Inflation effects and organized retailing in India

1) Is Indias Inflation structural or monetary? What are the causes and effects? 2) Can organized retailing in India reduce inflation?

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Structural inflation is a part of any emerging economy and so is Indias. In the initial period of growth take off, some parts of the economy tend to lag, and capacity creation in those areas is not anchored to high GDP growth. In India structural inflation is caused by high demand due to demography change and supply constraints. It is also evident from the WPI-IW and CPI-IW levels below the average levels for emerging economies. However, from 2007 food inflation has been driving the inflation levels to double digits. There is a structural as well as cyclical component to it. Stagnant agricultural productivity has been the primary cause of it. India is an emerging economy. It has seen a transition from agricultural dominated to service and recession is an integral part of any developing economy The key risk in our view, from a cyclical and structural perspective, will be the government's policies. If the government and the central bank attempt to boost growth through the support of loose fiscal and monetary policies instead of structural reforms, which help boosts savings and investments, inflation will be higher than expectations. This shows that inflation in India is inherent from the past. The Government of India (GoI), together with the RBI, took several measures to contain inflation. For example, the RBI increased the Cash Reserve Ratio (CRR) and repo rates in an effort to check money supply; the GOI reduced import duties on several food products and cut the price of diesel and petrol. Causes of inflation are Over- Expansion of Money Supply: Increase in Population: Expansion of Bank Credit, Deficit Financing, High Indirect Taxes, Black Money, Poor Performance of Farm Sector, High Administrative Pricing. Effects of inflation: Inflation will lead to deterioration of gross domestic savings and less capital formation in the economy and less long term economic growth rate of the economy. It causes currency debasement. With increased risk and higher uncertainties it decreases the investment in the economy slowing the growth. However, a moderate level of inflation can increase investment in an economy leading to faster growth or at least higher steady state level of income. This is due to the fact that inflation lowers the return on monetary assets relative to real assets, such as physical capital. To avoid inflation, investors would switch from holding their assets as money to investing in real capital projects. Organized Retailing in India With an expanding Indian economy, the countrys overall retail sector will become a $450 billion (Rs20.85 trillion) business by 2015, which is almost comparable to Italys current market size of $462 billion (among the worlds top 10 retail markets) and larger than Brazils current retail market size of $258 billion. Currently Organized retail accounts for only about 5% of the countrys annual retail business. According to a research, the modern retail business will create about 1.6 million jobs in the next five years. Modern retailers will not only create employment opportunities but also would help raise Indias overall economic productivity and could also result in lowering prices of goods. . The various self-service stores selling food and personal care products are pantaloons retail stores Ex: Pantaloons, Big Bazaar, Food Bazaar, Central. RPG Retail: Food World, Music World, Health & Glow and Spencers Tata Retail (known as TRENT): Croma, Westside, Star India Bazaar. K Raheja Corp. Group: Shoppers' Stop, Hypercity, Crossword, InOrbit Mall etc. Importance of Organised Retailing The Organised retail sector can be of great importance. The main reason is that it can charge lower prices because: 1) Economies of scale in procurement (mass buying from suppliers) 2) Economies of scale in handling and logistics such as via modernised distribution centres.

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The supermarket chains are known to build regional and global food procurement networks to reduce costs, deseasonalise offerings, and increase product diversity. Also, since organised retailers have large scale of operations and access to finance, they can help in minimising the marketing channel between producers and consumers. It also leads to the removal of the middle man from the chain thereby helping the farmers in getting the better prices. There are successes stories in which corporate have procured directly from farmers through contract farming. Under this, the farmer is required to plant the corporate crop on his land and harvest and deliver a quantum of produce based on the contract and at a pre- determined price. This helps in reducing structural inflation caused by the inefficiencies in supply chain management. Problems in India But what is happening is that in India, there are not many food retailers who are sourcing directly from farmers. Some who tried sourcing produce from farmers directly could not sustain it, due to regulatory and viability issues. Now, most retailers buy from the Agricultural Produce Marketing Committees or APMC yards, where various commodities are auctioned. the cost of transporting the goods from producers to consumers is a long list that increases the price of produce as it reaches the point of sale. However, on seeing some sample statistics in early 2010, it was found that price of commodities like onions and tomatoes was cheaper at kirana stores as compared to retail chain outlets like spencers daily and reliance fresh. The farm to fork model did not take off as expected and some retailers sought to purchase from APMCs. Adding to this, the supply chain models did not allow these retail chains to provide benefits to the consumers. The last five years have seen the organized sector have a market share of less than 5%, however growth is 35% annually as compared to 6% of unorganized sector. A number of people are turning to these stores for employment as compensation is relatively low in traditional agriculture. Organised retail is expected to garner about 16-18 percent of the total retail market (US $ 65-75 billion) in the next 5 years. The sector is also expected to boost the construction industry with projected demand of 700,000,000 sq feet for the year 2011.The organized retail sector will allow farmers direct access to larger markets in India and abroad (in case of FDI). Also, sometimes the premium price strategy also leads to the increase in prices of the commodities. On the flipside, if any one retail chain becomes too dominant then we run the risk of a monopoly in the market. Going by the current scenario, if we cannot control a few dominant players who control the prices then it would be an even more difficult task to control one big player. Future of Organized Retail Sector

The above diagram shows the potential consumer segment that can has the highest potential for the organised retail market and also this market is expected to grow from 14 million to 64 million. So this potential segment can have a positive impact on the economy by curbing the inflation up to a certain extent. But to achieve this: There should be an effective and efficient cost supply system. It will help in extending the lower process to the consumer and optimum price to the producers. For this FDI in the Organised Retail sector can also be increased so as to have the best possible distribution systems in India. Government should plan to provide some incentives that can lead to the inclusive growth by expanding this organised retail business in the rural market. Organised retail sector should be an ally in promoting food security for the urban poor and help in dampening the food price inflation.

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