FDI in India's Retail Sector: Problems and Prospects

By Kumar, Vinod; Singh, Mehar | Political Economy Journal of India, January-July 2011 | Go to article overview

FDI in India's Retail Sector: Problems and Prospects


Kumar, Vinod, Singh, Mehar, Political Economy Journal of India


Introduction

"No power on earth can stop an idea whose time has come" said Manmohan Singh, the then Finance Minister of India, quoting Victor Hugo while presenting the Union Budget 199495, making a reference to the Indian economy's unlimited potential. If Dr. Manmohan Singh were to use the quote again today, he would probably apply it in the context of the promise contained in the India's retail sector. The Indian retail market, which was largely unorganized till the 1980s has undergone an immense transformation in post-liberalization era. However, valued at $ 450 billion, the Indian retail sector is still relatively small by global standards, with giants like Wal-Mart alone reporting over US $ 315 billion (approx) in global sale. India is estimated to have around 15 million retail outlets, making it the country with the highest retail outlet density in the world. A.T. Kearney, a well known international management consultancy, in the year 2009, identified India as the most attractive retail destination in the world. With a significant contribution to the national GDP (10 percent) and employment (8 percent, second largest employer after agriculture) this sector can definitely be referred as one of the pillars of the Indian economy.

Retailing is the interface between the producer and the individual consumer, buying for personal consumption. This excludes direct interface between the manufacturer and the institutional buyers, such as the government and other bulk customers. A retailer is one who stocks producer's goods and is involved in the activity of selling it to the individual consumers, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. The retailing is divided into organized and unorganized sectors. Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate backed hypermarkets, supermarkets, departmental stores, shopping malls etc. Unorganized retailing, on the other hand, refers to traditional format of low cost retailing and it includes local kirana shops also known as 'mom and pop' stores, ownermanned general stores, paan-beedi shops, hand cart and pavement vendors. Unorganized retailing is by far the most prevalent form of trade in India and is highly fragmented in nature--constituting 95 percent of total retail trade.

The Indian retail sector is at an inflection point, with organized retail poised for an approximately 11.5 percent (CAGR). Size of organized retail market (5 percent) in 2009 is $ 35 billion which is expected to $ 155 billion by 2015 with average annual growth rate of 35 percent in organized retail. Having emerged as the world's most attractive destination for global retail, India still faces alarming issues that pose serious hurdles to the growth opportunities that the retail sector promises to the country's economic progress. The critical challenges are relating to the infrastructure (cold chains, warehousing and logistic infrastructure) and the policy issues (industry status for retail, relaxing licensing, permit and registration norms), etc.

India is currently facing world's most dynamic combination of highly informed and demanding consumer on one hand, and a rapidly increasing consumption level on the other. The average consumer today is richer, younger and more aspirational in his/her needs than ever before. The greater education level has increased the awareness among the consumers and they are becoming more demanding and discerning. Another prospect of retail sector in India is the young working population, hefty pay-packages, alongwith increasing working women population. Consumers now value convenience and choice at par with getting value for their hard-earned money. Growing consumer demand and the consequent responses of leading business houses have created a more complex and competitive market place--one that requires each firm to be more adaptive to consumers need and more aggressive at exploiting their unique capabilities to meet those needs. …

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