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The Indian Retail Revolution: Opportunities & Challenges

Good times lie ahead for the retail consumer in India. The Indian retail sector is poised for ‘big-bang’ growth in the foreseeable future, after some recent initiatives undertaken by the government to open up the sector to foreign players.

Good times lie ahead for the retail consumer in India. The Indian retail sector is poised for ‘big-bang’ growth in the foreseeable future, after some recent initiatives undertaken by the government to open up the sector to foreign players. And with a large number of domestic and foreign players namely Reliance Retail, the Bharti-Wal-Mart combine, AV Birla Group, Future group, Tesco’s and Carrefour all set to announce some really aggressive plans for their eventual entry into the sector, things just could not have gotten any better in the country. However, several obstacles need to be surmounted in order for the sector to successfully embark on the path towards tangible reforms and growth.

Changing Face of India’s Consumer Markets

India’s retail business is considered as one of the most attractive in the world. Consumer demand is booming as the government’s liberalizing policies have produced 8-9 percent annual GDP growth. Technopak, a Delhi-based retail consultancy, expects retail sales of $250-300 billion now to rise to nearly $430 billion by 2010. (1) Also the retail industry is the largest provider of jobs after agriculture, accounting for 6-7 percent of employment and about 10 percent of GDP. (2)

A Structure of Opportunity: Going Big

Currently India lags behind other Asian countries like China, Thailand and South Korea where the organized retail sector has a much greater percentage share of the total business carried out in those nations. This is in stark contrast to India, where of the approximately 98 percent “traditional retailing” taking place, most of the business is being handled by the so-called “kirana” stores (3). These stores suffer from some severe limitations, namely-the small size of their operations, low-cost format and the widespread under-reporting of business transactions resulting in tax evasion. Additionally, the Indian retail sector suffers from limited access to capital, labor and suitable real estate options. (4)  Technopak estimates that over the next four years, organized retail in India will receive investments in excess of $25 billion from 40 players. (5) The primary advantages of organized retailing is that retailers are able to leverage their massive size and well-established supply chains in order to deliver a variety of choice at competitive prices to the consumer.

Challenges in the Path to Reforms

Things, however, are not as rosy as they appear. There are those who believe that the retail sector should be kept shut since an influx of foreign supermarket chains may just wipe out the millions of small shops presently dominating the retail landscape. This potential loss in jobs has invited the ire of the Communist parties who want to protect the interests of the small traders and local shopkeepers. Since the government relies on the votes of these Communist parties for its parliamentary majority, implementing the reforms in the retail sector has become somewhat tricky. Other problems acting as potential stumbling blocks in the growth of organized retailing are poor infrastructure, land grabs, the massive red tapism prevalent in the bureaucracy and labor disputes. All of these legal, infrastructural, cultural and educational constraints would have to be overcome if the sector truly aspires to achieve the kind of growth it envisages for itself.

Despite challenges, big retailers make progress

Just recently, the Commerce and Industries Minister Kamal Nathsaid that the government is considering opening up retail sector for multi brand specialty formats like consumer electronics, sports goods, building and construction equipment and stationery. The move follows last year’s decision to allow 51 percent foreign direct investment (FDI) in single brand retail outlets. (6) Big players like Reliance Retail have already seized the opportunity and have announced plans to open approximately 5000 shops across India over the next five years. The government has received FDI proposals for single brand outlets from companies like Starbucks, Lee Cooper and Argentina’s Rino Jreggio but has yet to decide on these proposals. (7) This has resulted in the formulation of ambitious expectations about the projected rate of growth of organized retailing in India which is estimated to be about 37 percent in 2007 and 42 percent in 2008. (8) It is believed that the government will be forced to open up even further when the execution of the current spate of reforms gets underway.

Conclusion: Winners and losers

For the Indian consumer, the influx of foreign competition in the retail space would benefit them enormously. Not only would they have access to a vast array of choices but would also be able to obtain a highly superior quality of products at extremely affordable prices from several competing producers all over the globe. However, millions of small store-owners are terrified of the onslaught from domestic and foreign retailers and fear being driven out of business. The government must take strong steps to ensure that the huge gains to the consumers do not come at the expense of the ultimate demise of the “kirana” stores, which have been a staple feature of the retail landscape since time immemorial.

Source: www.asiaecon.org |



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