In the Wall Street Journal, Peter Wonacott says India Defies Slump, Powered by Growth in Poor Rural States.

Rama Lakshmi of the Washington Post said as much last month: Vast Rural India Sparkles As an Expanding Market

About 72 percent of India’s billion-plus people live in rural areas. For years, the poverty of rural India was seen as reining in the country’s economic growth. But today, analysts say, rural India is a critical audience for marketers because it has been relatively insulated from the crippling blow of the global slowdown.

India’s rural destiny still depends on good monsoon rains and robust agricultural production, but four years of bumper crops and heavy government investment in rural infrastructure have given birth to what some analysts call an emerging economy within India.

Last month, Patrick Barta of the Wall Street Journal called it The Rise of the Underground.

Given this, it’s not entirely coincidental that The American, the journal of the American Enterprise Institute wonders how Lalu Yadav managed to turn around the Indian Railways, the world’s 2nd largest employer (the Chinese Army is #1) and in doing so, morph from Huey Long to Jack Welch — The Indian Railway King

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.

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]

The Wall Street Journal, in an article last month, writes that jobs in India’s booming retail industry are a ticket out of the slums for many. The article, titled Humble Jobs at the Mall Are Lifting Legions of Indians Out of Poverty and told from the viewpoint of three employees of Pantaloon in Mumbai, goes on to say that

Such basic sales jobs, unremarkable and often derided in the West, are providing careers, confidence, and a shot at entering the consumer class to millions (emphasis mine) of impoverished young men and women across India. As their ranks swell, these children of slum dwellers, servants, sweepers and others low on the socioeconomic totem pole are forming a new stratum of workers. They are likely to play an important role in determining the future of the world’s second-most-populous nation.
….
Firm data are hard to come by, but available statistics and anecdotal evidence suggest an explosion in service jobs. Over the next three years, says the Images Group, a research and consulting group in India, the retail sector will create more than 2.5 million new jobs in the country. India’s Reliance Industries Ltd. says it will hire close to 500,000 people to staff its new chain of supermarkets. Pantaloon Retail Ltd., India’s largest retailer with annual sales of around $1 billion, hires more than 500 people a month. [link - subscription required]

The story seems very encouraging. However, I’m a tad puzzled at the evidence — it’s rather slender and the three data points don’t jell.

Data point # 1: Pantaloon, India’s biggest retailer is adding 500 people a month (extrapolating, that makes it 18,000 over the next three years. An assumption, here)

Data point # 2: Reliance will add 500,000 new employees.

Data point #3: The Images Group forecasts 2.5 million new jobs in retail over the next three years.

This might seem like a quibble, but are we to believe that

a) Reliance will add 83 times more employees than Pantaloon — 500,000 vs 18,000

b) Pantaloon, India’s biggest retailer will add only 0.72% of the new hires — 18,000 out of a total of 2.5 million, or

c) Reliance alone, with 500,000 new employees, will contribute 20% of the new jobs?

Q) Any hard data available regarding employment growth in India’s retail sector?

Update: Earlier posts on India’s retail industry
– Protect The Chain But At What Cost
– Kirana Will Still Rule
– The Better, Faster Road To Development
– The Wrong Behind
– A Nation Of Self-Employed
– More Bang For the Government Buck
– FDI In Single Brand Retail
– Rice, Roads And Regulations

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]

Professor Kaushik Basu of the Cornell University believes that the rise of the rupee against the dollar is inevitable in the mid-term. He also believes that the sudden collapse of the dollar is unlikely but there is not much that India can do to alter the current dynamics of exchange rates.

In recent days the rupee-dollar exchange rate has been, on average, Rs 39.3 per dollar. A year ago it was 44.7. This means that the rupee has appreciated against the dollar by 13.7% in the last year.

A gentle depreciation of the US dollar over the medium term seems to be unavoidable, given America’s over-spending. The big risk for India and the world is a sudden collapse of the dollar. This is unlikely, since a dollar meltdown is against the interest of all major players, but not impossible. It needs to be understood that the source of the rupee appreciation is, largely, outside of India. Over the last year virtually all major currencies have been appreciating vis-à-vis the US dollar. The euro rose by 14.7%, the pound by 10.4%; the Canadian dollar by 23%, Sweden’s kroner by 13.7% – the same as the Indian rupee. Vis-a-vis all major currencies, outside of the US dollar, the rupee has changed very little. The exception is China. Its currency has appreciated but only by 5.7%. China has a different strategy. It wants to keep up a sustained subsidy to its exporters and continue to build up dollar reserves. This is costly but it gives China muscle against the US. [HT]

This is not very good news for Indian IT firms, whose revenues are generated in dollars and costs are denominated in rupees. The fear of a slowdown in growth and profits has led the IT companies to employ complex hedging strategies against a weakening dollar. Prior to taking over as the Dean of Singapore’s Nanyang Business School a few months back, Jitendra V. Singh (then with the Wharton’s management department) had argued that Indian firms should use the rupee’s strength to their advantage by adapting their business models in innovative ways, much as Japan’s automakers did during the 1980s.

I believe there is a strong parallel here from which Indian companies – especially, though not solely, the IT firms – can learn some important lessons. If Indian companies compete mainly on cost arbitrage, they will find that as their costs rise because of the stronger rupee, they will increasingly become less profitable. Of course, it is also the case that, as the rupee appreciates, net margins at some companies erode more than at other firms. Specifically, if Indian IT companies compete as low-cost providers of IT services, their competitive advantage will erode in a regime of rupee strengthening.

Instead, Indian firms should take advantage of this opportunity to adapt their business models. How can they do that? While the details of the two industries are quite different, the Japanese automobile industry can suggest some answers. Consider what leading Japanese firms like Toyota did as the yen strengthened against the dollar. For product lines where they made the highest margins, such as the Lexus, they continued production in Japan. However, for lower-priced models — where their profit margins were lower and would have been eroded further by the rising yen — they moved production to the U.S. They protected their margins on non-premium products by moving production — and therefore shifting costs — into dollar-denominated areas. They also reduced their vulnerability to further appreciation of the yen.

You may remember that during the 1980s, Japanese auto makers were facing a protectionist backlash in the U.S., and they were subjected to import quotas. Their strategy of moving production of lower-priced/lower-profit cars into the U.S. paid off in a couple of different ways. First, they were able to shift yen-denominated costs into dollars. Second, this was a quite savvy political move, because although these companies continued to gain market share in the U.S., there was little pressure to shut down their plants. Doing so would have meant a loss of American jobs.

I believe Indian companies should take a similar approach in response to this recent rising rupee regime. They need to consider how to adapt their business models. To the extent that they compete primarily on cost arbitrage, the rising rupee will work against them. One key question to ask is how to develop other sources of competitive advantage, such as building high-level capabilities which cannot easily be replicated by competitors, or how to change the mix of activities carried out in India versus other countries. Of course, in order to do this, they will have to change their mindset: They will have to stop thinking of themselves as Indian companies and think more like global companies of Indian origin. They will need to analyze their portfolio of costs and move production to where it makes the most economic sense. Notably, Indian IT firms are trying to address rising wage costs by moving production within India to lower cost regions — Eastern India (Kolkata, Bhubaneshwar) and to Tier II and Tier III towns. However, this will only offset a rising rupee to a limited extent, since the costs will still be in rupees. [IK@W]

This prescription may hold good for Indian IT companies and these companies would surely be considering taking the suggested route. However if the IT companies follow this advise blindly, it will have grave implications for the overall health of the Indian economic landscape. It helps to recount the happenings in Japan during that period -

But, by the late 1980s, the exporters found it harder to bear the burden. They were caught in a squeeze between high costs at home and a rising yen, which made it harder to pass on those costs in export markets. As a result, more and more of the efficient exporters were being driven overseas. They were investing in offshore markets rather than in Japan itself. Step by step, Japan’s efficient export sectors were being “hollowed out.” As this happened, the productivity of the entire economy started being dragged down to the level of the stagnant sectors.

…At the end of 1989, when Japan’s “bubble economy” was at its height, the country felt on top of the world. The crippling heart attack was but a few months away, but Japan felt stronger than ever. [BW]

India growth model has to focus on generating suitable employment for its large population. If the efficient sectors of the economy move out and only the inefficient sectors remain in the country, the employment inclusive growth plummets. It has serious social and political implications in a democratic society. In a sense, individual companies would progress but that growth would be at the cost of country’s economic well-being. It is nobody’s case that this movement of firms should be legislated against; such policy prescriptions are unviable, if not unthinkable, in today’s ‘flat world’ and damaging in the long run.

For other Indian exporters, such as from the manufacturing sector, of leather products and clothes, or of commercial produce like tea and coffee, who are in direct competition with other Asian countries (mainly China), this is not even an option. They will continue to seek RBI intervention to keep the rupee competitive against the dollar, and peg the rupee vis-a-vis the yuan. Notwithstanding the difficulties involved in managing the rupee-dollar rate, there is no option for the government but to manage the rates in the short to medium term. This will indirectly benefit the Indian IT companies as well; some of them may even defer the implementation of their long-term plans to their own detriment.

That’s one of the proposals Sushant Singh puts forward in his article on moving towards an endgame in Jammu & Kashmir:

…unemployment among the youth of the valley remains to be adequately addressed. Handing out of doles and packages to the state government and public sector institutions is not the solution. An alternative would be to incent the private sector, perhaps even outside the state, with an offset to employ a certain percentage of people from Jammu & Kashmir.

The idea of converting the entire state into a virtual special economic zone (SEZ) has been mooted. The state has a special status under the Indian Constitution. So do SEZs. What is required is the repositioning the state to one that leverages its special status to achieve socio-economic development.

It would also require a rebalancing the distribution of fiscal transfers from the central government between the public and private sectors.

This will undermine the separatists’ main economic grouse—step-motherly treatment by the Centre and no attempts at development in the state. [Pragati - The Indian National Interest Review]

There is no truth to his claim that Gujarat’s poverty reduction figures are the result of it shifting the goalposts. He presents insufficient evidence to prove his claim about the public health system’s failings. In contrast, the reduction in the infant mortality rate—the barometer of a public health system—suggests that public health delivery is likely to have improved. His argument on the widening rural-urban divide falls flat for want of evidence. He makes wrong associations to imply causal links between low agricultural productivity and a decline in the state’s production of foodgrains, while falling into the illiberal trap of denying farmers a way out of agriculture. He offers incomplete facts to mischaracterise Gujarat’s power sector, which happens to be among the best in the country. And he dismisses the state’s investment and employment record without bothering about such inanities as facts. We saw that the UPA government’s inability to reform India’s restrictive labour laws is hurting Gujarat’s ability to translate the investments it is attracting into more jobs for its people.

Shivam is on firmer ground on the Sardar Sarovar project: according to the Comptroller and Auditor General’s report, the state’s water authorities diverted water designated for “drought prone areas” to the urban areas of Gandhinagar. It is good to see Tehelka—whom one would usually associate with the anti-dam agitation—making these arguments. Similarly, Shivam might have a point when he talks about people displaced by development, underscoring the need for India to make its property rights regime more robust.

Where does this leave us? Well, that apart from some clever juggling of facts, Tehelka doesn’t really offer enough evidence to support its conclusion that Gujarat is ‘just another socio-economically vulnerable state’. The Congress party in Gujarat, Shivam writes, “wants ‘development’ to be the key issue in the elections”. More power to it. The interests of Gujarat’s electorate will be best served if it can present robust and well-supported arguments to argue where and how the state could have done better. Now that would cause some tehelka, wouldn’t it?

Abi is right. Dweep didn’t go far enough. What India needs to do is to say “to hell with the WTO” and unilaterally, completely, dismantle trade barriers. For that matter, so does everyone else.

Here’s Sauvik Chakraverti on the topic on TCS Daily:

Unilateral free trade is a very good idea for a huge country such as India. If subsidized grain enters the market, poor marginal farmers, subsistence agriculturists and day laborers get cheap food. They will move away from subsistence farming as grain will be cheaper to buy in the market. They will move ‘from subsistence to exchange’, in Peter Bauer’s words, and integrate themselves with the urban exchange economy. Instead of grain, Indian farmers will produce fruits and vegetables or even flowers — solid cash crops. And this benefit will be paid for by US and EU taxpayers. [TCS Daily]

Moreover, dropping trade barriers for imports from Pakistan is the real peace process.