My First Recession

There is a special place for all the firsts in our lives... First day at school, first day at college, first drink, first job, first salary and many other firsts... These firsts in a way are milestones that define the journey of our life. As I was going through the newspaper in the morning today (which was full off grim business outlook, layoffs, etc) it struck me that this happens to be my first recession... Not something to be celebrated but interesting nonetheless... As far as the facts and figures go there has been a recession in India during 1996 but this one is the first one ever since I have become literate in economical sense and thus deserves its share of attention...

The times are exciting. Yes, I dare to say so and I say so during a recession at that... Living in this part of the world, I should call it a slowdown rather than a recession as India will still continue to grow with estimated GDP growth rate of anywhere between 5-7% in the next couple of years. I think as a student of the subject of finance the opportunity to learn is immense during these times. Not that there are no opportunities to learn when there is a general feeling of well being all around or when financial system around the globe is operating smoothly as it should unlike in the past few months but because there are a lot of things happening around which I may not seen again in my lifetime. Take for example the historic 700+ billion dollar bailout package in US, historical fall of the stock markets around the globe, the Iceland crisis, the historic rise and fall of crude oil prices and so on...

The good thing about slowdowns, recessions and bad times in general is that they help in weeding out the weak and unwanted excesses and result in many reforms or at least that is what we’ve seen in the past... I intend to look at this recession from an emerging markets’ perspective and focus on following aspects as India rides on this trough of the business cycle:

• The action in the Indian stock markets
• Actions of RBI in relation with the FED
• The policy reforms in India
• Indian businesses pre and post recession

Every week I will be taking up one important event pertaining to these aspects and discuss it at length. Your views, comments and inputs are welcome as always...

Indian Retail Industry… What does the future hold?

US based Wal-Mart Stores Inc., the world's biggest retailer, is entering India's sprawling retail market through a tie up with Bharti Enterprises Ltd. In the future, we will have many such cases of global retailers entering Indian markets, given the huge Indian consumer base and growth across all sectors of the economy generating a positive wealth effect of sorts.

According to KSA Technopak, a consultancy firm, the Indian retail market is projected to grow from US$300 Billion in 2006 to US$637 Billion by 2015 as GDP rises from US$804 Billion to US$1.7 Trillion over the same period. The bulk of the market is unorganised with less than 5% being classified as ‘organised retail’. The urban market is 45% of India's retail market, with the top 784 cities alone accounting for US$105 billion in retail sales. The rural market is dispersed over 627,000 villages, though it has a concentration around a core 100,000 villages that account for 50% of the rural population. Indian retail has a unique concept of ‘Kiranawallahs’, family run small shops.

With global players all set to capture the Indian retail, the Indian businesses have also recognised the opportunity and recently few large businesses have jumped into retailing. Reliance entered the retail market by opening its chain of Reliance Fresh hypermarkets in the city of Hyderabad. Reliance is expected to pump in close to US $ 5 billion in the next five years to build a chain of thousands of such shops across urban and rural India. The Aditya Birla Group is reported to be putting together a plan for a similar venture in the retail space. The group may invest upwards of US$3 billion to set up 6,000 stores within three years, with the first stores set to open by middle of next year. Pantaloon Retail, an earlier entrant to retail in India, has aggressive plans to double its retail space to 8 million sq ft within a year and to 30 million sq ft by 2010. It owns the most successful Big Bazaar/ Food Bazaar chain of retail shops. Godrej Agrovet and ITC (e-choupal) are large payers focusing primarily on the rural sector. Godrej plans to launch 1,000 Aadhar stores in rural India by 2010. The Tata Group is also getting involved in the business in a big way with Infiniti Retail venture. It has already opened its Chroma chain of consumer electronics shops across Mumbai. Global players like French retailer Carrefour, UK based Tesco are some of the other biggies in the pipeline waiting for their share of the action.

The Left is opposing such a generous liberalisation of the Indian markets. They believe that the scale and efficiency of the operations of the mammoth global retailers will hit the business of small family run Kiranawallah Shops and will leave millions of people jobless. The global players, on the other hand, are arguing that they will be targeting only the cream of the Indian consumer base in the urban India and will not affect Kiranawallahs in any significant way. They also argue that large Indian retailers like Reliance, Pantaloons, etc are also posing similar threat to the small retailers, if at all. Whatever may be the fate of the smaller retailers, the consumers will surely win with maturing retail market. Long used to shopping in packed and dusty marketplaces, they will flock to the neat, air-conditioned malls, fascinated by the convenience of one-stop shopping, a wide range of products to choose from, and significantly lower prices than they pay today. The savings will likely find their way back via higher consumption, helping drive the economy. Tax collections will also increase as more retail sales flow through the organised trade. Farmers and other suppliers who are able to deliver against the stringent quality requirements placed on them by modern retail will benefit from higher prices as middlemen get cut out of the supply chain. Landowners and real estate developers will laugh all the way to the bank as multi-billion dollar investments compete for limited supply of space.

So, what does the future hold for big retailers, Kiranawallahs and consumers?

As I’ve already mentioned, consumers are in for a good time for sure.

Contrary to general opinion, I think that the local Kiranawallahs are in a vantage position. They already have a loyal consumer base in place in rural as well as urban India. The young Indian consumer may be charmed by the large, brilliantly lit malls, larger than life shopping experience and loads of so called discounts, but small shops can counter these by their customised, personalised services. They will have to unite and achieve the benefits of scale which the bigger retailers enjoy. They will have to drastically change the way they services their consumers and innovate and they can survive this revolution in the Indian retail. The Kiranawallahs are placed in the vicinity of their consumers and this is where they score over the larger retailers. My local Kiranawallah almost knows all my family’s preferences right from the brand of the oil that we use to the quantity of wheat floor that we consume every month. For all my sundry orders like a loaf of bread, a bottle of ketchup, a pack of Maggie, I cannot go to a large retailer’s shop. My local Kiranawallah turns to my help in such cases. Indian consumer is not used to doing all his shopping for the month at one go. With the increasing share of organised retail in the Indian retail industry, the consumer will also have to transform itself into an organised consumer. If all small retailers in an area come together to give a basket of services to the consumers in the area then Kiranawallahs can very well survive alongside the big retailers. I really think that Kiranawallahs can see through this retail restructuring if they believe that they can counter bigger retailers and innovate.

As for large retailers, not everything is as good as it seems. There are already half a dozen players who have either announced their entry or are already operating in the organised retail. There will be enormous advertising and consumer education expenses that these larger players will have to bear. Immense competition in the large players will see a fierce price battle and will reduce the margins drastically. Foreign retailers cannot mimic their US or Europe business models directly into India as Indian consumer has its own characteristics and Indian market is like no other markets they’ve been before in. Only a few players with superior supply chain and consumer reach will survive this revolution.
Indian retail is trying to achieve in a decade what other developed retail markets have achieved in a span of two to three decades. This very fact makes this transition period very interesting. No one knows who will survive and who will not but consumers are surely in for a good time.

The Reservation Thing...

BCCI to introduce 30% reservation for backward classes in Indian Team…

Indian Railways introduce 50% reservation for backward classes…

Passing percentage for backward classes reduced to 20%...

Backward classes need not pay taxes… Prime Minister…

Backward class people will live 30% longer… The Almighty (what the heck)

I will not be surprised if I get to read any of these in TOI in the morning some day. I had decided not to react on this “Reservation Thing” and express my views anywhere or sign any petition as petitions and protests are hardly paid any attention these days. But later I realized that this political stunt for votes has much more to it than just being a political stunt. This is the time when India seems to be making a mark of its own on the global map, thanks to its skilled workforce. This is the time when graduates from IITs and IIMs are recognized world over for their brilliance. This is the time when Indian IT biggies are being known for their processes and efficiency. I really think that introducing (or rather increasing) reservations in premier educational institutes in India as well as in India Inc. is not an ideal way to support the massive growth we are witnessing today.

Facts:

1. Government has almost made up its mind to increase OBC reservations in IITs, IIMs and other such premier educational institutes to 49% from current 27%.

2. Government has been urging India Inc. to introduce reservations in jobs for backward classes and is now hinting at introducing a law for the same.

India edging over India:

Indeed there is a huge population in India that still does not have access to good educational facilities. There is large rural youth population that does not have access to opportunities as in urban India. We have a problem at our hands here and it needs to be addressed but introducing reservations is going to make matters worse rather than improving them. There is more to the current reservation policy than what meets our eye. First, we need to think from the point of view of an underprivileged student, who will use such reservations…

Where’s the Competition?

Reservations kill the very element of competitiveness. We can introduce better basic education, schools and colleges, more seats and scholarships if we want more people to be a part of modern, developing India. According to me, assisting backward classes to grow is a better option than securing their growth and that too at the expense of someone else’s. We need “National Talent Schemes” for spotting and promoting talent in less privileged sections of society. An underprivileged student surely needs financial assistance for his studies but does he really need assistance in terms of “seats solely reserved” for him? In fact “reserved seats” keep him from trying his best as he surely knows that he does not have to compete with all the students to secure the seat but it’s only the students of his category he is competing against.

Brain Drain:

Thinking from the perspective of a student in general, if he is not able to fulfill his dreams here in India, he will go abroad and fulfill them. We are already seeing this trend in urban India. If the government continues to continue with its reservation policies, the “Brain Drain” is just going to get worse. I strongly oppose reservations introduced in higher education and especially those in IITs and IIMs. We need to keep in mind that IITs and IIMs are not just educational institutes but they are “Best Education” that India has to offer. People go to IITs and IIMs not only because they are brands that assure highest of salaries but also because they are home to some of India’s greatest minds. Interaction and competition with like minded peers is one of the greatest offering of these institutes. It is really unfair to introduce reservations and thus bring down the quality of students in these institutes.

Government’ Stand:

Here's what our respected PM Mr. Manmohan Singh had to say about the stand of the government on the issue:

"We all need to ensure that no group feels excluded from enjoying the fruits of rapid economic growth"
Surely, we need to make sure that India as a whole profits from the massive economic growth we are going through today. At the same time we should not forget the reasons for this rapid growth. It is highly skilled low cost workforce in IT and ITES that has helped our economy gain this momentum. It is those ambitious entrepreneurs from IITs and IIMs that have catapulted India in this vantage position. The very concept of introducing reservations reduces the competitiveness and thus our advantage in these fields.

"Opening up the economy has meant diminishing job opportunities for the socially disadvantaged"
If there is a considerable difference between the skill set of “Socially Advantaged” and “Socially Disadvantaged” people then it’s a failure on the government’s part. It means that the government has failed to narrow down this gap. It is highly foolish of the government to expect the Indian industry to pay the price of its misdeeds by introducing reservations in jobs.

India Inc.’s Stand:

India Inc. has clearly signaled its disapproval on this matter. Industries should concentrate on increasing their stake holder’s wealth rather than anything else if we are to survive in the opened-up economy against other global players. Industry thinks that everyone should come forward and do something voluntarily to improve the condition of the socially disadvantaged but introducing a law and forcing things is not a solution.

Solution:

India has to manage two things at the same time if it has to progress in a true sense. At one hand it has urban population that is living like people in any of the developed countries. These people are rich, have access to best of facilities. On the other hand, it has a large rural population devoid of all such facilities. This rural population cannot afford and does not have access to good educational facilities. But this distinction should solely be done on the basis of income of a family and not on the basis of “which caste it belongs to”. Again, scholarships would be much better as compared to “reserved seats”.

What next?

After strong opposition from the Indian Industry on “reservation in jobs”, the government has softened its stand a bit. Even the IITs and IIMs have not been informed about the new reservation policies. I hope this “Reservation thing” was a mere vote-magnet for the assembly elections and will soon be forgotten by everyone. If not so, we are surely in for a lot of debate and controversies.