Wednesday, September 19, 2007

The Retail Debate Widens

Previous posts on this blog (here) discussed the issue of foreign direct investment (FDI) in retail trade. More recently, though, the debate has progressed beyond FDI. The issue has morphed itself into one of organised retail versus unorganised retail. This is evident from the fact that over the last couple of months, organised domestic retailers have been shown the door by some State Governments, prominent among them being Uttar Pradesh, West Bengal and Kerala after protests by the local unorganised players in the industry in the form of mom and pop kirana stores. Curiously enough, some of these State Governments had themselves invited the organized players in the first place to set up operations in their states.

From a legal, regulatory and policy-making perspective, this has important implications. While the FDI debate was largely being driven at the Centre, the domestic organized versus unorganized sector debate has shifted to the states. The State Governments possess licensing powers under the respective Shops and Establishments Acts to allow organized retailers to operate in their state, subject of course to checks and balances in terms of judicial review. The inevitable result of this phenomenon would be fragmented policy making and knee-jerk reactions by states. This would impede uniform policy making on what is becoming an important issue – retailization, which is affecting all emerging economies including India.

Today’s Business Standard carries an editorial that advocates the need for a proper policy intervention on this issue. It says:

“Any policy intervention has to take into account several factors. For one, any change of technology or scale will inevitably result in market shifts, which in turn could yield to downside effects like job losses, whether it is in retailing or in powerlooms replacing handlooms. The policy response in each case has to be to ensure that there are as few difficulties in absorbing the displaced in other parts of the economy - this implies facilities for re-training as well as ensuring that other parts of the economy grow well. Tax breaks for enterprises employing more labour (instead of for those employing more capital) and more labour flexibility for textile/garment firms wanting to expand operations come to mind immediately as some logical policy options. Any social cost-benefit analysis must also include the benefits reaped by millions of customers across the country through lower retail prices as well the benefits to farmers once the substantial wastages in the distribution chain get reduced. The policy responses being planned — a cess on large retailers, or restricting them to the outskirts of cities — are not very desirable because the government is then weighing in against efficiency. While it may be legitimate to try and ensure that small shopkeepers will not get affected, it also means that consumers will pay higher prices and that farmers will not benefit from lowered wastages in the supply chain.”

From this, it appears that what is required is a proper policy study on the impact of organized retail trade in the economy, by way of a cost-benefit analysis. It is only on the basis of the findings of such a study that the Government can frame a clear and coherent policy on organized retail. This would avoid the flip-flop approach on this issue as we have been witnessing over the last few months.
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