India rediscovers barter trade, streamlined by the Internet6 min read . Updated: 17 Aug 2010, 09:06 PM IST
India rediscovers barter trade, streamlined by the Internet
India rediscovers barter trade, streamlined by the Internet
New Delhi: JAlfred Prufrock, it is said poetically, measured out his life with coffee spoons. Magpie Retail Ltd, almost literally, measured out its 2009 with a far wider range of cutlery.
Last year, Magpie opened nine stores for premium kitchen and home accessories across India—its busiest year yet, in such terms. To furnish these stores—with wooden floors, desks and chairs, air conditioners—would have cost Rs15 lakh per 1,000 sq. ft, estimates Sumit Jain, Magpie’s general manager, sales.
It remains only an estimate, because Magpie didn’t pay for these furnishings in cash; they paid in knives, forks, spoons and an assortment of their other products. “We basically furnished all these offices through barter," Jain says. “We even got water dispensers and reverse osmosis filters."
Magpie’s decade of barter has coincided precisely with the history of organized barter in India. The first Indian barter exchange opened in 2000, but only recently has the pace of activity begun to accelerate; Rakesh Bhatnagar, chief executive of Net4Barter Pvt. Ltd, one of the oldest Indian exchanges, predicts a tripling or quadrupling of barter volumes in the next three years.
Perhaps sensing this opportunity, two Australian exchanges—Ormita and BBX—began trading in India within the last year. Relatively speaking, of course, these are still modest beginnings: Bhatnagar guesses that the market stands only at Rs120-130 crore. In contrast, he says, barter exchanges facilitate $12-13 billion (Rs56,000-60,700 crore) worth of swaps in the US every year, and Rohit Mahajan, director of Ormita India Pvt. Ltd, likes to observe: “30% of the Swiss economy runs on barter."
Popular perception has held barter to almost anthropological disdain, deeming it an economic activity fit for unsophisticated, moneyless societies. The 18th century economist Adam Smith called man a “bartering savage", as if each word was apt for the other. (Smith being Smith, of course, he celebrated that innate human desire to barter, deeming it a basic tenet of capitalism.)
Barter flourished most famously in the “storehouse economies" of ancient West Asia, where information could be easily centralized; those economies collapsed precisely because, as they grew more complex, information became harder to manage and coordinate. In the Internet, however, a new way to centralize information has emerged. The restaurateur who wants to swap free meals for a batch of tablecloths can now find this linen supplier herself.
Perhaps the canniest leverage of barter came in 1972, when PepsiCo Inc. entered the Soviet Union, becoming the first American product on the market there. Finding that it couldn’t convert its rubles into dollars to then bring to America, Pepsi asked the Soviet government for payment in an even more liquid currency: Stolichnaya vodka, to sell in the US and, thus, make its money.
It is startling to discover how effective modern barter can be. “One of our members is constructing a factory building on barter," Mahajan says. “Another offers university degrees, and another offers contact lenses. A sanitaryware manufacturer is producing and airing an advertisement, and it’s being done fully on barter—no cash anywhere." Taxes are paid on invoiced amounts as with any other purchases; as Bhatnagar says, “The tax authorities don’t care how you’ve paid for something. Taxes still apply."
Some economists are now keen to push barter to the other end of the sophistication spectrum, mulling over its place in the monetary system of the future. In 2000, at a World Bank conference, the Harvard political economist Benjamin M. Friedman suggested that, with barter thus streamlined by the Internet, it might replace the system of central banking—and so, by extension, the very system of hard cash.
Bhatnagar set up Net4Barter in 2000, drawing upon a memory from his previous job at UTV. “We were looking for a lot of outdoor media to promote TSN, our home shopping network, and for some reason, we thought of asking the media owners if they’d be interested in swapping say Rs10 lakh of hoarding space for Rs10 lakh of TSN products," he recalls. “I noticed that they were genuinely interested, but not necessarily in what we had."
Exchanges solve what Bhatnagar calls the essential dilemma of one-to-one barter: “Does each person want what the other has, and do they want it at the same time?" In exchanges listing 500-700 companies, one firm offers up a certain value of barter credit—10,000 forks’ worth, say, at a decided rate. It can then comb the exchange for the things it needs, like office chairs.
In return for matching parties up to counterparties, the exchanges take a commission—10% in the case of Net4Barter, 7% in the case of Ormita. The two firms—India’s biggest, at the moment—work slightly differently. Net4Barter maintains a godown in central Delhi, where it offers to store and even ship onward products that are in barter limbo. Ormita, however, believes in letting swappers make their own logistical arrangements.
Mahajan admits, ruefully, that Ormita came to India perhaps a year too late: “When the slowdown was happening, that would have been the best time." Barter exchanges thrive as the economy around them crumbles. Companies suddenly find themselves with too much inventory and too little cash; barter is the ideal way to get rid of the former and preserve the latter. “In the last two years, our business went up 30-40%," Bhatnagar says. “Companies that would never even consider barter earlier were now calling us!"
In a way, the ability of companies to get credit on barter exchanges—even as they are denied it elsewhere—can have a healing effect on a wounded economy. Studying two exchanges—the WIR in Switzerland, and the International Reciprocal Trade Association in the US—economist James Stodder found that “the credit they provide during recessions is highly stabilizing".
But written into barter’s genetic code seem to be some constraints that it cannot escape. Not everything can be swapped, for one. Airline tickets, with their highly variable prices, are non-starters. Commodities such as gold and oil, Mahajan says, “have razor-thin margins, so they’ll never show up on exchanges". Neither will products from a firm such as Apple Inc., which sells inventory faster than it can make it, and which can confidently believe that anybody desiring its products will pay cash for them.
On the other hand, there is a surfeit of media credits—of radio airtime or newspaper advertising or outdoor billboard space—available for barter on the exchanges. “It’s the most highly traded product in the industry," says Saurabh Nanda, director of a cosmetics firm called Nature’s Essence Pvt. Ltd. “It doesn’t require any warehousing, and it’s highly perishable."
Bhatnagar jokes that Net4Barter often operates like a media buying house in its essence, scouting for rates; close to 60% of its work involves advertising space. Mahajan admits that Ormita, too, depends upon media for half its business, although he wants to slash that to 30%. “The first 20 days we were in India, we could only sign up media houses offering space—nobody else!" Mahajan remembers.
Like Magpie and most other barter-savvy firms, Nature’s Essence is a member of multiple exchanges, the better to open up its options. “It’s been good so long as we do it in moderation," Nanda says. “The problem is, big companies seldom come on board in India."
Mahajan doesn’t believe, as Friedman does, that barter’s possibilities are endless. “The aim is really to transfer 5-10% of a company’s variable expenses into barter," he says. “But there are still telephone bills and electricity bills and employee salaries to be paid, and those need to be paid in cash. Some things just can’t be put into barter."