The Hindu Business Line : FDI in retailing — Short-changing the <I>kirana</I> store?

THE retail industry in India is often hailed as one of the sunrise sectors. AT Kearney recently identified India as the ``second most attractive retail destination'' from among 30 emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14 per cent to GDP and employing 7 per cent of the total workforce or 42 million (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the economy. Not only is it the largest component of the services sector, but is also double the size of the next largest broad economic activity in the services sector.

The retail industry is divided into the organised and unorganised sectors. The former refers to businesses employing more than ten persons and includes the corporate-backed hypermarkets and retail chains. The organised sector accounts for just 2 per cent of the trade and employs just five lakh persons. The latter refers to the traditional formats of low-cost retailing such as the local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, handcart and pavement vendors, and employs over four crore persons. Obviously, India's retail sector is highly fragmented, with about 11 million outlets operating in the country and only 4 per cent of them being larger than 500 sq ft in size. Its greatest contribution is that it is labour-intensive. Compare this with an employment of just 0.9 million in the US, yet doing a business more than 13 times of the Indian retail market size.

Estimates vary widely about the true size of the retail business in India. AT Kearney estimated it to be Rs 4,00,000 crore and poised to double in 2005. On the other hand, according to government figures, the retail trade in 2002-03 amounted to Rs 3,82,000 crore. One thing all are agreed upon is that the total size of the corporate-owned retail business was Rs 15,000 crore in 1999 and is poised to grow to Rs 35, 000 crore by 2005 and would continue to grow at a rate of 40 per cent per annum.

A look at the employment numbers is enough to paint a good picture of the relative sizes of these two forms of trade in India — organised trade employs roughly five lakh people, whereas the unorganised retail trade employs nearly 3.95 crores.

According to a Government of India study, the number of workers in the retail trade in 1998 was almost 175 lakhs. Given the recent numbers indicated by other studies, this is only suggestive of the magnitude of expansion of retail trade , both due to economic expansion as well as the ``jobless growth'' in the past decade. That about 4 per cent of India's population is in the retail trade says a lot about how vital this business is to the socio-economic equilibrium in India.

Food sales estimated to be 60 per cent of all retail is a very large segment of the total economic activity of the country and due to its vast employment potential, it deserves focussed attention. Efficiency enhancements and increase in the food retail sales activity would have a cascading effect on employment and economic activity in the rural areas for the marginalised workers. Thus, even without FDI driving it, the corporate owned sector is expanding at a furious pace. The question that arises is since there is obviously no dearth of indigenous capital, what is the need for FDI? It is not that retailing in India is in the need of any technology special to foreign chains.

But a report prepared by McKinsey and Company and the Confederation of Indian Industry (CII) predicted that global retail giants such as Tesco, Kingfisher, Carrefour and Ahold were waiting in the wings to enter the retail arena. This report also states that the retail trade holds the potential of becoming a $300-billion per year market by 2010, provided the sector is opened up significantly. It does not talk about creating additional jobs, however, which should be the prime concern of the policy-maker.

One of the principal reasons behind the explosion of retail and its fragmented nature is that retailing is probably the primary form of disguised unemployment/underemployment. Given the already over-crowded agriculture sector, the stagnating manufacturing sector, the hard nature and the relatively low wages of jobs in both, many million Indians are virtually forced into the services sector. Given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store, depending on his or her means and capital. And, thus, a retailer is born, seemingly out of circumstance rather than choice. This phenomenon explains the millions of kirana shops and small stores. The explosion of retail outlets in the more busy streets of Indian villages and towns is a visible testimony of this. The presence of more than one retailer for every hundred persons indicates the lack of economic opportunities that is forcing people into this form of self-employment, though much of it is marginal. Because of this fragmentation, the retail sector typically suffers from limited access to capital, labour and real-estate options.

As on January 1, there were 413.88 lakhs job-seekers registered at the Employment Exchange. They register at the exchange to enjoy the benefits and security that a job in the organised sector provides — lifetime employment, pension, and union membership. But over the period 1992-93 to 2001-02, only a total of 30,000 jobs were added in the organised sector.

Since jobs are so hard to come by, retailing with low capital and infrastructure needs is by far the easiest business to enter, and as such performs a vital function in the economy as an alternative social security net for the unemployed. India, being a free and democratic country, provides its people with this cushion of being able to make a living for oneself through self-employment, as opposed to say China, where the society is highly regulated. In this light, one can brand this sector as one of "forced employment", where the retailer is pushed into it purely because of the paucity of opportunities in other sectors.

Last year, the largest retailer in the world, Wal-Mart, reported a turnover of $256 billion and is growing annually at an average of 12-13 per cent. Its net profit was $9 billion. It had 4,806 stores employing 1.4 million persons. Of these, 1,355 were outside the US. The average size of a Wal-mart store is 85,000 sq. ft and the average turnover about $51 million. The turnover per employee averaged $175,000. In 2004, Wal-Mart had a 9 per cent return on assets and 21 per cent return on equity. In contrast, the average Indian retailer's turnover is just Rs 186,000 and fewer than 4 per cent have shop space larger than 500 sq.ft.

Let alone the average Indian retailer in the unorganised sector, no Indian retailer in the organised sector will be able to take on such giants as Wal-Mart if and when they come. With incredibly deep pockets, these mega-stores will be able to sustain losses for many years till its immediate competition is wiped out. This is a normal predatory strategy used by large players to drive out small and dispersed competition. This entails job losses by the millions.

India has 35 towns each with a population over one million. If, hypothetically, Wal-Mart were to open a store in each of these cities and they reached the average Wal-Mart performance per store, it would mean a turnover of over Rs 8,033 crore with only 935 employees. Extrapolating this with the average trend in India, it would mean displacing about 4,32,000 persons. If large FDI-driven retailers were to take 20 per cent of the retail trade, as the now somewhat hard-pressed Indian FMCG major anxiously anticipates, this would mean a turnover of Rs 80,000 crore on today's basis. This would mean an employment of just 43,540 persons, displacing nearly eight million persons employed in the unorganised retail sector.

With possible implications of this magnitude, a great deal of prudence should go into policy-making. We seem to be moving towards a policy steamrollered by vested interests acting in concert with industry/trade bodies. In this context, the Finance Minister, Mr P. Chidambaram, in the Mid-Term Review for 2004-05, stated that creating an effective supply chain from the producer to the consumer is critical for the development of many sectors, particularly processed and semi-processed agro-products. In this context, the role that could be played by organised retail chains, including international ones, merits attention.

(The author is Chairman, Centre for Policy Alternatives, New Delhi. He can be reached at mguru@sify.com)

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