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Foreign Direct Investment

in Indian Retail Sector


By:
Santosh Sahu
Rohit Tripathi
Sandeep Singh
Introduction
• The Retail Sector is the largest sector
in India after agriculture,
accounting for over 10 per cent of
the country’s GDP and around 8 per
cent of the employment.
• India has the most unorganized retail
market in the world. Most retailers
of the unorganized retail market
have their shop in the front and
house at the back.
Conti….
• Currently, the organized retail sector
accounts for only 5 per cent
indicating a huge potential market
opportunity.
• The Retail Industry in India is today
amongst the fastest growing
industries with several players
entering the market.
•  India is being seen as most
attractive market by retail investors
Urban Market
• According to a study by the McKinsey
Global Institute (MGI), Indian
incomes are likely to grow three-
fold over the next two decades and
India will become the world's fifth-
largest consumer market by 2025.
• About 61 per cent of total urban
income comes from households
that can be classified as middle
class—earning between US$ 1,493
and US$ 9,955 a year.
Retail Sector in Urban
Market
• According to a report by McKinsey,
India's overall retail sector is likely to
grow to US$ 419.93 billion by 2015.
• The turnover of the organised retail
segment in India is pegged at around
US$ 30 billion. It is expected to reach
US$ 55- 60 billion by 2011.
• In urban India, modern retail is likely to
grow from the current 9.6 per cent of
total retail to 26 per cent in the next
five years, as per Technopak Advisors.
Retail in Rural Market
• The rural retail market is currently estimated at
US$ 112 billion, or around 40 per cent of the
US$ 280 billion retail market.
• Major domestic retailers like AV Birla, ITC, Godrej,
Reliance and many others have already set up
farm linkages.

• Hariyali Kisan Bazaars (DCM) and Aadhars


(Pantaloon-Godrej JV), Choupal Sagars (ITC),
Kisan Sansars (Tata), Reliance Fresh, Project
Shakti (Hindustan Unilever) and Naya Yug
Bazaar are established rural retail hub.
Flashback
• The traditional format of retailing was of
neighborhood ‘KIRANA.’ With the
passage of time chain stores run by
Khadi and Village Industries
Commission came up.
• Textile companies like Raymonds,
Grasim, Bombay Dyeing etc
witnessed the opening of retail
chains.
• Later Titan by opening watches
showrooms successfully created an
organized retailing concept.
• Since late 1990’s, new companies like-
Big Bazaar, Food World, Subhiksha,
Trends in Indian Retail
• As the current retail sector in India is
reflected in expansive shopping
centers, multiplex- malls and huge
complexes offer shopping,
entertainment and food all under one
roof, the concept of shopping has
altered in terms of format and
consumer buying behavior, ushering
in a revolution in shopping in India.
• This has also contributed to large scale
investments in the real estate
sector with major national and global
players investing in developing the
Conti…..
• The trends that are driving the
growth of the retail sector in India
are…
• Low share of organized retailing.
• Falling real estate prices.
• Increase in disposable income and
customer aspiration.
• Increase in expenditure for luxury
items.

FDI in Retail Sector
• FDI in retail trading is not encouraged in any
form. Trading is permitted under automatic
route with FDI up to 51% provided it is primarily
limited to export activities, and the undertaking
is an export house/trading house/super trading
house/star trading house.
•  However, under the FIPB route 100% FDI is
permitted in case of trading companies for the
following activities..
• Export
• bulk imports with ex-port/ex-bonded warehouse sale.
• other import of goods or services provided at least 75%
of it is for procurement and sale of goods and services
among the companies of the same group and not for
third party use or onward transfer/distribution/sales.

A few foreign retail names appearing in the
market like Marks & Spencer, Benetton, Lifestyle
are in the nature of franchisee.
Regulation In FDI
• Current Government policy prohibits
foreign direct investment in retail
trading except for single brand retail
that fulfils the following conditions:
• Foreign equity does not go beyond 51
percent,
• Foreign Investment Promotion Board
(FIPB)/Department of Industrial Policy
& Promotion (DIPP) approval has been
issued,
• Products to be sold are of a ‘single
brand’ only,
Conti….
• Single brand products’ covers products
that are branded during
manufacturing,
• Additions to the product categories to
be sold under ‘single brand’ require
fresh Government approval.
Ø Intense debate currently centers on
what percentage of foreign
ownership should be allowed and
whether further liberalisation of the
FDI rules should occur, particularly
in the retail sector.
Benefits of Foreign
Investment
 Modern retail chains drive
efficiencies in the process of
distribution and invest in
infrastructure that would otherwise
be left to governments to build.Some
benefits that flow from foreign
investment in retailing are..
• Faster take up of modern retail
formats;
• Improved productivity and efficiency
of the retail sector;
Conti…
• Improved quality of employment;
• Investment in supply chain;
• Lower prices for consumers;
• Reduced number of intermediaries
because of closer integration of
suppliers, logistic service and
retailers;
• Linked local suppliers, farmers,
manufacturers to global markets;
• Improved product quality and service
for consumers;
Ø
WHAT WAS THE CRITERIA
FOR FDI
v Some time in 1991-92, the then Finance Minister and present
Prime Minister Dr. Manmohan Singhjireferred to certain
criteria for allowing Foreign Direct Investment. These
were :
v
1. Establishment of basic industries requiring huge capital and
advanced sophisticated technology.
2.
3. Infrastructure projects like electricity generation road building
etc.
4.
5. Projects which would generate employment

PRESENT CONDITION OF TRADERS
Fringe Benefit Tax
VAT
INEFFICIENT
ØLICENCES & PERMITS
ØINDUSTRIAL DISPUTE ACT
LABOURS
ØSHOP & ESTABLISHMENT ACT ØPREVENTION OF BLOCK MARKETING ACT
ØCOSUMER PROTECTION ACT ØANTI HOARDING & PROFEELING ACT
ØWEIGHT & MEASUREMENT ACT ØMONEY LENDING ACT
ØPACKAGING ACT ØPRODEND FUND ACT
ØPREVENTION OF FOOD ADULTRATION ACT ØMINIMUM WAGES ACT
ØESI ACT
ØGRATUITY ACT
ØBONUS ACT

ENTRY TAX

SERVICE TAX
FDI in Retail Trade

ANTI SOCAL ELEMENTS


OCTROI
WATER TAX

CENTRAL
EXCISE
POLITICIAL INTERFERANCE
PURCHASE TAX
SALES TAX INCOME TAX
POOR MARKET
CONDITION POWER PROBLEM

Cash Transaction Tax


INSPECTOR RAJ &
STAMP DUTY
Quarterly ‘C’ Form

WELTH TAX
HIGH BANK
CHARGES PROFESSIONAL TAX

New Naka Complex

ESSENTIAL COMMODITIES ACT


Supply Chain
• India has a particular need for foreign
investment in distribution on a large
scale.
• Approximately 20-40 percent of
perishable produce is wasted due to
multiple intermediaries, wastage
during transportation and storage,
high cycle times and an absence of
cold storage systems.
• The supply chain would be made more
efficient through economies of scale
in procurement and transportation,
bulk storage, trend forecasting and
M.N.C.
REGIME
CONTRACT FARMING

COLLECTION OF TO OWN FACTORY


AGRICALTURE PRODUCTS

TO CUSTOMER

TO OWN DEPT. STORE


Recommandation
• The retail sector in India is severely
constrained by limited availability of
bank finance.
• A National Commission must be
established to study the problems of
the retail sector and to evolve policies
that will enable it to cope with FDI.
• The proposed National Commission
should evolve a clear set of
conditionalities on giant foreign
retailers on the procurement of farm
produce, domestically manufactured
merchandise and imported goods.
Conti…
• Entry of foreign players must be gradual
and with social safeguards so that the
effects of the labour dislocation can be
analysed & policy finetuned.
• The government must actively encourage
setting up of co-operative stores to
procure and stock their consumer goods
and commodities from small producers.
• Quality regulation, certification & price
administration bodies can be created at
district and lower levels for upgrading the
technical and human interface in the rural
to urban supply chain.
Expected Investment
Sources says:

• Reliance Retail will invest US$5.5 billion by


2010-2011.
• Bharti-Wal-Mart will invest US$2.5 billion by
2015.
• Future Group (Pantaloon Retail) will invest
US$260 million by 2008.
• Metro AG is investing US$400 million over
the next three years.
• Targeting an emerging segment of night
shoppers, New Delhi-based round-the-
clock convenience chain Twenty Four
Seven Retail Stores Pvt. Ltd plans to
Conclusion
• Investing in organised retail sector in
India is a beneficial scheme for an
investor. The Retail Industry is
going to be the next boom industry
after I.T.
THANK YOU