India: Retail Revolution Cometh

Published by MBA Skool Team, Published on December 23, 2011

The retail revolution in India is entering into a new era which will redefine the Indian market completely and effect changes with far reaching consequences. With FDI in single-brand retailing approved in 2006, Wal-Mart and Carrefour started operating cash and carry wholesale stores in India, with Wal-Mart doing so via JV with Bharti Airtel. In the period between April 2000 and March 2010, the retail sector witnessed FDI investment worth nearly USD 1.8 billion. With a retail market valued at nearly US$ 400 billion, comprising nearly 40 per cent of India’s GDP and an expected growth rate of about 12 per cent per annum in the near future, the decision is sure to have retail biggies salivating. What remains to be seen, however, is how the decision of FDI in multi brand will affect the three Indian entities involved in the transaction, the consumer, the farmer and the neighborhood kirana store owner. Here in, we take a look at the same.

Retail Revolution

1) Farmers – The Indian farmer has been at the receiving end of the middlemen in the current Indian retail scenario. The fact that consumers in India pay 5 times what the farmer gets, compared to 2 times for the same situation in USA, is a start commentary on the extent to which middlemen prey on the Indian farmers. However, all that is set to change with the advent of the biggies like Wal-Mart. As it is, stories abound of Wal-Mart transforming livelihoods of about 1200 farmers in North India, from whom it currently stocks it wholesale stores. And this change has not been brought about only by paying better prices to the farmers. Low-tech innovations like  insect traps made with reusable plastic bags; bamboo poles helping bitter gourd grow bigger and straighter; and seedlings germinating from plastic trays under a fine net have transformed the Indian farming scene to a huge extent. What is driving Wal-Mart’s continued emphasis on farmers is probably the fact that it needs food at cheap prices to bring in the customer horde. Food, thus, is expected to be the major thrust area once multi-brand FDI comes into play. What however remains to be seen is whether this is just a honeymoon period or the trend continues.

2) Kirana Stores –With organized retail forming a miniscule 4-5 per cent of the Indian retail sector, the major impact of allowing multi-brand FDI would be felt on the kirana store owners and the neighborhood garment stores. Keeping in mind the vulnerability of the small shop owners, the govt. has imposed restrictions which include not allowing the retailers to set up shop in cities with a population of less than one million. While the govt. rationale is that protecting small shop owners in mid-sized and small cities is paramount, the ruling fails to take into account the impact this FDI would have in large cities. Cities like Delhi are dotted with small stores in every next neighborhood and the opening up of Wal-Mart and Telco stores, providing goods at cheaper prices will have a huge impact on these shops. Most of them would, eventually not be able to cope up and close down. This would lead to a large number of job losses as these shops cumulatively employ about 33.1 million people according to 2007-08 estimates. However, the unemployment fears seem unfounded, particularly when we see that between 1992, when FDI was first allowed in China, and 2001, the employment in retail and wholesale trade there actually increased from 4 per cent of the total work force to about 7 per cent of the total work force. While this is an encouraging sign, what remains to be seen is whether the same model that worked in China can actually work in India as well, particularly when there is a huge difference in the governance models of the two countries.

3) Consumers – The entry of foreign retailers is a win-win situation for the Indian consumer. With companies like Wal-Mart eliminating the middlemen, the consumers can expect to get fresher and better quality goods at cheaper prices than even before. One of the major reasons why the govt. has been so pro-active recently about passing FDI in multi-brand has been its lack of control on the inflation, particularly food inflation. By stipulating that the retailers spend 50% of their investments towards building and maintaining back-end infrastructure like warehouses, cold storage and transportation, the govt. wants to minimize the losses due lack of infrastructure. According to some estimates, 25-30 per cent of fruits and vegetables and 5-7 per cent of food grains in India are wasted. Also, 80 per cent of the total cold-storage facility in India is used for potatoes. In such a scenario, by ensuring that the FDI brings along with it better infrastructure, the govt. hopes to make adequate food available in the market, thus bringing down inflation.

Looking at the various factors involved, FDI in multi-brand retailing seems like a step in the right direction. Taking the examples of countries which have gone down the same path, China first allowed 49 per cent FDI in retail in 1992, which was eventually raised to 100% in 2004. The growth of China’s retail sector has been huge and perplexing at the same time. Apart from the increase in employment cited earlier, what is unique in China’s case is the fact that the number of traditional retailers actually increased by about 30 per cent between 1996 and 2001. Also, retail sales are touching nearly USD 1 trillion in China. Other countries which have allowed FDI in retail are today shining examples of economies which have reaped the benefits of globalization, including countries like Thailand and Singapore.

The government has taken a sensible decision in restricting the FDI limit as of now. Also, the riders attached should help protect the interest of the Indian people and ensure infrastructure development. However, something needs to be done to ensure that small shop owners are able to deal competitively with the big foreign retailers and are not forced to shut shop. Like China was at the time of opening up its economy, India is in a growth phase. The increase in employment in retail in China from 4 per cent in 1992 to 7 per cent in 1995 was roughly equal to jump of 16 million people. Hence, it is expected that the advent of the foreign retailers would have a similar effect on the Indian employment scenario as well as a marked improvement in the skill set of the Indian worker.

This article has been authored by Rachit Kwatra and Nikhil Nathani from FMS, Delhi

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