Opinion Opening up retail

For the sector to create jobs,infrastructure must come first.

Shobhana Subramanian

June 27, 2011 02:06 AM IST First published on: Jun 27, 2011 at 02:06 AM IST

Media reports say the government may throw open multi-brand retailing to foreign direct investment (FDI) in the six big metros with a rider that foreign retailers would be asked to set aside 50 per cent of their investment,stipulated at a minimum Rs 450 crore or roughly $100 million,to create back-end infrastructure. Whats unclear is whether foreign retailers will be allowed to own a controlling 51 per cent interest in the venture; but even a 26 per cent stake,as is the case in the insurance sector,should be tempting enough. Moreover,Indias top six cities would provide them with a large enough catchment to begin with.

Indeed,a calibrated approach to opening up the multi-brand retail space was always envisaged,given that it will take some convincing on the part of the government; not all political parties have been keen to import competition into this space fearing that many of the kiranas would be elbowed out. Thats unlikely to happen for a long time though given the convenience that they offer. Studies done by ICRIER show that very few kiranas actually shut shop just about 4 per cent and fewer than 2 per cent do so because of competition from organised retail; very often it is because the second generation wants to pursue other interests.

While the government is understandably keen to have foreign retail chains operating in the country given the high food inflation,it is unlikely consumers will see meaningfully lower prices in the near term,especially in the fruits and vegetables segment. Because of the way the regulation works,especially the APMC (Agriculture Produce Market Committee),it will be a while before the mandis are no longer in control of produce and prices.

It is in very few states that organised retailers today are able to access the farm gate directly,and even when they do,they are not always able to move produce from one region to another. In fact,the discussion paper put out by the DIPP last year notes that the wholesale regulated markets,governed by state APMC Acts,have developed a monopolistic and non-transparent character. Since there are at least four to five intermediaries in the chain between the farmer and the consumer-aggregator,market trader,wholesaler,sub-wholesalers,it results in both wastage and lower realisations for the retailer with the farmer getting a raw deal; his share of the total price paid by the consumer is estimated at 20-25 per cent,or even less according to a World Bank study,which is way below the world average of 50 per cent.

A Boston Consulting Group study estimates that,on average,as much as 46 paise of a rupee comprise wastage and profit margins of intermediaries. If organised retailers today are not able to sell fruits and vegetables at prices below those in the wet markets,it is partly because they dont yet have economies of scale; the total turnover clocked by organised retailers in the food and beverages segment is currently around $3.5 billion and the share of fruits and vegetables,within this,would be smaller. Also,contract farming can be a bit of a challenge when land holdings are fragmented; the average size of land holdings is estimated at 1.3 hectares,with more than 90 per cent of the plots being smaller than one hectare,so mechanisation is not easy. However,companies like Pepsi have succeeded in growing potatoes,and contract farming will take off if retailers are able to convince farmers that they have a ready buyer for their crop at a fair price. Once contract farming takes off,the issue of farm productivity,which is woefully low for several crops,can also be addressed.

Doubts have been raised on how much employment will actually be created by organised retailers and it has been pointed out that the number of jobs created so far by domestic players is insignificant at just a few lakhs. While that may be true,it is also a fact that virtually no back-end infrastructure has been created,partly because retailers have focused more on the front-end and havent spent too much time or money on the back-end. Typically,the ratio for direct to indirect jobs,the world over,is 1:1.5-2; and for the sector to throw up more indirect job opportunities,there has to be investment in infrastructure.

The government wants foreign retailers to allocate half their investment in the back-end,which ideally should include anything apart from store fronts; while that seems realistic for the food segment,it may be a tad high for the non-food segment. But,obviously,better storage facilities should bring down wastage,somewhat exaggerated,but definitely somewhere around 20-25 per cent of the 180 million tonnes of fruits and vegetables produced annually. As was hinted at in the DIPP paper,foreign retailers need to source 30 per cent of their merchandise from the SME sector; that shouldnt put them off even if it means additional money and effort to ensure that quality sustains. In fact,India is already a sourcing hub for several global retailers. What could keep them away is any resistance on the part of state governments; there have been instances in the past,in Uttar Pradesh for instance,of even domestic organised retailers being harassed. But then it was never going to be easy.

The writer is resident editor,Mumbai,The Financial Express
shobhana.subramanian@expressindia.com