retailing will generate the demand for processed food products and stimulate investment and technology transfer in the food processing industry.At present food processing sector account for 14% of manufacturing GDP and employs 13 million people.According to the confederation of Indian Industry,food processing sector has the potential of attracting phenomenal investment;human,capital,technological and financial; of over Rs.140000 Crores in the next decade.
    Talking about FDI in retail, the Mckinsey global institute has estimated that retail sector in India with reforms like removal of cap on FDI,flexible labor laws,product market liberalization,reforms in the urban land ceiling and tenancy laws etc. has the potential of creating 8 million new jobs.
    To put everything into perspective, in the USA retail trade makes up 11.6% of the total employment and in 2005 the average employment in retail was 1,52,54,900.In 2004 there were 85000 grocery stores in the US,providing 2.4 million jobs.Out of these 42.6 % stores employ fewer than 5 employees

    Comment by con man — December 12, 2006 @ 9:29 pm

  14. Hi!

    I was reading the commments and I found some points quite interesting. A part of my course actually deals with analysing the business practices of Wal-Mart. In the Indian context, you can forget productivity, you can forget logistics and everything else. Wal-Mart is not worried about that and will not contribute anything to it. Things about FDI and the like is talking too tall. If you look closely, we have already identified some of the problems that the farmers face today; inadequate transportation of perishable goods being one of them. Wal-Mart isn’t bothered about that. All it will say is – “get it fresh for me, or not get it all”. Wal-Mart will not go to the farms and buy from the farmers, it will not build roads for the farmers, it will not provide transport vehicles to transport the perishable goods. The company is known to play hardball for minimal money. It buys goods in large qualtities, no doubt, but it will just dump the farmer and his goods when it finds other farmers who will be ready to supply for cheaper; then when it finds another, it will then dump the second farmer like a hot potato, and this goes on. Farmers, in their search for large sales, will begin to produce more, not realizing that an axe is getting ready to fall on them very soon. Remember Rubbermaid? This is no different. Smaller retailers don’t and cannot exert as much pressure on the suppliers as much as Wal-Mart can. Its Predatory pricing

    Wal-Mart is also known to be a bad employer. Class action suits held in the USA will tell you the complete story.

    That isn’t all the story. There are plenty of reasons why retailing is good in India, but Wal-Mart alone can bring the part down to nothing. Undocumented workers, unpaid workers, child labour, unhygeinic working condtions, Chinese goods blitzkreig into the market, the list goes on. If it can do these things in a country like USA where regulations are so powerful, doing the same things in India is definitely an incentive for Wal-Mart to setup their operations. That is where it sees a large part of its money, not so much in the retailing part.

    The problems that I perceive are more at the grassroots level.

    That’s my 2 cents. Criticisms are most welcome.

    Prajwal

    Comment by Prajwal — April 22, 2007 @ 5:47 pm

  15. I agree that, to accelerate the economic growth we need the Private investment not in financial sector but also in agricultural sector. its right that a proper linkage between the urban market and rural market can push the farmer upward providing a remunerative price of the agricultural product. so to increase the private investment in agriculture not only central government, state government but also the academician encourage the contract farming system.

    But the question arises, who are the central player of this system and who are benefit from this. if we experience of this system, the small farmers, who are dominated in Indian agriculture, are discriminated by big business farmer. To explore the benefit form globalization and liberalization for small farmers, there is needed a suitable institutional frame work. without a proper frame work again we are encouraging the big business man like Mal-wart to enter in this sector. so this type of policy frame work will induce to increase the inequality in economy, which is not suitable for a healthy economy development.

    Comment by Braja Bandhu Swain — June 5, 2007 @ 10:31 am

  16. To the HECK with 1) Pseudo-Communists who still wander across illusive and nebulous stratum of twisted-mayoism when origin of mayoism (china) is undergoing radical transformation to socio-capitalism.

    Enough is the suffering of consumers who were all these years served/exploited with ultra-inferior products at ridiculous-prices as these products travel through layers and layers of …parasite-intermediaries(brokers, middlemen). Whom do they (leftists, anti-FDI’ers) trying to protect by resisting FDI in retail?

    Let’s welcome a marketplace where Direct FDI in retail in the next 5 yrs would eventually lead this economy to dsintermediated and effective chain mostly composed of producer, optional-trader and retail/wholesale groups.

    It serves many purposes:
    1) Keeps the CPI (consumer price index) and the inflation in constant check as consumer will have to spend less to get more as a result of world-class logistics/supplychains of these retail groups compete to get consumers into thier stores>

    2) Will for sure benefit the producer as retails attempt to cut all the layers and go direct to producers for procurement in several ways (a)contract farming where you’re ensured of risk-free returns for your harvest, (b)smart traders making use of commodity futures to hook up the aggregated produce to retail-procurers at very good rates that will eliminate layers,keep them some markup, but at the same time benefits farmers and retail/wholesale procurers.

    3) Will encourage farmers to start cultivation using up-to-date farming techniques for high-yields at low capital/operating costs as there is a clear danger of getting marginalized in this new context.

    4) will lessen/status-quo the subsidization burden on federal/state coffers as improved productivity in the chain would more than compensate for the costs of WTO-forced integration of indian economy to global market where a farmer in Idaho could dump his well-subsidized and high-yield produce to countries like india and china.

    5) Gradually helps to Scrap all these inefficient and corrupt state/federal agri. mktg agencies that barley accomplished thier stated objectives.

    6) Encourages cooperative movement amongst farming community to collectively share the burden of improvisation techniques to compete well on global level.

    Comment by Krishna Moturi — June 5, 2007 @ 12:32 pm

  17. Good summary, Krishna!. Totally agree with the state of affairs in this Retail space.

    If i may add to that,

    In the long run, Central govt. need to make sure that the wage-pressure of these retail-majors (very low salaries to workers to squeeze margins) won’t hurt the health of the economy and not keep these working-class always under the median-quality-of-life.

    Comment by Samir Patel — June 5, 2007 @ 12:45 pm

  18. Why dont we support our Indian Traders to put hands into this Market?
    let us stop foreign Nationals come and open their Trades in our Places.
    Indian is one of the richest place for Traders, let our own people come and surve us,
    Reliance will be the better option for this, or TATA, Vijay Mallya, Mittal so many are comig up to bring our markets in booming, thanks to all.

    See the $ rate from Dec2006 to June 2007…. an drastic drop in $rate, a good sign to INDIAN Economy. from nearly 45.2 droped to 40.40, awesome Indian Markets.

    Comment by Balaji Muniraju — June 5, 2007 @ 6:49 pm

  19. It’s good that our economy is growing very fast. With 8.2 GDP rate last year we have reached this year 9.2 which is the second best after 1991 reforms. But looking at the reality tihs figure is not for the common man. rising economy doesnt change the financial situation but it has become more worse.
    We r restricting the entry of foreign players into the retail market just for the sake of benefits of local players. but at the same time we r supporting our big industrialists to capture the market. Dont u think that even by opposing the entry of foreign players we r supporting our big industrialist to rule the market.
    Our big industrialists have opened many big stores like RELIANCE FRESH, BIG APPLE, PANTALOON, TRENT ETC. for meeting the needs of common man in better way. but there policy is very different. They are playing the policy of KNOCK-OUT. they have slashed their prices to such a level that its very difficult for local karyana stores to survive. Its obvious that after few we will not find typical karyana stores. but thing is that, IS IT GOOD FOR INDIA. WILL THIS RAISE THE STANDARD OF COOMON PEOPLE. WILL IT CREATE MORE EMPLOYMENT. There are many chances that once the local players are removed, this BIG players will create monoply.
    IS’NT IT THE THE ARRIVAL OF EAST INDIA COMPANY………………..
    SAVE THE COUNTRY

    Comment by atul gupta — June 8, 2007 @ 11:44 pm

  20. Walmart is responsible for killing the local business communities trading areas in North America.
    This trend is continuing. Walmart doesn’t respect the laws of its host nation either. In Jonquiere Quebec Canada this American Bentonville organization closed the Jonquiere store because the workers decided to get a union. They were tired of the low pay/low benefits. Walmart lied saying the store was struggling and closed it up. The real reason was to threaten every other worker in North America.

    Walmart is going to kill your local economy.

    Comment by Alex — June 9, 2007 @ 5:52 pm

  21. [...] Over the years that I’ve been writing about Wal-Mart I’ve noted a lot of very bad (and a few good) morsels of information, but I’ve never managed to do what The Indian Economy Blog did: talk about Wal-Mart and thermo-nuclear weapons in the same post; and, amazingly, do it in a positive manner. [...]

    Pingback by The Writing On The Wal » Blog Archive » NUCLEAR WEAPONS AND WAL-MART… — June 10, 2007 @ 2:51 am

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