India’s retail sector is a potpourri of formats. Local kirana stores offer credit, home delivery, fresh food and unpackaged foodgrains, all the while maintaining personal relationships with customers. Increasingly, these are being complemented by and, in some cases, replaced by organised big-box retail chains. And, finally, there is the booming e-commerce sector that threatens to overtake both and transform this sector. From personalised informal service to cash-on-delivery and even instalment payment systems, India’s retail sector has come of age.
With a consumer market of $600 bn annually in financial year 2015 and a forecasted growth of 15 per cent, 200 million consumers are served primarily by kirana stores (80 per cent market penetration). With a penetration of just five per cent by the organised sector and a booming e-commerce segment (50 per cent compound annual growth rate, $40 bn in 2015), the Indian retailing scene is extremely attractive.
Driven by a growing annual household income ($3,823 in 2015; $2,632 in 2005), declining communication costs (Internet users up to 300 million in 2015) and increasing credit and debit card penetration (350 million debit cards in 2015), the Indian consumer has been transformed.
The growth of organised retail would have many benefits. Accounting for 20 per cent of India’s gross domestic product and eight per cent of total employment, it remains critical to our growth prospects. With a higher sector productivity and scale, it could add $5 bn to the GDP annually, lowering consumer prices by five per cent, constraining inflation by 0.5 per cent and potentially increasing farmer income by 20-30 per cent. It would create 1.6 million formal jobs, with two-three times that number in supporting systems.
Yet, the retail sector faces growing pains and regulatory hurdles. The Internet penetration rate in India is still one of the lowest in the world (average broadband speed of just one mbps compared to six mbps in the US). The cost of operations and land price inflation in Tier-1 and Tier-2 cities is very high. Combined with unreliable power and transport options, this sector’s supply chain is gridlocked. A limited quality talent pool and increasing attrition, policy uncertainty about retail pricing and investments have constrained investments and growth.
Organised retail needs to be encouraged and welcome. But that requires structural reform and policy action. Multiple laws and regulations are in force at the Central, state and local levels for governing the retail sector. The distribution trade remains unregulated, while a plethora of laws such as the Essential Commodities Act, the Cold Storage Order, the Weights & Measures Act, labour laws, the Shops and Establishments Act distort the market. A stronger regulator for retail needs to be introduced, with a focus on malpractice and quality issues. Such a regulator could create a “single window” for procuring all clearances to establish a retail business.
Few Indian cities have implemented zoning laws, making real estate acquisition a potential risk. With retail not considered an essential service, land allocation for retail is frequently combined with commercial space, even in new townships. In China, entire new cities have been developed with high streets earmarked for retail. India’s policymakers only earmark petrol pumps. Zoning requirements for organised retail need to be introduced to keep small traders in business while inducing competition amongst organised retail.
Even more contentious is the implementation of a standard GST regime that will reduce high tax burdens and excise duty, restrict service taxes on rentals and incessant octroi fees that bolster inflation. A number of other taxes such as motor vehicles tax, goods and passengers’ tax, entertainment tax, electricity duty and entry taxes, including those levied in lieu of octroi, would get merged. Tax rate and administration harmonisation across states would reduce distortions and regulatory costs for taxpayers.
Even the booming e-commerce sector is beset with regulation. India currently permits 100 per cent foreign direct investment in B2B e-commerce activities but not in B2C companies. B2C companies like Flipkart and Amazon have adopted the marketplace model, instead of a sole warehousing model, taking orders that are filled by other domestic retailers.
A separate policy framework for investment in e-commerce that relies on a functionality based treatment of e-commerce platforms should be considered. India’s e-commerce sector has been built by enterprising individuals with participation from the private equity and venture capitalist industry. Encouraging strategic investments through the private equity route, over a three-four year period can be considered, subject to strict restraints on offline retail trading, 40 per cent sourcing from small and medium-sized enterprises/micro, small and medium enterprises and no sale of food/agriculture/processed food on such platforms.
For kirana stores, organised and online retail is a competitive threat and an opportunity. The pie is getting bigger. As India’s per capita income rises, consumption will rise too. With better infrastructure and supply chains, manufacturers will gain scale and efficiency. The high price of real estate means that modern retail cannot undercut kirana stores on prices consistently. By adopting best practices from organised retail and tweaking product mixes, along with better store design and hygiene, kirana stores can compete and profit. NGOs like Trans Retail Ventures, which help modernise “kutccha kirana stores” in Mumbai, should be encouraged.
Policy reforms should recognise the key role that kirana stores play in India’s retail market, addressing local needs in places that few would invest in. Traditional grocers still have an edge over modern ones in items such as grains and masalas, given their knowledge of local tastes and better sourcing ability. Small-scale shopkeepers cannot compete with highly marketed e-businesses. E-commerce monopolies in the travel segments should be discouraged, with the marketplace model advocated to support MSME growth. Any logistical infrastructure created by e-commerce players should be opened up as a national network (like gas pipelines), enabling SMEs and MSMEs to withstand predatory pricing and monopolistic behaviour. Moves by e-commerce players to tie up with local stores for delivery needs are particularly welcome and will utilise the latter’s inherent geographical advantage.
The bargain remains “our markets for your investments and technology”. Formalising retail is a natural process. India has opened its market to domestic organised retail, helping it develop skillsets and retailing technologies. With numerous retail chains emerging, that have experimented with different retail formats and merchandising techniques, FDI in retail would help provide additional know-how and institutionalise best practices. Future growth in retail, whether through organised retail, modernised kirana stores or e-commerce, will create jobs and fulfil aspirations for our youth.