While there has been a lot of media coverage on the hot debate about the benefits and pitfalls of allowing 51 per cent FDI in multi-brand retail, several important issues have not been properly highlighted either by the Government or by those opposing the move.
The most important is the impact on direct and indirect tax revenues for the exchequer. Another is a correct estimate of what amount of actual foreign investment India can expect. How many kiranas will actually get impacted?
One of India’s most respected retail consultants – Asipac – has come out with a simple and factual white paper covering these important issues:
l By 2015, Urban India will have 423 million people and will need 635 million sq. ft. of space for food retail (including pharma, beauty and FMCG) compared to 511 million sq. ft. today (total space occupied by modern trade and neighbourhood kiranas).
l Assuming that the organized sector (including the existing players) captures 7.5 per cent market share in four years, we will have 47.63 million sq. ft. of hypermarkets, supermarkets and pharmacies by 2015, compared to 15.3 million sq. ft. today. Even if foreign retailers capture 50 per cent of this and have 23.82 million sq. ft., at average ownership of 1,200 sq. ft. per kirana owner, this will only affect 19,850 businessmen and not crores of businessmen, as has been hyped.
l There’s much more to retail than just food & grocery. A total of 423 million urban Indians will need 3,680 million sq. ft. of space for non-food retailing. Assuming 20 per cent market share, the organized sector is estimated to have 736 million sq. ft. of non-food retail space.
l Thus, organized retail will have a maximum of 783.63 million sq. ft. (47.63 + 736.00).
l At one direct job for every 180 sq. ft. of retail space, 4.354 million people will be employed across the 783.63 million sq. ft. of space occupied by organized retail. With 1.5 indirect jobs (in supply chain and logistics) per direct job, it adds up to a total of 10.89 million jobs.
l A vast majority of the employees will be primary school drop-outs. Organized retailers will give them benefits such as PF, ESI and insurance, and hone their skills through training & development. What does the kirana do to increase India’s Human Development Index? So, FDI = HDI.
l Why would any political party want to favour 19,850 small businessmen over 10.89 million youth who don’t have many other other job opportunities?
l At estimated sales of Rs. 2,000 per sq. ft. per month in 2015, the 783.63 million sq. ft. of organized retail space will generate revenues of Rs. 18.807 trillion per annum and taxable profits of Rs. 564 billion (assumed at only three per cent of revenues).
l This translates to Rs. 2.594 trillion in GST collections (@ 16 per cent GST) and Rs. 174.28 billion in corporate income-tax. The Government is losing a minimum 50 per cent of this potential tax revenue because half of the business of the unorganized retail trade is probably escaping the tax net.
l The organized sector will have 780,000 managers earning average taxable salary of Rs. 1 million per annum. This will generate at least Rs. 195 billion of additional personal income-tax collections.
l The total Rs. 1576 billion in additional tax collections (Rs. 1294 billion in GST [50 per cent of total] + Rs. 87 billion in corporate income-tax [50 per cent of total] + Rs. 195 billion in personal income-tax) translates to an increase of more than 11 per cent in the tax collection of the Centre and States, wiping out the revenue deficit and making India a revenue surplus economy.
l Of the 783.63 million sq. ft. of organized retail space, about 103.9 million sq. ft. already exists. So we are talking about 680 million sq. ft. to be added a new. This will need infrastructure investments of Rs. 4.76 trillion (at an average Rs. 7000 per sq. ft. at 2012-2015 costs, for building construction, interiors and shop fit-ins) and Rs. 1.904 trillion in inventories (@ Rs. 2800 per sq. ft.), or a total investment of Rs. 6.664 trillion ($128 billion).
l If 50 per cent of this is foreign investment (by foreign retailers as well as financial investors), we are talking about FDI of $64 billion in four years, or $16 billion per annum, 80 per cent increase over the actual inflows of fiscal 2010-11. This will help the rupee to bounce back.
l Most importantly, about $180 billion will get converted from the black market economy to the accountable economy, and we may need a much smaller Lokpal authority.
Asipac undertakes strategic research on retail and retail real estate sectors. In retail real estate, it has provided development strategy, planning and lease management on retail/shopping centre projects of more than 17 million sq. ft., including seven of the 15 largest shopping centres in India.
The company has leased more than 8.5 million sq. ft. of retail real estate in south India alone in just six years. It has current leasing mandates for nine malls in five cities.