Despite challenges, India’s organised retail on growth path

Organised retail segment in India has been gradually growing with most statistics indicating robust growth ahead. As per estimates, the retail sector accounts for 22 percent of the GDP and contributes 8 percent of the total employment. Total retail sales in India is anticipated to grow from 411 billion dollars (over Rs 25, 58,000 crores) in 2011 to 804 billion dollars (over Rs 50,00,000 crores) by 2015. Factors contributing towards this rapid growth momentum include: advent of ecommerce, upbeat consumer sentiment, growing awareness, internet reach, economic growth and high disposable incomes.

Retail growth drivers

With the Modi government coming to power, consumer sentiment as well as business confidence got a clear boost. Improving global economic scenario and uptick in India’s GDP further acted as drivers to the growth. Even the Union Budget has calculated India’s real GDP growth for 2015-16 at 8.0-8.5 percent against the current year’s estimate of 7.4 percent. The Indian economy too is projected to grow 7.4 percent in the current financial compared to 6.9 percent last year, according to the new gross domestic product growth series, released by the Central Statistics Office.

Based on earlier series, the Indian economy was projected to grow by modest 5.5 percent in 2014-15 compared to 4.7 percent a year earlier. Meanwhile, inflation continues to remain well within RBI’s comfort zone of 6 percent for January 2016 with RBI now slashing rates by 50 basis points to 7.5 percent since January 15, as consumer inflation came down to 5 percent.

With the advent of ecommerce and its rapidly increasing reach in smaller towns, consumers in these areas are emerging as the strong customer base for modern retail. Most research studies suggest that factors like rising incomes levels of people in these areas, rise in awareness levels, nuclear families as well as working women are propelling the rise of the middle class whose consumption will become the largest in the country.

Impediments to growth

While the outlook is robust, there are several hurdles that the retail sector has been witnessing for the past few years like price inflation, currency fluctuations, and stricter FDI rules, which are playing a spoiler. While the Indian government allowed 100 percent FDI in single-brand retail in 2012, the green signal to growth came with a rider. The 30 percent mandatory sourcing from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors is posing a big hurdle for foreign brands waiting to enter the country. And while it allowed 51 percent FDI in multi-brand retail, it left the final decision of allowing an international multi-brand retailer in a particular state to the state governments.

And while the ecommerce segment is on a rapid growth track too, only marketplace models can raise funding through foreign investors. And for brick and mortar retail, there is limited availability of quality real estate and rising rentals are and infrastructure as well as operational costs force retailer to hike product prices.

Also, around 92 percent of Indian retail sector is unorganised and hence, majority of sales take place through small stores. Though organised sector is growing at a faster rate, unorganised sector is still preferred by customers as they are more convenient and easy to approach. A new report by the Boston Consulting Group and Retailers Association of India titled ‘Retail 2020: Retrospect, Reinvent, Rewrite’ suggests India’s retail market will double to one trillion dollars (over Rs 62 lakh crores) by 2020 from 60 billion dollars (over Rs 3,70,000 crores) in 2015. Report suggests that as the industry grows, players will be required to recast their approach and mould it accordingly.