It is less than a week since the Congress-led United Progressive Alliance (UPA) government surprised everyone, including many of its own, and announced its decision to allow freer foreign investment in retail. With the politics of the move overtaking the economics of it, the debate has since degenerated into vitriolic exchanges between the government and a surprisingly unified opposition.
No one is as yet talking of this, but a dispassionate view makes it clear that the policy change effected by the government has the potential to completely alter the status quo in this country (it is possible that this is inadvertent). In my view, this is probably the most disruptive reform ever attempted in modern India. Industrial delicensing and the lowering of import tariffs were hugely significant and changed the contours of manufacturing in India. A transformation of the entire supply chain is not only far more radical, but also has the ability to push change, good or bad, across India.
Like Mint pointed out on Tuesday in a full-page graphic, the farm-to-home supply chain involves more intermediaries than is the norm in most other parts of the world. One of my colleagues claims that India has six intermediaries in most supply chains compared with the global average of two.
Over the years, each level has created its own restrictive ecosystem. In Kerala, for instance, the local loader will determine which truck will carry a consignment of goods (the decision is taken by neither the truck operator nor the consignee). Similarly, the out-of-date agricultural produce marketing committee regime cannot be bypassed when goods reach the mandi or market; in Delhi, for example, a handful of people control the entire agricultural produce market. Anecdotal examples like these abound at every stage.
What the government has done is to initiate change right at the top, in the so-called last mile. However, if foreign retailers want to be effective in Indian conditions, then they will inevitably have to usher in change at every level; while, initially they will ride with what they have, their leap to the next stage of growth will only be possible if the status quo is altered—no intermediate stage in India is ready to handle the scales that big retailers will impose on the system.
This will not happen overnight. Nor will it happen painlessly. Nothing does, not in India. Still, over the next five to 10 years, the supply chain, as we know it, will undergo a tremendous overhaul. As the old ecosystem gives way to the new, political equations too will change. Currently, it is in the interests of the few who control the farm produce market—usually through a nexus with local politicians—to retain the status quo. It is not as if the new order will be without blemishes, but it will most certainly not be business as usual.
Ironically, the government doesn’t seem to get this. If so, the debate in the cabinet (reported in Mint on Tuesday) would not have produced specious claims about foreign investment in retail combating inflation (it certainly will not happen in the immediate future) or benefit small farmers. It is obvious that the messenger hasn’t understood the message.
That is the only rational explanation for what has been a series of missteps.
First, the change is badly timed from the political angle. It comes just ahead of a key electoral shootout in north India, including Uttar Pradesh, where Congress general secretary Rahul Gandhihas staked his own political credibility (and maybe future) on the outcome of the election. It also comes right in the middle of a Parliament session, with the opposition already targeting the government for its failure to get a handle on inflation—now perilously close to double digits. The sense of urgency is baffling. Indeed it is an imperative policy change, but it could have been delayed for another six months. After all, the UPA has waited for nearly four years after its chairperson, Sonia Gandhi, shot it down.
The second is the inexplicable flip-flop by commerce minister Anand Sharma. After having claimed that the 30% mandatory reservation was open to both domestic and global small and medium enterprises, Sharma clarified on Monday that it was only open to the former. Not only has the UPA made the policy change less commercially attractive to foreign investors with this move, it has also eroded its own credibility—communicating that it is not averse to changing its story to justify a situation. So, why are we not surprised that no one is willing to believe the government’s reassurance that the change is a calibrated one (restricted to 53 cities initially)?
Instead, the government would have been so much better off had it been more straightforward in its approach. Since agriculture is a state subject, taking state governments into confidence would have been a good starting point. Then, if a decision had to be taken immediately, at least Parliament, going by precedent, could have been taken into confidence.
Third, the UPA has backed the move with rhetoric—the immediate tamping down of inflation and generating employment (and this, in the context of the jobless growth legacy of UPA-I)—rather than honest facts. It has not helped that business lobbies have turned up the volume with cliches and random studies to drum up support in favour of the government.
The summation of the mishandling is that the message of change has been buried. And that, for a country sorely in need of the reform the move actually entails, is really bad news.
Also Read | Anil Padmanabhan’s earlier columns
Anil Padmanabhan is a deputy managing editor of Mint and writes every week on the intersection of politics and economics. Comments are welcome at email@example.com