FDI in Indian Retail sector- pros & cons

Presented by: 1) * K.Veena Madhuri Eaims.veenamadhuri@gmail.com 9542813818. 2) V.Divya Eaims.divya@gmail.com 9652095424 ABSTRACT Foreign direct investment is no longer questionable as it is recognized as an imperative driver of growth in the country. With its huge population, growing market, short supply of products and services, India requires external capital to accelerate economic development. However, policy makers are asked to show restraint in making decisions on the extent and areas of investment. The recent decision of allowing 100% FDI in retail has become a major controversy in the country. In view of this, the paper examines the current status of FDI in retail and discusses the prosand cons of having 100% FDI in single brand retail sector. Key words: - FDI, Retail sector, single brand retail sector, Multi brand retail sector

INTRODUCTION Foreign direct investment is a soaring high in recent years. Indian Government is making all the efforts to attract and facilitate FDI from Non-residents including overseas corporate bodies that are predominantly owned by them. An Indian company may receive foreign direct investment under government route and automatic route. FDI under the automatic route does not require prior approval eitherby the Government of India or the Reserve Bank of India (RBI). FDI in power trading, petroleum infrastructure, Processing and warehousing of rubber and coffee, Diamond and coal mining is allowed to the extent of 100%, through the automatic route. The government of India permitted foreign multinationals to invest up 51% in retail sector in single brand retail. Recently government has announced 100 percentforeign direct investment (FDI) in single-brand retail, and 51 percent FDI in multi brandretail1. This has led to heated debate and government has

for the presentpostponed its implementation. In this context, the paper discusses the rationale of the decision. INDIA DESTINATION FOR FDI India remains one of the hottest retail destinations on the planet occupying the fourth spot in consulting major A.T. Kearneys global retail development index. India has been rated as the 2nd most attractive FDI destinations in the world after china2. India has become a favored destination for many MNCs to invest for various reasons. (i) Huge market India is targeted for FDI is as India is the 7th largest country with 7 billion population, with over one billion a growing middle class. (ii) Growing nation The government of India is keen on promoting economic development and the progress is significant with gross domestic product (GDP) growth rate of over 8-10%. Measures to contain inflation and sustain demand are initiated from time to time. (iii) Demand larger than supply India is also attractive to business as demand for many products and services out strip supply. The vast nation is characterized by unorganized retailing, which offers convenience shopping, is not suitable to the emergent fashion life style shoppers in the country. There is a wide gap to bridge, by developing retail business that offers hygienic, expansive space for shopping a variety of goods and services under one roof. (iv) Favorable public policy FDI is promoted by the Indian Government which see its benefits as a comprising transfer of technology and skill shared access to the research and development, employment generation, access to the global market, export growth and increased foreign exchange earnings. FDI IN RETAIL

FDI is allowed in many sectors in India as can be observed from Figure -1

Fig.1 Sectors attracting highest FDI equity inflow 2000-2011 (US $ billion) Source: FDI into India An overview www.thersearchbase.com Services sector with US $ 28 billion inflow of capital is the higher beneficiary. The next beneficiaries are computer and telecom with $11 billion followed by real estate and construction with $ 10 billion. The industrial sector is less benefited, with automobiles, power and metallurgical, petroleum and chemicals getting FDI in the range of $6 to 3 billion. When it comes to retailing, FDI is totally prohibited in multi brand retailing along with the other sectors like atomic energy, lateness, gambling and betting, chit funds, Niche companies, agricultural and plantation, housing and real estate business, trading the transferable development right manufacturing of cigarettes, tobacco and tobacco substitutes. FDI in single brand retail trading was allowed up to 51% under the govt. route subject the fulfillment of the following condition (paragraph 6.2.16.4 of the consolidated FDI policy dated is to October 2011 issued by .(DIPP) Products to be sold should be of single brand only Products should be sold under the same brand internationally i.e. in one (or) more countries other than India. Only products which are branded during manufacturing would be covered Foreign investors should be the owner of the brand.

India attracted cumulative FDI flow of US 1, 97,935 from August 1991 to April 2011. FDI inflow in single brand retailing during last 3 years from 2009 to 2011August was only Rs 196 crores. LIBERALISED DECISION In view of the identified need to strengthen and modernize retailing in India, government has liberalized the FDI policy. 1. Single brand retails trading 100% FDI will be allowed in single brand retail trading. The prior conditions identified in the early policy have been retained. The condition are single brand, same brand internationally products branded during manufacturing and foreign investor to be owner of the brand. 2. Multi brand retail trading the largest changes provide that 51% foreign direct investment in the multi branding retail sector with the FIPB approval could be allowed subject to the fulfillment of the following condition. 50% of the total FDI should be in back and infrastructure. 30% of the procurement of the manufacturing product should be flow small industries. The retail store will only be allowed in the cities with a population of more than 10 lakhs people as per the 2011 census. As of Now there are only 51 such cities in India. The government reserves the first right to procure agricultural product. Fresh agricultural produce in including fruits, vegetable, flower, grains, pulses, fresh poultry, fishery and meat products may be unbranded5. FORCE FIELD OF NEW DECISION The new decision liberalizing FDI in retail sector was hailed by some as a radical and progressive one and labeled by some as an anti-poor and retrograde step. The supportive and opposing views are presented here6.

Supportive voices There are many who say that retailing in India has to become world class, competitive and contributive. (i) Shopping experience Foreign tourists and Indians, who visit foreign nations, feel that shopping in India is more need based and cannot offer opportunities for exploration, entertainment, relaxation like the shopping malls in developed nations.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! (ii) Conform to WTO agreement India being a signatory to World Trade Organizations General Agreement on Trade in Services had to open up the retail trade sector to foreign investment. Accordingly 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. As such, 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. (iii) Benefits outweigh the threats 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 the issue of allowing FDI in the retail sector was first met with incessant protests. The decision led to the rise in the level of employment and development of their countrys GDP. Thomas Varghese, Chairman, CII National Committee on Retail & CEO, Aditya Birla Retail maintained that the decision will help get much needed capital to fuel the growth of modern retail in India which in turn will immensely benefit farmers, small and medium enterprises, and

customers. Along with this, it will create a huge employment opportunity for the youth of this country. (iv) Benefits to consumer India will significantly flourish in terms of quality standards since the inflow of FDIin retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. Many of the foreign brands would come to India. Also inflation will be contained, benefiting consumers. Duke, Wal-Marts 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 endconsumer. Bijou Kurien, President & CEO, Lifestyle, Reliance Retail observed that the move will create an ecosystem where consumers will have a wider choice. (v) Small and medium enterprise grow Nagesh, Vice Chairman, Shoppers Stop, highlights the benefit. All SME and SSI vendors of the automobile industry became billion dollar market cap companies, so we will see the same benefits coming to retail industry vendors now. Ikea is already sourcing from several Indian vendors for exports, now they will start sourcing for selling in India. (vi) Spread of retail business Vinay Singh, MD, Max Hypermarkets India expected growth in retail business across the country. He said: the immediate impact with the capital coming into India will be that a lot more expansion and technology will come into retail. The result will be that there will be a far greater retail presence across India. Secondly, the efficiencies of retail will also increase. SanjivGoenka, Chairman, RP-SanjivGoenka Group Capex (investments) in any industry is most welcome, FDI or domestic, as this will create additional capacity and hasten the growth of modern trade. (vii) Increases employment opportunities

SanjivGoenka, Chairman, RP-SanjivGoenka Group opined that about 90 percent of the children do not pursue education beyond their schooling. With large number of new stores opening, modern trade will become a preferred choice of employment to them. This has its own positive impact on the economy as well. (viii) Creates healthy competition AnirudhDhoot, Director, Videocon Industries Ltd., observed that the entry of many large international retailers will create healthy competition amongst Indian retailers. There are already a number of global players who have formed alliances with Indian partners. With the FDI, people who already have established alliances will move fast and start scaling their business in India at a much faster rate. Those who are not present will become more interested in investing in India. Further India being a large nation, there will be space for different formats. He says: There is space for both the bigger format stores, organized retail, and the traditional retail stores. Each one caters to a different set of customers. The kirana stores are more localized, they are more like convenience outlets that cater to their catchment areas, and their USP is more to do with service. The bigger, organized stores are concerned about their USP being different from their competitors and they are positioned more like one-stop-shops. There is a difference in formats so I don't seen any major clash, or any dramatic impact. (ix) Facilitates overall development DipakAgarwal, Chief Executive (operations & strategy), DLF Brands Ltd is of the view that there will be overall development in the economy. He said: Allowing 51 percent FDI in multi-brand retail is also going to result in more improvements like general infrastructure growth, continuing GDP growth, tax reforms like GST and bringing control and competitiveness in real estate industry.

Opposing voices

The opposing voices are from those who fear job losses, loss of entrepreneurial opportunities and intense competition from major players. (i) Adverse effect on entrepreneurial opportunities The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers and it has been the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of Indias GDP. The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs. Harish Bijoor, Brand-expert & CEO, Harish Bijoor Consults Inc., supports the view in the following words: The small retailers of India will definitely be affected, particularly in the big cities of India, which will be the hinterland of play by new entrants. Also, we will have a kind of Retail Darwinism at play from now on. The big fish will shake and stir the small ones for a start. (ii) Adverse effect of on medium players Rajiv Thakur (Partner 7 to 9 Bazaar, Guwahati) opined that opening up of FDI for multibrand retail formats will definitely impact even medium size players. He observed: Maybe big chains can balance their stakes but if a player like Walmart or Carrefour enter, it will affect our business adversely. Opening up of FDI should have only been restricted to metros. (iii)Exploitation of consumers and suppliers Instead of providing benefits, global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. (iv) Social unrest The economic losses and suffering would lead to asymmetrical growth in cities, causing discontent and social tension.

(v) Current options are adequate

MNCs have been using so far the following routes, and their entry has to some extent led to good shopping experience. At the same time, it has protected the interests of farmers and small retailers. Franchise Agreements - In franchising and commission agents services, FDI 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 for players like Pizza Hut, Lacoste, Mango, Nike, Marks and Spencer. Cash And Carry Wholesale Trading - 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers Metro AG of Germany was the first significant global player to enter India through this route. Strategic Licensing Agreements - Some foreign brands give exclusive licences and distribution rights to Indian companies. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with RadhakrishnaFoodlands Pvt. Ltd Manufacturing and Wholly Owned Subsidiaries- The foreign brands that have wholly-owned subsidiaries in manufacturing are treated as Indian companies. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike, Reebok, Adidas, etc., followed this route. Nike entered through an exclusive licensing agreement with Sierra Enterprises. Now it has a wholly owned subsidiary, Nike India Private Limited.

CONCLUSION

The discussion shows that the decision is controversial. points about government of India has withdrawn the decision to allow 51% FDI in multi-brand retail, after stiff obstruction from its key allies. Addressing PHD Chamber of Commerce andIndustry finance MinsterMukherje said7: In a multi-party political system,consensus winning takes time. Therefore, it is taking longer than expected to collecttogether a verdict. Industry has strongly criticized the government for its failure topush ahead with economic reforms and the policy paralysis in the aftermath of corruption scandals which emerged since last year. Calling for the cooperation of industry in taking India forward, he said: The industry do not need to merely reiterate the issues at hand as that is not going to solve the problems; India needs the combined efforts of the entrepreneurs, the Industries, the management and the farmers to come out of this situation,"

REFERECES
1. Indian Government Announces Reforms to Retail Sector www.mondaq.com/.../Indian+Government+announces+reforms+to+r... Block all www.mondaq.com results 2. Retail Global Expansion: A Portfolio of Opportunities ... - A.T. Kearney www.atkearney.com/index.../retail-global-expansion-a-portfolio-ofBlock all www.atkearney.com results 3. Foreign Direct Investment in Indian Retail Sector An Analysis... www.legalindia.in/foreigndirect-investment-in-indian-retail-sector-. 4. Centre to notify 100% FDI in single-brand retail with riders - The Hindu www.thehindu.com News National Block all www.thehindu.com results 5. Foreign Direct Investment in Indian Retail Sector An Analysis... www.legalindia.in/foreign-direct-investment-in-indian-retail-sector-... Block all www.legalindia.in results, 24 Nov 2011 6. Foreign Direct Investment in Indian Retail Sector An Analysis... www.legalindia.in/foreign-direct-investment-in-indian-retail-sector-... Block all www.legalindia.in results, 24 Nov 2011, Indias Retail Sector, Dec 21, 2010, 7. The Hindu: Business / Economy: 'Challenges need to be tackled to ... www.thehindu.com Business Economy 24 Dec 2010