January 10th, 2018
Economic implications of the entry of big retailers in India
The entry of the big retailers in India bears positive effects with regard to consumers. Improved supply chain infrastructure following the entry of large retailers would enhance the value that the customer receives. Due to their enormous logistical capabilities, large retailers would make the distribution infrastructure more efficient thus reducing wastage and availing better produce to the consumers (Business Monitor International Ltd 2012a, p. 11). For instance, evaluating the effect of entry of large supermarket chains in unorganised retail industry, Reardon et al. found out that such entry led to better quality produce in the local market (cited in Lapoule 2010, p. 401). This, according to the study, arose since the supermarket chains provided local channels for marketing produce that would otherwise find market only through export channels.
Another benefit to consumers would arise with increased competition that encourages the existing retailers to improve their services in order to survive. A case study of five small retailers (kirana and mom-and-pop stores) published in Business Today for instance indicated that only the ones that improved their services were able to record good performance when large malls were built within their locality (‘Thriving in the shadow of big retail’ 2009). The entry of the big retailers thus enhances competition, which ensures most customers, not only the affluent, get access to better quality produce and service at fair prices.
The entry of big retailers also benefits farmers by providing a direct market for their produce. With the current unorganised state of the industry, farmers access markets mainly through middlemen who reduce the profits that farmers earn (Business Monitor International Ltd 2012a). By selling their produce directly to the large retailers, the farmers will thus avoid the middlemen or reduce the margins that the middlemen get thus increase their earnings.
The big retailers could also help in reducing inflationary pressures by enhancing supply-chain efficiency and investing in cold storage and warehousing facilities. Investments in cold storage for instance reduce wastage of fresh produce thus lowering the inflation that arises with shortage of such produce (Economics Intelligence Unit Limited 2011, p.1). Retailers could also reduce the inflationary pressure through supply-chain improvements that allow a wide range of customers to access better quality produce (Lapoule 2010, p. 401).
A drawback of the entry of the retailers would be lowering the employment level in the long term. Although in the short term the entry of such retailers would result in job creation in areas such as logistics and front-end retail business, in the long term the retailers would contribute to increased unemployment by pushing the small retailers out of the market. In the case study published in Business Today, some of the retailers interviewed indicated having reduced their workforce following the establishment of large malls within their location (‘Thriving in the shadow of big retail’ 2009). Studies assessing how Wal-Mart entry influences the employment levels in the American states also provide evidence that big retailers could lead to increased unemployment. In one such study, Basker (2004) demonstrated that despite Wal-Mart creating additional 40 jobs in the year of entry, such jobs were eliminated by the fifth year of operations with more job losses being experienced in sectors beyond the retail sector due to Wal-Mart’s outsourcing of raw materials from low-cost countries (p. 12).
Although the proposed opening provides a safeguard by requiring the multi-brand retailers to source at least 30% of their manufactured items from domestic entities (Kumar 2009), the widespread expansion of such big retailers could have adverse effects on the manufacturers. This would arise where the expansion of the retailers results into massive exit of small retailers reducing the alternative markets for the manufacturers thus enhancing the purchasing power of the large retailers. In its North American market, Wal-Mart’s high purchasing power has for instance forced manufacturers to agree to its demand for lower prices on their supplies thus straining the manufacturers’ resources (Basker 2004). Such an effect would similarly occur in India where the large retailers eventually gain a high purchasing power thus influencing the prices at which they receive their supply.
The effect on employment following entry of large retailers is more evident from the role that small retailers play in enhancing self-employment. Small retailers such as kirana shops and mom-and-pop shops generate a substantial amount of self-employment because they do not require massive investment in capital, land and labour (Thenmozhi & Dhanapal 2011, p. 69). The low start-up requirements means that even individuals lacking the access to financing, having low levels of education and lacking the experience to run massive retail shops could have successful small shops. Accordingly, when the entry of the big retailers results into the exit of such shops, the population with limited resources and qualifications would have minimal alternatives for self-employment.
The entry of large retailers could also lead to a secondary effect of reduced purchasing power. This would arise from reduced incomes when employers in the retail sector cut their labour costs to compete effectively with large retailers. One study examining the effect of Wal-Mart entry on wages in America for instance noted that Wal-Mart’s entry led to reduced wage levels in such regions by a magnitude of 1.5 per cent (Neumark, Zhang & Ciccarella 2008, p. 422). Reduced wage levels imply that employees would have lower disposable incomes thus reduce their expenditure on non-essential products. The decreased spending on non-essential products would facilitate further unemployment in industries trading in such products. Figure 1 provides a summary of the effects that the entry of the large retailers in India would lead to.
Effects of entry of large retailers in India
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