Business Today

Emulate ITC's model

India is on the threshold of a retail revolution. In fact, it has, in some segments, already traversed some way down that path.

Print Edition: Dec 02, 2007

Emulate ITC’s model

India is on the threshold of a retail revolution. In fact, it has, in some segments, already traversed some way down that path. But in some others—most notably in the spheres of allowing foreign direct investment in the sector and in agri-retailing—the issue has got bogged in a political crossfire.

Logically, both, and especially the latter, make eminent sense. In the case of the latter, the business model involves sourcing farm produce directly from farmers and then selling them to end-consumers. Since the trade, a.k.a. middlemen, appropriates a large chunk of the customer rupee, this model, by eliminating them from the value chain, theoretically, at least, gives both farmers and end-consumers better prices and leaves the retailer a substantial margin. So far, so good. But the reality of the Indian farm marketing scenario is that middlemen have substantial political clout. Seeing their profits—and in many cases, their businesses themselves— disappearing, these special interest groups have now struck back. Example: political “mobocracy” has derailed Reliance Retail’s push into Uttar Pradesh and West Bengal.

This is where India Inc. can learn from ITC’s strategy. The cigarettes-to-hotels-to-paper-to-FMCG major is also present in this segment, through its Choupal Fresh initiative, and, unlike Reliance and Bharti-Wal-Mart, is on the side of the angels. The company, which has a long history of sourcing agri-products (its tobacco, paper, and even the new FMCG businesses source primary farm produce directly from farmers), has not faced any protests. Reason: it has created a large rural constituency by working with small and marginal farmers and tribals by investing in afforestation, watershed management, livestock development and rural health and education programmes.

And it has done all this not as part of a corporate social responsibility programme, but as an integral part of its business plan. Then, its echoupal initiative, instead of cutting the middlemen out, has integrated them into the system. Yes, they do get a lower commission on ITC’s purchase of farm produce, but the business model ensures that they continue to earn money round the year—as opposed to the earlier model where they did so only during the harvesting season—from other goods and services that ITC and its partners sell through this channel.

By co-opting at least some of the powerful elements of the rural value chain in its business model, ITC has ensured that it faces little opposition to its business, even while others flounder. India Inc. will do well to emulate the ITC model.

Oil & inflation

Even as China increased retail oil prices in the country by 10 per cent early November to help its embattled refiners, India put out its inflation numbers for the week ended October 27 that, at 2.97 per cent, were the lowest in five years. Among the items whose prices remained unchanged were fuel and power. That, however, was by diktat. Globally, prices of crude oil were hovering near the $100-mark when this edit was being written. Analysts were citing expiration of sizeable futures contracts in the US as one reason why crude prices could top $100 in middle of November. (However, talk of OPEC, Organisation of the Petroleum Exporting Countries, stepping up production had eased prices a bit at the time of writing).

Crude prices topping the $100-mark is only a matter of time. Even if oil prices decline, they are unlikely to dip to $60 range of mid-2005. If India has been able to keep its retail prices down it’s only because the state-owned refiners have been asked to refrain from increasing prices. They are, of course, bleeding. As far back as September this year, when prices were at $80 or so, Indian refiners were asking for price revisions— a 15 per cent hike in the price of diesel and about a 7 per cent hike in petrol prices. However, the government has resolutely held on to the retail oil prices.

With elections set to take place in two states (Himachal Pradesh and Gujarat) and a general election still likely next year ahead of schedule, the government is loath to risk any unpopular moves. Higher oil prices will affect prices of just about every item of consumption.

Some economists estimate that if the entire increase in oil price hikes were passed on to consumers, inflation would increase by 1.5 percentage points. Linked to the issue of inflation is also that of interest rates, which have risen steadily since April 2006. If the government were to allow inflation to rise, interest rates will go up and that, in turn, will dull the appetite for credit and slow the economy down.

For now, the government is making up for the refiners’ losses by issuing oil bonds, which are a temporary, but bad, solution to the problem. For one, the government is taking on debt when it should simply have allowed the oil companies to increase fuel prices (tax payers will service this debt). For another, it’s forcing lenders to fund not an investment, but running expenses of the oil companies. The government, of course, knows this, but it has no choice. Or so it believes.

Prepare plan B

For some years now, Pakistan has been considered a failing state. The latest crisis in our north-western neighbour now threatens to tip it into the category of the failed ones. And this has important, and ominous, portends for India. The obvious issues, of course, relate to increased jihadi violence and the possibility of Pakistan?fs nuclear weapons falling into terrorist hands.

This will immediately raise India?fs risk weightage and make the country less attractive to foreign investors, thereby, jeopardising the long-term growth story. Thus, the Indian government needs to urgently prepare a pragmatic response roadmap that takes into account the various scenarios that may emerge in our troubled, and troublesome, neighbour.

India's response to the declaration of emergency in Pakistan has been muted. In sharp contrast to the vociferous. albeit only verbal.condemnation that has come forth from the West, India has chosen to downplay its concerns, merely expressing regret and hoping that the Pakistani establishment sorts out the problem. This is understandable. Any shrill Indian response to the situation is bound to be counterproductive.

But BT hopes that the Government of India, while watching the situation spiral out of control, is also quietly preparing a Plan B. Right now, it seems to have bought General Pervez Musharraf?fs thesis that after him will be the deluge. That?fs possible, perhaps, even probable, but that?fs by no means the only alternative.

But it's definitely the worst case scenario. Already, authoritative voices are discussing the possibility of Pakistan breaking up. Noted journalist, author and political commentator Selig S. Harrison has recently written about the possibility in The New York Times. "A simmering Pashtun secessionist movement could lead to the unification of the 41 million Pashtuns on both sides of the Afghanistan-Pakistan border and the emergence, in time, of a new national entity, "Pashtunistan', under radical Islamist leadership," he has written.

If Harrison's prediction comes true, the consequences for India, Afghanistan, West Asia and Central Asia will be catastrophic. Will New Delhi then still swear by the dated Panchsheel concept, declare moralistically that it will not, under any circumstances, interfere in the affairs of another country, and watch India being drawn into the vortex of chaos and terror that will inevitably follow?

India aspires to Great Power status. No country has become a great power only by making sanctimonious declarations and reacting belatedly to events that affect its own security and future. The government should immediately embark on back channel diplomacy with all the foreign and domestic players with a stake in Pakistan and cover its bases. Otherwise, it may have to rue its moralistic stance later.

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