Elementary, dear policymaker

Written by Ramrao Mundhe | Updated: Nov 5 2007, 05:48am hrs
If the government restricts the entry of big retailers, both foreign and domestic, to the Indian retail arena, it would be bad economics. Promoting competition in a sector is important for its efficient functioning, sustainable growth through innovation and consumer welfare. It has been evident that encouraging competition by allowing easy entry into and exit from a market is good for growth of that sector in particular and the economy in general.

With their large operations, big retailers benefit from economies of scale. Given healthy competition, each firm tries to make products available at the lowest possible prices. This would induce retailers to buy agricultural products, for example, directly from farmers. For this, they will establish their own chains for such purposes to minimise cost. By thus eliminating middlemen in the supply chain that are responsible for the sectors well-documented inefficiencies, they help the entire sector turn more efficient and competitive. This process will ensure that products are available at lower prices in comparison with what the consumer is paying at her local small retailer at present. The money saved by the consumer would again go into the economy, either in the form of savings (which would probably be invested) or expenditure (this would increase aggregate demand). This, in turn, would spur economic growth.

As the retail sector matures, new possibilities of investment in cold supply chains for agricultural products will be opened by retail agencies to cater to growing market demand. Such cold supply chains will help bridge the current gap between marketable surplus and marketed surplus in the agricultural product sector. Wastage in transit will fall sharply, and prices will even out across large geographies. Given Indias climate, the advantages of modern cold chain infrastructure cant be understated. Of course, the assurance of sustained power supply is critical to the success of cold chain networks. This represents a big challenge for the government.

Many have argued that if the retail sector is opened up to big business, millions of small retailersand estimated 12 million in allwould face unemployment. Since retailing for most small retailers is their only source of income, they might find it hard to recover from such a displacement. Any large change in any sector, technological or otherwise, has its losers and gainers. However, the question is whether the overall gains to the economy and its people are larger than such losses, and the answer in this case is yes.

In the 1980s, when computers were introduced by the government to modernise the economy, trade unions, bank workers and railway employees strongly opposed the change on fears that livelihoods would be lost. Today, the IT sector is the backbone of the modern Indian economy, and the issue was merely one of adjusting to new technology. Modern large-format retail, at its most sophisticated, presents a similar transformation. It is better to adapt to it than resist it.

If we look at the bigger picture of costs and benefits to various stakeholders, it would be clear that the gainers would be farmers, who would welcome disintermediation and better renumeration for their produce, which would induce them to invest more in their farming operations. Besides, big retailers would help develop Indias processed foods industry, which would create millions of new jobs. In general, any sector that undergoes such thorough modernisation tends to have a ripple effect in terms of allied/secondary services and jobs.

All said, it is now up to Indias policymakers to decide whether the interests of 12 million retailers or the welfare of over a billion consumers and a huge number of farmers. Not to be ignored is the fact that the new retail revolution is expected to generate around 2 million new jobs in just a couple of years, and many more over time. The employment generated in agro-based industries could be still higher. A boost to agricultural growth will not only alleviate poverty but also increase demand for various industrial goods, which will further generate secondary employment.

Yet, the myopia of our politicians, vested interests and lack of initiative have been holding this retail revolution back. Many states have failed to follow the guidelines laid down by the model APMC Act, which encourages private players to buy agricultural products directly from farmers. Bihar has scrapped the Act, and the UP government has recently withdrawn the agriculture investment policy under which private players could directly buy products from farmers. Such inconsistency in policies will only discourage investors and hurt regional development. Political leaders, who speak about alleviating poverty through development, need to demonstrate their support for a long-term vision that involves creating an efficient and effective regulatory framework for the retail sector.

The writer is an assistant policy analyst with Cuts Centre for Competition, Investment and Economic Regulation, Jaipur, and can be reached at rm6@cuts.org. These are his personal views