RANDOM ACCESS. Time to bury the ownership issue

There’s a clear takeaway from online retailer Flipkart’s astounding fundraising feat, and it is this: money — and investors — go where there is a genuine opportunity for growth. Roadblocks on that path, whether of the physical or the policy kind, are just that — roadblocks, to be either removed, or got around.

India’s largest e-retailer has just raised an additional $1 billion in funding, catapulting it to the global big league of internet businesses in terms of valuations. The important thing to note here is that this big ticket investment happened even though the much anticipated easing of foreign direct investment (FDI) limits on e-commerce ventures failed to happen in this Budget.

The BJP, and the ‘ swadeshi ’ ideologues who dominate the share of noise on such matters, need to note this. Remember, Flipkart, as well as other e-retailers, have managed to raise several rounds of investment — Flipkart alone has raised over $740 million in five rounds before the latest billion-dollar deal. This, despite coming under investigation for alleged violation of FDI rules (which it denies), and consequently switching its model from inventory-based sales to a ‘managed marketplace’ hosting third-party vendors.

Rival Snapdeal’s also talking of a fresh round of fund-raising. So clearly, lack of a policy is not deterring serious players.

There is a flip side to this as well. The lack of a policy has not stopped Flipkart, but will certainly deter more tentative players looking to explore the India growth story. It will also deter those who are perhaps under pressure in other markets and may find it less easy to convince shareholders. In either case, it is the country which loses, with nothing to show in the credits column.

Bad policy results only in losses for the country as a whole, not gains. Even the special interest groups for which such policy is ostensibly promulgated, end up being the losers in the long run. In other words, it is always a ‘lose-lose’ proposition.

The BJP’s turnaround on allowing FDI in retail, for instance, is pegged to the alleged need to ‘protect’ small, neighbourhood retail stores from big, bad retail.

In fact, it is the Flipkarts of the world that pose a larger threat to neighbourhood retail, not organised big box retail like Walmart, which have inherent limitations on where they can operate because of their business model. On the other hand, Flipkart can reach not just small towns, but any place with internet connectivity for the consumer and logistics connectivity for the seller. Small sellers in such places can’t compete with large e-tailers’ range and prices.

Yes, a village grocery store might survive, because of convenience and accessibility. But a retailer of, say, mobile telephones, or clothes or shoes in a large village or small town cannot compete with a Flipkart or a Myntra or a Snapdeal’s range and prices.

The Indian versions of Walmart and the like have already demonstrated that even in the bricks and mortar model of organised retail, the small retailers have seldom suffered by their entry. In fact, the entry of cash-and-carry businesses has helped small shopkeepers break the stranglehold on distribution enjoyed by wholesalers and stockists of large companies, as well as have a transparent price benchmark for any product, in contrast to the deliberately opaque ‘incentive’-based model preferred by large brand manufacturers.

Take food retail — a political hot potato, with all the sensitivities attached to the farm segment to which it is linked — as another example. Has the entry of organised food retail destroyed the small farmer and sent farm gate prices crashing? No. On the contrary, it has triggered a mini horticultural ‘green revolution’, with growers now assured of a steady, all-year market and more stable prices. Your neighbourhood vegetable or fruit vendor anywhere in the country has certainly not been put out of business.

On the contrary, the organised food retailers are racking up losses at a breathtaking rate.

According to a study by Crisil (‘CRISIL Insight’, May 2014), the losses of the top 10 food retailers had reached a staggering ₹13,000 crore as of last year. Losses, the report said, are likely to rise further, peaking at around ₹18,000 crore by 2017, before turning around.

And why are food retailers finding life so difficult? “The biggest challenge for food retailers is weaning customers away from well-established local kirana stores — or mom & pops,” Crisil analysts said in the report.

Given this, the bar on foreign investors is difficult to fathom. A foreign retailer will not behave differently from an Indian organised player. So why is it considered undesirable to allow a Sam Walton to do what a Sachin Bansal or a Mukesh Ambani is doing?

On the other hand, putting up these artificial barriers, essentially at the behest of vested interests, or at best based on base political motives, only denies money to the economy and the exchequer by way of taxes, denies infrastructure and denies jobs for tens of thousands.

Flipkart’s capital injection, for instance, prompted an immediate response from rival (and foreign-owned) Amazon.com, which announced $2 billion of additional investment, to be spent building warehouses and connectivity, and adding staff. In what way is this bad for the country?

The reality is that the Indian market is big enough to absorb even very large players. All organised retail put together so far (online and offline) has barely scratched India’s ₹2.5 lakh crore retail market. Organised food retail accounts for just 2 per cent of all food retail (Crisil data). Organised retail’s share is the largest in consumer durables, where it has a 27 per cent share (no mom & pops there!)

Flipkart itself has only under 10 per cent of the online market in India (and that too, after merging with Myntra). The bulk is accounted for by Indian-owned air travel players, and government-owned IRCTC.

It’s time our policymakers understood the implications.

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