Have we oversold the India story ?


Indian Economy From Aviation, Retail , Healthcare & SEZ Perspective

A lot of experts spoke about the robustness of the Indian economy when the global recession of 2008 did not entirely slow down India’s growth. Experts spoke at length about the pragmatism of India’s central bank leadership and its policies to have evaded the crisis. They even spoke about the sturdiness of the capital market and the role of the regulatory authority.  Today the global crisis is over in most of the nations. United States is back on track with the unemployment figures at a controllable rate and the retail spending picking up. Similarly Japan is expecting the return on investments it made after the Tsunami crisis last year. The amount spent on reconstruction has boosted the economy and it is expected to grow at respectable 2 percent this year. Only Europe seems to be lagging behind, however it must be taken into account that integrating economies of over 30 nations is a daunting task and credit has to be given to EU’s leadership for having dealt with the crisis in a respectable manner.

When compared to the growth rates of these developed nations India’s 7.6 percent growth rate seems to be enviable. So is everything great with the Indian economy? Is it really faring the way it is being projected? Every year fiscal consolidation is the buzzword yet the budget keeps running into deficit. The finance minister keeps promising to bring it under control yet deficit has increased from 4.6 percent last fiscal to 5.9 percent this fiscal year. Most of the deficit is on the account of food, fuel and fertilizer subsidies. The government keeps making provisions for the underprivileged but it is equally true that they are not getting the desired benefits. Most of the provisions are limited to mike & paper.

Let us evaluate the top most (so-called Sunrise )  sectors in India that are consumer driven and how they are faring – Retail , Healthcare , Aviation and also the ‘Oversold & over hyped SEZ story’.

We will have a moment of truth !

Aviation Industry

The India Aviation industry is in a tailspin. Every other day Air India, Kingfisher, Jet Airways etc are making the headlines for all the wrong reason.

Air India the state-owned company has been relying on frequent government bailouts for its existence. Air India alone was responsible for the 10 percent of the global aviation industry losses in the year 2008 while it handled dismal 0.35 percent of the global passenger traffic.  It is also over staffed with over 500 employees per aircraft whereas the industry average is around 120.

Kingfisher airlines owned by the flamboyant liquor baron Vijay Mallya is in troubles. Banks have finally decided to withdraw support in terms of providing further debt.  The only hope which the country’s third largest carrier can have right now is a government bailout. However there is a vehement opposition to such an action by the government. Experts and other industrial groups have strongly advised against such an action as it is a free market economy and it would amount to sheer wastage of taxpayers’ money.

Jet Airways has recently been in news when the tax authorities decided to freeze its account as it was about to default on its service tax payments. The Jet Airways spokesperson attributed the problem to rising crude oil prices and the high airport duties and lack of support from government in terms of policies. According to them the delay in service tax payment was a minor operational issue. However the mounting losses over past few years tell an entirely different story.  They were in news few years back for having laid off over 1200 employees and later taking them back next day after intervention from a local politician.

Other airlines in India like Spice jet, Go Air etc. have been on the fringe and have been moving back and forth from black to red.  An only Indigo airline is making profits. Several other have bowed down under pressure. They were either forced to shut down operations like Paramount Airlines or they managed to exit at the right time like Air Deccan and Sahara Airlines.

So what exactly is ailing the airlines in India?  Rising crude oil prices are often quoted as the culprit. In India fuel cost is almost 40 percent of the operational cost of running an airline whereas in other countries it remains around 15 percent. High fuels cost give little margin to maneuver in terms of other aspects like offering attractive tickets rates and other offers. However this is not the entire picture. Even though the crude prices reduced from $ 156 barrel to $70 barrel in 2008 to 2009, the Indian carriers continued to bleed and posted losses.

The real problem is of excess capacity due to overselling of India’s growth story . India’s daily domestic passenger traffic is approximately 1.51 lakh passengers whereas the capacity is around 2.16 lakh passengers. Imagine the revenue loss everyday on account of unused capacity. This has happened only due to the mindless unplanned expansion by the airlines hoping to cash on the Indian Incorporation growth story sold by the gang of politicians right from Sonia , Manmohan & inefficient Pranab and highly promoted Montek !  The airlines promoters were chasing numbers which was arrived on mere speculation & playing a ‘Valuation game to make quick buck’. They went on buying spree and expanded their fleet. Today the aircrafts remain underutilized.  India has the aircraft flying hours of 12 per day compared to 16 per day internationally.

Looking at the complete picture it is difficult fix the responsibility on the airline owners. They are capitalists who are driven by market forces. They anticipated growth in market based on market forecasts and other factors like projected rate of growth of GDP. They expected growth in industrial output and service industry output and subsequent increase in airline travel. However the reality was far removed from it. The India Incorporation failed to deliver and they were left in lurch. Today they are hoping for a miracle to save them from their predicament.

Losses Made by Major Domestic Carriers in India

Carrier Cumulative Loss 3 years (Cr)
Air India 13,000
Kingfisher Airlines 3900
Jet Airways 2400

Retail Industry

According to the experts the retail trade industry in India is having a bright future & is consumption driven due to the ‘reducing poverty due to social schemes and increasing middle class due to India’s growth story ‘. One of the studies by North bride capital expects it reach about USD 850 billion by 2012. Out of which organised retail will be having a share of over 20 percent. In numbers it over USD 175 billion. That is a huge market. According to others this figure will be achieved by 2015. Similarly other reports have painted rosy picture for the entire industry.  Currently it is increasing at a rate of 5% yearly.  A further increase of 7-8% is expected in the industry of retail in India by growth in consumerism in urban areas, rising incomes, and a steep rise in rural consumption.

As per consulting firm KPMG’s findings in a March 2009 report, the organised retail market in India has witnessed steady growth at 15 per cent in fiscal 2009. It will grow much faster, at the rate of 30-35 per cent annually, than the traditional one in the coming years. Fast moving consumer goods (FMCG) and apparel sectors are likely to drive this growth.

According to the 8th Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach 22% by 2010.

A India’s Retail Market Report by Boston Consulting Group

Year

Total Size ($ Billions)

Organised Retail ($ Billions)

Percentage

2005

244

8

3

2006

276

11

4

2007

316

15

5

2008

362

19

5

2009

368

22

6

2010

425

28

7

2011

471

35

7

2012*

528

44

8

2013*

590

55

9

*Forecast

 

The true story of the retail industry: It has become a ‘Valuation game’ due to over selling the India story of the growing middle class 

Subhiksha, Vishal Mega Mart, Koutons , Wadhawan group’s Spinach etc; do these names sound familiar and have something in common. Yes these are players in the organised retail industry who have succumbed and failed to deliver at their promoters expectations. These chain stores were at one time case studies of India’s organised retail success. So what actually forced them lower their shutters.   

According to Jagannadham Thunuguntla, head of SMC Global all these cases are classic examples of the retailers getting carried away by the India’s fascinating growth story and the phenomenal rise of the middle class.

The phenomenon is not limited with these cases mentioned above but also with the so-called successful ones in the industry. Country’s largest department store Shoppers Stop for instance posted an overall loss of Rs.4 crore in the last five years, while its debt soared to Rs.390 crore. The Tata group’s retail arm, Trent decided to close down its loss making chain, Fashion Yatra. It was launched in Oct 2008 and it was aiming at low-income shoppers in Tier 2 – 4 towns. Similarly Reliance Retail decided to close its Reliance Wellness format and not only that it scaled its hypermarket format down in some cities. Hypercity closed down its catalogue selling venture and also got rid of its Gourmet City format.

For the modern retailers penetrating further into urban markets has become a challenge. They have no option but to continue to create, preserve and then destroy the store formats they have come up with. Having closed down and revived several formats, most retailers have realised they need to constantly experiment with them to stay afloat.

So we can clearly see that India’s organised retail industry, which has the coveted potential of nearly a billion plus customers with enough cash to spare, has so far claimed a number of players, small and large. These players expanded too soon based on mere speculations.

While these retail stores were expanding and accumulating debts they hoped that the middle class with disposable income would be ready in short time to support them.  Things did not turn out the way they had planned. India Incorporation failed to deliver and along with that came the global economic crisis. These firms ultimately paid the price by closing down their shutters. For instance Subhiksha had expanded to over 1600 stores country-wide entirely on debt. This was a blunder that it committed as it was counting on the rising customer demand which was only on papers.

Not only the growth stories are misleading, at the same time the country’s back-end is not developed and huge investments go into developing it.  The vital supply chain required for the retail networks are entirely missing. This leads to a huge inventory cost which the small retailers are unable to cope up with. Take for example, it is estimated that in the food retail business in India, the wastage due to lack of proper storage facility is staggering 40%. This entire situation is largely the result of the lack of proper policy framework from the government.

The Indian retailers like Future group , Reliance and others are backing FDI so that they can get investment and save themselves from the fate of Subhiksha , Koutons , Gini & Jony , Spkykar , Vishal Mega mart , Foodland super markets, Surya Group etc . We have more companies going into CDR – Corporate debt re-structuring post the closure of the financial year 2011 ( March 2012 ). Banks do not wish to announce the failures or NPA’s in this year.

Ideally , retail businesses should have been making money due to consumer demand but the fact remains that India’s income and growth story is limited only to 6-10 towns and impacts less than 10 % of India’s population

 SEZ’s in India

India adopted the concept of zones from as early as 1965. Kandla in Gujarat was the first Asian export processing zone till the advent of the modern SEZ’s as such zones are now known as. With the passing of the SEZ Act in 2005, it was hoped that the Chinese success story would be replicated in India. It was expected that investor’s confidence would be established in the Government’s commitment to a stable policy regime. The real aim was to generate greater economic activity and employment with the establishment of SEZ’s following the Chinese model of economic growth !

There were numerous applications from multiple sources with individuals, indigenous companies, foreign MNC’s all rushing to have a share in the pie. Sadly it was a short phenomenon. The initial excitement was over as the problems started cropping up. Today in the last two years, as many as 60 applications for SEZs have been withdrawn, while 35 developers have applied for de-notification, according to data by CB Richard Ellis (CBRE), the real estate consultants.

Till date, the government has approved 584 SEZs. There are 381 notified SEZs, of which 148 are operational. Of these 148, only 17 are multiproduct SEZs. The remaining ones are SEZs dealing in engineering, electronics, IT/ITeS, hardware, textiles, bio-technology and gems & jewellery.

So what exactly is wrong with the SEZ idea in India which paid its dividends in China, Poland and Philippines?

On the whole the SEZ idea in India seems to be very much the product of the irrational expectation which has been fueled by imagination.

Healthcare Companies :  Most of the healthcare companies are ‘managing profits’ and as i write , a major healthcare ( hospital ) chain and a pharmaceutical conglomerate is about to wind up in the next 3 months . Imagine a healthcare & hospital company winding up ?

So the Congress party has sold the India story purely on ‘Imaginative basis and on speculative data’ numbers , have no idea of what is fueling inflation and what will deliver growth ? With all sunrise sectors on a downslide , it is better to replace these ‘ignorant intellectuals’ and bring in people who can understand the economy and run it efficiently .

Based on the governments high-octane pitches for the India’s growth story , consulting companies have brought out reports supporting government announcements , and  business houses have approached investors or moved to stock market and raised money and have put up expansion plans . But the reality is that, India does not have a growth story with the current fundamentals being very weak and ‘Leaky’ social schemes are making the party rich and not the population !

Also,  that the current stand of the government to raise the tax issue with Vodafone is a clear proof of what i am writing . India is desperate for funds and behaving like a dictator reversing a five decade legislation for just 10,000 crore ( USD 2 billion ). Does it not show the lack of morality and desperation for funds ? Rest will become apparent in April – May-June Quarter !

Lastly , the financial deficit of the government proves the rest ; all is not well with the India ‘bubble’ story ! Tough times are ahead , if we don’t take immediate action !

Rajendra Pratap Gupta

Healthcare I Retail I Rural Economy I Public Policy

www.commonmansblog.com

Flawed Retail Policy


The government’s decision to allow FDI in retail In only towns with a population of over 10 lac ( One million ) is totally flawed . India has over 8000 towns and cities, and if only the  53 flourishing towns get FDI , it clearly indicates a few things ;

1. All retailers would anyways like to be present in towns where there is business – Government is simply conveying & supporting the business plans for these big retailers

2. All retailers would be willing to invest in such towns ( be it front end or back end ) and not in smaller towns where real infrastructure  investment is needed

3. This policy will lead to more migration from smaller towns to these big 53 towns . So property / real estate will go up and so will the prices of major services and goods and drive inflation higher

4.In fact , these retailers must first prove their success in the smaller towns and not the bigger towns,  and make investment in the infrastructure in smaller towns

The MNC retailers must not be allowed in bigger towns before they invest in smaller towns or let them have two- three  small towns and one big town if at all the FDI has to be allowed

Automatically , the real interest of these retailers will come in open !

Post Pone FDI in retail for another five years


Prime Minister Dr. Singh,

Yesterday , I attended the meeting of CAIT ( Confederation of all India Traders ), I felt really bad seeing the plight of the traders, and the hell they would be subjected to , should FDI be allowed in India at this point .

Over the last few months, you have rallied all associated departments and ministries to build a case for FDI in retail. I feel sad that you & your government have ignored the fact , that FDI in retail at this juncture will put a big question mark on the means of livelihoods of over a Crore traders in the country .

I have seen that you / your government has been saying that inflation will come down as Wal-Mart , Carrefour , Tesco’s of the world come to India ( Wal-Mart has already come in few years ago ! ).

Prime Minister , remember, that Inflation has not come down despite Wal-Mart being in India . Your government’s logic that supply chain will get strengthened and prices will fall is fallacious . FDI in retail is a wrong justification for strengthening the supply chain , as FDI in supply chain is already allowed, and a lot of wholesalers are already around and more can come in without needing FDI – Why are you fooling around Manmohan ji ? How low will you stoop now to push to agenda of foreigners !!

Even those who are operating Cash & Carry business , are issuing cards to individuals to buy from them, thereby , stabbing the small retailers . Shut down Cash & Carry immediately after a proper investigation . I go to Sam’s Club in the US ( For your information , Sam’s Club is Wal-Mart’s Cash & Carry Venture in the US). Anyone can buy a card for USD 40 and start buying from Sam’s Club. I have gone twice with my friends to Sam’s club and brought goods from the store , my friends are not retailers , but Indian professionals working in the US . So when these retailers do the same in India , what will we do ???

Your government has failed to understand the cause of inflation , and firstly , you said that recession caused inflation ; then recession got over but inflation did not come down. Then you said that irregular and deficient rainfalls are the cause of inflation. Last year , we had good rains and inflation still did not come down. Realizing that there was no answer with your US educated ( read brain washed ) consultants ( Rajan ,Montek, Kaushik & Sam ) , your government said that inflation was due to high growth and it would continue . Study our next door neighbor – China . They have had high growth with less than 5 % inflation !! All your predictions have failed !!

Also remember dear economist, that ‘inflation is reversible but FDI is not’ . What I mean to say is that , when BJP comes to power, it will bring down inflation , but if you permit FDI ( As your government is hell bent on it ) , we will not be able to reverse FDI . So think before -hand !! Don’t jump like the nuclear deal & do another fiasco !!

Sonia Ji is shouting aloud on NAC podium for poor people on one side, and on the other side , both of you have already done a deal with major international retailers , and are hell bent on cracking the back bone of small retailers by allowing FDI

Government has a flawed policy with regards to FDI, as you are saying that you will allow FDI in top 35 towns to start with. This goes contrary to strengthening the supply chain. If you really want to strengthen the supply chain then please ask this big giants to start retail in ‘C’ class towns and then come to B & A class towns !!

Your statement that farmers will get better value because of FDI in retail : Wal-Mart’s of the world are known for extracting even the ‘blood’ of suppliers !! Their labor policy record needs to be closely examined , and how many times they have been fined !

Also, Wal-Mart is failure in Japan ( social dumping & doubts about its quality ) , Korea ( Wal– Mart failed to understand local customers) , Brazil ( Lack of understanding about local culture ) & Germany ( due to cultural insensitivity ) .

I am producing an excerpt from a report

‘Walmartization does not travel well’ Clearly, neither Wal-Mart’s business concept nor its social dumping – the so-called Walmartization – work in developed economies with a social dimension. Many consumers shun the Bentonville giant and prefer to do their shopping in stores where they know that workers are treated correctly and with dignity. There is also more and more uneasiness and suspicion about many of the products sold. Squeezing the last drop from suppliers can hardly promote safety and quality. There is also a growing aversion against buying, consuming and using products which could well have been made under inhuman conditions. That the tide is fast turning against Wal-Mart at home has not gone unnoticed abroad. Consumers start to know that the retail giant denies its American workers their fundamental rights, and many of them vote with their legs, going to other stores if they have a choice. The poor business results in Germany, Korea and Japan should be taken seriously in Bentonville

Another report : This article appears in the November 21, 2003 issue of Executive Intelligence Review. Wal-Mart Collapses U.S. Cities and Towns by Richard Freeman

During the last 20 years, Wal-Mart has moved into communities and destroyed them, wiping out stores, slashing the tax base, and turning downtown areas into ghost-towns. This is accomplished through Wal-Mart’s policy of paying workers below subsistence wages, and importing goods that have been produced under slave-labor conditions overseas. Often, communities will even give Wal-Mart tax incentives, for the right to be destroyed. Wal-Mart both reflects, and is, a major driving force for America’s deadly implementation of the Imperial Rome model. Unable to produce physical goods to sustain its own existence, the United States, like Rome, sucks in imported goods from around the world, using, in this case, a dollar that is over-valued by 50-60%. America has been transformed from a producer to a consumer society.

I believe that Wal-Mart destroyed American Economy and now it is here to kill ours !! Also, since we know that Wal-Mart is a failure in four countries , please produce a report on those four countries .

Also, let us examine that how many small mom & pop stores have shut down with the advent of Wal-Mart in the United States ? Similar study we must do in China .

Let me also tell you why Biyani’s & Ambani’s of the world are wanting FDI ?

Let me ask these retailers one question ? If the retail trade is so good and profitable , why they have the problem in raising money , investing and growing their business – why do they need foreign investment ? The talk that these MNC retailers bring latest technology is also misleading , as Indian retailers are working in a different environment and all foreign CEO’s have been an utter failure so far in India . You can see the example of Reliance Retail ; How many CEO’s have been brought from outside India in the last four years ? I understand that recently a new CEO was hired from Wal-Mart China !! These traders are actually looking at exiting the business by selling their business to these multinationals to make a quick buck !! That’s the real reason they need FDI .

Once FDI comes , farmers will cry for a good deal and Wal-Mart would never give them a fair deal . On one side , farmers are forced to sell land and other side whatever is left with land & cultivation , they would be forced to sell to these MNC chains at a wafer thin margin .

Congress is a killer party for the poor !! Prime Minister Singh , where is your plan to upgrade the current Kirana stores ? Why are you not excited with their welfare . Give them FDI ( Finance from domestic institutions ) , and provide them training .

I call upon Shri Nitin Gadkari , President BJP to stand behind these standalone Kirana store and oppose FDI . We should post pone FDI for another five years and then revisit the issue. A massive peaceful agitation is called for to stop FDI in Retail for the next five years .

Mail is marked to Montek, Raj Jain of Wal-Mart , CAIT and all leading retailers & political parties in India

A Common Man

Rajendra Pratap Gupta

http://www.rajendragupta.wordpress.com

Indian Pharmaceutical Industry is already controlled by US / Europe, and now it is Retail Sector’s turn – FDI round the corner


Dear Dr.Joshi,

Namaskaar,

I am sure that this finds you doing good.

Last  year i had detailed discussions with you on FDI and i sent you a note on not opening the retail sector to FDI. Till last year , you were the Chairman, Parliamentary Standing committee on commerce .

This year the issue is out again . It is shocking that UPA is even considering to open the Retail sector for FDI.  Just consider ;

Total retail market is Rs. 1.2 Lac crore. Isn’t that too tempting for recession hit economies like US/ Europe and U.K. to fight recession through markets abroad ? They cleverly call  us as an emerging / developing economy

To foreigners , this is a market but for us (Indians)  it is 40 % of our GDP.  You can expect that in the next few years , a good percentage of 40 % of our GDP will be in the hands of foreigners !!  . We have 15 million retailers , thereby directly employing at least 30 million people and indirectly 6 times more i.e. 90 million .

Only 4 % of our retailers have an area of 500 Sq. Ft.

Food constitute 70 % of our retail trade

The UPA’s discussion paper is a wrong start as it has by-passed the parliamentary standing committee’s report tabled in both houses in June 2009. Consisting of more than 40 Member of parliaments . The committee had taken into account the report submitted by ICRIER

British MP David Amess recently said that the Indian Government to tread”very carefully” if it opened up the multi-brand retail sector to FDI because the entry of companies like UK-based retailer Tesco would”literally change the fabric of life in India” by endangering small shops. Amess chairs the British All Party Parliamentary Group on Small Shops (APPGoSS).

The government is currently holding consultations on allowing companies such as US-based Wal-Mart, France’s Carrefour and Tesco to come in.  Critics have urged the government to insert safety clauses following protests from small independent retailers that potentially face closure.”Britain was a nation of small shopkeepers,” Amess.”All of that has changed and this is because of the supermarkets, led by Tesco. It is impossible for small shop keepers, who have so much to offer, to compete with the prices of the supermarkets”.

APPGoSS Secretary Bob Russell MP, added “the expansion of supermarkets in Britain has been to the serious detriment of small shops, there is no question about this”.

One in six small stores in Britain have gone out of business in the last decade, the group said.

Atul Patel, an Indian origin Briton who runs Pelican News, a small store in North West London. said his family-run business was now struggling to survive, with sales of meat, groceries and fresh fruit having dropped by at least a fifth  after Tesco opened a store hear his.

Largest Indian pharmaceutical companies like Ranbaxy and Nicholas Piramal have already changed hands and are no more with Indians . With the recent acquisition of Piramal with Abbott ,  MNC’s control more than 50 % of the Indian Pharmaceutical industry , and more acquisitions are likely to follow soon.

My personal belief is that, the when the large foreign retailers come in , the fight will not just be between large and small retailers but between  large and medium retailers . Small retailers will die for sure . Needless to mention , when the elephants fight , the grass ( small retailers ) gets trampled !!

Dr. Joshi , please take it up at the appropriate levels .

Recently , it was reported that acute poverty prevails in 8 Indian states ( 421 million people in Bihar , Chhattisgarh , Jharkhand , Madhya Pradesh, Orissa , Rajasthan , Uttar Pradesh and West Bengal which together account for more poor people than in the 26 poorest African nations combined ( 410 Million ), a new ‘multi dimensional’ measure of the global poverty said According to the MPI- Multidimensional Poverty Index , developed and applied by the Oxford Poverty and Human Development Initiative with UNDP support

Also, i hear that Economy is growing at approximately 8  %. I need to tell our Dr. Manmohan Singh, the economist that the literal meaning of Economy is “Community’s system of wealth creation” and not just growth of a few sectors, as is in the case of India and we call it Indian Economy ? So Indian “economy” is not growing , but a few sectors that are in a ‘few hands’ are growing !!

Dr.Joshi , you have profound knowledge of each and every aspect of history , culture and wealth creation and distribution , that is even acknowledged by Congress leaders in power.

Let’s work to change all this . I am hoping to meet you soon.

Thanks with best regards

Rajendra Pratap Gupta

Email : office@rajendragupta.in