THE ROLE OF FDI IN ORGANIZED RETAIL SECTOR IN INDIA

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Arth Prabhand: A Journal of Economics and Management

Vol.2 Issue 7 July 2013, ISSN 2278-0629

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THE ROLE OF FDI IN ORGANIZED RETAIL SECTOR IN INDIA

DR. MADHUR RAJ JAIN*; MR. PARMOD KUMAR SINGHAL**;

MS. AASTHA GUPTA***

*Head & Faculty of Management,

Galaxy Global Group of Institutions,

Dinarpur, Ambala, India.

**Assistant Professor,

Faculty of Management,

Galaxy Global Group of Institutions,

Dinarpur, Ambala, India.

***Assistant Professor,

Department of Commerce,

Arya Kanya Mahavidyalya,

Shahabad, India.

ABSTRACT

In the past decade, the Indian marketplace has transformed dramatically. However from the

1950’s to the 80’s investments in various industries was a limit due to the low purchasing power

in the hands of the consumer and Governments policies favoring the small- scale sector. Today

we are using the services and products of MNCs. The all credit goes to Dr. Manmohan Singh,

Prime minister, who has started the LPG program in 1991. Indian market is one of the largest

markets with high purchasing power. India in 1997 allowed foreign direct investment (FDI) in

cash and carry wholesale. Then, it required government approval. The approval requirement was

relaxed, and automatic permission was granted in 2006. Between 2000 to 2010, Indian retail

attracted about $1.8 billion in foreign direct investment, representing a very small 1.5% of total

investment flow into India. There is lots of work to be done in the field of logistics & supply

chain management. It is not possible for Indian government alone to developed world class

infrastructure and other allied facilities because of huge investment requirement. FDI in India

has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and

development. In order to create new & more jobs, FDI is the success mantra now. The further

step is again taken by Dr. Manmohan Singh in December, 2012 allowing the FDI in Retail sector

100% in single brand and 51% in multi brand business. This step will encourage the foreign big

and organized retailers like Cash and Carry, Wal-Marts in India. This step will be a success stone

in the economy of the India. FDI no doubt is creating innovation in retail sector but

simultaneously it may pull down the local and domestic retailers of India which is surely a

concern to worry about for Indian government. In this research we have just tried to bring down

maximum thoughts in lieu of FDI and form a constructive view over it.

KEYWORDS: FDI, Globalization, organized, MNCs, Investment, Retail.

______________________________________________________________________________

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INTRODUCTION

For Indian retailing, things started to change slowly in the 1980s, when India first began opening

its economy.

Textiles sector companies like Bombay Dyeing, Raymond's, S Kumar's and Grasim was the first

to see the emergence of retail chains and now these stores become the so much important in the

economy. Later on, Titan, maker of premium watches, successfully created an organized

retailing concept in India by establishing a series of elegant showrooms. For long, these

remained the only organized retailers, but the latter half of the 1990s saw a fresh wave of

entrants in the retailing business. This time around it was not the manufacturer looking for an

alternative sales channel. These were pure retailers with no serious plans of getting into

manufacturing. These entrants were in various fields, like – Food World, Subhiksha, Reliance

Fresh and Nilgiris in food and FMCG; Planet M, Easy Day, Mor, Big Bazar, SARAS, and

Music World in music; Crossword and Fountainhead in books; Pantaloons, Charlie, Wranglers,

Lee’s, Van Heusun, Peter England and so many retail stores in readymade cloths.

Now India is in the midst of a retail boom. The sector witnessed significant transformation in the

past decade from small-unorganized family-owned retail formats to organized retailing. Indian

business houses and manufacturers are setting up retail formats while real estate companies and

venture capitalist are investing in retail infrastructure. Many international brands have entered

the market. With the growth in organized retailing, unorganized retailers are fast changing their

business models. However, retailing is one of the few sectors where foreign direct investment

(FDI) is not allowed at present.

1.1 DEFINITION OF RETAIL

In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in

contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.

Thus, retailing can be said to be the interface between the producer and the individual consumer

buying for personal consumption. This excludes direct interface between the manufacturer and

institutional buyers such as the government and other bulk customers. Retailing is the last link

that connects the individual consumer with the manufacturing and distribution chain. A retailer is

involved in the act of selling goods to the individual consumer at a margin of profit.

1.2 DIVISION OF RETAIL INDUSTRY – ORGANIZED AND UNORGANIZED

RETAILING

The retail industry is mainly divided into: - 1) Organized and 2) Unorganized Retailing

Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who

are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets

and retail chains, and also the privately owned large retail businesses.

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Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing,

for example, the local kirana shops, owner manned general stores, paan/beedi shops,

convenience stores, hand cart and pavement vendors, etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the

unorganized retailers. The organized retail however is at a very nascent stage. The sector is the

largest source of employment after agriculture, and has deep penetration into rural India

generating more than 10 per cent of India’s GDP.

ENTRY OPTIONS FOR FOREIGN PLAYERS PRIOR TO FDI POLICY

Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players ha\d

been operating in the country. Some of entrance routes used by them have been discussed in

sum as below:-

1. FRANCHISE AGREEMENTS

It is an easiest track to come in the Indian market. In franchising and commission agents’

services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of

India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for

entrance of quick food bondage opposite a world. Apart from quick food bondage identical to

Pizza Hut, players such as Lacoste, McDonald’s Burger, Mango, Nike as good as Marks as good

as Spencer, have entered Indian marketplace by this route.

2. CASH AND CARRY WHOLESALE TRADING

100% FDI is allowed in wholesale trading which involves building of a large distribution

infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and

not Consumers. Metro AG of Germany was the first significant global player to enter India

through this route.

3. STRATEGIC LICENSING AGREEMENTS

Some foreign brands give exclusive licences and distribution rights to Indian companies.

Through these rights, Indian companies can either sell it through their own stores, or enter into

shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel

brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR

entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

4. MANUFACTURING AND WHOLLY OWNED SUBSIDIARIES.

The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in

manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These

companies have been authorised to sell products to Indian consumers by franchising, internal

distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an

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exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary,

Nike India Private Limited.

FDI IN SINGLE BRAND RETAIL

The Government has not categorically defined the meaning of “Single Brand” anywhere neither

in any of its circulars nor any notifications.

In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion

Board (FIPB) approval and subject to that (a) only single brand products would be sold (i.e.,

retail of goods of multi-brand even if produced by the same manufacturer would not be allowed),

(b) products should be sold under the same brand internationally, (c) single-brand product retail

would only cover products which are branded during manufacturing and (d) any addition to

product categories to be sold under “single-brand” would require fresh approval from the

government.

While the phrase ‘single brand’ has not been defined, it implies that foreign companies would be

allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok, Nokia, Adidas.

Retailing of goods of multiple brands, even if such products were produced by the same

manufacturer, would not be allowed.

Going a step further, we examine the concept of ‘single brand’ and the associated conditions:

FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only sell one

brand. For example, if Adidas were to obtain permission to retail its flagship brand in India,

those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for

which separate permission is required. If granted permission, Adidas could sell products under

the Reebok brand in separate outlets.

2. RESEARCH METHODOLOGY

The sheer potential of Retail sector and its contribution in Indian economy highlights the

relevance of this paper.

The objectives of paper are :

Advantages & Disadvantages of FDI in Retail.

Impact of FDI on various stakeholders.

Evaluate the effect of Organized Retail on the Unorganized Retail.

3. MATERIAL AND METHOD

The study is based on different literatures, Case studies and analysis of organized retail market.

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3.1 GLOBAL RETAILING SCENARIO:

Retail has played a major role in improving the productivity of the whole economy at large. The

positive impact of organized retailing could be seen in USA, UK, and Mexico and also in China.

Retail is the second largest industry in US. It is also one of the largest employment generators.

It is also important to understand that Argentina, China, Brazil, Chile, Indonesia, Malaysia,

Russia, Singapore and Thailand have allowed 100% FDI in multi brand retail. These countries

benefited immensely from it. Also small retailers co-exist. The quality of the services has

increased.

China permitted FDI in retail in 1992 and has seen huge investment flowing into the sector. It

has not affected the small or domestic retail chains on the contrary small retailers have increased

since 2004 from 1.9 million to over 2.5 million.

Take for example Indonesia where still 90% of the business still remains in the hand of small

traders.

3.2. INDIAN RETAILING TRENDS

The retail industry in India is of late often being hailed as one of the sunrise sectors in the

economy. AT Kearney, the well-known international management consultancy, recently

identified India as the second most attractive retail destination globally from among thirty

emergent markets. It has made India the cause of a good deal of excitement and the cynosure of

many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the

total workforce (only agriculture employs more) in the country, the retail industry is definitely

one of the pillars of the Indian economy.

Modern retail formats - The growth of western-style malls is changing the way urban

consumers shop.

We're seeing many bigger box, value based formats setting up shop. The size of these stores is

about 50,000 square feet, a departure from the smaller mom & pop-type store that dominates the

local retail landscape.

Shoppers' Stop - department store format.

Westside - emulated the Marks & Spencer model of 100 per cent private label, very good

value for money merchandise for the entire family.

Giant and Big Bazaar, SARAS, - hypermarket/cash & carry store.

Food World and Nilgiris – supermarket format.

Pantaloons and The Home Store - specialty retailing.

Tanishq has very successfully pioneered a very high quality organized retail business in fine

jewellery.

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A new entrant in the retail environment is the 'discounter' format. It is also is known as cash and-

carry or hypermarket. These formats usually work on bulk buying and bulk selling. Shopping

experience in terms of ambience or the service is not the mainstay here.

3.3. FDI in Retail Industry

FDI in retail industry means that foreign companies in certain categories can sell products

through their own retail shop in the country. At present, foreign direct investment (FDI) in pure

retailing is not permitted under Indian law. Government of India has allowed FDI in retail of

specific brand of products. Following this, foreign companies in certain categories can sell

products through their own retail shops in the country. India’s retail industry is estimated to be

worth approximately US$411.28 billion and is still growing, expected to reach US$804.06

billion in 2015. As part of the economic liberalization process set in place by the Industrial

Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series

of steps:

1995 : World Trade Organization’s General Agreement on Trade in Services, Which includes

both wholesale and retailing services, came into effect.

1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government

approval route.

2006 : FDI in cash and carry (wholesale) brought under the automatic route. Up to 51 percent

investment in a single-brand retail outlet permitted.

2011 : 100% FDI in single brand retail permitted.

The Indian government removed the 51 percent cap on FDI into single-brand retail outlets in

December 2011, and opened the market fully to foreign investors by permitting 100 percent

foreign investment in this area.

Government has also made some, albeit limited, progress in allowing multi-brand retailing,

which has so far been prohibited in India. At present, this is restricted to 49 percent foreign

equity participation. The specter of large supermarket brands displacing traditional Indian mom-

and-pop stores is a hot political issue in India, and the progress and development of the newly

liberalized single-brand retail industry will be watched with some keen eyes as concerns further

possible liberalization in the multi-brand sector. In this Paper, Authors discusses the policy

developments for FDI in these two organized retail sector.

3.4. FDI IN “SINGLE-BRAND” RETAIL

While the precise meaning of single-brand retail has not been clearly defined in any Indian

government circular or notification, single-brand retail generally refers to the selling of goods

under a single brand name. Up to 100 percent FDI is permissible in single-brand retail, subject to

the Foreign Investment Promotion Board (FIPB) sanctions and conditions mentioned in Press

Note 3[8]. These conditions stipulate that:

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Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even if

produced by the same manufacturer).Products are sold under the same brand internationally

Single-brand products include only those identified during manufacturing

Any additional product categories to be sold under single-brand retail must first receive

additional government approval FDI in single-brand retail implies that a retail store with foreign

investment can only sell one brand. For example, if Adidas were to obtain permission to retail its

flagship brand in India, those retail outlets could only sell products under the Adidas brand. For

Adidas to sell products under the Reebok brand, which it owns, separate government permission

is required and (if permission is granted) Reebok products must then be sold in separate retail

outlets.

3.5. FDI IN “MULTI-BRAND” RETAIL

While the government of India has also not clearly defined the term “multi-brand retail,” FDI in

multi-brand retail generally refers to selling multiple brands under one roof. Currently, this

sector is limited to a maximum of 51 percent foreign equity participation.

These are positive step and it will encourage international brands to set up shop in India. On the

other hand, this will also lead to competition among Indian players. It will be the consumers who

stand to gain,'' This would not change the market dynamics immediately as it will take some time

for these plans to fructify. The growing dominance of multinational companies in the country's

$200 billion retail business, had warned that any move to increase FDI in the retail sector would

ruin the business of small and medium traders scattered over the country. Organized retailers in

India are opposing the entry of MNCs in retail trading because of their predatory pricing strategy

that wipes out competition, when the Government decides to allow foreign players to enter the

retail space, it should first restrict them to lifestyle products segment before permitting them to

spread their wings into other areas like grocery marketing that has a direct impact on `kirana

stores'.

FDI in retail trade has forced the wholesalers and food processors to improve, raised exports, and

triggered growth by outsourcing supplies domestically. The availability of standardized products

has also boosted tourism in these countries. FDI in retail sector has been a key driver of

productivity growth in Brazil, Poland and Thailand. This has resulted in lower prices to the

consumer, more consumption and higher profit for the producer.

4. FOREIGN DIRECT INVESTMENT - IMPACT AND ANALYSIS

Market liberalization, a growing middle-class, and increasingly assertive consumers are sowing

the seeds for a retail transformation that will bring more Indian and multinational players on the

scene. The big Indian retail players looking to expand their operations include Shopper's Stop,

Pantaloon, Reliance, Lifestyle, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Globus,

Barista, Café Coffee Day, Wills Lifestyle, Raymond, Titan, Bata and Westside. Well-established

business houses such as Wadia, Godrej, Tata, Hero, etc., are drawing up plans to enter the fast-

growing organized retail market in India. The international players currently in India include

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McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony,

Sharp, Kodak, and the Medicine Shoppe. Global players are entering India indirectly, via the

licensee/franchisee route, since Foreign Direct Investment (FDI) is not allowed in the sector.

Despite all these developments, the organized retail business still comprises a small proportion of

the total size of the Rs 9,00,00-crore ($200 billion) retail sector. Retail business is growing at 5-6

per cent per annum. The size of organized retailing was estimated around Rs 26,000 crore in

2004, about three per cent of the total.

However, it is now set to grow at 25-30 per cent per annum. In developed countries, organized

retailing makes for over 70 per cent of the total business.

Recently, the Government announced its intention to open up the retail sector to foreign

investment. It is still, however, debating whether to allow 26 per cent or 49 per cent FDI in the

sector. Initially, the idea was to begin with 26 per cent and then gradually liberalize it further.

However, since China moved from 49 per cent to 100 per cent FDI in this sector last year, the

Commerce Ministry and the Prime Minister's Office (PMO) appear to be inclined to go for 51

per cent FDI at one go, despite opposition from Left parties.

Even as the government is debating the level FDI in of retail, a number of foreign players,

including the world's largest corporation, the $288- billion Wal-Mart Stores, Inc., have

announced their intention to enter India in a big way. With the impending opening up of the

sector to overseas investment, they are now keen on forays into the sector in partnership with

multinational chains. According to industry analysts, as many as 20 big Indian companies are

working on plans to enter the sector in partnership with foreign investors.

Despite all these favourable developments, the Government appears to be still dithering in giving

a green signal to FDI in this sector in view of the opposition from Left parties. It is indeed

unfortunate that this issue is hanging fire for nearly four years now, even as the government has

allowed foreign investment in a number of sectors including banking, telecom and insurance.

As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited

access to capital, labour and suitable real estate options. In contrast, China, which allowed 49 per

cent FDI in the retail sector since 1992, benefited immensely with foreign players bringing

capital and new technologies and growing export market for domestic products. At present,

around 40 foreign retail players account for almost 20 per cent of the organized retailing in that

country. India is tipped as the second largest retail market after China, and the total size of the

Indian retail industry is expected to touch the $300 billion mark in the next five years from the

current $200 billion. The size of organized retailing is expected to touch $30 billion by 2010 or

approximately 10 per cent of the total. Various retailers from across the word have been visiting

India over the past few months with a view to establishing their presence in a market that is

expected to witness exiting developments.

On the contrary, the opening up of the sector to FDI will lead new economic opportunities and

there will be more employment generation. According to a policy paper prepared by the

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Department of Industrial Policy and Promotion (DIPP), FDI in retail must result in backward

linkages of production and manufacturing and spur domestic retailing as well as exports.

The opening up of retail to FDI should be designed in a such as way that many sectors -

including agriculture, food processing, manufacturing, packaging and logistics -reap benefits. It

is understood that the multinationals that invest in retail business in India would also source

Indian goods for their international outlets in a big way and thus provide a boost to Indian

exports. Indian retail chains would get integrated with global supply chains since FDI will bring

in technology, quality standards and marketing.

According to the World Bank, opening the retail sector to FDI would be beneficial for India in

terms of price and availability of products. Experience everywhere has shown that organized

retailing tends to have a major controlling effect on inflation because large organized retailers are

able to buy directly from producers at most competitive prices. The scale of operation and

technology help organized retailers score over the unorganized players, giving the consumers

both cost and service advantages.

Government has opened up the real estate sector by allowing 100 per cent FDI in the

construction projects. The move is expected to attract foreign funds and new technology into the

market. Second, Foreign Trade Policy 2005-06 has extended the benefit of the export promotion

capital goods (EPCG) scheme to the real estate sector. This is expected to tremendously boost

the organized retail sector by enabling it to create better and modern infrastructure. Also, the

extension of concessional duty scheme for import of capital goods by retailers with minimum

area of 1,000 square metres and implementation of VAT will significantly help organized

retailing.

5. ADVANTAGES OF FDI IN RETAIL

5.1. OPPORTUNITIES GALORE

While it is important not to lose sight of the local “Mom and Pop” shops, there is a distinct

opportunity for FDI in multi-brand retail. At the present moment, Indian companies are

exporting different types of products to numerous retailers across the globe. There is a large

segment of the population which feels that there is a difference in the quality of the products sold

to foreign retailers and the same products sold in the Indian market.

In view of the availability of higher disposable incomes for Indians, there is an increasing

tendency to pay for quality and ease and access to a “one-stop shop” which will have a wide

range of different products.

If the market is opened, then the pricing could also change and the monopoly of certain domestic

Indian companies will be challenged. In the eventual analysis, the consumers will benefit in the

form of potential lower prices due to enhanced and, possibly, tough competition in the market.

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5.2. BENEFITS FOR THE FARMERS

Presumably, with the onset of multi-brand retail, the food and packaging industry will also get an

impetus.

Though India is the second largest producer of fruits and vegetables, it has a very limited

integrated cold-chain infrastructure. Lack of adequate storage facilities causes heavy losses to

farmers, in terms of wastage in quality and quantity of produce in general, and of fruits and

vegetables in particular. Farmers in India get only 10%-12% of the price the consumer pays for

the agri-products. Coming of organized retailing will benefit farmers in big way. Big retailers

sell their product at very competitive prices. So, they source it directly from the farmers. Middle

man does not have any place in this format of retailing. This will not only benefit farmers but

also help in checking the food inflation.

Also India has very inadequate facilities to store the food grains and vegetables. As the

investment will flow into back end infrastructure, supply chain will get strengthened. Storage is a

major problem area and 20%-25% of the agri products get wasted due to improper storage.

PRODUCT WASTAGE

TOMATOES 35%

MANGOES 30%

POTATOES 25%

With liberalization, there could be a complete overhaul of the currently fragmented supply chain

infrastructure. Extensive backward integration by multinational retailers, coupled with their

technical and operational expertise, can hopefully remedy such structural flaws. Also, farmers

can benefit with the “farm-to fork” ventures with retailers which helps (i) to cut down

intermediaries ; (ii) give better prices to farmers, and (iii) provide stability and economics of

scale which will benefit, in the ultimate analysis, both the farmers and consumers.

5.3. IMPROVED TECHNOLOGY AND LOGISTICS

Improved technology in the sphere of processing, grading, handling and packaging of goods and

further technical developments in areas like electronic weighing, billing, barcode scanning etc.

could be a direct consequence of foreign companies opening retail shops in India,. Further,

transportation facilities can get a boost, in the form of increased number of refrigerated vans and

precooling chambers which can help bring down wastage of goods.

5.4. IMPACT ON REAL-ESTATE DEVELOPMENT

Retail is closely dependant on real estate as any retailer will require substantial spaces for setting

up business. Real estate in India has gone through a revamp due to the demand of high-end retail

malls and people’s changing perception towards an enjoyable shopping experience. Thus real

estate can get a further facelift in India and receive more investment with the opening up of FDI

in multi-brand retail.

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6. DISADVANTAGES OF FDI IN RETAIL

Opponents of the FDI feel that liberalization would jeopardize the unorganized retail sector and

would adversely affect the small retailers, farmers and consumers and give rise to monopolies of

large corporate houses which can adversely affect the pricing and availability of goods. They

also contend that the retail sector in India is one of the major employment providers and

permitting FDI in this sector can displace the unorganized retailers leading to loss of livelihood.

Nevertheless much said about good things that FDI in retail will bring but argument will not be

justified if we do not take into account the grey areas. Some of the grey areas are:

Predatory pricing could strangulate the domestic retailers.

It has been seen MNCs retailers uses there big size to kill competitors.

In order to bring goods at lowest possible price for customers they squeeze the margins of their

suppliers. So as claimed by thousand that suppliers will benefit, it still doubted.

In order to correct these anomalies, India need to have strong regulator for the sector. And at the

same time strengthen the Competition Commission of India before these Big Retailers prowls

into the Indian Territory.

1. The entry of large global retailers such as Wal-Mart would kill local shops and millions of

jobs.

2. The global retailers would collude and exercise monopolistic power to raise prices and

monopolistic (big buying) power to reduce the prices received by the suppliers.

Hence, both the consumers and the suppliers would lose, while the profit margins of such retail

chains would go up.

3. It would lead to lopsided growth in cities, causing discontent and social tension elsewhere.

However, these arguments can be overruled in the light of the ICRIER study conducted in India

in 2008, which showed that although unorganized retail suffered initially with the opening up of

organized retail in their vicinity, this effect significantly weakened over time. The rate of closure

of unorganized retail shops in gross terms was found to be 4.2 % per annum, which was much

lower than the international rate of closure of small businesses. Similarly, the rate of closure on

account of competition from organized retail was found to still lower, at 1.7 per cent per annum.

This was achieved through competitive response from traditional retailers and through improved

business practices and technology up gradation.

However, the development of organized retail has the potential of generating employment for

both the skilled and unskilled sections of the population. The Government can protect small

retailers by restricting FDI to be permitted only for stores having floor size greater than, say,

2,000 square feet. Moreover, monopolies of large corporate houses can also be controlled by the

Government by enforcement of strict regulations and, where needed, through the Competition

Commission of India which is empowered to evaluate abuse of dominant position.

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The foreign direct investment (FDI) in the Indian retail sector should be allowed in a phased

manner so that it could serve the purpose of much-needed capital and bring boom in the sector,

according to Confederation of Indian Industry (CII) Chairman Kishore Biyani.

1. FDI should be gradually allowed first in relatively less sensitive sectors like garments, lifestyle

products, house ware and entertainment."

2. Alternative funding mechanisms and investment opportunities should be considered like FIIs

and venture capital in the primary market, besides FDI. Hence they should be legalized and

encouraged in the primary market.

3. Industry needs time for capital formation, which would take at least two-three years.

The gradual inflow of FDI should not be a hindrance for the growth of the retail sector.

GOALS

1. To serve the purpose of much needed capital and bring a boom in this sector.

2. To enhance the backend infrastructure.

7. WHETHER FDI IN RETAIL SHOULD BE ALLOWED IN INDIA?

Three arguments are generally extended against allowing FDI in the retail sector. First, this will

prevent the growth of domestic organized retail industry. Second, it will result in closure of small

retail stores, the so-called mom-and-pop stores and third, that it will disrupt the social

community and the given way of life. The first argument is passes simply because with the entry

of Reliance, Tatas and other large domestic players the domestic retail industry has surely come

of age. These corporate 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 clear head start. The equity argument

does not have solid empirical basis. As the ICRIER study on the same subject has shown,

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. As the entry of

Haldiram has not led to the demise of Nathus and Agarwal mishthan bhandars. Both can coexist

as they fulfill different needs and serve different clientele. Organized retailing generates

additionality of demand by reducing costs, lowering prices and also improves returns to

producers by eliminating unnecessary intermediaries. The third argument has greater substance.

Malls could lead to greater urban anonymity and a complete break down 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 urban planning. Organized retail

does not necessarily result in the dreaded mid-west. So FDI in retail improves growth prospects,

does not harm equity and discourages monopoly rents and therefore should be allowed.

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8. CURRENT REGULATORY FRAMEWORK

The regulatory regime for the existing homegrown retailers is quite exhaustive with as many as

40 licenses and permissions required to be obtained by the retailer from diverse authorities,

depending on the nature of activity.

For example, a multi-brand retailer selling food and perishable items has to have a prevention of

food adulteration license under the Prevention of Food Adulteration Act, a weights & measures

license under Weights & Measures Act for regulating the weights and measures and labels on the

food products sold, along with an agricultural produce marketing committee license under the

Agricultural Produce Marketing Committee Act for selling fruits and vegetables. If a retailer

decides to launch a store in more than one state then the number of licenses will multiply

accordingly. Therefore, an entity establishing retail stores across India will have to face

enormous licensing obligations in each state of operation. This too acts as a deterrent. As the

government has opens up the sector to FDI, in addition to the regular operating licenses, chances

are that the foreign multi-brand retailers will have to seek investment approvals as well from the

central regulator which, at present, is the Foreign Investment Promotion Board. With the passage

of time, the expectation would be that the multitude licenses across different states would be

reduced and homogenized.

9. FUTURE SCOPE

The sentiment towards 100 percent FDI in retail sector is gathering pace. Currently, the UPA has

a majority in the house and it seems quite possible that they will be able to pass the bill, making

FDI in multi-brand retailing, a reality. Moreover, with state governments like Punjab working

with modern retailers in furthering improvement of trade, there is a possibility that support will

flow in from other state governments as well.

However, the opposition led by the BJP is not in favour of this move and has presented a report

recently to the Parliament recommending a complete ban on FDI in retail.

The proposed FDI norms will open up strategic investment opportunity for global retailers, who

have been waiting to invest in India. This may have a significant impact on the current

arrangement of foreign players.

This policy will require investment from retailers in areas of supply chain, especially for

perishable products, thus helping farmers to get better income leading to an inclusive growth in

the country. Given the large number of SKU’s that retailers stock Small and Medium Enterprises

(SME) sector is also set to gain from this move due to preference given by retailers to private

label brands. The move will also encourage smaller suppliers to take their products to a national

platform that they could not previously manage due to lack of an organised supply chain of their

own. This policy will also open up avenues for attracting, developing and retaining talent.

Contract manufacturers would also benefit from these policy changes. With the global economy

still recovering, investment in India is lucrative to a retailer attributable to strong consumerism,

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rising disposable income, growing middle class population, favorable macro and micro economic

indicators supplemented by a stable government.

10. CONCLUSION

In the final analysis, for India, FDI in multi-brand retail should be seriously considered by the

government and, as with many other sensitive sectors; a gradual opening up could be made

possible. Despite country wide speculation on the plight of various Stakeholders, trading

associations, politicians, etc. have given various arguments for and against FDI in retailing.

However, such arguments are largely based on perception and there has not been serious

academic research in this area.

India needs to take a lesson from China where organized and unorganized retail seem to co-exist

and grow together. Further, India’s local enterprises will potentially receive an up gradation with

the import of advanced technological and logistics management expertise from the foreign

entities.

In our view, the government has an opportunity to utilize the liberalization for achieving certain

of its own targets:

improve its infrastructure;

access sophisticated technologies;

generate employment for those keen to work in this sector

FDI would lead to a more comprehensive integration of India into the worldwide market and, as

such, it is imperative for the government to promote this sector for the overall economic

development and social welfare of the country. If done in the right manner, it can prove to be a

boon and not a curse.

REFERENCES

“Emerging Equity Market in India, Role of Foreign Institutional Investors”, Economic and

Political Weekly, October

Aluvala, Dr. Ravi “ FDI,Prospcts & Challenges ahead for India”, “Indian Journal of Finance” ,

Vol.-5 No.-4, April,2011,

Economic Survey (2007-08), Ministry of Finance, Government of India, New Delhi, 2008

available at http://indiabudget.nic.in/es2007-08/ economy.html.

Gupta, Ashulekha, “Trends in FDI inflows to India after Liberalization”, “Pragyaan: Journal of

Management of IMS Dheradun”, Vol.-9, issue-2, December-2011.

ICRIER study, “Impact of Organized Retailing on the Unorganized Sector” May 2008,

fromhttp://siadipp.nic.in/policy/icrier_report_27052008.pdf

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Joseph, Mathew and Soundararajan, Nirupama (2009), “Retail in India: A Critical Assessment”,

Academic Foundation, NewDelhi.5

Kearney A.T., (2006) “Retail in India – Getting organized to drive growth”. DIPP. (2010),

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Industrial Policy and Investment Promotion, New Delhi.

Mohanty, J.P, Sharma Kamal, Guruswamy Mohan, Korah Thomas J. FDI in India's Retail Sector

– More Bad Than Good. Center for Policy Alternatives (CPAS), New Delhi.

Mukherjee Arpita and Patel Nitisha (2005), “FDI in Retail Sector: India”, Academic Foundation,

New Delhi.

Prasanna, N., “ FDI & Manufactured Export Performance in India”, “Indian Journal of Finance”,

Vol.-5, No.-1, January, 2011.

Rakshit, Mihir (2006): ‘On Liberalizing Foreign Institutional Investments’, Economic and

Political Weekly, March 18.

Ramakrishna, Dr. H., “FDI in India & China: Some Lessons for India”, “Indian Journal of

Finance”, Vol.-5, No.-12, Deccember, 2011.

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THE ROLE OF FDI IN ORGANIZED RETAIL SECTOR IN INDIA

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