Sunday, July 24, 2011

Opening of the shutters

For a country where the GDP is consumption driven, ironically only 4% of India’s shops occupy a space of more than 500 square feet. In grocery stores, young boys perch precariously on ladders to fetch jars from remote crannies. In bookshops, browsers brush bottoms as they jostle and squeeze past each other in crowded aisles. Posh boutiques are reached up narrow, winding staircases. And people hand-pick their fresh fruit and vegetables from hand-cart hawkers and pavement vendors.

Most Indian shopping still takes place in millions of independent grocery shops, or kirana (corner) stores, manned by the owner and perhaps an assistant or two which belong to what is known, quite accurately (and perhaps euphemistically), as the “unorganized” sector; small, family-owned shops surviving on unpaid labor and, often, free land for a small stall. “Organized” retail, such as hypermarkets, supermarkets and department stores, accounts for only 4-5% of the country’s $322 billion market.

India is again pussyfooting with the idea of opening the shutters of its retail market to foreigners. If it does, then plenty of global retailers will be lining up. It is rather easy to see the magnetism of the Indian market. Rapid economic growth in the past decade plus has increased the disposable income of the middle class. It is this urban consumer that the global chains are eyeing. With the Committee of Secretaries giving its nod for 51% FDI in multi-brand retail a few days back, the nodal Department of Industrial Policy and Promotion should be preparing a Cabinet proposal soon. But the deal is far from done.

With nary a doubt, opening up the retail space to foreign investment would help in overhauling the country’s antiquated supply chain. Shortcomings in the distribution systems have created huge differences between wholesale and retail prices. Inefficiencies are common. The government estimates that 40% of the fruit and vegetable production in country is lost due to inadequate storage and transport infrastructure. Waste of this magnitude, troubling in the best of times, is appalling as the country battles double-digit inflation. Yet, despite a consensus among policymakers that opening up of the retail sector to foreign investment has benefits both in the near and long term, the government has been comatose in a decision.

The reason behind this hesitation is the political clout of existing traders. The government’s move is fraught with political risk because retail deregulation is a divisive issue in India. An estimated 35m people or 7.3% of India’s workforce are employed in the unorganized retail sector. With domestic inflation rising, there remain widespread fears that the entry of global retail giants could hurt these kirana stores. The traders have been very vocal about their opposition to any form of organized retail and have regularly conducted mass protests and ransacked supermarkets to make their sentiments known. They fear that the arrival of big-box retailers will price the corner grocery stores out of business.

There is some truth to this. When an organized retailer opens nearby, small retailers typically lose about 23% of their sales in the first year. But after five years they are more or less back to where they started. This was also the case in Thailand, which opened up to foreign retailers after the Asian crisis in 1997. In the short term, according to a report, “the entry of foreign players in a recessionary economy adversely affected all segments—wholesalers, manufacturers and domestic retailers.” However, there were also benefits. The foreign invasion led to the development of organized retailing (now 20% of the Thai market); producers had to become more efficient; foreign retailers started buying more Thai goods.

Despite more pros than cons, will the government be willing to rock its already floundering political boat even more by antagonizing the trader’s cartel?  Or with this being India, will the rules be well shrouded in uneasy compromises? Will the shutters open or the Pandora’s Box?

I don’t think we’ll open the shutters – at least not just yet.

No comments:

Post a Comment