Retail Still in the Cold

Janees Reghelini , Retail Today
Mumbai, April 2012

Once again the Central Government doesn’t seem to have listened to retailers’ calls. Janees Reghelini analyses this year’s budget.

Modern retail might be growing fast, but it is now starting to face considerably more obstacles than it did in its nascence. It is also having a much wider impact on India’s economy.

“Traditionally, retail has been known to be one of the largest employment generators in the world. For a country like India this is the biggest advantage. Policy changes by the government, for example, will open up strategic investment opportunities for global retailers. This, along with spurring employment creation, will have a significant positive impact on all stakeholders and will provide a necessary fillip to the growth of the Indian economy on the whole,” says Rajendra Kalkar, senior centre director, High Street Phoenix.

Having great expectation from the Union Budget 2012-13, retailers voiced a number of demands they feel would help.

One of the most obvious demands was granting industry status, although it wasn’t addressed once again.

Contributing to over 10 per cent of the country’s GDP, Indian retail is India’s second largest employer after agriculture. With an increasing market demand, the sector is expected to grow at a pace of 25 to 30 per cent annually. Providing industry status would be the first basic step to reform the sector, politically.

Kalkar feels retail would benefit from having a ministry for a number of reasons, not least because its role has changed profoundly over the last few years. “Today, large-scale retailers are no longer perceived as mere sellers of products. A modern, advanced retailer must be able to innovate and enrich the value of its offering throughout its network, integrating more goods and services under an umbrella brand that increases distinctiveness and loyalty. In order to do so, it is necessary to have an entrepreneurial ability orientated
Retail still in the cold towards the evolution of demand, a socially-focused company mission, and also a legislative landscape that allows for this innovation process,” he says

“The present value of the Indian retail market is estimated by the India Retail Report to be around $500 billion. For consumption of this size, a ministry is entirely justified for us.”

CHALLENGES FACING INDIAN RETAIL INDUSTRY
• Tax structure in India favors small retail business
• Lack of adequate infrastructure facilities
• High cost of real estate
• Dissimilarity in consumer groups
• Restrictions in FDI
• Shortage of retail study options
• Shortage of trained manpower
• Low retail management skillretail in India.

The advantages of such a status include greater focus on retail development, fiscal incentives for the industry, an availability of organised financing and the establishment of integrated insurance norms. Currently, retail businesses are answerable to a number of authorities, from local municipalities to a hotchpotch of central ministries — Consumer Affairs, Commerce, Urban Development and Human Resource Development, to name a few. “Due to the nature of the sector, while the accountability to many authorities will remain, many of the larger retailers are lobbying to be taken under the wing of one ministry that can be a single source of cohesive policy and also champion the sector’s cause, similar to other significant business sectors, such as the Ministry of Commerce Industry, Mining, Textiles and Telecommunications,” says Devangshu Dutta, CEO of Third Eyesight.

“We must provide retailers with the necessary incentive to improve their overall standards and practices by recognising retail as an industry. This also means encouraging large companies with large investments, so they will be able to bring new methods of working into the market much more quickly.”

Dutta firmly believes that, if given due attention and supported by a planning and policy infrastructure, organised retail could become an unexpected source of widespread economic benefit.

Indian retailers were expecting much more by way of GST from the Union Budget 2012; they had hoped to see definite plans for the roll-out of a formal GST regime. But no significant announcements were made on the FDI and GST fronts, although it was announced that efforts were underway to arrive at a consensus on FDI in multi-brand retail.

Guruduth Prabhu of the Shopping Centres Association of India (SCAI) has been particularly vocal about the contents of the Budget: “It was insignificant from a shopping centre point of view. The industry’s much awaited FDI in multi-brand retail was not even considered as the government is yet to arrive at a consensus.”

So what will it take to convince the government to open up FDI in multi-brand retail? There is a dire need to find a catalyst to speed up this process. Can agencies like SCAI play a role to make this happen?

“As a body, SCAI has been attempting to meet with ministers and convince them of the advantages of retail, but it is a process that is so time consuming. As an association, we will be attempting to motivate relevant ministries and educating them about organised retail, and particularly retail real estate, as a future driver in terms of employment opportunities and the growth of economy,” Prabhu says.

Shopping centres are an important asset class for investors and developers who believe in returns over a long-term investment. Presently real estate itself is trying to motivate the government for recognition. “We are also approaching the government for separate status for the retail real estate industry as we believe that this sector will be one of the major drivers of economy. Secondly, the sector feels that shopping centres should be considered as part of urban infrastructure. Opening up of FDI will have a positive impact by opening up a number of avenues for both retail and real estate. We urgently need a catalyst, and any directives by the Government to assist with the inflow of international retailers and brands into India would be welcome,” Prabhu says

Agreeing with Prabhu, Dutta also believes that we must view retail as part of urban and social infrastructure, and it needs adequate planning, support and guidance for growth, rather than being treated as a “trading activity”, an afterthought in the urban planning of the last few decades. “It should also not be overly consolidated. A healthy mix is needed between the large and the small, between local, regional, national and international,” he insists, adding that opening up FDI will help bring more international brands into the country to fill the ample retail space that India has on offer and plug the gap made by a shortage of Indian-grown brands.

The budget might have fully exempted branded silver jewellery from excise duty but it has still imposed a four-per cent import duty on gold bars and ore, and 10 per cent on platinum and coloured gems.

“This has led to a setback in the jewellery industry and the jewellers association has planned a three-day nationwide bandh to protest against new excise, customs duty and consumer tax on gold imports,” says Subhash Verma, CEO of Aerens Gold Souk Group. “Also, the downside of this increase in custom duty is that it will lead to the trafficking of gold through illegal channels and will reduce demand among consumers, who will have to pay more.”

It is important to consider both the positive and the negative aspects of the impact of FDI, says Ian Douglas Watt, director of Pioneer Property Zone. “Regrettably, most of the discussion revolves around the perceived negative aspects, rather than the opportunities that exist for both local and foreign retailers by embracing it as a positive contribution toward India becoming a major player in the retail space internationally.”

Comparing retail to the Indian cricket team, Watt says that to be considered one of the best in the world, it is important to look at developing strengths overseas. The cricket team cannot only play under a protected umbrella locally where wickets are prepared to suit their strength and nullify the strength of the competing teams. They need to master all conditions, and that is also the case for retail.

“Given the size of the Indian population and their aspirations, it needs to be recognised that the Indian retailer has to plan to be a major player in world markets in the future. Right now, because the retail industry has not had the opportunities to become globally competitive, it is at a disadvantage as it really does not have a full understanding of the standards of the other players,” he says.

The sheer force of weight once this happens will mean that Indian companies will have the potential to become significant players internationally, even if this might not be immediately obvious as there is just so much to do to meet local needs. Every international retailer that enters the Indian market creates an employment opportunity for local Indians and the demand for their goods will only be as much as the Indian consumer sees as the need.

It is important to note that by preventing international players from having a presence in India will only compel them to establish a rather stronger online presence to meet Indian demands. This will eventually place them at an advantage as they will have established a presence and developed a customer base without even having entered the country.

“They scrape off the cream with very little cost whereas if they were to establish a physical presence, they would have to do so with local conditions influencing how they operate,” adds Watt.

Kalkar says: “Reforming the corporate tax system is an international innovation we should look at. Retailers pay the highest effective tax rate of any industry. Simplifying the tax code will ease the industry’s tax burden so retailers can grow.”

He continues to address the supply chain as another huge challenge. “The government must support efforts to streamline the transportation of goods from manufacturer to retailer to customer. The industry opposes regulatory proposals that lengthen the supply chain, raise transportation costs, or undermine the rapid delivery of affordable products.”

On the government’s part, harmonisation of taxes and tarriffs across the country is another area that needs immediate attention, says Dutta. “We might be one nation, but we are not yet one economically integrated zone. This leads to fragmentation of manufacturing and distribution, inefficiencies and additional supply chain costs that are entirely avoidable.”

By the next general election in 2014, retailers hope that the scenario would have improved significantly.

Payal Chopra, director of PS Srijan Group, spells out his perfect-world scenario for 2014: “The ministry will understand the importance of the retail industry and the advantages of a regulated sector in retail. Retailers and retail developers will have a healthy understanding and will work together in bringing an organised set-up to India. Small- and medium-sized players will receive assistance from a ministry so that their presence is not eliminated; and big chains will also receive incentives so investment can flow.”

Recently, Tier- II and III cities have become major drivers for the progress of retail. “It is for sure that these cities offer major potential for more retail giants by 2014, not least with their low lease rentals compared to the metro cities; they also require lower overhead costs and offer greater availability of manpower at much lower cost,” states L.V.S Rajasekhar, CEO of LEPL. “One can only hope that by the next general elections, Indian retail will be a stronger entity by itself and work towards ensuring that all their current demands are met by then.”