A Dissertation Synopsis on

FDI anD Its Impact on InDIan economy

Faculty of Management Studies, BHU, Varanasi Under the guidance of:

Dr. H. P. Mathur

Submitted By:
Juhi Kashyap MBA-IB (IV Semester)

FMS-BHU

2011-13 Roll-20 FMS-BHU

Definition of FDI
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). 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.

Types of Retailing
Retail business can be broadly classified into two categories: Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the publicly-traded supermarkets, corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganized 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

Modern Retail
The arrival of modern retail in developing countries occurred in three successive waves (Reardon and Hopkins, 2006; Reardon and Berdegue, 2007): The first wave took place in the early to mid-1990s in South America (e.g., Argentina, Brazil, and Chile), East Asia outside China (South Korea, Malaysia, Philippines, Thailand, and Taiwan), North-Central Europe (e.g., Poland, Hungary, and Czech Republic) and South Africa. The second wave happened during the mid to late 1990s in Mexico, Central America (e.g., Ecuador, Colombia, and Guatemala), South- East Asian countries (e.g., Indonesia), Southern-Central Europe (e.g., Bulgaria). The third wave had begun in the late 1990s and early 2000s in parts of Africa (e.g., Kenya), some countries in Central and South America (e.g., Nicaragua, Peru, and

Bolivia), South- East Asia (e.g. Vietnam), China, India, and Russia. India and Russia are late comers in the diffusion of modern retail. A fourth wave is just barely emerging in the poorest areas, such as Bangladesh, Cambodia, and West Africa. It may take another one or two decades before supermarket diffusion in the fourth wave areas is appreciable. According to the authors, the main reason why they lagged behind was the severe restrictions on foreign direct investment (FDI) in retailing in these countries.

Retailing in India
Retailing in India is one of the pillars of its economy and accounts for about 15% of its GDP. The size of India's retail market was estimated at US$ 470 billion in 2010. Of this, US$ 444 billion (95% of the market) was traditional retail and US$ 26 billion (5% of the market) was organized retail1.

Reforms in FDI Retail Policy in India

Prior to the 1990 reforms, India was a closed economy. During that time, the retail sector mainly consisted of small privately owned stores that did not have corporate management and were known as traditional retailers. These stores largely sold nonbranded products. The concept of branding was limited and very few brands such as Bata were present in the Indian market. The liberalization of the economy in the 1990s and the entry of multinationals and Indian corporate in manufacturing led to the proliferation of brands. Although FDI is restricted in retail, foreign retailers and brands entered the Indian market through various routes such as wholesale cash and carry, wholly-owned subsidiary in manufacturing, licensing and distribution agreements, joint ventures for each brand (or single-brand retail route), franchising and commission agents. In 1997, the Indian retail sector witnessed the first footprints of FDI with 100% FDI being permitted in cash & carry wholesale trading under the government approval route. Wholesale cash & carry business was subsequently brought under the automatic route in 2006. As a step ahead, FDI in single brand retail was permitted to the extent of 51% in 2006.
1

Source: Tecknopak analysis

 In July 2010, the Department of Industrial Policy and Promotion (DIPP) had put up a discussion paper proposing FDI in multi-brand retail. In July 2011, a Committee of Secretaries (CoS) had cleared the proposal to allow upto 51% FDI in multi-brand retail, which has been approved by the Union Cabinet in November 2011, albeit with a few riders. The Union Cabinet has also approved increasing the FDI limit in single brand retail to 100% with government approval. While no parliamentary approval is needed for the decision, State Governments have the prerogative to disallow the same in their respective states.

Inflows in FDI in retail

Between 2000 and 2010, Indian retail attracted about $1.8 billion in foreign direct investment, representing a very small 1.5% of total investment flow into India. According to the Global Retail Development Index (GRDI) report published by the leading US based consulting group, AT Kearney in June 2010, India is the third most attractive retail market for global retailers among the 30 largest emerging markets. Amount of FDI inflows in single brand retail till 31st March 2011 is 66.69 million dollars2.

FDI in the multi-brand retail

No FDI is allowed till date in the multi-brand retail category. This includes all firms in organized retail that seek to stock and sell multiple brands, such as large international retailers like WalMart and Carrefour. The policy allows 51 per cent FDI in a retail enterprise with the following conditions: (a) only single-brand products can be sold (i.e., the sale of multiple brands by a foreign retailer, even if produced by the same manufacturer, is not allowed), (b) products should be sold under the same brand internationally, (c) the retail would only cover products that are branded during manufacturing and (d) any addition to product categories would require fresh approval from the government. India is probably the only country in the world that has a brand-based retail FDI policy

Parameters Ownership/ investment requirement

2

Multi-brand Retail Minimum investment of US$ 100 million by

Fact Sheet on Foreign Direct Investment (FDI) (www.ficci.com)

the foreign investor Investment towards back-end infrastructure At least 50% of the investment by the foreign company to be in back-end infrastructure Stores to be restricted to cities with a population of one million or more (53 cities as per 2011 Census); given constraints around real estate, retailers are allowed to set up stores within 10 km of such cities At least 30% of manufactured items procured should be through domestic small and medium enterprises (SMEs) While the proposals on FDI will be sanctioned by the Centre, approvals from each State Government would be required

Location of stores

Sourcing

Approval of State Governments required

Source: Press Information Bureau, ICRA

Purpose of study
An important aspect of the current economic scenario in India is the emergence of FDI in multi brand retail. So, concerns have been raised that the growth of multi brand retailing may have an adverse impact on retailers in the unorganized sector of the country. In the context of divergent views on the impact of multi brand retail, it is essential that an in-depth analytical study of the possible effects on the unorganized retailing in India should be conducted.

Objectives:
To study the trends and patterns of flow of FDI. To assess the determinants of FDI inflows. To identify various parameters that defines economic growth. To evaluate the impact of FDI on the Indian economy on the identified growth parameters.

Sample Design
Sampling Plan: The research project conducted will be descriptive cum analytical in nature. Sources of Information: Both primary and secondary data will be employed. Sampling Frame: a) unorganized retailers catering to food, grocery and apparel business b) Consumers in Varanasi who are aware of FDI in retail and consume products from modern retail stores also. Instrument: A structured non-disguised questionnaire Sample size: 20 retailers and 100 consumers