Tag: Foreign Direct Investment

Foreign Direct Investment in Indian Retail Sector – An Analysis

Posted on | by Pulkit Agarwal | 74 Comments on 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

Foreign Direct Investment in Retail Sector: Others Surmounting, India Napping

Posted on | by Legal India Admin | 3 Comments on Foreign Direct Investment in Retail Sector: Others Surmounting, India Napping

Foreign Direct Investment in Retail Sector: Others Surmounting, India Napping 

“Foreign direct investment is so important to the growth of China’s economy that the national government doesn’t want to do anything to endanger that.” – Clive Jones

 

Preface

One of the most conspicuous and remarkable outcome of the process of globalization and liberalization has been the opening up of economies of evidently all the countries around the globe. The post globalization era has witnessed the emergence of a noteworthy principle in practice, namely, amalgamation of domestic economies with that of the global economy, which in turn has made a remarkable impact on each and every economic sector of all the nations. 

Nations are opening up the doors of all the permissible sectors of their economy, generously, to not just their national players, but also to foreign nationals, in order to boost the countries’ economic and social progress and in due course the Gross Domestic Product (GDP). In other words, the progression of globalization and liberalization has led to the emergence of the world as a single giant promising market.

Amidst today’s time of fierce competition and a quest to achieve and enhance a substantial level of economic and social development; each and every nation is trying to liberalize its economic policies in order to attract investments from not only, domestic players, but also from magnates all across the globe. Consequently, people with generous reserves of funds, all around the globe, are expanding their wings and seeking opportunities of investing in different spheres of this lucrative market.

What needs to be highlighted here is that India is not oblivious to the rapid developments taking place in the global market and has emerged as one of the prime destinations for the investment of funds from an impressive number of foreign investors.

This transnational movement of funds for the purpose of investment by the national/s of one country in another can be broadly defined as Foreign Direct Investment (FDI). In other words, FDI can be defined as the movement of capital across national frontiers in a manner that grants the investor control over acquired assets.

The advent of FDI in India was witnessed during the end of 1990’s when the Indian national government announced a number of reforms which aimed at helping in the process of liberalization and deregulation of the Indian economy.

Since its inception there has been a remarkable surge in the FDI inflows in the country. The total amount of FDI in India came to around US$ 42.3 billion in 2001, in 2002 this figure stood at US$ 54.1 billion, in 2003 this figure came to US$ 75.4 billion, and in 2004 this figure increased to US$ 113 billion. This shows that the flow of foreign direct investment in India has grown at a very fast pace over the last few years.

[1]According to the latest data released by Department of Policy and Promotion (DIPP) the FDI inflow during 2008-09 (from April 2008 to March 2009) stood at approx. US$ 27.3 billion. It is interesting to note here that as per an UNCTAD study –‘Assessing the impact of the current financial and economic crisis on global FDI flows’ India achieved a substantial 85.1 per cent increase in FDI flows in calendar year 2008—the highest increase across all countries—even as global flows declined by 14.5 per cent.

Needless to say, but FDI inflows has evidently proved to be very advantageous for the overall development of the Indian economy and inter alia has resulted in increased capital flow, improved technology, notable management expertise and favourable access to international markets.

It is to be noted that FDI in India is liberally allowed in all sectors including the services sector, except a few sectors where FDI is either absolutely forbidden on the grounds of national interest, or, other sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. Moreover, FDI for all the permissible items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval, which is accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

[2]Further, it is to be noted that India’s FDI Policy allows for investment only in the following form of investments, namely, through financial alliance, or through joint schemes and technical alliance, or through capital markets, via Euro issues or/ and through private placements or preferential allotments.

It is submitted that FDI Restrictions in Indian Sectors have been imposed on a few sectors by the Indian government. The various Indian Sectors having restrictions of foreign direct investment are atomic energy, nidhi company, betting and gambling, chit fund business, plantation or agricultural activities, real estate business, business in transferable development rights, lottery business, retail trading ,railway transport, mining of chrome, zinc, gold, diamonds, copper, iron, gypsum, manganese, and sulfur and ammunition and arms.

FDI Restrictions in Indian Sectors have been imposed in order to protect the interests of the country, as these sectors either relate to national security or sensitive enough to keep apart the foreign companies. Foreign direct investment restrictions in Indian sectors have also been imposed in order to allow the domestic companies to make more profits with less competition, than that of in the presence of rivalry international firms.

It is submitted that while in some sectors the restrictions imposed by the government are comprehensible; the restrictions imposed in few others, including the retail sector, are utterly baseless and are acting as shackles in the progressive development of that particular sector and eventually the overall development of the Indian Inc.

Now coming to the captioned topic of FDI in the Indian retail sector, it is submitted that the scenario of the same is kind of depressing and unappealing, since despite the ongoing wave of incessant liberalization and globalization, the Indian retail sector is still aloof from progressive and ostentatious development. This dismal situation of the retail sector undoubtedly stems from the absence of an FDI encouraging policy in the Indian retail sector.

However, it needs to be noted here that unfortunately this dismal situation is there to exist, especially in the light of the recent developments – in terms of the abrupt change in the ideology of the political parties filing the Parliament.

Before highlighting the anticipated future of the Indian retail sector in light of the recent unfavourable developments, it would be worthwhile to first briefly take into consideration the existing scenario of FDI in the Indian retail sector and the Indian retail market in general.

 

The FDI scenario in the buzzing Indian retail sector

It is submitted that retail trading in India constitutes as one of those few sectors where FDI is not freely and healthily allowed. Although, FDI is fully admissible in ‘cash and carry’ wholesale (back-end retail), it is admissible only up to 51 per cent in single-brand front-end retail.

Importantly, there is a complete ban on foreign investment in multi-brand, front-end retail. This has resulted in keeping all the giant corporate – backed retailers of the world like Walmart (USA), Carrefour (France), Tesco (UK), and Metro (Germany), who are very keen to foray into India’s retail sector, away from entering into the country. All of these retailers, therefore, to make their presence felt  in the country, have either tied-up or trying to tie-up with local corporates, to offer their services for back-end operations like sourcing, logistics, inventory management, among others, for front-end, multi-brand retail operations of such corporates.

[3]The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as 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 investors’ eyes. With a contribution of an overwhelming 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.

[4]The Indian retail sector is very different from that of the developed countries. In the developed countries, products and services normally reach consumers from the manufacturer/producers through two different channels: (a) via independent retailers (‘vertical separation’) and (b) directly from the producer (‘vertical integration’). In the latter case, the producers establish their own chains of retail outlets, or develop franchises. 

On the other hand, Indian retail industry is divided into organised and unorganised sectors. 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 supermarkets and retail chains, and also the privately owned giant 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.Unorganized retailing is by far the prevalent form of trade in India – constituting 98% of total trade, while organised trade accounts only for the remaining 2% – and this is projected to increase to 15-20 per cent by 2010.

[5] Needless to say, the Indian retail sector is overwhelmingly swarmed by the unorganized retailing with the dominance of small and medium enterprises in contradiction to the presence of few giant corporate retailing outlets. The trading sector is also highly fragmented, with a large number of intermediaries who operate at a strictly local level and there is no ‘barrier to entry’, given the structure and scale of these operations.

Moreover, the retail sector also acts as an important employment absorber for the present social system. Thus, when a factory shuts down rendering workers jobless; or peasants find themselves idle during part of the year or get evicted from their land; or the stagnant manufacturing sector fails to absorb the fresh entrants into the job market, the retail sector absorbs them all.

According to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. It is expected that India will be among the top 5 retail markets then. The organized sector is expected to grow to $100 bn and account for 12-15% of retail sales by 2015.

 [6]According to Subha Kalathur, analyst at Valuenotes, there is certainly a lucrative opportunity for foreign players to enter the Indian terrain. Growth rates of the industry both in the past and those expected for the next decade coupled with the changing consumer trends such as increased use of credit cards, brand consciousness, and the growth of population under the age of 35 are factors that encourage a foreign player to establish outlets in India. However, it is not out of place to mention here that the government policies towards FDI are the only hindering factors that do not make this a fairy tale for foreign players.

The recent developments contemplating a sea change in the Indian retail sector

[7]The history has witnessed that the concern of allowing unrestrained FDI flows in the retail sector has never been free from controversies and simultaneously has been an issue for unsuccessful deliberation ever since the advent of FDI in India. Where on one hand there has been a strong outcry for the unrestricted flow of FDI in the retail trading by the ruling UPA government and by an overwhelming number of both domestic and as well as foreign corporate retail giants; to the contrary, the Left wing along with the critics of unrestrained FDI have always fiercely retorted by highlighting the adverse impact, the FDI in the retail trading will have on the unorganized retail trade, which is the source of employment to an enormous amount of the population of India.

However, it is to be noted that lately there has been an remarkable surge in the demand for the liberalization of the Indian retail sector both  by at the domestic and as well as at the international front and it seems that the government is giving the matter a very pensive and careful consideration. Some of the factors that have contributed to this trend are the evident profits in the ever growing but conserved Indian retails sector, reduction in tariff, cheaper real time communications, and cheaper transport. The main reasons for such an unequivocal demand stems from the realisation that (i) while the retail sector requires heavy investment for expansion, there is hardly any local capital left in the capital markets as a consequence of global financial meltdown, and (ii) efficient management of multi-brand, multi-product, multi location retail, especially in the area of back-end operations, require heavy dose of technology, which over the years has been developed and perfected by foreign players.

In wake of relentless protests for the opening up of the Indian retail market for the reception of unrestrained FDI, the Investment Commission in July, 2006, suggested that 49% FDI be allowed in the Indian retail sector without any restrictions on the number of outlets or location of stores. The Indian retail boom and the Investment Commission’s suggestions renewed the debate on the issue of allowing FDI in the retail sector. The Commission opined that that foreign investment would help in improving the retail and supply chain infrastructure, and generate large-scale employment in the country. In addition, the Indian retailers could absorb some of the best operational practices of these international retailers and gain in experience. Ultimately, the consumers would benefit due to the availability of more product offerings, lower prices, and efficient service.

[8]The recommendations of the Investment Commission proved to be very promising and paved the way for a positive feedback by then ruling UPA government and also the BJP government on the issue of liberalization of the retail sector. It is interesting to note that Prime Minister Dr. Manmohan Singh while speaking on the occasion of the mid term appraisal of the Tenth Five Year Plan of the Government announced that his Government has been considering permitting FDI in retail sector ostensibly to attain the target of employment generation.

[9]Moreover, the Indian Council for Research on International Economic Relations (ICRIER) drafted a report which suggested that the opening up of the FDI regime should be gradual—over a 3 to 5 year timeframe – to give the domestic industry enough time to adjust to the changes. In the initial stage FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3 to 5 years (depending on the growth of the sector). FDI cap below 49 per cent (i.e., 26 per cent) would not bring in the desired foreign investment collaboration

[10].Furthermore, very lately in her address to Parliament in June, 2009, President Pratibha Patil, had said, “Our country has benefited from large foreign investment flows in recent years. These flows, especially FDI, need to be encouraged through an appropriate policy regime”.

[11]However, unfortunately the issue still remains nebulous; with only evident positive thinking on part of the government and with no final affirmative or negative decision on the same whatsoever.

The Parliamentary Committee’s Big Bang Theory

[12]Amidst the hope for the liberalization of the retail sector and the expectation for a promising decision by the present UPA government on the issue of according unrestrained reception to FDI in retail trading without any restrictions on the number of brands, outlets or location of stores; the parliamentary standing committee on commerce on 8th June, 2009, while presenting a picture of gloom, recommended a blanket ban on domestic corporate and foreign retailers from entering retail trade and also suggested restrictions to bar organized retail firms from setting up malls and selling other consumer products.

The 42 – member panel, headed by BJP leader Murli Manohar Joshi, has, as reported in the Economic Times Article, cautioned that allowing organized players, domestic and as well as foreign, to enter retail trade would result in the destruction of the economic foundation of the small retail supply chain. Moreover, the parliamentary committee has also suggested putting in place a regulation, a National Shopping Mall Regulation Act, to ensure that cartelization dos not take place, and regulate the fiscal and social aspects of the retail sector.

The committee observed that Consumers’ welfare would be sidelined, as the big retail giants by adopting a predatory pricing policy would fix lower price initially, tempting the consumers. After wiping out competition from local retailers, the big retailers would be in a monopolistic position and would be able to dictate prices, the panel said. It also said that procurement centers constituted by big corporates for making direct bulk purchases would initially pay attractive prices to farmers and cause gradual extinction of `mandis’ and regulated market yards.

The rationale advocated by the panel in shackling the liberalization of the Indian retail sector is that according to government accounts, the total retail business is of the order of rupees 12,00,000 crore, which is roughly one – third of the country’s GDP. Of this, 95% is accounted for by the unorganized sector. Moreover, the panel also harped that retail is the largest manpower employer in the country after agriculture and unorganized retail accounts for 8% of total employment, i.e., more than 40 million persons. The committee, therefore, concluded that in allowing the establishment of giant corporate – backed retail stores would result not only in the annihilation of the unorganized retail sector, but would ultimately result in unemployment of the masses and simultaneously would also cause serious disruption to the healthy contributions to GDP .

The panel also contended “in order to counter the adverse effects of corporate retail, there is an urgent need to design a legal and regulatory framework along with an enforcement mechanism that would ensure that the large retailers are not able to displace the small retailers by unfair means”.

Further, the panel concluded that the provision of FDI retail in single brand is not strictly adhered to and is in reality flouted. The panel opined that the shops in malls are selling other branded items along with the brands for which they got permission.

In addition to the above the committee also criticized the established of the cash – carry stores by foreign corporate retailers like Wal–Mart and METRO Group and in its report entitled “Foreign and Domestic Investment in Retail Sector”, suggested that the government should stop issuing further licenses for cash – and –carry, either to transnational retailers or to a combination of transnational retailers and the Indian partner as it is “a camouflage for doing retail trade through the back door”.

It is to be noted that the world leading retailer Wal-Mart was very eager to open a retail chain throughout India. The retail giant did everything possible so that the Government of India becomes inclined to liberalize FDI in retail sector. In February 2002, the world’s largest retailer, Wal-Mart, opened a global sourcing office in Bangalore. In November 2006, it announced its entry under a joint venture with the Indian corporation Bharti

[13]. However, all attempts proved to be futile and the giant retail MNC finally settled up with the establishment of a cash – carry outlet in Amritsar on June 6, 2009. Such stores don’t sell to end-users, but to retailers and middlemen. This is the only format under which foreign retail chains are allowed in India. It is submitted that at present, 100% FDI is permitted under automatic route in the wholesale cash – and carry trading.

Critical analysis of the ongoing events affecting the future of Indian retail sector

It is submitted that though the recommendation of the panel are not binding upon the Government; the same have outrageously done the intended harm. In other words, the direct result of the media hype of the recommendations of the Panel was the abrupt stoppage of all the progressive investment plans of various corporate giants all across the globe, who were desirous of investing an irresistible amount of capital in the Indian markets, in order to establish their brand name.

According to Shalini Thukral, Retail Merchandise Manager, Primetex Clothing Pvt. Ltd, Indian retail may lose FDI of up to Rs 400 crore (Rs 4 billion) this fiscal because of recommendations by the Parliamentary Panel on Commerce, which has opposed further leeway to the entry of international retail brands in the country.

[14]Unfortunately, the iconic $ 31-billion Scandinavian home products giant, IKEA, has put on hold its plans to set up 25 showrooms across the country foreign investment of around $ 1 billion. In an internal communication this week, IKEA told its stakeholders that Indian investment rules do not encourage it to go ahead with its investment plans — at least not in the near future.

[15]Moreover, Carrefour, Cartier, Armani, Tesco and UK-based Curry’s and Sports Direct International could also be some of the foreign retail players to cut down their investment in India following the government’s FDI policy on retail, observes Shalini Thukral, Retail Merchandise Manager, Primetex Clothing Pvt. Ltd

.[16]The ban is even extended to the big domestic corporate heavyweights retailers like Reliance, Bharti, Aditya Birla Group owned ‘More’ and Pantaloons Group owned ‘Big Bazaar’ to trade in grocery, fruits and vegetables. That would rule of Reliance Fresh from the Reliance stable and Bharti’s cash and carry stores.

Thus, it is to be noted that even though no decision has been taken by the government on the recommendations given by the panel; the direct ramifications of the recommendations have been evident considerable loss of FDI, managerial expertise, and jobs for the Indian retail industry along with sacrifice of the consumer’s interest and welfare.

Economic Survey 2008 – 2009 still keeps the hope alive

[17]It is interesting to note here that in contradiction to the recommendations of the Parliamentary Committee’s, the present UPA government has, as reflected in the Economic Survey 2008-09, which was tabled by the Finance Minister Pranab Mukherjee in the Parliament on 2nd July, 2009, raised hopes of all those who are looking for a favourable response of the government on the subject. While, the Economic Survey has made a strong case for opening up the FDI for multi-brand retail, it has recommended a gradual opening of the sector. Improving the investment environment would require “FDI in multi-format retail, starting with food retailing,” said the Survey, adding that initially the FDI could be allowed subject to the setting up a modern logistics system, perhaps jointly with other organised retailers. “A condition could also be put that it must have (for five years say) wholesale outlets where small, unorganised retailers can also purchase items (to facilitate transition),” added the Survey.

It is to be noted that the recommendations made in the Survey do provide direction to the government’s thinking on the subject. “It is a welcome suggestion and will help the Indian retail sector grow, by leading to inflow of money from overseas brands,” said Kishore Biyani, Chief Executive Officer, Future Group, to PTI. Moreover, according to Biyani, FDI will ensure a bigger playing field and sustained competition, resulting in reduction of prices for the consumer. He, however, recommended fixing a certain threshold investment for entering into the sector.

[18]Spencer’s Retail, the retail arm of RPG Group, a wholly owned subsidiary of group company Calcutta Electric Supply Company, also welcomed the Survey’s recommendation.“We view it in favourable light. There is enough room in the Indian retail sector for everybody to grow and FDI will bring about competitiveness between Indian and foreign players,” a Spencer’s Retail spokesperson said.

[19]Most modern (organised) retailers, who have been asking for removal of ban on FDI in retail, were excited with the recommendation made by the Survey in its report. However, unfortunately the recommendations embodied in the Economic Survey are not binding on the Parliament and the issue of the liberalization of the Indian retail market, in terms of unrestrained FDI in the retail trading, still needs a decisive affirmation by the Parliament in order to morph as a rule of law. Till then the issue will hang as a sword over the head of the government and would certainly act as a barrier to the healthy development of the Indian retail markets in terms of dearth of enormous amount of FDI and the lack of resultant healthy competition between the major organized retail sector giants.

Conclusion

It is submitted that the 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.

However, 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.

It is to be noted that FDI in retail would undoubtedly enable Indian Inc to integrate its economy with that of the global economy. Reference in this regard can also be made to the laudatory words of Prof. Gan Bhukta, Professor of Marketing, GITAM Institute of Foreign Trade, India, who has very aptly stated in his article entitled “Optimizing Youth Employment Through FDI in Retail in India” that “FDI will help to overcome both – the lack of experience in organized retailing as well as lack of trained manpower. FDI in retail would reduce cost of intermediation and entail setting up of integrated supply chains that would minimize wastage, give producers a better price and benefit both producers and consumers. From the stand point of consumers, organized retailing would help reduce the problem of adulteration, short weighing and substandard goods.”

Moreover, it is submitted that 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. Moreover, it is to be noted that the small retailers will still remain in good business owing to the fact of their convenient location near the residential societies and to the fact of the distant location of the mega stores and malls.

From this point of view, it can inter alia be concluded that the interest of the consumers should take precedence over the interest of the retailer and consequently healthy flow of FDI in retail should be permitted. 

Further, it would be worthwhile to list down certain advantages from the point of view of consumers which will inevitably flow from the establishment and development of larger stores and supermarkets:

In their article entitled “FDI in Retailing – Is it the need of the hour?” L. Dhamayanthi and S. Pradeep Kumar, MBA students of School of Management, Sri Krishna College of Engineering and Technology, have categorically stated that FDI will not just provide access to larger financial resources for investment in the retail sector but simultaneously will rationally allow larger supermarkets, which tend to become regional and national chains – (i) to negotiate prices more aggressively with manufacturers of consumer goods and thus pass on the benefit to consumers; and (ii) to lay down better and tighter quality standards and ensure that manufacturers adhere to them.

It is also to be noted that consumer goods manufacturers generally prefer supermarkets since they not just offer a wide range of their (manufacturers) products and services, so the consumer can enjoy single-point shopping, but simultaneously they by their attractive presentation and tempting retailing strategies also account for an increasing share of consumer product sales. Also, the fact that a well-known chain of supermarkets procures its goods from a known manufacturer becomes a stamp of quality. Moreover, with the availability of free flow of finance in conjunction with advent of healthy inflow of FDI, the supermarkets will be in a better position than small retailers to make shopping a pleasant experience by making investments in much needed infrastructure facilities like parking lots, coffee shops, ATM machines, etc.

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.

[20]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.

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.

By:

Sarthak Sarin

V Year, BBA.LLB

Symbiosis Law School, Pune

Sarthaksarin@gmail.com

1 Forms of Foreign Capital Flowing into India, available at http://business.mapsofindia.com/fipb/forms-foreign-capital-flowing.html, last visited 24th April, 2009

[2]  For an extensive reading on for what items/activities, the FDI is permitted under Automatic Route or through the Government approval; reference can be made to the Manual on the FDI in India, May – 2003, published by the Ministry of Commerce and Industry, and available at http://dipp.nic.in/manual/manual_0403.pdf., last visited 26th April 2009.

[3]  Indian Retail Biz, Economic Survey recommends opening of retail to foreign investment (FDI); suggests making beginning with ‘food’ segment, available at http://www.indiaretailbiz.com/blog/2009/07/02, last visited 24th April, 2009

[4]  Singhal, Arvind, Indian Retail: The road ahead, Retail biz, available at www.etretailbiz.com, last visited 24th  

   April 2009

[5]  Singhal, Arvind, Technopak Projections, 1999, Changing Retail Landscape, www.ksa-technopak.com.

[6]  Opportunity India: Retail Sector, available at      http://www.valuenotes.com/VNTeam/vn_investRetailSector_18oct06.asp?ArtCd=103512&Cat=I&Id=, last visited 25th April, 2009.

[7]  Ibid

[8]  Business Insights International, Foreign Direct Investment in the Indian Retail Sector, available at http://www.businessinsights.biz/Business%20Insights%20International/Business%20Updates/Foreign%20Direct%20Investment%20in%20the%20Indian%20Retail%20Sector.htm, last visited 24th April, 2009

[9]  Swadesh Dev Roye, No to FDI in Retail, No to Wal-Mart, available at

    http://indiafdiwatch.org/fileadmin/WARNstorage/NoFDI.pdf, last visited

[10] Dr. Mukherjee Arpita, Ms. Patel Nitisha, Report on FDI in Retail Sector: India, available at

    http://www.icrier.org/conference/2006/14july_05.html, last visited

 

[11] See The Times of India article entitled “House panel applies brake on FDI in retail”, June 6, 2009.

[12] The Economic Times article entitled “House panel for ‘no entry’ to corporates in retail”, June 6, 2009

[13]  Dey Dipankar , FDI in India’s Retail Trade: Some Additional Issues, available at  http://www.rupe-india.org/43/retail.html , last visited

[14]  FDI in Fashion Industry, available at http://toostep.com/debate/fdi-in-fashion-industry, last visited

[15]  See The Times of India article entitled “IKEA drops investment plans in India worth $1bn, 11th June, 2009

[16]  FDI in Fashion Industry, available at http://toostep.com/debate/fdi-in-fashion-industry, last visited

[17] India Retail Biz, Allowing FDI in retail will enlarge scope, bring fresh capital, and increase competition, say

    industry leaders, welcoming Eco Survey, available at http://www.indiaretailbiz.com/blog/2009/07/02, last visited

    26th April, 2009

[18] Ibid

[19] Ibid

[20]  India Retail Biz, Allowing FDI in retail will enlarge scope, bring fresh capital, and increase competition, say

     industry leaders, welcoming Eco Survey, available at http://www.indiaretailbiz.com/blog/2009/07/02, last visited

     26th April, 2009