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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 growalmost three times its current levels to $660 billion by 2015. However, in spite of the recentdevelopments 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 muchslower 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 theFDI limit in single brand retail in India to 100% (from the existing 51%) has come at a timewhen global retailers are facing severe problems in their home countries because of saturatedmarkets and thus scouting for new emerging and virgin markets, while domestic players, onthe 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 offunds invested, local sourcing, cities being opened for initial roll-out, etc. Also, oppositionfrom certain State Governments and political parties raises significant hurdles for effectiveimplementation 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 andcurtailment of inflation as the perceived benefits. While this long awaited move is notexpected 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 thewake of the current opposition by several political parties, which if persists, may pose amajor roadblock in the entry of the foreign retailers in India. Besides restricting the numberof cities these retailers can operate in, it could also lead to problems in creating supply chainefficiency. 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 beencouraged. At the same time, local retailers (kirana stores) are expected to remain a keyelement in the ecosystem in the foreseeable future, with their ability to offer door step serviceand 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 thepros and cons of FDI in the retail industry.

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    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 betterlogistical support for the exploding Indian retail

    Minimum 30% of the local sourcing requirements of manufactured or processedgoods from small and medium enterprise; In respect of proposals involving FDI

    beyond 51%, 30% sourcing would mandatorily have to be done from domestic SMEsand cottage industries artisans and craftsmen

    Retail outlets to come up in cities with more than 10 lakh population as earmarked by2011 census, i.e. 53 cities that accounts for over 42% of total urban population will beeligible to have internationally renowned retail outlets; given constraints around realestate, 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 samebrand name internationally.

    Introduction

    The Indian retail industry is the fifth largest in the world. Retailing in India is one of thepillars of its economy and accounts for about 17% of its GDP. The Indian retail market isestimated to be US$ 550 billion and one of the top five retail markets in the world byeconomic 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 growingmarket demand, the industry is expected to grow at a pace of 25-30% annually. Today, theorganized retail market in India is estimated to be worth around $28 billion; and is projectedto grow by 10 times by 2020. The Indian retail industry is the most promising emergingmarket for investment. The total retail sales in India is expected grow from US$ 395.96

    billion in 2011 to US$ 785.12 billion by 2015, according to the Business MonitorInternational (BMI) India Retail Report for the second-quarter of 2011 which is based onstrong underlying economic growth, population expansion, the increasing wealth ofindividuals and the rapid construction of organised retail infrastructure are key factors behindthe forecast growth. With the expanding middle and upper class consumer base, there willalso be opportunities in India's tier II and III cities. The organized sector is expected to growto $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$ 27.67billion 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 isexpected 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, mobilehandsets 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

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    to account for more than 91 per cent of regional retail sales in 2012, and by 2015 their shareof the regional market is expected to be at least 93 per cent. BMI forecasted growth inregional retail sales at 75.2 per cent for 2012, an annual average of 14.9 per cent. Organizedretail 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 reporttitled '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 FrankIndia, during 2010-12 around 55 million square feet (sq. feet) of retail space will be ready inMumbai, national capital region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and Pune.Besides, between 2010 and 2012, the organized retail real estate stock will grow from theexisting 41 million sq. feet to 95 million sq. feet. Driven by the growth of organized retailcoupled with changing consumer habits, food retail sector in India is set to be more thandouble to US$ 150 billion by 2025, according to a report by KPMG. According to the reportStrong and Steady 2011 released by global consultancy and research firmPricewaterhouseCoopers (PwC), India's retail sector, which is currently estimated at aboutUS$ 500 billion, is expected to grow to about US$ 900 billion by 2014. India has also beenranked as the third most attractive nation for retail investment among 30 emerging markets bythe 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 thethird largest share at US$ 2.7 billion in 2015, according to a report released by research firmOvum 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 gettingorganized 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 itis important for retailers to secure a distinctive position in the market place based on valuesrelationships or experience. Also, as the organised retail space in India continues to grow, it islikely 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. Onesuch initiative includes assessing the prospects of foreign players in this sector throughForeign Direct Investment. The advent of FDI in India was witnessed during the end of1990s when the Indian national government announced a number of reforms which aimed athelping in the process of liberalization and deregulation of the Indian economy. Since itsinception there has been a remarkable surge in the FDI inflows in the country. Moreover, FDIfor 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 ForeignInvestment Promotion Board (FIPB).In recent years the destination sectors in FDI have

    become more varied. FDI inflows have shifted from infrastructure, natural resources andexport driven manufacturing to other areas such as retailing, tourism, construction and off

    shore services. Studies have shown that after liberalization; countries such as Brazil, Polandand 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 economyand inter alia has resulted in increased capital flow, improved technology, notable

    management expertise and favourable access to international markets. Despite all theadvantages that come along foreign investment in any sector of the economy, it is to be notedthat FDI in India is not liberally allowed in all sectors including the retail sector, where FDI iseither absolutely forbidden on the grounds of national interest, or, other sectors where the

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    existing and notified sectorial policy does not permit FDI beyond a ceiling. In 1997, theIndian retail sector witnessed the first footprints of FDI with 100% FDI being permitted incash & carry wholesale trading under the government approval route, subsequently broughtunder 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 tillrecently. 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 ofSecretaries (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, StateGovernments have the prerogative to disallow the same in their respective states. Mountingopposition by several political parties and State Governments have raised hurdles in theeffective implementation of the key reform measure.

    Foreign direct investment (FDI) inflows between April 2000 and January 2011, in single-brand retail trading, stood at US$ 128.34 million, according to the Department of IndustrialPolicy and Promotion (DIPP).

    Carrefour, the worlds second-largest retailer, has opened its first cash-and-carry storein India in New Delhi. Germany-based wholesale company Metro Cash & Carry(MCC) opened its second Wholesale Centre at Uppal in Hyderabad, taking to itsnumber to six in the country.

    Jewelry retail store chain Tanishq plans to open 15 new retail stores in various partsof the country in the 2011-12 fiscal.

    V Mart Retail Ltd, a medium-sized hypermarket format retail chain, is set to open 40outlets over the next three years, starting with 13 stores in 2011, in Tier-II and Tier-IIIcities.

    RPG-owned Spencer's Retail plans to set up 15-20 new stores in the country in 2011-12.

    Spar Hypermarkets, the global food retailing chain of the Dubai-based LandmarkGroup, expects to start funding its India expansion beyond 2013 out of its local cashflow 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 thenext phase of expansion.

    Bharti Retail, owner of Easy Day storesupermarkets and hyper-martsplans toinvest 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' Donutsfinalize 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. GucciGroup NV, Netherlands is investing US$ 225,867 to pick up 51 per cent stake in theventure.

    Australia's Retail Food Group is planning to enter the Indian market in 2012. It hasambitious 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 Indianoperations to be bigger than their Australian business.

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    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 Lifestylestores for retailing apparel, cosmetics and footwear, besides 15 Home Centres that sellhome furnishing goods.

    Watch maker, Timex India, is looking at increasing its presence in the country byadding 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 millionand 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 nextthree years. It also plans to concentrate on online buyers.

    Pantaloon Retail India (PRIL) is planning to invest US$ 77.88 million this fiscal toadd up to 2.4 million sq ft retail space at its existing operations. Pantaloon Retail isalso 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 155Big Bazaar stores by 2014, increasing its total network to 275 stores.

    Aditya Birla Retail which operates the More chain of supermarkets and hyper-marketsis 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 andhypermarkets.

    British high street retailer, Marks and Spencer (M&S) plans to significantly increaseits retail presence in India, targeting 50 stores in the next three years. M&S currentlyoperates 17 stores in India through a joint venture (JV) with Reliance Retail.

    Leading watchmaker Titan Industries Limited plans to invest about US$ 21.83 millionfor opening 50 premium watch outlets Helios in next five years to attain a sales targetof US$ 87.31 million.

    Chinese retail major, Yishion has entered the Indian market and plans to have at least125 points of sales, including exclusive stores and multi-brand outlets, across India by2012.

    Road Ahead

    According to industry experts, the next phase of growth is expected to come fromrural markets.

    The organised modern retail segment in India will grow by over three times during thenext five years (from 2011), to reach a figure of US$ 80 billion, as per consultancyfirm, Technopak. India's modern consumption level will double within five years toan annual figure of US$ 1.5 trillion from the present level (taking 2011 as thereference 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$ 4.06billion-US$ 4.51 billion and is expanding rapidly driven by the growing aspirations ofyouth 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 hastwo stores with Hyderabad and will have few more by next year, Zegna, anotherItalian brand, known for its formal wear and quality suits, is also expanding andDiesel will have seven stores in the country.

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    Ramesh Tainwala, who brought global luggage maker Samsonite into the country, hasbought 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 presencein the booming retail space.

    In addition, the direct selling fast moving consumer goods (FMCG) segment isgrowing faster in Uttar Pradesh compared to markets in other states. Segment leaderAmway 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)Retail sector is the largest contributor to the Indian GDP after agriculture.(b)The retail sector provides 14% employment(c) India has world largest retail network with 14 million outlets(d)Total market size of retailing in India is around U.S $ 500 billion(e)Current share of organized retailing is just 2% which comes around to $ 10 billion(f) Organized retail sector is growing @ 28% per annum.

    The Indian retail sector is very different from that of the developed countries. In thedeveloped countries, products and services normally reach consumers from themanufacturer/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 developfranchises. 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 byfar the prevalent form of trade in India constituting 98% of total trade, while organisedtrade accounts only for the remaining 2%. Nonetheless the organized sector is expected togrow 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 toUS$ 833 billion by the year 2013. It is further expected to reach US$ 1.3 trillion by the year2018 at a CAGR of 10%. As the country has got a high growth rate, the consumer spendinghas 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 isexpected to grow further in the future days. By the year 2013, the organized sector is alsoexpected to grow at a CAGR of 40%. The key factors that drive growth in retail industry areyoung demographic profile, increasing consumer aspirations, growing middle class incomesand improving demand from rural markets. Also, rising incomes and improvements ininfrastructure are enlarging consumer markets and accelerating the convergence of consumertastes. Liberalization of the Indian economy, increase in spending per capita income and theadvent 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

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    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, theInternet revolution is making the Indian consumer more accessible to the growing influencesof 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 underthe 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 thecountry. 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 thestagnant manufacturing sector fails to absorb the fresh entrants into the job market, the retailsector 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 isoverwhelmingly swarmed by the unorganized retailing with the dominance of small andmedium 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 whooperate at a strictly local level and there is no barrier to entry, given the structure and scaleof these operations. The tax structure in India favours small retail business. Organized retailsector 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 ITmanagement is absent in retail sector. This lack of adequate infrastructure facilities, lack oftrained work force and low skill level for retailing management further makes the sector quitecomplex. 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 industrywill depend mostly on external factors like Government regulations and policies and realestate 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 fromrecession, 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 beenovercautious in lending. Thus, retailers are witnessing an uphill task in terms of wooing

    consumers, despite offering big discounts. Additionally, organised retailers have been facinga difficult time in attracting customers from traditional kirana stores, especially in the foodand grocery segment. In retail sector, Automatic approval is not allowed for foreigninvestment. There are restrictions on Foreign Direct Investment imposed in order to protectthe 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. Theretail trading in India constitutes as one of those few sectors where FDI is not freely andhealthily allowed. Although, FDI is fully admissible in cash and carry wholesale (back-endretail), 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 hasresulted 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

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    corporates, to offer their services for back-end operations like sourcing, logistics, inventorymanagement, among others, for front-end, multi-brand retail operations of such corporates.While in some sectors the restrictions imposed by the government are comprehensible; therestrictions 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 theoverall 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 retailsector is still aloof from progressive and ostentatious development. This dismal situation ofthe retail sector undoubtedly stems from the absence of an FDI encouraging policy in theIndian 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 inIndia has been much slower as compared to rest of the world. Over a period of 10 years, theshare of organised retailing in total retailing has grown from 10 per cent to 40 per cent inBrazil 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 directinvestment is freely not allowed. Within the country, there have been protests by tradingassociations and other stakeholders against allowing FDI in retailing. On the other hand, thegrowing market has attracted foreign investors and India has been portrayed as an importantinvestment destination for the global retail chain. The need for larger FDI is because India isat a stage where it needs US investments, technology, and management policies to sustainand enhance its economic growth. There are other necessities which a larger FDI will cater toviz., employment generation, income generation, technology transfer, and economic stability.Hence, the need for larger FDI is a pressing situation these days in India. Foreign countriesare well aware of lately there has been a remarkable surge in the demand for the liberalizationof 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 evergrowing but conserved Indian retails sector, reduction in tariff, cheaper real timecommunications, 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 hardlyany local capital left in the capital markets as a consequence of global financialmeltdown, and

    (ii) 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.

    Major Attractions for

    Global Retailers in India

    Retailing is being perceived as a beginner and as an attractive commercial business fororganized business i.e. the pure retailer is starting to emerge now. Indian organized retailindustry is one of the sunrise sectors with huge growth potential. Total retail market in Indiastood 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 toreach 10% by 2012. AT Kearney, the well-known international management consultancy,recently identified India as the third most attractive retail destination globally from among

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    thirty emergent markets. It has made India the cause of a good deal of excitement and thecynosure of many foreign investors eyes. With a contribution of an overwhelming 17% tothe 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 hugeemployment opportunities in retail sector in India. Indias retail industry is the second largest

    sector, after agriculture, which provides employment. According to Associated Chambers ofCommerce and Industry of India (ASSOCHAM), the retail sector will create 50,000 jobs inthe next few years. As per the US Census Bureau, the young population in India is likely toconstitute 53per cent of the total population by 2020 and 46.5 per cent of the population by2050 much higher than countries like the US, the UK, Germany, China etc. Indiasdemographic scenario is likely to change favourably, and therefore, will most certainly driveretail sales growth, especially in the organised retail segment. Even though organised retailershave a far lesser reach in India than in other developed countries, the first-mover advantageof some retail players will contribute to the sectors growth. India in such a scenario presentssome 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 andinvestors. In addition to these, improved living standards and continuing economic growth,friendly business environment, growing spending power and increasing number of consciouscustomers aspiring to own quality and branded products in India are also attracting to globalretailers 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 thoseexpected for the next decade coupled with the changing consumer trends such as increaseduse of credit cards, brand consciousness, and the growth of population under the age of 35 arefactors that encourage a foreign player to establish outlets in India. India thus continues to beamong 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$ 129million, according to the Department of Industrial Policy and Promotion (DIPP). The IndianCouncil of Research in International Economic Relations (ICRIER), a premier economicthink tank of the country, which was appointed to look into the impact of BIG capital in theretail sector, has projected the worth of Indian retail sector to reach 596 billion by 2011-12and ICRIER has also come to conclusion that investment of big money in the retail sectorwould in the long run not harm interests of small, traditional, retailers. A number of globalretail giants are thus eyeing this opportunity to swarm this seemingly nascent sector andexploit its unexplored potential. However, it is not out of place to mention here that thegovernment policies towards FDI are the only hindering factors that do not make this a fairytale for foreign players.

    Challenges forGlobal Retailers in Indian RetailSector

    History has witnessed that the concern of allowing unrestrained FDI flows in the retail sectorhas never been free from controversies and simultaneously has been an issue for unsuccessfuldeliberation ever since the advent of FDI in India. Where on one hand there has been a strongoutcry 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 ofunrestrained FDI have always fiercely retorted by highlighting the adverse impact, the FDI inthe 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 sectoroppose the same on various grounds, like, that the entry of large global retailers such as Wal-

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    Mart would kill local shops and millions of jobs, since the unorganized retail sector employsan enormous percentage of Indian population after the agriculture sector; secondly that theglobal retailers would conspire and exercise monopolistic power to raise prices andmonopolistic (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 industrialassociations have argued against FDI in retailing due to various reasons. It is generallyargued that the Indian retailers have yet to consolidate their position. The existing retailingscenario 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. Theexamples of South East Asian countries show that after allowing FDI, the domestic retailerswere marginalised and this led to unemployment. Another apprehension is that FDI inretailing can upset the import balance, as large international retailers may prefer to sourcemajority of their products globally rather than investing in local products. The global retailersmight resort to predatory pricing. Due to their financial clout, they often sell below cost in thenew markets. Once the domestic players are wiped out of the market foreign players enjoy amonopoly 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, especiallysmall retailers, are at a disadvantageous position compared to foreign retailers who haveaccess to International funds at lower interest rates. High cost of borrowing forces thedomestic players to charge higher prices for the products. Another argument against FDI isthat FDI in retail trade would not attract large inflows of foreign investment since very littleinvestment is required to conduct retail business. Goods are bought on credit and sales aremade on cash basis. Hence, the working capital requirement is negligible. On the contrary;after making initial investment on basic infrastructure, the multinational retailers may remitthe higher amount of profits earned in India to their own country. The hope for theliberalization of the retail sector and an unrestrained reception to FDI in retail trading withoutany restrictions on the number of brands, outlets or location of stores got the biggest blowwhen the parliamentary standing committee on commerce on 8th June, 2009, while

    presenting a picture of gloom, recommended a blanket ban on domestic corporate and foreignretailers from entering retail trade and also suggested restrictions to bar organized retail firmsfrom setting up malls and selling other consumer products. The report cautioned that allowingorganized players, domestic and as well as foreign, to enter retail trade would result in thedestruction of the economic foundation of the small retail supply chain. Moreover, the

    parliamentary committee has also suggested putting in place a regulation, a NationalShopping Mall Regulation Act, to ensure that cartelization does not take place, and regulatethe fiscal and social aspects of the retail sector. The committee observed that Consumerswelfare would be side lined, as the big retail giants by adopting a predatory pricing policywould fix lower price initially, tempting the consumers. After wiping out competition fromlocal 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 bigcorporates for making direct bulk purchases would initially pay attractive prices to farmersand cause gradual extinction of `mandis and regulated market yards. It is to be noted thatthough the recommendation of the panel are not binding upon the Government; the samehave outrageously done the intended harm. In other words, the direct result of the media hypeof the recommendations of the Panel was the abrupt stoppage of all the progressiveinvestment plans of various corporate giants all across the globe, who were desirous ofinvesting 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

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    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 largestretailer, Wal-Mart, opened a global sourcing office in Bangalore. In November 2006, itannounced 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 establishmentof 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 areallowed in India. It is submitted that at present, 100% FDI is permitted under automatic routein the wholesale cash and carry trading. Unfortunately, the iconic $ 31-billion Scandinavianhome products giant, IKEA, had to cancel its plans to set up 25 showrooms across thecountry foreign investment of around $ 1 billion. In an internal communication, IKEA told itsstakeholders 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 UK-based Currys and Sports Direct International could also be some of the foreign retail playersto 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 ofrecommendations by the Parliamentary Panel on Commerce, which has opposed furtherleeway 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 governmentand with no final affirmative or negative decision on the same whatsoever. Thus, it is to benoted that even though no decision has been taken by the government on therecommendations given by the panel; the direct ramifications of the recommendations have

    been evident considerable loss of FDI, managerial expertise, and jobs for the Indian retailindustry along with sacrifice of the consumers interest and welfare.

    Impact And Role Of Fdi In Indian RetailSector

    In the fierce battle between the advocators and antagonist of unrestrained FDI flows in theIndian 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 inrelation to the interests of retailers. Interestingly, in contradiction to the recommendations ofthe 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, theEconomic 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 wouldrequire 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 otherorganised 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 facilitatetransition. Most modern organised retailers, who have been asking for removal of ban on FDIin 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 ofunrestrained FDI, the Investment Commission in July, 2006, suggested that 49% FDI beallowed in the Indian retail sector without any restrictions on the number of outlets orlocation of stores. The Commission opined that that foreign investment would help inimproving the retail and supply chain infrastructure, and generate large-scale employment inthe 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 efficientservice. The recommendations of the Investment Commission proved to be very promising

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    and paved the way for a positive feedback to the global retailers towards the Indian retailsector (Business Insights International 2009). Thus, FDI in retailing is favoured on a numberof grounds. The global retailers have advanced management know how in merchandising andinventory management and have adopted new technologies which can significantly improve

    productivity and efficiency in retailing. The entry of large low-cost retailers and adoption ofintegrated 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 customerservices. They promote the linkage of local suppliers, farmers and manufacturers, no doubtonly those who can meet the quality and safety standards, to global market and this willensure a reliable and profitable market to these local players. As multinational players arespreading their operation, regional players are also developing their supply chaindifferentiating their strategies and improving their operations to counter the size ofinternational players. This all will encourage the investment and employment in supply chainmanagement. Moreover, joint ventures would ease capital constraints of existing organisedretailers and FDI would lead to development of different retail formats and modernization ofthe sector. Therefore, FDI in retail would undoubtedly enable India Inc to integrate itseconomy with that of the global economy. FDI will help to overcome both the lack ofexperience 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 wouldminimize 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 ofadulteration, short weighing and substandard goods (Bhukta 2009).FDI will not just provideaccess to larger financial resources for investment in the retail sector but simultaneously willrationally allow larger supermarkets, which tend to become regional and national chains

    (i) to negotiate prices more aggressively with manufacturers of consumer goods andthus pass on the benefit to consumers; and

    (ii) to lay down better and tighter quality standards and ensure that manufacturersadhere to them.

    Moreover, consumer goods manufacturers generally prefer supermarkets since they not justoffer a wide range of their products and services, so the consumer can enjoy single-pointshopping, 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 awell-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 withadvent 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 neededinfrastructure facilities like parking lots, coffee shops, ATM machines, etc. It can thus besafely contended that with the possible advent of unrestrained FDI flows in retail market, theinterests of the retailers constituting the unorganized retail sector will not be gravelyundermined, 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 tothe fact of their convenient location near the residential societies and to the fact of the distantlocation of the mega stores and malls. The benefits of larger FDI can thus be tangibly felt inthe domains pertaining to technological advancements, generation of export, productionimprovements, 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 isexperiencing, some Indian companies are doing better than even the multinational

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    corporations. Allowing healthy FDI in the retail sector would not only lead to a substantialsurge in the countrys GDP and overall economic development, but would inter alia also helpin 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 massesemployed 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 inretail 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 precedenceover 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 logisticsinfrastructure; political roadblocks could hamper potential investments. This long impendingapproval includes a set of riders for the foreign investors, aimed at ensuring the foreigninvestment makes a genuine contribution to the development of Indian infrastructure andlogistics, 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. Back-end infrastructure will include capital expenditure on all activities, excluding that on front-end 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 capitalrequirement of US$ 100 million is unlikely to be an issue for the large foreign players vyingto enter India in the supermarket/ hypermarket segment, it could make it difficult for foreigninvestors planning to enter specialty formats such as music, mobile, electronics goods, amongothers, as these formats require relatively lower investments. Further, the approvalrequirements from State Governments could limit the cities that FDI backed retailers canoperate 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 thenumber of cities these retailers can operate in, it could also lead to problems in creatingsupply chain efficiency. For the domestic retailers, reforms at structural level would berequired for partnering with foreign companies for the purpose of entering the states whereFDI 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 ofemployment, adverse impact on traditional retail and rise in imports from cheaper sourceslike 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 addressinflation concerns through price reductions facilitated by the extent of reduction in tradingmargins 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 retailchains like Walmart, Tesco and Carrefour, who have been vying to be a part of the Indiaretail growth story and that the entry of these companies in multi-brand retail would lead tooligopolistic pressures on the farmers and consumers at the same time throwing smallretailers out of business. Nonetheless, proponents hint at creation of jobs across front-end and

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    back-end operations, whether direct or indirect, and both in urban and rural areas. But thereare concerns over talent crunch being faced by the sector. There has not been adequateinvestment in talent development and thus it would be difficult for retail companies to getqualified manpower, requiring them to invest significantly in up-gradation of skill sets.

    Parameters Key concerns raised by

    oppositionparties

    Key perceived benefits

    Capital Infusion - Would enable cash-starveddomestic retailers todeleverage their overlystretched balance sheets by

    plugging the gap betweencapital required for growthand the ability of local

    players to raise capital

    Local incumbents Adverse impact on domestic

    small and unorganizedretailers as the move wouldlead to unfair competitionand ultimately result in large-scale exit of domesticretailers, especially the smallfamily managed outlets

    Local incumbents to

    benefit from technical inputs,investments in supply chain,and investments in humancapital

    There could be a potentialshift in bargaining power ofthese retailers with FMCGcompanies (at present, largeFMCG players are better

    positioned vis--vis retailersin discussing terms of trade)

    once these retailers becomelarge and attain size and scale

    Supply chain improvement Disintegration of establishedsupply chains byestablishment of monopoliesof global retail chains,leading to their control on

    both ends of the supply chain

    Improvement of supplychain/ distributionefficiencies, coupled withcapacity building andinduction of moderntechnology, which will helparrest wastages (in the

    present scenario, lack ofinvestment in logistics andinadequate storage facilitieshave been creatinginefficiencies in the foodsupply chain, leading tosignificant wastages).Though FDI is permitted incold chains to the extent of100% through the automaticroute, in the absence of FDI

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    in front-end retail,investment flows into thissector have been insignificant

    Inflation/ Consumer Welfare Side lining of consumerswelfare due to predatory

    pricing dictated by retailgiants on account of theirmonopolistic position

    The move to open up retailsector to FDI will reduce

    inflationary pressures as

    Farmers will be able todirectly sell their produce toretailers, thereby reducingmargins for middlemen

    Investments in cold-storage and warehousing willease supply-side pressuresthat have driven inflationclose to a double-digit

    Improved supply chaincontributes to savings in foodwastages which has beenrampant on account ofinadequate infrastructureFurther, consumers wouldalso benefit from widerchoices and better quality

    products

    Farmers Farmers to get affected onaccount of non-remunerative

    prices paid to them by thesecorporate giants

    Improvement in productivityand realizations for farmers

    through direct sales to theselarge organised players, thuseliminating the marginsoutflow to the middle-menwho have been dominatingthe value chain, and whose

    pricing lacks transparency

    Employment Generation Entry of global retail giantswill lead to uneven playingfield, resulting in large scalelabour displacement in the

    retail sector

    The opening of the sectorto FDI is expected to result increation of over 10 million

    jobs (including 6 million jobs

    in the logistics sector alone)in three years, across agro-

    processing, sorting,marketing, logistic

    management and the front-end retail business

    Expectations are that itwould create jobs not only in

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    the retail industry but also inrelated areas like real estateand construction

    Source: Press Information Bureau, ICRAThis decision to widen the retail sectors doors has come at a time when global retailers arefacing headwinds in their home countries and thus scouting for new emerging markets, whiledomestic players, on the other hand, are burdened with piling debt. With some of the majorforeign retailers like Metro, Walmart, Tesco already having presence in the Indian retailsector through the cash and carry route or through tie-ups with domestic retailers for supplychain 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 Tescofor a front-end joint venture. In addition, with full ownership resting with the foreign retailerin the single brand retail segment, India can expect entry of new global brands in thesegment.

    y FDI's benefit from the view if the customers1. 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

    2. The larger supermarkets, which tend to become regional and national chains, cannegotiate prices more aggressively with manufacturers of consumer goods and

    pass on the benefit to consumers

    3. They can lay down better and tighter quality standards and ensure thatmanufacturers adhere to them.

    4. The supermarkets offer a wide range of products and services, so the consumercan enjoy single-point shopping

    Back-endlogistics must for FDI inmulti-brand retail

    The government has added an element of social benefit to its latest plan for calibratedopening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreignretailers who first invest in the back-end supply chain and infrastructure would be allowed toset up multi brand retail outlets in the country. The idea is that the firms must have alreadycreated jobs for rural India before they venture into multi-brand retailing. It can be said thatthe 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 successfulexperiments in countries like Thailand and China; where too the issue of allowing FDI in theretail 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 thecommendable rise in the level of employment but also led to the enormous development oftheir countrys GDP. Moreover, in the fierce battle between the advocators and antagonist ofunrestrained 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 tobe considered and addressed while deliberating upon the captioned issue is the interests of

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    consumers at large in relation to the interests of retailers. It is also pertinent to note here thatit can be safely contended that with the possible advent of unrestrained FDI flows in retailmarket, the interests of the retailers constituting the unorganized retail sector will not begravely 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 utmostconvenience, 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 everysectors of Indian economy at one point of time or the other would be embraced byliberalization, privatization and globalization.FDI in multi-brand retailing and lifting thecurrent cap of 51% on single brand retail is in that sense a steady progression of thattrajectory. But the government has by far cushioned the adverse impact of the change that hasensued in the wake of the implementation of Industrial Policy 1991 through safety nets andsocial safeguards. But the change that the movement of retailing sector into the FDI regimewould 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 stakeis 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 andinventory management and have adopted new technologies which can significantlyimprove productivity and efficiency in retailing.

    Entry of large low-cost retailers and adoption of integrated supply chain managementby them is likely to lower down the prices.

    FDI in retailing can easily assure the quality of product, better shopping experienceand customer services.

    They promote the linkage of local suppliers, farmers and manufacturers, no doubtonly those who can meet the quality and safety standards, to global market and thiswill ensure a reliable and profitable market to these local players.

    As multinational players are spreading their operation, regional players are alsodeveloping their supply chain differentiating their strategies and improving theiroperations to counter the size of international players. This all will encourage theinvestment 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 arguedagainst FDI in retailing due to following reasons:

    Indian retailers have yet to consolidate their position. The existing retailing scenario ischaracterized by the presence of a large number of fragmented family owned

    businesses, who would not be able to survive the competition from global players.

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    The examples of south east Asian countries show that after allowing FDI, thedomestic 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 localproducts.

    Global retailers might resort to predatory pricing. Due to their financial clout, theyoften sell below cost in the new markets. Once the domestic players arewiped out of

    the market foreign players enjoy a monopoly position whichallows them to increaseprices and earn profits.Indian retailers have argued that since lending rates are much

    higher in India, Indian retailers, especially small retailers, are at a disadvantageouspositioncompared to foreign retailers who have access to International funds at lowerinterest 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 verylittle investment is required to conduct retail business. Goods are boughton credit andsales are made on cash basis. Hence, the working capital requirement is negligible. Onthe contrary; after making initial investment onbasic infrastructure, the multinationalretailers may remit the higher amountof 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 substantiallevel of economic and social development; each and every nation is trying to liberalize itseconomic policies in order to attract investments from not only, domestic players, but alsofrom magnates all across the globe. Consequently, people with generous reserves of funds, allaround 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 developmentstaking place in the global market and has emerged as one of the prime destinations for theinvestment of funds from an impressive number of foreign investors.

    In recent times the consumer are showing much greater confidence and in a due response theretail players in the market are veering towards aggressive expansion plan. Thesedevelopments are clearly signalling an affluent time for retail sector. As the organised retailspace 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 ancillariesand retail logistics to ensure sustained benefits. As a survival strategy, moves are on to allowFDI 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 advantagesof allowing unrestrained FDI in the retail sector evidently outweigh the disadvantagesattached to it and the same can be deduced from the examples of successful experiments incountries like Thailand and China; where too the issue of allowing FDI in the retail sectorwas 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 commendablerise in the level of employment but also led to the enormous development of their countrysGDP. Besides, it would also lead to inflow of latest technical knowhow, establishment ofwell integrated and sophisticated supply chains, availability of standard, latest and quality

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    products help in up gradation of human skills and increased sourcing from India. As Indiacapitalizes on the benefits of FDI, there will be more competition in the market at large andthe rural sector of the country will be in the process of reformation, thus bringing about asocio-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$ 50billion 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 ofliberalizing the Indian retail sector should be treaded cautiously in the wake of the fact thatinternational experience has shown that except for the huge profits raked in by thesupermarket chains, organized retail has been a lose-lose scenario for farmers, small tradersand 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 learnfrom the experiences of other developed and developing countries and develop its ownstrategies, 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 areexploiting the situation and are often entering the market and expanding their businessesthrough multiple routes and are operating in the country with more than one format ofretailing. The regulatory regime should address these issues. The entry norms should clearly

    state the approval requirements, conditions / restrictions if any imposed, etc. The governmentshould also strictly enforce the quality standards for local production and imports. Moreover,the Indian Council for Research on International Economic Relations (ICRIER) drafted areport which suggested that the opening up of the FDI regime should be gradual over a 3 to5 year timeframe to give the domestic industry enough time to adjust to the changes. In theinitial stage FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3to 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 allows100% FDI in Cashand-carry wholesale formats and 51% FDI is allowed in single brandretailing. However, the regulations have been interpreted as guiding to a blanket ban onforeign investments in the sector. Thus, even investments by financial investors like FIIs andPE funds are prohibited, limiting the flow of capital required for the growth of the sector. Aclarification of issues will enable investments by financial investors in the retail sector. Thiscan be done by allowing investments by investors such as FIIs, Venture Capital Funds andother financial investors in the sector. FDI in Retail trading should be opened up tosubstantially improve productivity and distribution system through modern format retailing.The government should come out with a policy statement laying down the roadmap formodern retail and allowing foreign investment in retail. If FDI in Retail industry is allowed, itwill help domestic players to capitalise MNCs players supply chains and distribution networkexperiences. The grant of industry status will help companies borrow at lower costs, and willalso bestow them fiscal incentives etc. Furthermore, the country has benefited from largeforeign investment flows in recent years. These flows, especially FDI, need to be encouragedthrough 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 significantlyencouraged.

    'FDI in retailingis the need of the hour'

    y THE debate on foreign direct investment (FDI) in retail is heating up. Once again, theruling Government and its allies are in sharp disagreement. What is the debate about?

    y The opposition to FDI in retail rests on several planks. One, the entry of large globalretailers such as Wal-Mart would kill local shops and millions of jobs. Two, the

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    global retailers would collude and exercise monopolistic power to raise prices andmonopolistic (big buying) power to reduce the prices received by the suppliers.

    y Hence, both the consumers and the suppliers would lose, while the profit margins ofsuch retail chains would go up. Three, it would lead to lopsided growth in cities,causing discontent and social tension elsewhere.

    y Before evaluating these apprehensions, it should be recognised that even the Left isnot against all kinds of FDI in retail. It is in favour of selectively allowing FDI in

    food, dairy and grocery segments of retail trade.

    y In other areas such as readymade garments and various industrial consumer goods, itwould allow only big domestic retailers to compete with small local kiranas. Evenwhen FDI is to be allowed in retail food and grocery sectors, it would like to put a capon foreign ownership.

    y In other words, foreigners if they want to enter will have to take local partnersto start with. Once the local partners and other local players learn by doing, the FDIcap can be raised gradually. Foreigners can be allowed to set up 100 per cent foreign-

    owned retail chains only after the local players are able to muster enough capital,experience and expertise to compete with established global giants.

    y It is interesting to note that the Left approach to the issue broadly follows the Chinesemodel. 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 foreign-owned retail stores were allowed only from 2004.

    y Further, foreign chains were initially permitted to set up stores only in a few selectcities. Local retailers were officially encouraged to become big by mergers andacquisitions so that they would be in a position to compete with big global players. Inother words, China provided infant industry protection to domestic retailers, which

    was gradually reduced as the local players gathered strength.

    y The supporters of FDI in retail see many advantages. The biggest benefit, accordingto them, would flow from higher exports. They point to the Chinese experience.

    y The global retailers taken together buy about $60 billion of goods each year fromChina for exports. Contrast this with India where less than $1 billion of exports areaccounted for by global retailers (mostly metro dairy farm). Clearly, the scope ofexports through the global retailers is enormous, indeed.

    y 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 localmarket and suppliers. This happens after they open local stores.

    y 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, thestandardisation, labeling and packaging, transportation, warehousing, the distributionnetwork, changing product mix quickly in response to changing global fashions and

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    establishing the right kind of captive suppliers who would not be selling to theircompetitors.

    y The supply chain and the infrastructure, which they would develop for their localstores, would yield significant cost economies when it is also used to procure suppliesfor 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 asubstantial presence in the Chinese local retail market.

    y How about the potential job loss in local kiranas? True, small retail stores are animportant 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 jobcan 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 levelsand tastes. For example, both Sony and Santosh can coexist, catering to marketsegments.

    y Entry of sophisticated branded products affects the unbranded mass market onlymarginally in a vast poor country such as India. Moreover, in malls where the largeretail chains set up their stores, typically, there will also be many small shops whichwill attract people.

    y Further, the street-corner shops will have some advantages over big stores locatedmany miles away in shopping plazas. In India, transportation and parking are big

    problems for people who want to visit shopping malls.

    y For them, it is more convenient and cost-effective to purchase many of their dailyrequirements from the neighbourhood stores, especially as these establishments stock

    goods that are in particular demand in the locality. Hence, the pop-and-mom streetcorner shops can very well survive.

    y The benefits from greater exports would be particularly high in the farm sector. Rightnow, there is a tremendous amount of wastage and value loss of agricultural productsdue to lack of storage, refrigeration, transportation and processing facilities. As aresult, 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 toexpect it to build the required infrastructure.

    y To the extent the large retailers establish a direct linkage with the farmers by cuttingout many layers of middlemen, develop the processing facilities and export the

    products to meet their global requirements, farmers would get better prices and biggermarkets while the consumers would benefit in terms of lower prices, better qualityand greater variety. The resultant rural prosperity may open up markets for other

    industrial goods and help a more balanced regional development as also job creationin other sectors.

    y Similar gains would flow from higher exports when the global chains are allowed inother sectors such as readymade garments. As for monopolistic pricing practices, the

    best safeguard would be in permitting all global chains to set up shops. Thecompetition among them (as has happened in the automobile industry) would ensure

    better prices for consumers and suppliers alike.

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    y Thus, the benefits from higher exports are likely to offset any direct job loss in thelocal kiranas as result of competition from big global retailers. Anyway, if thedomestic big players are allowed to operate, the job loss problem for the small shopswould 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 fullrange of benefits will not be realised.

    y 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 mustmake a clear commitment to the time-frame over which protection from foreigncompetition would be removed gradually.

    Table: Multi-brand

    Retail FDI Policy in

    other countries

    Country

    FDI

    Limits

    Benefits Remarks

    China 100% First permitted in 1992 withforeign ownership restricted to 49%,

    progressively lifted and now norestrictions

    Over 600 hypermarkets opened

    between 1996 and 2011

    The number of small outlets(equivalent to kiranas) increasedfrom 1.9 million to over 2.5 million

    Employment in the retail andwholesale sectors increased from 28million people to 54 million peoplefrom 1992 to 2001

    Impressive growthin retail andwholesale trade

    Thailand 100% Referred to a country where FDIhad an adverse effect on localretailers

    Has a limited capital requirement

    for retail and wholesale outlets

    Growth in agro-processingindustry

    Russia 100% Supermarket revolution took place in 2000s

    Heavy growth registered

    Indonesia 100% Modern retail took off in 1990s

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    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 www.Legalserviceindia.comy www.Scribd.comy www.rbi.org.iny www.dipp.nic.iny www.retailguru.comy www.ecomomicstims.comy www.ibef.org

    Reports/ Research Papers

    INDIAN RETAIL INDUSTRY: An Update: Relaxation of FDI norms for the IndianRetail 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-policies-paradigm-shift


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