The current FDI situation in the aviation sector

fdi in aviationPulkit Agarwal

Sakshi Vijay

Trouble in peaceful skies

Introduction

It is a dream for every Indian to fly, there are still looking only 2 or 2.5% of Indians that are flying every day. People in the country are eager to fly, the industry is ready to expand, but still there are losses.

Where is the problem? What is the solution?

Indian Aviation Minister, Ajit Singh has come up with a solution of allowing foreign airlines to participate up to 49 per cent in the equity of an air transport undertaking in India.

Aviation Industry in India

India is expected to be amongst the top five nations in the world in the next 10 years in the aviation sector. On the sidelines of the International Civil Aviation Negotiation (ICAN) Conference, Ms Pratibha Patil, President of India highlighted that currently, India is the 9th largest civil aviation market in the world. “Recent estimates suggest that domestic air traffic will touch 160-180 million passengers a year, in the next 10 years and the international traffic will exceed 80 million passengers a year,” added Ms Patil.

On one hand there is display of potential of the aviation sector in India but on the other hand Indian Aviation sector has been facing the worst turmoil resulting in losses of about Rs.10,000 crores for the financial year 31st March 2012. Kingfisher Airlines, one of the major airlines in India, is under heavy dues to various Authorities like The Income Tax Authority of India and Rs.278.52 crores to the Airport Authority of India (AAI). Out of the 6 major airlines operating in India, only one is making profits, that is, Indigo Airlines.

The reasons for such huge losses can be the extremely high rate of taxes levied on air tickets, rising operational costs, expensive fleet, worker’s standoff and so on. So even though Travel demand has grown but low fares have not allowed airlines to recover their cost. Spiralling cost of aviation turbine fuel (ATF), global economic slowdown and low yield due to intense competition and consequent widening gap between revenue and expenses have contributed to their problem .

 

SENSITIVITY AND RESTRICTIONS IN THIS SECTOR GLOBALLY

The airline industry has remained an exception globally, to the process of economic liberalization. Globally, the airline industry remains subject to several restrictions – in terms of both operations and of ownership & control. All countries impose restrictions in this one sector; restrictions that benefit national entities; and debar foreign investors generally for security reasons

 

As a general practice a majority of the countries – both in the developed and the developing world – have imposed a 49% ownership limit in the airline industry. This is true for Singapore, China and a host of other nations across Asia and Europe. The US, otherwise a free economy, is even more restrictive in the Airline sector. US limits the amount of foreign ownership in its domestic airlines to a maximum of 25%.

CURRENT FDI POLICY IN INDIA:

MEANING OF FDI:

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy .

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.

FDI IN INDIA:

In recognition of the important role of Foreign Direct Investment(FDI) in the accelerated economic growth of the country, Government of India initiated a slew of economic and financial reforms in 1991. India is now ushering in the second generation reforms aimed at further and faster integration of Indian economy with the global economy. As a result of the various policy initiatives taken, India has been rapidly changing from a restrictive regime to a liberal one, and FDI is encouraged in almost all the economic activities under the automatic route.

India is the second most important FDI destination (after China) for transnational corporations during 2010–2012. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. According to Ernst and Young, foreign direct investment in India in 2010 was $44.8 billion, and in 2011 experienced an increase of 25% to $50.8 billion.

FDI IN AVIATION SECTOR

Current rules do not permit foreign airlines to invest in domestic carriers, although non-aviation-related investors can hold up to a 49-percent stake.The proposal to allow foreign airlines to invest in domestic airlines is under active consideration of the Parliament.

If we trace the history of investment by foreign airlines in India we notice that politicians blocked a 1997 proposal by India’s Tata group to start an airline in association with Singapore Airlines.In his book An Outsider Everywhere—Revelations by an Insider, M.K Kaw, India’s former civil aviation secretary, underscored the significance of the government’s move. “The history of civil aviation in this country would have taken a different trajectory, if Tata-SIA had been allowed to float an airline,” he wrote.

At present the rules are as follows:

(a)Air Transport Services would include Domestic Scheduled Passenger Airlines; Non-Scheduled Air Transport Services, helicopter and seaplane services.

 

(b)No foreign airlines would be allowed to participate directly or indirectly in the equity of an Air Transport Undertaking engaged in operating Scheduled and Non-Scheduled Air Transport Services except Cargo airlines.

Scheduled air transport service means an air transport service undertaken between the same two or more places and operated according to a published time table or with flights so regular or frequent that they constitute a recognizably systematic series, each flight being open to use by members of the public;

Non-Scheduled Air Transport service means any service which is not a scheduled air transport service and will include Cargo airlines.

(c)Foreign airlines are allowed to participate in the equity of companies operating Cargo airlines, helicopter and seaplane services.

 

Simply put, FDI in Scheduled Air Transport Service/ Domestic Scheduled Passenger Airline is allowed upto 49% (100% for NRIs) through automatic route. FDI in Non-Scheduled Air Transport Service is allowed upto 74% (100% for NRIs) where upto 49% is allowed through automatic route and beyond 49% and upto 74% through government approval route.

 

PROPOSALS IN THE UNION BUDGET 2012-13

The following were the proposals made by the Finance Minister, Pranab Mukherjee in the Union Budget in 2012-13:

1. To address the immediate financing concerns of the civil aviation sector, It was proposed to permit external commercial borrowing (ECB) for working capital requirement for the airline industry for a period of one year subject to a ceiling of $1 billion

2. A proposal for allowing foreign airlines to participate up to 49 per cent in the equity of an air transport undertaking engaged in schedule and non-schedule transport services was to be under active consideration of the Parliament.

3. For reducing the ATF (aviation turbine fuel) price burden, the government allowed the airlines to directly import jet fuel as actual end users thereby escaping the state value added tax (VAT), which ranges from 3 to 33%. This move is expected to help them reduce overall costs as ATF constitutes around 45 per cent of their operating costs

4. Recommendation for allocating Rs.4,000 crore to the cash-strapped Air India.

5. In a bid to encourage maintenance, repair and overhaul (MRO) sector, the budget proposed to allow full exemption from customs duty and countervailing duty to aircraft spares, tyres and testing equipment

6. As a sop to Indians travelling abroad duty-free baggage allowance, which was last revised in 2004, was raised from Rs.25,000 to Rs.35,000 and for children of up to 10 years from Rs.12,000 to Rs.15,000

 

Aviation analysts felt that some of the measures in Budget 2012-13 that will bring down input costs for the airline industry which has been burdened with mounting losses. When implemented, the proposals would help in making India competitive in the international maintenance and repair of aircraft

EFFECT OF ECB:

ECB is a financial instrument used by the government to facilitate the access to foreign funds by Indian corporations and public sector undertakings.

ECB, according to analysts, will not only provide an additional source of much needed capital at low cost for the airline industry but also enable them to cushion themselves against the current financial crunch. The cost of borrowing from overseas is much lower than domestic debt and nearly 60 per cent of ECBs raised in 2011-12 cost 5 per cent less than the domestic borrowings. It is felt that this is the opportune time to raise foreign loans for Indian entities as interest rates in most developed countries are lower than in India and the aviation sector should be allowed to get maximum benefit of the prevailing situation.

 

PROPOSAL FOR ALLOWING FDI

Currently, foreign investors not related to the aviation business are allowed to hold stakes of up to 49 per cent in Indian carriers. However, on the recommendation of the aviation minister Ajit Singh, the government feels foreign airlines should be allowed to buy stakes of up to 49 per cent in Indian ones.

The decision to allow foreign airlines such as Emirates, Lufthansa, British Airways and Etihad to invest in domestic carriers was taken to save the cash-hungry Indian aviation sector, reeling from soaring fuel costs, swelling debts, high taxes and cut-throat competition. The move would also usher in international technical know-how and global expertise .

 

The Indian Airline Companies are hopeful that the foreign Companies will invest in India as it is a potentially big market with18% compound annual growth , more than USA and Europe.

For customers this step will be good or not will have to be seen later . However FDI in aviation will ensure reliability , efficiency , less delaying of flights and better operations . With taxes in control , the prices are also less likely to be affected. Operational advantages will be provided to the huge market. Above all , the key to survival will be customer satisfaction .

 

Even the Estimates Committee of Parliament has recommended removing the cap in Foreign Direct Investment in the civil aviation sector. The committee noted that the aviation industry is “heavily burdened” with taxes and levies like sales tax on aviation turbine fuel, withholding tax on leased aircraft, high airport charges and levy of royalty, service tax on agency fees, expenses incurred abroad on loans raised and also services rendered and consumed abroad They concluded that apart from addressing the shortage of funds, this would help raise the level of services for the consumers and promote healthy competition .

 

In an interview, Ajay Singh, the founder of Spice Jet highlighted how the scheme of FDI will promote efficiency amongst the competitors for foreign funds in India. He explained that eventually the market will determine which airline is going to survive and which is not, even in terms of foreign investment. Foreign airlines are not just going to come in and start investing money in inefficient airlines. So, in a sense FDI will actually promote efficiency because investment will gravitate towards those airlines that are more efficient.

Foreign Investor’s Concern Regarding FDI Policy in India

“In today’s difficult environment, generally speaking, many airlines are trying to keep their balance-sheets strong rather than investing in other airlines. …. Investing in loss-making business like the Airlines in India is obviously not a winning strategy,” IATA Director General and CEO Tony Tyler told PTI in an interview. He also proposed that more aviation friendly policies are required, particularly lifting the dead weight of taxation.

 

A similar view is expressed by Tim Clark, President, Dubai-based Emirates, saying that the euphoria over FDI in airline has the potential of turning into a damp squib as no airline would invest in Indian carriers unless the Indian government gave ultimate control to outside investors. What is highlighted is that Indian companies only want foreign airlines’ money and not their advice. They would like to continue operating in their old way, draining shareholders money in the process. Emirates were expected to be the ‘knight in shining armour’ whom other international players would have replicated by investing in India. The airline has made it clear that this is no longer going to be the case.

CERTAIN RIDERS:

Any proposal by any foreign carrier will not be put on the automatic route but will be approved on a case-to-case basis by the government. For the sake of safety the government has come up with a number of stiff riders. Each proposal will be vetted carefully before an approval is granted. The threat perception from individuals would be more than established for airlines that come forward for investment.

Even after a foreign carrier has invested in an Indian one, majority control must necessarily remain with a resident Indian. And, the board of directors of the target airline should continue to have two-thirds of its members as Indians. Besides, any such transaction for investment should fall within the SEBI guidelines. At no stage should the foreign shareholding in an airline – either by the foreign carrier, foreign institutional investors (FIIs) or through any other investment – exceed the sectoral cap of 49 %.

Conclusion

A Start Has Been Made

India is the 9th largest civil aviation market in the world and the recent estimates suggest that in next 10 years, domestic air traffic will touch 160-180 million passengers a year and international traffic exceed 80 million passengers. The sector, which is growing at the rate of close to 20 per cent and likely to generate about 2.6 million jobs in the next decade, needs to grow at a handsome speed to be used to its best potential.

Tony Tyler, IATA’s Director General and the CEO in his keynote address at the India Aviation 2012 conference displayed immense confidence in the Indian Aviation Industry saying, ‘I am passionate about aviation. And I am an India optimist. The IATA (International Air Transport Association) will be fully engaged in the team effort to turn Indian aviation into the great success story that it has the potential to become. India should not settle for a bronze medal in the world of aviation. It has pure gold potential,’ .

Bibliography

Websites :-

• www.Legalserviceindia.com

• www.Manupatra.com

• www.Scribd.com

• www.cci.in

• www.rbi.org.in

• www.dipp.nic.in

• www.legallyindia.com

• www.icsi.edu

Reports/ Research Papers

• economictimes.indiatimes.com;

• Aviationpros.com;

• Blog.seattlepi.com;

• Firstpost.com;

• Iata.org

Foreign Direct Investment in Indian Retail Sector – An Analysis

BY:-Pulkit Agarwal

 Esha Tyagi

 

Introduction

Just back from first frenzied shopping experience in the UK, a four year old ever-inquisitive daughter asked to her father, “Why do we not have a Harrods in Delhi? Shopping there is so much fun!” Simple question for a four-year-old, but not so simple for her father to explain.

As per the current regulatory regime, retail trading (except under single-brand product retailing — FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a ‘single-brand’; this condition being in addition to a few other conditions to be adhered to. That explains why we do not have a Harrods in Delhi.

India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (“FDI”). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.

Definition of Retail

In 2004, The High Court of Delhi[1] defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.

Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customersRetailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.

Division of  Retail Industry – Organised and Unorganised Retailing

The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing

Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP.[2] 

FDI Policy in India

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.[3]

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification,[4] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.

The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).

The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010[5] which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.

a)      FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.

b)      FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series)[6].

c)      FDI is not permitted in Multi Brand Retailing in India.

Entry Options  For Foreign Players prior to FDI Policy 

Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players ha\d been operating in the country.  Some of entrance routes  used by them have been discussed in sum as below:-

1.         Franchise Agreements 

It is an easiest track to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world.  Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.
2.         Cash And Carry Wholesale Trading 

100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers.[7] The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.

3.         Strategic Licensing Agreements 

Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

4.         Manufacturing and Wholly Owned Subsidiaries.

The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.

FDI in Single Brand Retail

The Government has not categorically defined the meaning of “Single Brand” anywhere neither in any of its circulars nor any notifications.

In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3[8] that (a) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed), (b) products should be sold under the same brand internationally, (c) single-brand product retail would only cover products which are branded during manufacturing and (d) any addition to product categories to be sold under “single-brand” would require fresh approval from the government.

While the phrase ‘single brand’ has not been defined, it implies that foreign companies would be allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed. 

Going a step further, we examine the concept of ‘single brand’ and the associated conditions:

FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets.

But, what is a ‘brand’?

Brands could be classified as products and multiple products, or could be manufacturer brands and own-label brands. Assume that a company owns two leading international brands in the footwear industry – say ‘A’ and ‘R’. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need to specify which of the brands it would sell. A reading of the government release indicates that A and R would need separate approvals, separate legal entities, and may be even separate stores in which to operate in India. However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand ‘A’ Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities.[9]

Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able to enter India. These chains would, typically, source products and, thereafter, brand it under their private labels. Since the regulations require the products to be branded at the manufacturing stage, this model may not work. The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreign manufacturer brands.[10]

There is ambiguity in the interpretation of the term ‘single brand’. The existing policy does not clearly codify whether retailing of goods with sub-brands bunched under a major parent brand can be considered as single-brand retailing and, accordingly, eligible for 51 per cent FDI.  Additionally, the question on whether co-branded goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail trading remains unanswered.

FDI in Multi Brand Retail 

The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.

In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce   circulated a discussion paper[11] on allowing FDI in multi-brand retail. The paper doesn’t suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store.

Foreign Investor’s Concern Regarding FDI Policy in India
For those brands which adopt the franchising route as a matter of policy, the current  FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away.
For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector – corporates such as Tata through its brand Westside, RPG Group through Foodworld, Pantaloon of the Raheja Group and Shopper’s Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing?

An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partner’s share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the ‘same’ field’ without the first partner’s consent if the joint venture agreement does not provide for a ‘conflict of interest’ clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently.

Concerns for the Government for only Partially Allowing FDI in Retail Sector 

A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Hon’ble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on ‘Foreign and Domestic Investment in Retail Sector’, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:

It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.

Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors. 

Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.

LIMITATIONS OF  THE PRESENT SETUP

Infrastructure

There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this  is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year.  Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales.  Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.

Intermediaries dominate the value chain

Intermediaries often flout mandi norms and their pricing lacks transparency.  Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character.  According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.   

Improper Public Distribution System (“PDS”)

There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising.  In spite of such heavy subsidies, overall food based inflation has been a matter of great concern.  The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages. 

No Global Reach

The Micro Small & Medium Enterprises (“MSME”) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets.  While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08[12]. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.

Rationale behind Allowing FDI in Retail Sector

FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.

The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose 173.04 points, or 0.99%, to 17,614.48.  But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.[13]

The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner – foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate India’s intentions in liberalising this sector in a phased manner.[14]

Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation.[15]

Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.

Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of ‘big’ money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers.[16]

In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the country’s GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them.

Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.

The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view and insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US-based Walmart, Germany’s Metro AG and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry ventures in India, have been demanding liberalisation of FDI rules on multi-brand retail for some time.[17]

Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill development,Tourism Development, Greater Sourcing From India, Upgradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to govemment through greater GDP, tax income and employment generation.[18]

Prerequisites before allowing FDI in Multi Brand Retail and Lifting Cap of Single Brand Retail

 

FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by integrating into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi –brand retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers. Similarly to develop our small and medium enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India. PDS  is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. To protect the interest of small retailers the government may also put in place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies. If Government is allowing FDI, it must do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure.

Further, To take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail and Multi- Brand Retail, the following recommendations are being proposed [19]:-

  • Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means.
  • Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.
  • Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entire retail sector.
  • Formulation of a Model Central Law regarding FDI of Retail Sector.

Conclusion 

A Start Has Been Made 

Walmart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale) business, which runs the ‘Best Price’ stores. It plans to have 15 stores by March and enter new states like Andhra Pradesh , Rajasthan, Madhya Pradesh and Karnataka.[20]
Duke, Wallmart’s CEO opined that FDI in retail would contain inflation by reducing wastage of farm output as 30% to 40% of the produce does not reach the end-consumer. “In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer,” Duke said, adding, that a similar trend was noticed when organized retail became popular in the US.[21]

Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a blessing in disguise for the economy.[22]

Back-end logistics must for FDI in multi-brand retail 

The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.

It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country’s GDP.

Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers.

It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.

The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.

Bibliography

Websites :-

 

  • www.retailguru.com

 

 

 

Reports/ Research Papers

 

  • A.T. Kearney’s Report on Indian Retail, 2008
  • FDI Consolidated Policy
  • Dr.R.KBalyan “FDI in Indian Retail- Beneficial or Detrimental-research paper
  • Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search
  • Dipakumar Dey-Aspects of Indian Economy-Google search

 

Newspapers

  • The Economic Times
  • The Business Standard

 


[1]Association of Traders of Maharashtra v. Union of India, 2005 (79) DRJ 426

[2] India’s Retail Sector (Dec 21, 2010) http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf

[3]Hemant Batra, Retailing Sector In India Pros Cons (Nov 30, 2010)http://www.legallyindia.com/1468-fdi-in-retailing-sector-in-india-pros-cons-by-hemant-batra

[4] Notification No. FEMA 20/2000-RB dated May 3, 2000

[5]FDI_Circular_02/2010, DIPP

[6] http://siadipp.nic.in/policy/changes/pn3_2006.pdf

[7] Supra Note 4

[8] Ibid.

[9] Mohan Guruswamy, Implications of FDI in Retail, (Dec 16 2010) http://www.scribd.com/doc/36888679

[10]Ibid.

[11] Discussion Paper on FDI in Multi Brand Retail Trading, http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdf

[12]  National Accounts Statistics, 2009

[13] Nabael Mancheri, India’s FDI policies: Paradigm shift, http://www.eastasiaforum.org/2010/12/24/indias-fdi-policies-paradigm-shift/-

[14] Discussion Paper on FDI in Multi Brand Retail Trading, http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdf

[15] Ibid

[16]Sarthak Sarin, (Nov 23, 2010) Foreign Direct Investment in Retail Sector  http://www.legalindia.in/foreign-direct-investment-in-retail-sector-others-surmounting-india-napping

[17] Nabael Mancheri, India’s FDI policies: Paradigm shift, http://www.eastasiaforum.org/2010/12/24/indias-fdi-policies-paradigm-shift/-

[18] Supra Note 11

[19] Ibid

[20]Economic Times Retail News, FDI in retail to contain inflation (Dec 31, 2010) walmart http://retail-guru.com/allow-100-fdi-in-retail-to-contain-inflation-walmart

[21] Ibid

[22] Supra note 17