Integrating India’s Service Sector with the Global Economy-Case Study-Wholesale Sector

National ConsultationServices Trade and Domestic Regulation in India

New Delhi, Thursday, November 29, 2007

Dipankar Sengupta

University of Jammu

Debashis Chakraborty

Indian Institute of Foreign Trade

Pritam Banerjee

George Mason University

Definitions UN Central Product Classification system defines Wholesale services as the business of taking title to products supplied by others and subsequently reselling them to retailers, industrial operations, or other professional businesses. Trade in wholesale services takes place mostly through commercial presence or Mode 3, though some wholesale services can be traded through Mode 1 or cross-border mode

Modes of Operation

Organized wholesale services operate through long-term contractual commitment to deliver

certain types of goods to retailers or other businesses

‘cash-and-carry’ models-in which goods are sold from a wholesale warehouse operated either on a self-service basis, or on the basis of samples, with the customer selecting from specimen articles using a manual or computerized ordering system, or a combination of the two.

Other Services Provided..

wholesale business provides other value-added services to their customers in the form of a unified back-end sourcing system-eg. assortment building, bulk-breaking, quality-control, warehousing, transporting, financing, risk-bearing, supplying market information, and providing management services

These services makes the wholesaler very important for development of an integrated market with strong information flows, logistics and low transaction costs.

Crucial Nature of Wholesale Services Since small retailers typically lack the financial

resources, expertise and scale to develop a supply-chain in combination with logistical and informational services that large organized wholesalers provide such wholesale services are critically important

to their competitiveness. Large, organized wholesalers also provide

credit and create certainty in terms of supplies for smaller retailers and SME that reduce their costs of operations

Nature of the Indian Supply Chain

Indian supply-chain infrastructure is under-developed. The quality of warehouses and refrigeration facilities

in India are very poor losses due to inefficient logistical support for

agricultural produce including agricultural raw-materials are very high (about 20% of the total value of such products on average)

Despite critical importance very little attention has been paid to this sector in terms policy analysis, investment and regulatory climate, and government incentives There is also a paucity of data of wholesale

services’ contribution to the Indian economy in terms of employment and national income.

Contribution of Wholesale and Allied ActivitiesSectoral GDP of Wholesale Services in India

Sectoral GDP W holesale and related activities (USD bln)

1996 201997 211998 201999 212000 222001 222002 232003 262004 312005 352006 38

The Wholesale Sector and the Economy Why Wholesale? arguments forwarded for the developmental

impact of organized retailing, especially with respect to fresh foods and agricultural produce sector, have more to do with the wholesale functions of organized retail!

Why Wholesale?

It is argued that organized retail in India will lead to the development of the back-end supply chain for agricultural produce and integrate fragmented agricultural markets by Developing logistical capacity including

warehousing and refrigerated warehousing for fresh produce

Eliminate middle-men from the transactions allowing the producer to retain a larger portion of the value-added

Lead to specialization in terms of products and diffusion of knowledge on better production practices, quality control and marketing

Development of overseas markets for Indian produce (arising out of quality control and lower transaction costs for sourcing produce)

Why Wholesale?

All of the above are benefits that arise from the consolidation of the sourcing function, i.e. what is traditionally defined as wholesale, not the retail or the selling function business models in OECD countries have

blurred to difference between retail and wholesale.

Large retail chains have to consolidate their sourcing of products; especially for agriculture produce and they do so by incorporating a comprehensive wholesale function within their business model

This integration of retail and wholesale functions by large super-markets in OECD countries is making it difficult to distinguish between the two in the more developed economies

The Case of India

Can Indian liberalize wholesale and not retail? Will large super-markets enter India only to

provide the ‘wholesale’ aspect of their integrated business model? Yes- if the wholesale sector offers enough

opportunity for profit and value-addition. The recent large scale investment into a purely

wholesale venture by Wal-mart in partnership with the Bharti group in India seems to suggest that there is interest in the wholesale services sector in India from big foreign investors in OECD countries.

The Case for Sequential Opening..

In the Indian context, the opening up of the wholesale sector as a prelude to the retail sector might make more strategic sense that there is a great deal of ambiguity about the

developmental impact of opening up the Indian retail sector ( by the retail function we are going by the purely GATS classification of what retail entails and not the comprehensive back-end integration of large super-markets that is usually implied in the literature urging liberalization of the Indian retail sector)

Developmental Impact: Wholesale and Retail Trade Liberalizations compared proliferation of large retail chains might lead to

a loss of such retail related jobs new retail oriented jobs created by

supermarkets is most likely to cater to a mostly lower middle-class and school educated (preferably with some English language skills) population- jobs lost are most likely to be in the small shops that typically employ workers with little or no schooling, coming from bottom of the economic pyramid

little evidence that the savings arising out of the economies of scale of such super-markets will be passed on to the consumer

issue of small-scale entrepreneurship, especially among women Many micro-credit oriented programs see

entrepreneurial women invest in a business model that involves traveling into cities from rural areas directly selling fresh produce. Competition from supermarkets might reduce the market size (and thereby the scope) that allows such entrepreneurship to flourish

Effects of Wholesale Trade Liberalization little disagreement over the fact that

consolidation and development of the back-end supply chain, which will arise out of the development of wholesale markets, can only have a net positive impact on the Indian economy It is well recognized that the Indian wholesale

market is far from integrated and is rather inefficient

Seidler (looking at Africa)-for those countries where the farm structure and the marketing system remain fragmented and marketing co-operatives and farmer groupings are largely underdeveloped, wholesale markets are still needed to provide farmers with effective and profitable marketing outlets for their produce In addition, are basic instruments for promoting

competition and improving public health and food quality control. This thereby lowers and stabilizes consumer prices and reduces post harvest losses.

Opening up of the wholesale sector is already seeing significant investment Walmart- Bharti- automated inventory

management systems, refrigeration infrastructure, modern logistics with trucks equipped with GPS and trucker tracking, warehousing and the development of proper credit system

Development of such a system will benefit small-scale farmers and manufacturers on one hand and small retailers on the other.

Likely Effects of Wholesale Trade Liberalisation An efficient wholesale system will allow India’s

small retailers to buy more for less and spend less money on maintaining inventory

This will improve the competitiveness of India’s small retailers allowing them to be better equipped for the eventual opening up of retail to foreign competition and the existing competition from Indian super-markets.

Trade Restrictiveness Index for Distribution Services

India 0.32Brazil 0.23Indonesia 0.32Thailand 0.39USA 0.16France 0.33

Implications having a high level of restriction on distributions services does not

necessarily translate into a having a underdeveloped retail and wholesale sector, even if the economy in question happens to be a developing country. Thailand for example has more restrictive market access in retail

Thai retail sector has been booming, fuelled by Mode 2 (consumption abroad) exports given its high tourist inflows.

The Thai back-end and warehousing infrastructure, i.e. wholesale consolidation is also well developed

Thailand is a successful exporter of fresh fruits, vegetables and flowers due to low transaction costs involved in its back-end supply-chain infrastructure.

France has a very restrictive market access regime for distribution services. Large retail stores in France can only get establishment rights once it

has been ascertained that the establishment of such a large retail will not adversely impact already established small stores and local farmers markets.

However, the retail sector in France is extremely well developed and France is home to several brand name retail chains

Domestic Regulations constrained by several regulatory measures, especially in the

wholesale trade of agricultural commodities. The agricultural sector continues to be governed by

regulations that were implemented during times of food scarcity in the first three decades

remains subject to a wide range of price and other controls that limit the flow of goods between states and sometimes even within states.

Regulatory oversight in the sector is shared between the central government and state governments.

At the central level the Essential Commodities Act, introduced more than 50 years ago, is the basis for restrictions that can affect trade in food grains, edible oils, pulses, kerosene and sugar

The various state-level Agriculture Produce Marketing Acts creates a huge plethora of regulations -Further, since these are state-level regulations they tend to be different from state to state.

In some cases, these state-level Agriculture Produce Marketing Acts do not allow co-operatives and private parties to set up modern wholesale markets - losses for grains, fruits, and vegetables of around 25 to 30%3.

The Public Distribution System (PDS), while not directly a regulatory measure the impacts wholesale services, distorts market prices

The state owned Food Corporation of India, through direct purchasing interventions and minimum price support for various agricultural commodities creates an uncertain environment .

Domestic Regulations

Re gula tory M e a sure Ex iste nce of such Im pa cting W hole sa le Se rvice s m e a sure s in India

Price controls on com m odities YES

Quantitative restrictions on YESsale and purchase of com m odities

Local governm ent requirem ents YESand restrictions

Restrictions on acquiring land YESfor operating businessesPresence of large S tate Owned YESEnterprises in the product m arket

To Sum Up.. In contrast to the Higher Education where foreign players with

their corpus of knowledge and training skills may be assumed to be beneficial this is not obvious in this sector

India’s GATS commitments are sufficiently liberal to allow entry to foreign players. The problems of this sector are in some sense more

intractable than that of higher education. Federal Polity- Some issues come under the purview of the

State Governments or the Local Governments But the greater part of regulatory reform is intertwined with the

question of reforms in the agriculture sector itself and the intermittent experiences of price hikes that make the liberalization of this sector politically contentious

It may be expected however, that the very entry of the organized sector whether domestic or foreign would by their entry and impact make reforms in this field logical and politically feasible

Thus reform is likely to be piecemeal each incremental step being dependent on previous experience