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Key-Challenges in Indian Retail Market

Key-Challenges in Indian Retail Market

Given the robust growth observed in various retail segments, the current scenario of the Indian retail sector is certainly bright and promising. However, there are number of issues which need attention:

1. Foreign Direct Investment (FDI)

The most vital ongoing policy issue in the retail sector is one of the foreign direct investment (FDI). Prior to 1997, there were no regulations restricting the entry of foreign players. The two major companies, namely Nanz and Spencers were granted permission to sell products directly to customers. In 1997, it was decided that FDI would not be allowed for mere trading as it would lead to the outflow of foreign exchange, drive out the unorganised retailers from business and increase unemployment. Recently, the government has notified the guidelines for FDI in single brand by stating that 51 per cent FDI would be allowed only in those single brand products that are branded during manufacturing and sold under the same brand internationally. (At present the brands are available through a network of local franchisees.) This rules out third-party sourcing of the kind that, say, Bata does in the case of shoes. The rationale behind this move is generating greater employment and encouraging multinationals to set up manufacturing bases in India . This move by the government has raised number of dubious issues like adverse impact on small  hops

(kirana stores) in terms of possible loss of jobs in unorganised retail sector and lack of business coupled with reduced requirement of middlemen. According to FDI proponents, some of the major benefits of opening up the retail sector are: Employment generation, Competitive environment resulting in price and quality advantage to consumers, Expansion of manufacturing base and foreign investment, Reward to farmers if direct purchase of produce from farmers and, Better standard of living to meet rising aspiration levels of middle and higher-middle income class.

Given these, the FDI in retail sector, is expected to benefit the economy considerably. The apprehensions raised by some of the industry experts regarding the job displacement is expected to be compensated by creation of jobs by allied sectors such as food-processing industries and there is no harm in jobs moving from one sub-segment to another sub-segment. It is said that the retail industry has the potential to create 8 million jobs. Moreover, as far as the small shops are concerned, the advantage of convenience that they hold over the far-located big malls will always remain. Similarly, personal relations with the small shop owners had been found to be advantageous over the period of time. What is more, comparing internationally, almost all major developed and developing countries have allowed FDI, whether with restrictions such as minimum capital requirements, sourcing conditions etc or with FDI in a phased manner. For e.g. China has opened retail sector partially in 1992 and allowed 100 per cent FDI only in 2004. Thus, for a decade, it allowed only one foreign outlet per province. It seems that the government of

India too, can also open the retail sector in a phased manner. Instead of over-protecting ‘mom-and-pop’ stores (which are fewer than both producers and consumers), especially when they are not at risk in terms of survival, the government may continue with allowing FDI in a phased manner.

2. Unbalanced Growth

Most of the modern retail opportunities are in the urban areas and the rural retail potential has remained untapped. While there is a large potential in rural areas, fragmentation and cost of market access are real deterrents. No doubt that rural retailing is gradually gaining grounds with the explorations by the corporates like ITC’s Choupal Sagar (rural hypermarket), HLL’s Shakthi and Mahamaza. However, the pace at which the retail sector has been expanding in rural areas should have been much more faster. The higher purchasing power in rural and semi-urban areas has significantly modified peoples’ lifestyle; for e.g. the sachet phenomenon is a thought to reach to the bottom of the pyramid. Lot of people in rural India are just not willing to buy a whole bottle of shampoo, but that doesn’t mean they won’t buy it. Thus, the key is in slicing the relevant customer segments and developing appropriate formats. If the specific needs of consumers are recognised, there would be a considerable market expansion, which would divert a part of retail business to rural areas and help in reducing rural-urban imbalance.

About the Author

R.YUVARANI M.Phil SCHOLAR PERIYAR UNIVERSITY, SALEM-11

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