I think we can all agree that efficiency is desirable in all systems. After all, this is the basis of nature itself. Hopefully, we can also agree that technology, when correctly deployed, enhances efficiency further. Why then, when an efficient, low-waste, high-value retail sector lies within India’s grasp, does it remain stubbornly elusive?
The global retail systems have transformed since the advent of the Information Age, and the dabbawalas of Mumbai, IKEA, Wal-Mart, Procter and Gamble, Unilever, Coca Cola and PepsiCo to name just a few can be considered exemplars in the vanguard of this movement. What they all have in common is efficient, flexible value chains.
These value chains stretch from the raw materials used in the production of finished goods to the waste that is generated once consumers have finished with them. They are efficient as they help bring goods and services to market faster and allow participants along the chain to act independently on the best information in response to market movements driven by transparency.
This in turn enables participants to benefit from lower inventories, fewer obsolete goods, more stable production and better capacity planning. The knock-on societal effect is higher-quality products and services at lower cost, better jobs and less pressure on natural resources.
Let’s face it – these are things that India could benefit from, and it is through this lens that India’s recent FDI reforms allowing foreign investment into “organized” retailing should be appraised, debated and ultimately judged.
Done correctly, investment in supply chains could be one of the most effective ways to upgrade the economy. Farmers could get better prices for their produce and the right incentives to grow more of the right crops; manufacturers could use forecasting to plan better; distributors could use their fleets more effectively as they scale up; and wholesalers and retailers could improve their return on investment by eliminating waste and inefficiencies. Even the government would benefit through higher tax receipts obtained through not only growth in output but also greater tax compliance due to greater transparency.
All of these benefits can be obtained by investing in value chains and employing well-known technologies and techniques. The investment does not have to come from foreign funds; indeed, the record shows that many Indian firms have begun to implement efficient and appropriate retail systems.
These improvements will cause pain for those that benefit from market inefficiencies and opacity. Those that create artificial supply shortages, abuse near-monopoly prices, apply excessive bargaining power over weaker participants in the value chain will feel the pinch, irrespective of domestic or foreign investment.
I say this is a good thing. Those whose economic rent is not commensurate with the value they add will see their position eroded and, in time – a process that has started already – will move instead to an area of the economy where they do deliver genuine value.
The big question, therefore, is not FDI versus no FDI, but modern India versus old India. Large and small, public and private, “organized” and “disorganized” (more about these unfortunate terms later), old and new, traditional and modern all coexist in India today. They always have and they always should, as it is this healthy mix of competing systems that spurs invention and innovation and makes the world a better place. Five per cent of the Indian retail sector is organized, compared to 20% in China and 25% in Indonesia, according to a PwC study.
So-called disorganized value-chains should not fear supply chain investment as they themselves are often already highly efficient. Geographically agglomerated collections of mom-and-pop shops prevalent in many bazaars around the globe, for example, benefit from economies of scale on both the supply side and the demand side almost as much as a single large “big bazaar” might. Suppliers can deliver goods to many adjacent outlets; buyers can easily compare outlets.
And, such collections of shops offer consumers choices of places to patronize that a big bazaar does not. In fact, the many mom-and-pop merchants differentiate themselves by competing on quality rather than price or assortment of offers. Delivery, credit (in the form running accounts because they know their customers well), exchanges and returns, help them provide an experience to their customers that a more organized value-chain would be incapable of replicating efficiently.
We see this in Germany, whose many small, high-tech “Mittlestand” firms are a major driver of the national economy. Likewise in Italy, with its many medium-sized leather and textile producers. Consider also the many wineries around the globe and the countless disorganized arts and crafts purveyors that no large organization has managed to challenge successfully. In business, small is not necessarily disorganized just as large is not necessarily organized.
It is a truism that India is a diverse country. It would be sheer folly to hope that a single value-chain design would be both efficient and appropriate for India. Instead, one would hope that all interested parties, including businesses, government and policy-makers, could embrace the notion that a variety of value-chain designs must be encouraged. By encouraging all forms and remaining agnostic to the sources of capital, India can have the efficient and appropriate retail systems it deserves.
Author: Sarita Nayyar is Managing Director and Head of Consumer Industries at the World Economic Forum.
Image: Workers walk inside an aisle of a newly opened major wholesale store in Hyderabad REUTERS/Krishnendu Halder