A brief overview of the Indian GDP & Retail sector
I was going through a broker research report when I came across this statement “India is a US$2.6 trillion economy, 30% (US$792bn) of which is from retail. 87% of the retail sector in India is traditional retail, 10% organized retail, and 3% e-commerce”.
I found the statement a bit dubious and intriguing as well. I mentioned dubious because any sector contributing 30% to the GDP would definitely raise at least a few eyebrows. Along with a few captivating terms used in the statement, the economy size at my sight immediately reminded me of the aggressive target of $5 trillion GDP that the Government set last year. Hence, I thought to dig the statement in some detail with an intention to absorb it better and discuss a few things in the process. Also, I think it’s important to remain aware of where we are positioned at both micro and macro level; that helps in understanding the broader picture. But before I start explaining, a couple of redundant short notes if you don’t mind:
- If you are someone who hates maths, a lot of numbers are involved, but it is all simple calculations. Just expect to re-visit 4th standard maths. Nothing too overwhelming :-)
- There might be a slight inconsistency in data since sources from different periods are used. Please don’t take that by heart and try and focus on the bigger picture — the concept underneath
Let’s delve into it without further ado:
I’ll break the statement into 3 parts and address them one at a time
- GDP/Economy
- Retail sector
- Organized & Unorganized channel
What’s GDP?
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Gross domestic product (GDP) is the total market value of all the finished goods and services produced within a country’s borders in a specific period. GDP counts only the final output of goods and services, not the production of intermediate goods or the value of labor in the chain of production to avoid double-counting because the final price of a good already includes the value of all the intermediate goods used to produce it. If you are unsure about how counting intermediate goods can lead to overestimation of GDP, this simple example will help you out.
India’s economy is the fifth-largest in the world with a GDP of $2.88 trillion, overtaking the UK and France in 2019. The US, China, Japan, and Germany are larger economies than India.
As mentioned earlier, last year Government did set an aggressive target of $5 trillion GDP by 2024, but that target looks simply out of the question as suggested by Former RBI governor C Rangarajan. A lot of economists called out the target as “unimaginably ambitious”.
“The target appears exceptionally daunting, if not impossible, going by the record of the current decade. Last July, as per my estimate, India needed to grow on average at 9 percent per year in real terms from the fiscal year 2020 to 2024 to achieve the target of a 5 trillion dollar economy.” R Nagaraj, Professor of Economics, Indira Gandhi Institute of Development Research.
Now, the current pandemic has further made the goal strenuous, and the target could get pushed by at least 2 years.
COVID-19 has made a big dent in the global GDP. IMF estimates that the cumulative loss to global GDP over 2020 and 2021 from the pandemic crisis could be around 9 trillion dollars (~10% of world GDP), greater than the economies of Japan and Germany, combined.
Looking beyond COVID, as per IMF & World Bank, China is projected to overtake the U.S. by 2024, with India taking the third spot. A proud moment for we Indians, right? Well, not really.
GDP (growth) is not a good indicator of the economic development of a country. What matters is whether the people living in a country are getting wealthier. Hence, GDP per capita (growth) is a far more important indicator and is widely analyzed by economists alongside GDP (growth).
India’s GDP per capita ($2,880 billion GDP divided by ~1.38bn population) is little more than $2,000. There is good news because according to industry experts, $2,000 per capita income is traditionally seen as an inflection point for any economy.
Shrey Loonker, a fund manager from Motilal Oswal AMC in this podcast suggests that $2,000 per capita is the threshold where the pattern and velocity of consumption changes. China saw exponential growth in consumption after 2006 when it achieved a $2,000 income per capita feat.
As a matter of fact, in 1980, the economies of China and India were almost the same in terms of gross domestic product (GDP). In fact, India’s per- capita GDP of USD 354 was marginally above China’s USD 339. Today, China is ~5x India. Broadly speaking, India is 14–15 years behind China.
And when we compare on per capita basis, India with GDP per capita at ~USD 2,134 continued to rank in low 130s in nominal terms.
I think we are through with the first part i.e. getting a fair idea of where we are in terms of economy size and our target.
Okay, let’s move on to the second part now — ‘Retail’
What is the retail sector?
Retail is the part of a country’s economy that is made up of businesses that sell goods through stores, on the internet, etc. to the consumer. The consumers do not then re-sell what they bought. Put simply; the purchaser is the ultimate consumer. Manufacturers are under no obligation to only work with one retailer, and consumers are less brand loyal than they were in previous generations. This means that the retail sector is extremely competitive. The following table sets forth the bifurcation of the retail market in various segments.
Firstly, let’s all understand that the retail size of $822.2bn mentioned above is the market size and not finished goods.
Just to give you a perspective, China’s retail market size is ~$5.3 trillion, neck to neck with the US.
In other words, it includes the value of all intermediate goods. And as we learned earlier, we are concerned with the market value that gets factored into GDP calculations. Now given the fact that the retail Industry contributes ~10% to India’s GDP, we can assume the value of finished goods should be around ~$290bn.
Moving ahead, as you can see, out of $822bn, 66.3% is towards food & grocery, etc. India being a developing country is more skewed towards consumer staples (essentials) vs. developed countries. As consumers’ disposable income increases, demand for discretionary products tends to increase disproportionately beyond a point, upgrading the overall consumption basket.
That wraps 2nd part of our discussion where we figured out the size of Retail Industry and its contribution to our GDP.
Let’s now explore the final piece - Organised vs. Unorganised
In a country like India, where the population and economy are growing, the retail business is a booming one, and there are several retail formats. I’ll classify them into modern/organized retail and traditional/unorganized retail. CRISIL Research defines organized retail as large-scale chain stores that are corporatized, apply modern management techniques, and have a relatively higher level of self-service. Few prominent examples of organized Brick & Mortar retailers are Big Bazaar, D-Mart, Reliance Retail, etc.
E-retail is part of organized retail, while unorganized retailers are mainly represented by local departmental stores, Kirana shops, and others.
- While organized retail, primarily brick & mortar, has been in India for two decades now, contribution to total retail is low at 10.6% (US$ 87.5 Bn) in 2019. Organized retail penetration was only ~7% in 2012. Organized Retail is further divided into Brick & Mortar retail and E-retail.
- Brick led retail — Hypermarkets, supermarkets, EBOs, etc. — $56bn (~7% of the pie)
- E-commerce led retail — $31bn (~4% of the pie)
2. Traditional retail — Small-store (Kirana) retailing has been one of the easiest ways to generate self-employment, as it requires limited investment in land, capital, and labor. Street vendors, or hawkers who sell goods on the streets, are quite popular in India. Through shouting out their wares, they draw the attention of customers. The unorganized retail sector is still predominating in India constituting ~89% (US$ 735 Bn) of total retail transactions in 2019.
China, on the other hand, accounts for more than 1/3rd of the economy’s retail sales through online channels. The United States has ~85% penetration in organized retail.
China now is the largest e-commerce market in the world as it accounts for 42% of global retail e-commerce transactions compared to the U.S.’s 24% share, according to a McKinsey Global Institute study.
Retail in India is still that neighborhood shop operating out of a modest home in a middle-class locality. According to the Retailer’s Association of India (RAI), the Indian retail industry has more than 15 million traditional and modern retailers. Retail employs ~40 to 50 million people directly (8% of the workforce). India has huge headroom for growth driven by socio-demographic (young population) and economic factors like urbanization, income growth, and nuclear families. Another significant driver is emerging internet penetration which thanks to Reliance Jio have reached 41% compared to China at 61% and the US over 88%. The rising accessibility to the internet and smartphones can expedite the growth story.
In short, though India is progressing well, a lot of ground is yet to be captured. I feel there is immense scope for India to start making a bolder mark, and not just scratch the surface.
Finally, I’ll rephrase the earlier statement based on what we have learned hoping to grasp more meaningfully now vs. what we 10mins ago “India is a US$2.9 trillion economy, 10% (~US$290bn) of which is from retail. 88.4% of the retail sector in India is traditional retail, while 10.6% is organized retail (incl. 3.8% e-commerce)”.
Until next time!!!
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