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NAME: RAJDEEP LAHA ROLL NO: 10011 SUB: RETAIL MANGEMENT TOPIC: FORIGN DIRECT INVESTMENT IN RETAIL

Abstract
The Indian retail industry is one of the sunrise sectors with a huge growth potential. According to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. However, in spite of the recent developments in retailing and its immense contribution to the 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. So the recent approval by the Union Cabinet for allowing 51% foreign direct investment (FDI) in multi-brand retail in India and increasing the FDI limit in single brand retail in India to 100% (from the existing 51%) has come at a time when global retailers are facing severe problems in their home countries because of saturated markets and thus scouting for new emerging and virgin markets, while domestic players, on the other hand, are burdened with piling debt because of high inflation and interest rate. While this long awaited approval, which has come as a relief to many organised retailers, includes a set of norms for the foreign investors like minimum investment, deployment of funds invested, local sourcing, cities being opened for initial roll-out, etc. Also, opposition from certain State Governments and political parties raises significant hurdles for effective implementation of the reforms. FDI in multi-brand retail has been opposed by several in the past citing fears of loss of employment and that traditional retail may be affected. However, adherents of the same indicate easy access to capital for domestic retailers, increased transfer of technology, enhanced supply chain efficiencies, increased employment opportunities and curtailment of inflation as the perceived benefits. While this long awaited move is not expected to have an immediate impact on the Indian retail sector, it is expected to reap benefits in the medium to long-term future. However, the move needs to be monitored in the wake of the current opposition by several political parties, which if persists, may pose a major roadblock in the entry of the foreign retailers in India. Besides restricting the number of cities these retailers can operate in, it could also lead to problems in creating supply chain efficiency. For the domestic retailers, reforms at structural level would be required for partnering with foreign companies for the purpose of entering the states where FDI will be encouraged. At the same time, local retailers (kirana stores) are expected to remain a key element in the ecosystem in the foreseeable future, with their ability to offer door step service and convenient access. In this context, the present paper attempts to analyse the strategic issues concerning the influx of foreign direct investment in the Indian retail industry and the pros and cons of FDI in the retail industry.

Highlights of FDI in Multi-brand Retail Segment and Single-brand Retail Segment


 Union cabinet clears 51% for multi-brand retail and 100%for single brand retail  Minimum investment from foreign retailer is $100 million; In case of Single-brand Retail the foreign investor should be the owner of the brand.  At least 50% of the total FDI must be invested in back-end infrastructure and better logistical support for the exploding Indian retail  Minimum 30% of the local sourcing requirements of manufactured or processed goods from small and medium enterprise; In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from domestic SMEs and cottage industries artisans and craftsmen  Retail outlets to come up in cities with more than 10 lakh population as earmarked by 2011 census, i.e. 53 cities that accounts for over 42% of total urban population will be eligible to have internationally renowned retail outlets; given constraints around real estate, retailers are allowed to set up stores within 10 km of such cities  The Government will have the first right to procure agricultural produce.  While the proposals on FDI will be sanctioned by the Centre, approvals from each State Government would be required  In case of Single-brand Retail products to be sold should be of a single brand (only those brands which are branded during manufacturing) only; sold under the same brand name internationally.

Introduction
The Indian retail industry is the fifth largest in the world. Retailing in India is one of the pillars of its economy and accounts for about 17% of its GDP. The Indian retail market is estimated to be US$ 550 billion and one of the top five retail markets in the world by economic value. Comprising of organized and unorganized sectors, retail industry is one of the fastest growing industries in India, especially over the last few years. With growing market demand, the industry is expected to grow at a pace of 25-30% annually. Today, the organized retail market in India is estimated to be worth around $28 billion; and is projected to grow by 10 times by 2020. The Indian retail industry is the most promising emerging market for investment. The total retail sales in India is expected grow from US$ 395.96 billion in 2011 to US$ 785.12 billion by 2015, according to the Business Monitor International (BMI) India Retail Report for the second-quarter of 2011 which is based on strong underlying economic growth, population expansion, the increasing wealth of individuals and the rapid construction of organised retail infrastructure are key factors behind the forecast growth. With the expanding middle and upper class consumer base, there will also be opportunities in India's tier II and III cities. The organized sector is expected to grow to $100 billion and account for 12-15% of retail sales by 2015. Mass grocery retail (MGR) sales in India are expected to undergo tremendous growth over the forecast period. BMI predicts that sales through MGR outlets will increase by 218 per cent to reach US$ 27.67 billion by 2015. BMI forecasts consumer electronic sales at US$ 29.14 billion in 2012, with over-the-counter (OTC) pharmaceutical sales at US$ 2.30 billion. The former sub-sector is expected to show growth of 66.8 per cent between 2011 and 2015, reaching US$ 48.61 billion, with projected double-digit growth of key products such as notebooks, mobile handsets and TVs. OTC pharmaceuticals, meanwhile, should increase more, by 106.9 per cent throughout the forecast period, to reach US$ 4.75 billion. China and India are predicted

to account for more than 91 per cent of regional retail sales in 2012, and by 2015 their share of the regional market is expected to be at least 93 per cent. BMI forecasted growth in regional retail sales at 75.2 per cent for 2012, an annual average of 14.9 per cent. Organized retail in India is expected to increase from 5 per cent of the total market in 2008 to 14-18 per cent and reach US$ 450 billion by 2015, according to a McKinsey & amp Company report titled 'The Great Indian Bazaar: Organized Retail Comes of Age in India'. Furthermore, according to a report titled 'India Organized Retail Market 2010', published by Knight Frank India, during 2010-12 around 55 million square feet (sq. feet) of retail space will be ready in Mumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and Pune. Besides, between 2010 and 2012, the organized retail real estate stock will grow from the existing 41 million sq. feet to 95 million sq. feet. Driven by the growth of organized retail coupled with changing consumer habits, food retail sector in India is set to be more than double to US$ 150 billion by 2025, according to a report by KPMG. According to the report Strong and Steady 2011 released by global consultancy and research firm PricewaterhouseCoopers (PwC), India's retail sector, which is currently estimated at about US$ 500 billion, is expected to grow to about US$ 900 billion by 2014. India has also been ranked as the third most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney in its 9th annual Global Retail Development Index (GRDI) 2010. Within Asia, India is expected to account for the third largest share at US$ 2.7 billion in 2015, according to a report released by research firm Ovum on January 12, 2011. In the late 1990's the retail sector has witnessed a level of transformation. Though initially, the retail industry in India was mostly unorganized, however with the change of tastes and preferences of the consumers, the industry is getting more popular these days and getting organized as well. As the retail market place changes shape and competition increases, the potential for improving retail productivity and cutting costs is likely to decrease. Therefore it is important for retailers to secure a distinctive position in the market place based on values relationships or experience. Also, as the organised retail space in India continues to grow, it is likely to see a number of initiatives in the near future. Companies are likely to combine expansion with innovative measures as they look to ensure profitability in difficult times. One such initiative includes assessing the prospects of foreign players in this sector through Foreign Direct Investment. The advent of FDI in India was witnessed during the end of 1990s when the Indian national government announced a number of reforms which aimed at helping in the process of liberalization and deregulation of the Indian economy. Since its inception there has been a remarkable surge in the FDI inflows in the country. Moreover, FDI for all the permissible items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval, which is accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).In recent years the destination sectors in FDI have become more varied. FDI inflows have shifted from infrastructure, natural resources and export driven manufacturing to other areas such as retailing, tourism, construction and off shore services. Studies have shown that after liberalization; countries such as Brazil, Poland and Thailand have received significant FDI in retailing. Needless to say, but FDI inflows has evidently proved to be very advantageous for the overall development of the Indian economy and inter alia has resulted in increased capital flow, improved technology, notable management expertise and favourable access to international markets. Despite all the advantages that come along foreign investment in any sector of the economy, it is to be noted that FDI in India is not liberally allowed in all sectors including the retail sector, where FDI is either absolutely forbidden on the grounds of national interest, or, other sectors where the

existing and notified sectorial policy does not permit FDI beyond a ceiling. In 1997, the Indian retail sector witnessed the first footprints of FDI with 100% FDI being permitted in cash & carry wholesale trading under the government approval route, subsequently brought under the automatic route in 2006. As a step ahead, FDI in single brand retail was permitted to the extent of 51% in 2006, while FDI in multi-brand retail remained prohibited till recently. In July 2010, the Department of Industrial Policy and Promotion (DIPP) had put up a discussion paper proposing FDI in multi-brand retail. In July 2011, a Committee of Secretaries (CoS) had cleared the proposal to allow up to 51% FDI in multi-brand retail, which has been approved by the Union Cabinet in November 2011, albeit with a few riders. The Union Cabinet has also approved increasing the FDI limit in single brand retail to 100% with government approval. While no parliamentary approval is needed for the decision, State Governments have the prerogative to disallow the same in their respective states. Mounting opposition by several political parties and State Governments have raised hurdles in the effective implementation of the key reform measure. Foreign direct investment (FDI) inflows between April 2000 and January 2011, in singlebrand retail trading, stood at US$ 128.34 million, according to the Department of Industrial Policy and Promotion (DIPP).  Carrefour, the worlds second-largest retailer, has opened its first cash-and-carry store in India in New Delhi. Germany-based wholesale company Metro Cash & Carry (MCC) opened its second Wholesale Centre at Uppal in Hyderabad, taking to its number to six in the country.  Jewelry retail store chain Tanishq plans to open 15 new retail stores in various parts of the country in the 2011-12 fiscal.  V Mart Retail Ltd, a medium-sized hypermarket format retail chain, is set to open 40 outlets over the next three years, starting with 13 stores in 2011, in Tier-II and Tier-III cities.  RPG-owned Spencer's Retail plans to set up 15-20 new stores in the country in 201112.  Spar Hypermarkets, the global food retailing chain of the Dubai-based Landmark Group, expects to start funding its India expansion beyond 2013 out of its local cash flow in the country. So far, the Landmark Group has invested US$ 51.31 million in setting up five hypermarkets and plans to pump in another US$ 51.31 million into the next phase of expansion.  Bharti Retail, owner of Easy Day storesupermarkets and hyper-martsplans to invest about US$ 2.5 billion over the next five years to add about 10 million sq. ft. of retail space in the country by then, according to a company spokesperson.  The country's largest consumer products company Hindustan Unilever is testing waters in the coffee shop market even as US giants Starbucks and Dunkin' Donuts finalize plans to tap into increasing out-of-home consumption of coffee in the country. Hindustan Unilever has opened a 'Bru World Cafe' outlet on a pilot basis at Juhu, an upmarket western suburb of Mumbai.  Luxury Goods Retail, which currently sells its products in India under a franchise agreement, has been allowed to directly retail Gucci products in the country. Gucci Group NV, Netherlands is investing US$ 225,867 to pick up 51 per cent stake in the venture.  Australia's Retail Food Group is planning to enter the Indian market in 2012. It has ambitious investment plans which aim to clock revenue of US$ 87 million from the country within five years from start of operations. In 20 years, they expect the Indian operations to be bigger than their Australian business.

 Lifestyle International, part of the Dubai-based US$ 1.5 billion Landmark Group, plans to have over 50 stores across India by 201213. These will include 35 Lifestyle stores for retailing apparel, cosmetics and footwear, besides 15 Home Centres that sell home furnishing goods.  Watch maker, Timex India, is looking at increasing its presence in the country by adding another 75 stores by March 2012 at an investment of US$ 1.3 million taking its total store count to 120. The company has recorded revenue of US$ 16.9 million and a net profit of US$ 1.8 million, during the first six months of the current fiscal, ending September 30, 2011.  Wills Lifestyle plans to expand its operations by opening 100 new stores in the next three years. It also plans to concentrate on online buyers.  Pantaloon Retail India (PRIL) is planning to invest US$ 77.88 million this fiscal to add up to 2.4 million sq ft retail space at its existing operations. Pantaloon Retail is also looking to hive off its value retail chain, Big Bazaar, into a separate subsidiary, which may eventually go for an initial public offer (IPO). PRIL proposes to open 155 Big Bazaar stores by 2014, increasing its total network to 275 stores.  Aditya Birla Retail which operates the More chain of supermarkets and hyper-markets is scaling up its private labels business as an independent strategic business unit (SBU) and profit centre. This may be spun off as a separate entity as private labels business account for over 19-20 per cent sales of More supermarkets and hypermarkets.  British high street retailer, Marks and Spencer (M&S) plans to significantly increase its retail presence in India, targeting 50 stores in the next three years. M&S currently operates 17 stores in India through a joint venture (JV) with Reliance Retail.  Leading watchmaker Titan Industries Limited plans to invest about US$ 21.83 million for opening 50 premium watch outlets Helios in next five years to attain a sales target of US$ 87.31 million.  Chinese retail major, Yishion has entered the Indian market and plans to have at least 125 points of sales, including exclusive stores and multi-brand outlets, across India by 2012. Road Ahead


According to industry experts, the next phase of growth is expected to come from rural markets. The organised modern retail segment in India will grow by over three times during the next five years (from 2011), to reach a figure of US$ 80 billion, as per consultancy firm, Technopak. India's modern consumption level will double within five years to an annual figure of US$ 1.5 trillion from the present level (taking 2011 as the reference year) of US$ 750 billion, according to Raghav Gupta, President, Technopak. Further, the luxury brand in the country is estimated to be worth about US$ 4.06 billion-US$ 4.51 billion and is expanding rapidly driven by the growing aspirations of youth and income levels in the country. Thus, major international brands are in the process of expanding their retail presence. For instance, Paul & amp; Shark now has two stores with Hyderabad and will have few more by next year, Zegna, another Italian brand, known for its formal wear and quality suits, is also expanding and Diesel will have seven stores in the country.

Ramesh Tainwala, who brought global luggage maker Samsonite into the country, has bought a 50 per cent stake in Planet Retail, which markets fashion brands like Guess, Next and Nautica from NRI businessman VP Sharma, in a bid to expand his presence in the booming retail space. In addition, the direct selling fast moving consumer goods (FMCG) segment is growing faster in Uttar Pradesh compared to markets in other states. Segment leader Amway India said it was growing by 35 per cent in Uttar Pradesh vis--vis 27 per cent pan-India.

. The importance of retail sector in India can be judged from following facts: (a) (b) (c) (d) (e) (f) Retail sector is the largest contributor to the Indian GDP after agriculture. The retail sector provides 14% employment India has world largest retail network with 14 million outlets Total market size of retailing in India is around U.S $ 500 billion Current share of organized retailing is just 2% which comes around to $ 10 billion Organized retail sector is growing @ 28% per annum.

The Indian retail sector is very different from that of the developed countries. In the developed countries, products and services normally reach consumers from the manufacturer/producers through two different channels: (a) Via independent retailers (vertical separation) and; (b) Directly from the producer (vertical integration). In the latter case, the producers establish their own chains of retail outlets, or develop franchises. On the other hand, Indian retail industry is divided into organised and unorganised sectors. Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed supermarkets and retail chains, and also the privately owned giant retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. Unorganized retailing is by far the prevalent form of trade in India constituting 98% of total trade, while organised trade accounts only for the remaining 2%. Nonetheless the organized sector is expected to grow faster than GDP growth in next few years driven by favourable demographic patterns, changing lifestyles, and strong income growth. Growth drivers in India for retail sector The retail industry in India is currently growing at a great pace and is expected to go up to US$ 833 billion by the year 2013. It is further expected to reach US$ 1.3 trillion by the year 2018 at a CAGR of 10%. As the country has got a high growth rate, the consumer spending has also gone up and is also expected to go up further in the future. In the last four years, the consumer spending in India climbed up to 75%. As a result, the Indian retail industry is expected to grow further in the future days. By the year 2013, the organized sector is also expected to grow at a CAGR of 40%. The key factors that drive growth in retail industry are young demographic profile, increasing consumer aspirations, growing middle class incomes and improving demand from rural markets. Also, rising incomes and improvements in infrastructure are enlarging consumer markets and accelerating the convergence of consumer tastes. Liberalization of the Indian economy, increase in spending per capita income and the advent of dual income families also help in the growth of retail sector. Moreover, consumer preference for shopping in new environs, availability of quality real estate and mall

management practices and a shift in consumer demand to foreign brands like McDonalds, Sony, Panasonic, etc. also contributes to the spiral of growth in this sector. Furthermore, the Internet revolution is making the Indian consumer more accessible to the growing influences of domestic and foreign retail chains. Reach of satellite T.V. channels is helping in creating awareness about global products for local markets. About 47% of India's population is under the age of 20; and this will increase to 55% by 2015. This young population, which is technology-savvy, watch more than 50 TV satellite channels, and display the highest propensity to spend, will immensely contribute to the growth of the retail sector in the country. Moreover, the retail sector also acts as an important employment absorber for the present social system. Thus, when a factory shuts down rendering workers jobless; or peasants find themselves idle during part of the year or get evicted from their land; or the stagnant manufacturing sector fails to absorb the fresh entrants into the job market, the retail sector absorbs them all. Challenges of Retailing in India In India the retailing industry has a long way to go and to become a truly flourishing industry, retailing needs to cross various hurdles. The first challenge facing the organized retail sector is the competition from unorganized sector. Needless to say, the Indian retail sector is overwhelmingly swarmed by the unorganized retailing with the dominance of small and medium enterprises in contradiction to the presence of few giant corporate retailing outlets. The trading sector is also highly fragmented, with a large number of intermediaries who operate at a strictly local level and there is no barrier to entry, given the structure and scale of these operations. The tax structure in India favours small retail business. Organized retail sector has to pay huge taxes, which is negligible for small retail business. Thus, the cost of business operations is very high in India. Developed supply chain and integrated IT management is absent in retail sector. This lack of adequate infrastructure facilities, lack of trained work force and low skill level for retailing management further makes the sector quite complex. Also, the intrinsic complexity of retailing- rapid price changes, threat of product obsolescence, low margins, high cost of real estate and dissimilarity in consumer groups are the other challenges that the retail sector in India is facing. The status of the retail industry will depend mostly on external factors like Government regulations and policies and real estate prices, besides the activities of retailers and demands of the customers also show impact on retail industry. Even though economy across the globe is slowly emerging from recession, tough times lie ahead for the retail industry as consumer spending still has not seen a consistent increase. In fact, consumer spending could contract further as banks have been overcautious in lending. Thus, retailers are witnessing an uphill task in terms of wooing consumers, despite offering big discounts. Additionally, organised retailers have been facing a difficult time in attracting customers from traditional kirana stores, especially in the food and grocery segment. In retail sector, Automatic approval is not allowed for foreign investment. There are restrictions on Foreign Direct Investment imposed in order to protect the interests of the country and also in order to allow the domestic companies to make more profits with less competition than that of in the presence of rival international firms. The retail trading in India constitutes as one of those few sectors where FDI is not freely and healthily allowed. Although, FDI is fully admissible in cash and carry wholesale (back-end retail), it is admissible only up to 51 per cent in single-brand front-end retail. Importantly, there is a complete ban on foreign investment in multi-brand, front-end retail. This has resulted in keeping all the giant corporate backed retailers of the world like Walmart (USA), Carrefour (France), Tesco (UK), and Metro (Germany), who are very keen to foray into Indias retail sector, away from entering into the country. All of these retailers, therefore, to make their presence felt in the country, have either tied-up or trying to tie-up with local

corporates, to offer their services for back-end operations like sourcing, logistics, inventory management, among others, for front-end, multi-brand retail operations of such corporates. While in some sectors the restrictions imposed by the government are comprehensible; the restrictions imposed in few others, including the retail sector, are utterly baseless and are acting as shackles in the progressive development of that particular sector and eventually the overall development of the Indian Inc. The scenario is kind of depressing and unappealing, since despite the on-going wave of incessant liberalization and globalization, the Indian retail sector is still aloof from progressive and ostentatious development. This dismal situation of the retail sector undoubtedly stems from the absence of an FDI encouraging policy in the Indian retail sector. Strategic Implications Of FDI In Retail In spite of the recent developments in retailing and its immense contribution to the economy, it still continues to be the least evolved industries and the growth of organised retailing in India has been much slower as compared to rest of the world. Over a period of 10 years, the share of organised retailing in total retailing has grown from 10 per cent to 40 per cent in Brazil and 20 per cent in China, while in India it is only 2 per cent from 1995-2005. One important reason for this is that retailing is one of the few sectors where foreign direct investment is freely not allowed. Within the country, there have been protests by trading associations and other stakeholders against allowing FDI in retailing. On the other hand, the growing market has attracted foreign investors and India has been portrayed as an important investment destination for the global retail chain. The need for larger FDI is because India is at a stage where it needs US investments, technology, and management policies to sustain and enhance its economic growth. There are other necessities which a larger FDI will cater to viz., employment generation, income generation, technology transfer, and economic stability. Hence, the need for larger FDI is a pressing situation these days in India. Foreign countries are well aware of lately there has been a remarkable surge in the demand for the liberalization of the Indian retail sector both at the domestic and as well as at the international front and it seems that the government is giving the matter a very pensive and careful consideration. Some of the factors that have contributed to this trend are the evident profits in the ever growing but conserved Indian retails sector, reduction in tariff, cheaper real time communications, and cheaper transport. The main reasons for such an unequivocal demand stems from the realisation that (i) While the retail sector requires heavy investment for expansion, there is hardly any local capital left in the capital markets as a consequence of global financial meltdown, and Efficient management of multi-brand, multi-product, multi-location retail, especially in the area of back-end operations, require heavy dose of technology, which over the years has been developed and perfected by foreign players.

(ii)

Major Attractions for Global Retailers in India Retailing is being perceived as a beginner and as an attractive commercial business for organized business i.e. the pure retailer is starting to emerge now. Indian organized retail industry is one of the sunrise sectors with huge growth potential. Total retail market in India stood at USD 500 billion in 2010-11 and is estimated to attain USD 575 billion by 2012-13. Organised retail industry accounts for only 5.5% of total retail industry and is expected to reach 10% by 2012. AT Kearney, the well-known international management consultancy, recently identified India as the third most attractive retail destination globally from among

thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign investors eyes. With a contribution of an overwhelming 17% to the national GDP and employing 14% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy Foreign companies attraction to India is the billion-plus population. Also, there are huge employment opportunities in retail sector in India. Indias retail industry is the second largest sector, after agriculture, which provides employment. According to Associated Chambers of Commerce and Industry of India (ASSOCHAM), the retail sector will create 50,000 jobs in the next few years. As per the US Census Bureau, the young population in India is likely to constitute 53per cent of the total population by 2020 and 46.5 per cent of the population by 2050 much higher than countries like the US, the UK, Germany, China etc. Indias demographic scenario is likely to change favourably, and therefore, will most certainly drive retail sales growth, especially in the organised retail segment. Even though organised retailers have a far lesser reach in India than in other developed countries, the first-mover advantage of some retail players will contribute to the sectors growth. India in such a scenario presents some major attractions to foreign retailers. There is a huge, huge industry with no large players. Some Indian large players have entered just recently like Reliance, Trent. Moreover, India can support significant players averaging $1 bn. in Grocery and $0.3- 0.5 bn. in apparel within next ten years. The transition will open multiple opportunities for companies and investors. In addition to these, improved living standards and continuing economic growth, friendly business environment, growing spending power and increasing number of conscious customers aspiring to own quality and branded products in India are also attracting to global retailers to enter in Indian market. Thus, there is certainly a lucrative opportunity for foreign players to enter the Indian terrain. Growth rates of the industry both in the past and those expected for the next decade coupled with the changing consumer trends such as increased use of credit cards, brand consciousness, and the growth of population under the age of 35 are factors that encourage a foreign player to establish outlets in India. India thus continues to be among the most attractive countries for global retailers. Foreign direct investment (FDI) inflows between April 2000 and April 2011, in single-brand retail trading, stood at US$ 129 million, according to the Department of Industrial Policy and Promotion (DIPP). The Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach 596 billion by 2011-12 and ICRIER has also come to conclusion that investment of big money in the retail sector would in the long run not harm interests of small, traditional, retailers. A number of global retail giants are thus eyeing this opportunity to swarm this seemingly nascent sector and exploit its unexplored potential. However, it is not out of place to mention here that the government policies towards FDI are the only hindering factors that do not make this a fairy tale for foreign players. Challenges for Global Retailers in Indian Retail Sector History has witnessed that the concern of allowing unrestrained FDI flows in the retail sector has never been free from controversies and simultaneously has been an issue for unsuccessful deliberation ever since the advent of FDI in India. Where on one hand there has been a strong outcry for the unrestricted flow of FDI in the retail trading by an overwhelming number of both domestic as well as foreign corporate retail giants; to the contrary, the critics of unrestrained FDI have always fiercely retorted by highlighting the adverse impact, the FDI in the retail trading will have on the unorganized retail trade, which is the source of employment to an enormous amount of the population of India. The antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-

Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. Many trading associations, political parties and industrial associations have argued against FDI in retailing due to various reasons. It is generally argued that the Indian retailers have yet to consolidate their position. The existing retailing scenario is characterized by the presence of a large number of fragmented family owned businesses, who would not be able to survive the competition from global players. The examples of South East Asian countries show that after allowing FDI, the domestic retailers were marginalised and this led to unemployment. Another apprehension is that FDI in retailing can upset the import balance, as large international retailers may prefer to source majority of their products globally rather than investing in local products. The global retailers might resort to predatory pricing. Due to their financial clout, they often sell below cost in the new markets. Once the domestic players are wiped out of the market foreign players enjoy a monopoly position which allows them to increase prices and earn profits. Indian retailers have argued that since lending rates are much higher in India, Indian retailers, especially small retailers, are at a disadvantageous position compared to foreign retailers who have access to International funds at lower interest rates. High cost of borrowing forces the domestic players to charge higher prices for the products. Another argument against FDI is that FDI in retail trade would not attract large inflows of foreign investment since very little investment is required to conduct retail business. Goods are bought on credit and sales are made on cash basis. Hence, the working capital requirement is negligible. On the contrary; after making initial investment on basic infrastructure, the multinational retailers may remit the higher amount of profits earned in India to their own country. The hope for the liberalization of the retail sector and an unrestrained reception to FDI in retail trading without any restrictions on the number of brands, outlets or location of stores got the biggest blow when the parliamentary standing committee on commerce on 8th June, 2009, while presenting a picture of gloom, recommended a blanket ban on domestic corporate and foreign retailers from entering retail trade and also suggested restrictions to bar organized retail firms from setting up malls and selling other consumer products. The report cautioned that allowing organized players, domestic and as well as foreign, to enter retail trade would result in the destruction of the economic foundation of the small retail supply chain. Moreover, the parliamentary committee has also suggested putting in place a regulation, a National Shopping Mall Regulation Act, to ensure that cartelization does not take place, and regulate the fiscal and social aspects of the retail sector. The committee observed that Consumers welfare would be side lined, as the big retail giants by adopting a predatory pricing policy would fix lower price initially, tempting the consumers. After wiping out competition from local retailers, the big retailers would be in a monopolistic position and would be able to dictate prices, the panel said. It also said that procurement centers constituted by big corporates for making direct bulk purchases would initially pay attractive prices to farmers and cause gradual extinction of `mandis and regulated market yards. It is to be noted that though the recommendation of the panel are not binding upon the Government; the same have outrageously done the intended harm. In other words, the direct result of the media hype of the recommendations of the Panel was the abrupt stoppage of all the progressive investment plans of various corporate giants all across the globe, who were desirous of investing an irresistible amount of capital in the Indian markets, in order to establish their brand name. The world leading retailer Wal-Mart was very eager to open a retail chain

throughout India. The retail giant did everything possible so that the Government of India becomes inclined to liberalize FDI in retail sector. In February 2002, the worlds largest retailer, Wal-Mart, opened a global sourcing office in Bangalore. In November 2006, it announced its entry under a joint venture with the Indian corporation Bharti. However, all attempts proved to be futile and the giant retail MNC finally settled up with the establishment of a cash carry outlet in Amritsar on June 6, 2009. Such stores dont sell to end-users, but to retailers and middlemen. This is the only format under which foreign retail chains are allowed in India. It is submitted that at present, 100% FDI is permitted under automatic route in the wholesale cash and carry trading. Unfortunately, the iconic $ 31-billion Scandinavian home products giant, IKEA, had to cancel its plans to set up 25 showrooms across the country foreign investment of around $ 1 billion. In an internal communication, IKEA told its stakeholders that Indian investment rules do not encourage it to go ahead with its investment plans at least not in the near future. Moreover, Carrefour, Cartier, Armani, Tesco and UKbased Currys and Sports Direct International could also be some of the foreign retail players to cut down their investment in India following the governments FDI policy on retail. Thus, Indian retail may lose FDI of up to Rs 400 crore (Rs 4 billion) this fiscal because of recommendations by the Parliamentary Panel on Commerce, which has opposed further leeway to the entry of international retail brands in the country. However, unfortunately the issue still remains nebulous; with only evident positive thinking on part of the government and with no final affirmative or negative decision on the same whatsoever. Thus, it is to be noted that even though no decision has been taken by the government on the recommendations given by the panel; the direct ramifications of the recommendations have been evident considerable loss of FDI, managerial expertise, and jobs for the Indian retail industry along with sacrifice of the consumers interest and welfare. Impact And Role Of Fdi In Indian Retail Sector In the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers. Interestingly, in contradiction to the recommendations of the Parliamentary Committees report, the Economic Survey 2008-09 raised hopes of all those looking for a favourable response of the government on the subject. While, the Economic Survey has made a strong case for opening up the FDI for multi-brand retail, it has recommended a gradual opening of the sector. Improving the investment environment would require FDI in multi-format retail, starting with food retailing. Initially the FDI could be allowed subject to the setting up a modern logistics system, perhaps jointly with other organised retailers. A condition could also be put that it must have, for five years say, wholesale outlets where small, unorganised retailers can also purchase items to facilitate transition. Most modern organised retailers, who have been asking for removal of ban on FDI in retail, were excited with the recommendation made by the Survey in its report. In wake of relentless protests for the opening up of the Indian retail market for the reception of unrestrained FDI, the Investment Commission in July, 2006, suggested that 49% FDI be allowed in the Indian retail sector without any restrictions on the number of outlets or location of stores. The Commission opined that that foreign investment would help in improving the retail and supply chain infrastructure, and generate large-scale employment in the country. In addition, the Indian retailers could absorb some of the best operational practices of these international retailers and gain in experience. Ultimately, the consumers would benefit due to the availability of more product offerings, lower prices, and efficient service. The recommendations of the Investment Commission proved to be very promising

and paved the way for a positive feedback to the global retailers towards the Indian retail sector (Business Insights International 2009). Thus, FDI in retailing is favoured on a number of grounds. The global retailers have advanced management know how in merchandising and inventory management and have adopted new technologies which can significantly improve productivity and efficiency in retailing. The entry of large low-cost retailers and adoption of integrated supply chain management by them is likely to lower down the prices. Also FDI in retailing can easily assure the quality of product, better shopping experience and customer services. They promote the linkage of local suppliers, farmers and manufacturers, no doubt only those who can meet the quality and safety standards, to global market and this will ensure a reliable and profitable market to these local players. As multinational players are spreading their operation, regional players are also developing their supply chain differentiating their strategies and improving their operations to counter the size of international players. This all will encourage the investment and employment in supply chain management. Moreover, joint ventures would ease capital constraints of existing organised retailers and FDI would lead to development of different retail formats and modernization of the sector. Therefore, FDI in retail would undoubtedly enable India Inc to integrate its economy with that of the global economy. FDI will help to overcome both the lack of experience in organized retailing as well as lack of trained manpower. FDI in retail would reduce cost of intermediation and entail setting up of integrated supply chains that would minimize wastage, give producers a better price and benefit both producers and consumers. From the stand point of consumers, organized retailing would help reduce the problem of adulteration, short weighing and substandard goods (Bhukta 2009). FDI will not just provide access to larger financial resources for investment in the retail sector but simultaneously will rationally allow larger supermarkets, which tend to become regional and national chains (i) (ii) to negotiate prices more aggressively with manufacturers of consumer goods and thus pass on the benefit to consumers; and to lay down better and tighter quality standards and ensure that manufacturers adhere to them.

Moreover, consumer goods manufacturers generally prefer supermarkets since they not just offer a wide range of their products and services, so the consumer can enjoy single-point shopping, but simultaneously they by their attractive presentation and tempting retailing strategies also account for an increasing share of consumer product sales. Also, the fact that a well-known chain of supermarkets procures its goods from a known manufacturer becomes a stamp of quality. Moreover, with the availability of free flow of finance in conjunction with advent of healthy inflow of FDI, the supermarkets will be in a better position than small retailers to make shopping a pleasant experience by making investments in much needed infrastructure facilities like parking lots, coffee shops, ATM machines, etc. It can thus be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/ sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience. Moreover, it is to be noted that the small retailers will still remain in good business owing to the fact of their convenient location near the residential societies and to the fact of the distant location of the mega stores and malls. The benefits of larger FDI can thus be tangibly felt in the domains pertaining to technological advancements, generation of export, production improvements, and hastening of manufacturing employment. Capital inflow into India has increased and so have the exports from the country. Thanks to the economic boom India is experiencing, some Indian companies are doing better than even the multinational

corporations. Allowing healthy FDI in the retail sector would not only lead to a substantial surge in the countrys GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them. Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. The interest of the consumers should therefore take precedence over the interest of the retailer and consequently healthy flow of FDI in retail should be permitted. Associated riders aimed at safeguarding interests of farmers and small unorganized retailers, ensuring funds deployment towards improving Indian supply chain and logistics infrastructure; political roadblocks could hamper potential investments. This long impending approval includes a set of riders for the foreign investors, aimed at ensuring the foreign investment makes a genuine contribution to the development of Indian infrastructure and logistics, at the same time facilitating integration of small retailers into the upgraded value chain. These riders could complicate potential FDI investments, acting as a damper. Backend infrastructure will include capital expenditure on all activities, excluding that on frontend units; i.e. it will include investment made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure, etc. Expenditure on land cost and rentals, if any, will not be counted for purposes of back-end infrastructure. While the minimum capital requirement of US$ 100 million is unlikely to be an issue for the large foreign players vying to enter India in the supermarket/ hypermarket segment, it could make it difficult for foreign investors planning to enter specialty formats such as music, mobile, electronics goods, among others, as these formats require relatively lower investments. Further, the approval requirements from State Governments could limit the cities that FDI backed retailers can operate in. The current opposition raised by a number of political parties, if persists, may pose a major roadblock in the entry of the foreign retailers in India. Besides restricting the number of cities these retailers can operate in, it could also lead to problems in creating supply chain efficiency. For the domestic retailers, reforms at structural level would be required for partnering with foreign companies for the purpose of entering the states where FDI will be encouraged. Impact on the Indian Retail Sector: No immediate impact, benefits to accrue over the medium to long-term While FDI in multi-brand retail has been opposed by several in the past citing fears of loss of employment, adverse impact on traditional retail and rise in imports from cheaper sources like China, adherents of the same indicate increased transfer of technology, enhanced supply chain efficiencies and increased employment opportunities as the perceived benefits. Besides, entry of large retail chains in India is expected to benefit the consumers by helping address inflation concerns through price reductions facilitated by the extent of reduction in trading margins effected to by the retail giants like Walmart, in addition to cutting of agri-waste. However, some estimates suggest that the move has been in support of multinational retail chains like Walmart, Tesco and Carrefour, who have been vying to be a part of the India retail growth story and that the entry of these companies in multi-brand retail would lead to oligopolistic pressures on the farmers and consumers at the same time throwing small retailers out of business. Nonetheless, proponents hint at creation of jobs across front-end and

back-end operations, whether direct or indirect, and both in urban and rural areas. But there are concerns over talent crunch being faced by the sector. There has not been adequate investment in talent development and thus it would be difficult for retail companies to get qualified manpower, requiring them to invest significantly in up-gradation of skill sets. Parameters Capital Infusion Key concerns raised by Key perceived benefits opposition parties Would enable cash-starved domestic retailers to deleverage their overly stretched balance sheets by plugging the gap between capital required for growth and the ability of local players to raise capital Local incumbents to benefit from technical inputs, investments in supply chain, and investments in human capital There could be a potential shift in bargaining power of these retailers with FMCG companies (at present, large FMCG players are better positioned vis--vis retailers in discussing terms of trade) once these retailers become large and attain size and scale Improvement of supply chain/ distribution efficiencies, coupled with capacity building and induction of modern technology, which will help arrest wastages (in the present scenario, lack of investment in logistics and inadequate storage facilities have been creating inefficiencies in the food supply chain, leading to significant wastages). Though FDI is permitted in cold chains to the extent of 100% through the automatic route, in the absence of FDI

Local incumbents

Adverse impact on domestic small and unorganized retailers as the move would lead to unfair competition and ultimately result in largescale exit of domestic retailers, especially the small family managed outlets

Supply chain improvement

Disintegration of established supply chains by establishment of monopolies of global retail chains, leading to their control on both ends of the supply chain

in front-end retail, investment flows into this sector have been insignificant Inflation/ Consumer Welfare Side lining of consumers The move to open up retail welfare due to predatory sector to FDI will reduce pricing dictated by retail inflationary pressures as giants on account of their Farmers will be able to monopolistic position directly sell their produce to retailers, thereby reducing margins for middlemen Investments in coldstorage and warehousing will ease supply-side pressures that have driven inflation close to a double-digit Improved supply chain contributes to savings in food wastages which has been rampant on account of inadequate infrastructure Further, consumers would also benefit from wider choices and better quality products Farmers Farmers to get affected on account of non-remunerative prices paid to them by these corporate giants Improvement in productivity and realizations for farmers through direct sales to these large organised players, thus eliminating the margins outflow to the middle-men who have been dominating the value chain, and whose pricing lacks transparency The opening of the sector to FDI is expected to result in creation of over 10 million jobs (including 6 million jobs in the logistics sector alone) in three years, across agroprocessing, sorting, marketing, logistic management and the frontend retail business Expectations are that it would create jobs not only in

Employment Generation

Entry of global retail giants will lead to uneven playing field, resulting in large scale labour displacement in the retail sector

the retail industry but also in related areas like real estate and construction

Source: Press Information Bureau, ICRA This decision to widen the retail sectors doors has come at a time when global retailers are facing headwinds in their home countries and thus scouting for new emerging markets, while domestic players, on the other hand, are burdened with piling debt. With some of the major foreign retailers like Metro, Walmart, Tesco already having presence in the Indian retail sector through the cash and carry route or through tie-ups with domestic retailers for supply chain management, some of the near-term possibilities could be a) Bharti Retail extending its back-end alliance with Walmart to front end b) Trent extending its relationship with Tesco for a front-end joint venture. In addition, with full ownership resting with the foreign retailer in the single brand retail segment, India can expect entry of new global brands in the segment.
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FDI's benefit from the view if the customers


1.

FDI will provide access to larger financial resources for investment in the retail sector and that can lead to several of the other advantages that follow The larger supermarkets, which tend to become regional and national chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the benefit to consumers They can lay down better and tighter quality standards and ensure that manufacturers adhere to them. The supermarkets offer a wide range of products and services, so the consumer can enjoy single-point shopping

2.

3.

4.

Back-end logistics must for FDI in multi-brand retail The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing. It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their countrys GDP. Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of

consumers at large in relation to the interests of retailers. It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience. The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. Arguments in favour of FDI in Retailing: FDI in retailing is favoured on following grounds:  The global retailers have advanced management know how in merchandising and inventory management and have adopted new technologies which can significantly improve productivity and efficiency in retailing.  Entry of large low-cost retailers and adoption of integrated supply chain management by them is likely to lower down the prices.  FDI in retailing can easily assure the quality of product, better shopping experience and customer services.  They promote the linkage of local suppliers, farmers and manufacturers, no doubt only those who can meet the quality and safety standards, to global market and this will ensure a reliable and profitable market to these local players.  As multinational players are spreading their operation, regional players are also developing their supply chain differentiating their strategies and improving their operations to counter the size of international players. This all will encourage the investment and employment in supply chain management.  Joint ventures would ease capital constraints of existing organised retailers  FDI would lead to development of different retail formats and modernisation of the sector. Arguments against FDI in Retailing:  Many trading associations, political parties and industrial associations have argued against FDI in retailing due to following reasons:  Indian retailers have yet to consolidate their position. The existing retailing scenario is characterized by the presence of a large number of fragmented family owned businesses, who would not be able to survive the competition from global players.

The examples of south east Asian countries show that after allowing FDI, the domestic retailers were marginalised and this led to unemployment.  FDI in retailing can upset the import balance, as large international retailers may prefer to source majority of their products globally rather than investing in local products.  Global retailers might resort to predatory pricing. Due to their financial clout, they often sell below cost in the new markets. Once the domestic players are wiped out of the market foreign players enjoy a monopoly position which allows them to increase prices and earn profits. Indian retailers have argued that since lending rates are much higher in India, Indian retailers, especially small retailers, are at a disadvantageous position compared to foreign retailers who have access to International funds at lower interest rates. High cost of borrowing forces the domestic players to charge higher prices for the products.  FDI in retail trade would not attract large inflows of foreign investment since very little investment is required to conduct retail business. Goods are bought on credit and sales are made on cash basis. Hence, the working capital requirement is negligible. On the contrary; after making initial investment on basic infrastructure, the multinational retailers may remit the higher amount of profits earned in India to their own country.

CONCLUSIONS AND RECOMMENDATIONS Amidst todays time of fierce competition and a quest to achieve and enhance a substantial level of economic and social development; each and every nation is trying to liberalize its economic policies in order to attract investments from not only, domestic players, but also from magnates all across the globe. Consequently, people with generous reserves of funds, all around the globe, are expanding their wings and seeking opportunities of investing in different spheres of this lucrative market. India too is not oblivious to the rapid developments taking place in the global market and has emerged as one of the prime destinations for the investment of funds from an impressive number of foreign investors. In recent times the consumer are showing much greater confidence and in a due response the retail players in the market are veering towards aggressive expansion plan. These developments are clearly signalling an affluent time for retail sector. As the organised retail space in India continues to grow, it is likely to see a number of initiatives in the near future. Companies are likely to combine expansion with innovative measures as they look to ensure profitability in difficult times. Players need to increase their investments in retail ancillaries and retail logistics to ensure sustained benefits. As a survival strategy, moves are on to allow FDI in the multi-brand retailing sector and there is fresh flow of equity investment in this sector which will definitely give the Indian retail sector a much needed boost. The advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economical decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their countrys GDP. Besides, it would also lead to inflow of latest technical knowhow, establishment of well integrated and sophisticated supply chains, availability of standard, latest and quality

products help in up gradation of human skills and increased sourcing from India. As India capitalizes on the benefits of FDI, there will be more competition in the market at large and the rural sector of the country will be in the process of reformation, thus bringing about a socio-economic stability. According to industry experts, the next phase of growth is expected to come from rural markets. Organised retail market in India is expected to reach US$ 50 billion by 2011 while the rural market is projected to dominate the retail industry landscape in India by 2012 with total market share of above 50 per cent. However, the path of liberalizing the Indian retail sector should be treaded cautiously in the wake of the fact that international experience has shown that except for the huge profits raked in by the supermarket chains, organized retail has been a lose-lose scenario for farmers, small traders and wholesalers, consumers and the environment and therefore society as a whole. Therefore, the strategy of opening up should be backed by appropriate reform measures. India can learn from the experiences of other developed and developing countries and develop its own strategies, laws and regulations that would be in the best interest of the country. As of now, there is no proper definition of retailing or retail formats in India. International players are exploiting the situation and are often entering the market and expanding their businesses through multiple routes and are operating in the country with more than one format of retailing. The regulatory regime should address these issues. The entry norms should clearly state the approval requirements, conditions / restrictions if any imposed, etc. The government should also strictly enforce the quality standards for local production and imports. Moreover, the Indian Council for Research on International Economic Relations (ICRIER) drafted a report which suggested that the opening up of the FDI regime should be gradual over a 3 to 5 year timeframe to give the domestic industry enough time to adjust to the changes. In the initial stage FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3 to 5 years depending on the growth of the sector. FDI cap below 49 per cent (i.e., 26 per cent) would not bring in the desired foreign investment collaboration. Current FDI policy allows 100% FDI in Cashand-carry wholesale formats and 51% FDI is allowed in single brand retailing. However, the regulations have been interpreted as guiding to a blanket ban on foreign investments in the sector. Thus, even investments by financial investors like FIIs and PE funds are prohibited, limiting the flow of capital required for the growth of the sector. A clarification of issues will enable investments by financial investors in the retail sector. This can be done by allowing investments by investors such as FIIs, Venture Capital Funds and other financial investors in the sector. FDI in Retail trading should be opened up to substantially improve productivity and distribution system through modern format retailing. The government should come out with a policy statement laying down the roadmap for modern retail and allowing foreign investment in retail. If FDI in Retail industry is allowed, it will help domestic players to capitalise MNCs players supply chains and distribution network experiences. The grant of industry status will help companies borrow at lower costs, and will also bestow them fiscal incentives etc. Furthermore, the country has benefited from large foreign investment flows in recent years. These flows, especially FDI, need to be encouraged through an appropriate policy regime. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. 'FDI in retailing is the need of the hour'
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THE debate on foreign direct investment (FDI) in retail is heating up. Once again, the ruling Government and its allies are in sharp disagreement. What is the debate about? The opposition to FDI in retail rests on several planks. One, the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs. Two, the

global retailers would collude and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers.
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Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. Three, it would lead to lopsided growth in cities, causing discontent and social tension elsewhere. Before evaluating these apprehensions, it should be recognised that even the Left is not against all kinds of FDI in retail. It is in favour of selectively allowing FDI in food, dairy and grocery segments of retail trade. In other areas such as readymade garments and various industrial consumer goods, it would allow only big domestic retailers to compete with small local kiranas. Even when FDI is to be allowed in retail food and grocery sectors, it would like to put a cap on foreign ownership. In other words, foreigners if they want to enter will have to take local partners to start with. Once the local partners and other local players learn by doing, the FDI cap can be raised gradually. Foreigners can be allowed to set up 100 per cent foreignowned retail chains only after the local players are able to muster enough capital, experience and expertise to compete with established global giants. It is interesting to note that the Left approach to the issue broadly follows the Chinese model. China first allowed FDI in retail in 1992. The initial FDI cap was 26 per cent. It took China 10 years to raise the limit to 49 per cent. The 100 per cent foreignowned retail stores were allowed only from 2004. Further, foreign chains were initially permitted to set up stores only in a few select cities. Local retailers were officially encouraged to become big by mergers and acquisitions so that they would be in a position to compete with big global players. In other words, China provided infant industry protection to domestic retailers, which was gradually reduced as the local players gathered strength. The supporters of FDI in retail see many advantages. The biggest benefit, according to them, would flow from higher exports. They point to the Chinese experience. The global retailers taken together buy about $60 billion of goods each year from China for exports. Contrast this with India where less than $1 billion of exports are accounted for by global retailers (mostly metro dairy farm). Clearly, the scope of exports through the global retailers is enormous, indeed. However, one may ask: Can Wal-Mart or Carrefour not source products from India, even if they are not allowed to set up stores here? Though in principle that is possible, in reality, things do not work out that way. A global chain would buy large quantities for exports on a sustained basis only when it establishes a close linkage with the local market and suppliers. This happens after they open local stores. By being continuously close to local suppliers and customers, they are in a better position to control and monitor the entire supply chain including the designing of products, the quality of inputs, the manufacturing process, the quality of output, the standardisation, labeling and packaging, transportation, warehousing, the distribution network, changing product mix quickly in response to changing global fashions and

establishing the right kind of captive suppliers who would not be selling to their competitors.
y

The supply chain and the infrastructure, which they would develop for their local stores, would yield significant cost economies when it is also used to procure supplies for their global needs. That is why Wal-Mart sources some $18 billion of goods from China for their global operations. But this happened only after it was allowed a substantial presence in the Chinese local retail market. How about the potential job loss in local kiranas? True, small retail stores are an important source of jobs, providing about 7 per cent of the total employment in India. Moreover, they are providers of employment of the last resort. Anyone without a job can set up a local retail outlet. However, India is not an integrated homogeneous market; it is a hierarchy of markets catering to people of many different income levels and tastes. For example, both Sony and Santosh can coexist, catering to market segments. Entry of sophisticated branded products affects the unbranded mass market only marginally in a vast poor country such as India. Moreover, in malls where the large retail chains set up their stores, typically, there will also be many small shops which will attract people. Further, the street-corner shops will have some advantages over big stores located many miles away in shopping plazas. In India, transportation and parking are big problems for people who want to visit shopping malls. For them, it is more convenient and cost-effective to purchase many of their daily requirements from the neighbourhood stores, especially as these establishments stock goods that are in particular demand in the locality. Hence, the pop-and-mom street corner shops can very well survive. The benefits from greater exports would be particularly high in the farm sector. Right now, there is a tremendous amount of wastage and value loss of agricultural products due to lack of storage, refrigeration, transportation and processing facilities. As a result, farmers' price realisation remains low while the consumers in the cities end up paying a high price. Given the fiscal problems of the government, it is too much to expect it to build the required infrastructure. To the extent the large retailers establish a direct linkage with the farmers by cutting out many layers of middlemen, develop the processing facilities and export the products to meet their global requirements, farmers would get better prices and bigger markets while the consumers would benefit in terms of lower prices, better quality and greater variety. The resultant rural prosperity may open up markets for other industrial goods and help a more balanced regional development as also job creation in other sectors. Similar gains would flow from higher exports when the global chains are allowed in other sectors such as readymade garments. As for monopolistic pricing practices, the best safeguard would be in permitting all global chains to set up shops. The competition among them (as has happened in the automobile industry) would ensure better prices for consumers and suppliers alike.

Thus, the benefits from higher exports are likely to offset any direct job loss in the local kiranas as result of competition from big global retailers. Anyway, if the domestic big players are allowed to operate, the job loss problem for the small shops would remain, while the benefits from larger exports would not be there. So, clearly, if big players are to be permitted in retail, this must extend to FDI. Otherwise, the full range of benefits will not be realised. Of course, some lead time can be provided to the local players to consolidate their position before they face full-fledged competition from established global players. But, then, temporary protection should be really temporary. The Government must make a clear commitment to the time-frame over which protection from foreign competition would be removed gradually.

Table: Multi-brand FDI Retail FDI Policy in Limits other countries Country China 100%

Benefits

Remarks

First permitted in 1992 with Impressive growth foreign ownership restricted to 49%, in retail and progressively lifted and now no wholesale trade restrictions Over 600 hypermarkets opened between 1996 and 2011 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

Thailand

100%

Referred to a country where FDI Growth in agrohad an adverse effect on local processing retailers industry Has a limited capital requirement for retail and wholesale outlets

Russia

100%

Supermarket revolution took place in 2000s Heavy growth registered

Indonesia

100%

Modern retail took off in 1990s

No limit on number of outlets Matahari is leading chain

Brazil, Argentina, Singapore and Chile allow 100% FDI in retail sector while Malaysia permits FDI to a certain limit Source: Press Information Bureau Bibliography Websites :y y y y y y y

www.Legalserviceindia.com www.Scribd.com www.rbi.org.in www.dipp.nic.in www.retailguru.com www.ecomomicstims.com www.ibef.org

Reports/ Research Papers  INDIAN RETAIL INDUSTRY: An Update: Relaxation of FDI norms for the Indian Retail Sector, albeit continues to face political roadblocks, DECEMBER 2011  A. FOREIGN DIRECT INVESTMENT IN INDIAN RETAIL SECTOR: STRATEGIC ISSUES AND IMPLICATIONST. Kearneys Report on Indian Retail, 2008  Dr.R.KBalyan FDI in Indian Retail- Beneficial or Detrimental-research paper  Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search  Dipakumar Dey-Aspects of Indian Economy-Google search  FDI in Retail Sector in India, Department of Consumer Affairs, Ministry of Consumer Affairs, Public and Food Department, Government of India.  U.S. Department of Labour, Bureau of Labour Statistics. http//stats.bls.gov/iag/whole  Bajpai and Das Gupta (2004) 'Multinational companies and FDI in China and India'  CGSO Working paper no. 2, January. The Earth Institute of Columbia University.  Palmade, V. and Andrea Anayiotas (2004) "Foreign Direct Investments Trends :  Looking Beyond the current gloom in Developing Countries". Public Policy Journal, September 2004.  Association of Traders of Maharashtra v. Union of India, 2005 (79) DRJ 426  Hemant Batra, Retailing Sector In India Pros Cons (Nov 30)  Discussion Paper on FDI in Multi Brand Retail Trading, Sarthak Sarin, (Nov 23, 2010)  Foreign Direct Investment in Retail Sector Nabael Mancheri, Indias FDI policies: Paradigm shift, http://www.eastasiaforum.org/2010/12/24/indias-fdi-policiesparadigm-shift