1. Why do you think that the Indian retail sector is so fragmented? 2. What are
ID: 444222 • Letter: 1
Question
1. Why do you think that the Indian retail sector is so fragmented?
2. What are the potential benefits to India of entry by foreign retail establishments? Who are the potential losers here?
3. Who stands to lose as a result of foreign entry into the India retail sector?
4. Why do you think reform of FDI regulations in India has been so difficult?
For years now, there has been intense debate in India about the wisdom of relaxing the country’s restrictions on foreign direct investment into its retail sector. The Indian retailing sector is highly fragmented and dominated by small enterprises. Estimates suggest that barely 6 percent of India’s almost $500 billion in retail sales take place in organized retail establishments. The rest takes place in small shops, most of which are unincorporated businesses run by individuals or households. In contrast, organized retail establishments account for more than 20 percent of sales in China, 36 percent of sales in Brazil, and 85 percent of all retail sales in the United States. In total, retail establishments in India employ some 34 million people, accounting for more than 7 percent of the workforce.
Advocates of opening up retailing in India to large foreign enterprises such as Walmart, Carrefour, Ikea, and Tesco, make a number of arguments. They believe that foreign retailers can be a positive force for improving the efficiency of India’s distribution systems. Companies like Walmart and Tesco are experts in supply chain management. Applied to India, such know-how could take significant costs out of the economy. Logistics costs are around 14 percent of GDP in India, much higher than the 8 percent in the United States. While this is partly due to a poor road system, it is also the case that most distribution is done by small trucking enterprises, often with a single truck, that have few economies of scale or scope. Large foreign retailers tend to establish their own trucking operations and can reap significant gains from tight control of their distribution system.
Foreign retailers will also probably make major investments in distribution infrastructure such as cold storage facilities and warehouses. Currently, there is a chronic lack of cold storage facilities in India. Estimates suggest that about 25 to 30 percent of all fruits and vegetables spoil before they reach the market due to inadequate cold storage. Similarly, there is a lack of warehousing capacity. A lot of wheat, for example, is simply stored under tarpaulins, where it is at risk of rotting. Such problems raise foods costs to consumers and impose significant losses on farmers.
Farmers have emerged as significant advocates of reform. This is not surprising because they stand to benefit from working with foreign retailers. Similarly, reform-minded politicians argue that foreign retailers will help to keep food processing in check, which benefits all. Ranged against them is a powerful coalition of small shop owners and left-wing politicians, who argue that the entry of large, well-capitalized foreign retailers
will result in the significant job losses and force many small retailers out of businesses.
In 1997, it looked as if the reformers had the upper hand when they succeeded in changing the rules to allow foreign enterprises to participate in wholesale trading. Taking advantage of this reform, in 2009 Walmart
started to open up wholesale stores in India under the name Best Price. The stores are operated by a joint venture with Bharti, an Indian conglomerate. These stores are only allowed to sell to other businesses, such as hotels, restaurants, and small retailers. By 2012, the venture had 20 stores in India. Customers of these stores note that unlike many local competitors, they always have products in stock, and they are not constantly changing their prices. Farmers, too, like the joint venture because it has worked closely with farmers to secure consistent supplies and has made investments in warehouses and cold storage. The joint venture also pays farmers better prices—something it can afford to do because far less produce goes to waste in its system.
For its part, in 2011 the Indian government indicated that it would soon introduce legislation to allow foreign enterprises like Walmart entry into the retail sector. On the basis on this promise, Walmart and Bharti were planning to expand downstream from wholesale into retail establishments, but their plans were put on hold in late 2011 when the Indian government announced that the legislation had been shelved for the time being. Apparently, opposition to such reform had reached such a pitch that implementing it was not worth the political risk. Opponents argued that global experience showed that FDI leads to job losses, although they cited no data to support this claim. Whether India will further relax regulations limiting inward FDI into retail remains to be seen.
Explanation / Answer
1.
Indian retail sector is so much fragmented because the industry is majorly dominated by small retail outlets, “kirana” stores, and mom-and-pop stores. Most of the retail outlets/shops are being run by the individuals or households. Out of the $500 billion retail industry in India, only 6 percent is captured by organized retail establishments. Due to the above reasons, the retail industry is fragmented in India.
2.
Entry of foreign retail establishments would provide the following potential benefits to India:
The potential losers in this scenario would be the owners of small shops as their businesses would get severely hurt by the entry of foreign retailers. Foreign retailers would provide quality products to the consumers at significantly lower price due to their effective processes and techniques. The local small shop owners could not offer such benefits to the customers. Hence, it might also result in job losses. Furthermore the left wing politicians would also
3.
The owners of small shop and the left-winged politicians would stand to lose as a result of foreign entry into the India retail sector. They have formed coalition to stop the entry of foreign retailers, because as per their views it might result in job losses and it would also force the small retailers out of business.
4.
In 2011, the Indian government has shown interest to reform their legislation regarding the FDI. However, the process was shelved off in late 2011. Reform of FDI regulations in India is very difficult as the process faced huge opposition from the small shop owners and some politicians. In India, 95-96 percent of the retail sector is dominated by such small shop owners. As per their view, reformation of FDI legislation would force them to get out of the business and result in job losses. Such enormous opposition might create huge political risk in the country. Due to these reasons, the reform of FDI regulations in India is very difficult.
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