The Indian Economy Blog

September 4, 2008

Resuscitating Indian Retail Industry

Filed under: Business,Human Capital,Labour market,Real estate,Retail,Trade — Pragmatic @ 9:35 pm

Unorganised and organised retail must coexist and flourish in India…

After almost scaring the Tata Motors away from West Bengal, Mamata Bannerjee has now trained her guns on Reliance Retail. Well, Reliance Retail should be used to being targeted by feisty women politicians. Immediately after coming to power in Lucknow, Ms. Mayawati had earlier undertaken a similar exercise in UP.

All this is taking place when behemoths of international retail are trying to enter the Indian market. Tesco has chosen to come with Tatas, while Reliance has tied up with Wincanton. The big daddy of them all, Wal-Mart is coming to India courtesy the Bharti group.

In the September edition of Pragati-The Indian National Interest Review, Prashant Kumar Singh makes significant observations about the confusion surrounding retail industry in India. He rightly notices that-

The debate over retail in India has been fixated on the growth of organised retail, entry of international retailers and concomitant demise of the traditional retailer. The spectre of ogres like Wal-Mart gobbling small retailers has completely paralysed the government on the policy formulation front; not because of any real concern for small retailers but more out of their perceived political clout. This lack of policy initiatives for boosting and regulating organised retail is unfortunately based on the fallacy that modern retail and unorganised retail are necessarily antagonistic.

…Available data provides sufficient evidence that traditional retail is under no immediate threat from organised retail. With the present rate of growth of organised retail of 45 percent per annum, any structural changes brought about by gradual policy shifts will take at least a decade before unorganised retail feels the heat. This assessment is not to condone continued government stupor towards the unorganised sector on the issues of credit availability, access to distribution channels, and realisation of fair price for the produce. It is, instead, meant to spur the government to initiate concrete measures to support the traditional retailers.

…Given the benefits of organised retail, the role of foreign direct investment (FDI) needs to be analysed. It is fallacious to prescribe FDI as the panacea for all the ills plaguing organised retail. The eagerness of international giants to enter Indian markets can be attributed to saturation of the developed markets and low penetration of formal retail in India. The entry of FDI in retail will tilt the balance between suppliers and retailers, force smaller players to adapt and differentiate, and bring consolidation in the sector. The accompanying direct benefits are substantial: increase in exports due to high level of sourcing from India, incorporation of global best practices, investments in the complete supply chain–especially in technologies relating to cold chain, food processing and IT, increase in product variety and categories, increase in employment, and secondary benefits of modern agriculture and shopping tourism. Moreover, this FDI in retail will arrive without any sops and tax breaks from the government, unlike IT and auto-manufacturing sectors, where state governments have been bending backwards to attract investments.

Prashant Kumar Singh makes a strong case that with the right government policies in place, “the ecosystem of the retail industry in India will then adapt itself to accommodate the two seemingly divergent strands of retailing, evolving into an indigenous Indian retail model”. To read the complete piece titled “Retail in Doldrums“, download the community edition(pdf) of the latest issue of Pragati-The Indian National Interest Review.

17 Comments »

  1. [...] [Crossposted on the Indian Economy Blog] [...]

    Pingback by Pragmatic Euphony · Resuscitating Indian retail industry — September 4, 2008 @ 11:38 pm

  2. There was a blog post on Our Delhi Struggle by Jenny and Dave, (http://ourdelhistruggle.wordpress.com/2008/08/01/customer-servic/) which one should read.

    The focus is on service – service in a large retail giant is treated as a process, a task; service in a small mom-and-pop is treated as an outcome, a contribution. The glamour of infrastructure (big malls with flashy signboards seems to blind us from the real driver of success – customer service). And the neighbourhood kirana fellow knows that. He would rather give his boys two new cycles so that they zip and deliver goods to the customers rather than have his shop redone with RFID tags and barcodes.

    If there is systematic intervention in this respect, it has to be one of capability building – strengthening the small businesses capacity to service, their only and as yet unbeatable competitive advantage.

    There is only one area where these large guys can have any impact – streamlining the supply chain. And I am hazarding a guess, that the real opposition to the big retailers is coming not from the local neighbourhood grocer but the middlemen brokers and commission agents (the traders & dalals who make up the bulk of most political parties).

    My own personal observation has been this – at the farm gate, the farmer gets about Rs. 5-7 per kilo of rice. When it hits Chembur in Mumbai, it is Rs. 25 per kilo. There’s Rs. 20 that goes into a hole between the farmer and kirana shop. This is beyond “free market dynamics”.

    Comment by Anannya Deb — September 5, 2008 @ 4:22 pm

  3. There have been careful studies in many countries wich have evaluated the impact of entry of not only FDI in the form of big retail companies like Wal Mart, Tesco and they indicate that the the impact has not been all that postive as has been presented pro-reformers. The small retailers and pop and mom stores in the neighbourhood have suffered on account of the entry of the big players owing to lack of level playing ground between them. Undoubtedly, the consumers and the suppliers especially the farmers will benefit, especially the latter since the middlemen will be eliminated as there will be direct sourcing. On balanace, it requires careful thinking before going for a big jump. Even the private players like Bhimani are not over enthused about the entry of foreign players. The retail market is estimated to be large, but the small players are diffused and not organised, which fact will go against them.

    Comment by Dr. Bina Punjabi — September 6, 2008 @ 11:29 am

  4. FROM A SESSION ON INTERNET BLOGGING HELD AT GURU NANK COLLEGE ON 6 SEPTEMBER 2008

    There have been careful studies in many countries wich have evaluated the impact of entry of not only FDI in the form of big retail companies like Wal Mart, Tesco and they indicate that the the impact has not been all that postive as has been presented pro-reformers. The small retailers and pop and mom stores in the neighbourhood have suffered on account of the entry of the big players owing to lack of level playing ground between them. Undoubtedly, the consumers and the suppliers especially the farmers will benefit, especially the latter since the middlemen will be eliminated as there will be direct sourcing. On balanace, it requires careful thinking before going for a big jump. Even the private players like Bhimani are not over enthused about the entry of foreign players. The retail market is estimated to be large, but the small players are diffused and not organised, which fact will go against them.

    Comment by Dr. Bina Punjabi — September 6, 2008 @ 11:30 am

  5. Along with retail shops,provisional shops are essential because the marginal consumers are in abundent in India.

    Comment by santosh pathare — September 6, 2008 @ 11:31 am

  6. No FDI will come to india if singur problem is not settled
    direct retail is beneficial to all in the long run

    Comment by gurdeep — September 6, 2008 @ 11:33 am

  7. Indian Retail Industry is keep growing world wide.It has small and large scale from a shop to mall keep raising in meteros.Retail industry has two phases one is organised like of Reliance etc. has made and other is unorganised like small shops not licensed etc.

    Kirti Rijhwani
    Lecturer
    Chemistry Dept.
    Guru Nanak College Of Arts,Commerce $ Science
    Sion E
    Mumbai
    Maharashtra

    Comment by Kirti Rijhwani — September 6, 2008 @ 11:35 am

  8. INDIAN RETAIL HAS BECOME POLITICAL ISSUE. IT IS A THREAT TO OUR OWN INDIGENEOUS MODEL (KIRANA STORES). DUE TO FDI IN RETAIL, THE ENTIRE STRUCTURE IN RETAIL WILL CHANGE IN THE NEAR FUTURE.

    INTERNET SESSION ON BLOGGING
    AT GURUNANAK COLLEGE,SION (EAST)
    MUMBAI.

    Comment by RAMRAJ.T — September 6, 2008 @ 11:36 am

  9. Policy should be made for the growth of organised retail as well as mom pop shops. I fully agree with the article.

    Dr. Manpreet Kaur,
    Dept. of Hindi,
    from the training session on Blogging
    Guru Nanak College of Arts, Science and Commerce,
    G.T.B. Nagar,
    Mumbai

    Comment by Dr. Manpreet Kaur — September 6, 2008 @ 11:37 am

  10. Like every aspect in life there is a positive and negative impact of the retail industry.Yes I would love to have all the exotic fruits and vegetables of my choice available to me in all seasonsd in the perfect ambience of a shopping mall; yet it takes away from me my personal rapport with the local vendor. Iwould prefer to have the two co-exist so that depending upon my need of the hour Iwould opt for either.

    Comment by pramoda sasidharan — September 6, 2008 @ 11:41 am

  11. It is true that foreign investment in the retail sector in India, would boost the economy in India besides providing consumers with a much easier way to shop. Yet, the threat to the traditional retailers is not something to be ignored. It is foolish on our part to not take any measures to make the environment conducive for both the organized and unorganized sectors. For the growth of our economy/country, we must come up with a policy that makes conditions suitable for both sectors to co-exist.

    Blogging session held in Guru Nanak Colleger, Sion, Mumbai on 6th September 2008.

    Comment by Divya Bhatnagar — September 6, 2008 @ 11:44 am

  12. With the increasing number of retail chain industries in India the consumeers have the wide choice regarding the purchase of goods but this has immensely affected the local industries,with their sales going down it is the right time that the leaders like Mamta Baneerji&
    Mayawati should come forward to protect their right

    Comment by prashant.l — September 6, 2008 @ 11:48 am

  13. I would like to know if both small retail and big retail businesses can coexsist. If yes, how? How can small retailers who are affected by the influx of multinationals be rehabilitated?

    Nandita moitra
    guru nanak college
    6-9-2008

    Comment by Nandita moitra — September 6, 2008 @ 11:51 am

  14. As a youngster.I will never appreciate the Singur incident , where TATA’s NANO project get stopped.The government should make such policy for these project.Which should be helpful for international retailer as well as small retailer.Govt. should analyse the role of FDI for making a balance between suppliers and retailers.because international retailers are also equally important for generating the employment as well asfor the development of a country.

    Comment by Sazida Peerzada — September 6, 2008 @ 12:05 pm

  15. One important factor for organised growth is facts. Facts comes only from organised sector. As rightly sad, no body knows how much the middleman is pocketing least bothered about the taxes. In organised retailing huge amount of taxes can be collected. The margins to the farmers will become consistent over a period of time which will enable him to plan the harvest accordingly. Unlike now where Onion prices can crash from Rs. 20 per kilo to Rs. 2 a kilo in no time. Imagine the hardship the farmer undergo in this kind of situation and in otherwise situation makes huge profit at once and over spend it and come back to sqare one.
    Another major advantage huge minimization of losses because of wrong crop planning. The main reason for the volatility of prices is because of under supply and over supply in addition to over reaction by the market. If one farmer makes a huge profit because of one corp the other farmers will follow suit in the next harvest season which leads to over supply. In case of retailing farmers can settle for a reasonable assured margin rather than speculate and hand over their fate to the middle men.

    Talking about small retailer losing the livelihood. But retailing can bring in more jobs. Jobs in organised helps in building more market because retail shop employee can be given loans which in turn helps consumerism.
    Unorganised sector many a time brings in child exploitation where underaged are made to work.

    Advantage:

    Organised jobs bring in more consumerism to help in building greater economy.
    Predictable income to the farmers which can bring in sustained development.
    Huge tax collection to the government kitty.
    Government will be better placed to regulate and take corrective action based on reliable data generated by virtue of organised retailing.
    Minimize losses due to over supply.

    Disadvantage:

    Cartelization of commodities
    Small retail may lose the livelihood.
    Capitalist become dominant capitalist.

    Comment by manikantan — December 2, 2008 @ 1:10 pm

  16. The debate over d possibility of the future inflow of foreign retailers in India is a high risk factor for the Indian traditional retail market. However, the Government and the policy makers could work out schemes to acccomodate both

    Comment by priya shah — December 20, 2008 @ 10:19 am

  17. I think there are some fundamental misconceptions regarding FDI in retail and the growth of indian retail in particular.

    Firstly, one key argument is that growth in FDI in retail will lead to increase in exports- is that really true? In developed countries the same growth over the last 50 years has led to an increase in imports. Also, what prevents the retailers from exporting now?

    Secondly, FDI will improve the supply chain. The distribution efficiency and effectiveness in the non food sector is very impressive as it is today. There are issues in the food sector especially fresh produce but will FDI into retail resolve a political and systemic issue?

    Thirdly, the projected growth of organised retail in India is expected to be phenomenal. I think that the revolution will happen in two ways: a) the change in the wholesale function due to large cash and carry organisation but this will be limited to cities in the medium term at least and b) the up gradation of existing independent retailers to compete with regional chains.

    And Finally, of course the smaller retailers will be put out of business- look at the hollowing out of the UK high streets for a good example. The government and institutional priority should be to establish a fair competitive environment with legal protection of consumers/suppliers and other stake holders, then get out of the way! The policy should consider the environmental costs of large retail organisations and the benefit of lower prices should be properly assessed. Increased McJobs is not really the goal but increased value add should be.

    These are just my views!

    Comment by Dr. Sundeep Manghat — December 31, 2008 @ 10:57 pm

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