FDI in retail: Positive and Negative arguments and my opinion

The Indian government is thinking to open their door for foreign companies to invest in India. Here I have prepared some arguments for analysing this whole FDI issue. v Positive arguments: Because of the investment of foreign companies, job opportunities in areas like marketing, agroprocessing, packaging, transportation, etc. will be created. According to the Government, 10 million new jobs will be created. Because of FDI, the post of middlemen in India will be removed. Because of that, farmers will get a good price for their crops and their exploitation will stop (which is going on for the last 150 years). Foreign companies will invest around $100 million in India. Because of that, infrastructure facilities, refrigeration technology, transportation, etc. will be renovated. That will lead to lowinflation rate. According to the Indian Governments conditions, foreign companies have to source a minimum of 30% of their goods from Indian micro and small industries. This will provide the scales to encourage domestic manufacturing, by creating a big effect for employment and to upgrade the technology. Countries like China, Indonesia, and Thailand already have 100% FDI in retail. After allowing FDI in retail, these countries have experienced tremendous growth in the agro processing industry, refrigeration technology and infrastructure. Foreign companies will also create a supply-chain in the India market. Because of that, food which perishes due to bad infrastructure facilities and refrigeration, will not be wasted.

v Negative arguments : FDI will lead to job losses. Small retailers and other small Kirana store owners will suffer a large loss. Giant retailers and Supermarkets like Walmart, Carrefour, etc. will displace small retailers. Supermarkets will establish their monopoly in the Indian market. Because of supermarkets fine tuning, they will get goods on low price and they will sell it on low price than small retailers, it will decrease the sell of small retailers. Jobs in the manufacturing sector will be lost because foreign giants will purchase their goods from the international market and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail. Although, our country had made a condition that they must source a minimum of 30% of their goods from Indian micro and small industries, we cant stop them from purchasing goods from international markets as per WTO law. So after coming to India, they can reduce this 30% by litigating at the WTO. My analysis :

At the first sight, we can see that benefits are more in numbers, but I think detriments are more serious.

In India, we have 11 shops per 1000 people. India has 1.2 crore shops, which gives employment to about 4 crore people.

What about the problems which these 4 crore people will suffer? As Indian governments condition, companies will buy 30% from small industries of India, but what about the other 70%? Walmart and all these big giants import their majority goods from China. If we consider Walmart as a country then Walmart will be the one of the top-10 countries which is importing goods from china. These giants will dump goods from China. We cant stop them for doing this. Our PM is saying that allowing this major FDI will bring new technology to India and it will bring proper refrigeration technology so that wastage of food/grains can be stopped. But dont you think India itself is capable for that? Why cant our government build storages for refrigeration of food? Is it ok to open our countrys gates for foreign giants just because of this reason? Why we are not passing Food Security Bill, which is still in the parliament? If government is not capable of building a supply chain and infrastructure, we can open this field for Indian entrepreneurs. Government is saying the cities which have a population of more than 1 million are open for these foreign companies. This is totally illogical. I bet, in the next 10 years they will open their stores in small cities, after opening their stores in metros first and so on. Today, when the American President is requesting their citizens to buy goods from small retailers, we are inviting them to our country. These companies have ruined their own country and we are expecting that they will save our farmers and food. We are expecting that they will give new technology and will invest in India to help our poor fellas. This is bull. Argument that only foreign companies can create the supply chain for farm produce is totally illogical. International retail players have no role in building roads or generating power. They are only required to create storage facilities and cold chains. This could be done by government of India also. I think there is no need to allow 51% FDI in India at this point. No need to go so fast. We should discuss this point in parliament (peacefully!). Words for Government:- Please dont waste 21 days of precious time on adjourning the parliament on the FDI issue. There are many bills which need to be passed immediatelylike the Jan Lokpal Bill and the Food Security Bill.

Have we oversold the India story ?

Indian Economy From Aviation, Retail , Healthcare & SEZ Perspective A lot of experts spoke about the robustness of the Indian economy when the global recession of 2008 did not entirely slow down Indias growth. Experts spoke at length about the pragmatism of Indias central bank leadership and its policies to have evaded the crisis. They even spoke about the sturdiness of the capital market and the role of the regulatory authority. Today the global crisis is over in most of the nations. United States is back on track with the unemployment figures at a controllable rate and the retail spending picking up. Similarly Japan is expecting the return on investments it made after the Tsunami crisis last year. The amount spent on reconstruction has boosted the economy and it is expected to grow at respectable 2 percent this year. Only Europe seems to be lagging behind, however it must be taken into account that integrating economies of over 30 nations is a daunting task and credit has to be given to EUs leadership for having dealt with the crisis in a respectable manner. When compared to the growth rates of these developed nations Indias 7.6 percent growth rate seems to be enviable. So is everything great with the Indian economy? Is it really faring the way it is being projected? Every year fiscal consolidation is the buzzword yet the budget keeps running into deficit. The finance minister keeps promising to bring it under control yet deficit has increased from 4.6 percent last fiscal to 5.9 percent this fiscal year. Most of the deficit is on the account of food, fuel and fertilizer subsidies. The government keeps making provisions for the underprivileged but it is equally true that they are not getting the desired benefits. Most of the provisions are limited to mike & paper. Let us evaluate the top most (so-called Sunrise ) sectors in India that are consumer driven and how they are faring Retail , Healthcare , Aviation and also the Oversold & over hyped SEZ story. We will have a moment of truth ! Aviation Industry The India Aviation industry is in a tailspin. Every other day Air India, Kingfisher, Jet Airways etc are making the headlines for all the wrong reason. Air India the state-owned company has been relying on frequent government bailouts for its existence. Air India alone was responsible for the 10 percent of the global aviation industry losses in

the year 2008 while it handled dismal 0.35 percent of the global passenger traffic. It is also over staffed with over 500 employees per aircraft whereas the industry average is around 120. Kingfisher airlines owned by the flamboyant liquor baron Vijay Mallya is in troubles. Banks have finally decided to withdraw support in terms of providing further debt. The only hope which the countrys third largest carrier can have right now is a government bailout. However there is a vehement opposition to such an action by the government. Experts and other industrial groups have strongly advised against such an action as it is a free market economy and it would amount to sheer wastage of taxpayers money. Jet Airways has recently been in news when the tax authorities decided to freeze its account as it was about to default on its service tax payments. The Jet Airways spokesperson attributed the problem to rising crude oil prices and the high airport duties and lack of support from government in terms of policies. According to them the delay in service tax payment was a minor operational issue. However the mounting losses over past few years tell an entirely different story. They were in news few years back for having laid off over 1200 employees and later taking them back next day after intervention from a local politician. Other airlines in India like Spice jet, Go Air etc. have been on the fringe and have been moving back and forth from black to red. An only Indigo airline is making profits. Several other have bowed down under pressure. They were either forced to shut down operations like Paramount Airlines or they managed to exit at the right time like Air Deccan and Sahara Airlines. So what exactly is ailing the airlines in India? Rising crude oil prices are often quoted as the culprit. In India fuel cost is almost 40 percent of the operational cost of running an airline whereas in other countries it remains around 15 percent. High fuels cost give little margin to maneuver in terms of other aspects like offering attractive tickets rates and other offers. However this is not the entire picture. Even though the crude prices reduced from $ 156 barrel to $70 barrel in 2008 to 2009, the Indian carriers continued to bleed and posted losses. The real problem is of excess capacity due to overselling of Indias growth story . Indias daily domestic passenger traffic is approximately 1.51 lakh passengers whereas the capacity is around 2.16 lakh passengers. Imagine the revenue loss everyday on account of unused capacity. This has happened only due to the mindless unplanned expansion by the airlines hoping to cash on the Indian Incorporation growth story sold by the gang of politicians right from Sonia , Manmohan & inefficient Pranab and highly promoted Montek ! The airlinespromoters were chasing numbers

which was arrived on mere speculation & playing a Valuation game to make quick buck. They went on buying spree and expanded their fleet. Today the aircrafts remain underutilized. India has the aircraft flying hours of 12 per day compared to 16 per day internationally. Looking at the complete picture it is difficult fix the responsibility on the airline owners. They are capitalists who are driven by market forces. They anticipated growth in market based on market forecasts and other factors like projected rate of growth of GDP. They expected growth in industrial output and service industry output and subsequent increase in airline travel. However the reality was far removed from it. The India Incorporation failed to deliver and they were left in lurch. Today they are hoping for a miracle to save them from their predicament. Losses Made by Major Domestic Carriers in India Carrier Air India Kingfisher Airlines Jet Airways Retail Industry According to the experts the retail trade industry in India is having a bright future & is consumption driven due to the reducing poverty due to social schemes and increasing middle class due to Indias growth story . One of the studies by North bride capital expects it reach about USD 850 billion by 2012. Out of which organised retail will be having a share of over 20 percent. In numbers it over USD 175 billion. That is a huge market. According to others this figure will be achieved by 2015. Similarly other reports have painted rosy picture for the entire industry. Currently it is increasing at a rate of 5% yearly. A further increase of 7-8% is expected in the industry of retail in India by growth in consumerism in urban areas, rising incomes, and a steep rise in rural consumption. As per consulting firm KPMGs findings in a March 2009 report, the organised retail market in India has witnessed steady growth at 15 per cent in fiscal 2009. It will grow much faster, at the rate of 3035 per cent annually, than the traditional one in the coming years. Fast moving consumer goods (FMCG) and apparel sectors are likely to drive this growth. According to the 8th Annual Global Retail Development Index (GRDI) of AT Kearney, India retail industry is the most promising emerging market for investment. In 2007, the retail trade in India had Cumulative Loss 3 years (Cr) 13,000 3900 2400

a share of 8-10% in the GDP (Gross Domestic Product) of the country. In 2009, it rose to 12%. It is also expected to reach 22% by 2010. A Indias Retail Market Report by Boston Consulting Group Year Total Size ($ Billions) 244 276 316 362 368 425 471 528 590 Organised Retail ($ Billions) Percentage

2005 2006 2007 2008 2009 2010 2011 2012* 2013* *Forecast

8 11 15 19 22 28 35 44 55

3 4 5 5 6 7 7 8 9

The true story of the retail industry: It has become a Valuation game due to over selling the India story of the growing middle class Subhiksha, Vishal Mega Mart, Koutons , Wadhawan groups Spinach etc; do these names sound familiar and have something in common. Yes these are players in the organised retail industry who have succumbed and failed to deliver at their promoters expectations. These chain stores were at one time case studies of Indias organised retail success. So what actually forced them lower their shutters.

According to Jagannadham Thunuguntla, head of SMC Global all these cases are classic examples of the retailers getting carried away by the Indias fascinating growth story and the phenomenal rise of the middle class. The phenomenon is not limited with these cases mentioned above but also with the so-called successful ones in the industry. Countrys largest department storeShoppers Stop for instance posted an overall loss of Rs.4 crore in the last five years, while its debt soared to Rs.390 crore. The Tata groups retail arm, Trent decided to close down its loss making chain, Fashion Yatra. It was launched in Oct 2008 and it was aiming at low-income shoppers in Tier 2 4 towns. SimilarlyReliance Retail decided to close its Reliance Wellness format and not only that it scaled its hypermarket format down in some cities. Hypercity closed down its catalogue selling venture and also got rid of its Gourmet City format. For the modern retailers penetrating further into urban markets has become a challenge. They have no option but to continue to create, preserve and then destroy the store formats they have come up with. Having closed down and revived several formats, most retailers have realised they need to constantly experiment with them to stay afloat. So we can clearly see that Indias organised retail industry, which has the coveted potential of nearly a billion plus customers with enough cash to spare, has so far claimed a number of players, small and large. These players expanded too soon based on mere speculations. While these retail stores were expanding and accumulating debts they hoped that the middle class with disposable income would be ready in short time to support them. Things did not turn out the way they had planned. India Incorporation failed to deliver and along with that came the global economic crisis. These firms ultimately paid the price by closing down their shutters. For instance Subhiksha had expanded to over 1600 stores country-wide entirely on debt. This was a blunder that it committed as it was counting on the rising customer demand which was only on papers. Not only the growth stories are misleading, at the same time the countrys back-end is not developed and huge investments go into developing it. The vital supply chain required for the retail networks are entirely missing. This leads to a huge inventory cost which the small retailers are unable to cope up with. Take for example, it is estimated that in the food retail business in India, the wastage due to lack of proper storage facility is staggering 40%. This entire situation is largely the result of the lack of proper policy framework from the government.

The Indian retailers like Future group , Reliance and others are backing FDI so that they can get investment and save themselves from the fate of Subhiksha , Koutons , Gini & Jony , Spkykar , Vishal Mega mart , Foodland super markets, Surya Group etc . We have more companies going into CDR Corporate debt re-structuring post the closure of the financial year 2011 ( March 2012 ). Banks do not wish to announce the failures or NPAs in this year. Ideally , retail businesses should have been making money due to consumer demand but the fact remains that Indias income and growth story is limited only to 6-10 towns and impacts less than 10 % of Indias population SEZs in India India adopted the concept of zones from as early as 1965. Kandla in Gujarat was the first Asian export processing zone till the advent of the modern SEZs as such zones are now known as. With the passing of the SEZ Act in 2005, it was hoped that the Chinese success story would be replicated in India. It was expected that investors confidence would be established in the Governments commitment to a stable policy regime. The real aim was to generate greater economic activity and employment with the establishment of SEZs following the Chinese model of economic growth ! There were numerous applications from multiple sources with individuals, indigenous companies, foreign MNCs all rushing to have a share in the pie. Sadly it was a short phenomenon. The initial excitement was over as the problems started cropping up. Today in the last two years, as many as 60 applications for SEZs have been withdrawn, while 35 developers have applied for de-notification, according to data by CB Richard Ellis (CBRE), the real estate consultants. Till date, the government has approved 584 SEZs. There are 381 notified SEZs, of which 148 are operational. Of these 148, only 17 are multiproduct SEZs. The remaining ones are SEZs dealing in engineering, electronics, IT/ITeS, hardware, textiles, bio-technology and gems & jewellery. So what exactly is wrong with the SEZ idea in India which paid its dividends in China, Poland and Philippines? On the whole the SEZ idea in India seems to be very much the product of the irrational expectation which has been fueled by imagination. Healthcare Companies : Most of the healthcare companies are managing profits and as i write , a major healthcare ( hospital ) chain and a pharmaceutical conglomerate is about to wind up in the next 3 months . Imagine a healthcare & hospital company winding up ?

So the Congress party has sold the India story purely on Imaginative basis and on speculative data numbers , have no idea of what is fueling inflation and what will deliver growth ? With all sunrise sectors on a downslide , it is better to replace these ignorant intellectuals and bring in people who can understand the economy and run it efficiently . Based on the governments high-octane pitches for the Indias growth story , consulting companies have brought out reports supporting government announcements , and business houses have approached investors or moved to stock market and raised money and have put up expansion plans . But the reality is that, India does not have a growth story with the current fundamentals being very weak and Leaky social schemes are making the party rich and not the population ! Also, that the current stand of the government to raise the tax issue with Vodafone is a clear proof of what i am writing . India is desperate for funds and behaving like a dictator reversing a five decade legislation for just 10,000 crore ( USD 2 billion ). Does it not show the lack of morality and desperation for funds ? Rest will become apparent in April May-June Quarter ! Lastly , the financial deficit of the government proves the rest ; all is not well with the India bubble story ! Tough times are ahead , if we dont take immediate action !

http://www.indiafdiwatch.org/index.php?id=76 http://www.indiafdiwatch.org/

FOREIGN DIRECT INVESTMENT- Some Facts and Figures

by KHURANA SHARMA on NOVEMBER 29, 2010

It is the movement of capital across national frontiers in a manner that grants the investor control over the acquired asset. TYPES OF INVESTMENT Greenfield investment: Direct investment in new facilities or the expansion of existing facilities. Greenfield investments are the primary target of a host nations promotional efforts because they create new production capacity and jobs, transfer technology and know-how, and can lead to linkages to the global marketplace. Greenfield investments are the principal mode of investing in developing countries.

Mergers and Acquisitions: Occur when a transfer of existing assets from local firms to foreign firms takes place. Cross-border mergers occur when the assets and operation of firms from different countries are combined to establish a new legal entity. Cross-border acquisitions occur when the control of assets and operations is transferred from a local to a foreign company, with the local company becoming an affiliate of the foreign company. Mergers and acquisitions are the principal mode of investing in developed countries. FDI IN INDIA IS PERMITTED THROUGH TWO ROUTES

Automatic approval by RBI The FIPB route (Foreign Investment Promotion Board)

FDIS IS NOT PERMITTED IN THE FOLLOWING SECTORS

Arms and ammunition Automatic energy Railway Transport Coal and lignite Mining of iron, manganese,chromosome,gypsum,sulphur,gold,diamonds,copper and zinc.

FDI IN REAL ESTATE ACCORDING TO FICCI

The size of real estate industry is estimated to be around U.S $ 12billion. Almost 80% real estate developed in India is in residential space & the rest comprise of offices, shopping malls, hotels and hospitals. Townships Housing Commercial premises Hotels Resorts Industrial parks Resorts Hospitals Educational institutes Recreational facilities

INVESTMENT IN SHOPPING MALLS IN INDIA

At present, housing and real estate is on the list of seven activities where FDI is prohibited. The commerce and industry ministry, which administers the foreign investment policy, is also looking at partly opening up retail trade, another prohibited activity, for FDI. The commerce and industry ministry has proposed opening up of the foreign investment policy by allowing 100% FDI in construction of commercial properties such as shopping malls and hotels.

In the broad sector of real estate, FDI of up to 100% is allowed only in the development of integrated township. The automatic route is, however, not available to such proposals which require to go through FIPB (Foreign Investment Promotion Board) clearance

TELECOM SECTOR

Indias 23 million-line telephone network is one of the largest in the world and the third largest among emerging economies. The industry is considered as having the highest potential for investment in India. India has witnessed rapid growth in Cellular, Radio Paging, Value-added services, Internet and Global Mobile Communication by satellite (GMPCS) services. It offers an ideal environment for investment

FDI IN INSURANCE

It was first mooted by P. Chidambaram as finance minister in the united front government in 1997. The sector was opened up in 1999. The IRDA act (Insurance Regulatory and Development Authority Act, 1999) allowed the insurance sector to be opened up. Indian insurance industry has attracted $235 million foreign direct investment. Currently the FDIs in insurance is restricted to 26%. The current UPA government has announced its intention to increase the cap on FDI in the insurance sector to 49%. According to us ambassador to India David Mulford at a conference on Indian insurance market. (06 October 2005) the FDI cap should be raised above 50 per cent within a short period so that foreign investors would have management control commensurate with their investment and the flow of FDI to the sector will increase.

COMPETITIVE ADVANTAGE OF INDIA IN FDI

From a shortage economy of food and foreign exchange, India has now become a surplus one. From an agro based economy it has emerged as a service oriented one. From the low-growth of the past, the economy has become a high-growth one in the long-term. After having been an aid recipient, India is now joining the aid givers club. Although India was late and slow in modernization of industry in general in the past, it is now a front-runner in the emerging Knowledge based New Economy. The Government is continuing its reform and liberalization not out of compulsion but out of conviction. Indian companies are no longer afraid of Multinational Companies. They have become globally competitive and some of them have started becoming MNCs themselves.

OBSTACLES FOR FDIS IN INDIA

Courts lead to long procedural delays. Violent separatist movements existing in Kashmir . Corruption faced by firms in India after bureaucratic red tape and power shortages.

Shortages of energy and handling capacities at the ports, and saturated rail and road networks . Lack of a regulatory environment, clear investment policies. Problems with land acquisition

GOLDMAN SACHS REPORT ON DREAMING WITH BRICS

Indias GDP will reach $ 1 trillion by 2011, $ 2 trillion by 2020, $ 3 trillion by 2025, $ 6 trillion by 2032, $ 10 trillion by 2038, and $ 27 trillion by 2050, will overtake Italy by the year 2016, France by 2019, UK by 2022, Germany by 2023,and becoming the third largest economy after USA and China. In terms of GDP, India will overtake Italy by the year 2016, France by 2019, UK by 2022, Germany by 2023,and Japan by 2032. Among the BRIC group India alone has the potential to show the highest growth (over 5 percent) over the next 50 years. The Chinese growth rate is likely to reduce to 5% by 2020, 4% by 2029, and 3% by 2046.

more at http://www.citeman.com/12306-foreign-direct-investment-some-facts-and-figures.html#ixzz2753ZRZ49

Foreign direct investment in India

Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 20102012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, US and UK were among the leading sources of FDI. According to Ernst and Young, foreign direct investment in India in 2010 was [11] $44.8 billion, and in 2011 experienced an increase of 13% to $50.8 billion. India has seen an eightfold [12] increase in its FDI in March 2012. India disallowed OCB's i.e. Overseas Corporate Bodies to invest in India . On 14 September 2012, Government of India allowed FDI; in aviation upto 49%, in Broadcast sector upto 74%, in multi-brand retail upto 51% and in single-brand retail upto 100%
[13]

http://www.ibef.org/