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R 021125Z DEC 08
FM AMCONSUL MUMBAI
TO RUEHC/SECSTATE WASHDC 6786
INFO RUEHNE/AMEMBASSY NEW DELHI 8027
RUEHBI/AMCONSUL MUMBAI 1951
RUEHCG/AMCONSUL CHENNAI 1963
RUEHCI/AMCONSUL KOLKATA 1758
RUEAIIA/CIA WASHDC
RHEHAAA/NSC WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE USD FAS WASHINGTON DC
RUEHRC/DEPT OF AGRICULTURE WASHINGTON DC
RUCPDOC/DEPT OF COMMERCE WASHINGTON DC

UNCLAS SECTION 01 OF 03 MUMBAI 000566 
 
SENSITIVE 
SIPDIS 
 
USDA PASS FAS/OCRA/HIGGISTON 
PASS USDA/FAS FOR OCRA/CARVER/BEAN/RIKER 
PASS TO USTR FOR AADLER/CLILIENFELD 
 
E.O. 12958: N/A 
TAGS: BTIO EAGR ECON EINV IN
SUBJECT: PEACEFUL CO-EXISTENCE OF SMALL AND BIG RETAIL DEBATED AT A 
CONFERENCE IN MUMBAI 
 
REF: MUMBAI 25 
 
¶1.  (U) Summary:   At a Mumbai conference on the retail sector 
in India, proponents and opponents of foreign and corporate 
investment in retail debated the future of small and big retail. 
 Much of the discussion centered around the Indian Council for 
Research on International Economic Relations' (ICRIER) study on 
the retail sector which found that the growth of organized 
retailing will cause a temporary decline in sales and profits of 
small retailers, but is necessary to increase productivity in 
agriculture and industry.  While no longer as politically 
sensitive, the issue still evokes strong reactions from those 
who fear the loss of jobs and income in India's disparate 
unorganized retail sector.  While no consensus is likely to 
emerge, it is clear that organized retail will slowly take up an 
increasing share of the retail market, especially in urban 
areas.  End Summary. 
 
ICRIER Retail Study Focal Point of Discussion 
-------------------------- 
 
¶2.  (U) At a conference on the Indian retail sector organized by 
the Asia Society on November 5, Nirupama Soundararajan, Research 
Associate of the Indian Council for Research on International 
Economic Relations (ICRIER), explained that the basic finding of 
the ICRIER study on the impact of the future growth of organized 
(large scale) retailing -- domestic and foreign -- on the 
unorganized retail sector is that small retailers will face a 
decline in sales and profit due to the growth of big retailers, 
but that this effect will weaken over time.  The ICRIER report 
predicted that the Indian retail sector is likely to grow at 13 
percent until 2011-12, whereupon the organized retail sector 
would grow at 45 percent per annum from 2012-2017, while 
unorganized retail will only grow by 10 percent.  The report 
also said that left alone, the unorganized sector -- which 
accounts for 95 percent of all retail in India -- will emerge as 
a "major bottleneck to raising productivity in both agriculture 
and industry."  (Note: The Indian government commissioned ICRIER 
to conduct a study on the impact of organized retailing on the 
unorganized retail sector.  The ICRIER study surveyed 2020 
unorganized retailers across 10 cities, 1318 consumers, 100 
intermediaries, and 197 farmers.  The report was released in May 
¶2008.  Opponents of organized retail denounced the study and its 
recommendations, arguing that it was not impartial nor 
representative.  End Note). 
 
¶3.  (U) Vinod Shetty of FDI Watch Campaign, which agitates 
against both domestic and foreign organized retail, pointed out 
that the unorganized retail and small trade sector employs 40-50 
million people; 50,000 traders operate at the Agricultural 
Produce and Marketing Committee (APMC) markets, which mainly 
cater to the unorganized retail sector.  These people have no 
"safety net" and Shetty warned that it would be "disastrous" if 
their jobs or livelihood are threatened with growth in corporate 
investment in retail -- whether domestic or foreign -- which he 
claimed did not bring in any new technology or new products. 
 
¶4.  (U) G. Chandrashekhar, the Associate Editor of the Hindu 
Business Line, was less pessimistic than Shetty, and argued that 
"the skewed income distribution in India creates a market and 
consumer for commodities at every price point."  He believes 
that 65 percent of India's population of 1 billion plus people 
will continue to shop in small retail outlets even 10 years 
hence, while 60-65 million families with rising purchasing power 
will shop at organized retail outlets which will be confined to 
urban centers.  So, there is no conflict between organized and 
unorganized retail, he argued.  According to Chandrashekhar, the 
unorganized retail sector has two options:  to compete with 
organized retail by offering more efficient services or to 
migrate to smaller cities and towns where organized retail is 
either absent or less prominent. 
 
¶5.  (U) ICRIER's Soundararajan agreed with Chandrashekhar and 
added that Indian consumers may go to big retailers to avail of 
discounts and free offers to purchase their monthly staples, but 
will still go to the small retailer in their neighborhood to buy 
items of daily consumption.  She pointed out that the key 
strength of small retailers is the personal relationship with 
consumers and service offerings like home delivery, proximity to 
the consumer, and the chance to bargain, which cannot be matched 
by big retailers.  Several small retailers are also modernizing 
 
MUMBAI 00000566  002 OF 003 
 
 
their outlets by installing air conditioning and modern 
displays, and now accept credit cards.  She noted that the 
ICRIER study revealed that small retailers want to stay and 
compete with big retail, but ask for a "level playing field." 
Contrary to expectations that big retail would swallow small 
retail, the study showed that only 4.7 percent of traditional 
retailers registered closure and only 1.7 percent of closure was 
due to the presence of organized retail in the same area.  Many 
small retailers who had closed shop cited competition from other 
small retailers as the reason for closure. 
 
Farmers: True Beneficiaries of Big Retail? 
-------------------------------- 
 
¶6.  (U) Shetty maintained that the amendment in the APMC act to 
allow organized retailers to procure agricultural produce 
directly from the farmers by setting up private markets unfairly 
 competes with the existing APMC markets.  (Note: The APMC Act 
was created to safeguard farmers from unscrupulous middlemen. 
Traders are required to buy only from the APMC market and pay a 
tax to the APMC for an operating license.  The APMC Act has been 
amended in several states to allow large retailers to set up 
their own market yards and procure directly from the farmers. 
End Note).  Singhvi, a trader who represents 750 trade 
associations, argued that like big retailers, traders should 
also be allowed to purchase directly from farmers. 
Chandrashekhar agreed with Singhvi and said that the amended 
APMC act creates an "artificial distinction" between an 
organized retailer acting as a retailer and acting as a trader. 
 
¶7.  (U) Shetty also argued that big retail would slowly engage 
in predatory pricing both at farm procurement stage and at the 
consumer stage of the business and wipe out small retail. 
Chandrasekhar pointed out that setting up big retail outlets in 
cities entailed the purchase of costly real estate and high 
operating costs.  Big retail cannot recoup these costs from the 
consumers who are "price sensitive".  So, the only way for big 
retailers to recoup costs is to buy goods from the farmers at 
lower prices.  The belief that big retail offers better prices 
to small and marginal farmers is a myth and is not sustainable, 
he argued.  Big retail cannot afford to give better prices to 
the farmers as compared to small traders.  But, he agreed that 
allowing direct procurement by big retailers has improved the 
marketability of agricultural produce.  A member of the 
audience, who was a farmer by profession, agreed that farmers 
wanted alternative buyers and did not want to be at the mercy of 
the APMC. 
 
¶8.  (U) Soundararajan acknowledged that farmers need an 
alternative way to sell their produce aside from APMC markets, 
given the pitiful and inadequate infrastructure at these 
markets.  For this reason, the ICRIER report recommended that 
the APMC market be modernized, but not shut, and that the 
competition commission's role should be strengthened to prevent 
predatory pricing.  She said that the ICRIER study showed that 
farmers gained substantially from the option of selling directly 
to organized retail.  Direct procurement by big retail decreased 
transaction costs for the farmers and saved them from paying a 
ten percent commission to agents at the APMC market.  The study 
showed that the farmer got only a 25 percent increase in price 
realization by selling directly to the organized retailer who 
largely maintained APMC-parity pricing.  However, decreased 
transaction costs and savings in the commission fee secured the 
farmers a 60 percent increase in profit realization, according 
to the ICRIER study.  Organized retail purchases only good 
quality produce from the farmers while produce of diverse grades 
and qualities is accepted at the APMC market.  Farmers therefore 
sell the best part of their produce to organized retailers and 
the rest at the APMC market.  The farmer is a "wise businessman" 
and makes sound business decisions, she emphasized. 
 
Comment: 
--------- 
 
¶9.  (SBU) The discussion on the retail sector, like others in 
the past, focused on the hotly-debated issue of the impact of 
foreign and corporate investment on small retailers and ignored 
more pressing issues like the creation of supply chain 
infrastructure.  Experts estimate that over a third of India's 
agricultural produce is spoiled or wasted before it reaches the 
 
MUMBAI 00000566  003 OF 003 
 
 
retailer's shelves due to inadequate storage, transportation, 
and distribution infrastructure.  Preventing this from happening 
by investing in supply chain infrastructure in a country with an 
enormous population to feed and support should be more important 
than who delivers the food to the consumer.  The political 
sensitivity of this issue has declined since its peak last year, 
and many smaller retailers and trading associations have begun 
to accept the reality of new competition.  However, the issue 
still evokes strong reactions from those who fear the loss of 
jobs and income in India's disparate unorganized retail sector. 
While no consensus is likely to emerge, it is clear that 
organized retail will slowly take up an increasing share of the 
retail market, especially in urban areas.  End Comment. 
FOLMSBEE