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India's economy needs the retail sector to grow

  • With the covid crisis halting commercial activity, this is the time for policymakers to focus on the retail sector which can positive ripple effects on the broader economy.

One unfortunate consequence of the countrywide lockdown over the last six weeks has been the complete paralysis of retail supply chains. The confusion stemming from differing state-level interpretations of rules regarding transportation coupled with the baffling distinction created between essential and nonessential goods by the central government has resulted in a complete breakdown of deliveries. The result has been massive losses for the sector and crippling shortages for consumers.

In retrospect, it should have been evident to planners that retail, as the nerve centre of an economy in distress, needed to be treated with care.

Till the pandemic struck, the $790-billion Indian retail sector was slated to double in size over the next five years on the back of rising consumption and increasing formalization. Instead, it finds itself hamstrung even as people now need supplies most urgently. Even e-commerce, which could have taken some of the load off physical retail, has collapsed in the face of logistical hurdles. While it has a mere 3% share of the total market, its scorching growth rate at 30% did suggest that in a crisis, it had the tools to supplement offline trade.

The problem with retail in India is its association with the enormous riches of a handful of new billionaires. When we think of retail, we think of Jeff Bezos and his $138 billion fortune and the likes.

In reality, it is far more mundane. Retail in India is still that neighbourhood shop operating out of a modest home in a middle-class locality. Retail in India is also like that young boy who's out delivering, come sun or rain, virus or violence. Not because he is foolhardy or even particularly brave, but because it is his only source of livelihood.

At a time when jobs have disappeared across sectors, organized retail presents one of the few opportunities for young men and women to make a living. While contributing 10% of India's gross domestic product (GDP), the sector employs nearly 8% of its workforce. This has the potential to rise to 20% over time.

Its importance, though, stretches even further. Indeed, retail is an agglomeration of many industries like entertainment, food, textiles and consumer electronics. Hence, if a garment store shuts, its ripple effects would be felt by every company in the textile business.

Mitigating the woes of the sector isn't easy because retail in India is highly fragmented. There are the thousands of small kirana shops dotting the country's villages, towns and cities. Mostly family-run, they face problems typical for a small entrepreneur—access to working capital, no insurance against losses and stringent credit term from large suppliers.

That's where they need linkages with a DMart or a Big Bazar or Amazon or Flipkart. These large players are the vehicles which will allow India's mom-and-pop stores to scale up and extend their reach. These big, well-funded, technologically savvy and dispersed firms help to bring costs down all along the supply chain, eventually lowering the prices for consumers.

Large offline retail, meanwhile, has its own worries including painful shutdowns. Given the weeks of lost business, that possibility looms large for thousands of businesses who need to keep paying their lease rentals as well as salaries of employees. Even when the lockdown is lifted, it could take months for footfalls to hit normal levels.

The retailers who run these businesses are also some of India's finest entrepreneurs. Rarely on the radars of venture capital or private equity players, they have battled on without much institutional backing. Now, however, they need support through restructuring of their leases along with schemes to share the salary burden with the state.

The online channels, though a small part of the mix, are the way forward. In categories where they have achieved momentum, they will soon be on par with offline business. As a BCG report quoted in Mint (shorturl.at/cpyB6) pointed out, the share of all electronics sold online grew from 1.4% in 2008 to 15.3% in 2018. What they need is a clear set of rules and assurance of smooth logistics.

The multiplier effect of retail through direct, indirect and induced effects is enormous. While figures are difficult to compute given the multiplicity of variables involved, experts say that for every rupee of retail sales, there is another 50 paise to 1 worth of sales in the broader economy.

This is not to say that manufacturing doesn't have a similar multiplier effect. In fact, a University of Maryland study estimated the manufacturing multiplier at a much higher 1.92.

The problem for India is that manufacturing is capital intensive, has long gestation periods and is highly susceptible to global forces. With China desperately looking to claw back its lost GDP growth, it will produce even more cost-competitive products and flood the global markets with them. We have already seen how that plays out. In the past, Indian smartphone companies that tried to compete with Chinese makers in the category came a cropper while those that played in the protected retail space for the same product have flourished.

Boosting retail will allow India to leverage its large domestic market. It is also an area in which we have traditional skills. This is the time to harness them.

Sundeep Khanna is former executive editor of Mint.

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