FDI – Boon or Bane

Fdi In Indian Retail Sector

Abstract

The research paper aims to understand whether the FDI policy introduced in the Retail sector in India is a Boon or a Bane. The paper gives an outlook of the Indian Retail Sector, its growth trajectories and its contribution to the national GDP. It also entails in detail the policy of FDI in this sector and its various clauses. The paper, in the end, talks about the benefits of implementing the FDI policy, and also what disadvantages it possess.

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Overview Of Indian Retail Sector

Indian retail sector is the most booming sector in the Indian economy and largest sources of employment after agriculture. Trade or retailing is the single largest component of the services sector in terms of contribution to GDP. Its massive share of 14% is double the figure of the next largest broad economic activity in the sector. India is the second most attractive retail destination ‘globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes.

With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy. It is undergoing a transitional phase to usher organized retail. The attitudinal shifts of the Indian consumers were in terms of “Choice Preference”, “Value for money’ and the emergence of organized retail format. The overall Indian retail sector is expected to rise to US $ 833 billion by 2013 and to US $ 1. 3 trillion by 2018.

In line with the global developments in the retail industry, Indian retail is largely dominated by the unorganized retailers. It has witnessed a massive transition in the last decade. Of the total retail sales, the food and grocery segment constitute the major chunk. Growing in tandem with the economy is the Indian retail sector. The sector is on a high growth trajectory and is expected to grow by more than 27 per cent over the next 5 to 6 years. Initially it was predominately fragmented through the owner- run “Mom and Pop

Outlets”. The change in lifestyle, education, travel and disposable income has changed the pattern of consumption. Customers are aware of their surroundings and developments. The awareness was created through the advent of technology such as television, cable and satellite channels. They are accustomed to the organized retail format. Understanding the pulse or trend of the market the large corporate groups like ITC, Reliance, Tata, Rahejia and others are infusing staggering amounts of capital into organized retail sector.

Some of the leading Indian retailers who had tapped this market were Bata India Ltd, Big Bazaar, Crossword, Ebony Retail Holdings Ltd. , Food Bazaar, Globus Stores Pvt. Ltd. , Liberty shoes Ltd. , Music World Entertainment Ltd. , Pantaloon Retail India Ltd. , Shoppers Stop, Subhiksha, Titan Industries, Trent, Benetton, Addidas, Reebok, Levis, Diary Farm, KFC, Metro, WalMart, Marks & Spencer’s etc are some of the popular global retail brands that have set up retail business in India.

The organized retail sector comes with the concept of malls, supermarkets and department stores. Like Subhiksha, Marks & Spencer’s, Oberon etc it gives a different feeling and the environment of pick and choose from a variety of products. The modern retail formats are encouraging development of well-established and efficient supply chains in each segment ensuring efficient movement of goods from farms to kitchens, which will result in huge savings for the farmers as well as for the nation. The Government also stands to gain through more efficient collection of tax revenues.

In the coming years it can be said that the hypermarket route will emerge as the most preferred format for international retailers stepping into the country. At present, there are 50 hypermarkets operated by four to five large retailers spread across 67 cities catering to a population of half-a-million or more. Estimates indicate that this sector will have the potential to absorb many more hypermarkets in the next four to five years. According to World Bank report, it is suggested to have an organized retail sector so that it is easy to have a direct control on the price mechanism and to control on the macro economic variables.

Strengths:

1. India attracted US$16. 9bn in foreign direct investment (FDI) inflows in 2006, according to the UN Conference on Trade and Development – a 153% year-on year increase.
2. A cheap, skilled, English-speaking workforce can do the jobs of Western workers for a fraction of the wages paid in North America or Europe.
3. Average annual GDP growth of 7. 7% is predicted by BMI through to 2016. With the population expected to increase from 1. 26bn in 2012 to 1. 32bn by 2016, GDP per capita is forecast to rise 77. % by the end of the forecast period, reaching US$2,980.
4. The value of the retail segment is expected to grow from an estimated INR22. 53trn (US$489. 80bn) in 2012 to INR27. 73trn (US$739. 56bn) by 2016.

Weaknesses:

1. The competitiveness of local firms is undermined by official red tape, from foreign investment restrictions to inflexible labor laws.
2. Intellectual property rights are poorly protected in India, one of 12 countries on the 2009 priority watch list compiled by the US Trade Representative.
3. The rural population of India represents more than 70% of the total, while almost 37% is classified as not economically active by the UN. This is a major obstacle for retailers seeking to rapidly expand their customer base.

Opportunities:

1. India could enhance the competitiveness of the local industry through further liberalization and deregulation.
2. Prime Minister Manmohan Singh is eager to reform the banking sector to increase the availability of long-term financing, particularly for large infrastructure projects.
3. The value of the OTC drug sector is forecast to grow by more than 94% by 2016, when it will be worth an estimated US$6. 58bn.

Threats:

1. The arrival of Western players, including management consultancy Accenture and technology company IBM, is raising local wages in the outsourcing sector.
2. China remains a major competitor for FDI flows into India. India has excessive bureaucracy and poor infrastructure in comparison with China, which attracted US$60. 6bn of FDI in 2005.
3. International retailers are restricted by India’s strict FDI regulations.

Single-brand retailers are able to own a 51% majority stake in a joint venture with a local partner, but multi-brand retailers must operate through a franchise or cash-and-carry wholesale model.

What Is FDI

Foreign Direct Investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10 percent or more or voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital of the long term capital, and short-term capital as shown in the balance of parameters.

It usually involves participation in management joint-venture, transfer technology, and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment resulting in a net FDI inflow (positive or negative) and “stock of foreign direct investment” and outward foreign direct investment, which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movement.

Fdi In Retail: It All Began In 2006

In 2006 the Indian government took the first step to promote organized retail in India by opening up single brand retailing to FDI. There are five entry routes through which the international players enter into the market, such as franchising, cash and carry wholesale trading, joint venture, manufacturing and distribution. Government of India permitted 100 per cent FDI in cash and carry wholesale formats through automatic route and up to 51 per cent FDI in single brand retail through Foreign Investment Promotion Board (FIPB).

This rule made the international brand much easier to enter into the Indian retail market. Through this agreement Reebok, Nokia and Adidas entered the Indian market. However the franchising is one of the way through which small retailers embrace organized retailing through brand association where there’s a scope for leveraging business operations. The 100 per cent FDI permits for cash and carry has paved the way for retail giants like German Based Metro and US based Wal-Mart to set up their shops in India.

Reliance Retail had made a tie up with UK based Marks & Spencer to float an equal joint venture and this would scale up 1400 stores by the end of the next fiscal year.

The benefits of FDI investment in the retail sector were:

1. It improves the quality in products and services because of higher competition
2. Improved the lifestyle
3. Economies of scale would help lower consumer prices and increase the purchasing power of the consumer
4. The technology upgraded the system in terms of logistics, production and distribution channels. It adds as a driver in the Supply Chain Management.
5. The FDI investment will help in flourishing and developing the retail segment.
6. It not only promotes tourism and would develop skills and manpower.

FDI Now In Retail

India's retailing industry is essentially owner manned small shops. In 2010, larger format convenience stores and supermarkets accounted for about 4 percent of the industry, and these were present only in large urban centers Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets.

Even single-brand retail was limited to 51% ownership and a bureaucratic process. In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple.

In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30 percent of its goods from India. Indian government continues the hold on retail reforms for multi-brand stores. On 14 September 2012, the government of India announced the opening of FDI in multi-brand retail, subject to approvals by individual states.

This decision has been welcomed by economists and the markets, however has caused protests and an upheaval in India's central government's political coalition structure. On 20 September 2012, the Government of India formally notified the FDI reforms for single and multi brand retail, thereby making it effective under Indian law. On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand retail in India. The Feds managed to get the approval of multi-brand retail in the parliament despite heavy uproar from the opposition.

The government of Manmohan Singh, prime minister, announced on 24 November 2011 the following: * India will allow foreign groups to own up to 51 per cent in "multi-brand retailers", as supermarkets are known in India, in the most radical pro-liberalisation reform passed by an Indian cabinet in years; * Single brand retailers, such as Apple and IKEA, can own 100 percent of their Indian stores, up from the previous cap of 51 percent; * Both multi-brand and single brand stores in India will have to source nearly a third of their goods from small and medium-sized Indian suppliers; * All multi-brand and single brand stores in India must confine their operations to 53-odd cities with a population over one million, out of some 7935 towns and cities in India.

It is expected that these stores will now have full access to over 200 million urban consumers in India; * Multi-brand retailers must have a minimum investment of US$100 million with at least half of the amount invested in back end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing to considerably reduce the post harvest losses and bring remunerative prices to farmers; * The opening of retail competition will be within India's federal structure of government. In other words, the policy is an enabling legal framework for India. The states of India have the prerogative to accept it and implement it, or they can decide to not implement it if they so choose. Actual implementation of policy will be within the parameters of state laws and regulations. The opening of retail industry to global competition is expected to spur a retail rush to India.

It has the potential to transform not only the retailing landscape but also the nation's ailing infrastructure. A Wall Street Journal article claims that fresh investments in Indian organized retail will generate 10 million new jobs between 2012–2014, and about five to six million of them in logistics alone; even though the retail market is being opened to just 53 cities out of about 8000 towns and cities in India. It is expected to help tame stubbornly high inflation but is likely to be vehemently opposed by millions of small retailers, who see large foreign chains as a threat. The need to control food price inflation—averaging double-digit rises over several years—prompted the government to open the sector, analysts claim.

Traders add huge mark-ups to farm prices, while offering little by way of technical support to help farmers boost their productivity, packaging technology, pushing up retail prices significantly. Big foreign retailers would provide an impetus for them to set up modern supply chains, with refrigerated vans, cold storage and more efficient logistics. Foreign chains can also bring in humongous logistical benefits and capital; the biggest beneficiary would be the small farmers who will be able to improve their productivity by selling directly to large organized players.

Advantages

1. Huge Market Size and a Fast Developing Economy India is the second largest country in the world just behind China in terms of population. Currently the total population is about 1. 2 billion.

This huge population base automatically makes a huge market for the business operators to capture and also a major part of it is still can be considered as un-served or not yet been penetrated. Therefore FDI investors automatically get a huge market to capture and also ample opportunity to generate cash inflows at relatively quicker times. The economy of India is also moving at faster pace than most of the economy of the world and inhabitants of the country also obtaining purchasing power at the same rate.

2. Availability of Diversified Resources and Cheap Labor Force The huge advantage every company gets by investing in India is the availability of diversified resources. It is a country where different kinds of materials and technological resources are available.

India is a huge country and has forest as well as mining and oil reserve as well. These are also coupled with availability of very cheap labor forces at almost every parts of the country. From Mumbai which is in the west to Bengal which is in the east there is ample opportunity to set up business venture and location and most importantly labor is available at low cost.

3. Increasing Improvement of Infrastructure A lot of research study in India finds out that historically the country fails to attract a significant amount of FDI mainly because of problems in infrastructure. But the scenario is changing. The Indian government has taken huge projects in transportation and energy sectors to improve the case.

The projects for developing road transport is worth of $90 billion, for rail it has undertaken several projects each worth of $20 million and for ports and airports the value of development projects is around $ 80 billion. In addition the investment in energy development is worth of $ 167 billion and investment in nuclear energy development is outside that calculation. These huge investments are changing the investment climate in the country and investors will benefit hugely by that (Department of Industrial Policy and Promotion, 2005; Dua & Rasheed, 1998).

4. Public Private Partnerships Another significant advantage foreign investors experience in India today is the opportunities of PPP or Public private Partnership in different important sectors like energy, transportation, mining, oil industry etc.

It is advantageous in several ways as it has eliminated the traditional tirade barriers and also joint venture with government is risk free up to the great extent (GOI, 2007; IMF, 2005; Nagaraj, 2003).

5. IT Revolution and English Literacy

Today the modern India considered being one of the global leaders in IT. India has developed its IT sectors immensely in last few years and as of today many leading firms outsource their IT tasks in India. Because of IT advancement the firm which will invest in India will get cheap information access and IT capabilities as Indian firms are global leader. Along with that Indian youth are energetic and very capable in English language which is obligatory in modern business conduction.

This capability gives India an edge over others. Foreign firms also find it profitable and worthy investment by recruiting Indian HR (GOI, 2006; GOI, 2007; IMF, 2005; Lall, 2002).

6. Openness towards FDI

Recently the Government of India has liberalized their policies in certain sectors, like Increase in the FDI limits in different sectors and also made the approval system far easier and accessible. Unlike the historical tradition, today for investing in India government approval do not require in the special cases of investing in various important sectors like energy, transportation, telecommunications etc (Economic Department, 2005; GOI, 2007; Nagaraj, 2003). . Regulatory Framework and Investment Protection In the process of accelerating FDI in the country the government of India has make the regulatory framework lot more flexible. Now a day’s foreign investors get different advantages of tax holiday, tax exemptions, exemption of service and central taxes. The government also opened few special economic zones and investors of those zones also get a lot of befits by investing money. Apart from that there are number of laws has been passed and executed for making the investments safe and secure for the foreign investors (IMF, 2005; Nagaraj, 2003; Planning Commission of India, 2002; World Bank, 2004).

FDI can be a powerful catalyst to vigorous competition in the retail industry, due to the current scenario of low competition and poor productivity. FDI will help if farmers can bargain. Villages only know how to produce things. We have to tell them how to market their produce, how to do value addition. One of the things we have talked about a lot in the book is cooperative farming. In India, farmers have small holding but they form a cooperative, it becomes a large holding and then form a cooperative, it becomes a large holding and then the farmer has bargain power. FDI will accelerate retail market growth, providing more employment opportunities. It s a basic principle that creating competition in general is good for the market. But the doubt is that, since proper procurement and distribution system and the infrastructure is not fixed, how the rest will fall in place, when the giant retailers enter our market. Back-end procurement will still remain big problem. Sumita Kale, economist, in his statement says that “the debate that by-introducing 51 percent FDI, a lot of money will flow out of the country is an old school of thought. Lots of our Indian companies are operating abroad and have successfully contributed to our economy. The bigger issue is that with benefits we might end up paying a price hence we must work on a reasonable solution.

As mentioned earlier the farmer will benefit from FDI as they will be able to get better prices for their produce. The elimination of the intermediate channels in that procurement process will lead to reduction of prices for consumers. Foreign brand will promote healthy completion in market. Every time the government brings up the subject of FDI, the domestic retailers with the support of some politician jump to lobby against the bill. As the government initializing the FDI, there is bound to be some problems, which can definitely be resolved. The government in near future can appoint a regulating body to monitor the retail sector just like other sectors.

There will be lot of man power requirement when FDI starts, logistic demands will be more, and people to serve in these stores will get jobs. Managerial positions will open up. Technological requirements and software developments will increase based on the Indian market software needs will be changed. Infrastructure and building constructions will take place. The living conditions will change, good roads will come up. There will be good flow of money that flows these are major benefits of FDI.

Disadvantages

Customers feel that retail stores offer better deals, but they don’t realize that they end up paying and buying more than what is required.

If 51 percent FDI is allowed in multi brand, it will teach the local retailers about real competition and help in ensuring that they give better service to Indian consumers. It is obviously good for local completion and there are no consequences of our local kirana shops disappearing. The Kirana stores operate in a different environment catering to certain set of customers and they will continue to find new ways to retain them. Kirana stores are convinced that stores all big stores will be set up far away from the city and the travel time in India will not help us to go often and buy things from these large stores. Large store buying will help only in bulk purchases. So there is no need to fear about the FDI investment in this context.

Investing in India definitely has some negative sides as well. Most noticeably India considered as a huge market but a major portion of that is a lower and middle class person who still suffers from budget shortage. The infrastructure of the country also needs to be improved a lot and already it is under huge strain. There are also problems exists in the power demand shortfall, port traffic capacity mismatch, poor road conditions deal with an inefficient and sometimes still slow-moving bureaucracy. The huge market in India is an advantage but it is also very diverse in nature. India has 17 official languages, 6 major religions, and ethnic diversity as wide as all of Europe.

This makes the tasks difficult for the companies to make appropriate product or service portfolio. India is not a member of the International Centre for the Settlement of Investment Disputes also not of the New York Convention of 1958. That make life bit difficult for the foreign investors. India still has a heavy regulation burden among other countries, for example the time taken to start business or to register a property is higher in India. Similarly, indirect taxes, entry-exit barriers and import duties have been major disadvantages (Nagaraj, 2003; Planning Commission of India, 2002; USITC, 2007; World Bank, 2004).

Keywords

Retail, FDI, SME, Multi-brand, Single-brand

References

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