FOREIGN DIRECT INVESTMENT

IN
RETAIL SECTOR

SUBMITTED BY:
SUPRIYA.S.BAG
[MFM] 2010.
CONTENTS
• Abstract

• Introduction to FDI

• Research question and Methodology

• Overview of FDI in retail

• Retail sector in India

• Current scenario

• Beneficial/Positive effects

• Negative effects

• Impact of FDI

• Recommendation- of 10th

• Experience of FDI in different Countries.

• Case study: China, China – India

• Limitations
WORK IN PROGRESS PAPER

ABSTRACT
The literature describes several development in Foreign Direct Investment In
Retail Sector of India. Foreign Direct Investment is considered to be an
important differentiator in the growth retail sector. FDI is a sturdy source for the
intensification of retailing and will create enormous opportunities for innovation
in retail sector in India but at the same time , it is quite likely that a section of
the domestic retailing industry will be severely hurt due to the entry of foreign
retailers. In this paper researcher has put emphasized on introducing the
concept with current scenario of FDI in retail, beneficial effects & negative
effects of FDI .These aspects are illustrated with case study of China with
respect of positive impact of FDI. In the end the role of FDI in retail sector is
evaluated & how this can lead to competivive advantage to India economy.

KEYWORD: FDI, FDI IN RETAIL, RETAIL SECTOR IN INDIA,

INTRODUCTION
FOREIGN DIRECT INVESTMENT

Foreign direct investment is that investment, which is made to serve the

business interests of the investor in a company, which is in a different nation
distinct from the investor's country of origin. A parent business enterprise and
its foreign affiliate are the two sides of the FDI relationship.

FDI occurs when a firm invest directly in facilities to produce &/ or

market a product in a foreign country. Once a firm under takes FDI, it becomes
a Multinational Enterprise (the meaning of multinational being- More than one
Country).

The retail sector has helped in giving strong impetus to overall economic
growth as a significant driver of the growth of services sector, which contributes
as much as 54 per cent of GDP. It has strong backward and forward linkages
with other sectors like agriculture and industry through stimulating demand for
goods and through mass marketing, packaging, storage and transport.
Moreover, it creates considerable direct and indirect employment in the
economy. Also, the consumers have benefited in terms of wide range of
products available in a market.
RESEARCH QUESTION AND METHODOLOGY

OBJECTIVE : EXPLORE THE NEED OF FDI IN RETAIL SECTOR.

RESEARCH QUESTION

Is FDI in retail good idea or bad?

In order to find the answer to the research question, we conducted a

literature survey and a case study on China. Researcher thinks that literature
study is necessary to put the focus on the beneficiary of FDI and negative
impact of FDI.

The FDi in retail sector has been extensively researched before, but still
the Govt has been in doubt for the FDI in India. As the researcher will like to
focus on the positive side of FDI where it will lead to the prosperity of the
country. To find out more about the retail sector in India the Govt. norms pays
an important role and the result will depend upon the declaration of the Indian
Govt norms. The researcher would be working on the challenges and
opportunities faced by FDI in retail sector. The case study is descriptive nature
and should be followed by in depth, structured way including data collection
procedure, sources, interview and the case study of different countries with
effect to FDI. This research consists of secondary data analysis.
OVERVIEW OF FDI IN RETAIL

Foreign Direct Investment plays vital role in the development of India's

economy. It is an integral part of the global economic system. Foreign Direct
Investment in India is allowed through four basic routes namely, financial
collaborations, technical collaborations and joint ventures, capital markets via
Euro issues, and private placements or preferential allotments.

Govind Shrikhande ( CEO, Shoppers Stop source-,Business standard / New Delhi. July 14 .
2010. says.) Foreign direct investment (FDI) in the retail sector is currently a hot
topic of debate. It is also a sensitive topic considering that the stakeholders in
this case are consumers, local retailers and global retailers, The recent
announcement by the Department of Industrial Policy and Promotion (DIPP) to
discuss various issues related to FDI is a welcome move. It has set the tone for
inviting all the stakeholders to comment on various aspects of the move.

FDI inflow helps the developing countries to develop a transparent,

broad, and effective policy environment for investment issues as well as, builds
human and institutional capacities to execute the same. However, experts are
still divided on the problems and prospects of FDI in retail. Some say it will
shrink employment opportunities, completely alter the retail distributional
structure and deal a death blow to the corner shop structure. The optimists, on
the other hand, see a whole range of opportunities — from improved collection,
processing and better distribution of farm products to generation of more
opportunities for the rural and urban unemployed.

India has been ranked as the 5th most desired retail destination. The
total size of Indian retail sector, including organized and unorganized sector, is
$300 billion, where currently the organized sector accounts for 4% only. It is
expected to grow to anywhere from 12-20% by 2010. It contributes of 14% to
the national GDP and employing 8% of the total workforce (second to
agriculture.) in the country. An estimated 40 million Indians work in retail
outlets. India is the second most attractive destination for retail among thirty
emerging nations. The IT industry has projected that organized retail will have a
25-30% market share of total retail by 2011.
RETAIL SECTOR IN INDIA
The retail sector has helped in giving strong impetus to overall
economic growth as a significant driver of the growth of services sector, which
contributes as mush as 54 per cent of GDP.

The retail sector, currently, is said to contribute 10 per cent of India’s

GDP (Confederation of Indian Industry), and is expected to grow at a robust rate of
36 per cent per annum by the end of 2010. (Associated Chambers of
Commerce and Industry of India, ASSOCHAM). This growth would expand the
size of the market to over Rs 14,79,000 crore from its current level of Rs
5,88,000 crore. The Indian retail market is estimated at Rs 9,300 billion and is
expected to grow at a compounded rate of 30 per cent over the next five years
(Retailers Association of India).

The retail sector is classified broadly into two:

• Organised Retail Sector

• Unorganised Retail Sector
(Source: survey conducted by KPMG for Federation of Indian Chamber of Commerce and
Industry (FICCI))

The major components of the retail sector are:

Food and Grocery, Fast Moving Consumer Goods (FMCGs), Consumer

Durables, Apparel, Footwear and leather, Watches, Jewellery, and Health and
Beauty

The anatomy of the retail market has shown that the clothing and textiles
constitutes 39 per cent of the organised retail pie, followed by food and grocery,
which accounts for 11 percent of the total retail market.

(SOURCE-according to the survey conducted by KPMG for Federation of Indian Chamber of

Commerce and Industry (FICCI),)

CURRENT SCENARIO OF FDI

FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand
Retailing was, however, permitted in 2006, to the extent of 51%. Since
then, a total of 94 proposals have been received till May, 2010. Of this,
57 proposals were approved. An FDI inflow of US $ 194.69 million (Rs.
901.64 crore) was received between April, 2006 and March, 2010,
comprising 0.21% of the total FDI inflows during the period, under the
category of single brand retailing. The proposals received and approved
related to retail trading of sportswear, luxury goods, apparel, fashion
clothing, jewellery, hand bags, life-style products etc., covering high-end
items. Single brand retail outlets with FDI generally pertain to high-end
products and cater to the needs of a brand conscious segment of the
population, mainly attracting a brand loyal clientele, which often has a
pre-set positive disposition towards the specific brand. This segment of
customers is distinctly different from one that is catered by the small
retailers/ kirana shops.
(SOURCE-Quick Estimates of National Income, 2008-09, Central statistical
Organisation)
 FDI in cash and carry wholesale trading was first permitted, to the extent of
100%, under the Government approval route, in 1997. It was brought under the
automatic route in 2006. Between April, 2000 to March, 2010, FDI inflows of US
$ 1.779 billion (Rs. 7799 crore) were received in the sector. This comprised
1.54 % of the total FDI inflows received during the period.

Trade is an important segment in India’s Gross Domestic Product

(GDP). As per the National Accounts, released by the Central Statistical
Organisation (CSO), GDP from trade (inclusive of wholesale and retail in
organised and unorganised sector), at current prices, increased from Rs
4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual rate of
16.2 per cent. The share of trade in GDP, however, remained fairly stable at
little over 15 per cent in last four years1. The share of the private organised
sector in total GDP from trade was 23.2 per cent in 2008-09 and it grew at
15.0% during the year. The share of the retail trade in GDP remained stable at
8.1 per cent during this period.
(SOURCE-Quick Estimates of National Income, 2008-09, Central statistical
Organisation)

Retail trading is one of the few sectors in India where, foreign direct
investment (FDI) is not freely and fully allowed. While the government allows
51% foreign investment in single-brand retail and 100% FDI in whole sale.FDI
in multi-brand and front-end retail is not yet allowed.(source-Images retail Aug
2010)

The Indian retail sector began to open up in 1997,when FDI in whole sale
trading was permitted and to the extent of 100%,under the government
approval route. It was however, bought under the automatic route in 2006. In
the same year FDI in single-brand retailing was permitted to the extent of 51%

.( source-Images retail Aug 2010)

1
The debate currently is over allowing FDI in multi-brand retail. Recently , the
(SOURCE-“Department Of Industrial Policy and Promotion” [DIPP]) -The nodal
agency for FDI policy, had thrown open for debate the ‘politically sensitive’
issues for opening the multi-brand retail sectors to foreign retail investment.
According to DIPP release, August 2010 , FDI inflows of $194.7million
(Rs.901.6 crore) were received between April 2006 and March 2010 comprising
0.21% of the total FDI inflows during the period from single brand retailing.FDI
inflows of $1.78billion (Rs. 7,799 crore) were recorded for the April 2000 to
March 2010 period from the cash and carry business, comprising 1.54% of total
FDI inflows received during the period.

(SOURCE- Department Of Industrial Policy and Promotion” [DIPP])

BENIFICIAL EFFECTS OF FDI ON INDIAN RETAIL SECTOR

Positive results on the economy:

Foreign Direct Investment in India is allowed through four basic routes

namely, financial collaborations, technical collaborations and joint ventures,
capital markets via Euro issues, and private placements or preferential
allotments.
AN Overview of Advantages of FDI
FDI inflow helps the developing countries to develop a transparent,
broad, and effective policy environment for investment issues as well as,
builds human and institutional capacities to execute the same.

Benefits of Foreign Direct Investment

Attracting foreign direct investment has become an integral part of the
economic development strategies for India. FDI ensures a huge amount of
domestic capital, production level, and employment opportunities in the
developing countries, which is a major step towards the economic growth of
the country. FDI has been a booming factor that has bolstered the economic
life of India. The effects of FDI are by and large transformative. The
incorporation of a range of well-composed and relevant policies will boost up
the profit ratio from Foreign Direct Investment higher. Some of the biggest
advantages of FDI enjoyed by India have been listed as under:

Economic growth- This is one of the major sectors, which is enormously

benefited from foreign direct investment. A remarkable inflow of FDI in
various industrial units in India has boosted the economic life of country.
Trade- Foreign Direct Investments have opened a wide spectrum of
opportunities in the trading of goods and services in India both in terms of
import and export production. Products of superior quality are manufactured
by various industries in India due to greater amount of FDI inflows in the
country.
Trade is an important segment in India’s Gross Domestic Product
(GDP). As per the National Accounts, released by the Central Statistical
Organisation (CSO), GDP from trade (inclusive of wholesale and retail in
organised and unorganised sector), at current prices, increased from Rs
4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual rate of
16.2 per cent. The share of trade in GDP, however, remained fairly stable at
little over 15 per cent in last four years. The share of the private organised
sector in total GDP from trade was 23.2 per cent in 2008-09 and it grew at
15.0% during the year. The share of the retail trade in GDP remained stable
at 8.1 per cent during this period
(source-Quick Estimates of National Income, 2008-09, Central statistical
Organisation)

Employment and Skill levels- FDI has also ensured a number of

employment opportunities by aiding the setting up of industrial units in
various corners of India.
The first is that the retail sector in India is the second largest employer
after agriculture. As per the latest NSSO 64th Round, in 2007-08 retail trade
employed 7.2% of total workers and provided job opportunities to 33.1 million
persons.
( Source-Quick Estimates of National Income, 2008-09, Central
statistical Organisation)

Technology diffusion and knowledge transfer- FDI apparently helps in

the outsourcing of knowledge from India especially in the Information
Technology sector. It helps in developing the know-how process in India in
terms of enhancing the technological advancement in India.

Linkages and spillover to domestic firms- Various foreign firms are now
occupying a position in the Indian market through Joint Ventures and
collaboration concerns. The maximum amount of the profits gained by the
foreign firms through these joint ventures
FEW MORE BENIFICIAL EFFECTS OF FDI ON INDIAN RETAIL SECTOR

• Lead to greater efficiency.

• Improvement of living standards.

• Apart from greater integration into the global economy.

• Better operations in production cycles and distribution.

• Tourism development.

• Benefits to government, as greater GDP, Tax income.

• Consumer is benefited by both price reductions and improved selection,

brought about by the technology and know-how of foreign players in the
market.One of the benefits of FDI/Foreign players is that they provide
access to global markets for Indian Producers as it might ultimately lead to
increased sourcing from India as was the case in China.
.(source-Images retail Aug 2010)

NEGATIVE RESULTS ON THE ECONOMY

• Render millions of unorganized retail sector jobless

• will transfer lower technology or goods in India (Dumping of goods)

• Foreign goods will be sought, so flow of foreign exchange and also loss
of domestic industries
• Domestic Industries (Manufacturers) will also have to face competition in
both pricing as well as quality
• Will also start influencing government laws and regulations (As done in
China, Malasiya, etc.)
• Buyer's monopoly: increased buyer concentration if FDI allowed in retail.

Example: in Canada, one single retailer, Wal-Mart, controls 52 per cent of

the retail market
IMPACT OF FDI IN RETAIL

• SOCIAL IMPACT

There has been a demographic shift in India, emergence of a larger middle and
upper middle classes and the substantial increase in disposable income has
changed the nature of shopping in India from need based to lifestyle dictated. In
addition to this, facilities like credit friendliness, availability of cheap finance and
a drop in interest rates have changed consumer markets.

As India a developing country integrating into the the global economy through
FDI improve standard of living by improving productivity and output growth.

• ECONOMICAL IMPACT

FDI may offer multi benefits to Indian economy. The 1920 million sq. ft modern
retail space will have annual revenue of about Rs. 883,000 crores. This
translates to the whopping Rs.98,000 crore in annual VAT collections and
almost Rs. 10,000 crores in additional income tax revenues to the exchequer.
As we see, we can pay for our total defence budget out of this. As we can see
how much our government may loose because of the revenue leakages in
traditional retail.

• CONSUMER IMPACT

Opening the sector in foreign participation, the consumer will benefit in terms of
price reduction, improve selection which will be result of upgraded technology
and know- how of foreign players in the market.
RECOMMENDATIONS IN THE MID TERM
APPRAISAL OF TENTH PLAN

• The retail sector is severely constrained by limited availability of bank

finance. The Government and the RBI need to evolve suitable policies to
enable retailers in the organized and unorganized sector to expand and
improve efficiencies.

• A National Commission should be set up to study the problems of the

retail sector which should also evolve a clear set of conditionality on
foreign retailers on procurement of farm produce, domesticality'
manufactured merchandise and imported goods. These conditionality’s
must state minimum space, size and other details like construction and
storage standards.

• Entry of foreign players must be gradual with social safeguards so that

the effects of labour dislocation can be analysed and policy fine tuned.
Foreign players should initially be allowed only in metros.

• Manufacturing sector in India must be developed to address the

dislocation of existing retailers.

• (SOURSE- REPORT-The Hon’ble Department Related Parliamentary Standing

Committee on Commerce, in its 90th Report, on ‘Foreign and Domestic
Investment in Retail Sector’, laid in the Lok Sabha and the Rajya Sabha on 8
June, 2009,)
POLICY OF FDI IN RETAIL TRADING IN OTHER
COUNTRIES
FDI is permitted in the retail sector in Brazil, Argentina, Singapore,
Indonesia, China and Thailand without limits on equity participation,
while Malaysia has equity caps on FDI in the retail sector.

EXPERIENCE OF FDI IN RETAIL TRADE IN CHINA

 FDI in retailing was permitted in China for the first time in 1992. Foreign
retailers were initially permitted to trade only in six Provinces and Special
Economic Zones. Foreign ownership was initially restricted to 49%.
 Foreign ownership restrictions have progressively been lifted and, and
following China’s accession to WTO, effective December, 2004, there
are no equity restrictions.
 ‘Wholesale and retail projects’ forms part of the Catalogue for
Encouraged Foreign Investment Industries (Annexure 1).
 Retail trade in China has been growing since 1992.
 Employment in the retail and wholesale trade increased from about 4%
of the total labour force in 1992 to about 7% in 2001. The number of
traditional retailers also increased by around 30% between 1996 and
2001.
 In 2006, the total retail sale in China amounted to USD 785 billion, of
which the share of organized retail amounted to 20%. 2

2
  Some of the changes which have occurred in China, following
the liberalization of its retail sector, include
Over 600 hypermarkets were opened between 1996 and 2001
• The number of small outlets (equivalent to ‘kiranas’) increased
from 1.9 million to over 2.5 million
• Employment in the retail and wholesale sectors increased from 28
million people to 54 million people from 1992 to 2001

• China is witnessing robust economic growth and increasing urban

and rural incomes are
fueling consumption level in this vast and complex
retail;environment. According to Euromonitor, retail sales in
China, which amounted to nearly USD 554 billion in 2003, were
expected to grow rapidly to reach USD 900 billion by 2009. 3
 China’s retail sector registered growth in 2007. The nominal growth of
China’s retail sales of consumer goods accelerated to 16.8% in 2007, up
from 13.7% in 2006. Total retail sales amounted to 8,921 billion yuan, of
which the wholesale and retail trade sector grew nominally by 16.7%, to
reach 7,504 billion Yuan.
 China’s promising consumer market has led to huge foreign interest. FDI
in the country’s retail and wholesale trade climbed in 2007. There were
6,338 new foreign retail and wholesale enterprises in 2007, up by 35.9%
year-on-year. The actual utilized foreign direct investment value
amounted to 2.68 billion US dollars, up by 49.6%. China’s retail and
wholesale trade sector has witnessed impressive growth in foreign direct
investment, among others.

(SOURCE- FICCI-ICICI Property Service Report, February, 2005

Impact of organized retailing on the unorganized sector – ICRIER study May,
2008
The benefits of modern trade to transitional economies – CII - PwC study, 2008)

3
EXPERIENCE OF THAILAND IN OPENING RETAIL
SECTOR TO FDI

Thailand is frequently referred to as a country in which FDI had an

adverse effect on the local retailers. It permits 100% foreign equity, with
no limit on the number of outlets. For the retail business, it has a capital
requirement of TBH100 million and TBH20 million for each additional
outlet, while it has a capital requirement of TBH100 million for each
wholesale outlet.

The factual position, as reflected in the Report of ICRIER, is as follows:

• Wet market and small family owned grocery stores dominated the Thai
Retail industry.
• Modern retail outlets by local Thai people came to prominence during the
economic boom in the early 1990s.
• Prior to 1997, no foreign investment was allowed and hence the retail sector
faced limited competition and thus had few incentives to upgrade their
operation.
• With the start of the Asian crisis in 1997, the entry ban on foreign players
was removed. Within a short span of time, the foreign players expanded
their operations significantly and marginalised the local retailers who were
already suffering from a recessionary trend of economy.
• Many local players had to close down their business.
• Entry of foreign players in a recessionary economy adversely impacted all
segments – wholesalers, manufacturers and domestic retailers in the short
run.
• However, entry of the foreign players had certain positive effects also, such
as:
o It led to the development of organised retailing and Thailand has
now become an important shopping destination.
o It encouraged growth of agro-food processing industry and
enhanced the exports of Thai-made goods through networks of
the foreign retailers

(SOURCE-The benefits of modern trade to transitional economies – CII - PwC

study, 2008)
EXPERIENCE OF RUSSIA
The Russian supermarket revolution has occurred only in the 2000s. It is still a
fragmented sector in a country with a population of 140 million. Very high
growth rates have been recorded. In 2002, sales by the top-15 chains totaled
US$2.7 billion; by 2006, sales by those chains had soared to US$19.2 billion.
The share of the top-3 chains was 40 per cent in 2002 and 54 per cent in 2006,
with the lead domestic chains acquiring many small regional and local chains.
The foreign share of sales was 33 per cent in 2002 and 35 per cent in 2006—
only inching up and spreading over 8 foreign chains among the top 15. The two
largest companies are Russian, but the origin of the capital, even of the
Russian companies, is usually a mix of domestic and foreign.

EXPERIENCE OF CHILE
The Chilean supermarket sector is a case of a take-off driven by domestic
capital, followed by nascent multinationalization, followed by abrupt
“demultinationalization.” The supermarket sector in Chile was launched in the
1990s, with the backing of domestic capital. Late in the 1990s, the number two
and number three global chains entered: Carrefour and Ahold. By 2002, those
two companies had 13 per cent of the US$4.6 billion in total sales of the top-
eight chains. However, by 2006 their share had plummeted to zero per cent of
the US$12.6 billion in total sales of the top eight (growing at a pace similar to
China’s); the Chilean subsidiaries of two foreign chains had been bought by the
top-two Chilean chains in 2003. Today those top-two chains have 65 per cent
of the market. The three market leaders, all domestic, are expanding rapidly
into other Latin American countries in mergers and acquisitions, becoming
regional multinationals. The domestic capital was based in a combination of
domestic bank credit and real estate, commercial, and financial services. These
were the tertiary sector ripple effects of the fundamental boom in copper and
wood products, and the fruit and fish boom.

(SOURCE- ICRIER Report on Impact of Organized Retailing on the Unorganized Sector, May
2008
Ibid)

EXPERIENCE OF INDONESIA

Indonesia permits 100% foreign equity in retail business, with no limit on the
number of outlets. It also does not impose any capital requirements. The
take-off of modern retail in Indonesia in the 1990s primarily involved
domestic chains. The current leading chain, Matahari, is indicative. Matahari
started as a small shop in 1958, grew into a chain of department stores, and
was then purchased by a giant banking and real estate conglomerate, Lippo
Group, in 1997, just before the crisis. The crisis created a sharp dip in
modern retail sales, which began recovering in the 2000s. Matahari doubled
its sales between 2002 and 2006, becoming a billion-dollar chain by 2006.
The share of foreign chains (one European and one Hong Kong) in the top-
seven chains is now 40 per cent. However, because the sector is still
fragmented, foreign chains do not have more than a 20 per cent share,
similar to the situation in China.

(SOURCE- FICCI-ICICI Property Service Report, February, 2005

Case study of China-Positive impact of FDI

The Chinese economy is much more integrated with the world economy
through
international trade and investment, which helps to explain its stronger rate of
GDP growthduring most of the past 3 decades.

GROWTH IN TRADE DUE TO MERCHANDISE EXPORTS

From the above graph it can be clearly concluded that when china was leading
in
retail trade in the world in 2003-2004 , merchandise trade contributed to the
maximum level in the GDP growth which is found increasing at an increasing
rate.
GROWTH IN TRADE DUE TO MERCHANDISE EXPORTS

Further maximum revenue generated from exports of merchandise. 2006

onwards India is leading in growth of retail sector so India should also adopt the
same strategy of exporting
to improve GDP.In 2004 USA was the major export partner of China followed
by HongKong, Japan, South koria and Germany.
CONTRIBUTION TOWARDS INFLATION CONTROL

In the year 1994 inflation rate of china was double than India. After 1994 foreign
inflow increased in china and due to that inflation rate constantly diminished in
china The main factor attributed toward this is control
prices due to end to end distribution network established by foreign
giant

LIMITATIONS OF THE RESEARCH

This research is very descriptive. Limitations to work on primary research.
No data available on future of FDI.
SOURCES & REFERENCES
E- Articles :
Business Standa

article was written by Jeffrey P. Graham and R. Barry Spaulding and originally
appeared on the now defunct Citibank international business portal. Copyright ©
Citibank. All Rights Reserved. rd / New Delhi July 14, 2010, Business

Magazines:

mages Retail [ Aug 2010] .Opportunities In Cross Border Retailing.2010.

Reports

The great Indian retail story/Ernst & young report/Page 8/9/10

 Foreign direct investment policy/march 2010.
 International Experience on Policy Issues/India vs China
 Reserve bank of India/Financial highlights

Websites
 http://www.economywatch.com/foreign-direct-investment/fdi-india
 http://www.indiafdiwatch.org/index.php?id
http://www.articlesbase.com/investing-articles/foreign-direct-investment-in-
retailing-in-india-its-emergence-prospects-1354932.html

Inclusive an article
Inclusive Article:

An Article

Is FDI in retail a good idea?

Business Standard / New Delhi July 14, 2010, 0:57 IST

This will make organised retail more efficient and help farmers. Kiranas have natural advantages that will
protect them to an extent, but if they are not modernised, the employment impact could be large.

Govind Shrikhande
CEO, Shoppers Stop

Large investments in infrastructure will help farmers and will boost exports in a big
way. It is unlikely organised retail will get more than 15% of the market even after a decade .
Foreign direct investment (FDI) in the retail sector is currently a hot topic of debate. It is also a sensitive
topic considering that the stakeholders in this case are consumers, local retailers and global retailers.

The recent announcement by the Department of Industrial Policy and Promotion (DIPP) to discuss various
issues related to FDI is a welcome move. It has set the tone for inviting all the stakeholders to comment
on various aspects of the move.

Let’s examine the key aspects related to this decision. To start with, why bring FDI in any sector? Clearly,
FDI benefits customers, economy and infrastructure. Our experience in telecom, automobile and
insurance sectors clearly shows the success of the FDI policy. With large-scale investments in each of
these sectors, customers are getting the best of services and products, and the resultant competition is
spurring the players to improve further. Even today, after the sector was opened up, the largest car brand
continues to be an Indian one.

The retail sector in India has a pretty unique structure. It started with rationing and grew through retail in
textile and footwear. Today, India has 15 million-plus retailers who account for $350-plus billion of annual
sales.
The retail space is dominated by the unorganised sector that contributes to 94 per cent of the sales.
During the last decade, many new formats — right from departmental stores to hypermarkets and
speciality stores — were launched in the country. Many global biggies are already present in India. Malls
have now become popular among middle-class families in various cities and towns. As the economy
keeps on growing, the retail market will continue to make progress. Customers will demand better
products and services in line with their growing income and aspirations. This will require large-scale
investments in manufacturing, retail space, technology, food logistics, processing, etc.

FDI in retail will have a far-reaching impact on various aspects of the economy. If rolled out in phases and
with proper checks and balances, it will give a boost to the economy. Customers will get a wide
assortment of quality goods at reasonable prices. They will be able to buy the best brands across various
categories.

Large investments in infrastructure would lead to a rise in farm productivity, manufacturing and food
processing as well as cold storage facilities. This would cut down wastage and spur growth in
employment, exports and GDP. It can also help revive the textile and handicrafts sector. With appropriate
controls in place, our exports can double in three years.

The introduction of technology and good management practices will improve product availability, reduce
wastage, improve quality and customer satisfaction.

China is an example of successful execution of FDI in retail in a phased manner. After FDI in retail,
Chinese retailers still hold a majority of retail share. The number of small retailers has doubled. Also,
exports and GDP growth has continued unabated in that country. China continues to dominate global
trade through large-scale FDI investment in the country.

The biggest argument against FDI is centred on its negative impact on small, unorganised retailers. We
believe that the unique model of retail in the country will not only survive FDI but also prosper once it’s
allowed.

Indian consumers are very particular about value and quality. They love to buy and cook fresh. Hence,
they will continue visiting the regular kirana stores and grocers for their daily needs. The large format
players will cater to the monthly needs for products and services.

Moreover, there isn’t much space available for large retailers to enter the most crowded areas within most
of the big cities. Therefore, large-scale retail stores will always remain a destination for big buys.
Customers will have to make an effort to reach them. And with difficult road connectivity and infrastructure
in cities, this will always remain a challenge.

Also, the ingenuity of Indian entrepreneurs has no match. Big retailers will find it difficult to measure up to
services like free home delivery, monthly khata and the personalised approach of kirana stores. Even 10
years after FDI is allowed, unorganised retail will dominate the Indian market with more than 85 per cent
share.

FDI should bring in investments in technology, infrastructure, cold storage facilities, distribution and
manufacturing. If the top two retailers, who are already in India, commit to buy 5 per cent of their global
purchases, this will translate into exports of $25 billion! — a game-changer for the Indian economy. '
In addition to this, India can also become a shopping destination for the world, leading to further boost to
the economy.

addition to this, India can also become a shopping destination for the world, leading to further boost to the
economy.

Praveen Khandelwal
General Secretary, Confederation of All India Traders

Given their outsourcing skills, resources and facilitation from the government, global players
will be able to crush competition and charge monopolistic prices

The recently released discussion paper by the government on foreign direct investment (FDI) in multi-
brand retail is nothing but an attempt to convert the domestic retail trade into crony capitalism. The trading
community is prepared to fight it tooth and nail as this involves the question of the survival of their trade. It
will adversely affect not only traders but also farmers, transporters, workers and several other sections
that are associated with the retail trade.

If multi-brand retail is allowed in the country, the sole aim of global retailers will be to dominate the
markets they enter into with the objective of capturing the maximum share, as they will be entering the
trade for business and not for charity. Given their outsourcing skills, resources and facilitation from the
government, they will be able to crush competition and, ultimately, dominate the market by charging
monopolistic prices.

One reason that has been stated in the discussion paper is domination of value chain by intermediaries —
as a result, it is said, farmers get only one-third of the total price paid by the consumers. It is necessary to
understand who the present intermediaries are. They are the bullock cart men, transporters, agents and
small traders. On the other hand, in the case of global players, the intermediaries are the brand
ambassadors who are paid crores of rupees, high consumption of power, high cost of warehousing and
transportation. The present intermediaries have contributed not only to the economy but also to the
substantial social development of the country. Further, small retailers are charged with keeping two-thirds
of the margin with themselves, which is factually incorrect. Since 2005, big corporate houses have been
engaged in retail operations and their prices are either higher than, on a par with, market prices. This
establishes that the two-thirds of the total margin is kept by these big retailers and they are not going to
sell their products at lower prices. Therefore, charging the retailers with keeping huge margin is only an
attempt to malign the trading community in order to find ways to allow MNCs in the retail sector.

After Independence, no efforts were made by the government to develop the existing retail trade into
structured, organised retailing. Hence, instead of allowing multi-brand retail, the government should
evolve a policy to upgrade the existing retailers, and on the pattern of the Micro, Small and Medium
Enterprises Act, we can have an Act to protect and promote small and medium retailers under separate
ministries with innovative schemes, such as a cluster approach to convert our unorganised retailers into
organised, modern retailers. They should be provided with credit facilities at low interest rates. This will
facilitate retail units coming together and transforming themselves into chain shops that will allow
bargaining in purchase, hence benefitting the consumer.
It is said that multi-brand retail will prove to be a boon to the farmers. Again, this is wrong. The global
players will initially buy products directly from farmers at attractive prices through their procurement
centres on contract basis or otherwise. Once the agricultural mandis and regulated market yards are
closed, they will radically reduce the procurement prices. As the big retailers possess tremendous
bargaining power, farmers will be forced to sell their produce at cut-throat prices, and will even be forced
to part with their agricultural land, which will render them as being mere employees of retail houses.

After agriculture, retail is the largest employment-generating sector in the country. Due to lack of a level
playing field, small retail stores as well as mid-sized departmental and chain shops would be severely hit,
thereby depriving millions of people of their jobs and livelihood. Does the government have any plan to
provide an alternative source of income to them and arrange for their rehabilitation? While the government
has provided many concessions and implemented assistance schemes for the protection and growth of
SSI sector, it has done nothing to safeguard the interest and nurture the progress of small- and medium-
sized retail units in the country. Prudence demands that the government should not disturb our traditional
retail trade, which is running without causing any financial strain to the government.

It is suggested that an independent, in-depth study of the retail trade should be carried out by a task force
comprising officials, experts and stakeholders to understand the ground realities of the retail trade. Efforts
must be made to modernise and organise the existing retail trade instead of inviting MNCs to conquer the
country once again.