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

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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

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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

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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