స్వదేశీ జాగరణ మంచ్

R. Vaidyanathan

In the last week, some Bangalore-based newspapers reported on page three the opposition by local traders to the operations of Metro, the German giant in the retail trade, including agricultural produce. That news item also looked like an afterthought, for filling the space after covering the escapades of noisy and vulgar celebrities. The English language media, which shouts on a daily basis from roof-top about the “cherished press freedom,” does not bother about a profound and far reaching issue, which is going to affect millions of Indians in terms of employment, culture and way of living.

From Manmohan Singh to Jaswant Singh (in between Chidambaram and Sinha), every FM has categorily stated in the Parliament that there is no move to introduce FDI in retail trade. As usual, there are some ill-informed editorials by semi-literate editors in some of the business papers about the need for FDI in retail trade (along with all activities including maintenance of toilets, but excluding in print media, since that will be against their “cherished press freedom”). It is another issue that, for a crumpled silk tie or a bottle of IMFL, one could get prominent space in the editorial pages in some of these business papers.

Unfortunately, there is not much debate (leave alone informed debate) even among the academicians and policy-makers about the far-reaching implications of the arrival of a global retailer like Metro.

Trade constitutes a very important segment of our economy with a 13% share in GDP during 2000-2001. In other words, in the aggregate GDP of Rs. 19 lakh crore during that year, trade was of the order of Rs 2.5 lakh crore. This is comparable to the 16% share of manufacturing in the same period. Agriculture constitutes nearly 25% of the share of GDP. (National Accounts Statistics, CSO, New Delhi-2002)

We also find (Table-1) that the share of the service sector is nearly 50% of the economy during 2000-01 and it is the fastest growing sector, clocking more than 8% during the period. Even though discussions on the service sector focus only on software, it is important to remember that the major components of service sectors are different. Four sectors, namely trade, transport (other than railways), construction and hotels and restaurant constitute dominant portions of the service sector other than business and professional services. As already seen, trade constitutes the third largest chunk of the economy other than agriculture and manufacturing.

Planning Commission Oct 2001 (India Stat)

The growth rate in trade alone between 1993-94 and 1999-2000 is around 16%, which is phenomenal.

Trade is conducted by partnership/proprietorship type of organizations with active involvement from members of the family and the community. The share in trade of these types of non-corporate organizations is more than 80%. (National Accounts Statistics –2002) and the share of corporate type organizations will be miniscule.

The other small component is that of government in trade.

The credit availed by these sectors comes from the sellers (in the form of payables/receivables) or from “open market” (non-bank) sources and from bank sources.

The financing of the activities by the non-corporate sectors, particularly in areas like trade (wholesale and retail), hotels and restaurants, is mainly from the private money markets where the rates of interest are much higher, at least twice that of a nationalized bank. These are cash flow-based lending rather than asset-based and are undertaken more by the unincorporated type of financing agencies. The organized non-banking sector is more into asset-based lending for items like machinery, equipments, trucks, etc. This is one of the major reasons for the large margins seen in trade, both wholesale and retail. For many of the fast moving consumer goods (FMCG), the gap between the company balance sheet figure and the street price figures is more than 35%, and one factor in this is the “open market” interest paid by the trade channels. In case of cash crops and vegetables, the gap between producer prices and consumer prices can be as high as 70 to 80%. Here again, the financing cost both for holding and transport plays a major role.

In the recent past, the interest rates have been moving south and large corporates are in a position to access funds from banks at less than 10%. But the flower girl and my vegetable vendor get it at half percent per day (returning half a rupee for hundred rupees borrowed in the morning). This works out to be more than 180% per annum. My retail provision stores man gets it in an interesting way. He gets Rs 45,000 (for a loan amount of Rs. 50,000) upfront and pays Rs. 500 per day for 100 days to repay Rs. 50,000. It turns out to be more than 10% for three months. My barber gets it through a local chit process at around 4% per month. The fast food restaurant (idli joint) at the corner of the road gets funds at 3% per month from a non-bank agency. The private bus operator in the suburbs gets it at 2.5% and the construction contractor near home gets it at 3% per month. The plumber, carpenter, fitter, painter, etc get funds at 3 to 4% per month.

The segmented financial markets present an ironical (if not tragic) picture of huge funds being available with bankers on the one hand and prohibitive interest rates at which funds are made available to trade and commerce, particularly the non-corporate, sector on the other. As already seen, the non-corporate sector has a dominant role in activities like trade (whole sale and retail), construction, hotels and restaurant, private transport and other services. These are clubbed together as unorganized sectors in our statistics and sometimes talked about as “residual” or “informal” sector.

India is an interesting country where the insignificant groups can focus on inconsequential issues through the media and make it a “national concern”. For instance, the India Inc, which has less than 12% share in national income, occupies all the sound bytes and print media column space, giving an impression that India Inc. is important when in reality it is the residual sector of the economy.

Hence, we are not talking here of some residual segments. These sectors constitute nearly fifty percent of our economy, and activities like trade have grown at more than 15 percent in the last decade.

It is to be noted that market knowledge and information regarding these activities is not fully available with the commercial banker on an updated basis. The typical bank manager of a public sector bank has a two to three year tenure in a particular branch and is also shifted across activities like foreign exchange, administration, agricultural finance, personal banking, training, industrial lending, etc. By and large, the commercial banks have been geared to “asset-based lending” rather than lending based on the forecast of cash flows. This is all the more true of such activities like trade, transport, hotels and restaurants, construction, etc, where there are significant fluctuations in the cash flows on a daily basis. In other words, risk assessment capabilities are not adequate in the context of these activities. Also, funds need to be available to these players without much paperwork and based on personal assessment. These activities are mostly financed by the Non-Bank Finance Sector (NBFS), consisting of companies into chits and similar activities and Un-incorporated Business Entities (UIBs). Large segments of disparate activities are clubbed together under a single banner called NBFS. It ranges from unincorporated entities like moneylenders to large companies dealing in thousands of crores in leasing businesses. It also includes share trading companies and truck financiers. There has not been any significant attempt to focus on the distinct activities of these constituents by the planners.

Unfortunately, there is no direct estimate available about the credit provided by the non-corporate bodies for trade and commerce in the economy. Elsewhere, we have estimated that in trade alone, the role of non-bank institutions in providing credit might be of the order of 60%. Hence, a significant role is played by the non-corporate financing bodies in our economy and the rates are much higher than that charged by the commercial banking system due to ease of transaction and trust-based lending.

The result is segmented distribution system and prohibitive financing cost at the retail level. What is the source of funds for this NBFS, which consists of lenders at the local level, chits, UIBs, etc?

We can surmise one possible source. There were raids by the Lok Ayuktha recently in various departments of government at Bangalore. Based on the figures released by the newspapers, one can estimate that at least half crore rupees is generated on a daily basis in a city like Bangalore in the process of “ rent” income by the government officials. This translates into nearly Rs. 150 crore per annum in one town. {It was revealed that some of the officials have not taken leave for many years!} We can imagine what it will be like nationally. All this money is not kept in the almirah, at home of the employees (except in movies!). This becomes the deposit for many of the local lenders who provide deposit rates of at least 3-4% per month. One finds at least two news items every day on page three in every newspaper about failed local chits or lenders and quarrels and fights due to that.

There is a need to integrate domestic financial markets through a system of making the UIBs in the credit market as channel partners to large banks. The reforms have focused only on the liability side of NBFS and failures therein, but the asset side is equally important in terms of credit delivery to large segments of our economy.

The significant role played by the non-bank institutions in the credit delivery mechanism has not been appreciated nor fully understood by the policy planners. The focus is more on the failure of some institutions. There have been failures in the non-bank sector in terms of institutions in both corporate and other forms of business.

There are two types of failures. One belongs to the class of malfeasance on the part of promoters in terms of running these institutions, which has resulted in the depositors' loss. This is related to the operational and supervisory mechanism. The other type of failure is related to the risk of the underlying assets invested in by these entities, and that is part of the business risk phenomena. There is a need to understand the return risk paradigm of any financial operation, and these entities are into cash flow-based lending as in activities like trade, hotels, construction etc. They do not have the benefit of the sovereign guarantee provided to public sector banks, nor have they any insurance facility as given to bank deposits. They also do not have the “comfort letters” provided to the MNC bankers in India by their parent companies abroad.

In such situations, failures are to be expected when dealing with lakhs of institutions. In the case of failure of commercial banks, particularly public sector banks, it is explained as “systemic” failure and the government pumps in more funds for re-capitalizing these institutions. The chances of failure of private institutions with significant risk taking activities are expected to be larger compared to government-owned, controlled and monitored institutions. Protecting the depositor interest should go hand in hand with enhancing the credit delivery mechanism to the largest sections of our economy.

In a sense, the non-banking finance companies -- both corporate as well as non-corporate -- are the best route to finance these activities of the non-corporate sector, particularly for the future income-based lending. This is due to the fact that, in their area, they are market savvy and have the ability to rate the partnership/proprietorship groups and monitor them and recover the money lent to them.

Hence, the public sector banks could finance the non-bank financial institutions on a wholesale basis and they in turn could fund the requirements of the non-corporate sectors in a chain of retailing credit and recovery functions. If the banks finance the NBFCs after rating them even at 4-5 % above prime lending rate (PLR), then these institutions could fund the non-corporate sector at perhaps 8-10% over and above the PLR. This is still lower than the open market rates of two and half to three times the PLR at which the sector, in many of these activities, is getting financed.

The financing of the non-bank organizations (both corporate and unincorporated) by the commercial banks should be treated on par with priority sector lending as long as the end users are these sectors. This implies that the commercial banks gear themselves in rating the non-bank organizations rather than thousands of unincorporated entities in trade, transport, construction, and hotels and restaurants.

In the case of non-corporate entities in the market, the commercial banker can be given the powers to license them and provide credit to them to reach the larger market. It can also be specified that only licensed non-corporate bodies will be permitted to operate in the credit market in terms of collecting deposits and also availing of loans from the banking institutions. This would provide opportunities to banks to enlarge their scope of operations and also provide the UIBs to carry on their business with loans from the banks. It will also introduce orderliness in terms of banks rating these entities for licensing them and reviewing it annually. The depositors are also protected to some extent in the context of assessment by the commercial banks for licensing them.

This concentric circle of banking will bring to an end the current inverse relationship between the size of borrowings and the cost of borrowings without much application of credit rating of the borrower. It would also facilitate creation of proper database in these activities for credit rating of these entities. This would bring down significantly the cost of borrowing by the trade channels.

The employment statistics available for this sector, to say the least, is meager and it is only pertaining to the corporate sector, which is residual in these activities. The data looks like some Bollywood yarn rather than a reliable tool for policy making. Of course, the mandatory and humorous footnote as in many government statistics is provided stating the “coverage is inadequate”.

For instance, Table-2 provides data on the employment in the private sector in various activities and it indicates that 330,000 persons are employed in trade activity in the whole country, which, to us, is funny, but tragic for meaningful policy formulation. Notice that, in construction, the employment is 57,000 as of 2000. In a city like Bangalore alone, it will run into lakhs.

Note: Coverage on Private account is inadequate

Source: Ministry of Labour- quoted in the Economic survey 2001-2002 pp., S-50 GoI New Delhi

With such a database, it is no wonder that the policy formulators and pink press are not concerned about the implications of Metro for employment in the retail trade.

The “shop till you drop” crowd thinks that the panacea to all our ills is to encourage global chains in our retail markets. The argument is that the MNCs bring funds, efficiency and cost-effective solutions. The consumer should be happy! The MNCs do not normally bring funding from outside sources since they can access funds in our domestic market by showing comfort letters from their parent companies. There are many local financial institutions, both government and private, which would lend them below prime rate since they are global and “suited-booted” and “tell nice lies with beautiful ties on their neck.” Plus, they are run (even remote controlled!) by “whites” -- financial institutions in India do not deny “white customers”. That the MNC will bring funds from abroad is a mirage and a belief that should be taken with tons of Saurashtra salt. Remember Enron, which was supposedly bringing Rs.10, 000 crore from outside. The final result is that our government institutions hold more than Rs. 6000 crore of worthless papers. Now RBI is asking these banks to show it as bad debt. Rebecca Mark (whose fame was that she walked on a ten inch high-heel shoe the length and breadth of Taj Hotel lobby in Mumbai) claimed that millions were spent to “educate” Indians as part of that project. We either refuse to get “educated” in the true sense or want to be more “educated” in Rebeccian sense. We not only never learn, we dream the same wrong Technicolor dreams aided by pink papers.

The other aspect is regarding the “technology” or “ knowledge base” they bring with them. What technology? Do we want to “dumb down India” as Wall Mart has done to the US? Should we replace the street corner Nadar or Muslim or Sardar or bania shopkeeper who can add fifty items without a calculator with a counter girl (no sexist bias) who cannot add five numbers without a machine?

Another issue is in terms of reduced cost. Has anyone done a proper study of the aggregate cost of these global retail chains? Most American homes have a retail store in their basement. They have at least one-month stock of coke and six-month stock of toilet paper since Sam Co. decides that mom and pop stores are to be shifted to individual households by offering great discounts. The refrigerator in every house is a retail shop and basements are godowns. In other words, individual households have become retail outlets using their credit card. For the economic expert, goods held by household is consumption but held by mom and pop store is inventory. Hence, inventory reduction has been achieved in the economy! Another aspect is the fuel cost of thousands driving miles to go to that rural supermarket and spending thousands of man or woman-hours doing nothing between the aisles. Do we want such a model here?

Should millions of small shopkeepers become employees of large retail chains? Are we intrinsically against self-employed groups? Unfortunately, we do not even debate these issues. Of course, the usually alert and shouting red-experts have not bothered much since it is the petite bourgeoisie who will suffer. And the petite bourgeoisie is not the vanguard of the revolution unlike, say, government employees!

For anything and everything, the pink press wants Indians to emulate the Japanese, the French, the Germans and, at least, the South Koreans. All petroleum services and products, rice, tobacco, salt alcoholic beverages and fresh food traded at public markets are excluded in Japan from any “distributional aspect” by other country companies. Australia, Japan, South Korea do not allow whole trade services in petroleum, its products, rice, tobacco, salt, milk, fertilizers etc by foreign companies.

The French, using their Loi Royer, simply restrict any development of hypermarkets to protect what they call the “centers of French towns and villages and the living of small shopkeepers.” Germany has legislative constraints on outlets above 1200 sq meter in size, not dissimilar to France's Loi Royer. This is inspite of the fact that trade constitutes relatively smaller portion of their economy both in terms of employment and value addition compared to India.

The controversy regarding Metro has other dimensions. It was suggested that they have permission from the state government to enter retail trade. The newspapers informed about predatory prices (40% discount etc). Long queues were formed outside their outlet. Then it was published that they are only into wholesale and not in retail since, as per law, they cannot do retail. Then it was suggested by ministers that the law should be amended. After all, Indian laws have been amended thousands of times and doing it once more to facilitate the grand entry of global malls and hypermarkets is child's play! Then there were reports that they will procure directly from farmers in the agricultural marketing yards. Then it was pointed out that they couldn't trade in agricultural commodities. The whole issue is a riddle packed in enigma, wrapped in a puzzle and delivered in mystery. The transparency in some of these areas, to say the least, is much to be desired. Remember that a cabinet minister (Arun Shourie) confessed in the Parliament that he could not find out who owns Jet Airways even after two years of investigation. That is the level of “reliable database” and “transparent disclosure” in our policy formulations.

The policy of GOI at the Cancun summit for the purpose of discussing trade and services was not to even “discuss” certain areas of services like legal, accountancy and distribution services consisting of wholesale trade and retail. But in practice, the present FDI allows up to 100% on cash and carry basis wholesale trading and under that, Metro Gmbh, a German retailer, and Shoprite Checkers, a South African firm, have been approved.

No debate, no discussion. The three monkeys of Mahatma have become national motto with respect to FDI in the service sector. Let not anyone carry the impression that we are against globalisation or against foreign companies in Indian trade, etc. What we are arguing is that the process is not debated nor is the planning proper. It is ad-hoc, haphazard and full of discretions and improvisations on the way. But national policy formulations affecting millions of livelihood is not like enacting amateur tamasha, or theru koothu or jatra where you improvise as you go along. National policy based on improvisation is a sure recipe for disaster to the affected. One gets worried if our trade policy is available for trade. Unfortunately, the government will sell it to the lowest bidder! We need to first and foremost integrate our domestic financial and product markets before trying to integrate with the global markets.

If the competition from the international giants has to be effectively met by our local retail trader, then cost-effective and efficient credit delivery mechanism is important for these players. The trend in commercial banks today is to merge existing branches rather than create new ones, particularly in the context of the voluntary retirement schemes introduced. In such a situation, it may not be possible for the commercial banks to enlarge the network necessary to cover a larger portion of the non-corporate sector in future. That would leave a huge unserviced gap.

Recognizing the important role of the NBFS in the credit markets, collect data to estimate their share to enhance the credit delivery to millions of service entities. The commercial banks can lend to these non-banking institutions that in turn can provide it to the trade entities.

Globalizing our trade sector without domestic integration of the credit markets may lead to a situation of cherry picking by the global players and/or linkages created only at the “creamy layer” level without adequate strengthening of the base of the system. The paradigm of taking the UIBs as channel partners by the commercial banks in a large scale would facilitate the players in these fastest growing activities to compete effectively with global players in the emerging scenario. We should not start with the premise that the pan chewing, dhoti clad, English-ignorant retail trader is “inefficient” and “cost-ineffective” and should be bleached by globally accepted detergents for cleansing.

It is required of us to recast the financial architecture of the Indian financial system if it has to ensure growth of the economy along with adequate availability of credit to the fastest growing sectors of the economy. The aggregate monetary policy of the central bank can be achieved if and only if the role of the NBFS, including the UIBs, is recognized and encouraged in our trade financing system.

I recall seeing a notice board at the southern most tip of the country on the seashore asking people to beware of the pickpockets. It was couple of years ago. The board, unfortunately (or interestingly), has tilted and points to the inland, namely the entire country. May be it can be re-written and kept in every state capital and Delhi stating that Bharath is on a basement discount sale for unlimited period.