Editorial

A few weeks ago, the McKinsey Global Institute, in its presentations to the Prime Minister, underlined the adverse impact of an inefficient retail sector on the Indian economy's growth potential. Now, the government has reportedly decided that foreign investment in retailing, something that most people would have considered relevant to improving its productivity, should not be allowed. The government apparently does not see how a fragmented, technologically primitive activity can cope with a competitive onslaught from large players backed by foreign technology and capital. However, the McKinsey analysis suggests that there is a large, positive externality to the whole economy that can arise from efficiency improvements in retailing. Its basic argument is that this will generate efficiencies all the way back up the product chain, improving productivity and thereby accelerating growth.

This is a vital point. There are two major reasons why an inefficient retail sector contributes to overall economic inefficiency. One, producers themselves have to make large investments in a distribution network to access retailers. Hindustan Lever and ITC, for example, are reputed, and deservedly so for the nationwide networks they have built and maintained. But, the stark fact is that the cost of building such networks is a huge deterrent - an "entry barrier" - for any potential competitor. Products of other, smaller companies, which might have done very well otherwise, simply find it impossible to get to the retailer, and therefore the consumer. Competitive threats, and therefore productivity improvements, tend to be stifled.

The other is that a retail sector populated with large players will actively seek out the best products and prices, rewarding efficient producers and penalising inefficient ones. It cannot be dictated to by the salesperson of a dominant manufacturer. The cost savings from active merchandising, combined with other scale economies, will allow it to not just push down margins but also to use flexible pricing as a competitive device when business is slack. Consumers benefit directly because of lower prices and greater choice, but so does the economy, because producers have to deal with consumers through an aggressively cost-cutting retail rector. Only the efficient can hope to survive this intermediation. From a policy perspective, if both these factors can contribute significantly to economic growth, then, clearly, this is a sector in which investment - domestic or foreign - should be facilitated, not deterred.

It is understandable that the government is concerned with the interests of potential losers - the innumerable small, family-owned and managed retail outlets. But it must recognise that they also have certain innate strengths which large chains cannot replicate - convenience, personalised service , neighbourhood and community relationships and comfort with small transactions. They will undoubtedly have to energise themselves to develop new competitive strategies, but this has been true of all sectors opened up to foreign investment; why should it be any different here? Even in the US and Europe, where mass merchandising has reached its zenith, boutiques co-exist with supermarkets. The only criteria that should apply are the interests of the consumer and of the national economy.