FDI must be allowed in multi-brand retailing if
the upward trend in retailing is to continue, writes Arpita
Mukherjee
 |
FDI
magnet: Centrestage Mall in Noida |
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There are over 15 million
retail outlets in the country, 93 percent of which are in the
unorganised sector |
India is in the
midst of a retail revolution. The sector witnessed rapid developments
in the past 10 years — from small unorganised family-owned businesses
to modern retail chains. Organised retailing is growing at a rate of
20-25 percent and is expected to reach Rs 1,00,000 crore by 2010. Its
share in total retailing is expected to rise from 3 percent to 9 percent
in the next four years. Many large Indian business houses have either
entered into retailing or are planning to do so in the near future.
Retailers such as Pantaloon Retail, rpg Retail, Shoppers’ Stop
and Trent are rapidly expanding their business through multiple formats
and mergers and acquisitions. Manufacturers such as Hindustan Lever
Limited and itc are vertically integrating their operations into retailing.
This sector has drawn the attention of venture capitalist and real estate
developers. Around 200 malls covering over 35-40 million square feet
of new retail space is coming up by the end of 2006.
Modern retailing,
which initially focussed on the metros, has now spread to smaller cities
and villages. Retailers such as itc and dcm Sriram Group have realised
the potential of the rural market, which is developing faster than the
urban market and now accounts for over one-third of the demand for many
products. Even unorganised retailers are changing their business models
to survive in a competitive environment.
The Indian retail
boom has captured global attention. AT Kearney’s 2005 Global Retail
Development Index ranked India at the top of 30 emerging markets for
global retailers even ahead of China which was placed fourth. Although
foreign direct investment (FDI) is not allowed in multi-brand retailing,
foreign retailers have entered the market through various routes such
as wholesale cash and carry (Metro Cash and Carry GmbH), franchising
(Mango and Marks and Spencer), local sourcing (Tommy Hilfiger) and manufacturing
(givo and Sony). Others have tied up with Indian players through technical
collaborations and joint ventures. A large number of foreign brands
have arrangements with leading department stores.
The hype about organised
retailing often fails to capture the true story. There are over 15 million
retail outlets in India, 93 percent of which are in the unorganised
sector. Most retail outlets are mom-and-pop stores and are low-profit
outlets that survive on unpaid/cheap labour and free land use. The supply
chain in India is highly fragmented. Studies have shown that around
40 percent of the fruits and vegetables get wasted in the supply chain
due to inefficient distribution and poor storage. Moreover, high real
estate cost, lack of infrastructure such as power and parking facilities,
restrictive zoning regulations, multiple taxes and interstate differences
in taxes makes it difficult for retailers to set up operations. The
recent problem faced by retailers in Delhi is an example of lack of
urban planning creating business uncertainties. In fact, the growth
of organised retailing has been much slower compared to the rest of
the world. Over a 10-year period (1995-2005), the share of organised
retailing in total retailing has grown by 40 percent in Brazil and 20
percent in China, while in India it was only 2 percent. The slow growth
of organised retailing has adversely affected the growth of allied sectors.
In
1995-2005, the share of organised retailing in total retailing
grew 40 percent in Brazil,
20 percent in China and only 2 percent in India |
Positive government
intervention is necessary since the sector has huge employment potential
and substantial backward linkages. Many laws relating to retailing are
outdated. For example, the Agricultural Produce Marketing Committee
Act, 1976 is creating a large number of intermediaries between the farmers
and the consumers, artificially increasing the prices of products while
farmers are not getting their due. Such regulations should be amended
for setting up the supply chain which is essential for the sector to
grow. Although franchising is an important mode of conducting business,
India does not have a comprehensive regulation on governing franchising.
Appropriate legislation should be implemented for protecting franchising
rights.
Certain legislations
in the real estate sector limit the availability of land for retail
use and increase its price. Regulations relating to land ownership should
be made more flexible. The government should review zoning regulations,
implement measures to prevent unfair land dealings, amend the Rent Control
Act, amend the Urban Land (Ceiling and Regulation) Act to make property
available for retail/wholesale use at concessional rates and rationalise
the stamp duties. These would restrict the artificial hike in real estate
prices. The town planning acts of most states should be amended to ensure
that local planning authorities pay adequate attention to the safety
and access requirements of the malls and ensure that the malls have
adequate parking facilities. A feasibility study for construction of
new malls is also essential.
A retailer requires
around 12 to 15 clearances at the Central, state and local level to
set up operations. A single-window clearance process would reduce uncertainly
and delays. There are various restrictions on interstate movement of
goods, especially foodgrain. This forces retailers/traders/wholesalers
to source locally and they are not able to reap the benefits of economies
of scale. For retailing to succeed, India should be treated as a single
market. Access to finance is a major problem for small and medium retailers
since only a few banks/financial institutions are willing to fund them
The government may explore the possibilities of setting up a separate
bank in the line of the Small Industries Development Bank of India to
meet the varying financial requirements of this sector. Often insurance
companies are not willing to insure traders. A separate insurance policy
for this sector would be beneficial.
It is often argued
that FDI is not required since big business houses are already investing
in this sector and there is no dearth of funds. FDI is not only required
for finance, but also for inflow of technical knowhow and best management
practices. In fact, organised retailers are entering into technical
collaborations with foreign companies. Today the government does not
have a clear FDI policy. Although 51 percent FDI in single-brand retailing
has been allowed early this year, it has not brought in substantial
investment. In the supply chain, investment can only be possible if
FDI is allowed in multi-brand retailing. Moreover, the restriction on
FDI is not an entry ban since foreign players are entering the country
through other routes. It is restricting investment and competition and
limiting the choice of consumers.
Mukherjee
is Senior Fellow, Indian Council for Research on International Economic
Relations
