Draft Report of the High Level Group on Services Sector

7.2.2 Organized versus Unorganized Retailing
As a result of the entry of large business houses into retailing and ambitious plans being implemented by them, the FDI issue has receded into the background somewhat. The small retailers now feel threatened by the organized retail giants, and there have been demonstrations in West Bengal and Jharkhand by vegetable vendors. The State Government of Uttar Pradesh has taken pre-emptive action by shutting down independent outlets of retail chains dealing with fresh farm products. The big issue now is whether organized retailing would throw the unorganized sector out of business. One view expressed on this is that local kirana shops and established vegetable vendors would retain their position as convenience shops and would not be displaced. Another view is that since the economy is rising at a rapid pace organized sector will take care of the resultant expansion of retailing activity, leaving the present position of unorganized retail secure to a large extent. It is true that at the height of Asian financial crisis foreign retailers were allowed entry by Thailand the local players were marginalized. However, Mukherjee and Patel have argued that in a crisis-ridden economy, when the local players where already facing a survival problem, foreign competitors squeezed them out. However, in India this is not likely to happen in the present times when the economy is expanding rapidly. The same authors refer to a survey-based study of 100 small retailers in close proximity of Foodworld and Subhiksha by KSA-Technopak in Chennai, which showed that none of them had to close down on account of the operations of the organized retailers. Most people believe that the organized sector will see new jobs of a higher quality than the organized and there would more jobs for the educated and skilled categories. Nagging doubts remain, however, in some sections about the possibility of adverse effect on the self-employed people in the unorganized retail sector especially if the organized sector expands too fast. Others point out that the benefit to consumers by way of economy in purchases and multiple choice and the benefit to the government by way of increased collection of taxes would far outweigh the adverse effect if any on the small retailers.

7.2.3 Challenges before the Organized Retail Sector and Response to Challenges

7.2.3a Physical Infrastructure

Retail trade depends critically on the quality of physical infrastructure, particularly on power and roads. The shortcomings of the power sector in the country are well known. Over the last five years, while supply increased, it was outstripped by demand with the result that the shortfall between peak demand and peak availability increased from 11.8 % to 13.8 %. Retail trade is significantly dependent on supply of electricity for lighting as well as for refrigeration and deficiencies in the quality and quantity of supplies impairs its efficiency. The need to maintain captive power plants on a standby increases the fixed cost and if the outages from the main grid are for long periods the high cost of generation in small plants increases the variable cost as well. The cost of generation of small captive units is as much as four times that of supplies from the grid.

The world over supplies for retailers, whether of fresh or manufactured goods move by roads, sometimes over long distances. While the National Highways programme has made has made good progress the traffic constraint problems e.g. mix of motorized and non-motorized traffic, ribbon development, check-posts on interstate borders by various State authorities. The cumulative result of all this is that vehicles move at very slow speed. Delhi-Mumbai takes three days and Delhi-Bangalore five days, when by international standards they should not be taking more than two or three days respectively. The poor road transportation infrastructure is compounded by the lack of penetration of information technology in the transport sector and by the lack of proper communications infrastructure. In the absence of a shipment tracking system a shipper cannot track the status of a shipment before it reaches the destination.
The longer time involved in road transportation and the absence of a proper communications infrastructure increases the cost of transport and consequently the logistical cost. Retail trade is heavily dependent on logistics and increases in logistical cost impair the efficiency of retail trade. It is estimated that in 2005-06 the total logistic cost on India was close to 15 % of the GDP as compared to just over 9 % in the USA and 10-12 % in other developed economies.
Urban infrastructure, and particularly urban transport infrastructure, is also critical for retail trade. The goods that are brought in from outside for the retail outlets have to be moved into these towns and cities through congested streets, on which the larger vehicles used for trunk routes cannot move.
The inadequacies in the power sector and in the road and urban infrastructure need urgent attention of both the Central and Sate Governments. Further, the High Level Group would make the following specific recommendations to cut down the logistic cost incurred by retail trade and also by the manufacturing sector:

3. 
   For the smooth flow of goods moving particularly by road transport integrated logistics hubs should be identified in consultation with industry associations and developed on PPP basis across the country; and
   
4. 
   The administrations of one million plus cities should develop Transport Nagars outside the municipal areas for smooth flow of vehicles containing both incoming and outgoing supplies.