Organised Retail, not FDI, is the Core Issue
Even as the Congress-led UPA daily increases the economic burdens of the common man, and moves with furtive determination to allow foreign direct investment (FDI) in retail, which could potentially disturb livelihoods of millions of traders across the country, there is no meaningful debate – either in public or in Parliament – over the core issue of Organised Retail. Indeed, the two are often confused, both in the minds of those addressing the subject, as well as in the general populace.
Indian economists have largely ignored the issue. There are hardly any papers, discussions, seminars open to public, and so on. The Indian Council for Research in International Economic Relations (ICRIER), undertook some research on behalf of the government, and submitted a report in 2008. It was subsequently published as a book, “Retail in India” (Joseph and Soundararajan, 2009), thereby making public the details of research undertaken, and conclusions arrived at. Broadly, “Retail in India” was perceived as favouring organised retail.
A Parliamentary Standing Committee on the subject, headed by Dr. Murli Manohar Joshi, tabled its report in the Lok Sabha on 8 June 2009. It opposed the entry of MNCs in Indian retail trade.
Barring the Left parties, the opposition parties have not taken positions on the subject. The BJP, though heavily populated with economists, has preferred the silent mode. Its sister organisation, the Swadeshi Jagran Manch, which maintained a high decibel count when the NDA was in power – which many alleged was a cover for corporate lobbying – has also not articulated a clear view on either organised retail or FDI in retail.
So the question arises, what was “Retail in India” all about? It was basically an extensive survey of all stakeholders related to retail. While most people expected the traditional retail sector to wither away if it were to compete with the organized retail sector, the main – surprising – findings of the survey revealed the contrary. (This is somewhat akin to the popular perception that 24x7 news channels would destroy the print media, which never materialised either).
It is true that the turnovers and profits of kirana shops in the vicinity of an organised retail outlet decline by 22.8 per cent in the first year; but the rate of decline in turnover drops in subsequent years till it levels out at a marginal 0.3 per cent per annum in the sixth year. As traditional and organised retail outlets co-exist, the negative impact weakens with time. This phenomenon is already visible in south India where organized retail has been present for over a decade, as well as in the rest of the country, especially in these inflationary high cost times. The traditional retails with their low overhead costs and suite of products actually have the competitive advantage!
ICRIER findings show that organized retail results in various positive externalities, such as, improvements in logistics and infrastructure, and efficiencies in the supply chain. Existent supply chains used by the traditional retailer today comprise of various levels of intermediaries. By reducing the number of intermediaries in the supply chain, producers and even retailers receive better prices and therefore greater profit, and consumers save more by paying less. The organised retailers’ direct procurement from producers, farmer and manufacturer alike, bypassing intermediaries, has more than just monetary advantages.
Any food produce, fresh or packed, from the time of despatch from the producers’ end, typically passes through at least three different tiers of people, and takes a minimum of two days to reach the shelf of a traditional retail outlet. Through a system of direct procurement, the produce reaches the shelves of an organized outlet in twenty four hours, and sometimes even less. The quality of produce is therefore better, especially in the case of perishables, further enhanced because of clean warehouses, cold storage in the warehouses, and even cold storage vehicles that transport these goods. Of course, these infrastructure costs have to be borne by the organised retailer, who includes them in his costs.
The Parliamentary Standing Committee headed by M.M. Joshi, however, argued against organised retail in its findings and recommendations on Foreign and Domestic Investment in Retail Sector, June 2009. The report’s recommendations are broadly threefold:
- Ban domestic and foreign corporate investment in the retail sector in India
- No further licenses to be awarded to cash and carry outlets
- Set up a regulatory framework for the retail sector
While a regulatory framework is certainly desirable, the first two recommendations are somewhat problematic. The first problem with the Standing Committee Report is the definition of organised retail. ICRIER defines organised retail as follows,
- “Organised retail or modern retail is usually chain stores, all owned or franchised by a central entity, or a single store that is larger than some cut-off point. The relative uniformity and standardization of retailing is the key attribute of modern retail. The size of each unit can be small so that a chain of convenience stores is modern retail. A single large department store is also modern retail.”
The Parliamentary Committee Report defines organised retail as,
- “Organised retailing refers to trading activities undertaken by licensed traders, that is, those who are registered for sales tax, income tax, etc. These include corporate backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kiranashops, owner operated general stores, paan/beedi shops, convenience stores, hand cart, pavement vendors, etc.” (Page 1-2)
But this Standing Committee definition of organised retailing automatically brings under its purview nearly 50 per cent of the traditional retailers, including the local kirana shops! This also means that the size of organised retailing will be greater than 5 per cent. The second problem with the Standing Committee report is that its recommendations are based on speculations rather than facts and figures.
Speculation one, the entry of FDI in retail will create mass unemployment (page 5). ICRIER’s findings, which did not really distinguish between domestic and foreign retail, were based on a survey which clearly indicated no decline in employment. In fact, there was evidence to suggest a marginal rise in employment. Further, the report did attempt to calculate the rate of closure of traditional retailers due to the presence of organised retail, and that was 1.7 per cent per annum. The problem is not the presence of organised retail. The problem is that only 12 per cent of traditional retailers have access to institutional credit, and therefore cannot expand to compete. Policy intervention can help solve this problem.
Speculation two, allowing cash and carry(C&C) wholesalers is allowing back door entry into retail (page 37-38). But the theory behind encouraging C&C stores is to help traditional retailers! Traditional retailers cannot buy FMCG in large quantities like organised retailers; hence they cannot avail of bulk discounts. C&C stores on the other hand, buy in bulk from manufacturers and pass the bulk discount on to the traditional retailer who buys from them. The traditional retailer also bypasses series of intermediaries in the process and saves on margins. Again, there is a need for policies to regulate cash and carry. Banning cash and carry will only take away the traditional retailer’s right to discounts.
Speculation three, large retailers will resort to predatory pricing in the coming years, which will affect consumers and farmers; and once organised retailers make their presence felt at the farm, the mandiwill be wiped out (page 38). ICRIER however found that consumers want both traditional retail and organised retail to co-exist. The survey reveals that low income consumers saved through organised retail purchases. Consumers shop at both outlets. The survey also noted that the traditional retailer has the competitive edge over organised retailers when attending to consumers. Traditional retailers are viewed as part of the community by consumers.
Organised retail and traditional retail have co-existed now for almost five years. The debate, if one exists, is not and should not be about FDI in retail. The debate should centre round organised retailversus traditional retail.
Domestic organised retail can just as easily affect traditional retail as FDI in retail, if there is no policy intervention. The harsh truth is that organised retail is here to stay, domestic or foreign. The question is whether we should be raising slogans against it and depriving certain stakeholders, like farmers and consumers, the right to a better profit and savings, or if India should adopt suitable policy measures to protect the interest of stakeholders and their right to higher earnings.
India needs to modernise its retail sector. Traditional retailers want to modernise and to compete. Organised retail is here to stay, if not foreign, at least domestic. India needs a policy framework to regulate the retail sector and provide the traditional retailers a level playing field to compete.
It is this that should be the focus of policy makers, academics and intellectuals – not FDI. It is time for India to tackle the developments taking place in the retail sector.
Disclaimer: The views expressed in this writing are solely of the author and do not necessarily reflect the views or policies of League of India, its Editorial Board or the business and socio-political interests that they might represent.
This article was first published on Vijayvaani website here