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Neha Kaushik

The entry of large foreign retailers is expected to trigger the next big change in consumer patterns in India.

A spate of reports on the Indian retail sector suggest that the presence of foreign investment in this sector could prove to be a catalyst for exponential future growth.

The Economist Intelligence Unit (EIU) country briefing on India, 2005, estimates that the retail market in India will grow from $394 billion in 2005 to $608.9 billion in 2009. In fact, KPMG in a recent study titled Consumer Markets in India, says that organised retail is expected to grow at a higher rate than the gross domestic product in the next five years, driven by changing lifestyles, strong income growth and favourable demographic patterns. According to the EIU, India currently has more than five million retail outlets, of which 96 per cent is smaller than 500 sq ft. But this scenario is changing fast. Malls are increasing in number in large cities, with plans for 150 new shopping malls by 2008.

Meanwhile, according to KPMG the next leap in consumer market growth will be spearheaded by the changing dynamics of the retail sector. "Companies expect that the next cycle of change in Indian consumer markets will be the arrival of foreign players in consumer retailing."

No wonder then that several global players, including the French retail giant Carrefour, Wal-Mart, 7-Eleven and Auchan want to enter India if the restriction on FDI is removed.

In fact, PricewaterhouseCoopers has ranked India among the six most-attractive destinations for investment in retailing alongside China, Turkey, Thailand, Malaysia and Hungary.

The Indian Council for Research on International Economic Relations (ICRIER) in a recent study recommended opening up retail to FDI in a phased manner over a 3-5 year period with at least 49 per cent FDI allowed initially.

The study dismisses fears over loss of level-playing field, stating that foreign investment will actually help existing retailers on several fronts. Many large domestic retailers feel that valuations at present are not attractive enough to allow foreign investment and the Government should allow the sector to `mature' first.

The study also finds that 48 per cent of the unorganised retailers feel that the impact of foreign retailers on their business would be the same as that of domestic organised retailers.

The study also advocates allowing FDI in retailing as it would speed up the growth of organised formats in the country and lead to lower prices, improved quality and greater choice of products. ICRIER adds that the slow growth of organised retailing is slowing down the development of allied sectors such as the food processing industry, and textile manufacturing.

KPMG finds that a partial opening up of the retail sector may not attract large-sized foreign retailers. In fact, two major multinational retail chains are believed to have indicated that they would not like to enter India unless they can own at least 51 per cent equity. The higher their equity, the easier it will be for them to expand.

The KPMG report also says that retailing would spread its wings to rural areas as well. "The Indian market is evolving dynamically and there is hidden consumption power in the low-income rural areas that offers considerable opportunities for organised retailers in the kind of rural territories that many companies have failed to address. The retail growth therein is expected to be double-digit if infrastructure allows consumer companies to reach new markets at reasonable costs." With growth in disposable incomes, the Indian consumer is emerging as more trend-conscious with the development of modern urban lifestyles, the KPMG report says. In fact, recent studies have found that as Indians have grown richer, they have begun to spend more on vehicles, phones and eating out in restaurants. The KPMG report finds that Indian retailing is gradually shifting from total reliance on countless small family-run stores towards larger, more formal retail outlets. It adds that the food and beverages segment is an emerging growth area.

Similarly, the gems and jewellery market account for a high proportion of total retail spend. However, for foreign retailers, concerns such as cost and availability of retail space, FDI controls, `unorganised' sector competition need to be addressed, the report says.

The distribution network also needs to be strengthened. In fact, most of the companies surveyed felt that the large geographical spread is a problem and so are the logistics of connecting various regions. "India is not like one country, it is like 25 different countries," one retailer said. Taxation barriers between states also hinder efficient regional distribution.

These may not be the most critical roadblocks for foreign retailers though. With the Left parties showing no signs of relenting on the issue of FDI in retail, the entry of these players now remains on hold.

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