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Chapter 3 - Historical Perspective on FDI Chapter 3 - Historical Perspective on
FDI
It has been said that India has one foot
grounded in time-honoured traditions and the
other fervently striding into the entrepreneurial
e-age .6 India truly does embrace diversity with
a passion like very few places in the world.
This study is focused on the retail sector and the
'current' Foreign Direct Investment (FDI)
position in India, and it therefore seems logical
to start in reasonably recent times.
Retailing can normally be defined as the sale of
goods or merchandise from a fixed location,
such as a department store or kiosk, or by post,
in small or individual lots for direct
consumption by the purchaser. 8
3.0 Overview
Retailing in India is slightly different than in
developed markets, in that it is divided in to
organized and unorganized retail. Organized
retail could be described as when trading is
taking place under a License or through people
that are registered for sales tax or income tax.
Unorganized retail is India's more traditional
style of low-cost retailing, for example, the
local kirana shops, owner-manned general
stores, paan/beedi shops, convenience stores,
hand carts and pavement vendors. 9
Before beginning however, let us briefly define
'Foreign Direct Investment', and 'Retailing', as
they are the key focus of the entire study.
Foreign Direct Investment can be defined as the
Acquisition or construction of physical capital
by a firm from one (source) country in another
(host) country. 7
6. Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, Augus
t 2003, page 32
7. http://www-personal.umich.edu/~alandear/glossary/f.html
8. http://en.wikipedia.org/wiki/retailin
9. Mohan Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Altern
atives, CPAS (2005)
15
3.0 Overview 3.0 Overview
Sathyaraj (2006) defines unorganised retailing
more specifically as an outlet run locally by the
owner or caretaker of a shop that lacks
technical and accounting standardization. The
supply chain and sourcing are also done locally
to meet local needs. 10
28. http://finance.indiamart.com/investment_in_india/fipb.html
22
Chapter 4 - Policy Environment and
Growth of Organized Retail
Chapter 4 - Policy Environment and
Growth of Organized Retail
4.1 Policy and Regulatory Environment
Alongside the Foreign Investment Promotion emerging and developing countries.
Board (FIPB) previously mentioned, there is also Differential treatment is limit
ed to a few entry
the Investment Commission which was rules, predominantly in some Services sector
s. 29
established in December 2004 as part of the
Ministry of Finance so as to facilitate and Currently, an application must be ma
de to either
enhance investment in India. They make the FIPB or the Secretariat for Industria
l
recommendations on policy and procedure to Assistance (SIA) depending on which A
pproval
the Government and recommend projects that route is being used, providing the pr
oposed
should be fast tracked through the approval details of investment, the business
plan,
process. They also assist in promoting India as financial and foreign company in
formation, etc.
an investment destination. A declaration is also required to confirm whether
the applicant has previous collaborations or
The Investment Commission (2009) believes
trade mark agreements in India in the same
the Foreign Investment regime in India as one sector/field to which the applicati
on relates
of the most transparent and liberal among (KPMG 2008)30
Foreign investment can be approved via one of two different routes:
a.
Automatic Approval route requires no prior approval, and filing of the investmen
t
details to the Reserve Bank of India (RBI) post-facto is literally for data reco
rds only.
The automatic route is appropriate in any sector where there is no 'sector cap'
i.e.
sectors where 100% foreign ownership is allowed and some other specified sectors
,
for example <26% of an Insurance company.
b.
FIPB Approval route is for proposals where the shareholding is intended to be
above a prescribed 'sector cap', or where the activity is one where FDI is curre
ntly
not allowed, or where it is mandatory for the application to be approved by the
FIPB
(for example, sectors requiring an industrial licence.)
(Source: Investment Commission Website)31
29. http://www.investmentcommission.in/policies_and_laws.htm
30. Investing in India, KPMG, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pi
ctures/Investing.pdf
31. http://www.investmentcommission.in/policies_and_laws.htm
23
4.1 Policy and Regulatory Environment
In terms of the Retail sector, foreign investment
is currently limited to 51% in single brand retail
stores and 100% FDI in wholesale cash and
carry. No multi-brand retailing is allowed.
Subject to these equity conditions, a foreign
investor can set up a registered company and
operate under the same rules and regulations
as an Indian company. Foreign investments are
freely repatriable, and are regulated under the
Foreign Exchange Management Act (1999)
(FEMA), administered by the Reserve Bank of
India's Exchange Control Department.
Ernst & Young (2007) in their report on behalf of
the India Brand Equity Foundation said:
The Government is progressively undertaking
reforms and liberalising the retail sector;
thereby attracting significant foreign
investments. The regulatory and supervisory
policies are being reshaped and reoriented to
meet the new challenges and opportunities in
this sector. To facilitate easier flow of Foreign
Direct Investments ( FDI ) inflow, instead of
having to seek Foreign Investment Promotion
Board ( FIPB ) approval, FDI up to 100 per cent is
allowed under the automatic route for cash and
carry wholesale trading and export trading. FDI
up to 51 per cent is allowed, with prior
Government approval for retail trade in 'Single
Brand' products with the objective of attracting
investment, technology and global best
practices and catering to the demand for such
branded goods in India. This implies that
foreign companies can now sell goods sold
globally under a single brand, such as in the
case of Reebok, Nokia and Adidas. However,
retailing of multiple brands, even if the goods
are produced by the same manufacturer, is
presently not allowed. Relaxation of FDI
restrictions are being vigorously pursued by the
business and trade coalitions and are expected
to fall in place over the next 3-5 years. 32
32. IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for
IBEF, 2007, Page 11 (www.ibef.in
24
4.1 Policy and Regulatory Environment
In February 2009, the Department of Industry Policy & Promotion (DIPP) released
a series of Press
Notes on changes relating to foreign investment. Those of particular interest to
this research are:
28
4.2 Growth in 'Organized Retailing
Chaze (2006) looked at 'unorganized and organized sectors in India, in the contex
t of retailing. He
spoke of how the organized retailing sector was beginning to grow rapidly.
He states that organized retailing (versus the
traditional Indian fare of stand-alone retail or
department stores) has to be one of the most
exciting growth industries in India today, with
branded stores and malls thus far covering a
miniscule 2% of the total market. 38
The Figure below shows how significant retail is to the Indian economy, contribu
ting 39% of GDP, and
yet organized retailing is still in an under-developed early stage at only 6% of
total market (2005)
when compared to other countries. It is clear from this data that India has a si
gnificantly lower
percentage of organized retailing compared to other developing markets such as C
hina with 20% of
organized retail penetration, and Brazil with 75%. When compared to their respec
tive retail sector
contributions to GDP, India is higher at 39% than China and Brazil.
42. IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IB
EF, 2007, Page 5 (www.ibef.in)
43. RIL Online http://www.ril.com/html/business/business_retail.html
31
4.2 Growth in 'Organized Retailing
44
According to RRL (2009) , 27% of global GDP is
attributed to retail, and in various developing
markets organized retail contributes typically
anywhere between 20% and 55% of GDP.
Placing the Indian retail market at
approximately $300 billion, with a growth rate
of 13% per year, RRL point out that presently,
although organized retailing is only
approximately 5%, this is likely to grow to 10%
by 2011. Therefore, RRL have begun an
implementation plan to create a high spec state
of the art retail infrastructure, to include a
strategy for opening multi-format stores such
as convenience, hypermarket, speciality and
wholesale stores.
Allowing FDI 100% in retailing would no doubt
significantly accelerate this growth. In fact,
Reliance in recognising that strategic alliances
are going to be a key driver to its retail business,
in financial year 2007-08, established key joint
ventures with international partners in apparel
(clothing), optical and office product
businesses. Further, RRL will continue to seek
synergistic opportunities with other
international players as well. 45
The growth of consumerism in India is one of
the key drivers fuelling the organised retail
growth. Pankaj Gupta (2006) 46 highlights
several demographic trends that are factors in
the growth of organized retailing. India is, for
example, experiencing rapid income growth so
consumers have a greater ability to spend.
There is growing urbanization and this urban
population has both a higher propensity to
spend, and a desire for convenience. India also
has a growing 'young' population which has
both the willingness and attitude to spend.
Gupta also states that there is a trend for Indian
consumers tending to 'buy now, save later' i.e.
consumers are prepared to borrow money for
today's consumption.
It seems fairly safe to assume that even without FDI, the organized retail secto
r in India is going to
grow rapidly, and this is going to have some effect on the traditional unorganiz
ed retailers.
44.
RIL Online http://www.ril.com/html/business/business_retail.html
45.
http://www.ril.com/html/business/business_retail.html
46.
Pankaj Gupta, Organised Retail in India, The Next Growth Frontier, Tata Strategi
c Management, June 2006, page 2,
(http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf)
32
4.2 Growth in 'Organized Retailing
Management consultant Rama Bijapurkar says
the poorest fifth live a hand-to-mouth
existence and are insignificant as consumers.
The next fifth, aspirants, acquire the most basic
consumer durables bicycles, fans and radios
and learn to aspire for more. The third group,
climbers, is hooked, but find that their desires
far outrun their income, so they buy the
cheapest goods. The fourth group, whom she
calls the consuming class is of inveterate
buyers; they weigh the price against what they
get for it. The top fifth are the rich; they buy the
best without looking at the price. 47
The Associated Chambers of Commerce and
Industry of India (ASSOCHAM) are cited in a
news-article at www.dare.co.in (an Indian
platform for entrepreneurs and business
owners), as supporting a proposal to give the
retail sector formal 'industry status'. In a note
by the Ministries of Commerce & Industry and
Consumer Affairs, the Chamber President,
Sajjan Jindal said that providing industry status
is the first basic step needed for reforming the
Indian retailing sector. 48
ASSOCHAM believe that the advantages of
having an industry status are that it will allow a
better focus on retailing development, fiscal
incentives, and availability of organized
financing and establishment of insurance
norms. 49 They feel the development of the
retail sector can take place at a faster pace if
there is a comprehensive legislation enacted.
The legislation should be simple and have a
futuristic approach. It should take into
consideration the developments that are taking
place in this arena worldwide. The legislation
should provide broad parameters within which
the retail sector should operate and day to-day
functioning and other modalities should be
prescribed in the Rules. The underlying idea is
to have minimum modifications in the Act in the
future. 50
51. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail
-sector.htm
34
Chapter 5 - Arguments for and
against FDI in Retailing
Chapter 5 - Arguments for and
against FDI in Retailing
5.1 Arguments for FDI in Retailing
There are many who argue that FDI in retailing
will be of benefit to India, and discussions are
often seen in the Indian media. In fact, some
even argue that if FDI in retail is not allowed, it
could be harmful to India's retail sector.
Tripathi (2009) the Director of Silk Hut (a mid-
sized silk garment retailer in Hyderabad), has
said "Industry experts believed that the
technical edge offered by foreign companies is
crucial for the survival of domestic retail
companies in the [current] downturn. 52
Tripathi (2009) feels that it is essential that FDI
be allowed in the retail sector at 100% equity,
because this is likely to encourage domestic
investment into the sector too, and generate
further employment opportunities. In addition
to this, he commented that during the
economic downturn that is currently being
experienced, most of the retail industry players,
both large and small, felt that it would be good
to boost the economy by facilitating higher FDI
inflows.
These arguments for improvements in
technology and increases in FDI inflows to
boost economic growth are supported by other
proponents of FDI in retailing. Singh & Banga
(2008) undertook a research paper on the
emergence & prospects of FDI in India's
retailing, and highlighted that despite the
developments in the industry in recent years
and the large contribution to India's economy,
"retailing continues to be the least evolved
industries and the growth of organised retailing
in India has been much slower as compared to
the rest of the world One important reason for
this is that retailing is one of the few sectors
where FDI is not allowed. 53
52. Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 http:
//
www.retailing360.com/article/8/2009062420090624193427218739345f/Barring-foreign-
players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html
53. Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 http://bimtech-ret
ail.com/downloads/FDI_RetailDude.pdf
35
5.1 Arguments for FDI in Retailing
Singh & Banga (2008) identify seven key
reasons for opening up the retail sector to FDI.
Firstly, they believe that the large global retail
players have a far more advanced knowledge of
management, particularly in inventory
management and merchandising and are far
more productive and efficient, utilizing new
technologies to their advantage. Secondly,
they argue that the foreign 'low-cost' big
players will adopt an integrated supply chain
management system which in turn should help
to lower the price of products, benefitting
consumers. Thirdly, Singh & Banga believe that
FDI will ensure that products are good quality
and that customer services improve, providing
a better shopping 'experience'. Fourthly, it will
encourage and promote the links between
domestic/local suppliers, manufacturers and
agricultural traders to global markets. Quality
and safety standards of domestics will be
improved by this as only those who meet strict
standards are likely to be selected. It will also
help in providing a profitable and reliable
market for the domestic local players. Singh &
Banga's fifth argument was that the foreign
retailers would begin to spread their operations
in India, and as this happened domestic players
would develop their supply chain, create new
strategies and improve operations to
counteract the competition from foreign
players, and this would inevitably encourage
investment and employment in supply chain
and back-end sectors. Joint Ventures between
domestic 'organized' retailers and foreign
players (such as Wal-mart & Bharti) would also
help to ease the capital constraints of the
domestics. Finally, it was highlighted that the
development of new retail formats and sector
modernization in general would be brought
around by FDI.
Singh & Banga (2008) concluded from their
research that it was evident that "ever growing
urban and rural markets in India represent an
unprecedented and vast unexplored
opportunity for retailing to all types of formats.
Initially there may be certain reservations and
apprehensions in allowing global players in
India's retailing, but if they are allowed in a
phased manner on the basis of a well conceived
and chalked out policy, they are likely to lead to
more investment in organized retailing and
allied sectors.
36
5.1 Arguments for FDI in Retailing
With the above said, their research paper also advised that a number of points n
eeded to be kept into
consideration when opening up FDI:
1.
The opening up of FDI should be phased, over a 5-10 year time frame so as to all
ow time for
domestic retailers to adjust.
2.
FDI in multi-brand retailing should be kept restricted in the near future, as In
dian retailers
would not be able to face this competition immediately.
3.
It is not currently desirable for FDI to be above 51%, even in single brand reta
iling. This will allow
checking and control of foreign retailer's business operations, and will help to
protect the
interests of domestic retailers. However, the sector cap (equity limit) could be
increased in due
course as it has been in the telecom, banking and insurance markets.
4.
Certain products that are sensitive should not be allowed, for example, arms/amm
unition and
military equipment. The excluded products should be expressly stated in policy.
5.
There should be restricted zones imposed by the government for the purposes of c
ity planning.
E.g. Supermarkets/Hypermarkets should be kept away from the city centers to prot
ect the
unorganized and small retailers who operate in these areas.
One of the most publicized and well known The ICRIER (2005) study revealed that
many of
studies was produced by the Indian Council for those in favor of FDI believed th
at the opening
Research on International Economic Relations up of the retail sector would be of
benefit to
(ICRIER) in association with the Academic India in terms of investment inflow, t
echnical
Foundation, who were asked by the Department knowledge and skills. Those in favo
r argued
of Consumer Affairs and the Government of that organized retailing requires heav
y
India to undertake a research project in to this investment if it is to expand r
apidly, and would
area of study, for which their findings were require supply chain set-up and the
published in 2005 so as to encourage the introduction of information technology.
debate of this important issue, and to enable
the Government to begin drawing up key policy
decisions.
37
5.1 Arguments for FDI in Retailing
FDI would ease the capital constraint and foreign players would bring in best man
agement
practices that can be replicated by the domestic players. They would invest in s
upply chain, source
products from India and provide a platform to domestic manufacturers to export t
heir products in
international markets through these retailers.
During the study by ICRIER (2005), groups of
traders in the unorganized retail sector who had
seen organized retailers locate in close
proximity to them, were asked questions to find
out if they had been adversely affected, and
whether they had been displaced by the
organized retailers' presence. According to the
results, 65% of unorganized players felt that
the growth of organized retailing has no major
impact on their business. Another 25% said
that they initially suffered some losses but had
changed their business strategies to face the
competition. The remaining 10% faced losses
but have not changed their business practices.
None of the unorganized players had to close
down their operations. 54
The main findings of the ICRIER study revealed
that FDI in retailing led to:
1. Increased speed of development in modern
formats
2. Improved productivity and efficiency of the
retail sector
3. Enhanced sourcing
4. Improved quality of employment no
negative impact on employment if the
economy is growing.
5. Encouraged investment in supply chain
6. Led to integration of suppliers, logistic
service and retailers reduction in the
number of intermediaries
7. Linked local suppliers, farmers,
manufactures to global markets
8. Low cost global retailers likely to lower
prices
9. Consumers are assured of product quality,
better service & shopping experience.
54. Mukherjee & Patel, FDI in Retail Sector India, Academic Foundation in associ
ation with ICRIER, 2005, page 120
38
5.1 Arguments for FDI in Retailing
The ICRIER (2005) study also reported that
those in favour of FDI argued that the reality of
the situation is that foreign retailers are already
operating in India due to the loop holes in
current policy and regulation, and that if FDI
was opened up, this would help to improve the
transparency of the regulatory system.
55
This argument is supported by Dey (2007) , of
the Research Unit for Political Economy (RUPE).
Although FDI is restricted, Dey points out that
the Government of India has taken a much more
liberal approach to wholesale, commission
agent services and franchising and this has
resulted in many foreign retailers having
already set up operations through a number of
different routes. For example, Pottery Barn,
Ralph Lauren and Gap have all made India a key
sourcing hub. Wal-Mart, one of the world's
largest retailers set up a global sourcing
operation in Bangalore in 2002, and at the end
of 2006, it entered a Joint Venture with the well
known Indian corporation Bharti. "For the time
being, Bharti is to own the chain of front-end
retail stores, while the two firms will have an
equal share in a firm that will engage in
wholesale, logistics, supply chain and sourcing
activities. This is seen as a preliminary step by
Wal-Mart pending the removal of all restrictions
on FDI in retail trade. 56
Although some of the above arguments
supports FDI being introduced more formally to
increase transparency to the regulations, the
debate becomes even more complex and
relevant when you consider the recent changes
by the Government in the series of Press Notes
released in February 2009 (as discussed in
Chapter 3.1 Policy & Regulatory Environment).
The Press Notes from Elliott's (2009) point of
view "legitimise cascading investments. 57 It is
important that regulations are made clear so
that the possibility of foreign retailers using
these grey areas or loop holes to set up
cascading businesses dressed up as Indian
controlled and owned companies is eliminated.
In our opinion this defeats the whole object of
having FDI restrictions in place in the retail
sector, and makes the entry of foreign retailers
harder to control and monitor.
In respect of single-brand retailing which is
allowed up to 51% equity, Khatore and Parekh
(2009) point out that "several major foreign
single-brand retailers have already established
their presence in India through the permissible
franchise route. Thus, the policy of not
allowing 100% investment appears
desynchronised, as outflow of funds from India
in the form of franchise payments is permitted
but inflow of foreign investments is
restricted. 58
55.
Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of
India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html
56.
Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of
India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html
57.
Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 200
9 http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html
58.
Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th J
une 2009, page 1
http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm
39
5.1 Arguments for FDI in Retailing
Khatore and Parekh (2009) also argue that the
growth projection that has been forecast for the
Indian retail sector may not be achievable if the
government does not act quickly in opening up
single-brand and multi-brand retail sectors.
Kumar (2006) argued that FDI in retail improves
growth prospects. In an article in The Economic
Times (August 2006) Kumar stated that there
are predominantly 3 arguments against
allowing FDI in the retail sector. The first was
that it could hinder or prevent the domestic
organized retailers from growing. Secondly, it
would result in small retail stores closing and
unemployment growing, and thirdly, that it
would disrupt the social community and the
given way of life.
Kumar (2006) counters each of these
arguments individually, retorting that the first
argument is out-of-date, because domestic
players such as Reliance, Tata and various other
large organized retailers have already grown
and matured and that "these corporates don't
need protection Actually, if these infants are
protected any longer they have good chances of
becoming delinquent adults. Soon enough,
monopoly rents will begin to accrue and bad
habits will get entrenched and it will then be
more difficult to open the sector. Domestic
players have the best locations anyway and a
clear head start. 59
The second argument is also not substantiated,
as Kumar argues that "liberalization of retail
raises overall economic welfare and does not
result in loss of employment. Some
restructuring will take place but local markets
will not close down. Both can coexist as they
fulfil different needs and serve different
clientele. 60
The third argument on the disruption of social
community and the given way of life has a
stronger case. Kumar acknowledges that
shopping centers & malls could potentially
result in "greater urban anonymity and a
complete breakdown of the bazaar culture and
the disappearance of the 'down town' space that
has its own charm. But, in France, Germany the
Nordic countries and also other parts of Europe,
experience has shown that local communities
can thrive if they are empowered and involved in
urban planning. 61
59.
Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th Augu
st 2006, page 1
http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/art
icleshow/1882764.cms
60.
Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th Augu
st 2006, page 1
http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/art
icleshow/1882764.cms
61.
Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th Augu
st 2006, page 1
http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/art
icleshow/1882764.cms
40
5.1 Arguments for FDI in Retailing
Kumar (2006) concludes that FDI in retail will
improve prospects of growth, will not harm
equity and will ensure that monopoly rents are
not encouraged, and therefore should be
opened up immediately.
Real estate consultant CB Richard Ellis also
believe that the government needs to open up
FDI in retail so as to bring in more investment
and to help promote competition in the sector
that has been hit hard by the current economic
slowdown. The existing FDI rules are a
constraint. There is need to open up the sector a
bit more as it will facilitate fresh infusion of
funds and also promote competition, 62 said
Chairman of CB Richard Ellis's South Asia office.
Mehta (2007) of the Birla Institute of
Management Technology in giving an overview
of the Indian retail market implied that
regardless of the risks to traditional retailers
such as the 'mom and pop' stores, FDI would
still bring significant benefits to the Indian
consumer and give them value for money. "The
standard of living of the people will increase
and they will have a better lifestyle which will
result in the development of the economy as a
whole. 63
When looking at FDI from a general point of
view, removed from the constraints of the retail
sector focus of this report, it could be argued
that FDI, if 'effective', will develop human
capital. Subbarao (2008) discusses this in a
research paper on FDI and Human Capital
Development, saying that "effective FDI
indulges in enhancement of human capital of
the country. 64 By 'effective' FDI, Subbarao
means investment that encourages the
development of a country that fosters the
development of each resident of the country.
62.
Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Inf
usion into Retail', 12th October 2009 -
http://www.indianrealtynews.com/retail-market/relax-norms-on-foreign-direct-inve
stment-to-ease-fresh-infusion-into-retail.html
63.
Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology,
2007, page 2 http://bimtech-retail.com/article2.html
64.
Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of M
anagement, February 2008, page 2
41
5.1 Arguments for FDI in Retailing
Subbarao (2008) also talks of other potential
benefits to host countries, including the
generation of employment, raising of
productivity, skills & technology transfer,
improved infrastructure, increased incomes,
enhanced exports, and contribution to the
long-term development of developing
economies. There is also the advantage to the
Government of additional taxes. Taxes that are
generated from the entry of foreign investors in
a host country can be used by the Government
to re-invest in human capital development.
Even without taxes, a United Nations
Conference on Trade and Development
(UNCTAD) report in 1994 (cited by Subbarao
(2008)) reported that foreign multi-national
investors' "demand for highly trained graduates
manifests itself in the form of financial support,
particularly to business schools. 65 Therefore,
it is likely that foreign retail investors will look
to invest in human capital development as well
as provide additional tax streams. With this
said, Subbarao acknowledges that different
countries have had different experiences with
regards to whether FDI has lead to the
enhancement of human capital.
The Financial Express (anonymous author,
2005) when discussing the arguments of those
who are against FDI, said that there are no
restrictions for Indian large corporates to enter
into retail. Many domestic players have huge
expansion plans and the ability to invest billions
of dollars themselves. What is the difference
between these domestic players expanding, or
foreign investors joining and expanding in the
Indian market?
The Financial Express (2005) believed it could
also be argued that organised retailing would
have little detrimental effect on retailers if
comparison is drawn from the impact of stores
like Wal-Mart on small US retailers. Retail sales
increased substantially overall; and although
retail sales were adversely affected in areas
such as clothing & groceries, there was an
increase in sales of general merchandise, home
furnishing, and food and drink.
India's retail sector is already undergoing a change propelled by evolving consum
er demand and
lifestyles, urban chaos and shortage of retail space, integration of markets, a
need for revamping
logistics, and above all, global competition. FDI may hasten this change, and ev
en benefit SMEs. It
would be better if FDI is allowed in phases, giving time for policy adjustments,
and with appropriate
riders on procurement to ensure that small producers gain from it. The debate mu
st shift into the
realm of 'how' instead of 'why'.
65. Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute
of Management, February 2008, page 7
42
5.2 Arguments against FDI in Retailing
When researching the justifications 'against' FDI
in India's retail sector, it should be recognised
that there have been many studies that have
looked at the strengths and weaknesses of
allowing FDI in developing countries in general,
of which several of these have focused on India.
Amar Nayak (2008) in his literature on multinationals
in India discussed some of these
studies to try to understand the impact of FDI on
host countries. It was evident that the
literature revealed a heterogeneous (varied)
effect on host countries, and whilst some
studies show that FDI has benefited a host
country, many other studies show that they
have either had a negative impact or no impact
on host countries. 66
Nayak (2008) when discussing the literature
that focused on India, pointed out that there
were apparent positive and negative effects
from FDI. For example, Johri (1983), by
studying the business strategies of foreign
multinational companies in the drug and
pharmaceutical industry, showed that domestic
companies benefited greatly by the
investments of foreign pharmaceutical
companies in India. 67 Other studies by N.
Kumar (1990), S Kumar (1996), Myneni (2000)
and Debroy (1996) were all identified by Nayak
(2008) as showing positive benefits to the
domestic companies and country as a whole.
To the contrary, a number of highly compelling
studies show that FDI has not been beneficial to
host countries. Nair-Reichert and Weinhold
(2001) studied the impact of FDI on over 24
countries in different stages of development
and found that FDI had a heterogeneous
impact. Country specific analyses of host
countries show that FDI has not helped them in
meeting their national objectives. 68 (Cited by
Nayak (2008)
Chakraborty and Basu (2002) had concluded
from research that the Indian Government's
trade liberalization policy had initially made a
positive impact, but as a whole had tended to
cause labour displacement. In fact, Nayak
(2002, 2004, 2005) had concluded FDI on the
whole in India has neither been effective for
India nor for the foreign companies in India.
(Cited by Nayak (2008)69
66. Amar K.J.R. Nayak, 'Multinationals in India, FDI and Complementation Strateg
y in a Developing Country', Palgrave Macmillan, 2008, page 13
67. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy
in a Developing Country, Palgrave Macmillan, 2008, page 13
68. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy
in a Developing Country, Palgrave Macmillan, 2008, page 13
69. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy
in a Developing Country, Palgrave Macmillan, 2008, page 15
43
5.2 Arguments against FDI in Retailing
Abrol (2005), the President of the Bombay Small
Scale Industries Association is cited by the
Financial Express website as having said
various ministers of the present government
are proposing FDI in retail. We believe
multinational retail and World Bank-
International Monetary Fund lobbies and some
self-serving bureaucrats are supporting it. This
proposal will create multiple East India
Companies in our country and affect livelihoods
of 1.2 crore (12 million) small retailers. Isn't the
proposal anti- national? 70
Abrol is not alone in this view. There have been
several parties who have spoken out strongly
against FDI in Retail. The organisation 'India
FDI Watch' argues why India should be kept
Independent, and the Center for Policy
Alternatives Society (CPAS), a privately funded
think tank focused on the study and review of
public policy in India, have produced a series of
reports on the problems with FDI in Retail. The
first in 2003, then in 2006, and a third in 2007.
All have compelling arguments that require
further consideration.
Mohan Guruswamy, Chairman of CPAS in New
Delhi was the former Advisor to the Finance
Minister, and a Harvard graduate. Along with
several colleagues (K Sharma, J P Mohanty and
Thomas J Korah) he produced a document titled
'FDI in India's Retail Sector, More Bad than
Good?' Guruswamy et al (2003) highlighted that
unorganised retailing accounted for
approximately 98% (in 2003) of total trade, with
organised retailing only having a share of 2% of
the market. The size of the retail market is very
hard to gauge, but estimates have placed it at
around Rs 4,00,000 crores (US$ 86,021.50
million) which was forecast at the time to
double by 2005. They acknowledged that
domestic retail businesses that were 'corporate'
owned, were only a small amount of the total
market, but were growing at a rate of 40%.
Federation of Indian Chambers of Commerce
and Industry (FICCI) in 2003 estimated total
retail business to be 44% of GDP, and food sales
made up 63% of total retail sales. With food
retail trade being a significantly large segment
of India's GDP, and because of its huge
employment potential, Guruswamy felt it
deserved special attention.
70. Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 h
ttp://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/1380
90/1
44
5.2 Arguments against FDI in Retailing
Guruswamy et al's (2003) first note was that economic activity in rural location
s. This raised
even if FDI was not opened up, the growth of the the question of whether FDI was
necessary at all
domestic 'organised sector' alone would result in this sector, if there is enoug
h domestic
in efficiency improvements and an increase in capital being injected in to the r
etail sector. The
food retail sales activity, which would have a furious growth of the domestic co
rporate
trickle down effect on employment and retailers would bring about enough investm
ent.
Guruswamy et al (2003) talked of retail as a 'Forced Employment' sector in India
. They argued
that one of the main reasons behind the growth of retail and its fragmented natu
re was that
Retailing was probably the primary form of disguised unemployment/underemployment
in the
country. Given the already over-crowded agriculture sector, and the stagnating m
anufacturing
sector, and the hard nature and relatively low wages of jobs in both, many milli
ons [of] Indians are
virtually forced into the services sector. Here, given the lack of opportunities
, it is almost a natural
decision for an individual to set up a small shop or store and thus, a retailer i
s born, seemingly
out of circumstance rather than choice.
This would explain why India is so highly fragmented with estimates at the time
of the above report
suggesting in the region of 11 million outlets with only 4% of them being larger
than 500 square feet
in size. But unemployment is high and many of the unemployed people turn to very
informal
retailing to try and make some kind of living, with limited alternative employme
nt opportunities.
45
5.2 Arguments against FDI in Retailing
Dey (2007) recognized this problem also, and retail sector Those displaced as a r
esult of FDI
stated that "the retail sector [in India] acts as an in retail may not show up a
s an increase in
important shock absorber for the present social visible unemployment 72
system. 71 When for example, a factory closes,
or a peasant gets evicted from their land, or the Interestingly, Guruswamy et al
(2003)
stagnant manufacturing industry fails to soak discussed a particular foreign ret
ailer who has
up new entrants to the job market, then the subsequently entered the Indian mark
et in 'cash
retail sector manages to absorb them all. & carry' wholesale (Wal-mart) arguing
that if
Skilled laborers end up as street hawkers, and they were to enter India, they co
uld use
educated youth turn to selling newspapers. A predatory strategies to force out s
maller
better off unemployed person might start competition and that this would create
telephone services and retail telecom cards. unemployment in the millions.
"Thus, after agriculture, the incidence of underemployment
is probably highest in the Indian
It was calculated that on the basis that India had 35 towns with over 1 million
people in each, and if
Wal-mart opened an average store in each city and they performed as well as an a
verage Wal-mart
store employing just over 10,000 employees only, then by extrapolating the turno
ver and no. of
employees alongside the average trend, it would be the equivalent of 432,000 peo
ple being
displaced. The report expanded on this theory further arguing that if FDI retail
ers were to acquire
say 20% of retail trade, this would equate to Rs. 800 billion of turnover, which
would lead to the
employment of just 43,540 people, but would displace approximately 8 million peo
ple employed
in the unorganised retail sector.
71. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspect
s of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.h
tml
72. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspect
s of India's economy No. 43, July 2007, page 2 http://rupe-india.org/43/retail.h
tml
46
5.2 Arguments against FDI in Retailing
Centre for Policy Alternatives' (CPAS) first report by as detailed above, acknow
ledges that there are
many good things that could come from FDI, and they have supported FDI in other
areas where they
feel the evidence suggests that it will benefit and grow the economy. For the re
tail sector, CPAS
make a number of recommendations for issues that should be addressed before cons
idering the
opening up of the retail sector to foreigners. These recommendations are summari
sed below:
1.
Bank Finance The government should create suitable lending policies so as to ass
ist
domestic organized and unorganized retailers to grow and improve their efficienc
y. These
policies should encourage those in the unorganized sector to migrate to the orga
nized sector.
2.
National Commission A National Commission should be set up to carry out research
in to
the retail sector to help create policies that will support the sector if and wh
en FDI arrives.
3.
Conditions Conditions with regards to sourcing of farm produce, domestically
manufactured merchandise and imported goods should be applied to large foreign r
etail
companies. The conditions should encourage the sourcing of goods from India's do
mestic
market.
4.
Timescale / Safeguards The opening up of the retail sector should be slow and gr
adual so
as to allow for the displacement of labor to be analyzed and policies amended wh
ere
appropriate, with social safeguards in place. Ensure high entry costs for foreig
n retailers and
implement regulations so that the retailer cannot use predatory tactics with the
ir pricing to
gain market share aggressively.
5.
Manufacturing Sector In order to cope with the labor displacement, CPAS strongly
suggest
that the manufacturing sector must be improved, in the belief that this will off
er some
compensation for the displaced labor from the retail industry.
6.
Co-operative Stores They recommend that the government should encourage co-opera
tive
stores so as to source and stock consumer goods/commodities from the small produ
cers, in
order to address the two problems of limited promotion and marketing ability, as
well as
assisting market penetration.
7.
Agricultural Perishable Produce Commission (APPC) A Commission to ensure that
procurement costs are fair for farmers of perishable commodities.
47
5.2 Arguments against FDI in Retailing
8.
Food Retail Sector
a.
Training to provide skills in transport, handling, storing, sorting, grading, hy
giene,
refrigeration equipment maintenance etc.
b.
Improve Infrastructure for retailing with focus on logistics and hygiene
c.
Creation of certification and price administration bodies to oversee regulation
of quality
and to assist with the upgrading of technical & human interface in the 'rural-to
-urban
supply chain'.
d.
Credit availability
e.
Implement cross integration of India's existing long food supply chains such as
dairy, fish,
fruit and veg to provide new products in new markets and help to improve consume
r
choice, and increase employment and economic activity.73
By undertaking their recommendations, CPAS The research study undertaken by ICRI
ER (2005)
believe that it will help to ensure that the revealed that those against FDI in
retail argue
domestic and foreign retailers are on equal that the entry of large multi-nation
al retailers
ground, and that domestic retailers are not could upset India's import balance,
as a number
especially disadvantaged. "The small retailers of these prefer to source globall
y (for example,
must be given ample opportunity to be able to from China) and may prefer this to
sourcing
provide a more personalized service, so that from India. This view is supported
by CPAS. In
their higher costs are not duly nullified by the a recent study, CPAS's Chairman
Guruswamy,
presence of big supermarkets and Sharma & Jos (2007) suggest the potential
hypermarkets.74 problem of a 'China Pipeline'.
It argues that the efficiency of the large global retailers is due to their abil
ity to procure goods
globally from the cheapest possible source. They are able to force prices down p
urely by
economies of scale, ie. purchasing such a large volume of any given item. China
has "mastered the
complexities of the procurement-logistics supply chain and do provide huge stand
ardised
volumes of quality household products at a low price within strict time schedule
s. Wal-Mart
procures £18 billion worth of Goods from China giving it a ready pipeline through
which cheaper
goods can flow into the Indian economic hinterland.
73.
Guruswamy, K Sharma, JP Mohanty, TJ Korah, FDI in India's Retail Sector; More Bad
than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 ht
tp://
cpasindia.org/reports/10-FDI-Retail-more-bad.pdf
74.
Guruswamy, K Sharma, JP Mohanty, TJ Korah, FDI in India's Retail Sector; More Bad
than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 ht
tp://
cpasindia.org/reports/10-FDI-Retail-more-bad.pdf
48
5.2 Arguments against FDI in Retailing
Those opposed also believe that foreign retail
investors may use predatory pricing
techniques, which are aggressive and can force
out domestic players by selling at below cost
until the domestics have been eliminated. Then
the foreign retailers have a monopoly of the
market and can increase prices and reap higher
profits. This is not such an inconceivable
concept, as it has happened elsewhere in the
world which can be seen, for example in an
article by the Institute for Local Self-Reliance75
where Wal-mart were charged with predatory
pricing in the United States in 2000.
The trading associations have pointed to the
fact that retail trade does not require large
amounts of investment to operate because
goods are bought on credit and sales are mainly
cash, and therefore the foreign retail investors
will not bring large inflows of foreign
investment. To the contrary, they argue that
"after making initial investment on basic
infrastructure, the multinational retailers may
remit the profits earned in India to their own
country. 76
India FDI Watch is a national coalition of labor
unions, trade associations, environmentalists,
NGOs and academics that have formed to block
attempts by Prime Minister Singh's government
to allow foreign direct investment in India's
retail markets (www.indiafdiwatch.org). They
have produced several reports that argue that
India should say no to FDI in retail unless the
foreign retailers "make satisfactory guarantees
that would protect communities; insure the
stability of existing small businesses and
traders; guarantee fair wages and working
conditions for their own employees and source
employees along with union protection and
agreements; and insure that a significant
percentage of sourcing derives from the Indian
market. 77
75. http://www.newrules.org/retail/news/walmart-charged-predatory-pricing
76. Mukherjee A, Patel N, 'FDI in Retail Sector India', Academic Foundation in a
ssociation with ICRIER, 2005, page 118
77. http://indiafdiwatch.org/index.php?id=80
49
5.2 Arguments against FDI in Retailing
One particular India FDI Watch campaign
believed that there is pressure on the
government from the IMF and World Bank to
allow labour standards to be dictated by the
demands of supply chain flexibility ie. 'hire and
fire' policy. They argue that if the government
is to change labour laws (as it has already
proposed to do in 2005), then the safe guards
that have been in place to protect India's labour
force will be lost and the business environment
will be far more conducive to FDI and global
integration, as the model used by global
retailers requires flexible labour markets to be
present.78
The same campaign report argued that Trans
National Companies (TNCs) are trying to bring
in changes through the World Trade
Organisation's GATS (General Agreement on
Trade in Services) to "safeguard their vested
interest 79 The proposed GATS agreement
would provide that an investor would not be
subject to the introduction of new barriers to
investment in a host country, would be provided
with post investment protection, protection
against all material and intellectual property,
effective protection against direct
expropriation as well as against indirect
expropriation through discriminatory
treatment, a mechanism for compensation in
the case of expropriation, a mechanism for the
settlement of disputes, and the right to
determine its own ownership structure and
provisions for legal, regulatory and
administrative transparency.80
This protection could be detrimental if India
decides to open FDI in retail, and then find that
it is not successful. It will be too late for the
government to go back on any decision, as the
GATS agreement may prevent them.
78. India FDI Watch 'Keep India Independent!', 2009, Page 23 - http://indiafdiwa
tch.org/fileadmin/India_site/FDI_in_retail.pdf
79. India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwat
ch.org/fileadmin/India_site/FDI_in_retail.pdf
80. India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwat
ch.org/fileadmin/India_site/FDI_in_retail.pdf
50
Chapter 6 - Detailed analysis of factors
and conditions related to FDI
Chapter 6 - Detailed analysis of factors
and conditions related to FDI
6.0 Survey Design & Sample
The survey sample consists of 70,000 people
who have registered to receive 'The India Retail
Newsletter', an e-web news service, which
provides the latest news on the sector. The
sample of people who are registered is made
up of Retailers, Fast Moving Consumer Goods
(FMCG) companies and manufacturers,
franchisors and franchisees, retail service
providers, real estate companies, software & IT
companies, hardware and system
manufacturers, consulting companies,
Figure 4
headhunting firms, and educational
institutions.
Out of the 70,000 participants in the survey,
there were 243 respondents. Figure 4 below
shows the profile of the survey sample used to
distribute the survey questionnaire, broken
down by Industry. 91% of the chosen sample is
employed in the Indian retail sector, and the
remaining 9% are in inter-related industries and
sub-sectors.
Survey Sample by Industry
1%
2%
1%
1%
4%
91% Retail
Retail
FMCG / Apparel / Manufacturing
Media
Real Estate
Information Technology
Other
A survey sample of this size is more than is required for the purposes of obtain
ing a representative
view of the domestic Indian retail sector. It covers not only participants who a
re within the retail
trade directly, but also others within retail-related sectors (as detailed above
) and therefore should
provide the researcher with a balanced view from various viewpoints.
51
6.0 Survey Design & Sample
The questionnaire was designed to contain
both open and closed ended questions for a
number of reasons. Open ended questions
allow further clarification of the closed-ended
responses, as well as allow for thoughts and
ideas to be discovered that perhaps have not
been considered in the literature review and in
earlier stages of this research. The justification
for using closed-ended questions was to
counter-balance any mis-interpretation / lack
of response in the qualitative areas.
The questions were written after a preliminary
review of the initial literature discovered during
the early stages of the research. The closed
ended questions would be able to provide a
simple view of whether a particular respondent
believed, for example, 'Yes, FDI should be
opened up', or 'No, reforms policy are not
necessary'. The open-ended questions were
6.1 Questions
Please see Appendix II for Survey Questions.
then designed to link in to these closed
questions and to draw out more detail, by
encouraging respondents to give reasons as to
why the felt a particular way, or what they would
propose as solutions to a specific problem, for
example, possible labour displacement.
It was important to ensure that anonymity and
privacy were considered throughout the survey,
so as not to discourage participants, and to
protect their personal views and opinions.
Therefore, the preliminary data on the
questionnaire i.e. name, occupation, sector etc
were not compulsory. A 'respondent ID
number' was allocated to each response when
collated on to computer software so that
specific respondent comments could be
referred to in the analysis, and for ease of
reference.
52
6.2 Data Analysis
Below is a summary of the data results from the survey following analysis. There
were 243
respondents in total, and 'no response' rates are recorded for those who answere
d some of the
survey questions, but not the specific question that is being analysed. The foll
owing analysis charts
display the results visually, but should be read in conjunction with Chapter 4.3
Results & Findings,
and using the Coding Key in Appendix I where appropriate. Each chart states if i
t requires the
Coding Key for interpretation.
Chart S1
No. of people aware of current FDI in Retail Policy(Question 1)
189
48
6
0
20
40
60
80
100
120
140
160
180
200
Yes No No response
No. of people
(Question 2)
203
38
2
0
50
100
150
200
250
Yes No No response
No. of people
Should the Indian Government open up FDI restrictions in the Retail Sector?
Chart S2
53
Are you happy with the current FDI Retail policy as it is?
(Question 4)
41
199
3
0
50
100
150
200
250
Yes No No response
No. of people
(Question 3 - please see Coding Key)
5
1
8
25
25
26
20
60
15
11
11
36
0 10 20 30 40 50 60 70
A
B
C
D
E
F
G
H
I
J
K
X
Coded Response
No. of respondents
Coded Qualitative Analysis of Reasons why FDI should or should not be opened up
in India
Chart S3
Chart S4
Chart S5
(Question 5)
Only Allow Branded Products
17%
No Response
4%
Certain Products Must Be
Manufactured/Sourced In India
By The Foreign Investor
31%
None
13%
An Exclusion Of Specific
Products For The Domestic
Retailer
3%
Only Allow FDI In Specific
Cities/Areas
0%
Equity Limits
4%
Only Allow Certain Retail
Formats (Eg: Malls)
12%
Other Restrictions
8%
A Minimum Investment Amount
Requirement
8%
What conditions should be imposed on foreign retailers if policy is changed?
54
Should Government reforms be made to support domestic retailers?
(Question 6)
170
70
3
0
20
40
60
80
100
120
140
160
180
Yes No No response
No of People
Chart S6
Coded Analysis of Suggested Reforms to Protect Domestic Retailers
(Question 7 please see Coding Key)
N
1%
Q
3%
R
2%
S
3%
T
1%
V
1%
K
0.3%
C
2%
W
1%
U
0.3%
I
1%
H
3%
F
1%
E
1%
D
1%
B
3%
A
7%
J
10% (Subsidy)
L
1%
M
2%
O
1%
P
6%
Y
12%
(no reforms necessary)
X
35%
(no response)
G
3%
(Question 8)
223
15
5
0
50
100
150
200
250
Yes No No response
No. of people
Will lifting restrictions on FDI in retailing allow more investment, technical s
kills and
consumer choice?
Chart S7
Chart S8
55
(Question 10 - Please see Coding Key))
A
5% B
6%
C
11%
D
28%
E
2%
F
8%
X
40%
Coded Analysis of Suggested Solutions to potential Labour Displacement problem
Chart S9
(Question 10 - Please see Coding Key))
A
5% B
6%
C
11%
D
28%
E
2%
F
8%
X
40%
Coded Analysis of Suggested Solutions to potential Labour Displacement problem
Chart S9
Coded Analysis of the no. of people who believe the argument that "foreign
retailers will not 'own a stake' and therefore will make little investment "
(Question 9 Please see Coding Key)
No. of people
200
180
160
140
120
100
80
60
40
20
0
182
25
36
FALSE (A) TRUE (B) NO RESPONSE (X)
Answer
Chart S10
(Question 11)
39
27
43
38
9
46
17
8
0
5
10
15
20
25
30
35
40
45
50
0 1 2 3 4 5-6 7-10 10+
Years
No of people
How many years should FDI policy be 'phased in' to allow domestic industry & mar
ket to adjust?
Chart S11
56
6.3 Results & Findings 6.3 Results & Findings
6.3.1 Chart S1 (Question 1)
Are you aware of the current FDI in Retail Regulation & Policy?
The first question revealed that 77.7% of respondents were aware of current FDI
in retail policy, with
19.7% not being aware, and 2.6% of respondents giving 'no response'. This data s
hows that a
significant amount of people within the domestic market place are paying an inte
rest in the current
policies and how these could influence their industry and country. The awareness
was anticipated to
be high, due to the very fact that the topic has been discussed in the Indian me
dia many a time over
the last decade.
6.3.2 Chart S2 (Question 2)
Do you think the Indian Government should open up Foreign Direct Investment (FDI
)
restrictions in the Retail Sector?
It was evident from the responses that a significant number of respondents would
like to see the
opening up of FDI in the retail sector.
83.5% of respondents said 'Yes', India should open up the FDI policy, whilst onl
y 15.6% said 'No'.
A very small 'no response' rate was observed from this question at 0.9%.
These results show a strong amount of support for the concept of opening up FDI,
although the data
analysis also highlights that there is still a small but significant (15.6%) gro
up of people within the
domestic industry who oppose the idea of opening up FDI.
6.3.3 Chart S3 (Question 3)
Please give reasons for your answer to Question 2
Question 3 was an open ended question asking why participants thought FDI policy
should or should
not be opened up. Responses were analysed and coded according to common themes.
11 themes
or categories were identified and allocated a code (please see Code Key in Appen
dix I for
identification of categories / themes.)
57
6.3 Results & Findings 6.3 Results & Findings
6.3.3 Chart S3 (Question 3)
24.7% of respondents believed that opening up FDI in the retail sector would all
ow for improved
skills, technology, innovation and best practices, as well as offer improvements
to infrastructure,
supply chain and logistics, an improved competitive environment which in turn wo
uld lead to
consumer benefits. They also believe that it would increase employment and econo
mic growth and
bring investment to the domestic sector including related-sectors such as agricu
ltural and
manufacturing operations, This particular group of respondents (coded H) were 'p
articularly pro-
FDI' and gave multiple reasons (as above) as to why the sector should be opened
up. Even more
revealing is that a further 45.3% of respondents mentioned either 1 or 2 of the
above reasons for
believing FDI should be opened up.
Therefore, 70% of respondents believe that one or more of the above reasons are
justification for
opening up FDI in the retail sector. This reflects a strong sentiment towards FD
I, and is a sign that
the domestic market feels positively about the widening of FDI policy and the be
nefits it could bring
to the countries industry and wider economy.
A small number of respondents, 6.2%, made specific mention of the argument of al
lowing 'free
market efficiency' to reign, and for there to be less 'protectionism' within the
retail sector.
4.5% were against the idea of opening up FDI yet, because they felt that the dom
estic market was not
developed enough yet. However, they also felt that in the future once the 'organ
ized' retail had
grown and reforms had taken place, it would be of benefit to the country to allo
w FDI in the sector.
A further 4.5% of respondents felt strongly that FDI would be of no benefit and
should not be
allowed. The researcher anticipated the number of respondents in this group to b
e higher, given
that 15.6% of respondents said 'no' to opening up FDI in Question 2 (see Chart S
2). However, these
figures could differentiate due to the fact that a 15.2% of participants did not
respond or make any
comments on Question 3.
58
6.3 Results & Findings 6.3 Results & Findings
6.3.4 Chart S4 (Question 4)
Are you happy with the current FDI Retail policy as it is?
Question 4 was intended to obtain a view of whether the domestic market was happ
y with the current
policies.
16.9% of people were satisfied with the policies as they are, while an overwhelm
ing majority of
81.9% were dissatisfied with the policies as they stand today.
Only 1.2% of people did not respond to this question which is an acceptable leve
l.
6.3.5 Chart S5 (Question 5)
If FDI policy is to open up in the future, do you think any of the following con
ditions should be
imposed on foreign retailers?
Question 5 was a multiple-choice question, with a number of suggested conditions
that could be
imposed on foreign investors. Participants were asked to select a condition they
felt should be
imposed (if any). The most significant group of respondents (31%), were those wh
o felt that foreign
investors should have to source certain products from India. 17% thought that on
ly branded
products should be allowed through FDI, while 13% of respondents felt that there
should be no
conditions imposed on FDI at all.
In terms of retail formats, 12% believed that foreign retailers should only be a
llowed to operate in
specific formats, for example, malls, and a further 8% felt that a minimum inves
tment amount should
be specified in policy. A smaller group of respondents (4%) felt that Equity lim
its should be put (or
kept) in place (as currently imposed on single-brand retail at 51% equity)
3% of respondents supported the idea of excluding certain products to protect do
mestic players, and
8% felt that 'other restrictions/conditions' would be more appropriate than the
options available for
selection in the multiple-choice box in Question 5. The 'no response' rate on th
is particular question
was 4%.
The data from question 5 reveals a strong support for conditions that involve so
urcing Indian
products, and thereby growing the manufacturing/agricultural industries and Indi
a's GDP. Branded
products and format restrictions were also supported by a number of respondents,
but more
surprising was the 13% of people who supported 'no conditions' at all.
59
6.3 Results & Findings 6.3 Results & Findings
6.3.6 Chart S6 (Question 6)
Do you think that government reforms need to be made to support domestic retaile
rs so that
they can face the foreign investment competition?
The data collected from Question 6 revealed that 70% of respondents felt that re
forms should be
made by the government to ensure that the domestic retailers are supported. The
other 28% of
respondents felt that no reforms would be necessary to support the domestic reta
ilers. The 'no
response' rate was reasonably low at 2%.
When interpreting this question alongside Chart S2 (Question 2), it is evident t
hat although 83.5% of
people felt that FDI should be opened up, 70% also felt that reforms were necess
ary to support
domestic retailers.
6.3.7 Chart S7 (Question 7)
Following Question 6, what reforms do you think should / should not be made?
Question 7 was open-ended, and aimed to discover what reforms the survey partici
pants believed
would, or would not, help to support domestic retailers. The data was analysed a
nd coded according
to common themes or specific recommendations for reform, which consisted of 25 d
ifferent coded
categories from the 243 responses (please see Coding Key in Appendix I).
10% of the survey respondents recommended that the government provide subsidy to
domestic
retailers, specifically in the form of low-rate loans/bank finance. In contrast
to this, 12% felt that no
reforms were necessary in order to protect the domestic retailers. This group (c
oded 'Y') who
commented that no reforms were necessary, had a tendency to also mention that th
eir preference
was for a 'free market' and that healthy competition would be preferred. There w
as also a tendency
with these respondents to commenting that the domestic players, particularly sma
ll 'kirana / mom &
pop' stores, would be able to survive alongside the foreign investors with out a
ny issues. For
example, one respondent said they [small retailers] will continue to exist, the k
ind of personalised
service, decision taking speed etc of small retailers can't be matched by big re
tailers. (Respondent
ID no. 94)
7% of respondents (coded 'A') suggested the government invest in, and provide fo
r equal access to an
organised wholesale & supply chain infrastructure, so that domestic retailers ca
n become more
efficient, bring down their costs and offer better value so as to be able to com
pete with foreign
investors in the market place.
60
6.3 Results & Findings 6.3 Results & Findings
6.3.7 Chart S7 (Question 7)
Tax relief and tax incentives for domestic retailers was a suggested recommendat
ion by 6% of
respondent, 3% felt that implementing educational retail training initiatives wo
uld be of benefit. A
further 3% recommended improving real estate regulations to facilitate the provi
sion of land to
domestics and to provide for allocation of land and city planning.
Bureaucracy was raised as a concern, with 3% believing that there is a need to r
educe administration
and formalities for domestic players to facilitate, for example, exporting or op
ening a new retail
outlet (which can require up to 30 licences).
6.3.8 Chart S8 (Question 8)
Do you believe that lifting restrictions on FDI in retailing will allow more inv
estment, technical
skills and consumer choice?
Question 8 specifically asked whether people agreed Yes or No to that lifting re
strictions on FDI
would allow more investment, technical skills and consumer choice in India.
91% of respondents answered 'Yes', believing that lifting restrictions would bri
ng more investment,
technical skills and consumer choices.
7% answered 'No', and there was a 2% 'no response' rate on this question.
By comparing these results to Chart S2 (Question 2) it reveals that although 83.
5% of people believed
FDI should be opened up, we can see that a higher proportion of people (91%) bel
ieve it would bring
increased investment, skills & consumer choice. This means that a number of resp
ondents whilst
having said 'no' they do not believe FDI should be opened up, clearly acknowledg
e that it would bring
benefits to the economy/industry (in terms of investment & skills) and to societ
y (in consumer
choice).
61
6.3 Results & Findings 6.3 Results & Findings
6.3.9 Chart S9 (Question 9)
It is argued by some who are against FDI, that foreign retailers will not 'own a
stake' in India,
and therefore will make little investment, but reap the profits all the same. Ho
w can you
counter this argument?
Question 9 was an open ended question, which asked participants to counter the a
rgument that
'foreign retailers will not 'own a stake' in India, and therefore will make litt
le investment, but reap the
profits all the same'. The responses were analysed and coded according to whethe
r they believed
the statement to be 'false' and disagreed - these respondents were able to count
er the argument
with solutions to prevent this from happening, or believed the statement to be '
true' and agreed
these respondents offered no counter argument and could provide no solutions to
this potential
problem. (please see Coding Key Question 9, Appendix I)
75% of respondents believed the statement to be false, and provided simple solut
ions to the
problems, or argued that it was not an issue of concern. One particular responde
nt said that Unless
the foreign retailers really invest in India, they would not be able to reap the
profits. Only long haul
players will really benefit from the Indian market. (respondent ID no. 56) Anothe
r argued that It is
not true. As such, retail needs heavy investments both front end and back end. I
t is unlikely that
foreign investors can overlook this point and hence their financial involvement
would be high. Yes,
there is certainly a fear of 'flight of capital' after some time, which needs to
[be] protected with proper
regulations (respondent ID no. 98). An interesting thought was also considered by
respondent ID
no. 81; by constructing businesses and providing fair wages, isn't that a defacto
investment?
10% believed the statement to be true. For example, respondent ID no. 141 said I
am for [this]
argument. I believe that fair returns should be in proportion to the investment
made by the foreign
investors. Also the money in India should be used for the welfare and developmen
t of India first.
Respondent ID no. 53 also agreed with the statement, saying this argument has som
e validity.
It is evident that the majority of people did not believe in the statement posed
by Question 9. The
responses analysed, conveyed strong support for the concept that foreign retaile
rs will be looking to
stay for the longer term in India (being that it has such huge retail market pot
ential), and therefore
will have to invest in improving infrastructure, supply chain, technology and sk
ills for example, so as
to make a success of their Indian operations.
62
6.3 Results & Findings 6.3 Results & Findings
6.3.10 Chart S10 (Question 10)
Can you think of any solutions to the potential problems of labor displacement i
n the
unorganized retail sector if FDI regulations are opened up?
Question 10 was an open ended question, where participants were asked to suggest
ways in which
they thought one of the key problems, labor displacement, could be resolved.
The responses were analysed and interpreted, and coded according to general them
es in response.
Please see Coding Key, Question 10, Appendix I
The data analysis revealed that 28% of the respondents believed that labour disp
lacement simply
wouldn't happen. For example, respondent ID no. 91 said I don't think that organi
zed retail
presents any threat of labour displacement in the unorganised retail sector. Rat
her it would provide
better opportunities.
To the contrary, 11% of respondents believed that there were no solutions to lab
our displacement,
and that displacement was inevitable if FDI in retail was opened up. This is not
to say that the
participants were either for or opposed to FDI, but merely that labour displacem
ent was not
something they believed could be 'solved'. Analysing this against the number of
people that believed
FDI should be opened up in India (203 respondents), 12% of these respondents als
o thought that
labour displacement was inevitable.
This could be interpreted to mean that this group has accepted labor displacemen
t as one of the
obvious risks of FDI, but that the benefits would outweigh the risks.
8% of respondents to question 10 argued that providing skills and comprehensive
training to
existing 'unorganized' retailers would allow them to upgrade their businesses an
d be innovative so
as to continue employment in the retail sector without being displaced. A furthe
r 6% thought that
foreign retailers should be asked to invest in retail related facilities first a
nd foremost, to offer
further employment in back-end services, manufacturing and farming, to compensat
e for the labor
displacement.
5% believed of people believed the Government should be responsible for providin
g and controlling
equal employment opportunities in both the growing 'organized' sector, and in ba
ck-end services.
These respondents had a tendency to believe that labor laws were in need of upgr
ading to support .
63
6.3 Results & Findings 6.3 Results & Findings
6.3.10 Chart S10 (Question 10)
The final group of respondents consisted of 3% who believed that there should be
compensation,
rights and benefits provided to those that are displaced. No participant specifi
ed whether this
should be from the Government, foreign retailers, or both.
The analysis of Question 10 has revealed that the majority of people believe tha
t either labor
displacement will not happen at all against those who believe if labor displacem
ent does happen,
there is little that can be done to prevent it.
6.3.11 Chart S11 (Question 11)
Over how many years do you think FDI policy could be phased in to allow domestic
industries/markets to adjust successfully?
Question 11 was a closed ended multiple choice question, asking participants to
say over how long a
period they thought FDI should be opened up to allow domestic retailers to adjus
t successfully (if at
all).
16% of respondents believed phasing in would not allow for any successful adjust
ment of domestic
retailers. This particular group believed also that the retail sector should be
opened up imminently.
The majority of respondents, 48%, thought 1 to 4 years was adequate enough time
to allow for the
successful adaptation of domestic retailers, with a weighting toward 2-3 years b
eing preferable.
A further 19% thought 5-6 years would be more appropriate, 7% believed 7-10 year
s, and a small
minority at 3% thought that the phasing should be over a period greater than 10
years.
64
Chapter 7 -Conclusion Chapter 7 -Conclusion
7.0 Introduction
So as to draw conclusions from this study, it is appropriate to review the objec
tives that were set out
earlier in Chapter 1:
1) To investigate the Indian retail market place and current policy & regulation
s with regards to
foreign investors.
2) Examine the arguments for and against changing current policy and improving t
he regulatory
environment
3) Compare the opinions of the Indian domestic retail sector so as to interpret
market sentiment
towards foreign investment, and to explore thoughts on the issues faced by the s
ector.
4) Consider what solutions could potentially resolve the issues and are supporte
d by the
majority of the domestic retail players.
7.1 Indian market place and FDI policy & regulations
It was clear from the literature review that India is a very unique market and h
as an extremely
dominant 'unorganized' sector that is concerned about the introduction of FDI in
the retailing sector.
Since 1991, economic reforms have been underway to utilize more foreign investme
nt and to
become increasingly efficient and internationally competitive. India has come a
long way in this
regard, but there are still areas that require further reform and improvement. F
or example, there are
issues with labour laws, real estate regulations as well as general economic pro
blems such as high
unemployment, inflation and 'jobless growth'.
Economic growth in India is good (with a 5 year average of over 8% real growth),
and the retail industry
contributes approximately 40% of this GDP, and yet still has a very under develo
ped 'organized
sector', and therefore offers exciting growth potential.
The Food & Beverages vertical has huge potential for the organised retail sector
as to date less than
1% of this vertical has been penetrated by organized retailers. Clothing & Texti
les also holds a fairly
significant share of the retail markets revenue. We believe that these are the t
wo most likely target
sectors for foreign investors.
65
Chapter 7 -Conclusion Chapter 7 -Conclusion
7.1 Indian market place and FDI policy & regulations
Changing consumer patterns appear to be a
large factor in the growth of the Indian
'organised' retail sector, with a burgeoning
middle-class, and a growing young population
with a willingness to spend. Consumer habits,
desires and incomes are changing and
demands for different retail formats are
emerging.
The retail sector in India does not have 'industry
status' and that this causes difficulties for all
concerned. Providing industry status would
allow comprehensive legislation to be put in
place to govern the running of the retail sector.
This in turn would assist in accelerated growth
of the retail sector and would remove a number
of barriers that are currently slowing down
growth, such as bureaucracy, formalities and
lack of finance for retailers, for example.
The literature review showed that current
investment policy is already quite liberal
towards FDI in many sectors, with only a few
sectors (predominantly service sectors such as
retailing) that are restricted. Retailing is
allowed via a number of methods such as
franchising/joint venture, but 100% equity is
only allowed in Wholesale Cash & Carry, and
51% in single-brand retailing. No multi-brand
retailing is allowed by foreign investors.
The recent changes brought about through a
series of Press Notes in 2009 have caused
confusion over the policy, as the changes allow
Joint Ventures to effectively create sub-
companies (cascading). We believe this may
encourage foreign investors to use this 'loop
hole' to create sub-companies so that they can
exceed FDI caps, and potentially enter areas
such as multi-brand retailing through the
'back-door' without technically breaking the
rules. There needs to be more clarity in this
area of policy. The literature review revealed
that although there are hurdles to be overcome
in the policy and regulatory environment, the
government seems to be working on various
solutions, for example, Special Economic
Zones.
66
Chapter 7 -Conclusion Chapter 7 -Conclusion
7.2 Arguments for & against changing policy and
improving the regulatory environment.
Those in favour of FDI in Retail argue the following reasons:
1.
The technical edge offered by foreign investors is crucial to the survival of do
mestic
retailers, particularly in the current downturn.
2.
Knowledge & skills would be transferred.
3.
Allowing 100% FDI will encourage domestic investment in the sector
4.
Economic boost with increased FDI inflows
5.
Improve the standard of living of the country as a whole (enhanced Human Capital
)
6.
Improve productivity and efficiency in management
7.
Foreign 'low-cost' retailers will set-up/adopt integrated supply chain managemen
t, which in
turn will lower prices for consumers and improve the infrastructure of the count
ry.
8.
Increased FDI in Retail will ensure quality products and customer services
9.
Will promote links between domestic/local suppliers, manufacturers and agricultu
ral traders
with the global market
10.
Sourcing / Exports from India would be enhanced.
11.
Standards (quality, health & safety etc) & best practices would improve
12.
Domestic players would develop new strategies to improve operations to counterac
t any
competition from foreign players
13.
Foreign retailers would encourage employment in back-end services
14.
Improvements in quality of employment
15.
Reduce the number of intermediaries
16.
Joint Ventures would help to ease the capital constraints of domestic companies
17.
Most acknowledged that phasing-in should be considered and that some restriction
s would
be required on equity limits, certain products, and certain 'zones'
18.
Research suggests that 'unorganised' retailers have not been adversely affected
by the
location and growth of 'organised' retailers nearby. Those that were affected, t
ended to
adopt new strategies to face competition
19.
Improve transparency and prevent 'back-door' entry and 'loop holes'.
20.
Not logical to have 51% restriction on single brand retailing when so many forei
gn single
brand retailers have already entered through the franchise route.
21.
Retail Growth forecasts may not be achievable without FDI stimulus
22.
Additional taxes will be raised for the benefit of India
23.
Contribution to the long-term development of the country (ie. investment in educ
ation,
infrastructure etc)
67
Chapter 7 -Conclusion Chapter 7 -Conclusion
7.2 Arguments for & against changing policy and
improving the regulatory environment.
Those against the opening up of FDI in the retail sector argue the following rea
sons:
1.
FDI has a heterogeneous effect on countries, ie. the results vary. Some studies
have shown
success of FDI in India, others have shown initial positive results but with a t
endency on the
whole towards causing labour displacement.
2.
The fast growth of domestic 'organised' retailing (40% per annum) would result i
n efficiency
improvements and increased retail sales which would in turn create employment an
d
economic growth, raising the question of whether FDI was required in this sector
at all.
3.
Retail as a 'Forced Employment' the sector is one of the primary forms of 'disgu
ised
employment / under employment' which acts as a shock absorber for the present so
cial
system, soaking up unemployed people who have little alternative but to try and
make some
kind of living.
4.
Those displaced by FDI may not show up as a 'visible' increase in unemployment.
5.
Foreign retailers may use predatory strategies to force out smaller competition
6. Various issues such as Bank Finance, conditions, safeguards, and improvements
to
manufacturing sector are required to be addressed before FDI in Retail should be
considered.
7.
Potential to upset the import balance, with the creation of a 'China Pipeline'.
8.
After minimal initial investment in basic infrastructure, Foreign investors may
re-patriate
profits back home.
9.
Foreign retailers should not be allowed until they make satisfactory guarantees
to protect
communities, support small businesses and traders, guarantee fair wages and work
ing
conditions, and ensure minimum sourcing from India.
10.
Hire and Fire' Policy in labour law would be more conducive to an FDI environmen
t, but
would destroy the safeguards that are in place to protect the labour force.
11.
Amendments to GATS Agreements could mean that any policy changes on FDI will be
irreversible as investments will be protected and have immunity to new barriers
to trade.
68
Chapter 7 -Conclusion Chapter 7 -Conclusion
7.3 Market sentiment and exploration of
domestic retailers' thoughts.
The survey revealed that there is a strong
market sentiment towards opening up FDI, with
83.5% of people supporting the opening of the
sector.
The domestic retailers who responded believe
that FDI in retail will bring the benefit of skills
transfer, technology, innovation and best
practises as well as supply chain, infrastructure
and logistics improvements. They also thought
that it would increase employment and
economic growth and draw more investment in
to the domestic sector and sub-sectors.
Overall, 70% of people believe that it would have
a positive impact.
A small percentage of people feel that India isn't
quite ready to open up its foreign retail policy
yet, but that it would be ready in the near future
and should begin planning a 'phased system'. A
minority (4%) believed there would be no
benefits at all of allowing FDI and were against
opening up policy.
This research has revealed that there is strong
support for imposing a condition on foreign
retailers to source certain products in India, as
well as some interest in restricting FDI to
branded products, and certain retail formats.
Interestingly, it was found that 70% of people also felt that reforms should be
made to support
domestic retailers in the face of competition from FDI, whilst 28% felt that dom
estic retailers did not
need reforms to support them.
The data collated from the survey highlighted a number of recommended reforms to
support
domestic retailers.
The reforms that were most commonly supported were, subsidies in the form of low
-rate loans,
provision of equal access to organized wholesale & supply chain infrastructure a
nd tax relief for
domestic retailers.
However, 12% of respondents felt that no support was necessary and that domestic
retailers would
support themselves. It was also suggested that bureaucracy and formalities be re
duced as this was
currently hindering domestic/foreign retailers and was restricting the growth of
the sector.
69
Chapter 7 -Conclusion Chapter 7 -Conclusion
7.3 Market sentiment and exploration of
domestic retailers' thoughts.
Over 20 recommendations for reform to support domestic retailers were gathered f
rom the data
analysis of the survey, for which the complete list is detailed in Chapter 4 & A
ppendix II.
This research has shown that an overwhelming majority (91%) believe that FDI in
retail will bring
benefits in the form of further investment, skills and consumer choice. The stud
y also ascertained
that 75% of people felt that foreign retailers would make a long term commitment
to investment in
India and would not simply make minimal investment then 'repatriate profits'.
It is evident from the survey results that 28% of people do not support the view
that allowing FDI will
cause labour displacement. This compares to 12% who believe labour displacement
is inevitable and
11% who believe there are no solutions to this problem. India's domestic market
is clearly divided on
whether there is even an issue of displacement.
We re-iterate that other countries have experienced varying results, and therefo
re there is no way of
knowing whether labour displacement will be non-existent, mild or severe in Indi
an retail. One
would imply that there is likely to be some displacement, but a well thought out
plan and policy &
regulatory system will minimize the risks here, and perhaps prevent it from happ
ening all together.
Survey respondents suggested the following ways in which labour displacement mig
ht be dealt
with:
7.4.1Recommendation 1
The government should revoke the recent Press Notes that relate to permitting ca
scading sub-
companies, as these are only serving to provide a loop-hole for back-door entry
by foreign
retailers and are not promoting transparency within the policy.
7.4.2 Recommendation 2
We recommend that the retail sector is granted 'industry status' as soon as poss
ible so that a
legislative framework can be put in place for the control and management of the
sector and its
day to day operation.
7.4.3 Recommendation 3
Begin recording detailed statistical data of the sector, both foreign, and domes
tic organised and
unorganised so that the impact of FDI when introduced can be closely monitored a
nd policy fine-
tuned accordingly.
7.4.4 Recommendation 4
Labour Laws need to be reviewed to be more in line with the requirements of reta
il sector
employment.
7.4.5 Recommendation 5
Investment should be made by the government to improve the efficiency of the man
ufacturing
sector so that this sector can grow and provide more employment opportunities go
ing forward.
7.4.6 Recommendation 6
City Planning needs to be addressed so that development is in such a way that it
protects the
traditional trader areas and does not clutter the already densely populated city
centers.
71
7.4 Recommendations 7.4 Recommendations
7.4.7 Recommendation 7
Real Estate Regulations need to be considered for reform so as to facilitate acc
ess to land and
property for use by the retail sector, and to provide equal access to space for
both foreign and
domestic players.
7.4.8 Recommendation 8
Certain sensitive products should be restricted from foreign retailing, so as to
protect the
traditional craftsmen and unorganised traders. The products to be restricted nee
ds to be given
thought and researched before any decisions are made.
7.4.9 Recommendation 9
The government should impose local employment quotas on foreign retailers, first
ly to reduce
the effects of any potential labour displacement, and secondly to encourage fore
ign retailers to
provide training, skills and development to local people who without it would no
t be able to
transfer to the 'organised' retail sector or back-end services.
7.4.10 Recommendation 10
Rules on re-patriation of foreign profits should be revised, to discourage (and
restrict) 100% of
profits from leaving India. Conditions imposed on requiring foreign retailers to
invest a
minimum amount in infrastructure and supply chain capabilities would be benefici
al.
7.4.11 Recommendation 11
Consider providing Tax relief and/or subsidy by way of low rate loans to domesti
c retailers to
provide support.
7.4.12 Recommendation 12
Implement a 'phased introduction' of FDI to the retail sector, say over 2-4 year
s, so as to provide
gradual adjustment for the domestic players and to allow fine-tuning and adjustm
ent of policy if
issues arise.
72
7.4 Recommendations 7.4 Recommendations
7.4.13 Recommendation 13
The government should reform price control policies to ensure that foreign retai
lers cannot sell
below a minimum price, rather than the current Maximum Retail Price (MRP).
7.4.14 Recommendation 14
Conditions of minimum sourcing from domestic agricultural and manufacturing sect
ors should
be imposed, so as to prevent the creation of a 'China Pipeline'.
7.4.15 Recommendation 15
Bureaucracy and formalities should be reduced by updating related legislation, f
or example,
reducing the number of licences required by businesses to open a store. This sho
uld assist the
domestic players in expanding and will help to streamline the efficiency of the
sector.
7.4.16 Recommendation 16
Geographical restrictions for foreign investors need to be considered so as to r
educe the impact,
or prevent the fast expansion of retailers in to rural areas. Special Economic Z
ones need to be
assessed with further research, to review their advantages and disadvantages to
both India as a
country, and to the foreign players.
7.4.17 Recommendation 17
Other related regulations such as copyright law, need to be updated and brought
in to line with
the needs of the future Indian retail sector.
73
7.5 Further research 7.5 Further research
There are many areas that have been highlighted as requiring further research du
ring this study.
Each individual argument for and against almost requires an entire research proj
ect to itself so
as to delve further into the complexities of each specific scenario, for example
, Special Economic
Zones which have not been possible to cover in any detail within this study coul
d provide an
interesting area of research so as to establish the advantages and disadvantages
of operating
under a SEZ system.
Consumerism is an area that is worthy of further research so as to ascertain whe
ther there is any
correlation between changes in consumer dynamics and the emergence of organized
retail in
specific 'verticals'.
The GATS Agreements and World Trade Organisation Doha Round would also be anothe
r
interesting avenue of research. With the Doha Rounds to conclude in 2010, it wou
ld be
interesting to investigate how this might impact foreign investment in the retai
l sector in India.
74
Appendix I Appendix I
Code Key for Open-ended Questions (3, 7, 9 & 10)
Question 3
A. Improve skills, technology, innovation and best practises
B. Improve infrastructure, supply chain and logistics
C. Both A & B (tendency to be more concerned with improvements in retail industr
y)
D. Improved competition & consumer benefits
E. Increase employment and economic growth
F. Both D & E (tendency to be more concerned with consumers/society and the econ
omy)
G. Increase investment in the 'organised' retail sector (believe required for gr
owth of domestic
organised retail, including Agricultural/Manufacturing
H. Commented on all of the above (A-G) (very pro-FDI, believe its "non-sense not
to open FDI in
retail")
I. Believe in free market efficiency and less protectionism (respondents gave a se
nse of political
disagreement and also had a tendency to agree with answer H i.e. Pro-FDI)
J. FDI shouldn't be opened up 'yet', but should be in the future. (believes the
domestic market is not
ready/developed enough yet)
K. FDI will not be of benefit. (Against FDI being opened up at all)
X. No response / Uninterpretable response
Question 7
A. Invest in and provide for equal access to an organised wholesale & supply cha
in infrastructure
B. Protect Certain Products/formats from FDI and consider keeping 'sector caps'
C. Provide 'knowledge' and skills to existing domestic retailers to innovate and
modernise
D. Remove intermediary middlemen in the supply chain
E. Price control regulations
F. Copyright/trademark regulations
G. Real Estate Regulations (including allocation of land / city planning legal f
ramework)
H. Bureaucracy -reduce admin and formalities (inc. exports, legal, business form
ation)
I. Restrict FDI profits allowed to leave India
J. Provide subsidy to domestic retailers (including low-rate loans/bank finance)
K. Provide Platform for domestic retailer marketing
L. Implement procedures for data collection/monitoring of global/Indian retail &
FDI data
75
Appendix I Appendix I
Question 7
M. Compulsory local sourcing for FDI (including policy to protect manufacturers/
farmers)
N. Regulation/Checking to ensure international standards within retail sector
O. Restrictions geographically on FDI (e.g.: Special Economic Zones)
P. Tax relief / incentives for domestic retailers
Q. Implement Educational Retail Training initiatives
R. Require a percentage of Foreigner Investment to go in to Indian development p
rojects
S. Friendlier Labour Laws and Goods & Services Tax (GST) introduction across Ind
ia
T. Provide retail business with lawful 'industry status'
U. Any reforms necessary to protect the domestic retailers
V. Systematic study of each sector required to address reforms required
W. Ensure a 'phased' introduction of FDI
X. No Response / Uninterpretable / Misinterpreted the question
Y. No reforms necessary. Free Market / Healthy Competition preferred
Question 9
A. Believed the statement to be 'false' and disagreed. Were able to counter the
argument with
solutions to prevent displacement from happening
B. Believed the statement to be 'true' and agreed. Offered no counter argument,
or were unable to
provide solutions to prevent displacement happening
X. No Response / Uninterpretable / Misinterpreted the question
Question 10
A. Government should provide and control equal employment opportunities in organ
ised and
backend services, and upgrade labour laws to support this.
B. Foreign investors should be asked to invest in retail related facilities firs
t, to offer further
employment in, for example, manufacturing and farming industries. Includes requi
ring a fixed
quota of employment of Indians by the foreign investor
C. No -there are no solutions to the labour displacement that FDI will cause.
76
Appendix I Appendix I
Question 10
D. No -Don't believe labour displacement will happen (or will be very limited).
E. Provide compensation / rights / benefits to those who are displaced. Includes
reform of
remuneration policy
F. Provide skills training to allow existing retailers to upgrade/innovate so as
to continue
employment in the retail sector
X. No response / Uninterpretable response / Misinterpreted the question
77
Appendix II Appendix II
Survey Questions
1.
Are you aware of the current FDI in Retail Regulation & Policy?
a.
Yes
b. No
2.
Do you think the Indian Government should open up Foreign Direct Investment (FDI
)
restrictions in the Retail Sector?
a.
Yes
b. No
3.
Please give reasons for your answer to Question 2.
4.
Are you happy with the current FDI Retail policy as it is?
a.
Yes
b. No
5.
If FDI policy is to open up in the future, do you think any of the following
conditions should be imposed on foreign retailers?
a. None
b. Equity limits
c. Only allow FDI in specific cities/areas
d. A minimum investment amount requirement
e. An exclusion of specific products for the domestic retailer
f. Certain products must be manufactured/sourced in India by the foreign investo
r
g. Only allow certain retail formats (e.g. Malls)
h. Only allow branded products
I. Other restrictions ? (please specify)
6.
Do you think that government reforms need to be made to support domestic retaile
rs so
that they can face the foreign investment competition?
a. Yes
b. No
7.
Following Question 6, what reforms do you think should / should not be made?
78
Appendix II Appendix II
Survey Questions
8.
Do you believe that lifting restrictions on FDI in retailing will allow more inv
estment,
technical skills and consumer choice?
a.
Yes
b. No
9.
It is argued by some who are against FDI, that foreign retailers will not 'own a
stake' in
India, and therefore will make little investment, but reap the profits all the s
ame. How can
you counter this argument?
10. Can you think of any solutions to the potential problems of labour displacem
ent in the
unorganised retail sector if FDI regulations are opened up?
11. Over how many years do you think FDI policy could be phased in to allow dome
stic
industries/markets to adjust successfully? Please select '0' if you don't think
phasing in
would allow successful adjustment for domestic players.
a. 0
b. 1
c. 2
d. 3
e. 4
f. 5-6
g. 7-10
h. 10+
Preliminary, non-compulsory fields were as follows:-
Name
Title
79
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