At an estimated Rs12.8 trillion in 2006, India''s retailing sector makes up close to 40 per cent of the country''s GDP. Of this, food and grocery (F&G) items account for a significant 74 per cent of total retail sales across both, the organised and unorganised sectors.

Only 1 per cent of the food items retailed in India flow through the organised retail channel.

An analysis done by CRISIL Research reveals that a robust, widespread and deeply penetrated organised food retailing network in India would address some key concerns facing the Indian economy today viz. limited rural prosperity and high food prices. Reduced supply chain costs arising out of lower wastage and storage costs can be shared between producers and consumers of food items as higher farm incomes and lower food prices.

The organised retail sector makes investments to reduce inefficiencies of the traditional multi-level F&G supply chain. These inefficiencies often arise out of restrictive procurement practices, and multi level storage and commissions. This pushes up the final retail prices paid by the Indian consumer to 2.6 times the prices paid to the Indian farmer. Better supply chain management implies disintermediation, an associated reduction in commissions and a far lower wastage of goods by enhancing transportation and storage facilities.

CRISIL Research has estimated the total avoidable supply chain costs in the F&G vertical in India at about Rs.1 trillion.

• About 57 per cent of this is due to avoidable wastage and
  
• About 43 per cent is due to avoidable costs of storage and commissions.

Consequently, the average realisation of the farmer is only 35-40 per cent of the retail price. This is very low as compared with farm realisations of 60-65 per cent of the retail price in countries like the US, which have an organised retail penetration of about 80 per cent.

Sudhir Nair, head, CRISIL Research, says "If one-third of the above-mentioned savings (around Rs 335 billion) are passed on to the consumer in the form of lower costs, it amounts to more than 3.5 per cent of the country''s spend on food items (Rs9,510 billion); this can play a significant role in lowering food inflation."

Strengthening the case for organised food retailing in the country, Nair further emphasises, "Realisations earned by farmers on food grains and fresh grocery, at current levels, are estimated at around Rs1.8 trillion. Assuming this segment shifts entirely to organised retailing, and two thirds of the savings from reduced supply chain inefficiencies are passed on to the farmer, farm incomes could grow by more than 37 per cent to Rs2.47 trillion. With 60 per cent of India''s population employed in agriculture, this is very significant."

Further if farmers spend around 80 per cent of this incremental income, an incremental spending of upto Rs536 billion would get added to the Indian economy. This is equivalent to nearly 1.7 per cent of India''s GDP.