Arvind Singhal: Liberating the retail sector

An FDI policy that links the scale of investments to the level of sourcing for exports may not be a bad idea.

The much-awaited, and much-speculated ICRIER report on the impact of organised retailing on the traditional retail is finally out. In the making for almost 15 months, it is a fine empirical effort to objectively assess the impact of the emergence of modern-format, relatively large retail businesses on the small, traditional retailers, on the intermediaries such as the wholesalers and commission agents, on the farmers, and indirectly, on the consumers by way of retail price movements where modern retail businesses have come up next to the traditional ones.

The findings of the report have already been covered in media at length. Yes, there will be some adverse impact of new, larger retailers when they start operating in close vicinity of the existing traditional ones. This, by itself, is no big discovery. In any market, the arrival of a new competitor is expected to have some impact on all the pre-existing ones. However, the report intelligently articulates that this is no serious cause of worry since over time, even these traditional retailers in the vicinity of the larger one(s) have shown the resilience and the determination to weather the challenge and successfully adjust to the new competitive environment.

More importantly, the report unambiguously highlights the many positive outcomes of modern retail with the most important one being the better price realisation potential for the farmer and the price-inflation dampening effect for the hundreds of millions of lower and middle income consumers.

Are the findings of the report, therefore, surprising? To all those who have maintained an objective, analytical view on the various dimensions of a modern, vibrant retailing ecosystem, the findings of the report merely reconfirm what could have been theoretically anticipated and explained and hence would only endorse those views. The report must be read more carefully, and with an open mind, by those vociferous elements in the UPA government (read: Left parties), Mayawati of BSP, and our own Don Quixotes going by names such as India FDI Watch.

The report should also be read very carefully by the ruling government as it struggles to come up with newer strategies on a weekly basis to keep the inflationary fires under some control. Both the UPA and the previous NDA governments have dithered for almost a decade on evolving and implementing a pragmatic policy for the development of a modern, efficient, quick-responsive, and cost-effective distribution and retail system spreading across the length and breadth of the country. The NDA was hamstrung by the perceived affiliation of small traders to the BJP vote bank, and the UPA by the irrational and intransigent stand of the leftists.

Like many other ideological mistakes and omissions of the previous years that have only stifled India's potential, the strangulation of the growth of the modern retail sector is now preventing policymakers from having access to one of the best tools to control inflation and the opportunity to create millions and millions of jobs at the grass-root level all across the country. India and hundreds of millions of Indians are already paying a steep price for creaky, inadequate physical infrastructure by way of roads, power, drinking water and affordable housing, and inadequate social infrastructure by way of accessible, affordable, quality education and healthcare. Let Indians not suffer more by not having accessible, competitive and price-efficient retailing.

The fundamental structure of the Indian economy is such that the growth of modern retail does not have to come at the expense of the traditional retail. There is enough growth in the economy and in private consumption to provide adequate share of the consumers' wallet to both the large and the small retailers. Further, large corporate retailers are already finding it a tough task to even secure right-sized and rightly priced properties next to the traditional retailers and are, therefore, focusing more on edge-of-town, large format retail options or on categories that do not directly compete with the traditional kirana and other neighbourhood stores.

They also face many organisational challenges in creating efficient national supply chains, recruitment and training infrastructure, and then building customer loyalty. They will certainly overcome these challenges in the years to come but in the interim, the traditional retail has enough time and opportunity to successfully adjust to the changing times and changing consumer preferences, as they have shown in city after city, and market after market.

The government must now take urgent steps to clear the cobwebs of ideological confusion on this subject and set upon itself to come out with a clear, progressive and inclusive (of traditional and modern) retail policy within the next three months. It has to start by ensuring that there is actually more competition within the large, modern corporate retail players and, hence, restrictions on foreign direct investment have to be removed. The government can actually kill many birds with an innovative FDI policy for international retailers if it can link the scale of their investment and the size of their operations in India "" whether directly or through a franchise operation "" to sourcing from India which will give a further fillip to exports of a wider range of manufactured consumer products from the country, while also creating many more direct and indirect jobs when such international retailers start working on developing a broader sourcing base in India to comply with the terms of the permission for their investment in India.

Further, the emerging domestic corporate players themselves need more financial resources to scale up and be in a position to compete with the global giants. The government must immediately remove all restrictions on FII and other institutional investment in the retail businesses "" whether listed or unlisted.

Another concurrent step should be to bring down the occupation cost of retail space across the country. The governments "" central and state "" must make more land available to develop more retail space and must substantially liberalise the floor-space norms to make more and more sensibly priced space available in all urban population clusters.

The Competition Commission must be strengthened to build an understanding of the dynamics of retail business and thereby fulfil the role of being the unofficial regulator for the retail sector, balancing the level of the playing field between the small and the large, and the large and the large.

And finally, in view of the tremendous employment generation potential of the sector, the government must facilitate the establishment of training institutes for retail talent at all levels, and actively encourage the myriad other retail business enablers such as logistics providers, cold chain operators, retail store fit-out fabricators and so on.

Like in every other sector, India has a lot of catching up to do. With the ICRIER report giving a reasonably clear green signal to proceed, the government should not waste any more time in liberating the retail sector.

arvind.singhal@technopak.com