Unorganised and organised retail must coexist and flourish in India…

After almost scaring the Tata Motors away from West Bengal, Mamata Bannerjee has now trained her guns on Reliance Retail. Well, Reliance Retail should be used to being targeted by feisty women politicians. Immediately after coming to power in Lucknow, Ms. Mayawati had earlier undertaken a similar exercise in UP.

All this is taking place when behemoths of international retail are trying to enter the Indian market. Tesco has chosen to come with Tatas, while Reliance has tied up with Wincanton. The big daddy of them all, Wal-Mart is coming to India courtesy the Bharti group.

In the September edition of Pragati-The Indian National Interest Review, Prashant Kumar Singh makes significant observations about the confusion surrounding retail industry in India. He rightly notices that-

The debate over retail in India has been fixated on the growth of organised retail, entry of international retailers and concomitant demise of the traditional retailer. The spectre of ogres like Wal-Mart gobbling small retailers has completely paralysed the government on the policy formulation front; not because of any real concern for small retailers but more out of their perceived political clout. This lack of policy initiatives for boosting and regulating organised retail is unfortunately based on the fallacy that modern retail and unorganised retail are necessarily antagonistic.

…Available data provides sufficient evidence that traditional retail is under no immediate threat from organised retail. With the present rate of growth of organised retail of 45 percent per annum, any structural changes brought about by gradual policy shifts will take at least a decade before unorganised retail feels the heat. This assessment is not to condone continued government stupor towards the unorganised sector on the issues of credit availability, access to distribution channels, and realisation of fair price for the produce. It is, instead, meant to spur the government to initiate concrete measures to support the traditional retailers.

…Given the benefits of organised retail, the role of foreign direct investment (FDI) needs to be analysed. It is fallacious to prescribe FDI as the panacea for all the ills plaguing organised retail. The eagerness of international giants to enter Indian markets can be attributed to saturation of the developed markets and low penetration of formal retail in India. The entry of FDI in retail will tilt the balance between suppliers and retailers, force smaller players to adapt and differentiate, and bring consolidation in the sector. The accompanying direct benefits are substantial: increase in exports due to high level of sourcing from India, incorporation of global best practices, investments in the complete supply chain–especially in technologies relating to cold chain, food processing and IT, increase in product variety and categories, increase in employment, and secondary benefits of modern agriculture and shopping tourism. Moreover, this FDI in retail will arrive without any sops and tax breaks from the government, unlike IT and auto-manufacturing sectors, where state governments have been bending backwards to attract investments.

Prashant Kumar Singh makes a strong case that with the right government policies in place, “the ecosystem of the retail industry in India will then adapt itself to accommodate the two seemingly divergent strands of retailing, evolving into an indigenous Indian retail model”. To read the complete piece titled “Retail in Doldrums“, download the community edition(pdf) of the latest issue of Pragati-The Indian National Interest Review.

Clark writes:

The Darwinian struggle that shaped human nature did not end with the Neolithic Revolution but continued right up until the Industrial Revolution.

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… economic success translated powerfully into reproductive success. The richest men had twice as many surviving children at death as the poorest. The poorest individuals in Malthusian England had so few surviving children that their families were dying out. Preindustrial England was thus a world of constant downward mobility. Given the static nature of the Malthusian economy, the superabundant children of the rich had to, on average, move down the social hierarchy in order to find work. Craftsmen’s sons became laborers, merchants’ sons petty traders, large landowners’ sons smallholders.

This framework possibly explains the classification of the English as “gentlemanly”. An extremely high proportion of the population in England has its backgrounds in “gentlemanly” famlies. Over the generations, their professions may have changed but they still retained their basic cultural traits – which were once gentlemanly.

On the same lines, one wonders why this kind of development didn’t happen in India, and the answer lies in the caste system. Given the rigid caste system here, it wasn’t possible for people to “downshift”. Given its tight linkage with profession, what the caste system did was to freeze the proportion of various castes in the total workforce.

Hence, even if the upper caste/class people managed to produce more surviving offspring, these offspring weren’t able to migrate to other “lesser” professions.  In other words, the survival of the fittest happened within castes. It was not until much after the industrial revolution and urbanization and the development of modern medicine, that people of different castes started professionallly competing with each other.

A recent ASSOCHAM Business Barometer Survey of 258 faculty members of MBA programs in India found that most professors did not know basic facts about the national and global economy.

“89 per cent of the teachers were unable to tell the GDP growth rate scaled by the Indian economy in the financial year 2006-07.

The survey further divulged that hardly 6 per cent of the lecturers surveyed read any business newspaper on regular basis. Moreover, persistent readers of business magazines were negligible”.

The appalling ignorance of these faculty members is symptomatic of an endemic financial and economic illiteracy among wide sections of Indian society, including intellectuals, media, politicians, policymakers, and the bureaucracy.

India’s economic illiteracy explains the pedestrian quality of most discussions about the economy — they rarely reflect an appropriate mental picture of India’s economic structure, its sources of growth and competitiveness, its vulnerabilities and challenges.

As we explain at more length in our Pragati essay, in terms of immediate public policy priorities, incorporation of economics in the education curricula is essential for multiple reasons – to increase the employability of graduates, to help manage social change better, to ensure more effective design and delivery of public services, to obtain a better ROI from budgetary outlays and ensure better governance.

Speaking of governance, for instance: policymakers are not sufficiently held accountable for their poor decisions which display a shameful and at times, willful, ignorance of basic economic principles. A prime example (just one of many) is the National Rural Employment Guarantee Scheme, which ignores the vital concepts of opportunity cost and moral hazard, and is not based on robust empirical evidence.

India’s hopes of moving into the 21st century and its dreams of reaping the so-called demographic dividend are unlikely to fructify unless the education establishment at the Centre and the States rethink the curricula and its priorities.

Questions:

1) Do you agree with Asher & Nandy? If so, how does that square with Ramesh Venkataraman’s view that “today’s electorate is starting to view government less as a mai-baap granting entitlements — seats in colleges, jobs in the public sector, subsidies — and more as an enabler of opportunities.”

2) At first blush, I would have assumed that an economically literate populace was a prerequisite for sound economic policy decisions. However, is that really true of the other developing countries, especially the Asian tigers? Can someone with first-hand experience of those countries comment? And, if they’re as bad as (or not much better than) India in terms of economic illiteracy (as I suspect), what explains their economic decision-making? The East Asian countries’ economic policies may be far from ideal, but I find it hard to believe that they’ve managed to come so far and so quickly on the basis of worthless economic policies.

This article talks about a program for Jains to donate money to help teach Jain students for free. It seems like a nice idea. Perhaps other groups (Patels, Jats, Chettiars) can follow their example. However, it may be a bad idea if you think that such charity should be open to all, not confined to one group. The latter is more equitable but it may not generate the level of donations that a more focussed program might generate. Perhaps this is something your blog should debate?

Comments are open.

More than three percent of defence employees retire every year. The bulk of this group is of soldiers, who constitute 85 percent of the defence forces. There is an average in-service death rate of 1.2 percent for the defence employees, largely due to counterinsurgency operations. Early induction age and early retirement age implies a younger age cohort for 90 percent of the defence employees compared to their civilian counterparts.

Due to early retirement, the defence employees do not fulfill the government criteria of 33 years service to earn a full pension. This ought to reduce the defence pensions bill significantly. However, the high ratio of 1.68 defence pensioners per defence employee implies an extended period of pension payments, which offsets the lower rates of defence pensions. The other civil departments, incidentally, have a ratio of 0.55 pensioners per employee.

Moreover, Indian population above 60 years of age is growing at a rapid pace, at an annual growth rate of 3.8 percent per annum in the period 1991-2001, as against the annual growth rate of 1.8% for the general population. The improved health care and increased life expectancy will skew the pensioners to employees ratio even further.

The recommendations of the Sixth Pay Commission are likely to push the defence pensions bill further northwards, if the example of Fifth Pay Commission is anything to go by. The implementation of Fifth Pay Commission recommendations had led to an increase in the defence pensions bill from 4947 Crore in 1997-98 to 10770 Crore in 2000-01.

It is believed that the defence pension bill has the potential to reach an unsustainable level, and perhaps even exceed the wage bill. This is borne out by the recent trends and is indicated by realistic assessment of such liabilities in the future years. The government has decided against introducing pension reforms in the defence services.

There is an immediate need to reduce the defence pension bill, which will otherwise continue to be a big drain on the national exchequer. This can be achieved by reducing the minimum military service requirements, pushing for early retirements with lateral absorption schemes and identifying a new model for defence pension reforms. These are desirable not only on the grounds of fiscal prudence and equity, but also to keep the military lean and young.

Here lies the crux of the matter. If use of new seeds, fertiliser use, irrigated land, cropping intensity, and private capital stock growth are not rising fast enough, then where is this credit going? To put it another way, what is the Indian farmer doing with the extra credit if he is not using it in seeds, fertiliser, water, capital or land? [IE]

differential effect of international trade on the demand for human capital across countries has been a major determinant of the distribution of income and population across the globe. In developed countries the gains from trade have been directed towards investment in education and growth in income per capita, whereas a significant portion of these gains in less developed economies have been channeled towards population growth. Cross-country regressions establish that indeed trade has positive effects on fertility and negative effects on education in non-OECD economies, while inducing fertility decline and human capital formation in OECD economies.

The researchers suggest that more than “the geographical and institutional factors, human capital formation, ethnic, linguistic and religious fractionalization, colonialism and globalization”, it is international trade that has had an “asymmetrical effect on the evolution of industrial and non-industrial economies” leading to a remarkable change in the distribution of world income in the past two centuries.

The expansion of international trade in the second phase of the Industrial Revolution enhanced the specialization of industrial economies in the production of industrial, skilled intensive, goods. The associated rise in the demand for skilled labor has induced a gradual investment in the quality of the population, expediting a demographic transition, stimulating technological progress and further enhancing the comparative advantage of these industrial economies in the production of skilled intensive goods. In non-industrial economies, in contrast, international trade has generated an incentive to specialize in the production of unskilled intensive, non-industrial, goods. The absence of significant demand for human capital has provided limited incentives to invest in the quality of the population and the gains from trade have been utilized primarily for a further increase in the size of the population, rather than the income of the existing population. The demographic transition in these non-industrial economies has been significantly delayed, increasing further their relative abundance of unskilled labor, enhancing their comparative disadvantage in the production of skilled intensive goods and delaying their process of development.

The most interesting portion of the paper is Part 6, the one dealing with Historical Evidence, which includes an analysis of the contrasting paths of development of UK and India over the last two centuries.

The evidence demonstrates that during the nineteenth century the UK traded manufactured goods for primary products with India. Consistent with the proposed hypothesis, industrialization in India regressed over this century whereas industrialization in the UK accelerated. The process of industrialization in the UK led to a significant increase in the demand for skilled labor in the second phase of the industrial revolution, triggering a demographic transition and a transition to a state of sustained economic growth. In India, in contrast, the lack of demand for skilled labor delayed the demographic transition and the process of development. Thus, while the gains from trade were utilized in the UK primarily towards an increase in output per capita, in India they were more biased towards an increase in the size of the population.

The concluding remark about the “slow transition of less developed economies into a state of sustained economic growth” is likely to gladden the hearts of most Indians. If “international trade accentuates the initial patterns of comparative advantage” and once India has slowly transited onto the path of sustained growth, then the Indian policy makers can rejoice at having done all the dirty, hard work. The growth trajectories of population, human capital and per capita income will take care of themselves, courtesy the Unified Growth Theory. Is it really that simple?

A courtesy salaam to Ajay Shah.

Q) Is this the first such internship programme in the Finance Ministry?

Let us begin with Dr. Manmohan Singh’s address to the Japanese Business Delegation, on 20 August 2007 -

Today, the Indian economy is in a position to sustain GDP growth rates that are close to 9%. Foreign Exchange reserves stand at over US$ 200 billion. We expect to receive Foreign Direct Investment of about US$ 30 billion this year. Our savings and investment rates are close to 35% of our GDP. Our foreign trade constitutes 33% of our GDP, which is a testimony to India’s growing integration into the global economy.

On cue is the speech by Finance Minister, P. Chidambaram at the Norwegian Nobel Institute, Oslo on ‘India’s Socio Economic Agenda: Development with Democracy’ delivered in October 2007.

The India growth story has been told and retold many times and all of you are familiar with that story. Allow me, however, to narrate some highlights of that story and bring you to the present day. GDP at market prices has increased from US$ 20 billion in 1950-51 to US$ 912 billion in 2006-07 and is expected to cross a trillion dollars in the current year. In terms of purchasing power parity, India’s GDP at US$ 4 trillion in 2006-07 accounted for 6.3 per cent of global GDP. Average annual economic growth, which had been constant and tardy at 3.5 per cent during the first thirty years of Independence, increased to 5.7 per cent during the 1990s and, since 2003-04, the average rate has increased further to 8.6 per cent. 2006-07, in particular, was a splendid year with the GDP growing at 9.4 per cent. This growth has not been jobless growth. During 1999-2000 to 2004-05, India added to its workforce about 12 million people each year. During this period, the rate of growth of employment was 2.9 per cent per year. India, after China, is the fastest growing economy of the world, and together with Brazil, Russia and China is the locomotive driving world growth.

The proportion of people living below the poverty line in India has declined from 51.3 per cent in 1977-78 to about 22 per cent in 2004-05. But in absolute terms they still number around 250 million. More than one third of our 1.1 billion people live on less than one dollar a day.

…we have achieved an enrolment ratio of 95 per cent in primary education. Of the children in school, 73 per cent are now reaching Grade V.

We have managed to provide drinking water to 83 per cent of our rural population and sanitation coverage has gone up in the last decade to 22 per cent from a dismal rate of 3 per cent.

Farm loans have more than doubled in three years from Rs 869 billion in 2003-04 to Rs 2032 billion in 2006-07. Loans to students have trebled from Rs 45 billion at the end of March 2004 to Rs 142 billion at the end of March 2007. It is not widely known that India runs the largest micro-finance programme in the world. At the end of August 2007, 2.93 million self-help groups, an overwhelming number comprising women alone, had been provided credit by the banks. The total amount of outstanding credit is Rs 181 billion.

One-third of the population is below the age of 15 years. India is the only large country in the world where the size of the working age population will grow – and will exceed the number of dependent children and old persons – until 2025, the year up to which projections of population have been made, and perhaps even beyond till 2045.

While the critics sharpen their knives (and you read the comments to this post), savour the moment and feel good about the Indian economy. And do join me in wishing the Indian Economy another great year ahead — 2008.

…compared to the army there is a general feeling in the CRPF ranks that its men are not adequately compensated. It is argued that Jawans are frustrated because their counterparts in the Indian Army doing similar jobs in militancy-infested pockets are better looked after. When TIMES NOW compared the two, this feeling was to a great extent found true.

While an army Jawan fighting militants in Kashmir gets a monthly pay packet of Rs 14,000 and host of other benefits including allowances in the form of disturbed area allowance his counterpart in the CRPF draws a meager pay of Rs 7,500 which includes all the allowances. [TimesNow]

Although the veracity of the report (Rs. 14,000 and 7500 for the same trooper in Kashmir) is debatable, it reminds us of that famous Woody Allen bon mot -

…two elderly women are at a Catskill mountain resort, and one of ‘em says, “Boy, the food at this place is really terrible.” The other one says, “Yeah, I know; and such small portions.” [WikiQuote]