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IMPACT OF FDI ON THE INDIAN ECONOMY

FDI is a direct investment into production or business in a country by a company in another


country, either by buying a company in the target country or by expanding operations of an
existing business in that country.Foreign direct investment (FDI) refers to foreign capital that is
invested to enhance the production capacity of the economy.

In order to understand the provisions relating to the concept of FDI, we should first go back to
the reforms made in 1991.The New Industrial Policy was announced in 1991 as a measure to
liberalise foreign direct investment in Indian industries..The policy allowed other countries to
invest in India across various segments.

As a result of the liberalised policies & reform measures taken by the government since 1991,
Indian Economy has achieved commendable growth rates over the last few years with many
success stories in many fronts. India’s growing retail boom is one such success story. With
strong fundamentals developing in the economy with changes in income levels, lifestyles, taste
& habits reflecting in strong consumerism with preference for superior quality and branded
products, vast domestic market with a very competitive manufacturing base, India also observed
a major retail boom in recent years.

Being encouraged by India’s growing retail boom many multinational companies also started
making beeline to enter India’s retail market. Indian Industry, by and large, has also hailed
investment from abroad which has been considered to be very vital for adding to domestic
investment, addition to capacity, higher growth in manufacturing, trade, business, employment,
demand, consumption and income with multiplier effect. But it is not the retail sector alone that
has been impacted. Many other segments have been impacted too.

Let us first understand the procedure as to how investment is obtained from another country and
the various authorities involved in the process.

ENTRY OF FDI:

Foreign Direct Investment can enter in two ways, either the Automatic Route or the Approval
route.

1. The Automatic Route: Under the Automatic Route, the non-resident investor or the Indian
company does not require any approval from the RBI or Government of India for the investment.

2. The Government Route: Under the Government Route, prior approval of the Government of
India through Foreign Investment Promotion Board (FIPB) is required. Proposals for foreign
investment under Government route as laid down in the FDI policy from time to time, are
considered by the Foreign Investment Promotion Board (FIPB) in Department of Economic
Affairs (DEA), Ministry of Finance. It is also called as the Approval Route.

Hence, when there is no need for any approvals for investing in a particular sector, it is called as
the Approval route. There is a wide range of activities where foreign investment does not require
approval from either the FIPB or the Reserve Bank provided the level of foreign investment does
not exceed the specified percentage and the foreign investor does not have a previous venture or
tie-up in India in the same field of activity. The specified percentage which the investment
should not exceed is called as the “sectoral cap”

Instances of the automatic route:

The automatic route is available to non-residents for subscription to a fresh issue of shares by an
Indian company and, pursuant to recent liberalisation, also to a transfer of existing shares of an
Indian company provided that certain pricing and reporting requirements are complied with.
Certain restrictions however continue to apply to secondary acquisitions of shares of financial
services sector companies by non-residents, including prior regulatory approval. FIIs and NRIs
may also purchase or sell shares on an Indian stock exchange under the Portfolio Investment
Scheme without the prior approval of the FIPB or the Reserve Bank.

REGULATORY FRAMEWORK:

The Government has put in place a policy framework on Foreign Direct Investment, which is
transparent, predictable and easily comprehensible. This framework is embodied in the Circular
on Consolidated FDI Policy, which may be updated every year, to capture and keep pace with
the regulatory changes, effected in the interregnum. The Department of Industrial Policy and
Promotion (DIPP), Ministry of Commerce & Industry, Government of India makes policy
pronouncements on FDI through Press Notes/ Press Releases which are notified by the Reserve
Bank of India as amendments to the Foreign Exchange Management (Transfer or Issue of
Security by Persons Resident Outside India) Regulations, 2000.

The following are the authorities under Foreign Direct Investment (FDI)

(a) Foreign Investment Promotion Board (popularly known as FIPB) : The Board is responsible
for expeditious clearance of FDI proposals and review of the implementation of cleared
proposals. It also undertake investment promotion activities and issue and review general and
sectoral policy guidelines;

(b) Secretariat for Industrial Assistance (SIA) : It acts as a gateway to industrial investment in
India and assists the entrepreneurs and investors in setting up projects. SIA also liaison with
other government bodies to ensure necessary clearances;
(c) Foreign Investment Implementation Authority (FIIA) : The authority works for quick
implementation of FDI approvals and resolution of operational difficultieis faced by foreign
investors;

(d) Investment Commission

(e) Project Approval Board

(f) Reserve Bank of India

SECTORS FOR FDI

The following sectors are allowed to bring in FDIs

1. Agriculture

2. Industry

3. Mining

4. Manufacture

5. Power

6. Service Sector

7. Civil Aviation Sector

8. Asset Reconstruction Companies

9. Banking – Private Sector

10. Banking – Public Sector

11. Broadcasting

12. Commodity Exchanges

13. Development of Townships, Housing, Built-up Infrastructure and construction development


projects

14. Courier services for carrying packages, parcels and other items which do not come within
the ambit of the Indian Post Office Act, 1898.

Credit Information Companies(CIC)

16. Industrial Parks both setting up and in established Industrial Parks


17. Insurance

18. Infrastructure companies in securities markets namely, Stock Exchanges, Depositories and
Clearing

Corporations

19. Non-Banking Finance Companies

20. Petroleum and Natural Gas Sector

21. Print Media

22. Security Agencies in Private Sector

23. Satellites – Establishment and operation

24. Telecommunications

25. Trading

IMPACT OF FDI IN VARIOUS SECTORS

Let us study the impact of the FDI across some of the sectors: The key highlights and provisions
in are:
1. Broadcasting

 The policy in broadcasting now allows foreign investment in the broadcasting sector upto
74%.
 Up to 49 per cent is to be permitted under the automatic route; and
 Beyond 49 per cent and up to 74 per cent be permitted under the Government route
 The Cabinet Committee of Economic Affairs (CCEA) also approved the proposal of the
Department of Industrial Policy & Promotion (DIPP) of allowing 74 per cent FDI in
mobile TV.

2. Aviation

 The recently announced norms in aviation will allow foreign aviation companies to invest
in Indian aviation companies.
 Even earlier, foreign investors had the option of investing upto 49% in the aviation
sector. It was subject to a condition that the foreign investor was not connected to
the aviation business. This condition has been done away with. Now, even foreign
carriers are allowed to invest.
3. Single brand retail

 The new policy allows 100 per cent Foreign Direct Investment (FDI) in single-brand
retail.
 The policy prominently mentions that the FDI proposals beyond 51 per cent investment
in single-brand retail will have to procure at least 30% of their requirements from
domestic companies.
 Further, 30 per cent, of the value of goods purchased, preferably from MSMEs, village
and cottage industries, artisans and craftsmen wherever it is feasible.

4. Multi-brand retail: The government has cleared the most awaited reforms allowing up
to 51 per cent in Foreign Direct Investment (FDI) in multi-brand retail, paving way for
the international multi-brand retailers interested to set up shop in India. The key
highlights are:

 Retail sales outlets may be set up in those States which have agreed or agree in future to
allow FDI in MBRT under this policy.

 The establishment of the retail sales outlets will be in compliance of applicable State
laws/ regulations, such as the Shops and Establishments Act etc.

 Retail sales outlets may be set up only in cities with a population of more than 10 lakh
as per 2011 Census and may also cover an area of 10 kms around the municipal/urban
agglomeration limits of such cities; retail locations will be restricted to conforming areas
as per the Master/Zonal Plans of the concerned cities and provision will be made for
requisite facilities such as transport connectivity and parking;

 In States/ Union Territories not having cities with population of more than 10 lakh as per
2011 Census, retail sales outlets may be set up in the cities of their choice, preferably the
largest city and may also cover an area of 10 kms around the municipal/urban
agglomeration limits of such cities. The locations of such outlets will be restricted to
conforming areas, as per the Master/Zonal Plans of the concerned cities and provision
will be made for requisite facilities such as transport connectivity and parking.

 At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within
three years of the induction of FDI.
 ‘Back-end infrastructure’ will include capital expenditure on all activities, excluding
that on front-end units; for instance, back-end infrastructure will include investment made
towards processing, manufacturing, distribution, design improvement, quality control,
packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc.
 Also, the expenditure on land cost and rentals, if any, will not be counted for purposes of
backend infrastructure.

FDI in multi-brand retail will give a boost to the organised retail sector, which positively impacts
several stakeholders, including producers, workers, employees, consumers, the government, and,
hence, the overall economy. Hence the employment opportunities shall tend to increase in a big
way.

In a true potential scenario, opening up of FDI can increase organized retail market size to $260
billion by 2020.

This would result in an aggregate increase in income of $35-45 billion per year for all producers
combined; about 3-4 million new direct jobs and around 4-6 million new indirect jobs in the
logistics sector, contract labour in the distribution and repackaging centres, housekeeping and
security staff in the stores.

FDI can help SMEs supply in large volumes, increase quality and become a vendor to
international players and increase the quality of products and become cost competitive in global
arena.

ANALYSIS OF THE RETAIL INDUSTRY:

The retail segment is an important sector

FDI in retail is different from the investment in corporate, manufacturing or infrastructure


sectors. Retail can be single or multi brand and may be described as a sale to the ultimate
consumer at a margin of profit.

India's retailing industry is essentially owner manned small shops. In 2010, larger format
convenience stores and supermarkets accounted for about 4% of the industry, and these were
present only in large urban centers. India's retail and logistics industry employs about 40 million
Indians (3.3% of Indian population).

Until 2011, Indian central government denied foreign direct investment (FDI) in multibrand
retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any
retail outlets. Even single-brand retail was limited to 51%
In November 2011, India's central government announced retail reforms for both multi-brand
stores and single-brand stores. These market reforms paved the way for retail innovation and
competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single
brand majors such as IKEA, Nike, and Apple.

The earlier policy:

 FDI up to 100% for cash and carry wholesale trading and export trading allowed under
the automatic route.
 FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade

While the FDI in single-brand retailing was allowed earlier,it was allowed upto 51%. Now, it is
being allowed upto 100%. FDI in multi-brand retailing is being allowed now. This means a retail
store with foreign direct investment can sell multiple brands under one roof. So, it is the link
between the producer/manufacturer and the individual consumer. India had to open up the retail
trade sector to foreign investment as she is a signatory to the World Trade Organization’s
General Agreement on Trade & Services, which includes wholesale and retail services.

The Indian retail sector is highly fragmented with around 97 per cent of its business being run by
unorganized retailers. Organized retail is still at a nascent stage. With the entry of FDI, the retail
sector will become organized. Foreign investment in food-based retailing would ensure adequate
flow of capital into the country and its productive use.

It will promote welfare of farmers by agriculture growth and thereby increasing their income
level. At present, intermediaries, known by different names in different parts of the country, flout
the business ethics, prices lack transparency and the due share of farmer is not paid to him.
Regulated markets have also developed monopolistic character. Indian farmers, at present,
realize only 1/3rd of the final price paid by the consumer as against 2/3rd realized by farmers in
the countries with a greater share of organized retail. FDI will assist in reducing the dominance
of value chain by intermediaries.

FDI in retail will make the consumer happy as well. In the absence of intermediaries, the
consumer will end up paying lower price for a better product. Besides, in the unorganized sector,
consumer has to argue and fight a lot in case he has to return some faulty product to the retailer.
This process will be standardized.

It will serve as an antidote to inflation. The producer will get direct payment from the retailer and
the same will be higher than what he was getting earlier due to the foul play by intermediaries. In
accordance to the provisions made, any company going for 51% partnership in retail will have to
tie up with a local partner. This will improve the income levels of all concerned and will make
economy flourish with quality branded products at a lower price.

FDI will improve investment in logistics of the retail chain, leading to an efficient market
mechanism. India is one of the biggest producers of fruits and vegetables (more than 180 million
tonne). However, it does not have a strong integrated cold-chain infrastructure with only around
5,400 cold storages having total capacity of about 24 million tonne. The irony is that 80% of the
capacity is used only for preservation of potatoes. Perishable horticultural commodities find it
difficult to link to distant markets, including overseas markets. FDI will become a catalyst in
avoiding distress sale and erosion & wastage in quality and quantity of the produce.

Foreign direct investment in the retail sector will spur competition as the current scenario is of
low competition and poor productivity. India will flourish in terms of quality standards and
consumer expectations.
Fears that the entry of FDI in multi-brand retail may cause unemployment as foreign firms may
not procure material from domestic producers and may import the same from international
market are unfounded as the entry of big companies like Reliance and Tata has substantially
improved the life standard of farmers and villages from where they are procuring. The present
public distribution system will also be strengthened with better products and storage facility.
Even the FDI retail may be assigned this job
.
Allowing FDI in multi-brand retail will bring about supply chain improvement, investment in
technology, manpower & skill development, upgrade in the agriculture sector, and benefits to the
government through greater GDP and tax income. The organized sector will also lay stress on
producing more and will generate more employment in production as well as retail industry.
As we have seen above, there shall be a huge impact on the employment opportunities and the
small and medium scale industries owing to multi-brand retail.

Hence the decision to allow FDI in retail was a good initiative taken by the Government.
REFERENCES

1. www.ibef.org
2. Economic Times newspaper
3. Times of India newspaper