Shop or drop?

Shop or drop?

The advent of large corporate retail chains has cut into the sales and profits of small shops, says an exclusive story published in Mint on Wednesday. That’s the core finding of a survey commissioned by the Prime Minister’s Office earlier this year in response to the pressure from the United Progressive Alliance chairperson Sonia Gandhi.

The new Indian Council for Research on International Economic Relations study is important since it has emerged from a high-profile political brawl rather than from calm academic interest. We fear that it could be used as cover for myopic policy decisions. It is very likely that political heat will be turned on once the entire survey results are made public by the government. Large retailers who have had to battle street protests and state governments will be pushed further against the wall. That would be unfortunate.

India needs modern retailing just as it needs better roads and more efficient land markets. Improvements in these areas can lift economy-wide productivity levels and put economic growth on firmer ground. Retail chains bind the producer and the consumer. They are currently woefully inefficient and in dire need of new investment. Large retail chains force producers and intermediaries to beat down costs, helping lift productivity in many parts of the economy. The consumer at the checkout counter benefits through lower prices.

All this does not mean that the introduction of large retailers will not lead to disruptions. One out of every 14 Indian workers is employed in the 15 million retail outlets that dot the country. Their protests will be too significant to be ignored by politicians. Hence, gradualism is called for.

But the point of this gradualism is not to protect small shopkeepers forever, since that would be a tax on consumers. Traditional retailers need time to adjust; and there are initial signs that some of them are responding to the challenge posed by modern retailers. Much of the improvements we see right now are in the front end: Better merchandising, improved store looks and credit offers, for example. But the real trick will be to help them improve their back ends. Small shops don’t have the money and reach to build their own efficient supply chains, which is the real killer competitive advantage in this line of business. An immediate way to help them is by getting in more cash and carry stores, which are wholesalers that sell to retailers. Small retailers can piggyback on the efficient sourcing of the big cash and carry firms, thus making them more productive at one shot.

Yet, Indian retailing is ripe for a shakeout. That around 7% of the workforce is busy selling in small stores means only one thing—productivity levels here are abysmal. Most countries get along with far fewer of their workers trapped in low-productivity retail jobs. Take a parallel example in Japan. That country’s heavily protected food industry has more workers than the combined workforce in Japan’s efficient steel, automobile, machine tools and computer industries. One in 10 Japanese workers is in the food processing industry. It’s a sign of weakness rather than strength. Much the same is the case with Indian retailing. We need fewer workers manning small stores.

The big political challenge will be how to manage the transition. There is no point pretending that it is going to be easy.

How should the government balance efficiency and human concerns in retailing policy? Write to us at