Good for retail

A mini revolution in the retail sector is already under way in India and, with the help of the right policy changes, it can bloom further and benefit consumers greatly.

Two issues are raised by opponents of large-format retail stores, and it's worth examining them on merit. One, is organised retailing really good for the economy and job creation?

And, two, will allowing foreign direct investment in the sector do more harm than good? Those in favour of the status quo are mainly driven by the concern that the spread of organised retailing will make many corner stores go out of business.

They could thus be killing more informal sector jobs than are being created in the formal sector. They also fear that once large retailers become well entrenched, they will start dictating prices, which will do nobody but themselves any good.

The anti-FDI lobby says that allowing in global players will only speed up the spread of large retail and hence must be resisted.

International and domestic evidence does not support these views. The US economy has benefited greatly from reform and modernisation in distribution, cutting down the mark-ups in price between factory, farmgate, and consumer.

The spread of organised retailing has been part of this process. On the other hand, the Japanese consumer has been paying a high price for his government's policy of protecting the corner store and shackling the growth of big retailers.

In India, too, there is no evidence that the growth of modern format stores is killing off the kirana shop. According to estimates, the total number of retail outlets in the country has grown from 6.5 million in 1994 to 12 million currently, even as chains such as Pantaloon, FoodWorld, and Shoppers' Stop have begun to dot the urban landscape.

While high-margin products often hold the key to profitability in such stores, it is nobody's case that retail chains charge higher prices for products of everyday use even after paying higher wages and rentals.

As far as one can see, there is still room for every kind of retail store to keep growing for a long time to come. This includes wholesalers like the German firm Metro, whose entry has been not just overtly opposed by small retailers and their lobbyists but covertly also by large retailers.

Going by the way Metro's cash counter is ringing, actual retailers are loving and patronising it.

But there is an additional systemic reason for favouring organised retailing, now that VAT is coming. The small retailer has been a notorious tax evader, something the organised retailer cannot afford to be.

VAT will tilt the balance somewhat in favour of the latter, since they will now be able to set off taxes paid against taxes recovered. Smaller retailers will have to start maintaining proper books of accounts to be able to claim similar setoff.

While this is good for tax compliance, one will have to wait awhile to see whether VAT actually inhibits the growth of small retailers. On balance, therefore, there is no good reason to oppose the growth of organised retailing.

Opening up FDI can only add to competition in the sector, benefiting consumers most of all.