The realities behind retailing

Print edition : February 10, 2006

THE question of whether to allow foreign direct investment (FDI) in Indian retail trade is a fiercely contested and divisive one. Those lobbying in its favour, particularly leading international retail giants such as Wal-Mart, argue that it will satiate the growing appetite of the Indian consumer. However, those advocating a more sober approach worry about the implications for the economy and for the millions of livelihoods at stake.

Addressing business leaders in Kuala Lumpur in December 2005 prior to the East Asia Summit, Prime Minister Manmohan Singh admitted that there were problems in opening up the retail segment to FDI. However, he promised that the government "will come up with a positive outcome in five-six months".

Although the United Progressive Alliance (UPA) government is inclined to open up the sector to foreign capital, it is aware of the backlash that could invite. That is why the Department of Consumer Affairs, Food and Public Distribution asked the International Council for Research on International Economic Relations (ICRIER) to undertake a study on the ramifications of the proposed move. FDI in Retail Sector is a result of that exercise.

Nine chapters follow the introductory section of the report. The introduction sets out the definitions of what constitutes retailing in the various sectors. The first chapter sets out the international background while the second looks at the trends in retailing in India. Chapter 3 explains the methodology of the survey conducted by the ICRIER while the following chapter explains the main findings. Chapter 5 provides an overview of the policy framework governing FDI in retail. The next chapter provides an account of those ranged against allowing FDI in retail trade. Of course, this is balanced by an account of the perceptions of the foreign participants in the Indian retail business. Chapter 7 sets out the possible strategies that India could employ in multilateral fora such as the World Trade Organisation (WTO). Chapter 8 provides an account of the constraints under which Indian retailers operate and the possible areas of reform. The last chapter sets out the strategy to be adopted for allowing FDI in the retail sector.

The report observes that although the retail outlet density in India is one of the highest in the world (the country has 15 million outlets), "Indian retailing continues to be one of the least evolved industries". Unlike in China and Brazil, where organised retailing has registered explosive growth in the last decade, in India organised retailing accounts for a mere 2 per cent of all goods sold in the country. In China organised retailing accounts for a 20 per cent share, whereas in Brazil it is 40 per cent. "One important reason for this is that retailing is one of the few sectors where FDI is not allowed," says the report. It also notes that this is despite the perception of India as an attractive retail destination. The study observes that India's major trading partners such as the United States, Japan and the European Union have made "requests" to New Delhi to allow FDI in retailing, during the Doha Round negotiations of the WTO.

The report recommends that FDI in retail be allowed to the extent of 49 per cent right away and that the sector be fully opened up in the next three to five years. Moreover, it recommends that there be no segment-specific restrictions, apart from those on military hardware, and asks the government to refrain from imposing local sourcing restrictions on foreign retailers and setting capital or investment norms. Zoning restrictions ought to be introduced without discriminating against foreign retailers, it says. The study argues that India should liberalise the sector unilaterally rather than wait for things to happen at multilateral fora such as the WTO.

Although glitzy hyper malls, supermarkets and department stores are becoming increasingly prominent in Indian metros, these are by no means the places where most Indians buy their goods. Those advocating the entry of foreign retailers argue that Indian retailing remains stuck in the past. Retailing, they argue, is still mostly done through kirana shops, owner-operated `general stores', paan and beedi shops, specialised kiosks and pushcart and street vendors.

A slide presentation by a leading private bank in India in 2004 claimed that the Indian urban consumer was "getting used to international lifestyles" and was more "discerning and demanding than ever". It also noted that shopping was no longer "need-based" but was a "family experience". It claimed that 100 million Indians in the 17-21 age group "tend to spend freely".

Unfortunately, the debate on the issue is being focussed narrowly. Allowing FDI in retail is being posited on the premise that it will result in cheaper prices and better quality for the discerning urban buyer. This may well be true to some extent, as Wal-Mart, the biggest corporate entity has shown during the last decade. Wal-Mart's sales amounted to $285.2 billion in the fiscal year ending January 31, 2005. In contrast, the total sales of two of the biggest Indian retailers, Bata India and Shoppers Stop (2004), amounted to $158 million and $102 million respectively.

The logic of going big into retailing is based on the premise that it gives the retailers the clout to bargain aggressively with the suppliers. This is what gives them the ability to lower prices. Indeed, studies of Wal-Mart's operations show that the company has successfully overturned the traditional manufacturer-distributor-retailer chain. This was achieved by scaling up retail operations significantly on the one hand, while deploying Information Technology to gather detailed information on consumer behaviour. Nelson Lichtenstein, author of a recent book Wal-Mart: The Face of Twenty-first Century Capitalism, has pointed out that it has overturned the century-long tradition of the retailer being dependent on the manufacturer.

Inside Le Marche's shop in New Delhi. With 15 million shops, India has the highest density of retail outlets in the world.-MANPREET ROMANA/AFP

In an interview to PBS, Lichtenstein said: "Now the retailer is the centre, the power, and the manufacturer (has) become the serf, the vassal, the underling who has to do the bidding of the retailer. That is the new thing." Cost cutting is the key in the new scheme. And, super retailers like Wal-Mart are able to force manufacturers of goods to cut costs even in impossible situations. Of course, consumer prices are cheaper, as a result.

But cheaper prices are not everything. A more substantial assessment of costs and benefits will have to weigh the economy-wide impact of the entry of large-scale retailers. Indeed, studies of Wal-Mart's operations in the U.S. indicate that the economy-wide implications of super-sized retailers are heavily negative. Job losses have been substantial and the wages of largely un-unionised Wal-Mart workers are no better than opportunities elsewhere.

A study by Emek Basker at the University of Missouri (2004) evaluated the widely circulated claim that Wal-Mart's entry in a particular locality (county) leads to an increase in jobs. Basker found that although there is an increase in employment immediately after a Wal-Mart store starts operations, half the gains were lost within the next five years as small- and medium-sized establishments closed down, unable to compete with the giant retailer.

Any analysis of retailing in India must be viewed in the context of the larger economic realities in order to comprehend the wider ramifications of allowing FDI in the sector. The most striking aspect of India's retail sector is the enormous significance it has as an employer and as a livelihood provider. Although retailing generates about 6-7 per cent of the national income, an overwhelming portion - 98 per cent - is done through the unorganised sector.

The ICRIER study shows that the unorganised segment is itself stratified. The study defines an "unorganised" retailer as one which is run locally and which does not have technical and accounting standardisation. This definition, while obviously excluding the mass of Indian retailing, also excludes some of the more popular retail outlets. For instance, Pothys, the popular clothing retailer in Chennai, is classified as an unorganised retailer because it does not employ the "standard" technical and accounting practices.

About four crore people are employed in retail trade. Assuming that each person supports a family of five, this implies that about 20 crore people are dependent on retail trade. For a vast majority of these households, retailing is a euphemism for a marginal existence. An article in the Economic and Political Weekly (Mohan Guruswamy, et al, February 12, 2005) pointed out that the principal reason for the explosive expansion in retail trade and its fragmented nature is the fact that it is the primary form of disguised unemployment/underemployment.

Given the distress in agriculture, and given the deceleration in the manufacturing sector, most households, whether urban or rural, have nowhere to turn to but retailing. Guruswamy and others note that a typical Indian retailer "is born seemingly out of circumstance rather than choice". "In this light, one could brand this sector as one of `forced employment', where the retailer is pushed into it purely because of the paucity of opportunities in other sectors."

It is obvious that the nature of Indian retailing mirrors the social and economic divide. The skewed income distribution obviously reflects the dichotomy in retailing. This is because a skewed income distribution implies a skewed consumption pattern. The small kirana store and the local grocer, on the one hand, and the large superstore, on the other, merely reflect this reality. The poor and working class households are able to purchase essentials in small quantities from the unorganised segment to meet their day-to-day needs. This is because these outlets are also flexible; they often provide goods on short-term credit. For these consumers, who are also mostly marginal workers, the price is not everything.

It is true that organised retailing holds the promise of lowering the prices of goods sold through the large stores. However, the `benefits' must be seen in the context of two sets of issues. First, these stores cater to a small minority of wealthy credit card-swiping customers who are able to buy goods at these stores.

But even more important, the entry of the large `format' stores will bring with them a completely different retail distributional structure. In fact, their very entry is predicated on replacing the existing structure with one that gives them the power to deal with manufacturers of industrial products and producers of agricultural commodities for sale through their outlets. And, seen in this context, the threat of Wal-Martisation is not an empty one if and when full-blown FDI in retail is allowed. There is fear that the changed distributional structure will not only drive ordinary retailers to ruin but will also have a damaging effect on producers. After all, while the wealthy have the option of being consumers first, the poor are primarily producers eking out a living.

In the past few years, Indian corporates such as the Tatas, ITC, the RPG Group and the Rahejas have established their outlet chains. Others such as Viveks in Chennai have established multi-brand stores. Several others have also ventured into niche areas such as entertainment. There has also been speculation in the media that the Ambanis may be planning a major foray into retail business.

Estimates of the organised retail business in India vary considerably. And the projections for the future vary even more. AT Kearney, the international management consultancy, which issues the annual Global Retail Development Index, placed India at the top of the rankings among 30 emerging markets worldwide in its 2005 report. It observed that India is at its "peak attractiveness, while China and Russia are beginning to level off". It noted that India's "under-served $330 million market has grown at an average of 10 per cent during the last five years." It pointed out that although one-third of the country lived below the poverty line, the "increasing mobility among the middle and upper classes, coupled with growing urbanisation, results in growing demand for retail goods". AT Kearney also noted that recent changes in the "regulatory landscape" in India have made India "much more attractive" to prospective foreign investors.

It is well known that there is very little reliable data on the retail trade business in India. Most projections, often prepared by consultants, are regarded to be highly speculative. There were expectations that this study, which included a primary survey, would rectify this weakness. However, the report belies these expectations. In fact, this is one of the major weaknesses of the report.

The duality of the Indian retail trade is its most abiding feature. There is on the one hand a mass of small retailers. On the other are a handful of large retailers. Of course, between the two extremes are the medium-sized players. It is obvious that the perceptions about the impact of FDI will vary, depending upon whose views are being sought. This is where the study falters. The sample size (391) is not only too small but also biased in favour of the larger players. For a government-appointed study, this has serious implications for not only the quality of the results but its very credibility. Hence, the report's slant in favour of allowing FDI is not surprising. After all, 98 per cent of the business is systematically ignored in the survey. Since retail trade sustains at least 60 million households, it is necessary to take a hard look before FDI is allowed into the sector.

Another important element missing is the viewpoint of suppliers of agricultural produce who are expected to be a major part of the supply chain if and when they are integrated into the FDI-driven retail business. What are their apprehensions? These are not explored in the report. It is obvious that a wider - and more unbiased - study is required before a decision is taken on the issue.

The experience from South-East Asia provides some idea about the possible consequences here. In Thailand, where the government allowed the entry of foreign retailers, there was a severe dislocation in the supply chain after the sector was opened up, during the 1997-98 financial crisis. However, in the face of protests by traditional shopkeepers, the government was forced to impose restrictions on the operations of the foreign retailers, while providing a `safety net' of sorts to those affected. Governments in other countries have imposed other restrictions in order to handle a host of problems that arise out of the entry of super-sized stores. For instance, zoning regulations are a common method of ensuring that the presence of these stores does not aggravate the dislocation of civic amenities in urban centres.

A recent study conducted by the Food Agricultural Organisation (FAO) estimates that 40 per cent of fruit sale and 30 per cent of vegetable sale in Thailand are now through supermarkets. The study observed that the procurement system had changed dramatically since the supermarkets established themselves. For instance, procurement is now more centralised. Sourcing is now done from large wholesalers, in many cases just one "preferred" wholesaler. High-volume buying gives these large retailers substantial economies of scale. The FAO study noted that increasing competition among the supermarkets resulted in the fall in the margins of farmers growing the produce.

SOME proponents of FDI in retail ask what difference would it make if FDI is allowed since small shopkeepers are in any case already under pressure from organised domestic retailers? Those against this line of reasoning argue that allowing unbridled FDI will result in a qualitative change in the environment in which millions of small retailers function. They point out that FDI will enable not only consolidation on a far bigger scale but much closer integration with global supply chains. This will result in severe dislocation of existing supply chains that feed these traditional outlets. In fact, the cautious response of some of the bigger retailers, seeking a more gradual opening up of the sector, explains the enormous risks involved.

Meanwhile, multinational retailers such as Wal-Mart are eyeing opportunities in developing countries because the markets in the developed world are getting saturated. The wealthy sections in these countries are seen as a huge potential market. Developing country governments, keen to whet the appetite of their wealthier and vocal citizens, have been pressured to open up their retail sector.

Wal-Mart International president and CEO John B. Menzzer visited India in May 2005. Speaking to analysts in the U.S. after he returned from India, he said regulatory hurdles were a deterrent to the company's plans for India.

Menzzer told CNN: "In our six government meetings, we created a very positive image of Wal-Mart in what we think is a very important future market... We have energised the FDI lobby and pre-empted the anti-FDI lobby in India. I believe we have told our story."

He also said that if the FDI regulations did not change soon, Wal-Mart was not prepared to wait endlessly. He said in that case the company was prepared to enter the Indian market with an Indian joint-venture partner to "take advantage of this market while it is still developing".

It is evident that the question of allowing foreign investment in retailing is being circumscribed in a manner that amplifies benefits and understates social and economic costs. A more reasoned audit of these costs is needed before a decision is taken to open the sector to foreign players.

FDI in Retail Sector: India

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