It is indeed disappointing to see several recent pronouncements that effectively imply status quo on policy towards the retail sector in India.
First, in June, came the parliamentary standing committee recommending a ban on both foreign and domestic corporate investment in the retail sector. Our political leaders, it seems, are quite all right with the current state of the unorganized retail sector—where the working conditions leave a lot to be desired, productivity levels are generally low and business and pricing practices least transparent.
Photograph: Abhijit Bhatlekar / Mint
Next, minister of state for commerce Jyotiraditya Scindia said in July that the current foreign direct investment (FDI) policy on retail would remain unchanged, implying that the present situation will continue. This is most unsatisfactory because in the absence of a real policy, we can neither regulate the sector adequately nor provide the needed protection to small farmers and producers, who simply have to accept the ground realities where regulatory provisions are lacking.
Thankfully, the minister for commerce and industry has remained non-committal and kept his options open. We want to, on the basis of extensive research done at the Indian Council for Research on International Economic Relations (Icrier), encourage him to re-examine the costs and benefits of modernizing the retail sector and, more specifically, take cognizance of the recommendations made in a May 2008 Icrier report authored by Mathew Joseph (and others).
This study was based on the largest-ever survey of all relevant stakeholders in the retail business. The survey covered 2,020 traditional retailers across 10 major cities, 1,318 consumers shopping at both organized and traditional retail outlets, 100 intermediaries and 197 farmers. In addition, 805 traditional retailers not in the vicinity of “supermarkets” in the four metros were surveyed as a “control sample”.
One of the study’s main findings was that over and above the observable benefits, modernization of retail will result in various positive externalities such as improvements in logistics and infrastructure and efficiencies in the supply chain. Traditional retail relies on several layers of intermediaries, each of which adds its margins and commissions, so that there is a significant differential between farm-gate and shelf prices. This also explains the rising gap between consumer and wholesale prices in consumer goods. Traditional retail results in close to 40% wastage due to multiple handling of the produce; that too poor handling due to lack of cold storages and inefficient packing. Modernizing the supply chain and using clean and scientifically designed warehouses and cold chains will result in immediate gains.
Another significant gain will be the additional generation of better quality employment at all levels of the modern retail supply chain. The retail trade in India currently employs 37 million people. Organized retail, through front- and back-end operations alone, is expected to generate 1.7 million jobs in the next five years. If the supply chain is modernized, it would double employment opportunities by creating jobs in small manufacturing, food processing, construction, cold storages, warehousing, sorting, packing and labelling.
Other findings of the study were:
1. Given the huge future expansion in retail, both traditional and organized retail outlets will coexist. This is not a zero-sum game by a long shot. One estimate is that by 2011-12, given gross domestic product (GDP) growth, the total value of business handled by the traditional retail sector will be $496 million (84% of total share) and that of the organized retailers will be 16%.
2. There was no evidence of a decline in overall employment in the traditional retail sector as a result of the entry of organized retailers. In fact, there was a marginal rise of 0.8% in employment for the traditional retailers because they tried to build on their competitive strength of providing personalized services, including home deliveries.
3. Consumers shop from both kinds of outlets and want both to exist.
4. Organized retail is relatively more beneficial to low-income consumers, as they cherry-pick their products, track discount schemes and, thereby, save more.
5. A majority of traditional retailers are keen to stay in the business; they compete and do not see themselves being pushed out.
6. Profit realization for farmers selling directly to organized retailers is 60% higher compared with selling in the mandi (market).
7. The closure rate for traditional retailers due to the presence of organized retailers is only 1.7%, which is much lower than the average rate of business closure abroad.
8. Given the expected increase in GDP and concomitant volume of retail (15% of GDP), it will be difficult for the traditional sector, given its space constraints and poor infrastructure, to meet the needs of the growing urban population.
International experience suggests that many countries used organized retailers or cash-and-carry stores to modernize their respective traditional retail formats and the existing supply chains. China, ranked third in the AT Kearney Global Retail Development Index 2007, had no organized retail in 1989. But since 1990, steady liberalization of the sector between 1992 and 2004 has resulted in the share of organized retail increasing to 20%. At the same time, China has steadily modernized its wet markets, or its traditional open-food markets, with the help of organized retailers and has provided excellent infrastructure for its hawkers and small retailers. The same experience has been replicated across South-East Asia.
Similarly, the Indian government must take parallel action to improve the infrastructure for wet markets, hawkers and vendors on the one hand and facilitate the entry of both foreign and domestic retail houses in the domestic markets on the other. Competition will facilitate modernization, as the survey results of the Icrier study indicate. The investment policy allowing modern corporations to enter the market can be carefully framed to ensure “fair trade” principles and explicit encouragement for small producers’ cooperatives. In the absence of policy, the sector’s growth will be haphazard and distorted.
Rajiv Kumar is director and Nirupama Soundararajan is a research associate at the Indian Council for Research on International Economic Relations, or Icrier. These are their personal views. Comment at firstname.lastname@example.org