PARUL INSTITUTE OF MANAGEMENT

PARUL AROGYA SEVA MANDAL

PROJECT ON

EFFECT ON INDIAN ECONOMY BY FDI IN RETAIL SECTOR

PREPARED BY - VAIBHAV LANGALIYA - ISHITA SHAH - PRATEEK CHAVDA - MUKUL BHATIA - SWATI SMITASAMAL - PRAVESH BHATIA - MAYANK MODHIA - HITESH KOTHARI - MANOJ PATIDAR Submitted to Prof. Ashish Bhatt (PARUL INSTITUTE OF MANAGEMENT- PGDM)

PGDM SEM-I

Page 1

PARUL INSTITUTE OF MANAGEMENT

ACKNOWLEDGEMENT

We sincerely thank our parents for their tremendous contributions and support both morally and financially towards the completion of this project. Our parents who guided and motivated us from time to time in making this project, despite of their busy schedules. And today we can say that whatever we learned and whatever knowledge we have is all because of our parents kind support and believe in us. We are really fortunate that we have grown up in a privileged position with love and care of our parents, who have always supported us.

PGDM SEM-I

Page 2

PARUL INSTITUTE OF MANAGEMENT

INDEX

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16.

Introduction Definition of Retail Division of Retail Industry Definition of FDI FDI Policy in India FDI Policy with Regard to Retailing in India Rationale for FDI in retail trading Entry Options for Foreign Players prior to FDI Policy Case History Retail in India: Challenges Negative Impact of FDI in retail sector in India Alternative steps to counter negative impact of FDI FDI in Retail Sector of India - Analysis 2011 Congress (Not Govt) Has Cited Two Major Benefits Viewpoints of different economists. Ultimately, India would surely need to open up Retail sector For FDI; its just a matter of timing. 17. Conclusion 18. References

4-5 6 7 8 8 9 10 11 12 13 14-15 16 17 18 19-20 21 22 23

PGDM SEM-I

Page 3

PARUL INSTITUTE OF MANAGEMENT

INTRODUCTION
Liberalization of trade policies during the last one and half decade has led India to become an investment friendly country. Foreign direct investment (FDI) in this country is very important context of this liberalization. India being the tenth most industrialized country in the world, well known mainly for agro-based with around 70% population engaged in the farming sector. However, FDI was centered on the urban manufacturing sectors during the initial stage of liberalization because of its civic infrastructure, labour availability, flexible taxation mechanism etc. The success story of FDI in these sectors is known to us.

PGDM SEM-I

Page 4

PARUL INSTITUTE OF MANAGEMENT

For a very long time there were efforts for FDI in the retail sector so that the trader can reap the benefit of FDI. Retail trade contributes around 10-11% of Indias GDP and currently employs over 4 crores (approx) of people. FDI in retail is fundamentally different from that in manufacturing. FDI in manufacturing basically enhances the productive employment in most cases; but FDI in retail trade may create job losses and displacement of traditional supply chain. One of the main features of rural India is disguised unemployment. Farmers, evicted from the agricultural sector, engage in small retail trades for livelihood. The main fear of FDI in retail trade is that it will certainly disrupt the livelihood of the poor people engaged in this trade. The opening of big markets or foreign-sponsored departmental outlets will not necessarily absorb them; rather they may try to establish the monopoly power in the country. However, so many positive factors are also there in favour of FDI in Indian retail service. In this background the present work makes an attempt to study the likely impact of FDI on Indian retail sector, with focus on some specific cases.

PGDM SEM-I

Page 5

PARUL INSTITUTE OF MANAGEMENT

DEFINITION OF RETAIL
In 2004, The High Court of Delhi defined the term retail as a sale for final consumption. A sale to the ultimate consumer. 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. The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. It has made India the cause of a good deal of excitement 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.
PGDM SEM-I Page 6

PARUL INSTITUTE OF MANAGEMENT

DIVISION OF RETAIL INDUSTRY

The retail industry is mainly divided into: Organised Retailing Unorganised Retailing Organised 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.

Unorganised Retailing 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, 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 Indias GDP.

PGDM SEM-I

Page 7

PARUL INSTITUTE OF MANAGEMENT

DEFINITION OF FDI
FDI is defined as investment in a foreign country through the acquisition of a local company or the establishment thereof an operation on a new site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.

FDI POLICY IN INDIA

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time. The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continues basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required.

PGDM SEM-I

Page 8

PARUL INSTITUTE OF MANAGEMENT

FDI POLICY WITH REGARD TO RETAILING IN INDIA

We will have to consider Press note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities. In lieu of the same: a) FDI up to 100% for cash and carry wholesale trading and export trading is allowed under the automatic route. FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products, subject to Press Note 3 (2006 Series). FDI was not permitted in Multi Brand Retailing in India

b)

c)

However as a result of the cabinets decision on 24th November, 2011, points b & c above have undergone a change wherein: b) c) FDI up to 100 % is allowed for retail trade of Single Brand products. FDI is permitted in Multi Brand Retailing upto 51%.

PGDM SEM-I

Page 9

PARUL INSTITUTE OF MANAGEMENT

RATIONALE FOR FDI IN RETAIL TRADING

FDI in the retail sector could bring in various benefits for the country, such as: Improvement in the supply chain infrastructure Improvement in farmer income Benefits to customers Improvement in the supply chain infrastructure by bringing in technical know-how and capital: FDI can be a powerful catalyst to spur competition in the retail industry. It will help generate funds for developing post -harvest and cold chain infrastructure while incentivising international retailers to introduce latest technology and adopt international best practices. Improvement in farmer income through the removal of structural inefficiencies: Farmers were found to benefit significantly from the option of direct sales to organized retailers. For instance, the profit realization for farmers selling directly to the organized retailers is expected to be much higher than that received from selling in the mandis. Benefits to customers in the form of better quality of products and lower prices. Past trends indicate that large consumers have been benefited from organized retail in the domestic market. In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the countrys GDP and overall economic development, but would also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them.
PGDM SEM-I Page 10

PARUL INSTITUTE OF MANAGEMENT

ENTRY OPTIONS FOR FOREIGN PLAYERS PRIOR TO FDI POLICY

Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had been operating in the country. 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. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks & 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, DSPAR 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 exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
PGDM SEM-I Page 11

PARUL INSTITUTE OF MANAGEMENT

CASE HISTORY
Once again government and Opposition are in loggerhead on FDI in retail. The committee of secretaries (CoS) has cleared the proposal for allowing foreign direct investment (FDI) in the retail sector and most CoS members favoured 51 per cent limit, which is a momentous signal for big retail players like Wal-Mart, Carrefour who are eyeing to set up retail chains in India with market size more than $500 billion. One of the recommendations of the CoS is that such stores should be opened in the cities with population of over 1 million. And as per 2011 census there are around 45 cities in India which satisfy this condition. The other recommendation is that the minimum capital required for FDI is $100 million out of which 50 per cent should go for back-end infrastructure development. They also suggested that 30 per cent of goods and commodities should be purchased from local suppliers. Our current retail chains purchase around 65-70 per cent of their supplies from local suppliers.

PGDM SEM-I

Page 12

PARUL INSTITUTE OF MANAGEMENT

RETAIL IN INDIA: CHALLENGES

1. Rapid price changes, constant threat of product obsolescence and low margins.

Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character.

2. A threat to Mom & Pop Store

It will lead to closure of tens of thousands of mom-and-pop shops across the country and endanger livelihood of 40 million people. Small and medium retailers will become victims of predatory pricing policies of multinational retailers It will disintegrate established Kiranas by encouraging monopolies of global retailers Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes

3. Improper Public Distribution System (PDS)

There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a farm-to-fork retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.

4. No Global Reach

The Micro Small & Medium Enterprises (MSME) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets
Page 13

PGDM SEM-I

PARUL INSTITUTE OF MANAGEMENT

NEGATIVE IMPACT OF FDI IN RETAIL SECTOR IN INDIA

The most important factor which is against allowing FDI in retail sector is that small traders will not able to compete with the big players and thus cease to exist. These traders dont have the capital and expertise to compete with big retail chains. They will not be able to buy goods at a lower price from suppliers while big players who have a strong supply chain network across the world which gives them a high bargaining power to buy goods at the lowest price. It is assumed that initially foreign stores would keep the prices of their products low in order to attract their customers & eliminate their competitors. But with the time they would establish their monopoly in Indian markets & hence quality and price of products would be compromised. It would be like Bringing back East India Company. Also in a country like India where millions of people are semi-skilled, it is the retail sector which offers them source of earning as one can easily open a small shop with a little capital. The government should understand that before approving any policy reform in the retail sector it must create jobs in other sectors which can accommodate these people. Only 1 employee is recruited in 400 yards of a Wall-Marts showroom. So it is estimated that on an average only 1 will be able to get job in Multi-brand stores while at least 10 people would be losing their jobs due to FDI. If foreign stores are able to set up their monopoly, then even farmers would have no other option than selling their crops to Multi-brand stores at low prices. This would exploit farmers.
PGDM SEM-I Page 14

PARUL INSTITUTE OF MANAGEMENT

Some economist give the argument that policies of Globalisation & Open Trade across the border initiated by Dr. Manmohan Singh during 1990s has not been so effective in controlling inflation & price rise . Moreover the problem of unemployment still persists in India. Opening of Multi-brand stores, setting up of infrastructure, recruitment of staff & maintenance of quality of products during initial stages would force the foreign retailers to sell their products at higher price. So Governments plea, that Inflation would be controlled to a larger extent, does not convince majority of Indians. Advocates of FDI in retail give China has an example, which witnessed enormous growth in retail sector after allowing FDI. But they dont inform that China allowed a gradual increase in FDI in retail it allowed an FDI of up to 26 per cent in 1992 and increased it to 49 per cent in 2002 and allowed 100 per cent in 2004. It is also not justifiable to compare India with China: China is a communist country where job market is regulated in contrast India is a democratic country where people have an option to start their own business. In China, manufacturing sector offers numerous employment opportunities but this is not the case with India.

PGDM SEM-I

Page 15

PARUL INSTITUTE OF MANAGEMENT

ALTERNATIVE STEPS TO COUNTER NEGATIVE IMPACT OF FDI

Change in Economic policies has become a necessity now. There must be a proper survey regarding actual position of demand & supply ration in India.

Although by allowing FDI in retail the biggest gainer will be the consumer who will get more choices at attractive prices, if this is achieved by rendering millions unemployed and denying them their livelihood, then such benefit are worthless. The government should realise that its prime responsibility is to create more jobs for unemployed people. It would make sense that any policy which leads to reduction in jobs should be put on hold until new sources of employment are created. Instead of opening the sector for FDI in urgency, the government should invest in training of small retailers and traders to guide them on the subject of storing, grading, and refrigerating of perishable goods. Institutes like ITIs and NGOs can be very helpful for implementation of such schemes. Infrastructure of local mandis also need to be upgraded and all kind of facilities and training should be provided to the management of local mandis to reduce the wastage of goods and increase efficiency. Proper Land Acquisition policies, socio-economic facilities to farmers & proper infrastructure for cold storage & transportation of grains should be on main agenda of Government. Strengthening of Public Distribution System (PDS) would allow a proper chain of demand & supply.

PGDM SEM-I

Page 16

PARUL INSTITUTE OF MANAGEMENT

FDI IN RETAIL SECTOR OF INDIA - ANALYSIS 2011

Will FDI in Retail in India really create thousands of jobs while making easy, the life of (poor) farmers? The government of India offered a policy permitting foreign direct investment (FDI) in retail sector of India (Nov 2011). It says this move will boost the economy and create more jobs. There is a section of people excited about this. And there is a section of people going against it. Most affected are our politicos - who have brought parliament to a stop. The following checks out the views and opinions of different entities on FDI in Retail in India (As on Nov 2011.) Before clicking "Read More", grab a cup of coffee. This will take time if you go on clicking all the links. :D

India: Contributing to Global Development Through FDI? When government opened up doors for foreign direct investment (FDI) in $28 billion retail sector in India (Nov 2011), there were well, I cannot say it was a mixed reaction. There have been only two kinds of reaction: happy people and protesters. The only ones seem to be most affected (with the kind of noise they are making), are the politicians. Some politicos in the government (within the UPA) are also opposing the move. Consumers are happy as most of them always preferred foreign brands to 'Made in India' brands. Someone said, "Be Indian, Buy Indian" but it has lost its context these days. The reason cited is - quality of home productions is always poor. I have seen people going to US to buy sarees exported to the US from India and then, gift them as "Made In US" Sarees! If end consumers are happy, politicos should also be supporting the move but they are not. As far as I know, politicians in India dont do anything without incentives. Then, what could be the reason behind these protests?
PGDM SEM-I Page 17

PARUL INSTITUTE OF MANAGEMENT

CONGRESS (NOT GOVT) HAS CITED TWO MAJOR BENEFITS

Yeah! Bring In Those Dollars

1. Low Cost Products With more foreign companies investing in retail, consumers will get more choices and will have to spend less. That is indeed, good news - especially when the inflation is bent upon climbing up and up. 2. Employment Will Increase Govt says lot many jobs will be created for people. In India, where unemployment is a major problem, foreign companies that come to India, will offer jobs to Indians. This is also good as the govt failed to provide proper support to Indians aspiring to provide jobs to other Indians. It has programs like Jawahar Rozgar Yojna etc in place but right now, Anna Hazare and Co. is fighting to get them working without the applicants having to pay heavy kickbacks.
PGDM SEM-I Page 18

PARUL INSTITUTE OF MANAGEMENT

VIEWPOINTS OF DIFFERENT ECONOMISTS

51% FDI will accelerate retail market growth, providing more employment opportunities It is a basic principle that creating competition in general is good for the market. But I have a doubt that since proper procurement and distribution system is not yet fixed, how will the rest fall in place when the giant retailers enter our market. Back-end procurement will still remain a big problem. The 51% foreign direct investment (FDI) will obviously have a negative impact on small retailers, but it will benefit the consumers as they will have wider choices at competitive prices. It will accelerate the retail market growth and provide more employment opportunities. The debate that by introducing 51% FDI, a lot of money will flow out of the country is an old school of thought. Lot of our Indian companies are operating abroad and have successfully contributed to our economy. The bigger issue is that with benefits we might end up paying a price hence we must work on a reasonable solution. Sumita Kale, economist Farmers will benefit from FDI as they will be able to get better prices for their produce The FDI Bill will definitely have a positive impact on the retail industry and the country by attracting more foreign investments. With big retail giants coming to India, it will surely improve our back-end storage and procurement process. Once these multi-chain retailers establish themselves, they will create infrastructure facilities, which will also propel the existing infrastructure. The farmers will benefit from FDI as they will be able to get better prices for their produce. The elimination of the intermediate channels in the procurement process will lead to reduction of prices for consumers. The regulation in the FDI Bill that 30% of the total procurement has to come from small and medium enterprises will benefit the domestic businesses. The fear that FDI will have a negative impact on the small retailers is completely wrong. It is not that everyone will run to these giant retail stores. Anant Sardeshmukh, executive director general, MCCIA
PGDM SEM-I Page 19

PARUL INSTITUTE OF MANAGEMENT

Foreign brands will promote healthy competition in market Every time the government brings up the subject of FDI, the domestic retailers with the support of some politicians jump to lobby against the bill. As we are initiating the FDI, there is bound to be some problems, which can definitely be resolved. The government in near future can appoint a regulating body to monitor the retail sector just like other sectors. By allowing 51% foreign investments in the Indian market, it will teach the local retailers about real competition and help in insuring that they give better service to Indian consumers. It is obviously good for local competition and I dont see as a consequence, our local kirana shops disappearing. The kirana stores operate in a different environment catering to a certain set of customers and they will continue to find new ways to retain them. I dont see a problem with FDI as it will boost our economy. Zubin Kabraji, regional director, Indo-German Chamber of Commerce Customers feel that retail stores offer better deals, but they dont realise that they end up buying more If 51% FDI is allowed in retail market, it will be a big trouble for the small shopkeepers. The big giants entering the market will surely impact the small store owners. The government says that the farmers will benefit, but I feel it will just be a temporary benefit. Once these giant foreign retailers have monopoly, they will start exploiting the market. I feel in the long run, it will not benefit the Indian economy. For example in a country like France, Walmart was not permitted to set up its stores whereas in Germany, FDI is not allowed. If the US is not allowing Indian goods to be sold in their market, why should then we give them a chance to set up base here. The discounts that these big retail stores offer in order to lure customers are also now being offered by our kirana stores. I feel that people should not fall prey to big retail stores because it is a trap wherein consumers end up buying more than what is required. Customers feel that they are getting better deals, but they are at the same time enticed to buy more. Suryakant Pathak, MD, Grahakpeth & Secretary, Grahak Panchayat
PGDM SEM-I Page 20

PARUL INSTITUTE OF MANAGEMENT

ULTIMATELY, INDIA WOULD SURELY NEED TO OPEN UP RETAIL SECTOR FOR FDI, ITS JUST A MATTER OF TIMING
1. Stimulating Competition

FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.

2. Globalization

The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India.

3. Knowledge & Tech sharing

The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate Indias intentions in liberalizing this sector in a phased manner.

4. Flow of capital

Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers.

5. Meeting consumer expectation & Quality checks

India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.
Page 21

PGDM SEM-I

PARUL INSTITUTE OF MANAGEMENT

CONCLUSION
The case is made for allowing FDI in retail on the basis of the need to develop better supply-chain network for supporting activities like warehousing, cold storage, transportation and logistics services. It is said that about 40 per cent of fruits and vegetables rot before they can be sold due to lack of cold storage facilities and poor infrastructure. While the facts may be true and infrastructure and development needs are also undeniable, the belief that it can be developed only by allowing FDI is unfounded. It is the failure of all governments since the last green revolution that they are not able to provide any major reform in agriculture and related sectors. Now to hide their failure and inability to provide better infrastructure they are taking the help of foreign players whose very existence is based on making profit for their shareholders. Studies suggest that wherever these retail chains have opened the growth of nearby areas have come down compared to the average growth of the region. So the government should be more cautious to open the retail sector for FDI as the odds of losing is much higher.

PGDM SEM-I

Page 22

PARUL INSTITUTE OF MANAGEMENT

REFERENCES
http://www.powercutmedia.in/2011/11/fdi-in-retail-sector-of-indiaanalysis.html http://www.economicwatch.com http://www.wikipedia.org http://www.scribd.com http://www.moneycontrol.com http://www.globaljurix.com/foreign-direct-investment.php http://www.caclubindia.com http://www.wwf-uk.org/news/fdi.pdf http://legalindia.com

PGDM SEM-I

Page 23