India Needs Retail Therapy


As India struggles to combat inflationary pressures particularly among food products, there is an increasing clamor for supply side reforms that would address the structural issues facing the economy.

One particular contentious topic is the retail sector.

India’s retail sector is large – $400 billion according to some estimates – and is set to grow with the nation’s increasing levels of prosperity and demographic dynamics. This, along with the low levels of product penetration and the largely unorganized nature of retail makes it an extremely appealing market for global players.

Manpreet Romana/Agence France-Presse/Getty Images

A customer shops for groceries at a neighborhood shop in New Delhi.



However, India permits only up to 51% foreign direct investment in single brand retail stores and 100% FDI in cash-and-carry stores that can engage in wholesale trading. FDI in multi-brand retail stores is not permitted.

The arguments for opening up retail start with the technology, expertise and funds that this would bring to build robust supply chains across the nation. This would reduce wastage (estimated at 30% to 40% of total production), improve food safety, hygiene and increase overall efficiency.

As farmers get linked directly to retailers, they will benefit from transparency in pricing, better realizations, knowledge and skills transfer, access to credit and a reduction in the impact of market vagaries.

Moreover, the elimination of layers of middlemen will reduce the huge price differential that exists today between the farm and fork price to the mutual benefit of farmers and consumers.

It’s not surprising that these folks have been the most strident opponents of reforms. They have secured support from existing local players in the organized retail sector, most of whom are keen to delay competition on their home turf. They have played up the adverse impact that foreign players will have on the livelihood of the 12 million mom-and-pop retail stores or « kiranas » that dot the country.

While the entry of competition is bound to have an effect, the severity of the impact is debatable. India’s expensive real estate, poor infrastructure and cultural issues are stacked in favor of the local kirana. Indeed, many experts believe that both kiranas and large retailers offer distinct advantages to consumers and will coexist as the market expands.

Retail is a high, direct and indirect, employment generator with relatively low « qualifications » requirements that makes it particularly attractive. The opening of the sector also would benefit the exchequer. Organized retail brings cash transactions, which are often unreported, into the formal economy. This, along with an expansion of the market and introduction of services such as logistics and warehousing would improve overall tax collections.

However, reforms in this sector have been slow and ground ceded mostly to vested interests.

This may be changing. Over the last few months, there has been a lot of talk of opening of the sector.

The Economic Survey of 2010-11, which was presented in Parliament in February, recommended opening of the retail sector to foreign investors. A high-level government committee headed by India’s Chief Economic Advisor Kaushik Basu also made the same recommendation in its May report. R. Gopalan, India’s Economic Affairs Secretary, made a strong case for FDI in retail in a recent interview with The Times of India.

The 1992 economic reforms helped India avert default and lifted millions of people out of poverty. Today, the country needs to deal with its twin problems of slowing growth and high inflation; second-level reforms are urgently required.

A bold move such as allowing 100% foreign direct investments in retail can be the proverbial silver bullet for this government with multiple benefits in terms of controlling inflation, helping farmers and consumers, and silencing its critics.

Will the government provide this retail therapy?

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