Indian Retail Industry

Foreign Direct Investment in

India's Retail Sector

An exhaustive analysis of factors influencing the FDI debate 2009

An All India Retail Research Report

1. http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm

2. Knight Frank – 'Market Review' Quarter 3 2006

Abstract

In 2006 the Government has promoted limited FDI in single-brand retailing and

has considered opening up further in a phased system with emphasis on joint

ventures with domestic players, evident with the highly controversial Wal-Mart

joint venture with Bharti. Studying other countries such as China, where

restrictions were initially imposed on the locations and formats in which foreign

retailers could operate is also on the agenda of the Indian Government.

The Indian media regularly discusses the issues of FDI in Retailing. The Hindu

Business Line's opinion on the 'Great FDI in Indian Retail debate', is that “organized

retail at present accounts for a mere 4% per cent of the total market (2008) as

against 20% in China and 40 % in Thailand” and that “there is a growing demand

for modern retailing formats that offer a clean and hygienic environment to shop 1

in”. This has created significant debate for allowing FDI regulations to open up,

although little has changed for multi-brand retailing restrictions to date.

Knight Frank revealed in their Market Review (Q3 2006) that the move by the

Indian Government to allow FDI in real estate had been an “opportune move” and

although “multi-brand retailing is still not allowed, FDI in single-brand retailing 2

has elicited heightened interest”.

02

Abstract 02Contents 03Table of Figures & Charts 05

Chapter 1 - Introduction 06

1.1 Rationale 07

1.2 Report Aims & Objectives 08

1.3 Layout of Study 09

Chapter 2 – Study Methodology 10-14

Chapter 3 – Historical Perspective on FDI

3.0 Overview 15-17

3.0.1 Post Independence & Pre-reform 17

3.0.2 Post-reform 18-20

3.0.3 FDI in Retail 21-22

Chapter 4 – Policy Environment and Growth in Organized Retailing

4.1 Policy and Regulatory Environment 23-28

4.2 Growth in 'Organized’ Retailing 29-34

Chapter 5 – Arguments for and against FDI in Retailing

5.1 Arguments for FDI in Retailing 35-42

5.2 Arguments against FDI in Retailing 43-50

Chapter 6 – Detailed analysis of factors and conditions attached to FDI

6.0 Survey Design & Sample 51-52

6.1 Questions (See Appendix II) 52

6.2 Data Analysis 53-56

6.3 Results & Findings

6.3.1 – 6.3.11 57-64

Contents Page

03

Chapter 7 - Conclusion

7.0 Introduction 65

7.1 Indian market place and Policy & Regulation 65-66

7.2 Arguments for and against Policy Change 67-68

7.3 Market sentiment and exploration of domestic retailer's thoughts 69-70

7.4 Recommendations (7.4.1 – 7.4.17 inclusive) 71-73

7.5 Further Research 74

Appendix I – Coding Key (open ended question interpretation) 75-77Appendix II – Survey Questions 78-79

Reference List 80-82Bibliography 83

04

1. Figure 1 20

2. Figure 2 29

3. Figure 3 30

4. Figure 4 51

5. Chart S1 53

6. Chart S2 53

7. Chart S3 54

8. Chart S4 54

9. Chart S5 54

10. Chart S6 55

11. Chart S7 55

12. Chart S8 55

13. Chart S9 56

14. Chart S10 56

15. Chart S11 56

Table of figures & charts

05

3. 2009 Global Retail Development Index, AT Kearney – http://www.atkearney.com/images/global/pdf/2009_Global_Retail_Development_Index.pdf

Chapter 1 - Introduction

India is without doubt a 'growth' economy and

many consider it an attractive country to invest

in, particularly in its rapidly growing and

changing retail market. However, Foreign

Direct Investment (FDI) is restricted in the retail

sector, and despite many years of debate, the

regulations are still only changing very slowly

and there are still lots of uncertainties.

AT Kearney (2009), the well-established

international management consultancy, in their

Annual Global Retail Index, ranked India as No.

1 out of 30 of the top emerging markets, and 3has done for some years. Foreign Investors are

watching India, ready for a piece of the action in

the retail market, but there are still plenty of

uncertainties, restrictions and potential socio-

economic risks.

This division of the retail sector, which has a

very heavy weighting towards, unorganized, is

just one of the issues contributing to the

sensitive debate on FDI in India at the moment.

What are the potential risks to the unorganized

retail sector, and of course to the wider Indian

economy? There are several groups who are

strongly opposed to FDI in the Indian retail

sector, but are their concerns unfounded?

Equally, could FDI in retail be a disaster for the

sector and the Indian economy? What reforms

are necessary, if any, to protect the sub-

continent's domestic retail sector and national

interests?

India is a very diverse country and it is

important to fully understand its nature. There

is cultural and religious diversity like nowhere

else in the world, a thriving democracy along

with bureaucratic inconveniences and serious

infrastructure deficiencies.

06

4. Mukherjee A & Patel, N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005,

quoted from foreword by A Virmani

5. KPMG, 'Doing Business with India' Report, July 2009, page 85

From street/cart retailers working on

pavements/roadsides and small family run

businesses to international brands such as

Rolex and Nike, the retail market in India is

vibrant, colorful and highly fragmented.

Arvind Virmani (2005), the Director & Chief

Executive of the Indian Council for Research on

International Economic Relations (ICRIER)

acknowledged when referring to FDI in India's

retail sector that “In spite of its importance,

there has not been any extensive research in 4

this area.”

It is this lack of independent research that

specifically focuses on the retail sector that has

inspired us to undertake this study so as to

provide a balanced and independent review of

current opinions/thoughts on FDI in Retail

policy, and to assess the potential costs and

benefits for the sector and India as a whole.

“As retailing in India is attracting the attention

of many global players, the Indian Government

is paying increased attention to the country's

retail environment. FDI in retailing remains a

widely debated and heated issue in India's

economic and political environment.

However, the Government is gradually taking 5

steps to open the sector.” (KPMG 2009)

We also wish to look at the issues which are

currently under discussion by the domestic

players about FDI in India's retail sector, to

establish an understanding of the reasoning

behind current policy and the controversial

viewpoints that keep India divided on FDI Retail

pol icy. This research wi l l provide

recommendations for ways in which policy

could be changed and improved to reduce the

risks of FDI for India, and to benefit the

domestic retailers and related industries as well

as the economy as a whole. There is a desire to

try to assist in facilitating the process of reform

by providing a summary of the key issues and

suggesting what regulatory reforms could be

considered to help India resolve the issues that

this report highlights. sector and the Indian

economy? What reforms are necessary, if any,

to protect the sub-continent's domestic retail

sector and national interests?

1.1 Rationale

07

The aim of this report is to provide an analysis

of the arguments for and against FDI in India's

re ta i l sec to r , i n o rder to p rov ide

recommendations on reforms to government

policy that could reduce the risks of lifting

restrictions on FDI in retail.

The report's objectives are to investigate the

Indian market place and review current policy

and regulations with regards to foreign

investors so as to gain an understanding of the

current position on FDI, as well as an overview

of the Indian system. This will be followed by an

examination of the arguments both for and

against changing current policy and improving

the regulatory environment. This will enable us

to assess the key factors to be considered in

making policy changes in the future.

The next objective will then be to compare the

thoughts and opinions of people working within

or alongside India's domestic retail sector, via a

survey, to interpret the domestic market

sentiment towards foreign investment, and to

explore thoughts on the issues faced by the

sector. It will then be possible to consider what

solutions could potentially resolve the issues

and are supported by the majority of domestic

retail players.

1.2 Report Aims & Objectives

1.2 Layout of Report

Chapter 1 will present the problem and reason behind the study (rationale). It will set out

the aims and objectives of the report and give an outline of what the report will involve.

Chapter 2 will detail the approach and methods of research used to collect data for the

survey. It will also look at data sources and the limitations of the research & data.

Chapter 3 will provide a historical perspective starting with an overview of FDI in India.

Chapter 4 will explain the current policy framework with respect to FDI in India and chart

the growth of organized retailing in India.

Chapter 5 will present arguments from both sides – those who are for and those who are

against FDI in retail in India.

Chapter 6 will analyze the factors influencing FDI to a greater level of detail with the aid of

a survey conducted amongst the domestic retail and allied industries in India. The survey

results will be analyzed and interpreted, with the findings presented.

Chapter 7 will present conclusions and recommendations based on the overall findings of

the study.

09

This particular study on FDI in India's retail

sector will utilize an inductive approach to the

research, which should help to achieve the aim

and objectives set out in Chapter 1. The

investigation will allow us to form a reasoned

opinion as to what government policy changes

are required to make the opening up of FDI in

retail as successful as possible for the domestic

market and India's economy.

This study will be based predominantly on

qualitative research techniques, using primary

as well as secondary methods, in order to allow

for an in-depth and insightful exploration of

current issues surrounding FDI in India's Retail

market, and to assist in gaining an

understanding of the 'sentiment' in India

towards foreign retailers and their potential

impact on the retail sector and wider economy.

There will be a certain amount of quantitative

analysis undertaken with the data received from

the proposed research survey, but this will be

interpreted alongside 'qualitative' open-ended

questions too, so as to offer more depth to the

respondents' opinions.

The report hopes to establish if there is a

genuine argument for government policy to

change in favor of FDI in retail, to assess and

make recommendations of changes to current

policy, and to consider the risks to India's

economy, society, and the unorganized retail

sector, with a view to encouraging 'socially

responsible investment'.

To initiate this study, three questions were

originally designed to help construct aims and

objectives, and to provide some initial focus.

The three questions were:

1. What methods of FDI in retail are currently

permitted and what is the policy?

2. What are the key issues concerning FDI policy

change in India's retail sector?

3. How can policy help to reduce the risk of FDI

in retail for India and its domestic markets?

Chapter 2 - Study Methodology

2.0 Study Approach

10

2.1 Study Techniques

2.1.1 Types of Research

Primary research in the form of an internet-

based survey was used to collect data of a

qualitative open-ended nature, using a

descriptive approach so that the report can

analyze and interpret the Indian domestic retail

market's sentiment towards FDI and how many

people are in favor of various aspects, as well as

ask what changes to policy and the sector they

believe are necessary and why.

2.1.2 Literature Review

There is a reasonable amount of literature

available on FDI in India, although it is by no

means abundant in the specific area of Retail.

Current policy is in a state of flux; hence a

review of literature on the latest policy

proposals and arguments for and against

changing policy will be the back-bone of this

study. It will enable accurate and relevant

questions to be formulated for the proposed

survey questionnaire and provide a good

background understanding of the likely

causes of any patterns and trends that may

The survey also includes quantitative 'closed-

ended' questions for gathering data that can be

analyzed and interpreted alongside the follow-

up open-ended questions.

Secondary research was carried out in the form

of a literature review, to compare and contrast

material and interpret the issues with a view to

drawing conclusions and developing

recommendations.

be revealed by the survey.

It is important with a review such as this to

ensure that the sources of information are

reliable and trustworthy as possible. A broad

range of opinions from institutional and

corporate material, to academic and business-

orientated literature as well as the

newspapers/online media and internet

resources will be reviewed and each source was

considered for its reliability, and potential to

misconstrue the truth.

11

2.1.3 Survey Questionnaire

Qualitative survey questionnaires will

inherently have issues of 'interpretation' of

results, due to the open-ended questions and

subjective nature. It may also suffer

complications with data inaccuracy, for

example, if participants are unwilling to give

honest opinions on their views of particular

subjects, or through incorrect interpretation of

sentiment in a participant's responses by the

researcher. This can be minimized by ensuring

that the questions are pre-planned well to

ensure they gather the correct information that

will help to answer the questions underlying

this research, and that are clear and concise to

take in to account possible language skill

differences/difficulties in participants. By

ensuring the questions are directly related to

the objectives of this research will increase the

quality of the results achieved and help to justify

the use of this research technique. The

structure should be so that bias is minimized

with questions that do not lean towards

encouraging a particular response from the

participant.

Coding will be required for analysis and

interpretation of the open-ended questions.

NB: For further information on the survey

sample and design, please see Chapter 4.

2.1 Study Techniques

12

2.2 Data Sources

2.2.1 Primary Data Sources

The primary data sources in this research were

collected via an emailed survey questionnaire

(see Appendix II). We designed a test survey to

be emailed to a pre-selected 'test-sample'.

The final survey was then sent out to a

significant sample of Indian retailers and others

in retail-related industries.

2.2.2 Secondary Data Sources

Searching the internet extensively the starting

point of this research and provided some

valuable secondary data. Website such as the

Government of India's Ministry of Finance

www.finmin.nic.in which provides information

on current FDI policy through the Foreign

Investment Promotion Board (FIPB), and also

provides press releases and data and statistics

have been useful. The report also references

some small domestic industry group's website

useful, and other trade lobby sites. One

particular notable internet resource was the

C e n t e r f o r P o l i c y A l t e r n a t i v e s

(www.cpasind.com) which have provided

particularly informative reports on some of the

key issues with FDI in Indian Retail.

2.2.2.1 Internet

There is a vast amount of literature on FDI in

general; however there is less on FDI in India,

and limited amounts that are specifically

focused on the retail sector. The available text

on general FDI were useful background

research though, and the more specific texts

such as 'FDI in Retail Sector India' by Arpita

Mukherjee & Nitisha Patel and 'Multinationals in

India' by Amar Nayak were utilized to a greater

extent as this report considered them to be far

more relevant to the debate on this research

topic.

2.2.2.2 Academic Textbooks

To obtain up to date information and opinions

on the research topic it was necessary to refer to

domestic and international news articles and

gather a variety of industry reports and papers,

for example the India Brand Equity Foundation

(IBEF) report on India's Retail Market &

Opportunities, and India FDI Watch's report in

association with the Association of Community

Organizations for Reform Now (ACORN). All of

these helped to provide a wide and balanced

understanding of the key issues of this

research.

2.2.2.3 News Articles and Industry Reports

13

2.3 Limitations of Research Study

2.3.1 Survey Response Limitations

2.3.2 Inconsistency of Data & Statistics available on India and FDI/ Retail

Due to the nature of the survey being

internet/online-based, it was inevitable that

this would have limitations on survey response;

however this was counterbalanced by using a

very large sample base. Survey responses were

also potentially limited by the length of the

survey and by language barriers.

We noted that data available, particularly in

relation to India's retail sector, was often

inconsistent. However, for the purposes of this

research being more of an exploratory nature,

this did not have too much impact on the

findings. Up-to-date data was also hard to

source.

14

3.0 Overview

6. Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, August 2003, page 32

7. http://www-personal.umich.edu/~alandear/glossary/f.html

8. http://en.wikipedia.org/wiki/retailin

9. Mohan Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Alternatives, CPAS (2005)

Chapter 3 - Historical Perspective on FDI

It has been said that India has “one foot

grounded in time-honoured traditions and the

other fervently striding into the entrepreneurial 6

e-age”. India truly does embrace diversity with

a passion like very few places in the world.

This study is focused on the retail sector and the

'current' Foreign Direct Investment (FDI)

position in India, and it therefore seems logical

to start in reasonably recent times.

Retailing can normally be defined as “the sale of

goods or merchandise from a fixed location,

such as a department store or kiosk, or by post,

in small or individual lots for direct 8consumption by the purchaser.”

Retailing in India is slightly different than in

developed markets, in that it is divided in to

organized and unorganized retail. Organized

retail could be described as when trading is

taking place under a License or through people

that are registered for sales tax or income tax.

Unorganized retail is India's more traditional

style of “low-cost retailing, for example, the

local kirana shops, owner-manned general

stores, paan/beedi shops, convenience stores, 9

hand carts and pavement vendors.”

Before beginning however, let us briefly define

'Foreign Direct Investment', and 'Retailing', as

they are the key focus of the entire study.

Foreign Direct Investment can be defined as the

“Acquisition or construction of physical capital

by a firm from one (source) country in another 7(host) country.”

15

10. Sathyaraj (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.html

11. Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.htm

12. World Trade Organisation - http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm

13. World Trade Organisation - http://www.wto.org/english/tratop_e/dda_e/dda_e.htm

3.0 Overview

Radhika (2006) goes on to be more explicit

about the differences, saying “The major

difference between organized and

unorganized retailing lies in its number

(chain) of store operations. An unorganized

outlet may be just stand alone or can have [a]

maximum of 2-3 outlets in a city, where as

the organized outlets are "any retail chain

(more than two outlets) which is

professionally managed (even if its family

run), has an accounting transparency… and

organized Supply Chain Management with

centralized quality control and sourcing

(certain parts can be locally made) can be 11termed as an "organized retailing" in India.”

India is a democratic Union of States and the

Government operates through a parliamentary

system. India has also been a member of the

World Trade Organization (WTO) since 1995.

The World Trade Organization is a place

“where member governments go, to try to sort

out the trade problems they face with each 12other” They are currently actively

participating in the Doha Round which

“provides the mandate for negotiations on a

range of subjects and other work. The

negotiations include those on agriculture and 13services, which began in early 2000.”

Sathyaraj (2006) defines unorganised retailing

more specifically as “an outlet run locally by the

owner or caretaker of a shop that lacks

technical and accounting standardization. The

supply chain and sourcing are also done locally 10to meet local needs.”

16

India is the most populous democracy in the

world, and is the second most populated

country at 1.172 billion people, based on 14

United Nation statistics as at 1st July 2009. It

has a largely young population with 35% of

India's population being under 14 years of age

and more than 60 per cent of the population is

14. Wikipedia - http://en.wikipedia.org/wiki/List_of_countries_by_population

15. Census of India - http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx

16. Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 22

17. Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 7

3.0 Overview

estimated to make up the working age group

(15-60). The large working-age population will

no doubt translate to an attractive consumer

base compared to other economies of the world,

placing India as one of the main targets of the 15global retail players.

3.0.1 Post Independence & Pre-Reform

There were “half-hearted attempts made by the

Rajiv Gandhi government in the mid-1980s to

selectively open the economy to foreign trade

and relax import restrictions, which did not

have the intended consequence of stimulating

investment and eventually pushed the balance

of payments out of gear. Export growth had

turned negative and for the first time Indian

industrial production recorded negative 16

growth. “

In 1990-91 the current account deficit was 3.1% 17and inflation was 12%. Things began to get out

of hand and the government went to foreign

lenders pledging gold held at the Reserve Bank

of India (India's central bank) for short term

loans so as to help get through the financial

crisis. In 1990, just as China was beginning to

become a popular place for investors, India was

in the middle of economic agony after many

years of over-zealous government control over

economic activity, isolation and poorly

managed fiscal policy. By half way through

1991, the Indian government was about to

default on its foreign currency loans; and its

foreign exchange reserves were so low that

India only had enough dollars for two weeks'

worth of imports.

Foreign finance had all but closed the door on

India. The political problems that this position

caused were immense and it was only the

recognition of the fiscal problems that finally

persuaded the politicians and bureaucrats to

release their hold on the economy. The crisis

brought around something totally unexpected;

it brought around change from a completely

uncompromising centralized system of control

to a market-orientated system, where

regulation in some of the key sectors of the

economy was to be enforced independent of the

government.

17

18. Chase, Aaron, 'An Investor's Guide to the Next Economic Superpower', John Wiley & Sons pte, Ltd 2006, page 11

19. Sagarika Dutt, 'India in a Globalized World', Manchester University Press, 2006, page 111

20. Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalization of the Indian Economy',

MPG Books Ltd, 2003, page 40

3.0.2 Post-Reform

Economic reform was now on the agenda after

the financial disaster of 1991; and these

reforms “brought in three elements that India

was never previously allowed to have:

competition, entrepreneurship and the 18

beginnings of world-class infrastructure.”

The government of the time, Congress (led by

Narasimha Rao), revealed a new 'industrial

policy' and the Finance Minister when sending a

memorandum dated 27th August 1991 to the

International Monetary Fund (IMF), said “The

thrust will be to increase the efficiency and

international competitiveness of industrial

production and to utilize foreign investment

and technology to a much greater degree than

in the past, to improve the performance and

rationalize the scope of the public sector, and to

reform and modernize the financial sector so

that it can more efficiently serve the needs of

the economy” (Cited by Datt and Sundharam, 19

2001:231)

Between 1991 and 1999 as India moved away

from a state controlled economy and slowly

developed into a liberalized economy, each

successive government has supported the

reform process and tried to hasten things. Due

to the ever decreasing role of the government in

the economy, resource allocation began to be

influenced by the markets, and as a result,

prices & availability across the economy became

competitive rather than monopolistic.

The post-reform performance of the economy

had been good, and between 1994 and1997

Gross Domestic Product (GDP) grew in real

terms by over 7%, which placed India among the

best-performing countries in the world.

However, a study of the economic reforms and

liberalisation of the Indian economy by Kalirajan

and Sankar (2003) acknowledges this but

highlights that whilst this economic growth is

encouraging, “there is no doubt that given the

low per capita income the need for an

accelerated growth rate becomes urgent. The

inflation rate was on average at a high of 10.7%

per annum in the first five years of the reform

period, but gradually came down to less than 5% 20

in the last few years”.

3.0 Overview

18

21. Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy',

MPG Books Ltd, 2003, page 41

22. Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 4

23. Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 15-16

24. Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 18

3.0.2 Post-Reform

The Indian National Congress with the support

of the United Progressive Alliance have been in

government since 2004 and were re-elected for

a further term in May 2009. Although a more

liberal approach to foreign investment in India

has emerged in recent times, Kalirajan and

Sankar (2003) argue that “low overall

productivity of investment, excessive

fragmentation of markets, shortage of

invertible funds, and the poor infrastructure

may pose significant problems to sustained

higher economic growth… there is reason to

believe that growth impulses from the first 21generation of reforms may have ebbed”.

The Indian government has clearly recognized

this, and in the Finance Minister's Budget

Speech for 1999-2000, it was stressed that

there was a need to debate and make decisions

in relation to the next wave of reforms to be put

in place to ensure India's economic strength

and to make it “fully capable of competing

successfully in the evolving world order”. (cited 22

by Kalirajan and Sankar 2003)

The liberalizations subsequently introduced by

the Finance Minister (Manmohan Singh) have

clearly been successful. “Between 1991 and

2004, India's economy grew by an average of 6%

a year. In 2005 and 2006 growth accelerated to

over 8% and in 2007 it looked like it might be 23

well over 9%.”

Farndon (2007) discusses how the development

of the Indian economy has been quite

unconventional. He highlights a 'normal'

pattern of economic development starting with

the emergence of cheap & low-cost

manufacturing to provide a broad base of

employment for the masses, which

subsequently encourages urbanization, and as

this continues to grow, he notes a shift whereby

higher value products that are more

sophisticated emerge. Finally, service and high

tech industries start to emerge.

Farndon (2007) highlights the issue of job

insecurity in India, and how few people are

employed in a recognized position. To explain,

he uses the example that in 2006, India had a

workforce of 470 million, but only 35 million of

these (approx. 7%) were in formal, income tax

paying positions – and of this 35 million, the

majority (21 million) are employed by the

government. Essentially, “a country with a

population of over a billion has hardly more

income tax payers than the UK. All the rest –

some 435 million people – work in what Indians 24

call the 'unorganized sector'”.

3.0 Overview

19

ECONOMIC INDICATORS- INDIA 2003-2010

03-07 Average 2008 2009(forecast)

2010(forecast)

Real GDP (% Growth)

Inflation (% year-end)

Fiscal Balance (% of GDP)

Exports (% Growth)

Imports (% Growth)

Current Account (% GDP)

Reserves (mth of imports)

External Debt (% GDP)

8.9

4.9

-3.8

24.3

30.7

-0.3

9.9

16.0

7.4

8.2

-6.0

20.1

33.1

-3.6

7.6

14.0

4.9

5.4

7.0

-8.0

-8.5

-4.0

7.7

14.6

6.5

4.4

-4.8

10.6

12.1

-3.9

6.5

13.8

Economic Indicators between 2003 and 2008, and forecasts for 2009-10 are as below

Figure 1

It is evident that 2009 is going to be a bad year in terms of Imports/Export Growth and GDP for India,

but this is consistent with the global financial crisis that has been playing out during this research

i.e. 2008-09. Looking at the data going back to 2003-07 however, GDP growth has been very

healthy average at 8.9% per annum real growth, and despite a rise in inflation in 2008, this is now

beginning to settle and is forecast to drop further.

25. Peter Whelan, 'India Economics', EDC Economics, May 2009, page 1 - http://www.edc.ca/english/docs/gindia_e.pdf

3.0.2 Post-Reform

3.0 Overview

“India… has shot straight into the third stage, with an economic boom that has relied almost entirely

on high-tech and service industries. It does have a range of manufacturing industries, but they are

remarkably small for a country of India's size and prosperity. There is no doubt that India's success

in the IT world has transformed the country. A milestone was passed in 2003 when the software

sector alone earned more money than the entire cost of the country's oil imports – the factor that had

brought the country to its financial knees in 1991. This meant that when the invasion of Iraq pushed

oil prices up again, India was able to ride out the difficulties almost with equanimity”

25Source: EDC Economics

20

26. http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm

27. Knight Frank – 'Market Review' Quarter 3 2006

3.0.3 FDI in Retail

3.0 Overview

60+ years after independence India's

government is now starting to take a closer look

at liberalising its foreign investment policies.

In 2006 the Government has promoted limited

FDI in single-brand retailing and has

considered opening up further in a phased

system with emphasis on joint ventures with

domestic players, evident with the highly

controversial Wal-Mart joint venture with

Bharti. Studying other countries such as China,

where restrictions were initially imposed on the

locations and formats in which foreign retailers

could operate is also on the agenda of the

Indian Government.

The Indian media regularly discusses the issues

of FDI in Retailing. The Hindu Business Line's

opinion on the 'Great FDI in Indian Retail

debate', is that “organised retail as present

accounts for a mere 2% per cent of the total

market (2005) as against 20% in China and 40 %

in Thailand” and that “there is a growing

demand for modern retailing formats that offer 26

a clean and hygienic environment to shop in”.

This has created significant debate for allowing

FDI regulations to open up, although little has

changed for multi-brand retailing restrictions

to date.

Knight Frank revealed in their Market Review

(Q3 2006) that the move by the Indian

Government to allow FDI in real estate had been

an “opportune move” and although “multi-

brand retailing is still not allowed, FDI in single-

brand retailing has elicited heightened 27

interest”.

The government has created a specific Board to

deal with promotion of FDI in India and to be the

sole agency to handle matters related to FDI.

The 'Foreign Investment Promotion Board' (FIPB)

as it is known, is chaired by the Secretary

Industry (Department of Industrial Policy &

Promotion or DIPP) within the office of the Prime

Minister. Its key objectives are to promote FDI

in India with investment promotion activities

both domestically and internationally by

facilitating investment in the country via

international companies, NRIs (non-resident

Indians) and other forms of foreign investors.

The FIPB should review policy and puts

appropriate institutional arrangements in place

with transparent rules, guidelines, and

procedures for investment promotion and

approval.

21

28. http://finance.indiamart.com/investment_in_india/fipb.html

3.0.3 FDI in Retail

3.0 Overview

The FIPB should meet every week, ensuring that

the cases that are pending are dealt with

quickly. It is there to ensure that the investors

applying with FDI proposals receive a response

on the Government's decision within six weeks.

FDI proposals deposited with the board's

secretariat should be put in front of the Board

within 15 days. The Administrative Ministries

must also make any comments either before

and/or in the FIPB meeting. The overall aim is

to provide a “transparent effective and investor

friendly single window providing clearance for 28investment proposals.”

When looking specifically at FDI in retail, India

certainly has some 'political debates',

particularly regarding the potential risk of

displacing labour in the retail sector. Retail

employs a huge number of people in the

'unorganised' sector, the majority of which does

not have any skills. This has made retail a major

political issue as there is pressure on the

government to compensate the people who are

displaced and provide alternative employment

options.

22

29. http://www.investmentcommission.in/policies_and_laws.htm

30. Investing in India, KPMG, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf

31. http://www.investmentcommission.in/policies_and_laws.htm

Chapter 4 - Policy Environment and

Growth of Organized Retail

4.1 Policy and Regulatory Environment

Alongside the Foreign Investment Promotion

Board (FIPB) previously mentioned, there is also

the Investment Commission which was

established in December 2004 as part of the

Ministry of Finance so as to facilitate and

enhance investment in India. They make

recommendations on policy and procedure to

the Government and recommend projects that

should be fast tracked through the approval

process. They also assist in promoting India as

an investment destination.

The Investment Commission (2009) believes

the Foreign Investment regime in India as “one

of the most transparent and liberal… among

emerging and developing countr ies .

Differential treatment is limited to a few entry 29rules, predominantly in some Services sectors.”

Currently, an application must be made to either

the FIPB or the Secretariat for Industrial

Assistance (SIA) depending on which Approval

route is being used, providing the proposed

details of investment, the business plan,

financial and foreign company information, etc.

A declaration is also required to confirm whether

the applicant has previous collaborations or

trade mark agreements in India in the same

sector/field to which the application relates 30(KPMG 2008)

Automatic Approval route requires no prior approval, and filing of the investment

details to the Reserve Bank of India (RBI) post-facto is literally for data records only.

The automatic route is appropriate in any sector where there is no 'sector cap' i.e.

sectors where 100% foreign ownership is allowed and some other specified sectors,

for example <26% of an Insurance company.

FIPB Approval route is for proposals where the shareholding is intended to be

above a prescribed 'sector cap', or where the activity is one where FDI is currently

not allowed, or where it is mandatory for the application to be approved by the FIPB

(for example, sectors requiring an industrial licence.)31

(Source: Investment Commission Website)

Foreign investment can be approved via one of two different routes:

a.

b.

23

In terms of the Retail sector, foreign investment

is currently limited to 51% in single brand retail

stores and 100% FDI in wholesale cash and

carry. No multi-brand retailing is allowed.

Subject to these equity conditions, a foreign

investor can set up a registered company and

operate under the same rules and regulations

as an Indian company. Foreign investments are

freely repatriable, and are regulated under the

Foreign Exchange Management Act (1999)

(FEMA), administered by the Reserve Bank of

India's Exchange Control Department.

Ernst & Young (2007) in their report on behalf of

the India Brand Equity Foundation said:

“The Government is progressively undertaking

reforms and liberalising the retail sector;

thereby attracting significant foreign

investments. The regulatory and supervisory

policies are being reshaped and reoriented to

meet the new challenges and opportunities in

this sector. To facilitate easier flow of Foreign


Direct Investments (“FDI”) inflow, instead of

having to seek Foreign Investment Promotion

Board (“FIPB”) approval, FDI up to 100 per cent is

allowed under the automatic route for cash and

carry wholesale trading and export trading. FDI

up to 51 per cent is allowed, with prior

Government approval for retail trade in 'Single

Brand' products with the objective of attracting

investment, technology and global best

practices and catering to the demand for such

branded goods in India. This implies that

foreign companies can now sell goods sold

globally under a single brand, such as in the

case of Reebok, Nokia and Adidas. However,

retailing of multiple brands, even if the goods

are produced by the same manufacturer, is

presently not allowed. Relaxation of FDI

restrictions are being vigorously pursued by the

business and trade coalitions and are expected 32to fall in place over the next 3-5 years.”

32. IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in

24


32. IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in

In February 2009, the Department of Industry Policy & Promotion (DIPP) released a series of Press

Notes on changes relating to foreign investment. Those of particular interest to this research are:-

Press Note 2 - 'Guidelines for calculation of total foreign investment’

Press Note 3 - 'Guidelines for transfer of ownership or control of Indian companies in

sectors with caps from resident Indian citizens to non-resident entities.

Press Note 4 – ‘Clarificatory guidelines on downstream investment by Indian Companies'.

The Press Notes do not appear to have instigated amendments to the Foreign Exchange

Management Act (FEMA), yet were supposed to come in to effect from the date of announcement, so

this is clearly going to cause confusion.

33Press Note 2 (2009) introduces the concept of “ownership and control” for the first time. It

allows foreign-invested Indian companies to create and invest in downstream companies or

associated businesses without the original investment being counted. John Elliott (July 2009),

South Asia correspondent for the Financial Times comments that “this legitimises cascading

investments which have been used to bring foreign capital into sectors such as telecoms that

need heavy investment. FDI limits here are bypassed by progressively adding foreign investment

through tiers of subsidiary joint ventures so that, though official limits are exceeded overall, the 34rules are not technically broken.”

The government in a number of statements has said that areas such as multi-brand retailing (i.e.

where FDI is totally banned) will not be affected by these Press Note changes. It is however

questionable whether there is anything to stop a Joint Venture forming under a wholesale cash and

carry operation, and then setting up sub-companies in, for example multi-brand retailing, but

present this as an Indian owned and controlled business.

25


33. Ministry of Commerce & Industry, 'Guidelines for calculation of total foreign investment', Press Note No. 2 (2009 series), Department of Industrial Policy & Promotion,

February 2009, page 3 - http://siadipp.nic.in/policy/changes/pn2_2009.pdf

34. Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 – http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html

35. KPMG, Investing in India, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf

As it stands today, there are a number of market

entry methods available for retailers under

current FDI policy, for which the most common

methods are:-

· Strategic License Agreements

(agreement with domestic player)

· Cash & Carry Wholesale trading (100%

ownership)

· Joint Ventures

· Franchising

· Distribution

· Manufacturing

Cash and carry is a particularly attractive option

for foreign investors as complete ownership

(100%) is allowed in this format. Several global

players including Wal-Mart and Metro have

entered the Indian market through this method.

On a more general note of regulation, the

governing Act overseeing foreign exchange is

the Foreign Exchange Management Act (1999).

The objective of this Act is to amend and

consolidate the laws in relation to foreign

exchange. Consideration also needs to be

given to other policies and regulations that may

affect FDI inflows in to India, for example labour

or company law. An example is the Payment of

Gratuity Act (1972) which provides for “gratuity

inter alia to employees in factories, plantations,

shops, establishments, and mines in the event

of superannuation, retirement, resignation,

death or total disablement due to accident or 35disease.”

Cash and carry is a particularly attractive option

for foreign investors as complete ownership

(100%) is allowed in this format. Several global

players including Wal-Mart and Metro have

entered the Indian market through this method.

26


36. Investing in India, KPMG, 2008, page 79 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf

37. IBEF !India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 12 (www.ibef.in)

KPMG (2008) highlight just some of the key legislation that could have a potential impact

on foreign investors setting up in India, as per below:

· Payment of Bonus Act 1965

· Minimum Wages Act 1948

· Shops & Establishment Act

· Contract Labour (Regulation and Abolition) Act 1970

· Industrial Disputes Act 1947

· Workman's Compensation Act

· Profession Tax

· Maternity Benefit Act 1961

· Employees Provident Fund and Miscellaneous Provisions Act 1952

· The Employees State Insurance Act 1948

· Goods & Services Tax (GST) (Proposed for July 2010)

36

The India Brand Equity Foundation (IBEF) in

2007 has also said that “The Government is

expected to take a calibrated approach in land

and rent reforms to improve the real estate

regulatory environment and facilitate easy

access to retail space for international

investors. The Government is releasing large

tracts of unused land for retail development in

the Mumbai and National Capital Regions

(NCRs). This is soon to be followed by other

state governments, with the Governments

benefiting from the access to impressive

revenues from land sales and tax collection

from retail developments. Solutions to

problems related to the lease rentals and pro-

tenancy laws, which significantly deter

international investors, are being pursued by

the Government, with initiatives like Special

Economic Zones (SEZs), allotment of 37Government controlled land etc.”

27


To provide confidence to investors and show

commitment to a SEZ policy regime that is

stable and focused on increasing economic

activity and employment through the setting up

of SEZs, a comprehensive draft SEZ Bill was

prepared after extensive debate with

stakeholders. The Special Economic Zones Act,

2005, was passed by Parliament in May 2005

and came into effect on the 10th February 2006,

providing for a more streamline and simplified

set of procedures and for 'one-stop' clearance

on matters relating to central as well as state

governments.

The main objectives of the SEZ Act are:

· generation of additional economic activity

· promotion of exports of goods and services

· promotion of investment from domestic &

foreign sources

· creation of employment opportunities

development of infrastructure facilities

Despite the current policy and regulatory

environment not being 'perfect' for foreign

investors, there are clearly moves towards

improving the current position and facilitating

FDI inflows without having a detrimental impact

on various sectors of the economy.

The current policy is trying to encourage Joint

Ventures in multi-brand retailing so as to boost

the domestic retailer's growth in this area.

However, there is also the risk that some

foreign retailers will not be interested in

investing unless they have 100% ownership and

that the current policy will prevent them from

choosing India as an FDI in Retail destination.

In reality, this may present itself as 'back-door'

multi-brand retailing through the use of the

aforementioned 'cascading' sub-companies of

Joint Ventures.

28

4.2 Growth in 'Organized’ Retailing

Chaze (2006) looked at 'unorganized and organized’ sectors in India, in the context of retailing. He

spoke of how the organized retailing sector was beginning to grow rapidly.

He states that “organized retailing (versus the

traditional Indian fare of stand-alone retail or

department stores) has to be one of the most

exciting growth industries in India today, with

branded stores and malls thus far covering a 38

miniscule 2% of the total market.”

The Figure below shows how significant retail is to the Indian economy, contributing 39% of GDP, and

yet organized retailing is still in an under-developed early stage at only 6% of total market (2005)

when compared to other countries. It is clear from this data that India has a significantly lower

percentage of organized retailing compared to other developing markets such as China with 20% of

organized retail penetration, and Brazil with 75%. When compared to their respective retail sector

contributions to GDP, India is higher at 39% than China and Brazil.

Although retail is a significant contributor

to India’s Economy ...

Retail % Contribution to GDP (Yr 2005)

17

55

23

39

South

Africa

Vietnam China India

32

22

USA Brazil

... organized retailing is still at a very

nascent stage in India

Organized Retail Penetration (%)

3222 20

6

South

Africa

Vietnam China India

8575

USA Brazil

Retail is a significant contributor to india’s GDP;however organized retail plays only a small role in that

Source: Confederation of Indian Industry & AT Kearney Report (2006)39

38. Chaze, Aaron, India, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons (Asia) Pte Ltd, 2006, page 23

39. CII / AT Kearney, Retail In India: Getting Organized to Drive Growth', November 2006, page 5

29


40. IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in)

Vietnam on the other hand is the only country in this figure with a higher GDP contribution at

55% (compared to India at 39%) as well as having a higher percentage of organized retail

penetration at 22% (compared to 6% in India).

Food and Beverages vertical constitutes the largest percentage share of the revenue at 74.41%,

and yet only has 'organized' penetration of 0.98%, so is likely to be a target sector for foreign

retailers. Figure 3 below shows the revenue and share of verticals, as well as the penetration of

organized retail:

Figure 3

Vertical Value (US$ millions) Share of Total

Revenue (%)

Organised Retail

Penetration (%)

Food & Beverages 231,951 74.41 0.98

Clothing & Textile 29,024 9.31 16.39

Consumer Durables 15,171 4.87 17.04

Home Décor 9,463 3.04 8.76

Jewellery & Watches 13,390 4.30 6.19

Beauty Care 6,854 2.20 3.56

Footwear 3,268 1.05 32.84

Books, Music & Gifts 2,610 0.84 13.08

40Source: IBEF India

The Indian consumer behavior of preferring proximity to retail formats is also particularly

pronounced in the food & beverages sector, with food, grocery and allied products largely

sourced from the local stores or hand cart vendors very close to home.

30


42. IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in)

43. RIL Online http://www.ril.com/html/business/business_retail.html

Ernst & Young (2007) have said that “prevalence

of traditional retailing is highly pronounced in

small towns and cities with primary presence of

neighborhood 'kirana' stores, push-cart

vendors, 'melas' and 'mandis'. Organized

formats are only in the initial stages of adoption

in these regions. Leading retail players in the

industry are beginning to explore these

markets and the rural consumers are slowly

beginning to embrace the newer organized

retail formats. “ With such a high level of

unorganized retail employment in the country,

it is understandable that the rapid growth of

organized retailing naturally causes some

concern for smaller industry and traditional

retailers. It does however seem inevitable that

organized retail will continue to see strong

growth in India as rural (and urban) consumers

begin to accept and adapt to new and modern 41

retailing formats.

“Modern/Organised retailing is growing at an

aggressive pace in urban India, fueled by

bourgeoning economic activity. Organized

retail revenues are expected to increase from an

estimated US$ 12.9 billion per annum in 2005-

06 to more than US$ 43 billion by 2009-10. The

sector is predicted to grow by 400 per cent, in

value terms, by 2007-08. A large number of

domestic and international players are setting

up base and expanding their business with

newer organized retail formats and intense 42

competition driving innovation in formats.”

Reliance Industries Limited (RIL), one of the

largest domestic organized retailers in India,

has set up a subsidiary of RIL called Reliance

Retail Limited (RRL) to drive forward the groups

growth in the organized retail sector, with its

'vision' to “generate inclusive growth and

prosperity for farmers, vendor partners, small 43shopkeepers and consumers.”

31

It seems fairly safe to assume that even without FDI, the organized retail sector in India is going to

grow rapidly, and this is going to have some effect on the traditional unorganized retailers.


44According to RRL (2009) , 27% of global GDP is

attributed to retail, and in various developing

markets organized retail contributes typically

anywhere between 20% and 55% of GDP.

Placing the Indian retai l market at

approximately $300 billion, with a growth rate

of 13% per year, RRL point out that presently,

although organized retailing is only

approximately 5%, this is likely to grow to 10%

by 2011. Therefore, RRL have begun an

implementation plan to create a high spec state

of the art retail infrastructure, to include a

strategy for opening multi-format stores such

as convenience, hypermarket, speciality and

wholesale stores.

Allowing FDI 100% in retailing would no doubt

significantly accelerate this growth. In fact,

Reliance in recognising that “strategic alliances

are going to be a key driver to its retail business,

in financial year 2007-08, established key joint

ventures with international partners in apparel

(clothing), optical and office product

businesses. Further, RRL will continue to seek

synergist ic opportunit ies with other 45international players as well.”

The growth of consumerism in India is one of

the key drivers fuelling the organised retail 46growth. Pankaj Gupta (2006) highlights

several demographic trends that are factors in

the growth of organized retailing. India is, for

example, experiencing rapid income growth so

consumers have a greater ability to spend.

There is growing urbanization and this urban

population has both a higher propensity to

spend, and a desire for convenience. India also

has a growing 'young' population which has

both the willingness and attitude to spend.

Gupta also states that there is a trend for Indian

consumers tending to 'buy now, save later' i.e.

consumers are prepared to borrow money for

today's consumption.

44. RIL Online http://www.ril.com/html/business/business_retail.html

45. http://www.ril.com/html/business/business_retail.html

46. Pankaj Gupta, Organised Retail in India, The Next Growth Frontier, Tata Strategic Management, June 2006, page 2,

(http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf)

32


Management consultant Rama Bijapurkar says

“the poorest fifth live a hand-to-mouth

existence and are insignificant as consumers.

The next fifth, aspirants, acquire the most basic

consumer durables – bicycles, fans and radios –

and learn to aspire for more. The third group,

climbers, is hooked, but find that their desires

far outrun their income, so they buy the

cheapest goods. The fourth group, whom she

calls the consuming class… is of inveterate

buyers; they weigh the price against what they

get for it. The top fifth are the rich; they buy the 47best without looking at the price.”

The Associated Chambers of Commerce and

Industry of India (ASSOCHAM) are cited in a

news-article at www.dare.co.in (an Indian

platform for entrepreneurs and business

owners), as supporting a proposal to give the

retail sector formal 'industry status'. In a note

by the Ministries of Commerce & Industry and

Consumer Affairs, the Chamber President,

Sajjan Jindal said that “providing industry status

is the first basic step needed for reforming the 48Indian retailing sector.”

ASSOCHAM believe that the advantages of

having an industry status are that it will allow a

better “focus on retailing development, fiscal

incentives, and availability of organized

financing and establishment of insurance 49

norms.” They feel the development of the

retail sector can take place at a faster pace if

there is a comprehensive legislation enacted.

The legislation should be “simple and have a

futuristic approach. It should take into

consideration the developments that are taking

place in this arena worldwide. The legislation

should provide broad parameters within which

the retail sector should operate and day–to-day

functioning and other modalities should be

prescribed in the Rules. The underlying idea is

to have minimum modifications in the Act in the 50

future.”

47. Kattuman, Paul A, recorded discussion - Judge Business School University of Cambridge, 23 September, 9.55am.

48. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm



33

For retail operations under current Rules, need to apply for and obtain a series of licenses and

permits. These range from basic trading licenses and product specific licenses, to pollution

clearance, amongst others. Every retail outlet is required to obtain these, even if it is a part of a 51chain. “These are irritants, [and] add time and cost to the process of establishing a retail chain”

Kattuman (2009), whilst citing Rama's view on consumption said the following:

“Indians can be divided into a number of generations; those born before independence, the

product of post-independence socialist India, and those who grew up after liberalization. Each

has a different mind set and approach to consumption. As time passes, each generation will pass

into history, and new generations will arise. Their changing outlook has an influence on

consumption patterns.”



34

52. Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 -

http://www.retailing360.com/article/8/2009062420090624193427218739345f/Barring-foreign-players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html

53. Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 – http://bimtech-retail.com/downloads/FDI_RetailDude.pdf

Chapter 5 - Arguments for and

against FDI in Retailing

5.1 Arguments for FDI in Retailing

There are many who argue that FDI in retailing

will be of benefit to India, and discussions are

often seen in the Indian media. In fact, some

even argue that if FDI in retail is not allowed, it

could be harmful to India's retail sector.

Tripathi (2009) the Director of Silk Hut (a mid-

sized silk garment retailer in Hyderabad), has

said "Industry experts believed that the

technical edge offered by foreign companies is

crucial for the survival of domestic retail 52companies in the [current] downturn.”

Tripathi (2009) feels that it is essential that FDI

be allowed in the retail sector at 100% equity,

because this is likely to encourage domestic

investment into the sector too, and generate

further employment opportunities. In addition

to this, he commented that during the

economic downturn that is currently being

experienced, most of the retail industry players,

both large and small, felt that it would be good

to boost the economy by facilitating higher FDI

inflows.

These arguments for improvements in

technology and increases in FDI inflows to

boost economic growth are supported by other

proponents of FDI in retailing. Singh & Banga

(2008) undertook a research paper on the

emergence & prospects of FDI in India's

retailing, and highlighted that despite the

developments in the industry in recent years

and the large contribution to India's 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… One important reason for

this is that retailing is one of the few sectors 53

where FDI is not allowed.”

35


Singh & Banga (2008) identify seven key

reasons for opening up the retail sector to FDI.

Firstly, they believe that the large global retail

players have a far more advanced knowledge of

management, particularly in inventory

management and merchandising and are far

more productive and efficient, utilizing new

technologies to their advantage. Secondly,

they argue that the foreign 'low-cost' big

players will adopt an integrated supply chain

management system which in turn should help

to lower the price of products, benefitting

consumers. Thirdly, Singh & Banga believe that

FDI will ensure that products are good quality

and that customer services improve, providing

a better shopping 'experience'. Fourthly, it will

encourage and promote the links between

domestic/local suppliers, manufacturers and

agricultural traders to global markets. Quality

and safety standards of domestics will be

improved by this as only those who meet strict

standards are likely to be selected. It will also

help in providing a profitable and reliable

market for the domestic local players. Singh &

Banga's fifth argument was that the foreign

retailers would begin to spread their operations

in India, and as this happened domestic players

would develop their supply chain, create new

strategies and improve operations to

counteract the competition from foreign

players, and this would inevitably encourage

investment and employment in supply chain

and back-end sectors. Joint Ventures between

domestic 'organized' retailers and foreign

players (such as Wal-mart & Bharti) would also

help to ease the capital constraints of the

domestics. Finally, it was highlighted that the

development of new retail formats and sector

modernization in general would be brought

around by FDI.

Singh & Banga (2008) concluded from their

research that it was evident that "ever growing

urban and rural markets in India represent an

unprecedented and vast unexplored

opportunity for retailing to all types of formats.

Initially there may be certain reservations and

apprehensions in allowing global players in

India's retailing, but if they are allowed in a

phased manner on the basis of a well conceived

and chalked out policy, they are likely to lead to

more investment in organized retailing and

allied sectors.”

36


With the above said, their research paper also advised that a number of points needed to be kept into

consideration when opening up FDI:

1. The opening up of FDI should be phased, over a 5-10 year time frame so as to allow time for

domestic retailers to adjust.

2. FDI in multi-brand retailing should be kept restricted in the near future, as Indian retailers

would not be able to face this competition immediately.

3. It is not currently desirable for FDI to be above 51%, even in single brand retailing. This will allow

checking and control of foreign retailer's business operations, and will help to protect the

interests of domestic retailers. However, the sector cap (equity limit) could be increased in due

course as it has been in the telecom, banking and insurance markets.

4. Certain products that are sensitive should not be allowed, for example, arms/ammunition and

military equipment. The excluded products should be expressly stated in policy.

5. There should be restricted zones imposed by the government for the purposes of city planning.

E.g. Supermarkets/Hypermarkets should be kept away from the city centers to protect the

unorganized and small retailers who operate in these areas.

One of the most publicized and well known

studies was produced by the Indian Council for

Research on International Economic Relations

(ICRIER) in association with the Academic

Foundation, who were asked by the Department

of Consumer Affairs and the Government of

India to undertake a research project in to this

area of study, for which their findings were

published in 2005 so as to encourage the

debate of this important issue, and to enable

the Government to begin drawing up key policy

decisions.

The ICRIER (2005) study revealed that many of

those in favor of FDI believed that the opening

up of the retail sector would be of benefit to

India in terms of investment inflow, technical

knowledge and skills. Those in favor argued

that organized retailing requires heavy

investment if it is to expand rapidly, and would

require supply chain set-up and the

introduction of information technology.

37

54. Mukherjee & Patel, FDI in Retail Sector India, Academic Foundation in association with ICRIER, 2005, page 120


During the study by ICRIER (2005), groups of

traders in the unorganized retail sector who had

seen organized retailers locate in close

proximity to them, were asked questions to find

out if they had been adversely affected, and

whether they had been displaced by the

organized retailers' presence. According to the

results, “65% of unorganized players felt that

the growth of organized retailing has no major

impact on their business. Another 25% said

that they initially suffered some losses but had

changed their business strategies to face the

competition. The remaining 10% faced losses

but have not changed their business practices.

None of the unorganized players had to close 54down their operations.”

The main findings of the ICRIER study revealed

that FDI in retailing led to:

1. Increased speed of development in modern

formats

2. Improved productivity and efficiency of the

retail sector

3. Enhanced sourcing

4. Improved quality of employment – no

negative impact on employment if the

economy is growing.

5. Encouraged investment in supply chain

6. Led to integration of suppliers, logistic

service and retailers – reduction in the

number of intermediaries

7. Linked local suppliers, farmers,

manufactures to global markets

8. Low cost global retailers likely to lower

prices

9. Consumers are assured of product quality,

better service & shopping experience.

“FDI would ease the capital constraint and foreign players would bring in best management

practices that can be replicated by the domestic players. They would invest in supply chain, source

products from India and provide a platform to domestic manufacturers to export their products in

international markets through these retailers.”

38


The ICRIER (2005) study also reported that

those in favour of FDI argued that the reality of

the situation is that foreign retailers are already

operating in India due to the loop holes in

current policy and regulation, and that if FDI

was opened up, this would help to improve the

transparency of the regulatory system.

55This argument is supported by Dey (2007) , of

the Research Unit for Political Economy (RUPE).

Although FDI is restricted, Dey points out that

the Government of India has taken a much more

liberal approach to wholesale, commission

agent services and franchising and this has

resulted in many foreign retailers having

already set up operations through a number of

different routes. For example, Pottery Barn,

Ralph Lauren and Gap have all made India a key

sourcing hub. Wal-Mart, one of the world's

largest retailers set up a global sourcing

operation in Bangalore in 2002, and at the end

of 2006, it entered a Joint Venture with the well

known Indian corporation Bharti. "For the time

being, Bharti is to own the chain of front-end

retail stores, while the two firms will have an

equal share in a firm that will engage in

wholesale, logistics, supply chain and sourcing

activities. This is seen as a preliminary step by

Wal-Mart pending the removal of all restrictions 56on FDI in retail trade.”

Although some of the above arguments

supports FDI being introduced more formally to

increase transparency to the regulations, the

debate becomes even more complex and

relevant when you consider the recent changes

by the Government in the series of Press Notes

released in February 2009 (as discussed in

Chapter 3.1 Policy & Regulatory Environment).

The Press Notes from Elliott's (2009) point of 57

view "legitimise cascading investments.” It is

important that regulations are made clear so

that the possibility of foreign retailers using

these grey areas or loop holes to set up

cascading businesses dressed up as Indian

controlled and owned companies is eliminated.

In our opinion this defeats the whole object of

having FDI restrictions in place in the retail

sector, and makes the entry of foreign retailers

harder to control and monitor.

In respect of single-brand retailing which is

allowed up to 51% equity, Khatore and Parekh

(2009) point out that "several major foreign

single-brand retailers have already established

their presence in India through the permissible

franchise route. Thus, the policy of not

a l l ow ing 100% inves tment appears

desynchronised, as outflow of funds from India

in the form of franchise payments is permitted

but inflow of foreign investments is 58

restricted.”

55. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 – http://rupe-india.org/43/retail.html


57. Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 – http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html

58. Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th June 2009, page 1 –

http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm

39


Khatore and Parekh (2009) also argue that the

growth projection that has been forecast for the

Indian retail sector may not be achievable if the

government does not act quickly in opening up

single-brand and multi-brand retail sectors.

Kumar (2006) argued that FDI in retail improves

growth prospects. In an article in The Economic

Times (August 2006) Kumar stated that there

are predominantly 3 arguments against

allowing FDI in the retail sector. The first was

that it could hinder or prevent the domestic

organized retailers from growing. Secondly, it

would result in small retail stores closing and

unemployment growing, and thirdly, that it

would disrupt the social community and the

given way of life.

Kumar (2006) counters each of these

arguments individually, retorting that the first

argument is out-of-date, because domestic

players such as Reliance, Tata and various other

large organized retailers have already grown

and matured and that "these corporates don't

need protection…Actually, if these infants are

protected any longer they have good chances of

becoming delinquent adults. Soon enough,

monopoly rents will begin to accrue and bad

habits will get entrenched and it will then be

more difficult to open the sector. Domestic

players have the best locations anyway and a 59

clear head start.”

The second argument is also not substantiated,

as Kumar argues that "liberalization of retail

raises overall economic welfare and does not

result in loss of employment. Some

restructuring will take place but local markets

will not close down. Both can coexist as they

fulfil different needs and serve different 60

clientele.”

The third argument on the disruption of social

community and the given way of life has a

stronger case. Kumar acknowledges that

shopping centers & malls could potentially

result in "greater urban anonymity and a

complete breakdown of the bazaar culture and

the disappearance of the 'down town' space that

has its own charm. But, in France, Germany the

Nordic countries and also other parts of Europe,

experience has shown that local communities

can thrive if they are empowered and involved in 61

urban planning.”

59. Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 –

http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms





40


Kumar (2006) concludes that FDI in retail will

improve prospects of growth, will not harm

equity and will ensure that monopoly rents are

not encouraged, and therefore should be

opened up immediately.

Real estate consultant CB Richard Ellis also

believe that the government needs to open up

FDI in retail so as to bring in more investment

and to help promote competition in the sector

that has been hit hard by the current economic

slowdown. “The existing FDI rules are a

constraint. There is need to open up the sector a

bit more as it will facilitate fresh infusion of 62

funds and also promote competition,” said

Chairman of CB Richard Ellis's South Asia office.

Mehta (2007) of the Birla Institute of

Management Technology in giving an overview

of the Indian retail market implied that

regardless of the risks to traditional retailers

such as the 'mom and pop' stores, FDI would

still bring significant benefits to the Indian

consumer and give them value for money. "The

standard of living of the people will increase

and they will have a better lifestyle which will

result in the development of the economy as a 63

whole.”

When looking at FDI from a general point of

view, removed from the constraints of the retail

sector focus of this report, it could be argued

that FDI, if 'effective', will develop human

capital. Subbarao (2008) discusses this in a

research paper on FDI and Human Capital

Development, saying that "effective FDI

indulges in enhancement of human capital of 64

the country.” By 'effective' FDI, Subbarao

means investment that encourages the

development of a country that fosters the

development of each resident of the country.

62. Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Infusion into Retail', 12th October 2009 -

http://www.indianrealtynews.com/retail-market/relax-norms-on-foreign-direct-investment-to-ease-fresh-infusion-into-retail.html

63. Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology, 2007, page 2 – http://bimtech-retail.com/article2.html

64. Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 2

41


Subbarao (2008) also talks of other potential

benefits to host countries, including the

generation of employment, raising of

productivity, skills & technology transfer,

improved infrastructure, increased incomes,

enhanced exports, and contribution to the

long-term development of developing

economies. There is also the advantage to the

Government of additional taxes. Taxes that are

generated from the entry of foreign investors in

a host country can be used by the Government

to re-invest in human capital development.

Even without taxes, a United Nations

Conference on Trade and Development

(UNCTAD) report in 1994 (cited by Subbarao

(2008)) reported that foreign multi-national

investors' "demand for highly trained graduates

manifests itself in the form of financial support, 65

particularly to business schools.” Therefore,

it is likely that foreign retail investors will look

to invest in human capital development as well

as provide additional tax streams. With this

said, Subbarao acknowledges that different

countries have had different experiences with

regards to whether FDI has lead to the

enhancement of human capital.

The Financial Express (anonymous author,

2005) when discussing the arguments of those

who are against FDI, said that there are no

restrictions for Indian large corporates to enter

into retail. Many domestic players have huge

expansion plans and the ability to invest billions

of dollars themselves. What is the difference

between these domestic players expanding, or

foreign investors joining and expanding in the

Indian market?

The Financial Express (2005) believed it could

also be argued that organised retailing would

have little detrimental effect on retailers if

comparison is drawn from the impact of stores

like Wal-Mart on small US retailers. Retail sales

increased substantially overall; and although

retail sales were adversely affected in areas

such as clothing & groceries, there was an

increase in sales of general merchandise, home

furnishing, and food and drink.

65. Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 7

“India's retail sector is already undergoing a change propelled by evolving consumer demand and

lifestyles, urban chaos and shortage of retail space, integration of markets, a need for revamping

logistics, and above all, global competition. FDI may hasten this change, and even benefit SMEs. It

would be better if FDI is allowed in phases, giving time for policy adjustments, and with appropriate

riders on procurement to ensure that small producers gain from it. The debate must shift into the

realm of 'how' instead of 'why'.”

42

5.2 Arguments against FDI in Retailing

When researching the justifications 'against' FDI

in India's retail sector, it should be recognised

that there have been many studies that have

looked at the strengths and weaknesses of

allowing FDI in developing countries in general,

of which several of these have focused on India.

Amar Nayak (2008) in his literature on multi-

nationals in India discussed some of these

studies to try to understand the impact of FDI on

host countries. It was evident that the

literature revealed a heterogeneous (varied)

effect on host countries, and whilst “some

studies show that FDI has benefited a host

country, many other studies show that they

have either had a negative impact or no impact 66on host countries.”

Nayak (2008) when discussing the literature

that focused on India, pointed out that there

were apparent positive and negative effects

from FDI. For example, “Johri (1983), by

studying the business strategies of foreign

multinational companies in the drug and

pharmaceutical industry, showed that domestic

companies benefited greatly by the

investments of foreign pharmaceutical

67companies in India.” Other studies by N.

Kumar (1990), S Kumar (1996), Myneni (2000)

and Debroy (1996) were all identified by Nayak

(2008) as showing positive benefits to the

domestic companies and country as a whole.

To the contrary, “a number of highly compelling

studies show that FDI has not been beneficial to

host countries. Nair-Reichert and Weinhold

(2001) studied the impact of FDI on over 24

countries in different stages of development

and found that FDI had a heterogeneous

impact. Country specific analyses of host

countries show that FDI has not helped them in 68

meeting their national objectives.” (Cited by

Nayak (2008)

Chakraborty and Basu (2002) had concluded

from research that the Indian Government's

trade liberalization policy had initially made a

positive impact, but as a whole had tended to

cause labour displacement. In fact, Nayak

(2002, 2004, 2005) had concluded “FDI on the

whole in India has neither been effective for

India nor for the foreign companies in India.” 69(Cited by Nayak (2008)

66. Amar K.J.R. Nayak, 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008, page 13

67. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13



43


Abrol (2005), the President of the Bombay Small

Scale Industries Association is cited by the

Financial Express website as having said

“various ministers of the present government

are proposing FDI in retail. We believe

multinational retail and World Bank-

International Monetary Fund lobbies and some

self-serving bureaucrats are supporting it. This

proposal will create multiple East India

Companies in our country and affect livelihoods

of 1.2 crore (12 million) small retailers. Isn't the 70

proposal anti- national?”

Abrol is not alone in this view. There have been

several parties who have spoken out strongly

against FDI in Retail. The organisation 'India

FDI Watch' argues why India should be kept

Independent, and the Center for Policy

Alternatives Society (CPAS), a privately funded

think tank focused on the study and review of

public policy in India, have produced a series of

reports on the problems with FDI in Retail. The

first in 2003, then in 2006, and a third in 2007.

All have compelling arguments that require

further consideration.

Mohan Guruswamy, Chairman of CPAS in New

Delhi was the former Advisor to the Finance

Minister, and a Harvard graduate. Along with

several colleagues (K Sharma, J P Mohanty and

Thomas J Korah) he produced a document titled

'FDI in India's Retail Sector, More Bad than

Good?' Guruswamy et al (2003) highlighted that

unorganised retai l ing accounted for

approximately 98% (in 2003) of total trade, with

organised retailing only having a share of 2% of

the market. The size of the retail market is very

hard to gauge, but estimates have placed it at

around Rs 4,00,000 crores (US$ 86,021.50

million) which was forecast at the time to

double by 2005. They acknowledged that

domestic retail businesses that were 'corporate'

owned, were only a small amount of the total

market, but were growing at a rate of 40%.

Federation of Indian Chambers of Commerce

and Industry (FICCI) in 2003 estimated total

retail business to be 44% of GDP, and food sales

made up 63% of total retail sales. With food

retail trade being a significantly large segment

of India's GDP, and because of its huge

employment potential, Guruswamy felt it

deserved special attention.

70. Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 – http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1

44


Guruswamy et al's (2003) first note was that

even if FDI was not opened up, the growth of the

domestic 'organised sector' alone would result

in efficiency improvements and an increase in

food retail sales activity, which would have a

trickle down effect on employment and

Guruswamy et al (2003) talked of retail as a 'Forced Employment' sector in India. They argued

that one of the main reasons behind the growth of retail and its fragmented nature was that

Retailing was “probably the primary form of disguised unemployment/underemployment in the

country. Given the already over-crowded agriculture sector, and the stagnating manufacturing

sector, and the hard nature and relatively low wages of jobs in both, many millions [of] Indians are

virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural

decision for an individual to set up a small shop or store… and thus, a retailer is born, seemingly

out of circumstance rather than choice.”

This would explain why India is so highly fragmented with estimates at the time of the above report

suggesting in the region of 11 million outlets with only 4% of them being larger than 500 square feet

in size. But unemployment is high and many of the unemployed people turn to very informal

retailing to try and make some kind of living, with limited alternative employment opportunities.

economic activity in rural locations. This raised

the question of whether FDI was necessary at all

in this sector, if there is enough domestic

capital being injected in to the retail sector. The

furious growth of the domestic corporate

retailers would bring about enough investment.

45


Dey (2007) recognized this problem also, and

stated that "the retail sector [in India] acts as an

important shock absorber for the present social 71system.” When for example, a factory closes,

or a peasant gets evicted from their land, or the

stagnant manufacturing industry fails to soak

up new entrants to the job market, then the

retail sector manages to absorb them all.

Skilled laborers end up as street hawkers, and

educated youth turn to selling newspapers. A

better off unemployed person might start

telephone services and retail telecom cards.

"Thus, after agriculture, the incidence of under-

employment is probably highest in the Indian

retail sector… Those displaced as a result of FDI

in retail may not show up as an increase in 72visible unemployment”

Interestingly, Guruswamy et al (2003)

discussed a particular foreign retailer who has

subsequently entered the Indian market in 'cash

& carry' wholesale (Wal-mart) arguing that if

they were to enter India, they could use

predatory strategies to force out smaller

competition and that this would create

unemployment in the millions.

It was calculated that on the basis that India had 35 towns with over 1 million people in each, and if

Wal-mart opened an average store in each city and they performed as well as an average Wal-mart

store employing just over 10,000 employees only, then by extrapolating the turnover and no. of

employees alongside the average trend, it would be the equivalent of 432,000 people being

displaced. The report expanded on this theory further arguing that if FDI retailers were to acquire

say 20% of retail trade, this would equate to Rs. 800 billion of turnover, which would lead to the

employment of just 43,540 people, but would displace approximately 8 million people employed

in the unorganised retail sector.



46


Centre for Policy Alternatives' (CPAS) first report by as detailed above, acknowledges that there are

many good things that could come from FDI, and they have supported FDI in other areas where they

feel the evidence suggests that it will benefit and grow the economy. For the retail sector, CPAS

make a number of recommendations for issues that should be addressed before considering the

opening up of the retail sector to foreigners. These recommendations are summarised below:

1. Bank Finance – The government should create suitable lending policies so as to assist

domestic organized and unorganized retailers to grow and improve their efficiency. These

policies should encourage those in the unorganized sector to migrate to the organized sector.

2. National Commission – A National Commission should be set up to carry out research in to

the retail sector to help create policies that will support the sector if and when FDI arrives.

3. Conditions – Conditions with regards to sourcing of farm produce, domestically

manufactured merchandise and imported goods should be applied to large foreign retail

companies. The conditions should encourage the sourcing of goods from India's domestic

market.

4. Timescale / Safeguards – The opening up of the retail sector should be slow and gradual so

as to allow for the displacement of labor to be analyzed and policies amended where

appropriate, with social safeguards in place. Ensure high entry costs for foreign retailers and

implement regulations so that the retailer cannot use predatory tactics with their pricing to

gain market share aggressively.

5. Manufacturing Sector – In order to cope with the labor displacement, CPAS strongly suggest

that the manufacturing sector must be improved, in the belief that this will offer some

compensation for the displaced labor from the retail industry.

6. Co-operative Stores – They recommend that the government should encourage co-operative

stores so as to source and stock consumer goods/commodities from the small producers, in

order to address the two problems of limited promotion and marketing ability, as well as

assisting market penetration.

7. Agricultural Perishable Produce Commission (APPC) – A Commission to ensure that

procurement costs are fair for farmers of perishable commodities.

47


8. Food Retail Sector

a. Training to provide skills in transport, handling, storing, sorting, grading, hygiene,

refrigeration equipment maintenance etc.

b. Improve Infrastructure for retailing with focus on logistics and hygiene

c. Creation of certification and price administration bodies to oversee regulation of quality

and to assist with the upgrading of technical & human interface in the 'rural-to-urban

supply chain'.

d. Credit availability

e. Implement cross integration of India's existing long food supply chains such as dairy, fish,

fruit and veg to provide new products in new markets and help to improve consumer73 choice, and increase employment and economic activity.

By undertaking their recommendations, CPAS

believe that it will help to ensure that the

domestic and foreign retailers are on equal

ground, and that domestic retailers are not

especially disadvantaged. "The small retailers

must be given ample opportunity to be able to

provide a more personalized service, so that

their higher costs are not duly nullified by the

presence of b ig supermarkets and 74

hypermarkets.

The research study undertaken by ICRIER (2005)

revealed that those against FDI in retail argue

that the entry of large multi-national retailers

could upset India's import balance, as a number

of these prefer to source globally (for example,

from China) and may prefer this to sourcing

from India. This view is supported by CPAS. In

a recent study, CPAS's Chairman Guruswamy,

Sharma & Jos (2007) suggest the potential

problem of a 'China Pipeline'.

It argues that the efficiency of the large global retailers is due to their ability to procure goods

globally from the cheapest possible source. They are able to force prices down purely by

economies of scale, ie. purchasing such a large volume of any given item. China has "mastered the

complexities of the procurement-logistics supply chain and do provide huge standardised

volumes of quality household products at a low price within strict time schedules. Wal-Mart

procures £18 billion worth of Goods from China giving it a ready pipeline through which cheaper

goods can flow into the Indian economic hinterland.”

73. Guruswamy, K Sharma, JP Mohanty, TJ Korah, “FDI in India's Retail Sector; More Bad than Good?” Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 -

http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf

74. Guruswamy, K Sharma, JP Mohanty, TJ Korah, “FDI in India's Retail Sector; More Bad than Good?” Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 -

http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf

48


Those opposed also believe that foreign retail

investors may use predatory pricing

techniques, which are aggressive and can force

out domestic players by selling at below cost

until the domestics have been eliminated. Then

the foreign retailers have a monopoly of the

market and can increase prices and reap higher

profits. This is not such an inconceivable

concept, as it has happened elsewhere in the

world which can be seen, for example in an 75article by the Institute for Local Self-Reliance

where Wal-mart were charged with predatory

pricing in the United States in 2000.

The trading associations have pointed to the

fact that retail trade does not require large

amounts of investment to operate because

goods are bought on credit and sales are mainly

cash, and therefore the foreign retail investors

will not bring large inflows of foreign

investment. To the contrary, they argue that

"after making initial investment on basic

infrastructure, the multinational retailers may

remit the profits earned in India to their own 76country.”

India FDI Watch is a national coalition of labor

unions, trade associations, environmentalists,

NGOs and academics that have formed to block

attempts by Prime Minister Singh's government

to allow foreign direct investment in India's

retail markets (www.indiafdiwatch.org). They

have produced several reports that argue that

India should say no to FDI in retail unless the

foreign retailers "make satisfactory guarantees

that would protect communities; insure the

stability of existing small businesses and

traders; guarantee fair wages and working

conditions for their own employees and source

employees along with union protection and

agreements; and insure that a significant

percentage of sourcing derives from the Indian 77

market.”

75. http://www.newrules.org/retail/news/walmart-charged-predatory-pricing

76. Mukherjee A, Patel N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, page 118

77. http://indiafdiwatch.org/index.php?id=80

49


One particular India FDI Watch campaign

believed that there is pressure on the

government from the IMF and World Bank to

allow labour standards to be dictated by the

demands of supply chain flexibility ie. 'hire and

fire' policy. They argue that if the government

is to change labour laws (as it has already

proposed to do in 2005), then the safe guards

that have been in place to protect India's labour

force will be lost and the business environment

will be far more conducive to FDI and global

integration, as the model used by global

retailers requires flexible labour markets to be 78

present.

The same campaign report argued that Trans

National Companies (TNCs) are trying to bring

in changes through the World Trade

Organisation's GATS (General Agreement on

Trade in Services) to "safeguard their vested

79interest” The proposed GATS agreement

would provide that an investor would not be

subject to the introduction of new barriers to

investment in a host country, would be provided

with post investment protection, protection

against all material and intellectual property,

e f fec t i ve p ro tec t ion aga ins t d i rec t

expropriation as well as against indirect

expropriation through discriminatory

treatment, a mechanism for compensation in

the case of expropriation, a mechanism for the

settlement of disputes, and the right to

determine its own ownership structure and

provisions for legal, regulatory and 80

administrative transparency.

This protection could be detrimental if India

decides to open FDI in retail, and then find that

it is not successful. It will be too late for the

government to go back on any decision, as the

GATS agreement may prevent them.

78. India FDI Watch 'Keep India Independent!', 2009, Page 23 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf

79. India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf

80. India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf

50

Chapter 6 - Detailed analysis of factors

and conditions related to FDI

6.0 Survey Design & Sample

The survey sample consists of 70,000 people

who have registered to receive 'The India Retail

Newsletter', an e-web news service, which

provides the latest news on the sector. The

sample of people who are registered is made

up of Retailers, Fast Moving Consumer Goods

(FMCG) companies and manufacturers,

franchisors and franchisees, retail service

providers, real estate companies, software & IT

c o m p a n i e s , h a r d w a r e a n d s y s t e m

manufacturers, consulting companies,

headhunting f i rms, and educat ional

institutions.

Out of the 70,000 participants in the survey,

there were 243 respondents. Figure 4 below

shows the profile of the survey sample used to

distribute the survey questionnaire, broken

down by Industry. 91% of the chosen sample is

employed in the Indian retail sector, and the

remaining 9% are in inter-related industries and

sub-sectors.

A survey sample of this size is more than is required for the purposes of obtaining a representative

view of the domestic Indian retail sector. It covers not only participants who are within the retail

trade directly, but also others within retail-related sectors (as detailed above) and therefore should

provide the researcher with a balanced view from various viewpoints.

Survey Sample by Industry

1%

2%

1%

1%

4%

91% Retail

Retail

FMCG / Apparel / Manufacturing Media Real Estate Information Technology

Other

Figure 4

51

6.0 Survey Design & Sample

The questionnaire was designed to contain

both open and closed ended questions for a

number of reasons. Open ended questions

allow further clarification of the closed-ended

responses, as well as allow for thoughts and

ideas to be discovered that perhaps have not

been considered in the literature review and in

earlier stages of this research. The justification

for using closed-ended questions was to

counter-balance any mis-interpretation / lack

of response in the qualitative areas.

The questions were written after a preliminary

review of the initial literature discovered during

the early stages of the research. The closed

ended questions would be able to provide a

simple view of whether a particular respondent

believed, for example, 'Yes, FDI should be

opened up', or 'No, reforms policy are not

necessary'. The open-ended questions were

then designed to link in to these closed

questions and to draw out more detail, by

encouraging respondents to give reasons as to

why the felt a particular way, or what they would

propose as solutions to a specific problem, for

example, possible labour displacement.

It was important to ensure that anonymity and

privacy were considered throughout the survey,

so as not to discourage participants, and to

protect their personal views and opinions.

Therefore, the preliminary data on the

questionnaire i.e. name, occupation, sector etc

were not compulsory. A 'respondent ID

number' was allocated to each response when

collated on to computer software so that

specific respondent comments could be

referred to in the analysis, and for ease of

reference.

6.1 Questions

Please see Appendix II for Survey Questions.

52

6.2 Data Analysis

Below is a summary of the data results from the survey following analysis. There were 243

respondents in total, and 'no response' rates are recorded for those who answered some of the

survey questions, but not the specific question that is being analysed. The following analysis charts

display the results visually, but should be read in conjunction with Chapter 4.3 Results & Findings,

and using the Coding Key in Appendix I where appropriate. Each chart states if it requires the

Coding Key for interpretation.

No. of people aware of current FDI in Retail Policy

(Question 1)

189

48

6

0

20

40

60

80

100

120

140

160

180

200

Yes

No

No response

No. of people

(Question 2)

203

38

2

0

50

100

150

200

250

Yes

No

No response

No. of people

Should the Indian Government open up FDI restrictions in the Retail Sector?

Chart S1

Chart S2

53

Are you happy with the current FDI Retail policy as it is?(Question 4)

41

199

3

0

50

100

150

200

250

Yes No No response

No. of people

(Question 3 - please see Coding Key)

5

1

8

25

25

26

20

60

15 11

11

36

0 10 20 30 40 50 60 70

A

B

C

D

E

F

G

H

I

J

K

X

Coded Response

No. of respondents

Coded Qualitative Analysis of Reasons why FDI should or should not be opened up in India

Chart S3

Chart S4

Chart S5

(Question 5)

Only Allow Branded Products

17%

No Response

4%

Certain Products Must Be

Manufactured/Sourced In India

By The Foreign Investor

31%

None

13%

An Exclusion Of Specific

Products For The Domestic

Retailer

3%

Only Allow FDI In Specific

Cities/Areas

0%

Equity Limits 4%

Only Allow Certain Retail

Formats (Eg: Malls)

12%

Other Restrictions

8%

A Minimum Investment Amount Requirement

8%

What conditions should be imposed on foreign retailers if policy is changed?

54

Should Government reforms be made to support domestic retailers?(Question 6)

170

70

3

0

20

40

60

80

100

120

140

160

180

Yes No No response

No of People

Chart S6

Coded Analysis of Suggested Reforms to Protect Domestic Retailers(Question 7 please see Coding Key)

N

1%

Q

3%

R

2%

S

3%

T

1%

V

1%

K

0.3%

C

2%

W

1%

U

0.3%

I

1%

H

3%

F

1%

E

1%

D

1%

B

3%

A

7%

J 10% (Subsidy)

L

1%

M

2%

O

1%

P

6%

Y

12%

(no reforms necessary)

X

35%

(no response)

G

3%

(Question 8)

223

15

5

0

50

100

150

200

250

Yes No No response

No. of people

Will lifting restrictions on FDI in retailing allow more investment, technical skills and consumer choice?

Chart S7

Chart S8

55

(Question 11)

39

27

43

38

9

46

17

8

0

5

10

15

20

25

30

35

40

45

50

0 1 2 3 4 5-6 7-10 10+

Years

No of people

How many years should FDI policy be 'phased in' to allow domestic industry & market to adjust?

Coded Analysis of the no. of people who believe the argument that "foreign retailers will not 'own a stake' and therefore will make little investment…"

(Question 9 Please see Coding Key)

182

25

36

0

20

40

60

80

100

120

140

160

180

200

FALSE (A) TRUE (B) NO RESPONSE (X)

Answer

No. of people

(Question 10 - Please see Coding Key))

A

5%

B

6%

C

11%

D

28%

E

2%

F

8%

X

40%

Coded Analysis of Suggested Solutions to potential Labour Displacement problem

Chart S9

Chart S10

Chart S11

56

6.3.1 Chart S1 (Question 1)


Are you aware of the current FDI in Retail Regulation & Policy?

The first question revealed that 77.7% of respondents were aware of current FDI in retail policy, with

19.7% not being aware, and 2.6% of respondents giving 'no response'. This data shows that a

significant amount of people within the domestic market place are paying an interest in the current

policies and how these could influence their industry and country. The awareness was anticipated to

be high, due to the very fact that the topic has been discussed in the Indian media many a time over

the last decade.


Do you think the Indian Government should open up Foreign Direct Investment (FDI) restrictions in the Retail Sector?

It was evident from the responses that a significant number of respondents would like to see the

opening up of FDI in the retail sector.

A very small 'no response' rate was observed from this question at 0.9%.

These results show a strong amount of support for the concept of opening up FDI, although the data

analysis also highlights that there is still a small but significant (15.6%) group of people within the

domestic industry who oppose the idea of opening up FDI.


Please give reasons for your answer to Question 2

Question 3 was an open ended question asking why participants thought FDI policy should or should

not be opened up. Responses were analysed and coded according to common themes. 11 themes

or categories were identified and allocated a code (please see Code Key in Appendix I for

identification of categories / themes.)

83.5% of respondents said 'Yes', India should open up the FDI policy, whilst only 15.6% said 'No'.

57



24.7% of respondents believed that opening up FDI in the retail sector would allow for improved

skills, technology, innovation and best practices, as well as offer improvements to infrastructure,

supply chain and logistics, an improved competitive environment which in turn would lead to

consumer benefits. They also believe that it would increase employment and economic growth and

bring investment to the domestic sector including related-sectors such as agricultural and

manufacturing operations, This particular group of respondents (coded H) were 'particularly pro-

FDI' and gave multiple reasons (as above) as to why the sector should be opened up. Even more

revealing is that a further 45.3% of respondents mentioned either 1 or 2 of the above reasons for

believing FDI should be opened up.

Therefore, 70% of respondents believe that one or more of the above reasons are justification for

opening up FDI in the retail sector. This reflects a strong sentiment towards FDI, and is a sign that

the domestic market feels positively about the widening of FDI policy and the benefits it could bring

to the countries industry and wider economy.

A small number of respondents, 6.2%, made specific mention of the argument of allowing 'free

market efficiency' to reign, and for there to be less 'protectionism' within the retail sector.

4.5% were against the idea of opening up FDI yet, because they felt that the domestic market was not

developed enough yet. However, they also felt that in the future once the 'organized' retail had

grown and reforms had taken place, it would be of benefit to the country to allow FDI in the sector.

A further 4.5% of respondents felt strongly that FDI would be of no benefit and should not be

allowed. The researcher anticipated the number of respondents in this group to be higher, given

that 15.6% of respondents said 'no' to opening up FDI in Question 2 (see Chart S2). However, these

figures could differentiate due to the fact that a 15.2% of participants did not respond or make any

comments on Question 3.

58



Are you happy with the current FDI Retail policy as it is?

Question 4 was intended to obtain a view of whether the domestic market was happy with the current

policies.

Only 1.2% of people did not respond to this question which is an acceptable level.

16.9% of people were satisfied with the policies as they are, while an overwhelming majority of

81.9% were dissatisfied with the policies as they stand today.


If FDI policy is to open up in the future, do you think any of the following conditions should be imposed on foreign retailers?

Question 5 was a multiple-choice question, with a number of suggested conditions that could be

imposed on foreign investors. Participants were asked to select a condition they felt should be

imposed (if any). The most significant group of respondents (31%), were those who felt that foreign

investors should have to source certain products from India. 17% thought that only branded

products should be allowed through FDI, while 13% of respondents felt that there should be no

conditions imposed on FDI at all.

In terms of retail formats, 12% believed that foreign retailers should only be allowed to operate in

specific formats, for example, malls, and a further 8% felt that a minimum investment amount should

be specified in policy. A smaller group of respondents (4%) felt that Equity limits should be put (or

kept) in place (as currently imposed on single-brand retail at 51% equity)

3% of respondents supported the idea of excluding certain products to protect domestic players, and

8% felt that 'other restrictions/conditions' would be more appropriate than the options available for

selection in the multiple-choice box in Question 5. The 'no response' rate on this particular question

was 4%.

The data from question 5 reveals a strong support for conditions that involve sourcing Indian

products, and thereby growing the manufacturing/agricultural industries and India's GDP. Branded

products and format restrictions were also supported by a number of respondents, but more

surprising was the 13% of people who supported 'no conditions' at all.

59


Do you think that government reforms need to be made to support domestic retailers so that they can face the foreign investment competition?

The data collected from Question 6 revealed that 70% of respondents felt that reforms should be

made by the government to ensure that the domestic retailers are supported. The other 28% of

respondents felt that no reforms would be necessary to support the domestic retailers. The 'no

response' rate was reasonably low at 2%.

When interpreting this question alongside Chart S2 (Question 2), it is evident that although 83.5% of

people felt that FDI should be opened up, 70% also felt that reforms were necessary to support

domestic retailers.



Following Question 6, what reforms do you think should / should not be made?

Question 7 was open-ended, and aimed to discover what reforms the survey participants believed

would, or would not, help to support domestic retailers. The data was analysed and coded according

to common themes or specific recommendations for reform, which consisted of 25 different coded

categories from the 243 responses (please see Coding Key in Appendix I).

10% of the survey respondents recommended that the government provide subsidy to domestic

retailers, specifically in the form of low-rate loans/bank finance. In contrast to this, 12% felt that no

reforms were necessary in order to protect the domestic retailers. This group (coded 'Y') who

commented that no reforms were necessary, had a tendency to also mention that their preference

was for a 'free market' and that healthy competition would be preferred. There was also a tendency

with these respondents to commenting that the domestic players, particularly small 'kirana / mom &

pop' stores, would be able to survive alongside the foreign investors with out any issues. For

example, one respondent said “they [small retailers] will continue to exist, the kind of personalised

service, decision taking speed etc of small retailers can't be matched by big retailers.” (Respondent

ID no. 94)

7% of respondents (coded 'A') suggested the government invest in, and provide for equal access to an

organised wholesale & supply chain infrastructure, so that domestic retailers can become more

efficient, bring down their costs and offer better value so as to be able to compete with foreign

investors in the market place.

60


Tax relief and tax incentives for domestic retailers was a suggested recommendation by 6% of

respondent, 3% felt that implementing educational retail training initiatives would be of benefit. A

further 3% recommended improving real estate regulations to facilitate the provision of land to

domestics and to provide for allocation of land and city planning.

Bureaucracy was raised as a concern, with 3% believing that there is a need to reduce administration

and formalities for domestic players to facilitate, for example, exporting or opening a new retail

outlet (which can require up to 30 licences).



Do you believe that lifting restrictions on FDI in retailing will allow more investment, technical skills and consumer choice?

Question 8 specifically asked whether people agreed Yes or No to that lifting restrictions on FDI

would allow more investment, technical skills and consumer choice in India.

7% answered 'No', and there was a 2% 'no response' rate on this question.

By comparing these results to Chart S2 (Question 2) it reveals that although 83.5% of people believed

FDI should be opened up, we can see that a higher proportion of people (91%) believe it would bring

increased investment, skills & consumer choice. This means that a number of respondents whilst

having said 'no' they do not believe FDI should be opened up, clearly acknowledge that it would bring

benefits to the economy/industry (in terms of investment & skills) and to society (in consumer

choice).

91% of respondents answered 'Yes', believing that lifting restrictions would bring more investment,

technical skills and consumer choices.

61



It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same. How can you counter this argument?

Question 9 was an open ended question, which asked participants to counter the argument that

'foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the

profits all the same'. The responses were analysed and coded according to whether they believed

the statement to be 'false' and disagreed - these respondents were able to counter the argument

with solutions to prevent this from happening, or believed the statement to be 'true' and agreed –

these respondents offered no counter argument and could provide no solutions to this potential

problem. (please see Coding Key Question 9, Appendix I)

75% of respondents believed the statement to be false, and provided simple solutions to the

problems, or argued that it was not an issue of concern. One particular respondent said that “Unless

the foreign retailers really invest in India, they would not be able to reap the profits. Only long haul

players will really benefit from the Indian market.” (respondent ID no. 56) Another argued that “It is

not true. As such, retail needs heavy investments both front end and back end. It is unlikely that

foreign investors can overlook this point and hence their financial involvement would be high. Yes,

there is certainly a fear of 'flight of capital' after some time, which needs to [be] protected with proper

regulations” (respondent ID no. 98). An interesting thought was also considered by respondent ID

no. 81; “by constructing businesses and providing fair wages, isn't that a defacto investment?”

10% believed the statement to be true. For example, respondent ID no. 141 said “I am for [this]

argument. I believe that fair returns should be in proportion to the investment made by the foreign

investors. Also the money in India should be used for the welfare and development of India first.”

Respondent ID no. 53 also agreed with the statement, saying “this argument has some validity.”

It is evident that the majority of people did not believe in the statement posed by Question 9. The

responses analysed, conveyed strong support for the concept that foreign retailers will be looking to

stay for the longer term in India (being that it has such huge retail market potential), and therefore

will have to invest in improving infrastructure, supply chain, technology and skills for example, so as

to make a success of their Indian operations.

62



Can you think of any solutions to the potential problems of labor displacement in the unorganized retail sector if FDI regulations are opened up?

Question 10 was an open ended question, where participants were asked to suggest ways in which

they thought one of the key problems, labor displacement, could be resolved.

The responses were analysed and interpreted, and coded according to general themes in response.

Please see Coding Key, Question 10, Appendix I

The data analysis revealed that 28% of the respondents believed that labour displacement simply

wouldn't happen. For example, respondent ID no. 91 said “I don't think that organized retail

presents any threat of labour displacement in the unorganised retail sector. Rather it would provide

better opportunities.”

To the contrary, 11% of respondents believed that there were no solutions to labour displacement,

and that displacement was inevitable if FDI in retail was opened up. This is not to say that the

participants were either for or opposed to FDI, but merely that labour displacement was not

something they believed could be 'solved'. Analysing this against the number of people that believed

FDI should be opened up in India (203 respondents), 12% of these respondents also thought that

labour displacement was inevitable.

This could be interpreted to mean that this group has accepted labor displacement as one of the

obvious risks of FDI, but that the benefits would outweigh the risks.

8% of respondents to question 10 argued that providing skills and comprehensive training to

existing 'unorganized' retailers would allow them to upgrade their businesses and be innovative so

as to continue employment in the retail sector without being displaced. A further 6% thought that

foreign retailers should be asked to invest in retail related facilities first and foremost, to offer

further employment in back-end services, manufacturing and farming, to compensate for the labor

displacement.

5% believed of people believed the Government should be responsible for providing and controlling

equal employment opportunities in both the growing 'organized' sector, and in back-end services.

These respondents had a tendency to believe that labor laws were in need of upgrading to support .

63


The final group of respondents consisted of 3% who believed that there should be compensation,

rights and benefits provided to those that are displaced. No participant specified whether this

should be from the Government, foreign retailers, or both.

The analysis of Question 10 has revealed that the majority of people believe that either labor

displacement will not happen at all against those who believe if labor displacement does happen,

there is little that can be done to prevent it.


Over how many years do you think FDI policy could be phased in to allow domestic industries/markets to adjust successfully?

Question 11 was a closed ended multiple choice question, asking participants to say over how long a

period they thought FDI should be opened up to allow domestic retailers to adjust successfully (if at

all).

16% of respondents believed phasing in would not allow for any successful adjustment of domestic

retailers. This particular group believed also that the retail sector should be opened up imminently.

A further 19% thought 5-6 years would be more appropriate, 7% believed 7-10 years, and a small

minority at 3% thought that the phasing should be over a period greater than 10 years.

The majority of respondents, 48%, thought 1 to 4 years was adequate enough time to allow for the

successful adaptation of domestic retailers, with a weighting toward 2-3 years being preferable.


64

Chapter 7 -Conclusion

7.0 Introduction

So as to draw conclusions from this study, it is appropriate to review the objectives that were set out

earlier in Chapter 1:-

1) To investigate the Indian retail market place and current policy & regulations with regards to

foreign investors.

2) Examine the arguments for and against changing current policy and improving the regulatory

environment

3) Compare the opinions of the Indian domestic retail sector so as to interpret market sentiment

towards foreign investment, and to explore thoughts on the issues faced by the sector.

4) Consider what solutions could potentially resolve the issues and are supported by the

majority of the domestic retail players.

7.1 Indian market place and FDI policy & regulations

It was clear from the literature review that India is a very unique market and has an extremely

dominant 'unorganized' sector that is concerned about the introduction of FDI in the retailing sector.

Since 1991, economic reforms have been underway to utilize more foreign investment and to

become increasingly efficient and internationally competitive. India has come a long way in this

regard, but there are still areas that require further reform and improvement. For example, there are

issues with labour laws, real estate regulations as well as general economic problems such as high

unemployment, inflation and 'jobless growth'.

The Food & Beverages vertical has huge potential for the organised retail sector as to date less than

1% of this vertical has been penetrated by organized retailers. Clothing & Textiles also holds a fairly

significant share of the retail markets revenue. We believe that these are the two most likely target

sectors for foreign investors.

Economic growth in India is good (with a 5 year average of over 8% real growth), and the retail industry

contributes approximately 40% of this GDP, and yet still has a very under developed 'organized

sector', and therefore offers exciting growth potential.

65

7.1 Indian market place and FDI policy & regulations

Changing consumer patterns appear to be a

large factor in the growth of the Indian

'organised' retail sector, with a burgeoning

middle-class, and a growing young population

with a willingness to spend. Consumer habits,

desires and incomes are changing and

demands for different retail formats are

emerging.

The retail sector in India does not have 'industry

status' and that this causes difficulties for all

concerned. Providing industry status would

allow comprehensive legislation to be put in

place to govern the running of the retail sector.

This in turn would assist in accelerated growth

of the retail sector and would remove a number

of barriers that are currently slowing down

growth, such as bureaucracy, formalities and

lack of finance for retailers, for example.

The literature review showed that current

investment policy is already quite liberal

towards FDI in many sectors, with only a few

sectors (predominantly service sectors such as

retailing) that are restricted. Retailing is

allowed via a number of methods such as

franchising/joint venture, but 100% equity is

only allowed in Wholesale Cash & Carry, and

51% in single-brand retailing. No multi-brand

retailing is allowed by foreign investors.

The recent changes brought about through a

series of Press Notes in 2009 have caused

confusion over the policy, as the changes allow

Joint Ventures to effectively create sub-

companies (cascading). We believe this may

encourage foreign investors to use this 'loop

hole' to create sub-companies so that they can

exceed FDI caps, and potentially enter areas

such as multi-brand retailing through the

'back-door' without technically breaking the

rules. There needs to be more clarity in this

area of policy. The literature review revealed

that although there are hurdles to be overcome

in the policy and regulatory environment, the

government seems to be working on various

solutions, for example, Special Economic

Zones.


66

7.2 Arguments for & against changing policy and improving the regulatory environment.

Those in favour of FDI in Retail argue the following reasons:-

1. The technical edge offered by foreign investors is crucial to the survival of domestic

retailers, particularly in the current downturn.

2. Knowledge & skills would be transferred.

3. Allowing 100% FDI will encourage domestic investment in the sector

4. Economic boost with increased FDI inflows

5. Improve the standard of living of the country as a whole (enhanced Human Capital)

6. Improve productivity and efficiency in management

7. Foreign 'low-cost' retailers will set-up/adopt integrated supply chain management, which in

turn will lower prices for consumers and improve the infrastructure of the country.

8. Increased FDI in Retail will ensure quality products and customer services

9. Will promote links between domestic/local suppliers, manufacturers and agricultural traders

with the global market

10. Sourcing / Exports from India would be enhanced.

11. Standards (quality, health & safety etc) & best practices would improve

12. Domestic players would develop new strategies to improve operations to counteract any

competition from foreign players

13. Foreign retailers would encourage employment in back-end services

14. Improvements in quality of employment

15. Reduce the number of intermediaries

16. Joint Ventures would help to ease the capital constraints of domestic companies

17. Most acknowledged that phasing-in should be considered and that some restrictions would

be required on equity limits, certain products, and certain 'zones'

18. Research suggests that 'unorganised' retailers have not been adversely affected by the

location and growth of 'organised' retailers nearby. Those that were affected, tended to

adopt new strategies to face competition

19. Improve transparency and prevent 'back-door' entry and 'loop holes'.

20. Not logical to have 51% restriction on single brand retailing when so many foreign single

brand retailers have already entered through the franchise route.

21. Retail Growth forecasts may not be achievable without FDI stimulus

22. Additional taxes will be raised for the benefit of India

23. Contribution to the long-term development of the country (ie. investment in education,

infrastructure etc)


67

7.2 Arguments for & against changing policy and improving the regulatory environment.

Those against the opening up of FDI in the retail sector argue the following reasons:-

1. FDI has a heterogeneous effect on countries, ie. the results vary. Some studies have shown

success of FDI in India, others have shown initial positive results but with a tendency on the

whole towards causing labour displacement.

2. The fast growth of domestic 'organised' retailing (40% per annum) would result in efficiency

improvements and increased retail sales which would in turn create employment and

economic growth, raising the question of whether FDI was required in this sector at all.

3. Retail as a 'Forced Employment' – the sector is one of the primary forms of 'disguised

employment / under employment' which acts as a shock absorber for the present social

system, soaking up unemployed people who have little alternative but to try and make some

kind of living.

4. Those displaced by FDI may not show up as a 'visible' increase in unemployment.

5. Foreign retailers may use predatory strategies to force out smaller competition

6. Various issues such as Bank Finance, conditions, safeguards, and improvements to

manufacturing sector are required to be addressed before FDI in Retail should be considered.

7. Potential to upset the import balance, with the creation of a 'China Pipeline'.

8. After minimal initial investment in basic infrastructure, Foreign investors may re-patriate

profits back home.

9. Foreign retailers should not be allowed until they make satisfactory guarantees to protect

communities, support small businesses and traders, guarantee fair wages and working

conditions, and ensure minimum sourcing from India.

10. Hire and Fire' Policy in labour law would be more conducive to an FDI environment, but

would destroy the safeguards that are in place to protect the labour force.

11. Amendments to GATS Agreements could mean that any policy changes on FDI will be

irreversible as investments will be protected and have immunity to new barriers to trade.


68

7.3 Market sentiment and exploration of domestic retailers' thoughts.

The survey revealed that there is a strong

market sentiment towards opening up FDI, with

83.5% of people supporting the opening of the

sector.

The domestic retailers who responded believe

that FDI in retail will bring the benefit of skills

transfer, technology, innovation and best

practises as well as supply chain, infrastructure

and logistics improvements. They also thought

that it would increase employment and

economic growth and draw more investment in

to the domestic sector and sub-sectors.

Overall, 70% of people believe that it would have

a positive impact.

A small percentage of people feel that India isn't

quite ready to open up its foreign retail policy

yet, but that it would be ready in the near future

and should begin planning a 'phased system'. A

minority (4%) believed there would be no

benefits at all of allowing FDI and were against

opening up policy.

This research has revealed that there is strong

support for imposing a condition on foreign

retailers to source certain products in India, as

well as some interest in restricting FDI to

branded products, and certain retail formats.

Interestingly, it was found that 70% of people also felt that reforms should be made to support

domestic retailers in the face of competition from FDI, whilst 28% felt that domestic retailers did not

need reforms to support them.

The data collated from the survey highlighted a number of recommended reforms to support

domestic retailers.

The reforms that were most commonly supported were, subsidies in the form of low-rate loans,

provision of equal access to organized wholesale & supply chain infrastructure and tax relief for

domestic retailers.

However, 12% of respondents felt that no support was necessary and that domestic retailers would

support themselves. It was also suggested that bureaucracy and formalities be reduced as this was

currently hindering domestic/foreign retailers and was restricting the growth of the sector.


69

7.3 Market sentiment and exploration of domestic retailers' thoughts.

Over 20 recommendations for reform to support domestic retailers were gathered from the data

analysis of the survey, for which the complete list is detailed in Chapter 4 & Appendix II.

This research has shown that an overwhelming majority (91%) believe that FDI in retail will bring

benefits in the form of further investment, skills and consumer choice. The study also ascertained

that 75% of people felt that foreign retailers would make a long term commitment to investment in

India and would not simply make minimal investment then 'repatriate profits'.

It is evident from the survey results that 28% of people do not support the view that allowing FDI will

cause labour displacement. This compares to 12% who believe labour displacement is inevitable and

11% who believe there are no solutions to this problem. India's domestic market is clearly divided on

whether there is even an issue of displacement.

We re-iterate that other countries have experienced varying results, and therefore there is no way of

knowing whether labour displacement will be non-existent, mild or severe in Indian retail. One

would imply that there is likely to be some displacement, but a well thought out plan and policy &

regulatory system will minimize the risks here, and perhaps prevent it from happening all together.

Survey respondents suggested the following ways in which labour displacement might be dealt

with:-

· Provide skills and comprehensive training to 'unorganised' retailers to allow them to

evolve/innovate and remain employed in retail trade.

· Foreign retailers should invest in back-end services, manufacturing and farming initially to

compensate for the labour displacement.

· Government should provide and control equal employment opportunities both in the

‘organised' sector and in back-end services.

· Compensation, rights and benefits should be provided to those displaced.

Nearly 50% of people believe a 1-4 year phasing in period would allow domestic players to

successfully adjust to foreign players, whilst 16% thought a phased system would not allow domestic

retailers to adjust anyway. 19% believed a 5-6 year phasing in period would be more successful,

while only 10% believed 7+ years was necessary.


70

7.4.1Recommendation 1

7.4 Recommendations

Based on the research carried out, we propose several recommendations for areas that have been

highlighted as concerning for FDI in retail. These recommendations are by no means an

exhaustive list but should serve as a framework for consideration of the various ways forward

with policy change:-

The government should revoke the recent Press Notes that relate to permitting cascading sub-

companies, as these are only serving to provide a loop-hole for back-door entry by foreign

retailers and are not promoting transparency within the policy.

7.4.2 Recommendation 2

We recommend that the retail sector is granted 'industry status' as soon as possible so that a

legislative framework can be put in place for the control and management of the sector and its

day to day operation.


Begin recording detailed statistical data of the sector, both foreign, and domestic organised and

unorganised so that the impact of FDI when introduced can be closely monitored and policy fine-

tuned accordingly.


Labour Laws need to be reviewed to be more in line with the requirements of retail sector

employment.


Investment should be made by the government to improve the efficiency of the manufacturing

sector so that this sector can grow and provide more employment opportunities going forward.


City Planning needs to be addressed so that development is in such a way that it protects the

traditional trader areas and does not clutter the already densely populated city centers.

71

7.4 Recommendations


Real Estate Regulations need to be considered for reform so as to facilitate access to land and

property for use by the retail sector, and to provide equal access to space for both foreign and

domestic players.


Certain sensitive products should be restricted from foreign retailing, so as to protect the

traditional craftsmen and unorganised traders. The products to be restricted needs to be given

thought and researched before any decisions are made.


The government should impose local employment quotas on foreign retailers, firstly to reduce

the effects of any potential labour displacement, and secondly to encourage foreign retailers to

provide training, skills and development to local people who without it would not be able to

transfer to the 'organised' retail sector or back-end services.


Rules on re-patriation of foreign profits should be revised, to discourage (and restrict) 100% of

profits from leaving India. Conditions imposed on requiring foreign retailers to invest a

minimum amount in infrastructure and supply chain capabilities would be beneficial.


Consider providing Tax relief and/or subsidy by way of low rate loans to domestic retailers to

provide support.


Implement a 'phased introduction' of FDI to the retail sector, say over 2-4 years, so as to provide

gradual adjustment for the domestic players and to allow fine-tuning and adjustment of policy if

issues arise.

72

7.4 Recommendations


The government should reform price control policies to ensure that foreign retailers cannot sell

below a minimum price, rather than the current Maximum Retail Price (MRP).


Conditions of minimum sourcing from domestic agricultural and manufacturing sectors should

be imposed, so as to prevent the creation of a 'China Pipeline'.


Bureaucracy and formalities should be reduced by updating related legislation, for example,

reducing the number of licences required by businesses to open a store. This should assist the

domestic players in expanding and will help to streamline the efficiency of the sector.


Geographical restrictions for foreign investors need to be considered so as to reduce the impact,

or prevent the fast expansion of retailers in to rural areas. Special Economic Zones need to be

assessed with further research, to review their advantages and disadvantages to both India as a

country, and to the foreign players.


Other related regulations such as copyright law, need to be updated and brought in to line with

the needs of the future Indian retail sector.

73

7.5 Further research

There are many areas that have been highlighted as requiring further research during this study.

Each individual argument for and against almost requires an entire research project to itself so

as to delve further into the complexities of each specific scenario, for example, Special Economic

Zones which have not been possible to cover in any detail within this study could provide an

interesting area of research so as to establish the advantages and disadvantages of operating

under a SEZ system.

Consumerism is an area that is worthy of further research so as to ascertain whether there is any

correlation between changes in consumer dynamics and the emergence of organized retail in

specific 'verticals'.

The GATS Agreements and World Trade Organisation Doha Round would also be another

interesting avenue of research. With the Doha Rounds to conclude in 2010, it would be

interesting to investigate how this might impact foreign investment in the retail sector in India.

74

Code Key for Open-ended Questions (3, 7, 9 & 10)

Appendix I

Question 3

A. Improve skills, technology, innovation and best practises

B. Improve infrastructure, supply chain and logistics

C. Both A & B (tendency to be more concerned with improvements in retail industry)

D. Improved competition & consumer benefits

E. Increase employment and economic growth

F. Both D & E (tendency to be more concerned with consumers/society and the economy)

G. Increase investment in the 'organised' retail sector (believe required for growth of domestic

organised retail, including Agricultural/Manufacturing

H. Commented on all of the above (A-G) (very pro-FDI, believe its "non-sense not to open FDI in

retail")

I. Believe in “free market efficiency” and less protectionism (respondents gave a sense of political

disagreement and also had a tendency to agree with answer H i.e. Pro-FDI)

J. FDI shouldn't be opened up 'yet', but should be in the future. (believes the domestic market is not

ready/developed enough yet)

K. FDI will not be of benefit. (Against FDI being opened up at all)

X. No response / Uninterpretable response

Question 7

A. Invest in and provide for equal access to an organised wholesale & supply chain infrastructure

B. Protect Certain Products/formats from FDI and consider keeping 'sector caps'

C. Provide 'knowledge' and skills to existing domestic retailers to innovate and modernise

D. Remove intermediary middlemen in the supply chain

E. Price control regulations

F. Copyright/trademark regulations

G. Real Estate Regulations (including allocation of land / city planning legal framework)

H. Bureaucracy - reduce admin and formalities (inc. exports, legal, business formation)

I. Restrict FDI profits allowed to leave India

J. Provide subsidy to domestic retailers (including low-rate loans/bank finance)

K. Provide Platform for domestic retailer marketing

L. Implement procedures for data collection/monitoring of global/Indian retail & FDI data

75

Question 7

M. Compulsory local sourcing for FDI (including policy to protect manufacturers/farmers)

N. Regulation/Checking to ensure international standards within retail sector

O. Restrictions geographically on FDI (e.g.: Special Economic Zones)

P. Tax relief / incentives for domestic retailers

Q. Implement Educational Retail Training initiatives

R. Require a percentage of Foreigner Investment to go in to Indian development projects

S. Friendlier Labour Laws and Goods & Services Tax (GST) introduction across India

T. Provide retail business with lawful 'industry status'

U. Any reforms necessary to protect the domestic retailers

V. Systematic study of each sector required to address reforms required

W. Ensure a 'phased' introduction of FDI

X. No Response / Uninterpretable / Misinterpreted the question

Y. No reforms necessary. Free Market / Healthy Competition preferred

Question 9

A. Believed the statement to be 'false' and disagreed. Were able to counter the argument with

solutions to prevent displacement from happening

B. Believed the statement to be 'true' and agreed. Offered no counter argument, or were unable to

provide solutions to prevent displacement happening

X. No Response / Uninterpretable / Misinterpreted the question

Question 10

A. Government should provide and control equal employment opportunities in organised and

backend services, and upgrade labour laws to support this.

B. Foreign investors should be asked to invest in retail related facilities first, to offer further

employment in, for example, manufacturing and farming industries. Includes requiring a fixed

quota of employment of Indians by the foreign investor

C. No - there are no solutions to the labour displacement that FDI will cause.

Appendix I

76

Question 10

D. No - Don't believe labour displacement will happen (or will be very limited).

E. Provide compensation / rights / benefits to those who are displaced. Includes reform of

remuneration policy

F. Provide skills training to allow existing retailers to upgrade/innovate so as to continue

employment in the retail sector

X. No response / Uninterpretable response / Misinterpreted the question

Appendix I

77

Appendix II

Survey Questions

1. Are you aware of the current FDI in Retail Regulation & Policy?

a. Yes

b. No

2. Do you think the Indian Government should open up Foreign Direct Investment (FDI)

restrictions in the Retail Sector?

a. Yes

b. No

3. Please give reasons for your answer to Question 2.

4. Are you happy with the current FDI Retail policy as it is?

a. Yes

b. No

5. If FDI policy is to open up in the future, do you think any of the following

conditions should be imposed on foreign retailers?

a. None

b. Equity limits

c. Only allow FDI in specific cities/areas

d. A minimum investment amount requirement

e. An exclusion of specific products for the domestic retailer

f. Certain products must be manufactured/sourced in India by the foreign investor

g. Only allow certain retail formats (e.g. Malls)

h. Only allow branded products

I. Other restrictions…? (please specify)

6. Do you think that government reforms need to be made to support domestic retailers so

that they can face the foreign investment competition?

a. Yes

b. No

7. Following Question 6, what reforms do you think should / should not be made?

78

AppendixAppendix II

Survey Questions

8. Do you believe that lifting restrictions on FDI in retailing will allow more investment,

technical skills and consumer choice?

a. Yes

b. No

9. It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in

India, and therefore will make little investment, but reap the profits all the same. How can

you counter this argument?

10. Can you think of any solutions to the potential problems of labour displacement in the

unorganised retail sector if FDI regulations are opened up?

11. Over how many years do you think FDI policy could be phased in to allow domestic

industries/markets to adjust successfully? Please select '0' if you don't think phasing in

would allow successful adjustment for domestic players.

a. 0

b. 1

c. 2

d. 3

e. 4

f. 5-6

g. 7-10

h. 10+

Preliminary, non-compulsory fields were as follows:-

Name

Title

79

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