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The detail in retail PDF Print E-mail
Monday, 25 July 2011 00:00
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If the government does indeed open up organised retail to foreign investment, coming as it does on the heels of last week’s clearance to BP’s $7.2-bn investment in Reliance’s gas venture, this is certain to give a big leg up to India Inc’s sagging spirits. Of course, last week’s clearance to allow FDI in retail with some riders (it’s only for 36 cities with more than a million population) was only from the Committee of Secretaries, and only shows one part of the government wants it—it still needs a larger approval from a Cabinet that is a lot more driven by political considerations and, after that, clearances really depend upon individual state governments.

Even so, a few broad points need to be made. The first, one made in the past, is how organised retail cuts the number of middle layers between producers (like farmers) and the final consumer, and so reduces consumer prices—go to any big retail store and buy vegetables to know this. Second, you wonder a bit about the anti-FDI chant given that Indian corporates—Reliance, Tata, Pantaloon, AV Birla, to name a few—are already in this business. If it’s okay for Pantaloon to expand, it should be okay for Wal-Mart to expand. Three, whatever else the fight may be about, it is not about the life and death of existing kirana shops. A numerical example will help. Assume India’s GDP grows around 15% per year for the next decade, so that takes GDP from $1.8 tn today to around $7.3 tn in a decade. If the share of retail remains the same, 26% today, that means retail will grow from $470 bn today to $1.9 tn in a decade; if organised retail’s share rises very optimistically from 6% today to 20%, that means organised retail will grow from $28 bn to $380 bn, or 29.7% a year. That still leaves enough room for kiranas to grow at over 13% a year. Once you take into account the fact that there’s not that much space for organised retail in the centre of most cities, the potential for kiranas rises. With rentals the way they are in south Delhi, for instance, organised retailers have to pay around 30-40% of turnover as rental in new shopping malls—anything above 6-8% is really unviable. It is this lopsided economics that is responsible for so many retail chains shutting shops across the country and, in some cases like Subhiksha, even winding up completely—that’s why, as compared to the market share projection of 16% by 2011-12, organised retail’s share is around 5-6%. Hopefully, the Cabinet will keep this in mind when taking a decision on FDI in retail.

 

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