PEACEFUL CO-EXISTENCE OF SMALL AND BIG RETAIL DEBATED AT A

UNCLAS SECTION 01 OF 03 MUMBAI 000566 SENSITIVE SIPDIS USDA PASS FAS/OCRA/HIGGISTON PASS USDA/FAS FOR OCRA/CARVER/BEAN/RIKER PASS TO USTR FOR AADLER/CLILIENFELD E.O. 12958: N/A TAGS: BTIO EAGR ECON EINV IN SUBJECT: PEACEFUL CO-EXISTENCE OF SMALL AND BIG RETAIL DEBATED AT A CONFERENCE IN MUMBAI REF: MUMBAI 25 ¶1. (U) Summary: At a Mumbai conference on the retail sector in India, proponents and opponents of foreign and corporate investment in retail debated the future of small and big retail. Much of the discussion centered around the Indian Council for Research on International Economic Relations' (ICRIER) study on the retail sector which found that the growth of organized retailing will cause a temporary decline in sales and profits of small retailers, but is necessary to increase productivity in agriculture and industry. While no longer as politically sensitive, the issue still evokes strong reactions from those who fear the loss of jobs and income in India's disparate unorganized retail sector. While no consensus is likely to emerge, it is clear that organized retail will slowly take up an increasing share of the retail market, especially in urban areas. End Summary. ICRIER Retail Study Focal Point of Discussion -------------- ¶2. (U) At a conference on the Indian retail sector organized by the Asia Society on November 5, Nirupama Soundararajan, Research Associate of the Indian Council for Research on International Economic Relations (ICRIER),explained that the basic finding of the ICRIER study on the impact of the future growth of organized (large scale) retailing -- domestic and foreign -- on the unorganized retail sector is that small retailers will face a decline in sales and profit due to the growth of big retailers, but that this effect will weaken over time. The ICRIER report predicted that the Indian retail sector is likely to grow at 13 percent until 2011-12, whereupon the organized retail sector would grow at 45 percent per annum from 2012-2017, while unorganized retail will only grow by 10 percent. The report also said that left alone, the unorganized sector -- which accounts for 95 percent of all retail in India -- will emerge as a "major bottleneck to raising productivity in both agriculture and industry." (Note: The Indian government commissioned ICRIER to conduct a study on the impact of organized retailing on the unorganized retail sector. The ICRIER study surveyed 2020 unorganized retailers across 10 cities, 1318 consumers, 100 intermediaries, and 197 farmers. The report was released in May ¶2008. Opponents of organized retail denounced the study and its recommendations, arguing that it was not impartial nor representative. End Note). ¶3. (U) Vinod Shetty of FDI Watch Campaign, which agitates against both domestic and foreign organized retail, pointed out that the unorganized retail and small trade sector employs 40-50 million people; 50,000 traders operate at the Agricultural Produce and Marketing Committee (APMC) markets, which mainly cater to the unorganized retail sector. These people have no "safety net" and Shetty warned that it would be "disastrous" if their jobs or livelihood are threatened with growth in corporate investment in retail -- whether domestic or foreign -- which he claimed did not bring in any new technology or new products. ¶4. (U) G. Chandrashekhar, the Associate Editor of the Hindu Business Line, was less pessimistic than Shetty, and argued that "the skewed income distribution in India creates a market and consumer for commodities at every price point." He believes that 65 percent of India's population of 1 billion plus people will continue to shop in small retail outlets even 10 years hence, while 60-65 million families with rising purchasing power will shop at organized retail outlets which will be confined to urban centers. So, there is no conflict between organized and unorganized retail, he argued. According to Chandrashekhar, the unorganized retail sector has two options: to compete with organized retail by offering more efficient services or to migrate to smaller cities and towns where organized retail is either absent or less prominent. ¶5. (U) ICRIER's Soundararajan agreed with Chandrashekhar and added that Indian consumers may go to big retailers to avail of discounts and free offers to purchase their monthly staples, but will still go to the small retailer in their neighborhood to buy items of daily consumption. She pointed out that the key strength of small retailers is the personal relationship with consumers and service offerings like home delivery, proximity to the consumer, and the chance to bargain, which cannot be matched by big retailers. Several small retailers are also modernizing MUMBAI 00000566 002 OF 003 their outlets by installing air conditioning and modern displays, and now accept credit cards. She noted that the ICRIER study revealed that small retailers want to stay and compete with big retail, but ask for a "level playing field." Contrary to expectations that big retail would swallow small retail, the study showed that only 4.7 percent of traditional retailers registered closure and only 1.7 percent of closure was due to the presence of organized retail in the same area. Many small retailers who had closed shop cited competition from other small retailers as the reason for closure. Farmers: True Beneficiaries of Big Retail? -------------- ¶6. (U) Shetty maintained that the amendment in the APMC act to allow organized retailers to procure agricultural produce directly from the farmers by setting up private markets unfairly competes with the existing APMC markets. (Note: The APMC Act was created to safeguard farmers from unscrupulous middlemen. Traders are required to buy only from the APMC market and pay a tax to the APMC for an operating license. The APMC Act has been amended in several states to allow large retailers to set up their own market yards and procure directly from the farmers. End Note). Singhvi, a trader who represents 750 trade associations, argued that like big retailers, traders should also be allowed to purchase directly from farmers. Chandrashekhar agreed with Singhvi and said that the amended APMC act creates an "artificial distinction" between an organized retailer acting as a retailer and acting as a trader. ¶7. (U) Shetty also argued that big retail would slowly engage in predatory pricing both at farm procurement stage and at the consumer stage of the business and wipe out small retail. Chandrasekhar pointed out that setting up big retail outlets in cities entailed the purchase of costly real estate and high operating costs. Big retail cannot recoup these costs from the consumers who are "price sensitive". So, the only way for big retailers to recoup costs is to buy goods from the farmers at lower prices. The belief that big retail offers better prices to small and marginal farmers is a myth and is not sustainable, he argued. Big retail cannot afford to give better prices to the farmers as compared to small traders. But, he agreed that allowing direct procurement by big retailers has improved the marketability of agricultural produce. A member of the audience, who was a farmer by profession, agreed that farmers wanted alternative buyers and did not want to be at the mercy of the APMC. ¶8. (U) Soundararajan acknowledged that farmers need an alternative way to sell their produce aside from APMC markets, given the pitiful and inadequate infrastructure at these markets. For this reason, the ICRIER report recommended that the APMC market be modernized, but not shut, and that the competition commission's role should be strengthened to prevent predatory pricing. She said that the ICRIER study showed that farmers gained substantially from the option of selling directly to organized retail. Direct procurement by big retail decreased transaction costs for the farmers and saved them from paying a ten percent commission to agents at the APMC market. The study showed that the farmer got only a 25 percent increase in price realization by selling directly to the organized retailer who largely maintained APMC-parity pricing. However, decreased transaction costs and savings in the commission fee secured the farmers a 60 percent increase in profit realization, according to the ICRIER study. Organized retail purchases only good quality produce from the farmers while produce of diverse grades and qualities is accepted at the APMC market. Farmers therefore sell the best part of their produce to organized retailers and the rest at the APMC market. The farmer is a "wise businessman" and makes sound business decisions, she emphasized. Comment: -------------- ¶9. (SBU) The discussion on the retail sector, like others in the past, focused on the hotly-debated issue of the impact of foreign and corporate investment on small retailers and ignored more pressing issues like the creation of supply chain infrastructure. Experts estimate that over a third of India's agricultural produce is spoiled or wasted before it reaches the MUMBAI 00000566 003 OF 003 retailer's shelves due to inadequate storage, transportation, and distribution infrastructure. Preventing this from happening by investing in supply chain infrastructure in a country with an enormous population to feed and support should be more important than who delivers the food to the consumer. The political sensitivity of this issue has declined since its peak last year, and many smaller retailers and trading associations have begun to accept the reality of new competition. However, the issue still evokes strong reactions from those who fear the loss of jobs and income in India's disparate unorganized retail sector. While no consensus is likely to emerge, it is clear that organized retail will slowly take up an increasing share of the retail market, especially in urban areas. End Comment. FOLMSBEE