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Tuesday, 18 September 2012 00:00
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FDI in retail will take time to pay off, but pay off it will

Though the Opposition parties, along with some associations of kirana stores, are portraying the decision to allow FDI in retail as anti-small shopkeeper—and proof of the Prime Minister being more responsive to US pressures—this is nothing but fear-mongering. At its starkest, the argument these worthies will present is a simple one: since Walmart has a turnover around that of the entire Indian retail sector but hires just 5% of the number of employees, Walmart’s entry will mean 95% of Indian kiranas will go bust. While that may be a great argument, how incorrect it is can be seen from the fact that while Big Retail was supposed to have a 16% share of India’s retail market by now, the actual market share is a mere 4%. While it is true Walmart has still not been allowed into the retail end of the market, Indian biggies like Reliance Industries have been in this market for a while but still haven’t cracked the code. ITC is one of India’s more successful firms—witness the large market share it has made in the packaged foods business in such a short while—but it has given up on its foray into organised retail. Kishore Biyani, the earliest entrant in the business, is up to his neck in debt and Subhiksha, once the darling of the organised retail business, closed after choking on debt … There are many more, but the lesson is clear: it takes decades to build supply chains and kiranas have several advantages that aren’t easy to replicate.

If it wasn’t enough that the government has put many restrictions on where FDI-retailers can operate, there is an equally large shortage of retail space in city centres; and the high rentals of 30-40% of revenues make the business unviable for an industry that typically can’t afford to pay more than 5-6% of turnover. In any case, even if organised retail was to get a 15% market share in a decade, this still leaves kiranas with a market that is growing at 7-8% a year in real terms since overall consumption is growing at 9% or so. At the other extreme, if organised retail does take over the entire industry (it won’t though) and offers 20% savings over kiranas—why else will you shop there?—this will increase overall savings in the country anywhere up to around a third! Think of what that will do for interest rates and therefore overall investments and growth in both GDP and jobs. Organised retail looks a win-win, not the lose-lose the Opposition is making it out to be.

 

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