If there are three areas of economic policy where we have been often wrong for much of the past 50 years, these are the external sector, agriculture and the importance of distribution and retailing.
The topic currently under hot debate, namely foreign direct investment in the retail sector, combines all these issues -- no wonder we keep debating it endlessly. Quite apart from the economic logic or ideology, perhaps there is also a cultural/philosophical issue.
In a recent book, Eastern Philosophy, Chakravarthi Ram-Prasad argues that, while ancient Indian philosophers wrestled with abstract issues like the nature of being and reality, their Chinese counterparts focused on how best to live.
Does Chinese pragmatism about the "colour of the cat" being immaterial, as contrasted with our endless debate on the subject ("No full stops in India"), illustrate the same difference even in the 21st century? To be sure, Marxists, who oppose FDI in the retail sector, claim ideological descent from the German economist, not ancient Indian philosophers, but Marx's economic model has been abandoned wherever it was tried, except in Cuba and North Korea.
But to come back to where we began, our erroneous policies on the external sector started with export pessimism. Therefore, the focus of the industrial policy was on import substitution regardless of economic cost.
The consequential rigidities of industrial and import licensing ensured that much of Indian industry remained high cost and uncompetitive, thus perversely proving the thesis of export pessimism! Indeed, in that era, Manmohan Singh's was a lonely voice not subscribing to the received wisdom. No wonder he was later the architect of the far more rational industrial, trade and exchange rate policies of the last 15 years -- the effect on balance of payments has been wholly positive.
During the first few plans, agricultural output was also not given its due importance till the prospect of perpetual food shortages focused the attention of our political masters. But we continue believe more in subsidising than in reducing waste or adding value to the output.
This has led to continued rural poverty, except in some isolated pockets. One problem is that a huge proportion of perishable agricultural output like fruits and vegetables is left to rot in the fields in the absence of cold storages and transport infrastructure, and becomes a dead loss to the economy.
An all too visible manifestation of the inefficiencies is the huge disparity between the price which the producer gets and the price the consumer pays -- sometimes as high as 10-20 times! Clearly, what is needed is an efficient supply chain backed by improved infrastructure, cold storages, packing and transportation. And, the traditional system of distribution, ending with the mom and pop shops or the street-side vegetable seller, is just not capable of creating it.
This brings me to the third blind spot: distribution and retailing. First, umpteen indirect taxes hamper a smooth chain. Again, for decades, financing of manufacturing was considered virtuous while finance for trade or consumption was discouraged.
The middlemen were, broadly speaking, thought to be parasites standing between the producer and the consumer, contributing little to economic growth or output. The fact is that the circle of economic activity cannot be completed until what is produced reaches the consumer and, therefore, efficient distribution and retailing are very important.
To quote just one example, can we imagine a vibrant automobile sector without an efficient distributor and service network and, indeed, vehicle finance? Or a fast-growing and needed housing sector without availability of housing finance?
The entry of the organised sector in retail trade is capable of mitigating, if not solving, the huge waste involved in the current system, simultaneously paying better prices to the producer and lower prices for the consumer.
This is manifest to anybody visiting some of the newer supermarkets in urban/metropolitan India: the produce is cleaner, fresher, well-packed, and often cheaper than the vegetable seller on the street.
This is possible because of the far more efficient distribution system which organised retail chains are employing, by cutting layers of middlemen. One very positive sign is that a way seems to have been found for the corporate sector to enter the rural economy through contract farming -- almost every day one sees major corporate names making forays in the area.
If the huge margin between producer and consumer prices is one attraction, they are also perhaps inspired by what Pepsi succeeded in doing for the potato farmer in Punjab, partly to fulfill the export obligations imposed on it when it entered India.
But do we really need FDI in the retail sector besides the domestic corporate sector?
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