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Retail FDI to raise tax revenues, control leakages: Arvind Singhal

Aditi Phadnis  |  New Delhi 

Arvind Singhal, an expert on the retail sector and a patriotic Indian, tells Aditi Phadnis India must look at foreign direct investment in multi-brand retail objectively

So, what did you think of the debate on foreign direct investment (FDI) in multi-brand retail in Parliament?
With greatest respect, I have to say I was appalled by the compromises with the truth that I heard the Bharatiya Janata Party (BJP) speakers in Parliament make; and, the exaggerated statements by the Congress speakers.

Just to highlight one each: The leader of the Opposition claimed that will claim the “rozi” of 40 million and the “roti” of 200 million. Does this mean 40 million are engaged in the retail trade in India? The total number of households in India is 220 million. Around 60 per cent are engaged in farming. In fact, independent shops number no more than 12 to 15 million.

And then, this whole issue of FDI. How is FDI different from the so-called damage being done to Indian retail by Westside, Reliance Fresh and RPG? Has there been any job loss because of these large format stores? FDI only means the financial structure of the stores will change. Sure, if Parliament wants, it can close down the stores started by Tatas and Birlas. Then, you might as well close India down.

I am afraid I have also lost respect for the government, which has no business spreading un-truths. What linkage will Walmart have with farmers? The problems of Indian agriculture are quite different from the solutions offered by organised retail. Do we seriously expect foreign investors to come to India and solve the problems of landless farmers? Are we expecting that cotton farmers in Maharashtra will stop dying because India will get FDI in retail?
The debate was an exercise in absurdity. As an Indian, I was deeply disappointed.

There are two fears that have been expressed in the FDI debate in Parliament: one that there will be widespread loss of jobs and impoverishment if we permit FDI in retail; and two, the Indian government will get nothing out of it. What do you think?

A study done by Technopak, the management consulting firm that I head, suggests FDI in retail will not lead to any loss of jobs. On the contrary, an independent retail sector will create an additional nine million jobs by 2021. Simultaneously, FDI in retail will also help corporatised retail to create in excess of 2.5 million jobs through direct employment alone, by 2021. E-tailing – by itself – has the potential to create one million jobs. These additions will increase the total employment in the retail sector from the current 23 million to 35 million by 2021.

Second, will increase tax revenues (in the form of value-added tax, etc) nearly fivefold — from the current annual $3.4 billion to $16.2 billion, by 2021. This incremental revenue will directly accrue to the coffers of state governments.

Can you set out the context of FDI in retail in India?
India has witnessed sustained growth in merchandise retail in the last decade (2002-2012). Going forward, despite the economic uncertainty and the slowdown in the country’s economy, the growth of merchandise retail will continue to grow sustainably. The main reason for this growth is the fact that India’s gross domestic product (GDP) will continue to grow at a sustained rate of around six per cent in the next decade. This growth in GDP translates to growing consumption in Indian households, which in turn will be manifested as growth of merchandise retail through an increasing need for food, apparel and other targets of discretionary spending.

Second, urban India’s share in merchandise retail will grow from the current 48 per cent in 2012 to nearly 56 per cent by 2021. Ten years ago, this contribution was around 40 per cent. Going forward, an increasing share of incremental merchandise retail (as discussed in the previous point) will come from urban and semi-urban centres. This inference is more an outcome of the rapid urbanisation that India has witnessed in the past two decades of sustained growth.

Since 1991, India has witnessed the emergence of urban centres with a massive scale of consumption. To put things in perspective, there are 53 Indian cities with populations in excess of one million today. In 1991, there were 23 such cities.

Apart from these urban consumption centres, urbanisation of India will also subsume towns and clusters, where the majority (more than 50 per cent) of households will no longer be dependent on agriculture.

The third – and the most – crucial is the fact that corporatised retail’s share of total merchandise retail will at best grow from the current seven per cent to 20 per cent by 2021. The retail sector started to see private investments from both Indian and international players (to such extent as they were allowed) in the past 15 years. In spite of these spirited efforts, Indian corporatised retailers have managed to garner a mere seven per cent of the Indian retail pie. Therefore, 93 per cent of the retail sector still comprises independent retail, and is fragmented. This is despite the fact that India’s GDP grew at 8.5 per cent.

I believe that the share of corporatised retail – in a realistic scenario – will grow to no more than 20 per cent of the total merchandise retail pie by 2021.

Given the pressures of inflation and uncertainty in the world economy, a sustained real growth exceeding six per cent over 10 years is challenging. Other reasons for this estimate have largely to do with the structural issues that adversely affect the value chain of the retail sector. This relates to issues of real estate, sourcing and distribution.

What about fears of loss of employment?
India is home to around 15 million points of sale, or shops — of which a majority are run as standalone entities owned and operated by members of the same family. These “independent retail” shops, therefore, provide employment to family members and paid employees. Almost all the paid employees in these shops are part of an informal workforce and have no guaranteed social security cover, minimum wage or fixed working hours. Employment in this segment averages around 1.5 employees per shop.

On the other hand, employment in corporatised retail comprises employees working on the shop floor, clerks manning the billing counters, security guards and employees in central/corporatised functions.

Figures show that employment in corporatised retail has not grown at the cost of independent retail. In fact, independent retail has added four million jobs in the last decade. In the next decade, while corporatised retail will add another 2.7 million jobs, independent retail will create nine million more jobs.

Hence, the argument that FDI in retail will lead to job losses in independent retail is flawed. Equally flawed is the argument that FDI in retail will create many new jobs in corporatised retail. It is true that opening up the retail sector will definitely create new jobs in corporatised retail, but it will be limited by corporatised retail’s inability to grow its share in total merchandise retail.

What about its impact on inflation?
Food has the largest impact on consumer price inflation. This is validated by the fact that 70 per cent of merchandise retailing today comprises food and groceries. Therefore, mapping the share of corporatised retail in dispensing food merchandise will give an objective picture of corporatised retail’s ability (present and future) to tame inflation.

For simplicity, merchandise retail is broadly classified into three categories — food and groceries, apparel, and others (jewellery and watches, electronics, home improvement, pharmacy, footwear, etc).

While 70 per cent of total merchandise retail comprises food and groceries, only three per cent of food and groceries is retailed through corporatised retail. This is not going to change much in the coming decade. While corporatised retail’s share will register an impressive growth in other categories, food and groceries will prove to be a challenge. By 2021, the share of corporatised retail in food and groceries retail will grow by a mere two percentage points, to around five per cent. This is largely to do with the market structure on the supply side of the Indian economy. This market structure will not allow inter-state movement of goods, tax structures, and inadequate capacities in the food supply chain will act as the chief barriers to this integration.

The inability of corporatised retail to grow its share in food and groceries retail will, therefore, curtail its firepower in achieving the intended objective of taming inflation.

In your opinion, what is the biggest advantage to the government?
There is a positive relationship between the increase in tax receipts and the increasing share of corporatised retail. Most retail transactions conducted in around 15 million shops in India are in cash. This provides a significant leeway for a parallel economy to thrive. There are tax (VAT) leakages via under-invoicing or non-reportage of sales. The structure of independent retail also provides enabling conditions for the trade of spurious and counterfeit goods.

With an increasing share of corporatised retail, the probability of such leakages diminishes and the certainty of tax receipts increases.

First Published: Sun, December 09 2012. 00:02 IST