by: Pratyush Patari
Early next year, the American retail giant WalMart, will open its first store in India in a joint venture with Indian telecom company Bharti Enterprises. This is likely to herald a new era in both Indian and global retail, as external retail of this scale enters India for the first time, and international retail takes yet another step towards tapping into emerging markets.
India’s retail sector is arguably one of the most promising investment opportunities in the world. A booming economy, inflating consumer confidence, rising population and most importantly rising per capita income levels are all factors that lend credibility and promise to Indian retail. The structure of the sector also presents great opportunities. Majority of the Indian retail landscape is dominated by small retailers and unorganized bazaars that don’t bank on the huge potential for economies of scale. Further, the government is adopting increasingly liberal policies that are slowly opening the Indian market up to foreign investors and competitors.
If it maintains a long-term growth rate of 6-7%, which is widely considered possible, India will become the world’s 5th largest consumer in the next 20 years. This growth is going to be fueled by a shift in the country’s income pyramid. The Indian middle class will swell by over ten times its present size to 583 million people – nearly twice the US’s current population. Over 23 million people – more than Australia’s current population, will comprise the country’s wealthiest citizens. Average real household disposable income will grow at 5.3% annually, compared to the US’s 1.5% annual growth over the past two decades.
The growth in income will be highly disproportionate to population growth, i.e., increased consumption occurs because more people have more money, not just because there are more people. 80% of consumption growth will come from rising incomes, 16% due to growth in households, and 4% due to shifts in saving patterns.
Hold up! Before you go out and regurgitate these statistics to a potential employer, consider this…
Retail means nothing for economic growth and well being on its own. Retail is only a link between production and consumption, therefore it is reasonable to argue that retail growth is only sustainable if both production and consumption capacities grow at a very healthy rate.
Strong retail fundamentals require a broad based increase in spending power. 60% of India’s population is engaged in Agriculture, a sector plagued by falling margins, decreasing international competitiveness due to the lack of modernization in farming techniques, severe debt and land fragmentation. The government has faced a wave of criticism following a media led campaign that highlighted that more than 25,000 debt-ridden farmers have ended their own lives in the past 10 years. Clearly, the sector that employs majority of the population is ailing, and requires large-scale reform.
Even if consumers are willing to spend more, retail can only flourish when consumers are able to spend more – i.e., when supply meets growing demand. There have been a series of recent inflationary scares in India, and although the government has taken short-term fiscal and monetary measures to curb inflation, there exists a widespread consensus that the root of the problem is cost-push. If one looks beyond the oil prices cliché, the infrastructural bottlenecks are glaringly obvious. Electricity, transportation, communication and rigid labor laws are only few of the infrastructural problems that require serious governmental attention. Further, the government is spending money primarily on protecting domestic business with trade barriers and subsidies instead of investing in infrastructure that will enhance their competitiveness. Red tape and power struggles between the centre and individual states only serve to distort the distribution of government spending.
Having said this, I believe that the Indian economy will be able to sustain high growth rates that will in turn drive consumption and retail growth. This is because what India is experiencing now is more than just monetary growth; it’s a paradigm shift. Most simply put, a series of factors have altered economic incentives of various players over the past decade, and in each player responding to these changes, the country is prospering as a whole. For example, economic openness and access to media has resulted in an exchange of values and ideals that have strengthened people’s wants – they are demanding governmental investment in education and infrastructure and it is in the incumbent government’s interest to fulfill these wants. As businesses grow and new businesses crop up in and around cities, the jobs created attract domestic immigrants. This alters a farmer’s incentive to farm and he moves to the city in the hope of a better life –making the economy less reliant on agriculture and more on services.
Overall, the interactions of changing economic incentives have, and are likely to continue to propel the Indian economy and society towards advancement, growth and well being.