The latest Economic Survey expressed optimism about the decision to allow foreign retailers in the multi-brand segment. In this context, it would be meaningful to discuss the rationale and the consequences of this decision alongside the success stories of countries which have opened doors to foreign retail much earlier.
The Indian agricultural sector is rife with disguised unemployment and the entire agricultural supply chain is in want of efficiency. The NABARD 2011 retail study mentions that up to 7% of food-grains and 30% of vegetables never make it to the marketplace and are wasted. Indeed, the sector is looking for a major overhaul not seen since the green revolution. Our dismal warehousing facilities have been a reason for distress sales made by thousands of hapless farmers, acknowledged mournfully by the Chief Minister of Andhra Pradesh. If not a panacea, we can at least expect some sort of a start, aided by the investment in infrastructure that large foreign retailers are slated to make. This also has implications for the larger well-being of the society. In Brazil’s case, 30 million people have risen out of poverty since 2003 and created a
new middle class. China has witnessed rapid urbanisation along with the growth of organized retail. We hope for a similar story in our country.
The promise of India
A burgeoning middle class, popularity of nuclear families, and increase in disposable income aided by a drop in fertility rate (over 15% in the last ten years) and increase in women in the work-force has created a $400 billion-plus retail industry with huge potential. The demographics indicate a low median age of 25, promising demand for a diverse basket of goods.
Other relative advantages over its peers as outlined by the A.T. Kearney Global Retail study are low market saturation and high income growth. It is well known that the performance of Indian organised retail brands has not been very encouraging for prospective entrants into the market but what is not apparent at the surface is that they lack the investment in the supply chain to reduce their costs. Barring vegetables, organised retailers still source their stocks from wholesalers, thereby conceding up to 8% of the final price of the product to the middlemen. The efficiency gains from increased backward linkages are corroborated by findings of a survey conducted by Korea Agro-Fisheries Trade Corporation in 2005 in which producers gained 13.1% and consumers paid 8.8% less. In India, too, there is great scope for extracting efficiency gains.
What are critics lamenting? That 12 million plus kirana stores and local vendors will be displaced along with multitudes of middlemen? Indeed a recent study found that 1.4 workers were displaced for every job created as a result of growth of organised retail in USA. Having said that, there are several points that will serve to alleviate these concerns in the Indian case.
Firstly, the average Indian consumer will take some time to warm up before parting with the comfort of closely-located mandis and the door-to-door bhajiwala not to mention the perceived relative freshness of vegetables in local markets. The Chinese experience has shown that organised and unorganised markets have coexisted, with the latter dominating in the fresh foods segment. Poland has seen a similar phenomenon where the deregulation of the economy in the 1990s led to the simultaneous growth of mom-and-pop stores as well as FDI-driven large retailers. Moreover, the Indian kirana store is unlikely to give up without a fight. There are several services which they can provide that are not limited to doorstep delivery, credit and personal relationships. An earlier Hindu article cited a study by Tsinghua University, China
which studied the growth of the Chinese retail sector. The study showed that the rapid urbanization in China easily absorbed the displaced labour. Barely 30% of India is urban, whereas, the figure is 50% for China and nearly 85% for Brazil. There is immense scope for India’s lagging Tier-2 and Tier-3 cities to grow. As for how the displaced labour will be employed – such investments in supply chain will certainly entail growth in the logistics sector, which will see job creation.
Also, employment in the retail firms themselves cannot be neglected. About half the jobs set to be created will require the employees to have little or no education. This is indeed good news for many of the vendors, who have not received formal education. If all else fails, the Thailand experience shows that the government can take active steps to mitigate adverse impacts on employment by implementing zoning laws. Similarly, the imposition of ‘invisible barriers’ like China that include regulating the location of retail stores and checking the sourcing of stocks can be considered as cards which the government can play.
For the Indian farmer, the predominant scenario is that he will stand to benefit. Farming is quite fragmented in India, and there is no perceived threat of consolidated production and emergence of ‘preferred producers’ as was the case in Malaysia and Thailand. Cooperative farming is still in the stage of infancy. What the government needs to do, though, is step in and revamp the Agricultural Produce Marketing Committee to further formalise the market facing the farmers. Streamlining this process will assist the retail sector in sourcing steady supply of good quality produce. This coupled with increased storage facilities will help give farmers their due. The Indian consumer will definitely be better off given the price reductions from economies of scale. Consolidation in retail will not necessarily come at the expense of the customer because retailing by its nature is a very low margin industry and the German experience shows that as long as there are certain firms who operate using discount strategies like Every Day Low Price (EDPL), prices will remain in check.
The path ahead
The government should bring in foreign retail expansion state-wise and, like China, regulate presence in areas that least threaten the existing unorganised setup without compromising firm profitability. A situation like Brazil with high market concentration of organised retailers could warrant precautionary enforcement of anti-trust policies. It should necessitate investment in warehouses as part of the 30% commitment to back-end infrastructure. The state of fragmentation of producers and poor grading facilities, as was the case with Korea, should push the government to increase farmer awareness in quality of produce to curtail the threat of import sourcing. In conclusion, India, being one of the late movers in opening the doors to FDI in retail, can take many anticipatory measures to prevent any unwanted adverse impacts to the economy during the course of the structural transformation that is to follow.
The markets will likely do the rest of the work.
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BRIC Spotlight Report 2012 “Retail Sector in Brazil: Riding the Wave of Middle-Class Growth and Consumer Credit Boom.” Thomas White Global Investing
Gopal, V.V. Suryanarayana, A. 2011 “Growth Drivers and Challenges for Organised Retail in India” vol.1 (2011) © (2011) IACSIT Press, Kuala Lumpur, Malaysia
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Joseph, M. Soundararajan, N. Gupta, M. Sahu, S. 2008 “Impact of Organised Retailing on the Unorganised Sector.” Indian Council for Research on International Economic Relations (ICRIER)
Krishnan, A. 2012 “In China, local retailers thrive after gradual opening” The Hindu http://www.thehindu.com /news/international/in-china-local-retailers-thriv e-after-gradualopening/ article3 9493 41 .ece
National Bank for Agricultural and Rural Development (NABARD) 2011. “Organised Agri-Food
Retailing in India.” Mumbai
Srivathsan, A 2012 “Small is Big in Asia’s Booming Retail Sector” www.thehindu.com/news/national/small-is-big-in-asias-booming-retailsector/ article3949344.ece
Stiegert, K.W. Kim, D.H. 2009. “Structural Changes in Food Retailing: Six Country Case Studies.” FSRG Publication
Nithin Nemani am a post-graduate in Economics from Indian Institute of Technology, Kharagpur (2011) currently employed by Nomura, a leading global investment bank, in Mumbai.