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Structure Of Retail Sector In India

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Any opinions, findings, conclusions or recommendations expressed in this material are those of the authors and do not necessarily reflect the views of UK Essays.

Published: Mon, 24 Apr 2017

Abstract

Despite the ongoing wave of incessant liberalization and globalization, the Indian retail sector is still aloof from progressive and ostentatious development. This dismal situation of the retail sector undoubtedly stems from the absence of a Foreign Direct Investment (hereinafter referred as “FDI”) encouraging policy in the Indian retail sector. In this context, attempts have been made to study the strategic issues concerning the structure of Indian retail sector, current FDI policy and its limitation. Moreover, the latest move of the government to allow 51% FDI in multi-brand retail in India and increasing the FDI limit in single brand retail in India to 100% (from the existing 51%) is facing opposition which has raised significant hurdles for effective implementation of the reforms. FDI in retail has been opposed citing fears of loss of employment and that traditional retail may be affected. However, adherents of the same indicate easy access to capital for domestic retailers, increased transfer of technology, enhanced supply chain efficiencies, increased employment opportunities and curtailment of inflation as the perceived benefits. By analysis of the debate that’s raging over opening the retail sector to FDI it is pointed out that opening up of FDI in retail in India could potentially be a mixed blessing for domestic players and negative impact if any is expected to be short-lived and to weaken over time. Also, the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it. Though it’s time for opening the door for FDI in retail the same should be treaded cautiously and the proliferation of foreign capital into retailing needs to be anchored in such a way that it results in a win-win situation for India.

Introduction

The retail industry comprising of organized and unorganized sectors is of late often being hailed as one of the fastest growing sectors in India. According to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. Though initially, the retail industry in India was mostly unorganized, however with the change of tastes and preferences of the consumers, the industry is getting more popular these days and getting organized as well. The Indian retail sector is ready to take on challenges from global retail players such as Wal-mart and Carrefour.

Recently, to encourage the organized retailing in the country government decided to allow 51% FDI in multi brand retail and 100% in single brand retail in November, 2011.While this long awaited approval, come as a relief to many organised retailers and foreign players, oppositions from state government, political parties etc., raises significant hurdles for effective implementation of the reforms.

Structure Of Retail Sector In India

Before we go into the intricacies of the issue we must know what retail means and what the structure of retail sector in India is.

Retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit. [1] Also, the High Court of Delhi [2] defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale).

The retail industry in India is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the 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 kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. Unorganized retailing is by far the prevalent form of trade in India. [3] 

Current Fdi Scenario With Respect To Retail In India

The advent of FDI in India was witnessed during the end of 1990’s when the Indian national government announced a number of reforms which aimed at helping in the process of liberalization and deregulation of the Indian economy. [4] 

FDI in Single- Brand Retailing was, permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010. Of this, 57 proposals were approved. The proposals received and approved related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, lifestyle products etc., covering high-end items. FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997. It was brought under the automatic route in 2006. But, FDI in Multi-Brand retailing is prohibited. [5] 

Limitation Of Present Setup

Limitation in the present scenario calls for relaxation of FDI norms. These limitations are as follows:

Infrastructure

There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. [6]  Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. [7] Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.

Intermediaries dominate the value chain

Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail. [8] 

Improper Public Distribution System (“PDS”)

There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages. [9] 

No Global Reach

The Micro Small & Medium Enterprises (“MSME”) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08 [10] .This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.

Prospected Changes In Fdi Policy For Retail Sector In India

Recently in July 2010, the Department of Industrial Policy and Promotion (DIPP) had put up a discussion paper proposing FDI in multi brand retail. In July 2011, a Committee of Secretaries (CoS) had cleared the proposal to allow upto 51% FDI in multi-brand retail and increasing the FDI limit in single brand retail to 100%, which has been approved by the Union Cabinet in November 2011, albeit with a few drivers [11] . These drivers in bill are as follows:

For multi-brand retail- Minimum investment of US$ 100 million by the foreign investor is required and atleast 50% of the investment by the foreign company to be in back-end infrastructure. The proposal restricts the location of stores to cities with a population of one million or more (53 cities as per 2011 Census); given constraints around real estate, retailers are allowed to set up stores within 10 km of such cities. Also, at least 30% of manufactured items procured should be through domestic small and medium enterprises (SMEs). While the proposals on FDI will be sanctioned by the Centre, approvals from each State Government would be required.

For single brand retail- While allowing FDI limit in single brand retail to 100% with government approval, some restriction is again laid down. The foreign investors are to be an owner of the brand and products to be sold should be of a ‘single brand’ only. Also, in respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from domestic SMEs and cottage industries artisans and craftsmen. Further, like in multi-brand retail state government approval is needed.

But, the mounting opposition by several political parties and State Governments has prevented the effective implementation of the key reform measure.

Challenges For Foreign Firms In Organized Retail In India

The first challenge is competition from the unorganized sector. Traditional retailing has been established in India for many centuries, and is characterized by small, family-owned operations. Because of this, such businesses are usually very low-margin, are owner-operated, and have mostly negligible real estate and labor costs. Moreover, they also pay little by way of taxes. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector. It is often said that the mom-and-pop store in India is more like a father-and-son enterprise. Such small shops develop strong networks with local neighbourhoods. The informal system of credit adds to their attractiveness, with many houses ‘running up a tab’ with their neighbourhood kirana store, paying it off every fortnight or month. Moreover, low labor costs also allow shops to employ delivery boys, such that consumers may order their grocery list directly on the phone. These advantages are significant, though hard to quantify. In contrast, players in the organized sector have to cover big fixed costs, and yet have to keep prices low enough to be able to compete with the traditional sector.

Getting customers to switch their purchasing away from small neighbourhood shops and towards large-scale retailers may be a major challenge.

The other major challenge for retailers in India, as opposed to the US, is the storage setup of households. For the large-scale retail model to work, consumers visit such large stores and return with supplies likely to last them for a few weeks. Having such easy access to neighbourhood stores with whom, as discussed above, it is possible to have a line of credit and easy delivery service, congested urban living conditions imply that few Indian households might be equipped with adequate storage facilities.

Concerns Causing Roadblock In Implementation Of Relaxed Fdi Norms

History has witnessed that the concern of allowing unrestrained FDI flows in the retail sector has never been free from controversies and simultaneously has been an issue for unsuccessful deliberation ever since the advent of FDI in India. The recent proposal for relaxation of FDI norm is also facing the same challenges and opposition creating roadblock for implementation of suggested reforms. The antagonists of FDI in retail sector oppose the same on various grounds which are as follows:

Move will lead to large-scale job losses. [12] International experience shows supermarkets invariably displace small retailers. Small retail has virtually been wiped out in developed countries like the US and in Europe. South East Asian countries had to impose stringent zoning and licensing regulations to restrict growth of supermarkets after small retailers were getting displaced. India has the highest shopping density in the world with 11 shops per 1,000 people. It has 1.2 crore shops employing over 4 crore people; 95% of these are small shops run by self-employed people.

Adverse impact on domestic small and unorganized retailers as the move would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets. [13] 

Global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in essentials, including food supplies, being controlled by foreign organizations. [14] 

Disintegration of established supply chains by establishment of monopolies of global retail chains, leading to their control on both ends of the supply chain. [15] 

Farmers to get affected on account of non-remunerative prices paid to them by these corporate giants. [16] 

Key Perceived Benefits

In spite of the recent developments in retailing and its immense contribution to the economy, it still continues to be the least evolved industries and the growth of organised retailing in India has been much slower as compared to rest of the world. Over a period of 10 years, the share of organised retailing in total retailing has grown from 10 per cent to 40 percent in Brazil and 20 percent in China, while in India it is only 2 per cent (between 1995-2005). [17] One important reason for this is that retailing is one of the few sectors where foreign direct investment is not healthily and liberally allowed. Given this backdrop, it is widely acknowledged by the advocators of the reform that FDI can have some positive results on the economy, triggering a series of reactions that in the long run can lead to greater efficiency and improvement of living standards, apart from greater integration into the global economy. [18] Some of the benefits claimed by implementing FDI in retail sector are as follows [19] :

These would enable cash-starved domestic retailers to deleverage their overly stretched balance sheets by plugging the gap between capital required for growth and the ability of local players to raise capital.

Local incumbents will be benefited from technical inputs, investments in supply chain, and investments in human capital.

There could be a potential shift in bargaining power of these retailers with FMCG companies (at present, large FMCG players are better positioned vis-à-vis retailers in discussing terms of trade) once these retailers become large and attain size and scale.

Improvement of supply chain/ distribution efficiencies, coupled with capacity building and induction of modern technology, which will help arrest wastages (in the present scenario, lack of investment in logistics and inadequate storage facilities have been creating inefficiencies in the food supply chain, leading to significant wastages). Though FDI is permitted in cold chains to the extent of 100% through the automatic route, in the absence of FDI in front-end retail, investment flows into this sector have been insignificant.

The move to open up retail sector to FDI will reduce inflationary pressures as :

Farmers will be able to directly sell their produce to retailers, thereby reducing margins for middlemen.

Investments in cold-storage and warehousing will ease supply-side pressures that have driven inflation close to a double-digit.

Improved supply chain contributes to savings in food wastages which has been rampant on account of inadequate infrastructure.

Further, consumers would also benefit from wider choices and better quality products. [20] 

Improvement in productivity and realizations for farmers through direct sales to these large organised players, thus eliminating the margins outflow to the middle-men who have been dominating the value chain, and whose pricing lacks transparency.

The opening of the sector to FDI is expected to result in creation of over 10 million jobs (including 6 million jobs in the logistics sector alone) in three years, across agro-processing, sorting, marketing, logistic management and the front-end retail business.

Expectations are that it would create jobs not only in the retail industry but also in related areas like real estate and construction.

Consumer Benefit

In the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers. [21] 

In wake of relentless protests for the opening up of the Indian retail market for the reception of unrestrained FDI, the Investment Commission in July, 2006, opined that that foreign investment would help in improving the retail and supply chain infrastructure, and generate large-scale employment in the country. In addition, the Indian retailers could absorb some of the best operational practices of these international retailers and gain in experience. Ultimately, the consumers would benefit due to the availability of more product offerings, lower prices, and efficient service. The entry of large low-cost retailers and adoption of integrated supply chain management by them is likely to lower down the prices. Also, FDI in retailing can easily assure the quality of product, better shopping experience and customer services. They promote the linkage of local suppliers, farmers and manufacturers, no doubt only those who can meet the quality and safety standards, to global market and this will ensure a reliable and profitable market to these local players. [22] 

Also, from the stand point of consumers, organized retailing would help reduce the problem of adulteration, short weighing and substandard goods. FDI will not just provide access to larger financial resources for investment in the retail sector but simultaneously will rationally allow larger supermarkets, which tend to become regional and national chains to negotiate prices more aggressively with manufacturers of consumer goods and thus pass on the benefit to consumers and to lay down better and tighter quality standards and ensure that manufacturers adhere to them. [23] 

Authors View

In principle, governments should not prevent anybody, Indian or foreign, from setting up any business unless there are very good reasons to do so. Hence, unless it can be shown that FDI in retail will do more harm than good for the economy, it should be allowed. Authors are of view that concern raised by opponents is exaggerated. Opening up of FDI as per reform in India could potentially be a mixed blessing for domestic players and negative impact if any is expected to be short-lived and to weaken over time.

A major argument given by opponents of FDI in retail is that there will be major job losses. Frankly, the jury is out on whether this is the case or not, with different studies claiming different findings. Big retail chains are actually going to hire a lot of people. So, in the short run, there will be a spurt in jobs. Eventually, there’s likely to be a redistribution of jobs with some drying up (like that of middlemen) and some new ones sprouting up. Infact, the government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The whole idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing. Also, fears of small shopkeepers getting displaced are vastly exaggerated. When domestic majors were allowed to invest in retail, both supermarket chains and neighbourhood pop-and-mom stores coexisted. It’s not going to be any different when FDI according to the reform is allowed. It is also pertinent to note here that that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined [24] , since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience. The argument that farmers will suffer once global retail has developed a virtual monopoly is also weak. To begin with, it’s very unlikely that global retail will ever become monopolies. Stores like Wal-Mart or Tesco are by definition few, on the outskirts of cities (to keep real estate costs low), and can’t intrude into the territory of local kiranas. So, how will they gobble up the local stores. Mega retail chains will keep price points low and attractive – that’s the USP of their business. This is done by smart procurement and inventory management: Good practices from which Indian retail can also learn.

The benefits of larger FDI in other sector has been tangibly felt in the domains pertaining to technological advancements, generation of export, production improvements, and hastening of manufacturing employment. Capital inflow into India has increased and so have the exports from the country. Allowing healthy FDI in the retail sector would not only lead to a substantial surge in the country’s GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them. Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments.

Further, with regard to the concern raised about limit of cap for FDI in multi- branding authors would like to highlight that Industrial organisations such as CII [25] , FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.

RECOMMENDATION

FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. [26] Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. Therefore, apart from the drivers incorporated in the bill negative effect if any can be further diluted and given below are the recommendation for the same:

Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated that at least some percentage of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers.

Public Distribution System is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. To protect the interest of small retailers the government may also put in place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies.

Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies. [27] 

A National Commission must be established to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI- as and when it comes.

The proposed National Commission should evolve a clear set of conditionalities on giant foreign retailers on the procurement of farm produce, domestically manufactured merchandise and imported goods. These conditionalities must be aimed at encouraging the purchase of goods in the domestic market, state the minimum space, size and specify details like, construction and storage standards, the ratio of floor space to parking space etc. Giant shopping centres must not add to our existing urban snarl. [28] 

In order to address the dislocation issue, it becomes imperative to develop and improve the manufacturing sector in India. There has been a substantial fall in employment by the manufacturing sector, to the extent of 4.06 lakhs over the period 1998 to 2001, while its contribution to the GDP has grown at an average rate of only 3.7%. [29] 

The government must actively encourage setting up of co-operative stores to procure and stock their consumer goods and commodities from small producers. This will address the dual problem of limited promotion and marketing ability, as well as market penetration for the retailer. The government can also facilitate the setting up of warehousing units and cold chains, thereby lowering the capital costs for the small retailers.

Set up an Agricultural Perishable Produce Commission (APPC), to ensure that procurement prices for perishable commodities are fair to farmers and that they are not distorted with relation to market prices.

Quality regulation, certification & price administration bodies can be created at district and lower levels for upgrading the technical and human interface in the rural to urban supply chain.

Credit availability for retail traders must be encouraged with a view to enhancing employment and higher utilization of fixed assets. This would lead to less wastage (India has currently the highest wastage in the world) of perishables, enhance nutritional status of producers and increase caloric availability.

CONCLUSION

India’s retail sector remains off-limits to large international chains especially in multi-brand retailing. A number of concerns have been raised about opening up the retail sector to FDI in India. But, after in depth study it can be safely contended that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it. While initially the small indigenous retailers business would be impacted once modern retail enters the locality, this adverse impact is expected to be short-lived and to weaken over time.

India’s experience between 1990-2010, particularly in the telecommunications and IT industries, showcases the various benefits of opening the door to large-scale investments in these sectors. Arguably, it is now the turn of retail. It is expected that organized retail could help tackle inflation, particularly with wholesale prices. It is also expected that technical know-how from foreign firms, such as warehousing technologies and distribution systems, for example, will lend itself to improving the supply chain in India, especially for agricultural produce. Creating better linkages between demand and supply also has the potential to improve the price signals that farmers receiv


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