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Thursday, March 1, 2007

India's Retail Revolution

by Arjun Swarup: Washington

In 1984, Arthur Hailey wrote a novel called Strong Medicine, which described the American pharmaceutical industry. Two thirds of the way through the book, the main protagonist goes off, along with her family, on around the world trip. In the space of a couple of pages she describes her experiences and impressions of the different places she sees. These descriptions obviously mirror Hailey’s own impressions, thus the Middle East is described as 'oil rich', Greece is described as 'idyllic', and India is described as "that giant subcontinent, the land of savage contrasts, pictures of wealth and beauty contrasted with scenes of appalling filth and degradation”.

22 years on, that description probably remains the most apt summary of the sub-continent everto have been written. In 2005, India had more billionaires than any other region in Asia, and yet at the same time, 1 in 5 children could not get access to clean drinking water. The economy was growing at some 8% per year, yet 380 million Indians continued to live on less than a dollar per day.

Since India opened up its economy in 1991, our GDP has doubled in size to some $745 billion, and per capita income has now reached the dizzying height of $728. Today, the Indian economy stands poised on the threshold of what many (with the honorable exception of the Economist) see as being a spectacular take-off. Yet, despite this startling turnaround in fortune, the issues associated with taking the benefits of the new economic growth out into the hinterlands, in order to create the much needed mass employment, and to create a layer second and third tier cities of international standard, remain significant and pressing challenges. Organized retailing is India’s one clear example of these challenges, and the changes which are presently occuring in the retail sector in India represent one of the best opportunities in decades to aggressively tackle smoe of the big picture problems, and really begin to broad-base India’s development.

As is generally known, India’s economic boom, and especially since the turn of the century, over has largely remained restricted to a few large cities scattered across the country. The recent dramatic rise in GDP growth rates has been mainly by driven by IT,IT related services, and to a more limited extent manufacturing (and especially capital intensive manufacturing) .Three factors have driven this boom – the talent and expertise which is to be found within the country in these sectors, the global demand for such products, and particularly for such products when they bear the 'made in India' trademark', and and finally the relative lack of regulation inside India itself of these new 'sunrise' industries.

Put another way, in these 'pocket-sectors', India has taken rapid strides towards becoming a market economy. In the much larger, rural, sections of India, the presence – and benefits of a market economy are currently perceived to be virtually non-existent. The key to creating a market economy in rural India lies in creating a demand for the products of rural India, as well as in creating a far more efficient agricultural sector. One symptom of the malaise is to be found in the fact that 28,000 crores worth of fruit and vegetables, the core output coming from rural India, is left to rot every year, This is largely due to the absence of cold-storage infrastructure and the inability of the farmer to get the product to market place in time, and sell it at prices which are remunerative of the effort needed to achieve this, or simply due to a lack of buyers or demand for the products in question.

Now one thing is clear. The arrival of FDI in substantial quantities in the Indian retail sector has considerable potential for addressing some of the problems in rural infrastructure and supply chains, and thus has the potential to substantially changing the face of Rural India

The bulk products approach of point-of-sale of retailers - such as Wal-Mart , Metro, Carrefour,etc - has important implications for the evolution of agricultural value-added products such as jams, sauces, and packaged soups. In the case of Wal-Mart these constitute as much as 60% of the annual sales total, and if this could be sourced internally, through the leveraging (and intensification) of India’s agricultural output, then the benefits to India's farmers could be immense. The big retailers will inevitably enter into contracts with farmers for sourcing agricultural produce and part of the answer to India's lamentable agricultural productivity performance undoubtedly lies in just such contract-based farming

So this is an area of HUGE opportunity for India, yet at one and the same time it is also fraught with risk. The Indian farmer, the bulk of whose output is currently wasted, would be assured of a buyer for his product, at stable prices. He would not be subjected to the vagaries of seasonality and volatility of market prices as he is at present Most importantly the big retailers will set up cold-storage infrastructure thereby reducing wastage. In addition, given India’s existing capital intensive industrial manufacturing base, and thus the comparatively high levels of technology already in place there, much of the value-addition industry will be based inside India itself. Thus the ancillary benefits for India would be tremendous.

FDI in retail would create wealth in Rural India, thereby broad-basing India's growth and creating huge job opportunities in India's villages. One fact which cannot be emphasized enough here is that value and wealth is created by sectors. IT and related services directly impact on only a small minority of India's population, and this sector by its very nature can only take Indian developement so far up. If India wants to really become a fully developed economy, regional disparities need to disappear, and a wealthy hinterland is an absolute must .

However, one question that needs to be addressed is – "what happens to the Indian consumer"? On one account, if a Wal-Mart feels that there is more to be gained from exporting the value-added products, could India not be faced with the situation where its own people are deprived of cheap, high-quality products. Looking at the huge wastage issue which exists at the present time, and the enormous potential which exists for improving productivity, this does not seem to be a justifiable fear.

Moreover, the Indian middle class, which is now moving towards international standards in terms of consumption levels, is already at 400 million strong, and is growing very rapidly - by an estimated 40 million every year. To put this number in some sort of perspective, the current size of the Indian middle class is equal to the entire combined population of the United States and Japan, while the 40 million addition is like adding the equivalent of a population like Spain or Poland's every year.Thus the most probable outcome is that for all these big retailers India would continue to be the principal market. Indeed the key problem for the agricultural sector is still going to be meeting the needs of this growing market without producing price inflation in agricultural products.

As India's middle class population grows, and as towns and second and third tier cities grow, many people will have the economic power to buy agricultural products in the cash sector, and this means more demand for fruits and vegetables, as well as for a whole range of other retail products like cosmetics, household goods etc. The the organized retailing sector in India may begin to assume immense importance.

Why? Because retail has the capacity to affect every single Indian, in more ways than we can begin to imagine. The prices we pay for goods right now affects directly just how much disposable income we have, and the availability of goods implicitly determines productivity as well as living standards, and above all, the cheaper and more available goods are, the more we are able to consume, and the more we consume, the more employment and wealth we generate.

Organized retailing can lead to lower prices, greater availability of goods, and trigger anew and growing cycle of consumption and wealth creation. India’s biggest strength lies in the fact that the bulk of its markets are domestic, and consumption from within India alone can drive rural growth. However a facilitator is needed, to connect the buying power of urban India with the selling power of rural India, and organized retail could be just that facilitator.

Worldwide, organized retailing is big business. Four out of ten of America’s richest people are from the Wal-Mart family. Wal-Mart is as much a symbol of the American landscape, as the chai-walla and the sabzi wala are dots on the Indian one.

Organized retailing can do for India what electronics did for Japan, low-cost manufacturing did (or claims to have done) for China, and what gold and oil did for the Middle East. It can help the weaker and poorer sections of society leapfrog years of conventional development, and create large amounts of wealth. Challenges remain, but organized retailing offers India an important opportunity. It is one we must be ready to grasp with both hands.