Today’s post is written by Sunny Gupta, a long-time Safal Niveshak tribesman from New Delhi.
Sunny posted this originally on the Forum, seeking answers from fellow tribesmen. I thought putting this as a post would bring in a greater amount of discussion.
The points Sunny has raised, plus the questions he has asked, are important points for us as ‘aam aadmi’, and also matter a lot for us as investors.
Over to you, Sunny.
While this may be a complicated topic, and renowned economists would discuss such things, I want to bring it up and see how such events affect us as investors.
The topic is related to policy paralysis of past several months, and the sudden burst of policy actions related to fuel subsidy reduction and FDI allowance in various sectors.
My take is this – If these policies are “implemented properly”, they should help reduce financial inefficiencies in the country.
On reduction of fuel subsidy
Take fuel subsidy for example – the world knows that energy is becoming costlier and this will not change for years to come, at least, maybe decades.
Then, why burden the government’s financials to subsidize fuel?
There’re several examples of “misuse” of these subsidies, notable being industrial use of diesel (running power back-up systems). Does industry really need subsidy in this form?
As per a recent report by World Bank, the benefit of fuel subsidy goes more to the rich than poor, and it is very clear that it is just a political drama and “cheating” the poor.
Imagine this – if you remove all subsidies on all fuels and make them market-linked, tax them at constant rates across states (so that you eliminate smuggling of fuel across state boundaries), it might increase inflation to some extent.
But let’s look at the consequences. The large amount of surplus funds with the government will allow introducing tax breaks to the poor – so that the “actual subsidy” is channelized properly.
The fuel will then be used in the right manner – those who can afford to burn fuel in their cars and power back-up systems, will need to pay tax, and they can pay tax.
On the other hand, those who feel the pinch from fuel price increase, should get the benefit in terms of lower or almost zero tax (any family of four with annual household income of Rs 8 lac in a metro city should NOT be taxed anything).
Hope the government gets the point, and this is NOT impossible to do – many developing nations have adopted this approach, most importantly, Indonesia.
On FDI in Retail
Ok, now that reduction of biggest subsidy and implementation of DTC & GST helps channelize the money to the ones who need, without impacting our fiscal deficits, let us target the next inefficiency in the system – too many middle-men.
Look at the agriculture and distribution system. As much as 30% of food gets wasted in distribution and transportation – reason, so many channels of middle men.
I agree that many people will possibly lose their jobs if Walmarts of the world start sourcing food directly from farmers. But just imagine the benefits to rest of the people.
Why do countries like the US and Australia have such efficient agriculture systems? It is because they have huge farms and farmers benefit from economies of scale – that’s what is needed in India as well.
Biggies like Walmart can come and help integrate micro-farms, help improve productivity, and help give consistent income to the farmers who are today facing burdens like uncertainty of rains, power supply, purchase price, transportation to “mandis” etc.
If the government can impose restriction on retail MNCs to provide jobs to poor farmers (either on the same fields, which they might lease or buy, or in other areas of their businesses like the distribution system, back-end, etc), FDI won’t hurt the poor farmers.
As far as the middle-men are concerned, yes I agree they’ll be severely impacted. But then, we have to sacrifice someone for the benefit of larger groups.
Possibly it won’t be so bad – what fraction of Indian population are these middle-men? Since they’re small, many of them can get absorbed within business chains of the retail MNCs.
Now what about the neighbourhood kirana store? I think they’ll stay here.
Even today, we have many departmental stores and we do visit them once a month or so. But for day to day groceries, we still call the kirana store and get stuff delivered to our homes – this model won’t change easily.
In all, here are my views on the benefits of FDI in retail:
- Poor farmers get a more certain job – the ones who want to pursue it, and it’ll help reduce the suicide rates due to extremely skewed micro-lending conditions.
- Food wastage drops, and this means more food for everyone – and due to competition (government must ensure healthy competition in this sector), market pricing mechanisms will help contain food inflation & bring down prices of essential food articles.
- Since the middle-men would have vanished, it’ll help avoid hoarding (again, we need a mechanism to ensure that retail MNCs don’t manipulate prices, and there should be financial obligation on these companies to ensure we don’t have conditions of food price bursts – why should it happen when we eliminate the root causes (middle-men)…if they occur in extreme conditions of drought, etc., the retail MNCs are liable to report to government and set nationwide price limits…not an impossible task to do).
- All this will mean taming a big menace of food inflation.
Phew! A long-long post! But, I’ll stop here and not discuss other items like FDI in aviation.
What do you think?
If these policies are implemented properly over years, could it be a big positive for India and help continue the growth story?
Conversely, what are the implications if we don’t do this clean up?
I believe there’s a big threat to widening the gap between the rich and poor even further, since the poor will keep struggling from paying taxes to fuel cars of the rich and the middle-men to pay for their food (and hence their lives).
Finally, based on these policy changes and their planned implementation, can it fuel a long bull run in the stock market (which I know none of us in acquisition phase want, right?)
About the Author: Sunny Gupta works as a Lead Analog/Mixed Signal Design Engineer at Freescale Semiconductor India Pvt. Ltd.. Apart from being an active learner of value investing, he takes interest in all subjects finance and economics.