FOREIGN DIRECT INVESTMENT IN RETAIL TRADE

INTRODUCTION
Trade (both wholesale and retailing) is the single largest component of employing over 40 million people in the service sector. The retail industry is one of the most promising and upcoming sectors in India. With the rise in purchasing power of the individuals particularly the middle class and a large consumer base, India has not been able to match the demand for consumer products with its supply chain. Although the government was reluctant and had

reservations for the opening up of the retail sector in India, but over the period of liberalisation of economy it had opened its markets for foreign players. India being a signatory to WTO and undertaking the mandates of GATT and GATS was under an obligation to open up its markets for free trade amongst the foreign participants. With the advent of privatisation and globalisation, the concept of Laissez faire or free market economy makes it inevitable for a paradigm shift in the structure of the markets.

DEFINITION
Trade essentially means the business of buying and selling commodities for a profit. Principally there are two types of trade1. Wholesale- Trading engaged in the sale of goods in large quantities for resale by a retailer. The wholesale trader sells his goods to retailers and not to consumers. 2. Retail- Retail can be best described as the interface between the manufacturer and the

consumer for their personal consumption. A retail transaction is the final stage of the supply chain. Retailers are identified as those having a valid Sales Tax Registration, VAT Registration, Excise duty registration etc. Further retail can be divided into:

1. UNORGANISED

The traditional kirana shops (corner shops) still continue to be the backbone of the industry. Largely unorganised retailing, convenience stores involves low capital investments and mainly concentrating on a few sets of products, attracting only a particular range of consumers. They employ about 40 million people these include small and medium retail outlets, roadside vendors, pavement hawkers etc. About 95% of the whole retailing business constitutes this field. It does not earn much profit but only manages a subsistence living. However the scenario has been changed considerably after the influx of the branded products into the markets ranging practically from food, furniture, clothes and apparels to footwear. India has the highest retail outlet density in the world, about 15 million outlets, employing around 40 million people.1

2. ORGANISED
Organised retail is referred to as trade transactions carried on by licensed retailers i.e., those who are registered for sales tax, income tax etc. They are planned and structured either undertaken by private retail businesses or Corporate Houses. It constitutes only 3-4% of the entire retail sector. Examples- supermarkets like Big Bazaar, retail chains like FabIndia etc. The glaring disproportionate division in these sectors is due to various factors. Deep rooted poverty- Poverty is the mother of all evil and with this problem a host of other issues are interconnected. Lack of education and underdeveloped infrastructure, low government initiative had leaded the people to look for a living where they can meet both the ends. 30 % of the total population is below the national poverty line. 2 Majority of the people has thus restored to hawking business or retailing small goods here and there. Educated Unemployed youthLarge sections of the educated youth are not getting jobs according to their merit and to earn a livelihood resort to the retail business or get engaged in some menial jobs. Even the

http://164.100.47.5/newcommittee/reports/EnglishCommittees/Committee%20on%20Commerce/90th%20Com mittee%20Report-Commerce.pdf accessed on 28/5/11. 2 http://devdata.worldbank.org/AAG/ind_aag.pdf, accessed on 28/5/11.

unskilled labour mostly engaged in farming take to part time trading in lean seasons for agriculture. Hence the labour absorbing capacity of this business by providing security in adverse times is threatened by the setting up of the retail chains.

FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR.

According to IMF Glossary of Terms- Direct Investment means international investment made by a resident entity in one economy (direct investor) with the objective of establishing a lasting interest in an enterprise resident in an economy other than that of the investor (direct investment enterprise).3 With the Statement on Industrial Policy of 1991, Indian economy was liberalised on a stage by stage basis with more autonomy in private hands and change in the policies on investment. Further in 2000, the Industrial policy indicated towards a more open economy and thus paved the way for both domestic and Foreign Investment. FDI inflows in this industry is rather termed as a protected.

FDI POLICY Phase of 1991.

1991, FDI in trading was allowed upto 51% under government approval route only for Trading Companies principally undertaking export activities.

Phase of 1997.
1997- PRESS NOTE NO.3 (1997 Series) In 100% FDI is permitted in case of trading companies for the following activities:

exports; bulk imports with ex-port/ex-bonded warehouse sales; cash and carry wholesale trading;

http://www.imf.org/external/np/sta/di/glossary.pdf accessed on 28/5/11.

Other import of goods or services provided at least 75% is for procurement and sale of goods and services among the companies of the same group and not for third party use or onward transfer/distribution/sales.

Phase of 2006.
PRESS NOTE 4 of 2006 Seriesi. Wholesale/cash and carry trading 100% under the Automatic Route In August 2007, Walmart announced to establish a joint venture with Bharti Enterprises, Bharti Walmart Private Limited, for wholesale cash-and-carry operations in India. Other eg- Carrefour, Metro. i. ii. iii. Business to Business sales (B2B) - 100% under the Automatic Route Source from Small scale sector - 100 % allowed with prior approval of FIPB Storage / Warehousing including warehousing of agriculture products with refrigeration (cold storage) - 100% is allowed under automatic route iv. Test marketing- 100 % allowed with prior approval of FIPB

PRESENT POLICY Retail Trade Generally NO Exception- Single Brand Product Trade- FDI up to 51%, with prior Government approval FDI is prohibited in retail trade as per FDI Consolidated Policy of 2011, except retailing in Single Brand Product where FDI upto 51% allowed with prior approval of the Government. The other areas allowed are: Wholesale/cash and carry trading 100% under the Automatic Route Business to Business sales (B2B) - 100% under the Automatic Route Export trading - 100% under the Automatic Route Source from Small scale sector - 100 % allowed with prior approval of the Government
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Test marketing- 100 % allowed with prior approval of the Government Storage / Warehousing including warehousing of agriculture products with refrigeration (cold storage) - 100% is allowed under automatic route. Sourcing from MSEs is a very positive step if this can be implemented effectively. As regards the apprehension that direct Foreign Investment in retail will uproot the small scale industries as well as shops is countered by this policy. This will not only reduce the transportation cost for imports by the branded retailers will also be a fillip to the indigenous industries. Joint ventures would ease capital constraints of existing organised retailers. ENTRY ROUTES PRIOR TO 2006 Franchise Agreements Franchise is a manner of operating business in which the franchiser, being a foreign company, grants its local (in this case Indian) franchisee the rights to sell or manufacture goods or to provide a service identified with the franchiser in its mother country. This option has been extensively explored by foreign retailers for venturing into India.

Eg- Lacoste, Mango, Nike, Pizza Hut. Cash And Carry Wholesale Trading Wholesale trading involves bulk trading and to consumers directly. It is a business to business chain. One essential characteristic of this business is, business is carried on a credit basis. However FDI in wholesale on a credit basis is strictly prohibited and the only method possible is cash and carry. Metro AG of Germany was the first significant global player to enter India through this route. Manufacturing and Wholly Owned Subsidiaries. Nike, Reebok, Adidas, etc. have wholly-owned subsidiaries in manufacturing and are for that reason, authorized to do retail. These companies have been authorised to sell products to Indian customers 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. Levis and Tommy Hilfiger are sourcing products from Indian manufacturers like Arvind Mills TWO WAYS OF ENTRY FOR RETAIL TRADINGgovernments policy on FDI, the permitted routes were, 1. Single branded product 2. Experimental method. After 2006, with the change in

SINGLE BRAND PRODUCT RETAILING

Press Note 3 (2006 Series)- FDI up to 51%, with prior Government approval in retail trade of Single Brand products was allowed. A brand is the identity of a specific product, service or business. A brand is the essence or promise of what will be delivered or experienced. OBJECTIVE was to attract investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. SUBJECT TO THE FOLLOWING CONDITIONS: i. ii. iii. Products to be sold should be of a Single Brand only. Products should be sold under the same brand internationally. Single Brand product-retailing would cover only products which are branded during manufacturing. Another significant factor is that they have no conditions on entry and exit. No minimum time has been specified as to the operation of business.

PROCEDUREApplications for FDI in retail trade of 'Single Brand' products are required to be made to the Secretariat for Industrial Assistance ('SIA') in the Department of Industrial Policy & Promotion ('DIPP'), and should indicate the product/product categories that are proposed to be sold under a 'Single Brand'. Any further additions to the product/ product categories to be sold under such a 'Single Brand' would require a fresh approval of the SIA.

MULTIBRAND
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 on allowing FDI in multi-brand retail. The paper doesnt suggest any upper limit on FDI in multi-brand retail. 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. However opening up of this sector must be on a calibrated manner. To ensure that the foreign investors make a genuine contribution to the development of infrastructure, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure or agro processing units etc.

ARGUMENTS FOR ALLOWING FDI The above mentioned apprehension can be countered by the following positive factors. One key point to be noted here is that the Multi branded chains set up in the urban sectors will further increase the divide and inequalities between rural and urban India, with infrastructural development concentrated only in the urban places.

Attracting FDI has a high potential in the Indian sector because foreign players eye the large market size and with its huge population has a high consumer base. Labour absorbing capacity.- in lean periods and seasonal agriculture, the farmers resort to retailing business and thus generate employment Foreign players eye the large market size and with its huge population has a high consumer base. Retail chains will enable the easy access to products and in a planned and organised manner will reach out to every nook and corner of the country.

COMPETITION ISSUESFrom the consumer point of viewEasy availability of goods Free access to variety of products with reduction in prices. Multitude of choice From the retailer point of viewMore organized Syndicate of retailers, or co operatives, business will be more profitable The problem of inadequacy of capital investment will be solved. Otherwise they resort to bank loans Competition increases efficiency and hence will urge the retailers to improve their quality standards products, technology and managerial skill.

TEST MARKETING
Test marketing is the trial distribution of a planned new product or service to determine the likely acceptance of the product. FDI is permitted in a Company if manufacturing of such products is involved and investment is made simultaneously for setting up manufacturing facilities.

FIPB allows foreign companies for test marketing of their products for a two-year period by the end of which they are required to set up manufacturing facilities in India. 100 % FDI is allowed. Example - Direct selling companies like Amway and Oriflame entered the Indian market through this route. Daichii, a Japanese pharmaceutical company test marketed for 2 years and then bought Ranbaxy, hence industry was established.

CONCLUSION
Retailing is in a rapid state of change due to speedy technological

developments, changing competitive positions, varying consumer behaviour as well as their expectations, so long as it is affordable and readily available.
Since the Indian retail sector is vastly fragmented and domestic retailers are in the route of strengthening their situation, the opening up of FDI regime should be in phased and calibrated manner.

The free entry of Foreign Retail Brands and supermarkets will enhance the economys productive most cases. base, enhances technological capability and generates employment in