India Will Not Liberalise Retailing – Country Will Keep Ancient Food Distribution System – Failure To Carry Out This and Other Needed Reforms May Doom Growth

By Paolo von Schirach

Related piece:

December 19, 2011

WASHINGTON – In a previous piece, (see link above), I had expressed concerns about the strong opposition against the announced decision by the Indian Government led by Prime Minister Manmohan Singh to open the country to large international supermarket chains. The purpose of this reform was to attract experienced foreign investors who would modernize an archaic Indian food distribution system that is costly and inefficient. In India layers of middle men and a myriad of small shops make everything more expensive, while fueling price rises and thus inflation.

No foreign supermarket chains

Well, the opposition won. Much to the dismay of Walmart and Tesco and with harm for the Indian people who deserve better the market opening and the consequent needed modernization of this huge sector serving an enormous population of more than one billion will not take place. At least not now. And so the Indians will continue to rely on a fragmented and costly universe of small shops that cannot possibly offer good prices as they cannot afford and are not equipped to buy large quantities, thus lowering prices. Food will continue to be more expensive than it need be, while it will to continue to spoil on route to market because of bad infrastructure and an ancient distribution system that lacks sufficient numbers of refrigerated trucks and warehouses.

Other reforms needed

But this is not all. As noted by Eswar Prasad of Cornell University in an op-ed piece in The Financial Times, (India must not let slip its shining moment for reform, December 19, 2011), this new set back needs to be added to endemic corruption, the ill effects of subsidies for food and energy, rigid labor markets and an antiquated financial system that fails to properly capitalize new enterprises.

Resistance to change

While India’s economic liberalization of the 1990s gave impetus to vigorous growth, in order to sustain it, India needs to go to the next level, and it appears incapable to do so. The political process is maddeningly complicated and there is genuine resistance to change. However, by keeping the old social stratification more or less intact, the government cannot enlist the poor among the supporters of reform. This way only some elites benefit from economic growth and the phenomenon is too narrowly focused to engineer real change within a country that is still mostly very poor.

Cash payments instead of subsidized items

As Prasad argues, just by providing cash payments instead of subsidized food and energy, the government would vastly reduce the graft and corruption involved in the supply and delivery of subsidized items. Besides, India “needs desperately needs a more efficient financial system to channel domestic and foreign capital into productive investments“. And then in Prasad’s list there are labor market and education system reforms, and a lot more.

Indian government cannot provide leadership

Quite clearly, even in the most optimistic scenario, it would be a daunting task to engineer fundamental change in any large third world country. And India is especially large and mostly poor. But India seems to have run out of political steam right when its economy needs bold reforms and skilled leadership to see them implemented.

A well run democratic system helps growth and opportunity. Unfortunately, while India has all the trappings of a democratic system, the institutions alone are no guarantee of good stewardship. Modern capitalism needs to be sustained by people who believe in open markets and free enterprise. Not enough of them where it counts in India.

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