Domestic and foreign investment in Indian retail sector
Chandan Mukerjee | Sunday, 20 July 2008
THEORETICALLY investment in retail sector will have a positive spill-over effect on other related sectors of the economy. Practically it needs to be assessed and ensured that investments are channelised properly for an integrated development in all the related sectors of the economy, instead of utilisation by organised big retailers for capital accumulation without providing any direct benefit to the economy at large.
Given the basic features of the Indian retail industry like 1) being fragmented, 2) having low financial capability; and 3) with dependence of large section of population on the sector for livelihood, promotion of any investment i.e. domestic and/or foreign direct investment (FDI) is a welcome move.
Almost 12 million outlets are there in the country. Four per cent of these outlets are larger than 500 square feet in size. Approximately there are 11 outlets for every 1,000 people.
Approximately 40 million people are involved in the retail industry (directly and indirectly).
Structurally, the Indian retail industry can be segregated into two groups, traditional small retailers in the unorganised sector (kinara shops and other small shops) and organised big retailers (e.g. hypermarkets, supermarkets and department stores). (Organised retails are like Reliance Fresh, More, Wall-Mart etc.) Accordingly, the investment issues differ based on this classification.
India's retail industry, both organised and unorganised, is now worth $295 billion. Organised retail forms about 4.0 per cent of the country's $322 billion market. (Source: Delloite Haskins and Sells Study). Growth of unorganised retail sector is pegged at 6.0 per cent. (Source: Indian Realty News, July, 12, 2008).
So far the Government of India allowed 100 per cent foreign direct investment (FDI) in cash and carry through the automatic route and 51 per cent in single brands. Besides, the franchise route is also made available for big operators.
Promotion of any further investment in the retail sector needs to be justified and carried out under some guiding principles so as to make it beneficial for the whole economy.
For small unorganised retailers, domestic investment (from banks, micro-credit institutions through innovative banking solutions) needs to be specifically provided to augment their capital resource. It will help to increase their scale of operations and profitability. It needs to be the key focus area for the government in the country. The unorganised retailers also need to gang up into co-operatives so that they can buy in bulk from suppliers at lower cost.
Undoubtedly allowing investment in organised big retail will provide consumers a wider array of products (both national and international). But for consideration of any investment the following issues needs to be factored in: firstly how much price benefit in reality will be available to customers through these organised big retailers needs to be checked. So far only marginal benefit in term of slight reduction (less than 10 per cent) in price has been achieved by consumers. Major breakthrough in terms of pricing strategy is not there in the country to control inflationary prices of products. Pricing strategy need to help consumers save money. At the same time there should not be any collusion and predatory pricing to wipe out competition from small unorganised retailers.
Secondly, from supply-side perspective how much domestic capabilities (domestic produce, supply chain mechanism, domestic intermediaries) through forward and/or backward linkage effect (due to sourcing of intermediary and final products from indigenous firms and sectors) will be created in the country needs to be analysed. Also the cash and carry model that the big retailers bring in the market must help the related parties.
This needs to be done to gauge how much benefit actually other related sectors in the country is having in an integrated manner due to promotion of investment in the retail sector. This becomes important specifically in today's scenario when organised retailers with objective of higher margin on investment source many products from other countries having comparative price advantage compared to those of India. Promotion of investment should not be detrimental to the interest of local producers and farmers. Thirdly, from employment perspective how much job creation and job displacement will take place in the economy is also a key issue. The employment aspect of investment in retail sector needs to be measured. Allowing investment by the big retailers will lead to generation of jobs for skilled workforce, both directly and indirectly (employment mostly in direct sales, store management procurement, packaging, storage, transport, other logistic services etc.). But, at the same time, it will displace many small retailers/entrepreneurs in the country.
So investment must have a positive effect in the economy in terms of net job creation in different areas of retail sector. If net employment generation figure is adverse, it will create social tension (as direct and indirect livelihood dependency on retails sector is high) unless and until new and additional job opportunities are explored in other sectors of the economy to absorb these workers. So a proper safeguard mechanism to protect small retailers in initial stage needs to be designed.
Finally it also needs to be looked that big retail houses, due to access to investment, do not marginalise small retailers operating in close vicinity and oppress the entrepreneurial capacity and urge in the economy.
It is obvious that a globally integrated economy like that of India cannot keep its door closed to any type of investment. Investment needs to be provided to make the sector globally competitive to sustain economic shocks. So investment must lead to incremental economic benefits and not substitute the on-going activities.
Also it is said that in a highly populated country (huge market size) like that of India, there will be co-existence of both unorganised and organised retailers. (When an organised retailer opens nearby, small retailers typically lose about 23 per cent of their sales in the first year, the ICRIER Report finds. But after five years they are more or less back to where they started.) What seems prudent is to tighten the domestic regulatory issues so that both unorganised and organised retailers can work in a given framework without spilling any negative implication in the economy. Proper framework needs to be laid down to provide a level playing ground to all the players in retail segment by factoring in demand, supply and employment issues.
So, along with allowing investment in the retail sector, a regulatory body (as in financial sector) for monitoring and surveillance activity needs to be put in place. Also the competition commission's role needs to be strengthened further to prevent collusion or predatory pricing and ensuring availability of institutional credit to the traditional unorganised retailers in the country.
The writer works for, Reliance Communications Limited, Mumbai
Given the basic features of the Indian retail industry like 1) being fragmented, 2) having low financial capability; and 3) with dependence of large section of population on the sector for livelihood, promotion of any investment i.e. domestic and/or foreign direct investment (FDI) is a welcome move.
Almost 12 million outlets are there in the country. Four per cent of these outlets are larger than 500 square feet in size. Approximately there are 11 outlets for every 1,000 people.
Approximately 40 million people are involved in the retail industry (directly and indirectly).
Structurally, the Indian retail industry can be segregated into two groups, traditional small retailers in the unorganised sector (kinara shops and other small shops) and organised big retailers (e.g. hypermarkets, supermarkets and department stores). (Organised retails are like Reliance Fresh, More, Wall-Mart etc.) Accordingly, the investment issues differ based on this classification.
India's retail industry, both organised and unorganised, is now worth $295 billion. Organised retail forms about 4.0 per cent of the country's $322 billion market. (Source: Delloite Haskins and Sells Study). Growth of unorganised retail sector is pegged at 6.0 per cent. (Source: Indian Realty News, July, 12, 2008).
So far the Government of India allowed 100 per cent foreign direct investment (FDI) in cash and carry through the automatic route and 51 per cent in single brands. Besides, the franchise route is also made available for big operators.
Promotion of any further investment in the retail sector needs to be justified and carried out under some guiding principles so as to make it beneficial for the whole economy.
For small unorganised retailers, domestic investment (from banks, micro-credit institutions through innovative banking solutions) needs to be specifically provided to augment their capital resource. It will help to increase their scale of operations and profitability. It needs to be the key focus area for the government in the country. The unorganised retailers also need to gang up into co-operatives so that they can buy in bulk from suppliers at lower cost.
Undoubtedly allowing investment in organised big retail will provide consumers a wider array of products (both national and international). But for consideration of any investment the following issues needs to be factored in: firstly how much price benefit in reality will be available to customers through these organised big retailers needs to be checked. So far only marginal benefit in term of slight reduction (less than 10 per cent) in price has been achieved by consumers. Major breakthrough in terms of pricing strategy is not there in the country to control inflationary prices of products. Pricing strategy need to help consumers save money. At the same time there should not be any collusion and predatory pricing to wipe out competition from small unorganised retailers.
Secondly, from supply-side perspective how much domestic capabilities (domestic produce, supply chain mechanism, domestic intermediaries) through forward and/or backward linkage effect (due to sourcing of intermediary and final products from indigenous firms and sectors) will be created in the country needs to be analysed. Also the cash and carry model that the big retailers bring in the market must help the related parties.
This needs to be done to gauge how much benefit actually other related sectors in the country is having in an integrated manner due to promotion of investment in the retail sector. This becomes important specifically in today's scenario when organised retailers with objective of higher margin on investment source many products from other countries having comparative price advantage compared to those of India. Promotion of investment should not be detrimental to the interest of local producers and farmers. Thirdly, from employment perspective how much job creation and job displacement will take place in the economy is also a key issue. The employment aspect of investment in retail sector needs to be measured. Allowing investment by the big retailers will lead to generation of jobs for skilled workforce, both directly and indirectly (employment mostly in direct sales, store management procurement, packaging, storage, transport, other logistic services etc.). But, at the same time, it will displace many small retailers/entrepreneurs in the country.
So investment must have a positive effect in the economy in terms of net job creation in different areas of retail sector. If net employment generation figure is adverse, it will create social tension (as direct and indirect livelihood dependency on retails sector is high) unless and until new and additional job opportunities are explored in other sectors of the economy to absorb these workers. So a proper safeguard mechanism to protect small retailers in initial stage needs to be designed.
Finally it also needs to be looked that big retail houses, due to access to investment, do not marginalise small retailers operating in close vicinity and oppress the entrepreneurial capacity and urge in the economy.
It is obvious that a globally integrated economy like that of India cannot keep its door closed to any type of investment. Investment needs to be provided to make the sector globally competitive to sustain economic shocks. So investment must lead to incremental economic benefits and not substitute the on-going activities.
Also it is said that in a highly populated country (huge market size) like that of India, there will be co-existence of both unorganised and organised retailers. (When an organised retailer opens nearby, small retailers typically lose about 23 per cent of their sales in the first year, the ICRIER Report finds. But after five years they are more or less back to where they started.) What seems prudent is to tighten the domestic regulatory issues so that both unorganised and organised retailers can work in a given framework without spilling any negative implication in the economy. Proper framework needs to be laid down to provide a level playing ground to all the players in retail segment by factoring in demand, supply and employment issues.
So, along with allowing investment in the retail sector, a regulatory body (as in financial sector) for monitoring and surveillance activity needs to be put in place. Also the competition commission's role needs to be strengthened further to prevent collusion or predatory pricing and ensuring availability of institutional credit to the traditional unorganised retailers in the country.
The writer works for, Reliance Communications Limited, Mumbai