Kerala Ban on Organized Retail - What’s the Logic
Kerala is all set to ban organized retailing. An article in the FT quotes C. Divakaran, minister for food and civil supplies:
The mood of the people is against the entrance of Reliance in the retail sector. We are going to add some powers to the state government to restrict or prevent these monopoly houses in the state-level retail sector.
Mr. Divakaran’s keen appreciation of the ‘mood of the people’ is absolutely correct. Most consumers would love to pay more for their groceries. They know that they can’t afford it themselves but will willingly sacrifice 10% of what they spend every month in order to protect the livelihoods of their local seth log. Most of the seth log have gotten fat and happy with the booming growth in Indian cities, but the aam admi in the same cities understand that they must suffer and pay more for their daal chawal to keep the seth log in their gaddis.
Right…and pigs fly.
IEB has a post shedding some light on the economics of organized retailing. If you boil it down here’s how organized retailing especially grocery retailing works:
Organized retail invests in the business. Not just in the stores but also in procurement, food processing and the supply chain. As a result they squeeze inefficiences out of the supply chain and develop higher value products. More value is created (consumers spend more on better products) and less is spent on distribution (economies of scale, less spoilage etc.). The benefits are shared between the consumer and the producer. I believe that in a competitive environment the organized retailer actually makes less as a % than unorganized retail. The reason why a Subhiksha can price HLL goods so much cheaper than the corner kirana store is not so much that HLL gives it to Subhikhsa cheaper (there is some of that too) but primarily because Subhiksha knows how to make money by turning inventory faster at a rock bottom margin.
That the farmer also benefits is less intuitive, but a little thought will clear this up as well. HLL’s bargaining position vis-a-vis an organized retailer is very different from HLL vis-a-vis a small kirana store. This means a lower margin for HLL. But a farmer’s bargaining position does not change substantially with an organized retailer. From a situation where a local trader monopolized procurement from his fields because of indebtedness or other reasons, the farmer now deals with a large corporate buyer. But at least he has a choice now. On the other hand, the organized retailer’s efforts to develop infrastructure (like a cold chain to reduce spoilage) and new products to expand the market (like organic produce) will result in greater value for the farmer’s crop.
There is zero economic logic in this upcoming Kerala ban on organized retailing. But there is heaps of political logic. Start with the fact that Kerala is a net consumer of agricultural goods. The economy is driven by service industries and receipts from foreign based workers not by agriculture. So the farmer lobby is small and weak. Small spells “few voters” and weak spells “little money to spare for campaign donations”. The merchants lobby on the other hand is both large and strong. They have much to lose. And they are vocal. They have street power and money power.
So sorry all you pensioners in Kerala. If you were hoping to finally be able to afford your medicines because you won’t have to swallow the horrendous markups of your local chemist, it was just too good to be true. Your government cares more about the chemists and their markups and less about you. And it cares nothing about progress.
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