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All about making retail work in India

June 23, 2008 12:02 IST

Nearly 15 years after Dr Manmohan Singh started removing the inspector raj that governed Indian industry, you can see how competitive it has become, of how Indian firms are buying global firms, and competing them into the dust locally.

So how is it that, with no such reforms in the number of inspectors who govern them or any attempt to enable them to get credit, traditional retail isn't getting hit by the spread of organised retail in the country (according to the latest Economic Census, only 700,000 out of nearly 14 million retail establishments get credit from a government-owned institution/bank)?

Which is why, when the Indian Council for Research on International Economic Relations presented the findings of its report on the impact of organised retail on the unorganised sector at B-school BIMTECH's seminar ten days ago, most found it hard to believe.

While the kirana and the Left representatives attacked the report on the grounds its sample wasn't accurate, the real problem was different. And that was, that while the Icrier report showed a huge decline in the fortunes of kiranas in the first year after organised retail moved into the neighbourhood (a 23 per cent fall in both turnover and profits of kiranas, Icrier underplayed this by saying it was only temporary -- in the second year, sales/profits fell 6-7 per cent; by 7-10 per cent in the third year . . . after the fifth year, turnover fell only 0.3 per cent and profit by 0.8 per cent.

But Icrier never studied the same kiranas for five years or got their annual sales/profits for each year. The way it went about its analysis was to get data separately for sample firms which had been in the vicinity of organised retail for a year, for two years, for three years, and so on. It then constructed a time-series of this cross-sectional data.

Marrying cross-sectional and time-series data is conceptually undesirable, but even if you assume it is okay, the results are frightening.

If, as the report says, a kiranas' sales fall 22.8 per cent in the first year, 7.5 per cent in second year, and so on, this means a kirana shop that had sales of Rs 100 in the first year was left with sales of just Rs 52 in the fifth year, after which things more or less stabilise!

This is hardly a low impact, more so since these sales are in nominal terms -- factor in inflation, and the impact is even more serious. If, on the other hand, Icrier is saying sixth year sales fall only 0.3 per cent in comparison with the Rs 100 in the first year, this doesn't jell with the 22.8 reduction in first year sales that the sample reveals and the 7.5 per cent in the second year and so on -- for the two scenarios to be compatible, kirana sales would have to start rising dramatically after the fall in the first year and Icrier isn't saying that.

Which is why the Left representative asked Icrier why, if there was virtually no impact on kiranas, the very first recommendation it had made was that the government help kiranas form cooperatives to be able to do bulk buying, and that it upgrade the infrastructure of existing kiranas, including converting all uncovered wetmarkets to covered ones with proper hygiene!

Besides, another possible reason for the 'low' impact of organised retail is that organised retail in the country itself hasn't quite got its act together -- how many organised retailers do you hear of that can help cut, on a sustained basis, household budgets by 15-20 per cent more than kiranas can?

Indeed, as my colleague Shobhana Subramanian pointed out in an earlier piece, the revenue earned per square foot has been falling for even the country's largest retailer, Pantaloon, from Rs 2,080 per square foot in Q1 2006-07 to Rs 1,859 in Q2 2007-08.

So, once organised retail gets, well, organised, it's a safe bet to assume kiranas will face a tough time.

Unless, of course, kiranas get organised in the meanwhile. Icrier's report has a table that shows Subhiksha has more than double the sales per square foot of space as compared to even Pantaloon.

Since Subhiksha's stores have little more ambience than larger kiranas, but have the advantage of bulk buying, this is clearly one way forward for kiranas.

But the spread of organised retail is clearly desirable from the point of view of what it does for consumers, and farmers (who see a sharp rise in margins as wastage from the traditional supply chain fall). Icrier doesn't do the maths, but if organised retail cuts household spending by 15-20 per cent, that's a saving of $60-80bn.

This is around a fifth of our savings today! An addition of this level would naturally result in a big fall in interest rates and therefore a step-up in economic activity.

So what it really boils down to is how those rendered unemployed by large retail are to be employed elsewhere. And there will be large unemployment. Unorganised retail accounts for 37 million jobs while, according to Icrier, organised retail will capture 16 per cent of the market by 2011-12 with just 1.7 million jobs.

The way forward lies in considerable reforms that make entry and exit easier for industrial units across the economy and which encourage them to use more labour than capital; and in considerable re-training to make kirana employees employable for these industrial units.

Unless this happens, organised retail will face heightened political opposition since kiranas are the biggest source of employment in India today, much greater than even industry.

Sunil Jain
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