You merely need to walk through the jostling bazaar crowds in any of India’s major cities to realize that we, too, are a nation of shopkeepers.
There are an estimated 12 million small shops in the country—from tiny tea stalls to multi-purpose stores selling just about everything under the sun. These bastions of private enterprise are said to employ close to 42 million people, or about 8% of the total labour force. It means there is one Indian retail worker for every 11 working Indians. That’s an astonishing lot of shopkeeping.
The interesting question is: Why do we have so many small shops dotting our landscape?
I suspect that the answer lies in their economics. Yet, over the past few weeks, I have been able to get precious little by way of information about their profit margins and working capital cycles and cost structures. It is hard to tell what allows these shops to thrive.
This lack of information is a bit worrisome. The noisy debate on whether India should invite foreign investment in the retailing business often revolves around the future of these small stores. Surely there should be some more information in the public arena about the economics of small retailers—so that the debate is based on facts rather than prejudices.
It is not easy to understand how shops that often occupy very expensive real estate can make ends meet by peddling low-margin items. It just doesn’t make economic sense.
There are two possible explanations. First, many of these shops occupy premises that are either under rent control or are extensions of homes. Second, they employ family labour. These two facts ensure that your friendly neighbourhood kirana owner does not pay market costs for land and labour. That allows him to stay competitive. He perhaps also has access to cheap funding from the family and a working capital cycle that leaves him with a lot of cash.
This model may not be sustainable as the economy grows and wages rise. The future of many shops is bleak.
Look at the economic forces ranged against the small merchant. A shopkeeper in my neighbourhood has three sons, who help their father rather than seek work outside. Given the wages they forgo by not working for someone else, these three young men may be giving up Rs45,000 every month to work in their family shop. But this is not taken into account when the daily profit figures are totted up.
There is perhaps a cultural reason why certain communities—this family is from Kutch—are so ready to turn a blind eye to rising opportunity costs. But economics could eventually overpower cultural assumptions.
The threat to kirana shops will not come from the big-box retailers alone. Parts of the economy have become more productive, thanks to access to capital and global competition. Hence, wages are rising across the economy. The tradables sector can protect profits because productivity is rising faster than wages.
The problem is that small shops (among others in the non-tradables sector) are unlikely to see productivity gains that are enough to match rising wage rates. So, they are either likely to face a huge profit squeeze or they will, have to raise prices to protect profits.
This is likely to happen irrespective of whether Reliance and Wal-Mart build huge big-box retailing empires or not. The debate on retailing misses the general economic point. A shift in productivity levels in the economy will force street-side retailers to pay higher wages without having matching gains in productivity. If they have to protect their profits, they either need capital to raise productivity or they have to raise prices. By pure economic logic, there is no third way.
All this has precious little to do with Wal-Mart.
Of course, it would be wrong to conclude that street-side retailers have no future in India. They run a tight ship, which enables them to borrow from informal moneylenders at usurious rates of interest. Many work with very little capital and can sell things at extremely low prices.
A study by the National Institute of Public Health and Hygiene says that vendors of street food in Kolkata can sell 1,000 calories, in the form of a bowl of hot Chinese soup, for only Rs5. It is difficult to buy calories at a cheaper rate than this.
So the point of this article is not to disparage the small shopkeeper, but to point out that economic forces are working against him. He performs a useful social function and is often smart.
The neighbourhood shopkeeper I wrote about earlier is incredibly innovative. I have known him for three decades, and use him to source all sort of stuff—from music CDs to textbooks for my daughters to small electronic items. I once jokingly asked Hemant whether he would get me a Mercedes car. “Just give me a week,” he said.
I think he meant it.
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