Corner shops on the ropes

Traditional shopkeepers are afraid for their futures as foreign retail chains are pushing the government to ease its investment restrictions so they can cash in on India's promising retail sector.

In his tiny, dimly lit grocery shop, Babulal Borana stands behind a counter stacked with grimy plastic bottles of sweets and sacks of rice, lentils and various spices. These days, Mr Borana, 53, lights a sweet-smelling incense stick daily in front of a figure of Laxmi, the Indian goddess of wealth, praying for the survival of his business. His store in a decrepit building had done brisk business for more than 20 years in this western city not far from Mumbai.

Four years ago, a neon-lit, airconditioned supermarket owned by Reliance Retail, the retail wing of the billionaire Mukesh Ambani's Reliance Industries, opened just a few metres from his shop. The large, modern store has shrunk his earnings by a quarter. "It's difficult competing with them," says Mr Borana, who has never attended school. "How will I survive if more such stores open up?" As India's economy grows rapidly, one of the most bitter debates is whether the Indian government should allow the retail giants to threaten the nation's estimated 15 million family-run neighbourhood operations known in Hindi as kirana stores.

More than 200 million consumers depend on kirana stores. These small businesses comprise about 97 per cent of India's retail market, the Federation of Indian Chambers of Commerce and Industries says. India's retail sector is one of the fastest growing in the world. Total sales are expected to grow from US$353 billion (Dh1.29 trillion) this year to $543.2bn by 2014, the market research company Business Monitor International says.

In June last year, the consultancy AT Kearney ranked India as the most attractive nation for retail investment among 30 emerging markets for the fourth time in five years. India has already attracted several foreign retail giants such as Wal-Mart, Carrefour and Tesco. Wal-Mart, which runs wholesale operations in India in an equal partnership with Bharti Enterprises, plans to open between 10 and 12 wholesale stores in the country within three years.

Foreign companies such as Wal-Mart are only allowed to operate in the country through franchise tie-ups with local partners. The retail sector remains heavily regulated with strict limits on foreign investment. Foreign investors are allowed to own only up to 51 per cent of chains that sell only a single brand of goods, such as Gucci. But foreign companies have for years been pushing for an easing of investment rules. The government may finally relent.

It is considering a proposal to allow 51 per cent foreign ownership of retailers that sell more than a single brand of products. This move will enable foreign companies to sell directly to Indian consumers. Some, such as Wal-Mart, already have wholesale operations that serve other businesses. The liberalisation of the retail sector is expected to attract huge capital infusion that could help expand the economy and bridge India's fiscal deficit, which recently touched a 16-year high of 6.9 per cent of the GDP.

The more efficient retail sector promised by the foreign companies is expected to help slow India's rising food price inflation by curbing the waste that is common at the small stores and the distribution networks that serve them. But the move is a political hot potato. Some fear this move could drastically reduce the number of traditional traders and shopkeepers, an unorganised workforce of 40 million.

This sector is the second-largest employer in India after agriculture. Only 4 per cent of traditional retailers have shops larger than 46 square metres, and only 12 per cent of them have access to institutionalised credit. About 45 per cent of unorganised retail business in India is owned by the lower rungs of the country's social caste system, according to a 1998 economic census by India's ministry of statistics and programme implementation.

It is feared that opening up the retail sector to foreign players could create widespread social unrest as millions of poor people lose their livelihoods. "The large retailers will come with predatory pricing, excellent warehousing strengths and big cash," says Nirmala Sitharaman, a spokeswoman for the Bharatiya Janata Party. "Have we any scheme to protect our small and medium operators? Without a level playing field, we are opening the floodgates for our unorganised work force to be inundated and eventually to be washed away."

But the proponents of foreign investment say the move will modernise India's retail sector and benefit tens of millions. New western-style stores will offer consumers wide aisles, refrigerated cases, uniformed workers and a large variety of products, neatly packaged, accurately weighed and economically priced. "Can we delay the growth of our children, curb the aspirations of the youth, go back to the days of Fiats and Ambassadors, fly only Indian Airlines?" says BS Nagesh, the vice chairman of Shoppers Stop, a leading domestic chain of department stores.

"Rising aspirations … create demand for new products and new services. The assortment required to fulfil these desires cannot be fitted into a small … store." India's single-brand retail sector attracted investment of $194.6 million between April 2006 and March this year, according to the department of industrial policy and promotion (DIPP). Mr Nagesh says India's retail sector needs far more foreign capital in order to modernise.

"We should open up the industry at the earliest so that modern retail can support development of the total retail ecosystem," he says. "India can achieve high growth only if modern retail is 30 to 40 per cent of the retail sector and becomes a primary driver of growth and consumption. "The real question, therefore, is not whether we need to allow modern retail to grow or the current retailers to modernise, but how to allow flow of capital to help modernise retail."

Considering the sensitivity of this move, DIPP this month recommended placing certain conditions on the retail chains funded by foreign investment. It has suggested foreign investment in the retail sector should only be allowed in cities with populations of more than 1 million people. It has also proposed at least 50 per cent jobs at such chains to be reserved for local residents. The government says it is considering the recommendations.

Some observers say the rapid growth of India's middle class means there will be opportunities for traditional and modern retail. The middle class will swell by more than 10 times from 50 million in 2007 to 583 million by 2025, according to a 2007 study by the McKinsey Global Institute, an independent research group within the consultancy McKinsey. India's 300 million-strong middle class is largely urban. Its members have an annual income of between $4,500 and $22,000, according to the National Council for Applied Economic Research, a think tank in New Delhi.

By 2025, India is expected to emerge as the fifth-largest consumer market, moving up from 12th position in 2007, the council said. In small localities, the infrastructure that retailers such as Mr Borana enjoy cannot be replicated by modern retailers. He says his business is able to reach small neighbourhoods and housing societies that are not attracted by Reliance Retail's advertising on local radio and in glossy print; promotion that shops like his cannot afford.

Mr Nagesh says if the doors are opened to foreign investment, modern retailers will have to develop a close collaboration with the small retailers. And their model of customer service will help the small retailers improve their own productivity and efficiency. "In both the cases, small retailers will benefit," he says. "By curbing [foreign investment], we are actually hurting the small retailers."