Indian retail needs that little nudge

While the world debated and discussed the $570 bn fiscal stimulus package announced by the Chinese government, few noticed a unique and innovative policy decision from the government across the straits in Taiwan. The Chinese had drawn up a massive bill, largely funded by tax payers, to be spent by the government itself in boosting economic activity. Taiwan, on the other hand, decided to give back some money to its citizens to spend by themselves, thereby creating demand for products in local markets, which in turn could boost economic activity and job creation.

Under a new policy announced in December 2008, the island's 23 million people regardless of age or wealth were given 3,600 Taiwan dollars (around $165) as shopping vouchers. “The program is aimed at boosting the economy and is expected to contribute to a 0.64 per cent increase in 2009 GDP,” explained Premier Liu Chao-shiuan. The core belief behind this programme is that government spending is not effective due to leakages and delay in execution, whereas private spending is far more efficient in boosting economic activity, creating demand for goods and services and raising employment levels. The idea of the voucher and stimulating growth through private consumption has been powerful enough for even the governments of Japan and Germany to consider such a move.

In India, private consumption demand has been the key driver of economic growth, with private final consumption expenditure contributing over half of India’s growth in the past decade. In fact, almost 68 per cent of India’s GDP is accounted by private consumption, as against 39 per cent in China, making the case for stimulating the Indian economy by growing private consumption far stronger than anywhere else in the world.

Yet, most policy prescriptions in India have focused more on government spending and some tax rebates to selective industries. Rather than depending on policy prescriptions that have been tried before, it is time, we start exploring innovative measures that can positively affect the economic scenario in India. With a young demographic profile and growing urbanisation, the increase in private consumption can have a much longer and sustainable impact in creating demand and jobs across the country.

Given the right policy prescriptions, modern retail could also play a major role in stimulating private demand in India. One of the biggest stumbling blocks for retail to develop in India was the rising cost structures, led by the rise in real estate prices. For the first time in many years, we are witnessing a scenario wherein real estate costs are falling and the retail business is becoming more and more viable. Along with it, people costs and operational costs are also stabilising. There are distinct signs of consolidation about to take place in retailing in India.

As the share of modern retail grows, so will its impact on the domestic economy. By 2012, modern retail will directly employ over 1.6 million people at shop floors. Almost all of them will come from lower income groups and lesser educational backgrounds and those who might not have found employment in other sunrise sectors in India. In addition, retail will create millions of more jobs in support services like security, mall and facilities management, construction and supply chains. Reports by consultancy major, McKinsey & Co., point out that for the government level, modern retail will help improve indirect tax collection by 1 per cent, add to GDP growth and play a role in controlling inflation.

Cities in India have few public spaces for people to converge. With the growth of modern retailing, shopping malls and high streets have emerged as modern India’s public spaces where the middle class comes and spends time with family.

Yet, the role and contribution of modern retail in India is yet to be acknowledged. Even when sectors as diverse as IT, hospitality, multiplexes and real estate enjoy various fiscal incentives from the government, modern retail is largely ignored by policy makers. In fact, modern retail is viewed as a luxury, and imposed with more taxes, discriminatory power rates and stiff regulations.

As we step into a new year, we are also entering a new era of business and economic environment. A new era calls for fresh thinking, exploring new scenarios and new solutions. Whether it is through deficit-financed tax cuts that will put more money in the pocket of consumers, or through vouchers that encourage people to spend immediately, we have to explore ways and means to further boost private consumption. And as modern retailers acquire size and scale, we have to work on government advocacy that ensures that modern retail plays a far more decisive role in the country’s economic growth and development.