As per estimates made by ASSOCHAM, the US$ 300 bn Indian retail sector, which has been notching YoY growth of almost 35% to 40%, is expected to surpass US$ 365 bn in CY08. Growth prospects are likely to face hurdles owing to factors such as restrictions on FDI (foreign direct investment), the lack of a uniform tax structure across states and increasing pressure on infrastructure in key consumer markets (logistics issue).

The retail sector is growing at a hasty pace, fuelled by a strong economy, favourable demographics, rising disposable income level and rapidly changing lifestyles and consumer aspirations of an ever-burgeoning middle class.

Retailers are taking benefit of this growth and accordingly are aiming to expand. The year 2008 may witness lot of activities such as joint ventures, expansion and capital raising to fund expansion plans. Further, the players will try to strengthen their back-end activity to ensure smooth functioning and to support the growth of the business.

Industry wish list

FICCI

• The sector should be granted industry status.
• Uniform tax structure should be implemented. Gradual shift from the various state taxes to uniform tax would result in ease in sourcing goods efficiently and in turn aid the growth of the retail sector. The introduction of VAT in all states would result into the scrapping of differential sales tax prevailing in different states on the same product.
• Allow retailers to adjust the service tax on all inputs (rents and telephone) against the sales tax they collect from customers. The retailers' who pay the state VAT do not have any output service tax against which they can set off service tax paid by them.
• Eliminate multiple licenses and clearances. Retailers need to obtain licenses and permits such as basic trading licenses, product specific licenses, pollution clearances etc for every retail outlet  (even its' a chain store). This only delays the opening of stores and increases cost.
• FDI limit should be further liberalised, which will ensure development of robust cold chain system, bets retailing practices and wide range of goods and services at competitive prices. It will also bring along with it increased focus on farmer education and training resulting into better crop/ yield management practices.  100% FDI in multi brand retailing must be allowed in certain areas such as electronics, automobiles, sports goods etc. 

Budget over the years

Budget 2007-08

• The Finance Minister has been silent on proposals for the retail industry.
• However, he reduced central sales tax from 4% to 3%. This coupled with proposed gradual shift from the various state taxes to uniform tax would result in ease in sourcing goods efficiently and in turn aid the growth of the retail sector.
• The extension of service tax on rentals has aggravated the retailers' problem as it exerted pressure on margins. 
• Slashed the peak customs duty for non-agriculture goods from 12.5% to 10% and a reduction in excise duty on footwear parts from 16% to 8%. This resulted in lower raw material cost for the players who are engaged in manufacturing and retailing of these products.

Key positives

Demand drivers: The retail sector is growing at a hasty pace, fuelled by a strong economy, favourable demographics, rising disposable income level and rapidly changing lifestyles and consumer aspirations of an ever-burgeoning middle class. Retailers are taking benefit of this growth and accordingly are aiming to expand. This fast-paced growth is aided by mall development, fuelled by the government bodies' initiative of releasing real estate space for retail development in prime areas.

Government's take on real estate development: Earlier there was a shortage of quality real estate. However, with the mall mania catching up and recent initiatives by the government that has released land for development is likely to aid the growth of the retail sector. In 2008, 150 new malls are likely to be added taking total operational space from 40 m sq ft in 2007 to over 60 m sq ft in 2008 and in turn fuelling growth of the retail sector.

Key negatives

No industry status: The grant of industry status to retail sector will ensure access to funds, will bring more transparency in operations and streamline the process of clearing applications and issues related to taxes. 

Regulatory issues: Despite the regulatory reforms improving the economy's trade prospects, some major barriers still exist, with tariff rates being the highest in the world. The issue of FDI (51% FDI is allowed in single brand retailing) has been debated time and again and the policy makers are exploring areas where FDI can be invited without hurting the interest of local retail community. If this happens it will not only bring the required capital but also better technology and industry best practices, which will help retailers to further scale up their business, while extending benefits to consumers.

Other bottlenecks: For the vibrant retail sector, the year 2007 was mixed as the booming sector witnessed tribulations in the middle of the year due to unanticipated cost pressures such as service tax on rentals and high power costs apart form the usual problems of delays in store opening and high manpower attrition. Further, with interest rates showing no signs of abating have resulted in increased corporate expenses.

Retailing is a volume game, the players do not enjoy heavy cash flows. Thus, to grow and expand they either have to infuse capital or borrow, which exerts downward pressure on margins and in turn returns to shareholders