Evolution of indian retail market from 2005-10. Capturing macroeconomics impact on retail in indian market.

1. EVOLUTION OF INDIAN
RETAIL
Arpita Gautam
SPJIMR (2015-16)

2. ABSTRACT
ThisreportprovidesdetailedinformationaboutRetail IndustryinIndia.Itexploreshow the GDP
changedinIndiain the last2 yearsand whathas been itsimpacton the retail industry.Itfurthertalks
aboutthe inflationary/deflationarypressuresinthe economy.Anditsimpactonsavingsandinvestment
inthe economy.The reportalsoincludesthe trendof India’sCurrentAccountdeficitanditsimpact on
exchange ratesandtherebyonthe retail sector.Italso highlightsgovernment’sfiscal andmonetary
policieswhichmayhave impactedthe sector
INTRODUCTION
The IndiaRetail Industryisthe largestamongall the industries,accountingforover10 percent of the
country’sGDP and around8 percent of the employment.The RetailIndustryinIndiahascome forthas
one of the mostdynamicand fastpacedindustrieswithseveral playersenteringthe market.InIndiathe
vast middle classanditsalmostuntappedretail industryare the keyattractive forcesforglobal retail
giantswantingtoenterintonewermarkets,whichinturnwill helpthe IndiaRetailIndustrytogrow
faster.Indianretail isexpectedtogrow25 percent annually.Modernretail inIndiacouldbe worthUS$
175-200 billionby2016. The Food Retail IndustryinIndiadominatesthe shoppingbasket.The Mobile
phone Retail IndustryinIndiaisalreadyaUS$ 16.7 billionbusiness,growingatover20 per centper
year.
CHANGING CONSUMPTION PATTERNS
In a developingeconomylike India,the biggestchallenge amarketerfaceswouldbe totackle the ever
changingconsumptionpractices. The majorityof the Indianconsumersare shiftingfrombrandloyalist
to value conscious,whichwouldrequire greatereffortsonthe partof a retailertosatisfythe billion
demandsandprovisionof enduringservices.These changesare reflectedinthe growingdisposable
income andper capitagrowthin the table below:
Source: www.tradingeconomics.com | World Bank Group
The above indicatorsclearlygive the belowinferences:
The total marketsize of retail inIndiawasUS$ 490 billionin2013, registeringaCAGRof 6.1 per cent
since 1998.
INDICATORS 2006 2008 2010 2012 2014
% Growth
2014/2006
Retail sector (Bn $) 321 368 424 518 534 66%
GNI per capita in PPP $ 3200 3730 4410 5000 5760 80%
GDP actual 834.2 1238.7 1365.4 1835.81 1861.8 123%
GDP per Capita PPP 3262.04 3805.69 4177.17 4786.74 5243.9 61%

3. GNI percapital [1]
; PPP(US dollar) inIndiawaslastmeasuredat5760 in 2014, according to the World
Bank.
The Gross DomesticProductpercapita inIndiawas lastrecordedat 1262.64 US dollarsin2014. The GDP
perCapita inIndiaisequivalentto10 percentof the world'saverage.GDPper capitain Indiaaveraged
477.50 USD from1960 until 2014, reachingan all-time highof 1262.64 USD in2014 and a record lowof
228.34 USD in1960. GDP per capitainIndiais reportedbythe WorldBank.
The Gross DomesticProductpercapita inIndiawas lastrecordedat 5565.05 US dollarsin2014, when
adjustedbypurchasingpowerparity(PPP).The GDPperCapita,inIndia,whenadjustedbyPurchasing
PowerParityisequivalentto31 percentof the world'saverage.GDPpercapita PPPin Indiaaveraged
3120.57 USD from 1990 until 2014, reachinganall-time highof 5565.05 USD in2014 and a recordlowof
1760.02 USD in 1991. GDP per capita PPPinIndiaisreportedbythe World Bank.
The foodand grocery segmentremainsthe primarysegmentwitharound65% share inthe total Indian
retail marketsegment.We have reachedto4% level inorganizedhorticulture whencompared
internationallywhere ithasreachedto56%. The Indianfoodprocessingindustryisorganizedupto25%
and consumersare buyingsuperiorvarietiesandqualityproduce,even dicedfruitsandvegetables.The
recenttrendshave alsowitnessedincrease inconsumptionof fruitsalthoughcomparedtovegetables,
the formerbeingexpensive inthe Indianmarketconditions.The Indianconsumersare projectedto
spendmore onfreshfoodand itis estimatedthatthere will be 130 millionnewconsumersinIndiaby
2015 as per the Euro monitorInternational'sCountriesandConsumersdatabase.
Global Retail DevelopmentIndex(GRDI) 2013, the global slowdownhasimpactedIndia‟sgrowthalso
and as a resultIndia’sgrowthrate fell froma10-year average of 7.8 percentto 5 percentand inGRDI
rankingIndiaslippedto14th.India’spreviouslow rankingwas6thplace inthe inaugural Index in2002
but in2009 it stoodfirst.Howeverthe GRDIreportpointsoutsome positive factorsleadingtooptimistic
expectations.These factorsare:stronglong-termfundamentalsandyoung,increasinglybrand- and
fashion-consciouspopulation.The reportprojects14to 15 percentgrowthper yearinretail sector
through2015 and due to more urbanizationandmore potential new investmentbyretailers,expectsa
higherproportionof modernretail whichis7percentin2012
[1]
GNI per capita based onpurchasing power parity (PPP): PPP GNIis gross nationalincome(GNI) converted tointernational dollars using
purchasing power parityrates.An internationaldollar has thesamepurchasing poweroverGNI as a U.S. dollarhas in theUnited States. GNIis
the sum of valueadded by allresidentproducers plus any producttaxes (less subsidies) not includedin the valuation ofoutput plus net receipts
of primary income (compensation ofemployees and property income) fromabroad.Data are in currentinternationaldollars.

4. Inflationary Pressures
Inflation as defined by classicaleconomist is “Inflation shows rise in the price level and fall in the
value of the money”. There are many reasons for inflationary pressures on an economy.
Structural shifts in the inflationary process are caused by lower oil prices and deceleration in
agriculture prices and wages. These are simultaneously being reflected in dramatically improved
household inflation expectations. Three striking developments in three areas that signal a
structural shift in the inflationary process in India: crude-oil, agriculture, and inflation
expectations.
(Figure 1.1) a. Momentum of CPI(in % andbase2012) Figure-1.1b. Inflation rate inIndia (inpercent) (From 2013-15)
 Crude-oil :
Crude-oil prices are expected to remain benign in the coming months. The average of
estimatesbythe IMF for (crude spot) and by the US EnergyInformationAdministration(EIA)
forBrentandWestTexasIntermediatecrude indicatesthatoil priceswill beabout29percent
lower in 2015-16 compared with 2014-15 (US$ 59 versus US$ 82) refer (Figure-1.2).The risk
that the decline in oil prices will reverse itself always exists because of unpredictable
geopolitical developments. However, the persistence of moderated oil prices seems highly
probable foratleastthree reasons:weakerglobaldemand,increasedsupplies,andthe global
monetary and liquidity environment. Finally, the anticipated end to the abnormally low
interestcycle inthe US and the prospectof future rate increaseswill favourextractionof oil
overkeepingitinthe ground,therebyfurtherboostingsupplyandkeepingpricessoft.Higher
rates will alsoleadtofinancial asset-reallocationawayfromcommodities,especiallyoil,asa
class into US financial instruments.

5. In additiontothat Inflationexpectationsare alsoreinedinbylowerfuel pricesandthis
couldhelpthe muchawaitedrate cutcycle inIndia,whichmostmarket participants expect
as a likely event by the second quarter of
thisyear.However,toolowanoil price isnota one waystreetforIndia.Ithassome marginal
negative effects aswell.India'sexportstooil producingeconomiescouldgetimpactedwhen
the growth rates of those economies take a dip due to low oil prices.
The fact that a large part of the Indian diaspora is
workinginoil producingcountries,anyslowdownthere
can also affect the inward remittances. Thus, it is very
critical that oil recovers to a level (say around $70) at
whichit isbalancedin favourof India'simportswithout
affecting its exports too much.
(Figure 1.2) Future price prediction of Crude Oil
The sectorsthat will have a positive impactdue to fallingoil pricesdirectlyaswell asindirectlywill be a)
automobiles, (b) plastic industries including pipes, (c) chemicals and resins selectively, (d) paints, (e)
footwear manufacturers etc. The benefit of a lower crude oil price is yet to be fullypriced in stocks like
Tata Motors,Bata,Relaxo,etc.Sectorsnegativelyimpactedwillbe upstreamoil andgascompanies.These
companies will feel a mixedeffect. On the positive side, a lower oil price means a lower subsidyburden
anda drop innetrealisationiscushionedbyadropinsubsidy.Realisation wouldgetimpactedforprivate
sectoroil companiesaswell.Companieswhichgetorder-flowsfromthe oilandgassector,couldseesome
slowdown in order inflow. Likewise, oil drilling and exploration companies are also likely get impacted
negatively. The oil price fall has created huge volatilityin world markets including India, which is not
insulatedfromthe contagioneffectsof thisdevelopment.However,the silverliningforIndiaisthatwhen
the dust settlesdown,the capital earmarkedforemergingmarketsandBRICseconomies,islikelytoflow
into India given its relative attraction compared to a weakening Brazil on falling iron-ore prices or a
collapsingRussiareelingunderthisoil price fall.Chinaappearsto be competitionbutIndiawitha newly
elected democratic, progressive government should steal the show in 2015.
Retail doesn’tbenefitmuch
Passingthe crude oil fall tothe retail customershasbeenonlyafractionof the actual fall.The fall in
crude pricescan’t be replicatedexactlyatthe retail level becauseseveral cost-intensive processesresult
intoitsrefined,usable form.Eventhen,passingthe crude oil fall wassmall.Crudeprices(USO) are down
~47% fromJuly2014 alongwithassociatedETFs(OIH).Atthe retail level,pricesonlyfell16% for Indian
consumers.One of the reasonsforthisis the excise dutyhike.Althoughithelpsboostthe government’s
revenues,itdissuadesoil marketingcompanies fromeffectingalargerprice cutat the retail level.
 Agriculture(Rural Inflation)

6. India’sinflationwillbe shapedbypressuresfromagriculture,foreignanddomestic.Accordingto
WorldBankprojections,global agriculturalpriceswillremainmuted-alikelydecline of4.8percent
in 2015 relative to 2014. This will likely have a key impact in moderating increases in domestic
support prices.
a. Food Inflation:
i. The major reason for food inflation is the mismatch of demand and supply of
agricultural products.Thiswouldincludefoodgrains,pulses,edibleoil,fruitsand
vegetables. The post liberalizationerahasseenasuddenspurtinthe percapita
income of the people withaconsequentincrease inthe demandforqualityfood
as people have become more conscious of nutritional value and their intake of
calories.
ii. Againinthe postliberalizationerathere hasbeenincreaseinpopulationof about
40 crores since 1991. This has also led to the increase in the demand.
iii. The demonstrationeffecthasinfluence themiddleclasstoimitatetheupperclass
regardingthe choice and consumptionof food itemsTherebyincreasingthe per
capita consumption.
iv. The occupational distribution of the population has undergone a drastic change
after 1991 due to diversification, though even today, agriculture remains the
backbone of Indianeconomy.Theynolongerwanttotoil underthesunbutprefer
‘white collar’ jobs which fetch them steady income because of this we can see
growth of industries and tertiary sectors to certain extent.
v. Urbanization or rural push/ urban pull factor has change the life of the people.
Mechanization has set in; labour intensive techniques have been replaced by
capital intensive techniques. As a consequence labourers become jobless and
move out in search of jobs.
vi. The change in the attitude of the people has also contributed to the increase in
demand for food grains. Since post liberalization, imported food items which
were noteasilyavailableinIndiaare tobe foundineverynookandcorner.People
do not realize the fact, that though it is their income which they are expending
they are burdening the country’s foreign exchange reserves.
vii. Popular schemes to increase agricultural growth rate do not find a place in the
final budgetary allocations. The government does not have control over the
fixation of the minimum price of the commodity which would be advantageous
bothtothe farmerandconsumer.Lackof control bygovernmentonprice fixation
has led to hoarding and black marketing of essential commodities so that it can
be sold later at sky high prices.
viii. There are certain factors that are beyond the control of the government like
population, per capita consumption, income and demonstration effect. India
beinga secularcountry it isdifficulttoenforce restrictionof familysize.Thishas
tobe atotal voluntarydecision.But,whatthegovernmentcandoistopropagate
is the benefits of small family. Increase in per capita income is welcomed by an
individual as well as a country. Though a part of the income is paid to the

7. government as tax the individual will still be left with a large proportion of his
income to spend.The large proportionof income leadstodemonstrationeffects
or deadinvestments.The excessincome maynotbe channelisedfor investments
that give returns.
Figure 1.3:FoodInflation(year-(2012-2015)) Figure-1.4Rural Wage Growth(in%)
b. Wage Pressure:The mostdramaticstructural changerelatestowagepressures.Asshown
in Figure 1.4, wage growth has declined to about 3.6 percent from over 20 percent. If
these trendscontinue,rural wage growthcancontinue todecelerate,furthermoderating
inflationary pressures.
Inflationary Expectation:
The third factorrelatestoinflationexpectations.Until recently,householdsurveysof inflation
expectationconductedbythe RBIshowedthatexpectationshave beenstubbornlypersistentandat
levelswell above actual inflation.Butinthe mostrecentsurveytheydroppedbynearly7-8percentage
pointsoverall horizons(Figure 1.5).If thischange conveyssome information,inflationexpectationswill
increasinglybe anchoredatmore reasonable levels,moderatingwage setting.Insum, the structural
shiftthatwas arguedinthe Mid-YearEconomicAnalysis2014-15 seemswell underway.
Consumerprice inflationwhichislikelytoprintat6.5 percentfor2014-15 islikelytodecline
further.Ourestimate for2015-16 isfor CPIinflationtobe in5.0-5.5 percentrange and forthe GDP
deflatortobe in the 2.8-3.0 percentrange.The implicationisthatthe economywill over-performon
inflationwhichwouldclearthe pathfor Trendsin financial marketssuggestthat there hasbeena
gradual easingof depositratesinrecentfew monthsasyieldson10 year governmentbondshave been
fallingconsistentlyduringthisperiod(Figure1.6).Decliningyieldscouldtriggerreductioninlending
ratesby banksin the comingmonths.Withthe easingof inflationaryconditions,the RBIhasalready
signalledashiftinthe monetarypolicystance whenitcutpolicyreporatesby25 basispointsto 7.75
percentinJanuary2015. In some ways,furthermonetarypolicyeasingwouldentail the policyrate
catchingup withmarketrates.

8. Figure-1.4 Householdinflationexpectation(in %) Figure-1.6 Bonds Yield(in%)
Liquidityconditionshave remainedbroadlybalanced sofarduring2014-15. The implementationof a
revisedliquiditymanagementframeworkhashelpedinreducingvolatilityinthe overnightinter-bank
segmentandbetteranchoringthe call rate near the policyrate.Withthe fiscal deficittoremainunder
control and the newliquiditymanagementframeworkinplace,liquidityconditionsare expectedto
remaincomfortable in2015-16.
Deflationary Pressure( During April to November,2014)
Deflationarypressure persistedforthe sixthmonthinarow as fall inpricesof fuel andmanufactured
itemspulledinflationtoanewlowof (-)2.65 per centinApril,promptingindustrytodemandarate cut
by the Reserve Bank.Inflation,asmeasuredonthe Wholesale Price Index (WPI),hasbeeninthe
negative zone since November,2014. InApril lastyear,it was5.55 percent.The deflationarytrendhas
bolsteredthe case fora rate cut by RBI as retail inflationhasalsoeasedandindustrialproductionis
down. Asper the Inflationdata,manufacturedproductswitnesseddeflationforthe secondconsecutive
monthin April asinflationdroppedtoa recordlow of (-)0.52per cent.
Inflationinfoodarticlescategorystoodat5.73 percent, as against6.31 percent inMarch. Fuel and
powerinflationwas(-)13.03percentin April.Industrychambersraisedclamourforlowerinterestrates,
sayingthe data providesample space forRBIto slashthe keypolicyrate to fuel investmentsandpropel
growth.( refer Figure-1.7)
Figure-1.7 Depicts the deflationaryPressures that causeda dipininflation (during April-November,2014)

9. India'sretail inflationhitsthree-monthlow
India'sconsumerprice inflationunexpectedlyslowedtoathree-
monthlowinMarch, whichcouldencourage the Reserve Banktodeliveranotheroff-cycle interestrate
cut to boosteconomicrecovery.Retail pricesrose 5.17percentyear-on-yearlastmonth,slowerthana
5.5 percentannual rise predictedbyanalystsinaReuterspoll anda 5.37 percentgaininFebruary.Food
priceswere up6.14 percentyear-on-yearinMarch comparedwitha revised6.88 percentrise a month
earlier.Withinflationbelowthe 6.0percentupperendof the central bank's targetrange,The central
bankhas cut interestratestwice thisyearat unscheduledmeetings,butkeptitskeyreporate on holdat
7.50 percent,waitingtoassessinflationpressuresandgive commercialbanksmore time tocut lending
rates.Thishas raiseda further25 basispointcut i.e.Reporate reduced to 7.25.
Q).How has the inflationary/deflationarypressure impactedsavingsandinvestmentinthe economy?
Impact ofinflation/deflationonsavingsand investment
Inflationhasconsistentlygone downinlast5years.Witha higherGDP,thishas ledto increase inthe
real income andpurchasingpower.Savingsandinvestmenthave alsogone upproportionately.

10. Figure 1-8. Inflationtrendsoverlast2years
Figure 1-9. Savingstrendinlast5 years
Figure 1-10. Sector-wise growthinsavings
Inflationhasbeencontinuouslydecreasinginlast2 years.Ithas remainedbetween5to6 % of GDP on
an average as showninFigure 1-8. Withmore real income,bothsavingsandexpendituresof consumers
have gone up.
Householdsavingshave grownsteadilywith23.6 to 24.4 % of GDP inthe last 2 years.Private sector
savingshasalsoseensteadyprogressby0.1% everyyear.Publicsavingshasseensharpincrease from
2.0 to 3.5 % of GDP in last2 years.Asa result,the grossdomesticsavingshasgrownsignificantly
comparedto previousyears.Figure 1-9& 1-10 show the savingstrendandsector wise contributionto
the savings.
Bank depositshave beenthe mostpreferredchannel of savingsandcontinue tobe so.Besides,
insurance andshare marketinvestmenthave gone significantlyup.
But consideringthe higherGDPgrowthas comparedto the inflation,the savingscouldbe expectedto
grow higherthanthe numbersavailable.Thisindicatedthatconsumerexpenditureshave alsogone up.

11. Withhigherpurchasing,livingstandardshave improvedandpeopleare willingtoaddluxuryitemsother
than theirbasicneeds.Thishasledtorapid growthinthe retail sector.