Supermarkets vital for India, but government slays them in the aisles

Food inflation is good for India. At first look it may seem like a flawed idea running against sound economics.

Food inflation is good for India. At first look this may seem like a flawed idea running against sound economics.

Inflation is decried as the poor man's tax. In recent weeks it has sparked angry street protests and in the past has had several governments voted out of power.

It erodes savings and cuts discretionary spending. If inflation is not tamed, India's rapidly growing economy, driven by domestic consumption, risks losing its mojo.

So how can it be good?

It isn't yet, but with food inflation of between 11 and 15 per cent in recent weeks, profits have soared for one of India's fastest-growing sectors: the US$28 billion (Dh102.84bn) organised retail trade.

In recent months, big supermarket chains have recorded near double-digit rises in sales of grocery items. They include: Reliance Retail, led by the tycoon Mukesh Ambani; Spencer, owned by the RPG group in Mumbai; and the Aditya Birla Group's More Retail.

Indian families typically spend between 30 and 60 per cent of their monthly earnings on food, so rising food prices are squeezing the budgets of hundreds of millions of households like never before. But not every grocery aisle in India is prone to inflationary pressures.

A study in December by the Boston Consulting Group (BCG) in four Indian cities found organised retail stores offer consumers more than 6 per cent in monthly savings on groceries, compared with the millions of family stores, known as kiranas, that dominate the retail sector.

"These [savings] can be used to pay one month's electricity bill or a premium for a systematic investment plan to secure one child's future," BCG said in its study.

While food inflation has accelerated elsewhere, at More Retail's shops it has stayed at about 2 per cent.

The chain also offers various plans bundling together products - 10kg of sugar, 5 litres of oil and 10kg of flour, for example, at a discounted price - leading to further savings.

The Confederation of Indian Industry lobby group says organised retail trade could lead to cumulative national savings of between $25bn and $30bn, almost 0.5 per cent of the country's GDP, by 2020.

In a sharp contrast to kiranas, such stores offer refrigerated cases and a large variety of products that are neatly packaged, accurately weighed, and economically priced.

A 2007 study by Crisil Research, based in Mumbai, reported that about 1 trillion rupees (Dh81.37bn) worth of food is lost to waste and poor warehousing a year.

Organised retail, Crisil said, would bolster the food supply chain, lift farm incomes and reduce the cost of food for consumers. But instead of encouraging its expansion, the Indian government is choking it. The retail sector remains heavily regulated with strict limits on investment from overseas. Foreign investors are allowed to own up to 51 per cent of stores that sell one brand of products only.

Retailers such as Walmart, which sell more than one brand of products in stores, are only allowed to operate in India through franchise partnerships with local partners.

They have lobbied the government for years to allow 51 per cent foreign ownership of multi-brand retailers to enable them to woo India's vast consuming class directly.

BCG estimates the sector has the potential to grow to $260bn by 2020, but there is a pressing need for a cash flow of $60bn over the next decade to achieve that. It could only happen if India relaxes its foreign investment rules.

But the Indian finance minister Pranab Mukherjee, who acknowledges the need to modernise Indian retail, has not relented. The industry was disappointed when Mr Mukherjee said nothing on this subject in last week's annual budget announcement.

Since last year, India's reserve bank has raised interest rates seven times to quell inflation.

Tinkering with interest rates has not helped end India's inflationary woes. Improving the food supply chain and modernising retail may be the only way to do it.