EntErprisE survEys 60346 EntErprisE notE sEriEs rEtail 2010 Challenges of retailing in india Mohammad amin U sing Enterprise Surveys data on 1,948 retail stores in India, this note highlights the key problems and challenges faced by retailers in 41 large cities of India. Inadequate power supply, access to finance, corruption, tax rates, and land-related problems are the most important obstacles to further growth. Competition in the sector also appears to be low, reducing labor productivity. Differences in the severity of these problems across regions and retail stores of various sizes are discussed. EntErprisE notE no. 10 The retail and wholesale sector in India is one of the pressing problems. The note also sheds light on the low largest sectors, contributing 14 percent to the national level of competition in the sector and its consequences for gross domestic product (GDP) and 10 percent to formal the efficiency of retail stores. employment.1 The sector has also shown strong growth in recent years, with a compounded annual growth rate inadequate power supply is the most of over 8 percent during 2000-2006 (at constant prices) important obstacle to retailing compared with 7 percent for the national GDP. Despite From a list of twenty obstacles, stores were asked to its large size, the retail and wholesale sector has received identify the one most important for their business (figure very little attention in India and elsewhere, largely due to 1). Most stores (33 percent) identified electricity as the data limitations. This note uses Enterprise Surveys' data on 1,948 retail stores in 41 large cities of India to highlight Figure 1 obstacles to doing business key problems and policy issues. The sample consists of traditional or grocery stores faced by retailers in india (64 percent of the sample), consumer durable stores (26 percent), and modern-format stores (10 percent).2 The Electricity Access to nance median floor area of the shops equals 150 square feet, with Corruption annual sales of Rs 500,000 (US $10,309) and growing at a Land Tax rates rate of 6.6 percent per annum. The number of employees Informality World Bank Group Crime & disorder (excluding the manager) per store averages 4.7, a figure Obtaining permits highly inflated by a handful of large stores. About 43 Tax administration Pricing regulations percent of the stores are run by the owner/manager with Transportation no additional employees; 35 percent have 1-3 employees; Court functioning Skill shortage and 22 percent have 4-500 employees. Over 93 percent of Policy uncertainty Store hour restrictions the stores have a single owner, and roughly half the stores Customs use rented or leased land (as opposed to owned land). Telecom Labor laws Using these data, this note highlights the key obstacles Macro instability FDI restrictions and problems faced by Indian retailers and how the 0 5 10 15 20 25 30 severity of the obstacles varies across rich and poor states % and small and large stores. Inadequate power supply, poor access to finance, and high corruption are the three most Source: Enterprise Surveys. Table 1 power outages stores facing outage incidents Hours of outage losses from outages outages (%) per month per month (% of annual sales) indian retailers all stores 82.9 26.9 65.1 4.6 Leading states 77.4 23 47.6 4.0 Lagging states 90.6 42.8 126.3 7.1 Ahmedabad (city with best power supply) 22.5 1.2 1.5 0.4 Gurgaon (city with worst power supply) 100 91.6 339 17.2 retailers in ECa and Manufacturing firms in india Retailers, ECA 42.1 NA 4.3 0.8 Manufacturing, India 77 NA 46.2 6 Source: Enterprise Surveys. Ahmedabad is the best performing city as far as losses due to power outages are concerned, while Gurgaon is the worst. ECA refers to 27 countries in Eastern Europe and Central Asia surveyed by Enterprise Surveys in 2005. Mfg., India relates to the survey of registered manufacturing sector conducted in 2006 Enterprise Surveys. Leading and lagging states are listed in endnote 3. most important obstacle followed by access to finance retained earnings is the most (16.7 percent), corruption (11.5 percent), land-related common source of finance problems (9.8 percent), and high taxes (9.1 percent). These The bulk of investment in working capital is financed by top five obstacles are consistent across small and large the retained earnings of the stores (78 percent). Similarly, stores as measured by the floor area of the shop. However, among the firms that invested in fixed capital, 82 percent large stores are less concerned about finance and more of their investment was financed by the retained earnings. concerned about taxes. Is the use of external financing low because Indian The data also show an interesting pattern across high- retailers are credit constrained? Consider a store "credit income (leading) and low-income (lagging) states.3 Compared constrained" if it wanted to borrow but did not because with the lagging states, fewer stores report access to finance it thought the loan would not be approved, collateral as the single most important obstacle in the leading states requirements were unattainable, or the application (22.9 percent vs. 9.7 percent). This is also true of electricity procedures were complex.4 About 14 percent of the (40.6 percent vs. 28.7 percent). The opposite holds for stores in the full sample are credit constrained, with a corruption (8 percent vs. 15.4 percent), tax rates (3.2 percent high of 52 percent in the state of Bihar and a low of vs. 12.6 percent), and land-related problems (7.3 percent vs. 6.4 percent in Maharashtra. Small stores are more likely 11.1 percent). We note that these comparisons do not imply to be credit constrained than the rest. The same holds that leading states perform worse in absolute terms than for lagging compared with leading states, although this is the lagging states in governance-related issues (corruption, largely restricted to stores of intermediate size (figure 3). taxes). Rather, with economic development, governance- For a comparison, credit-constrained stores equal 7.6 related issues become greater binding constraints for stores' percent in the European and Central Asia (ECA) countries. operations than finance and infrastructure. Even ECA countries, such as Moldova and Uzbekistan, that less developed states face more power outages have roughly similar per capita GDP as India show fewer credit-constrained firms (4.7 and 6.6 percent, respectively). Table 1 confirms much better supply of electricity in leading vs. lagging states. However, we must be careful in large stores suffer more from corruption rushing to a conclusion from this. Figure 2 shows that losses Inspections by government officials can result in a bribe to Indian retailers per hour of power outage are much higher payment or a request for one. About 40 percent of the at initial hours of power outage. Consistent with the figure stores in the sample were inspected during the survey year. and the fact that leading states have fewer hours of power Roughly 44 percent of these inspections culminated in a outages, an hour's reduction in power outage in the leading bribe payment or a request for one, with the figure rising states implies cost saving to retailers (in absolute terms) that to over 90 percent in the state of Punjab and 87 percent in is about 1.93 times the same in the lagging states. Hence, Bihar. In other words, 17.4 percent of all stores surveyed on pure efficiency grounds, increasing power supply in the either made a bribe payment to government officials or leading states seems more beneficial than in the lagging states. 2 were asked for one. While there is substantial variation retailing in smaller cities across states in the incidence of bribery (with or without The metropolitan cities of Bangalore, Chennai, Delhi, conditioning for visits by government officials), the Hyderabad, Kolkata, and Mumbai have traditionally been variation has little to do with per capita income of states the retailing hub of India and also the main contributors to or other available measures of overall development. The the ongoing retailing boom. Arguably, a similar expansion of same holds for the frequency of inspections. Relative to retailing activity in the relatively small non-metropolitan cities small stores, the incidence of bribery is higher for large would be required if the retail sector is to make a significant stores but this is entirely so because large impact at the macro level. There is much talk stores are more frequently inspected about expansion of retailing activity in the (figure 4). Somewhat surprisingly, Inadequate power relatively smaller non-metropolitan cities bribery incidence is roughly the same in of India.5 For the business environment, leading vs. lagging states. supply, access to the key difference between metropolitan finance, and and non-metropolitan cities lies in power non-availability of land is not the only land-related problem corruption are some supply. In non-metropolitan cities, losses due to power outages average 5.5 percent Among stores that reported access to of the most severe of annual sales of the stores, and hours land as a moderate or bigger obstacle problems faced by of power outage in a typical month to doing business (32 percent), non- average 78.9. Corresponding figures for Indian retailers. metropolitan cities are much lower, at 2.6 availability of land was identified as a contributory factor by 81 percent, percent and 32.5 hours, respectively. unclear ownership titles by 29 percent, problematic and costly registration process by 63 percent, and difficulty Competition in indian retailing is low in obtaining permits to use the land by 47 percent. In Less than 40 percent of stores reported competitive some states such as Haryana, Madhya Pradesh, and pressure as fairly important or very important for the prices Maharashtra, costly registration process is identified as of the stores' main products. The corresponding figure in a bigger problem than the non-availability of land by a ECA is 71 percent. In short, competition in Indian retailing majority of stores. In short, a comprehensive approach seems low by international standards. Amin (2007) finds that toward land reforms is necessary. pro-competitive reforms could increase labor productivity in Indian retailing by as much as 87 percent. Figure 2 states with better power Figure 3 small-sized stores are supply are likely to gain more more credit constrained than the rest from further than large-sized stores improvement in power supply % of retail stores that are credit constrained 35 30 25 Losses per hour of power outage 6 (% of annual sales, logs) 4 20 2 15 0 All stores -4 -3 -2 -1 -2 0 1 2 3 4 10 Leading states -4 Lagging states -6 5 -8 0 -10 1 2 3 4 5 6 7 8 9 10 Hours of power outage in a typical month (logs) Floor area of the shop (decile groups) Source: Enterprise Surveys. Source: Enterprise Surveys. The figure is a partial scatter plot controlling for store-type fixed Higher values along the horizontal axis imply larger floor area. effects (traditional, consumer durable, and modern-format store), Leading and lagging states are defined in endnote 3. city fixed effects, and floor area of the shop. The strong negative relationship shown does not depend on the stated controls. 3 3. States are grouped into leading, middle, and lagging Figure 4 large stores are more states based on their level of development. The grouping likely to pay bribes than is taken from Kochar et al. (2006). Leading states include the small-sized stores Delhi, Gujarat, Karnataka, Kerala, Maharashtra, and Punjab. Lagging states are Bihar, Jharkhand, Madhya Pradesh, Orissa, and Uttar Pradesh. The remaining states 60 are classified as the middle (income) states. % of stores that pay bribe or 50 are requested for one 40 4. This is a conservative definition of credit-constrained 30 stores because it assumes that stores that borrowed externally 20 did not face any constraint on the amount borrowed. 10 5. The metropolitan cities include Bangalore, Chennai, 0 Delhi, Hyderabad, Kolkata, and Mumbai. 1 2 3 4 Floor area of the shop (quartile groups) references Bribe incidence in full sample Bribe incidence among inspected stores Amin, Mohammad. 2007. Labor Productivity and Competition in India's Retail Stores. Mimeograph; Source: Enterprise Surveys. available at www.enterprisesurveys.org Higher values along the horizontal axis imply larger floor area. Gordon, J. and P. Gupta. 2004. Understanding India's Services Revolution. IMF Working Paper WP/04/171. The note attempts to highlight the main problems Washington, D.C.: International Monetary Fund. confronting the retail sector in 41 large cities of India. Kochar, Kalpana, Utsav Kumar, Raghuram Rajan, Arvind Inadequate power supply, access to finance, and corruption are Subramanian, and Ioannis Tokadlidis. 2006. India's some of the most severe problems faced by Indian retailers. Pattern of Development: What Happened, What Competition in the sector seems low, and pro-competitive Follows. NBER Working Paper 12023. Cambridge: reforms could improve retailing efficiency significantly. National Bureau of Economic Research. notes 1. These estimates are based on National Accounts Statistics and taken from Gordon and Gupta (2004). 2. Cities in the sample include (in alphabetical order): Ahmedabad, Bangalore, Bhopal, Bhubaneswar, Chandigarh, Chennai, Coimbatore, Cuttack, Delhi, Dhanbad, Faridabad, Ghaziabad, Greater Mumbai, Guntur, Gurgaon, Gwalior, Hubli-Dharwad, Hyderabad, Indore, Jaipur, Jamshedpur, Kanpur, Kochi, Kolkata, Kota, Kozhikode, Lucknow, Ludhiana, Madurai, Mangalore, Mysore, Nagpur, Nashik, Noida, Patna, Pune, Surat, Vadodara, Vijayawada, and Vishakhapatnam. The Enterprise Notes Series presents short research reports to encourage the exchange of ideas on business environment issues. The notes present evidence on the relationship between government policies and the ability of businesses to create wealth. The notes carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 4