September 2, 2008

Retail in doldrums

Issue 18 - Sep 2008
Prashant Kumar Singh

There are signs that India’s retail revolution is in danger of fizzling out.  Many retailers in Mumbai and New Delhi region are abandoning the malls and some developers are converting the  space earmarked for retail to office space in many upcoming malls. Leftists, the swadeshi brigade and sundry others with vested interests can gloat over the woes now faced by the organised retail, but the impending slowdown is a result of the government ignoring the potential of retail industry: in employment generation and numerous economic spin-offs for the society.

The debate over retail in India has been fixated on the growth of organised retail, entry of international retailers and concomitant demise of the traditional retailer. The spectre of ogres like Wal-Mart gobbling small retailers has completely paralysed the government on the policy formulation front; not because of any real concern for small retailers but more out of their perceived political clout. This lack of policy initiatives for boosting and regulating organised retail  is unfortunately based on the fallacy that modern retail and unorganised retail are necessarily antagonistic.

Traditional or Unorganised Retail
The total retail sector in India, estimated at around US$325 billion, occupies a significant share of the Indian economy. Food and grocery is the largest segment with around 60 percent share in the total retail, followed by apparel and footwear with nine percent with other sectors trailing far behind. Within the sub-segment of  fresh produce sellers in the wet market, the unorganised sector has a 99 percent share. On the other hand, in the apparel and footwear sector, the share of unorganised retail is relatively smaller, at 81.5 percent.
Available data provides sufficient evidence that traditional retail is under no immediate threat from organised retail. With the present rate of growth of organised retail of 45 percent per annum, any structural changes brought about by gradual policy shifts will take at least a decade before unorganised retail feels the heat. This assessment is not to condone continued government stupor towards the unorganised sector on the issues of credit availability, access to distribution channels, and realisation of fair price for the produce. It is, instead, meant to spur the government to initiate concrete measures to support the traditional retailers. 
The government must demonstrate its seriousness by implementing mechanisms for ensuring better access to credit through banks and micro-finance institutions, facilitating “cash and carry” outlets for sale to unorganised retail, enabling formation of farmers’ co-operatives to warehouse and sell agricultural produce and by upgrading the infrastructure. The obvious example is of wet markets and wholesale markets. Measures need to be put in place for better comfort and ambience to form clusters, relieving traffic congestion, enforcing hygiene and health standards. This will go a long way in accepting traditional retailers, hawkers and wet markets as an intrinsic part of the retailing landscape.
Notwithstanding this, the unorganised sector will be in no position to meet the growing demand for retail and formal retailers need to step in to bridge the gap. Despite having highest number of retail outlets in the world, at two square feet per person, India also has the lowest per capita retail space. In India, the share of organised retail in the total retail sales is one of the lowest in the world at around 4 percent, just above 1 percent in Pakistan. The comparable figures for countries like Britain, France and Germany are 80 percent, while Southeast Asian countries have a share ranging from 30 percent to 55 percent. Indian organised retail sector, with its current size of US$12.8 billion is a small fraction of the global figure of US$6000 billion.

The continued inaction on the part of the government will not help  consumers, retailers or producers. The much celebrated  Indian entrepreneurial spirit should encourage the government to approve FDI in retail at the earliest. The government cannot renounce its responsibility to create economic incentives by providing an appropriate architecture supported by relevant laws, to facilitate an interdependent and symbiotic relationship between the various constituents. The ecosystem of the retail industry in India will then adapt itself to accommodate the two seemingly divergent strands of retailing, evolving into an indigenous Indian retail model.

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