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FDI in Retail


Contents 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. Introduction Research problem Reason behind the study Methodology of data collection Overview FDI policies with regard to retailing FDI in single and multi brand retailing Challenges and opportunities of retail in India Literature review Qualitative analysis Conclusion

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FDI in Retail


India is now the last major frontier for globalized retail. In the twenty years since the economic liberalization of 1991, Indias middle class has greatly expanded, and so has its purchasing power. But over the years, unlike other major emerging economies, India has been slow to open its retail sector to foreign investment. Recent signals from the government however suggest that this may be about to change: global supermarket chain stores such as Wal-Mart (United States), Carrefour (France), Marks & Spencer and Tesco (United Kingdom), and Shoprite (South Africa) may finally be allowed to set up shop in India. Foreign direct investment (FDI) in the retail sector in India is restricted. In 2006, the government eased retail policy for the first time, allowing up to 51 per cent FDI through the single brand retail route (see Section 2 for a classification of organized retail in India). Since then, there has been a steady increase in FDI in the retail sector, and the cumulative FDI in single-brand retail stood at $195 million by the middle of 2010 (DIPP, 2010). Foreign investment in the single-brand retail sector in India has been resilient to the global economic crisis of 2007-08. Given Indias large population and rapidly expanding middle-class, there is robust and growing demand and a rapidly expanding market.

FDI in Retail

In the past few decades large retailers have experienced substantial growth around the world. Evidence suggests while the impact of entry by large retail chains on employment and incumbent mom-and-pop stores is mixed, there can be substantial benefits to consumers in the form of lower prices and lowered food price inflation in particular. Similarly, by employing improved distribution and warehousing technologies, large retail chains are in a position to provide better price signals to farmers and to serve as a platform for enhanced exports. At the same time, public outcry over the impact of these chain stores on other retailers and local communities is reported around the world. Small retailers, farmers, and even large organized competition have concerns about the entry of large global chain stores. On balance, however, in this paper we argue that opening up FDI in India to multi-brand retailers from abroad may be a catalyst to growth and the development of the retail industry, with positive externalities for the rest of the economy. As per the current regulatory regime, retail trading (except under single-brand product retailing FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a single-brand; this condition being in addition to a few other conditions to be adhered to. India being a signatory to World Trade Organisations General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towardsopening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (FDI). In 1997, FDI in cash and carry (wholesale) with 100% ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single brand retail outlet was also permitted in 2006. All Indian households have traditionally enjoyed the convenience of calling up the corner grocery "kirana" store, which is all too familiar with their brand preferences, offers credit, and applies flexible conditions for product returns and exchange. And while mall based shopping formats are gaining popularity in most cities today, the price-sensitive Indian shopper has reached out to stores such as Big Bazaar mainly for the steep discounts and bulk prices. Retail chains such as Reliance Fresh and More have reportedly closed down operations in some of their locations, because after the initial novelty faded off, most shoppers preferred the convenience and access offered by the local kirana store. So how this Western multi-brand would stores such as Wal-Mart and Carrefour strategies their entry into the country and gain access to the average Indian household? Wal-Mart has already entered the market through its partnership with Bharti, and gained opportunity for some early observations. The company's entry into China will also have brought some understanding on catering to a large, diverse market, and perspectives on buying behaviour in Asian households. Carrefour on the other hand has launched its wholesale

FDI in Retail

cash and carry operations in the country for professional businesses and retailers, and will now need to focus more on understanding the individual Indian customer. As such, these retail giants will try to gain from some quick wins while reaching out to the Indian consumer. For one, they will effectively harness their expertise with cold storage technologies to lure customers with fresh and exotic vegetables, fruits and organic produce. Secondly, they will also emphasise on the access that they can create for a range of inspirational global foods and household brands. Thirdly, by supporting domestic farmers will try ensuring supplies of essential raw materials to them. Surely, these should engage shoppers' and farmers interestbut what needs to beseen is whether they can effectively combine these benefits, with the familiarity,convenience and personalised shopping experiences that the local "kirana" storeshave always offered.

Growth and Evolution of Indian Retail Sector

The Indian Retail Industry is the 5th largest retail destination and the second most attractive market for investment in the globe after Vietnam as reported by AT Kearneys seventh annual Globe Retail Development Index (GRDI), in 2008.The growing popularity of Indian Retail sector has resulted in growing awareness of quality products and brands. As a whole, Indian retail has made life convenient, easy, quick and affordable. Indian retail sector specially organized retail is growing rapidly, with customer spending growing in unprecedented manner. It is undergoing metamorphosis. Till 1980 retail continued in the form of kiranas that is unorganized retailing. Later in 1990s branded retail outlet like Food World, Nilgiris and local retail outlets like Apna Bazaar came into existence. Now big players like Reliance, Tatas, Bharti, ITC and other reputed companies have entered into organized retail business. The multinationals with 51% opening of FDI in single brand retail has led to direct entrance of companies like Nike, Reebok, Metro etc. or through joint ventures like Wal-mart with Bharti, Tata with Tesco etc.

Evolution of retail sector can be seen in the share of organized sector in 2007 was 7.5% of the total retail market. Organized retail business in India is very small but has tremendous scope. The total in 2005 stood at $225 billion, accounting for about 11% of GDP. In this total market, the organized retail accounts for only $8 billion of total revenue. According to A T Kearney, the organized retailing is expected to be more than $23 billion revenue by 2010. The retail industry in India is currently growing at a great pace and is expected to go up to US$ 833 billion by the year 2013. It is further expected to reach US$ 1.3 trillion by the year2018 at a CAGR of 10%. As the country has got a high growth rate, the consumer spending has also gone up and is also expected to go up further in the future. In the last four years, the consumer spending in India climbed up to 75%. As a result, the Indian retail industry is expected to grow further in the future days. By the year 2013, the organized sector is also expected to grow at a CAGR of 40%. The

FDI in Retail

key factors that drive growth in retail industry are young demographic profile, increasing consumer aspirations, growing middle class incomes and improving demand from rural markets. Also, rising incomes and improvements in infrastructure are enlarging consumer markets and accelerating the convergence of consumer tastes. Liberalization of the Indian economy, increase in spending per capita income and the advent of dual income families also help in the growth of retail sector. Moreover, consumer preference for shopping in new environs, availability of quality real estate and mall management practices and a shift in consumer demand to foreign brands like McDonalds, Sony, Panasonic, etc. also contributes to the spiral of growth in this sector. Furthermore, the Internet revolution is making the Indian consumer more accessible to the growing influences of domestic and foreign retail chains. One report estimates the 2011 Indian retail market as generating sales of about $470 billion a year, of which a miniscule $27 billion comes from organized retail such as supermarkets, chain stores with centralized operations and shops in malls. The opening of retail industry to free market competition, some claim will enable rapid growth in retail sector of Indian economy. Others believe the growth of Indian retail industry will take time, with organized retail possibly needing a decade to grow to a 14 25% share.[17] A 25% market share, given the expected growth of Indian retail industry through 2021, is estimated to be over $250 billion a year: a revenue equal to the 2009 revenue share from Japan for the world's 250 largest retailers., The Economist forecasts that Indian retail will nearly double in economic value, expanding by about $400 billion by 2020.[20] The projected increase alone is equivalent to the current retail market size of France. In 2011, food accounted for 70% of Indian retail, but was under-represented by organized retail. A.T. Kearney estimates India's organized retail had a 31% share in clothing and apparel, while the home supplies retail was growing between 20% and 30% per year. These data correspond to retail prospects prior to November announcement of the retail reform.

FDI in Retail

Research problems:
FDI in retail being a broad concept, primary dada method cannot be applied for this project.

Reason behind the study: Aim/ Objective of project:

To understand FDI policies in retail sector, single brand as well as multi brand retail. And its challenges and opportunities in India.

Limitation of project:
Since the project highlights FDI in retail sector, we are left unknown of the same carried out in other sectors such as telecom, real estates, insurance etc.

Methodology of data collection: 1. SECONDARY DATA


FDI in Retail


Retailing in India is one of the pillars of its economy and accounts for 14 to 15% of its GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail markets in the world, with 1.2 billion people. India's retailing industry is essentially owner manned small shops. In 2010, larger format convenience stores and supermarkets accounted for about 4% of the industry, and these were present only in large urban centers. India's retail and logistics industry employs about 40 million Indians (3.3% of Indian population). Until 2011, Indian central government denied foreign direct investment (FDI) in multibrand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process. In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple. The announcement sparked intense activism, both in opposition and in support of the reforms. In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold till it reaches a consensus. In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30% of its goods from India. Indian government continues the hold on retail reforms for multi-brand stores. IKEA announced in January that it is putting on hold its plan to open stores in India because of the 30% requirement. Fitch believes that the 30% requirement is likely to significantly delay if not prevent most single brand majors from Europe, USA and Japan from opening stores and creating associated jobs in India.

FDI in Retail

Entry options for foreign players prior to FDI policy

Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had 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, 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 exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.

FDI in Retail

FDI policy in India

FDI as defined in Dictionary of Economics (Graham Bannock is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) 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. 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 ForeignExchange 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 continued 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.

Role of FDI in Indian retail trade In January 2006, the Government relaxed FDI (foreign direct investment) controls on retailing to allow foreign retailers to participate directly in the Indian market for the first time by allowing equity ownership in `single brand' retailing. Thus, foreign entities are now allowed to operate their stores, but only if they are single-brand stores and only up to 51 per cent ownership. The impact of the consequent increase in FDI, in Indian retail, is expected to not just develop strong backward linkages but also create a domestic supply chain of international standards. What is encouraging now for these global majors is the new policy thrust, which intends to further liberalize the FDI regime in Indian retail. Though FDI in retail trade is as yet restricted, the Government of India has a more liberal policy towards wholesale trade, franchising, and commission agents services, thus preparing the ground for FDI in retail as well. Foreign retailers have already started operations in India through Large international retailers of home furnishing and apparels such as Pottery Barn, The Gap and Ralph Lauren have made India one of their major sourcing hubs. Up to 100 per cent FDI is allowed in cash and carry operations. The Great Wholesaling Club Ltd is one such example. In February 2002, the worlds largest retailer, Wal-Mart, opened a global sourcing office in Bangalore. In November 2006, it announced its entry under a joint venture with the 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 on FDI in retail trade.

FDI in Retail

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities. a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route. b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brandproducts, subject to Press Note 3 (2006 Series). c) FDI is not permitted in Multi Brand Retailing in India.

Prospected Changes in FDI Policy for Retail Sector

The government (led by Dr.Manmohan Singh, announced following prospective reforms in Indian Retail Sector 1. India will allow FDI of up to 51% in multi-brand sector. 2. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores, up from previous cap of 51%. 3. The retailers (both single and multi-brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers. 4. All retail stores can open up their operations in population having over 1million.Out of approximately 7935 towns and cities in India, 55 suffice such criteria. 5. Multi-brand retailers must bring minimum investment of US$ 100 million. Half of this must be invested in back-end infrastructure facilities such as cold chains, refrigeration, transportation, packaging etc. to reduce post-harvest losses and provide remunerative prices to farmers. 6. The opening of retail competition (policy) will be within parameters of state laws and regulations.


FDI in Retail

Effect on farming communities:

A supermarket revolution has been underway in developing countries since the early 1990s. Supermarkets (here referring to all modern retail, which includes chain stores of various formats such as supermarkets, hypermarkets, and convenience and neighbourhood stores) have now gone well beyond the initial upper- and middle-class clientele in many countries to reach the mass market. Within the food system, the effects of this trend touch not only traditional retailers, but also the wholesale, processing, and farm sectors. When supermarkets modernize their procurement systems, they require more from suppliers with respect to volume, consistency, quality, costs, and commercial practices. Supermarketsimpact on suppliers is biggest and earliest for food processing and food-manufacturing enterprises, given that some 80% of what supermarkets sell consists of processed, staple, or semi-processed products. But by affecting processors, supermarkets indirectly affect farmers, because processors tend to pass on the demands placed on them by their retail clients. Supermarket chains prefer, if they are able, to source from medium and large processing enterprises, which are usually better positioned than small enterprises to meet supermarketsrequirements. The rise of supermarkets thus poses an early challenge to processed food microenterprises in urban areas. By contrast, as supermarkets modernize the procurement of fresh produce (some 1015% of supermarketsfood sales in developing countries), they increasingly source from farmers through specialized and dedicated wholesalers (specialized in product lines and dedicated to modern segments) and occasionally through their own collection centers. Where supermarkets source from small farmers, they tend to buy from farmers who have the most non-land assets (like equipment and irrigation), the greatest access to infrastructure (like roads and cold chain facilities), and the upper size treacle of land (among small farmers). Where supermarkets cannot source from medium- or large-scale farmers, and small farmers lack the needed assets, supermarket chains (or their agents such as the specialized and dedicated wholesalers) sometimes help farmers with training, credit, equipment, and other needs. Such assistance is not likely to become generalized, however, and so overtime asset-poor small farmers will face increasing challenges surviving in the market as it modernizes. When farmers enter supermarket channels, they tend to earn from 20 to 50% more in net terms. Among tomato farmers in Indonesia, for example, net profit (including the value of own labour as imputed cost) is 3339% higher among supermarket channel participants than among participants in traditional markets. Farm labour also gains. But supplying supermarket chains requires farmers to make more up-front investments and meet greater demands for quality, consistency, and volume compared with marketing to traditional markets.


FDI in Retail

Impact on Consumers and existing Supermarkets Supermarkets tend to charge consumers lower prices and offer more diverse products and higher quality than traditional retailersthese competitive advantages allow them to spread quickly, winning consumer market share. In most countries supermarkets offer lower prices first in the processed and semiprocessed food segments. Only recently, mainly in the first- and second-wave countries have supermarket prices for fresh fruits and vegetables been lower than traditional retailers (except in India). The food price savings accrue first to the middle class, but as supermarkets spread into the food markets of the urban poor and into rural towns, they have positive food security impacts on poor consumers. For example, in Delhi, India, the basic foods of the urban poor are cheaper in supermarkets than in traditional retail shops: rice and wheat are 15% cheaper and vegetables are 33% cheaper. Existing Indian retail firms such as Spencer's, Foodworld Supermarkets Ltd, Nilgiri's and ShopRite support retail reform and consider international competition as a blessing in disguise. They expect a flurry of joint ventures with global majors for expansion capital and opportunity to gain expertise in supply chain management. Spencer's Retail with 200 stores in India, and with retail of fresh vegetables and fruits accounting for 55% of its business claims retail reform to be a win-win situation, as they already procure the farm products directly from the growers without the involvement of middlemen or traders. Spencers claims that there is scope for it to expand its footprint in terms of store location as well as procuring farm products. Foodworld, which operates over 60 stores, plans to ramp up its presence to more than 200 locations. It has already tied up with Hong Kong-based Dairy Farm International. With the relaxation in international investments in Indian retail, Indias Foodworld expects its global relationship willonly get stronger.


FDI in Retail

FDI in single and multi brand retail

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 the conditions mentioned in Press Note 3 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, and 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.

FDI in Multi-Brand Retail

The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper [14] on allowing FDI in multi-brand retail. The paper doesnt suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multibrand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous kirana store.


FDI in Retail

Challenges and opportunities of retail in India

A number of concerns have been raised about opening up the retail sector for FDI in India. The first concern is the potential impact of large foreign firms on employment. Following agriculture, in 2007-2008, the retail sector is the second largest employer in India (National Sample Survey Organization, 64th round).5 Retail trade employed 7.2% of the total workforce which translates to 33.1 million jobs (DIPP Report, 2010). Moreover, the share of retail employment has risen significantly when compared to its share in 1993-1994. The pattern holds for both males and females, in rural, and in urban areas. A second related concern is that opening up FDI may lead to unfair competition and ultimately result in large-scale exit of incumbent domestic retailers, especially the small family-owned business. Given the large unorganized component of the retail sector, this is a major concern. Kalhan (2007) highlights how small shops in Mumbai are adversely affected, in terms of falling sales, by the growing influence of shopping malls in the city. If employment too is adversely affected, it is not clear how organized retail may absorb this displaced labor. A third concern raised by domestic incumbent firms in the organized retail sector is an infant industry argument: that this sector is under-developed and in a nascent stage. In this view, it is important that the domestic retail sector grow and consolidate first, before being exposed to foreign investors. Domestic firms in this sector oppose liberalizing retail to FDI as they view multinational companies as direct competitors. A newspaper article describes opposition from an incumbent: Kishore Biyani [chief executive of the largest retailer in India] argues that the retail sector should not be given away to foreign players while it is too young to compete on a level playing field. He lacks the capital to build even average-sized Wal-Mart stores of 200,000 square feetfour times larger than his flagship Big Bazaar (Wal-Mart Assault, India Daily, July 24, 2005). In the Indian policy debate, a contrasting view is that growth in organized retail is expected to benefit producers, without (significantly) hurting smaller traders and that they may preserve their smaller domains without being swallowed up by large retailers. However, the experience of organized retail in other parts of the world does not always bear this out. With respect to the impact of entry by big-box stores such as Wal-Mart on retail employment and earnings, evidence from the United States is mixed. Using county-level data, a recent study finds that Wal-Mart entry increases retail employment in the year of entry (Basker, 2005a) while contrasting evidence indicates that each Wal-Mart worker replaces approximately 1.4 retail workers representing a 2.7 percent reduction in average retail employment (Neumark, Zhang and Ciccarella, 2008). Yet other work on Wal-Mart expansion suggests that store openings reduced both average earnings of retail workers (Dube, William and Eidlin, 2007). Recent evidence also suggests that having a chain store in a market makes roughly 50% of the discount stores unprofitable and that Wal- Mart's expansion over the 1990s explains about 4050% of the net reduction in the number of small discount stores (Jia, 2008).


FDI in Retail

The retail experience in Thailand furthers this concern. Sarma (2005) chronicles how traditional shopkeepers continued to suffer even when the Thai economy recovered, after the Asian crisis of the late 1990s. Foreign-owned retailers, he argues, grabbed a big share of the retail market, often through unethical means. In response the government instituted safety nets in the form of strengthening the marketing of the products sold by small retailers, the provision of soft loans, and setting up a central logistics system to act on behalf of the small shopkeepers. In particular to moderate the expansion of the foreign retailers, a similar story of increased regulation of large retailers to prevent market capturing and uncontrolled proliferation is told by Kalhan and Franz (2009). The UK Competition Commission found in a 2000 study6 of major retail chains including Marks & Spencer, Sainsbury and Tesco that the burden of cost increases in the supply chain has fallen disproportionately heavily on small suppliers such as farmers. Apart from prices, the report states that smaller farmers came under severe pressure from supermarkets due to the latters requirement for large volumes of each product, pushing farmers to grow single crops rather than the multiple produce they would usually grow to minimize risk. Observed supermarket practices too may work against the interests of incumbent retailers, even organized ones. Supermarkets chains routinely sell some products at lower than market prices, which appear to benefit consumers, but this puts pressure on small local stores and has an adverse impact on low-income and elderly consumers who rely on local shops. Supermarkets also tend to alter prices in different branches adjusting to local rivals, price-flexing as the UK Competition Commission termed it, again working to the disadvantage of local mom-and-pop stores. Guruswamy et al (2005) argue that firms with deep pockets are able to bear sustained losses, eventually forcing higher cost businesses (small and dispersed competition) out of business. This has a large effect on employment too. In several South-East Asian countries, such as Malaysia and Thailand, the trend has been to move from many smaller suppliers to a few larger ones. Moreover, the share of fresh produce retail in supermarkets, as opposed to from so-called wet markets has also increased substantially. The emerging role of modern retail chains in fresh produce sales is most evident in Malaysia's major cities, where they accounted for as much as 60 percent of fruit sales and 35 percent of vegetable sales in 2002. Close behind is Bangkok, where 40 percent of fruits and 30 percent of vegetables were sold through supermarkets and hypermarkets.7 The Food and Agriculture Organisation concluded in a report that such activities are observed in other countries and regions too. Organized retail increases pressure on farmers to produce standardized produce, pushes down prices and margins, and over time weeds out larger numbers of smaller suppliers in favour of fewer and larger preferred suppliers


FDI in Retail


The changing structure and scale of retail can critically impact several industries in the short term the retail industry itself, manufacturing, and real-estate, to name a few. And in the long term, spill-over effects can be felt in other industries. The growth of retailing has the potential to impact the performance of interlinked sectors such as manufacturing of consumer goods and agriculture-based Industries. We begin by discussing the potential benefits of allowing entry by large foreign discount retail chains on lowering inflation, improving distribution and warehousing technologies. We do so by comparing findings from US studies that examine the effects of Wal-Mart and other large chains entering the US retail sector and the upheaval in the retail landscape brought about in the US beginning in the early 1990s. The section concludes by describing a couple of policy recommendations made in the Indian Governments recent discussion paper on opening up the retail sector with a view to protecting domestic firms and increasing employment in the retail sector. Lowering Inflation and Food Prices Evidence from the United States suggests that FDI in organized retail could help tackle inflation, particularly with wholesale prices. Inflation is a politically sensitive subject, particularly for incumbent governments in a democratic country such as India, in particular because rising food prices tend to be regressive in their impact. This is underscored by the fact that the weight of food in rural and agricultural household consumption baskets is approximately 65-70%. Recent studies quantify the price impact of entry by low cost entrants. For example, using average citylevel prices of various consumer goods, price dynamics in 165 US cities before and after WalMart entry suggest robust reduction in prices for several products while magnitudes vary by product and specification, but generally range from 1.53% in the short run to four times as much in the long run (Basker, 2005b) with significant increases in consumer surplus especially for lower income households (Hausman and Ephraim, 2007). Taking into account demographics, store characteristics, and market conditions, corroborating evidence suggests that Wal-Mart decreases prices by 6%-7% for national brand goods and by 3%-8% for private label goods. Price decreases are most significant in the dry grocery and dairy departments. Moreover, Wal-Mart sets grocery prices significantly lower than its competitors (Volpe and Lavoie, 2008). Hausman and Leibtag (2004) also argue that a more appropriate approach to estimating CPI figures which would lead to a continuously updated expenditure weighted average price calculation in comparison to the official Bureau of Labor Statistics (BLS) approach. Estimates using their new approach would lower food at home inflation by about 0.32 to 0.42 percentage points, in turn lowering the estimated inflation rate by about 15% per year (Hausman and Leibtag, 2004). In India, food accounts for nearly 50% of the consumption basket and the impact on inflation reduction could therefore be significant.


FDI in Retail

Improving Distribution and Warehousing Technologies It is expected that technical knowhow from foreign firms , such as warehousing technologies and distribution systems, for example, will lend itself to improving the supply chain in India, especially for agricultural produce. Here there are multiple inefficiencies in the supply chain that leads from farm to the dinner table. While the Indian government is the largest purchaser of food crops for many farmers, the consequence of a poor distribution system is that much of the stockpile fails to reach consumers, and ends up rotting or as waste. India is the worlds second largest producer of fruits and vegetables in the world after China, producing around 180 million tons per year. Official estimates are that about 25-30 per cent of this produce goes waste between harvest and consumption. Encouraging wholesale trading can create demand throughout the supply chain. In this spirit, the recent discussion paper talks of earmarking 50 per cent of FDI inflows for building up of backend infrastructure, logistics and agro processing (DIPP Report, 2010). In theory, if fresh produce is collected efficiently at the farm-gate, and end-to-end cold-chain is maintained in storage and transportation until it reaches supermarket shelves as in developed countries, this wastage can be eliminated, translating into better prices for farmers and lower prices for consumers besides greater availability of the produce for processing, export and other value-addition. Creating better linkages between demand and supply also has the potential to improve the price signals that farmers receive. This could allow them to better respond to market demand, and thus reduce uncertainty. The Indian Prime Minister, Dr Manmohan Singh, called for a debate on the opening up of the sector on similar lines, pointing to the vast difference between farm gate and consumer prices.9 In this context, the DIPPs discussion paper points out that the farmers get just a third of the total price paid by the final consumer, as against two-thirds realized by farmers in nations with a higher share of organized retail. FDI in retail, therefore, could be an efficient way of addressing concerns of farmers and consumers (DIPP Report, 2010). Evidence from the United States also however suggests by connecting suppliers worldwide with downstream buyers, the retail sector as a whole, has become more efficient at providing consumers with the goods they want at better prices and with increased convenience (Basker, 2007). An added benefit of improved distribution and warehousing channels may also come from enhanced exports. A recent study notes that each of the world's largest retailers---Wal-Mart, Carrefour, Tesco, and Metro---entered China after 1995 and that their subsequent expansion in China may have influenced Chinese exports through two channels (Head, Jing and Swenson, 2010). First, the authors argue that large retailers may have enhanced bilateral exports between the retailers' Chinese operations and destination countries also served by stores in the retailers' networks. Second, Chinese city-level exports to all destinations may have grown if multinational retailer presence enhanced the general export capabilities of local suppliers. Evidence from Chinese city-level retail goods exports supports the capability hypothesis as the expansion of Chinese city exports follows the geographic expansion of the retailers' Chinese stores and global procurement centers (Head, Jing and Swenson, 2010). Wal-Mart has therefore contributed to the trend of increased outsourcing which could bode well for agricultural exports from India.


FDI in Retail

Employment Effects and Small Domestic Firms The Indian Government recommends that retail firms source a percentage of manufactured products from the small and medium domestic enterprises (DIPP Report, 2010). With a restriction of this sort, the opening up of the retail sector to FDI could therefore provide a boost to small-andmedium enterprises. Moreover, expansion in the retail sector could also generate significant employment potential, especially among rural and semi-urban youth. The discussion paper considers the possibility of reserving 50 per cent jobs in FDI-funded retail outlets for rural youth. Other issues up for debate include identifying possible locations for such outlets. The current thinking is that these stores could initially be allowed to come up in cities with populations of over one million, particularly on the outskirts.


FDI in Retail

Literature review:
Effects of Foreign Direct Investment (FDI) in the Indian Economy Sourangsu Banerji, applied statics unit, Indian Statical Institute, India. Version 1- 21 Jul 2013

Abstract: In this paper we study the effects of Foreign Direct Investment (FDI) with respect to India and its economy. We try to analyze the merits and demerits of FDI upon implementation in the Indian domestic market. Introduction: Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting management interest (10 percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short term capital as shown in the balance of payments. It usually involves participation in management, joint venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.FDI is one example of international factor movements. For FDI: - causes a flow of money into the economy which stimulates economic activity - Employment will increase - Long run aggregate supply will shift outwards -Aggregate demand will also shift outwards as investment is a component of aggregate demand - It may give domestic producers an incentive to become more efficient - The government of the country experiencing increasing levels of FDI will have a greater voice at international summits as their country will have more stakeholders in it . Against FDI: - Inflation may increase slightly. - Domestic firms may suffer if they are relatively uncompetitive. - If there is a lot of FDI into one industry e.g. the automotive industry then a country can become too dependent on it and it may turn into a risk that is why countries like the Czech Republic are "seeking to attract high value-added services such as research and development (e.g. biotechnology)"


FDI in Retail

FDI in India: A virtual Debate!!! For: I think to start with, FDI (foreign direct investment) multibrand retail policy should be adopted as there is not any issue about the fact that this will affect the fellow shopkeepers .Instead it will give ample opportunities to the unemployed (lower class) and also improve the quality of the product. I don't know that why Indian govt. has completely postponed the idea of passing the bill. Against: "Instead it will give ample opportunities to the unemployed (lower class)" Corporations predict that a total of 2 million jobs will be created when they infiltrate India's economy. There are 200 million people in India, however, whose jobs depend on the retail sector, which intervention of big business will destroy through forcing small businesses to close and killing local economies. "Improve quality of product" Big businesses will monopolize their respective markets in India by destroying all small competitors, and then they will be in complete control of prices, so it will ultimately come at a cost. Also, after monopolizing, product quality will stop mattering, since all small businesses whose products competed in quality would be destroyed. Also, vegetables and fruits that will be imported from outside India will be not fresh and stale due to long distance transportation and constant refrigeration. My argument is that FDI of major corporations in India will lead to detrimental effects, such as unemployment, destruction of local economies, and the consumers of India will not benefit. Letting Indias economy be hijacked by large foreign corporations is a bad idea. For: "Intervention of big business will destroy through forcing small businesses to close and killing local economies. How can intervention of big businesses destroy and kill local economies India most of the local areas and villages already have the local retail shops. They wont be affected as the foreign retail investments would be only establishing themselves in metropolitan and centralized cities like Delhi, Mumbai etc. plus PM also said that each and every city can decide whether to have FDI policy in their area or not. "Product quality will stop mattering" Product quality can't stop mattering at all because every day there is numerous cases of fake dairy products. You may not be familiar with that fact but I am. "Destroying all small competitors" Entering of multi-retail brands such as Wal-Mart to India would have no effect on local shops. It will give a good competition to companies like reliance fresh (which is also similar to Wal-Mart


FDI in Retail

and yet it has not at all had any significant effect on local retail shops.).plus brands like reliance can also learn so much from these foreign brands. Against: "How can intervention of big businesses destroy and kill local economies India most of the local areas and villages?" Big businesses will destroy local economies by displacing many people affiliated with small businesses, including shopkeepers, hawkers, vendors, and workers. "They wont be affected as the foreign retail investments would be only establishing themselves in metropolitan and centralized cities." Who said that they are restricted to metropolitan and centralized cities? Also, establishment of large foreign businesses in metropolitan cities would have to affect neighboring villages and towns, since products will be branched off to them. When FDI hit Thailand, 60,000 small shops closed. Through market saturation, large corporations are able to create widespread impact in an economy. "Fake dairy products" The opponent is correct that I am unfamiliar with this claim... and I cannot find any information about it. I'm still not sure, though, how it is relevant to my argument that, through monopolization, large corporations can lower product quality due to a huge decrease in competition. According to a study, when two malls were established next to 82 small shops and 29 hawkers, these were the effects on them: "-71% of small businesses sampled reported falling sales. -Sales decline is evenly distributed by value of inventory up to 25 lakhs. It has most frequently impacted larger shops in the size range of 400-500 sq ft and 300-400 sq ft and those less than 100 sq. ft. -Highest concentration in declining sales by business type was experienced in grocery stores who, of those sampled, 87% reported a decline in sales. -63 % of the sample said that they felt threatened by the Malls. 50% of the sample was expecting serious trouble. 92% said that their children would not continue with the business. -Hawkers are facing increasing eviction drives and harassment around the Malls. 41% reported an increase in eviction drives, 24% in harassment by agents of the Malls, 17% increase in bribes and hafta. -72% of hawkers experienced a fall in sales and all reported falling profits, which means falling income for them." Moreover, there is a negative impact on farming, since large corporations will push farmers to work for them and get involved in single-crop farming and the use of artificial means of farming.


FDI in Retail

Due to monopolization, farmers will have to sell their products to corporations at the offered price, whatever it may be. This is already starting to happen in India.

Is FDI in retail bane or boon? The governments decision to open up Foreign Direct Investment (FDI) in the retail sector has created uproar of opposition in the political arena. However there seems to be a greater diversity of opinion among our readers at least. On Sunday 27 November, Firstpost Published an article titled, Manmohan Singhs big retail risk which has received a number of comments arguing both for and against FDI in the retail sector. We found these comments extremely interesting and thought provoking in terms of the points they raised, and have therefore decided to publish a cross section of them here. The FDI issue has points both for and against it: Some readers such as Arul Prakash feel that the measures will put farmers at a disadvantage and also result in a situation where consumers are not given the freshest produce. He writes, Once they come, the farmers who now have several middlemen to sell their goods will have only a few retail stores to sell in future. Usually that means price he gets will not be as competitive as it is today. Second! the same supermarkets may not actually give the best products grown in India to Indians..third! they can alter the food habits of the nation. Instead of eating fresh foods we will all be eating canned foods soon! Guest, an anonymous commenter on the article also feels that FDI will be more bane than boon. He says, Manmohan Singh and his team may believe that Wal-Mart, Carrefour etc. are coming to India to uplift the condition of agricultural sector and will improve supply chain efficiency. We believe they are coming for sheer profit motives and if that means squeezing the billion+ Indians, selling Chinese goods, killing indigenous ventures - they will do that. Todays independent entrepreneur and businessmen will become their salaried employees. On the other side of the debate, Shiva Kakkar does notbelieve that the entry of foreign players such as Wal- Mart will necessarily kill off the kirana stores, and says that Indias bad supply chain management could do with some propping up. He says, Opening up of foreign store does guarantee one thing stiffer competition and aggressive pricing and better quality of service. But that doesn't mean that Kirana store guys would die of hunger. They have their own clientele and I have seen that when competition stiffens they tend to adapt to it. I come from a tier 2 city. When Reliance and Big Bazaar first entered, there was the same opposition but after that I have seen many small Kirana store owners turn their stores into departmental format and they seem to have maintained their clientele. Secondly, I have noted that they tend to have a better hold of tastes of the local public, for e.g. shich variety of rice or wheat sells more than others etc. The one good thing was that it was only after the onslaught of retail chains, the kirana guys started valuing customers. I have seen men who wouldnt give a damn if you stomped out of their shops change their attitude and give better service. Still, the return policies and complaints department happens to be a problematic affair for local stores. Truly speaking, I am thrilled how foreign retailers would handle the Indian retail scenario.


FDI in Retail

Secondly, people arguing on supply lines being hijacked by Wal-Mart need to see the footage rolling on Rice and Wheat rotting in rains that was flashing on every channel barely a month ago. Had efficient supply chain management been there, thousands of tonnes of those grains could have been saved. Accept it - India is BAD at supply chain management, be it PDS or private. We need expertise of foreign retailers. Maybe, it has a lesson or two for us too. Meanwhile another reader, Catamaran says that thegovernment decision is a brave one, and the opposition to the move should be ignored in the interest of Indias future. In his own words, Good Moveby Government..Every good thing has opposition in this world before the actual fools start to see the benefits of it.same happened when India was opened to foreign companies in see where is least the world recognize us todayWait n Watch..INDIA will do much well by these kind of brave decisions. Yet other readers such as Sai, see both the positives and negatives of the FDI move. On the positive side he cites Infrastructure build up, more cold storages, less food rotting, for urban and semi urbans its very good in terms of creating new jobs for those who wanted to work but not finding it and also encourage for part time jobs,introduction of new brands, its will be only allowed to 50- 60 cities i.e. only 20% of total population, 80% people still go for kiranas However he sees negatives too. Wal-Mart especially has very bad track record in handling its own employees, developed countries US and Euros have negative statement that Multi Brand retailers cut the jobs and give less returns to the farmers from what they were getting before they enter their market, might hamper Kiranas where they will open store, may in coming years will lead to cane foods in India and at higher prices so will lead to higher inflation. The biggest concern is that may change people's mentality, India is country where people saves more, but after these multi brands enter, people will spend more and save less(as we all know how we behave when we enter a shopping mall).. thats the reason why US and Euro went through 2008 meltdown and still wont be able to recover and might in 2-3 years will be declared bankrupts.


FDI in Retail

Merits/Demerits of Foreign Direct Investment: Merits: Merits-Attracting foreign direct investment has become an integral part of the economic development strategies for India. FDI ensures a huge amount of domestic capital, production level, and employment opportunities in the developing countries, which is a major step towards the economic growth of the country. The effects of FDI are by and large transformative. The incorporation of a range of well-composed and relevant policies will boost up the profit ratio from Foreign Direct Investment higher. Some of the biggest advantages of FDI enjoyed by India have been listed as under: Economic growth- This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country.

Trade- Foreign Direct Investments have opened a wide spectrum of opportunities in the trading of goods and services in India both in terms of import and export production. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Employment and skill levels- FDI have also ensured anumber of employment opportunities by aiding the setting up of industrial units in various corners of India. Technology diffusion and knowledge transfer- FDI apparently helps in the outsourcing of knowledge from India especially in the Information Technology sector. It helps in developing the know-how process in India in terms of enhancing the technological advancement inIndia. Linkages and spillovers to domestic firms- Various foreign firms are now occupying a position in the Indian market through Joint Ventures and collaboration concerns. The maximum amount of the profits gained by the foreign firms through these joint ventures is spent on the Indian market.

Demerits: Demerits of FDI in India: FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in terms of investment patterns: The disadvantages of foreign direct investment occur mostly in case of matters related to operation, distribution of the profits made on the investment and the personnel. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. The various disadvantages of foreign direct investment are understood where the host country has some sort of national secret something that is not meant to be disclosed to the rest of the world. It has been observed that the defense of a country has faced risks as a result of the foreign


FDI in Retail

direct investment in the country. At times it has been observed that certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making the investment themselves. Foreign direct investment may entail high travel and communications expenses. The differences of language and culture that exist between the country of the investor and the host country could also pose problems in case of foreign direct investment. Another major disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution.

To Sum up, Positives: Foreign direct investment would allow India to secure foreign infrastructure into India, which would increase Indias capital base rapidly. If anything if India can attract FDI in the big picture its nothing but positive things. China has grown tremendously because of FDI. So, the benefits can be listed as: - Employments opportunities - reduce spoilage and - enable the delivery of affordable products to customers. Negatives: The negatives are that it can affect local communities, when larger projects come in. It also means subjecting domestic firms to foreign competition which can harm domestic firms, and this isn't necessarily due to incompetence of the domestic firm. Foreign firms may have technology that India has not acquired. On the other hand FDI brings those technologies to India much quicker. The negative impacts: -improper time of allowing FDI in Retail in India because of lack of infrastructure and -taking of revenue and market share by the big foreign giants.


FDI in Retail

Conclusion Indias retail sector remains off-limits to large international chains especially in multi-brand retailing. A number of concerns have been raised about opening up the retail sector to FDI in India. The first concern is the potential impact of large foreign firms on employment in the retail sector. A second related concern raised in the DIPPs report is that opening up FDI would lead to unfair competition and ultimately result in large-scale exit of incumbent domestic retailers, especially the small family-owned business. A third concern raised by domestic incumbent firms in the organized retail sector is that this sector is under-developed and in a nascent stage. In this paper we argue that the potential benefits from allowing large retailers to enter the Indian retail market may outweigh the costs. Evidence from the United States suggests that FDI in organized retail could help tackle inflation, particularly with wholesale prices. It is also expected that technical know-how from foreign firms, such as warehousing technologies and distribution systems, for example, will lend itself to improving the supply chain in India, especially for agricultural produce. Creating better linkages between demand and supply also has the potential to improve the price signals that farmers receive and by eliminating both waste and middlemen also increase the fraction of the final sales prices that is paid to farmers. An added benefit of improved distribution and warehousing channels may also come from enhanced exports. Indias experience between 1990-2010, particularly in the telecommunications and IT industries, showcases the various benefits of opening the door to large-scale investments in these sectors. Arguably, it is now the turn of retail.


FDI in Retail

Qualitative analysis: Porters five force model.

Threat of New Entrants:

One trend that started over a decade before has been a decreasing number of independent retailers. While the barriers to start up a new store are not impossible to overcome, the ability to establish favourable supply contracts, leases and be competitive is becoming virtually impossible. There vertical structure and centralized buying gives chain stores a competitive advantage over independent retailers. 95% of the market is made up of small, uncomputerised family run stores. Now there are finally signs that the Indian government dropping its traditional protectionist stance and opening up its retail market to greater overseas investment. It has already allowed 51% ownership in single-brand goods leading to entry of McDonalds, Marks & Spencer, Body Shop and Ikea and with proposal of raising the ownership to 100% will attract more foreign retailers. Also with allowing investment by foreign retailers in multi-brand retailing in a phased manner will lead to more inflow of foreign investors in Indian retail sector. On the whole threat from new entrants in retail industry is high.


FDI in Retail

Power of Suppliers:
Historically, retailers have tried to exploit relationships with supplier. A great example was in the 1970s, when Sears sought to dominate the household appliance market. Sears set very high standards for quality; suppliers that did not meet these standards were dropped from the Sears line. This could also be seen in case of Walmart that places strict control on its suppliers. A contract with a big retailer like Walmart can make or break a small supplier. In retail industry suppliers tend to have very little power.

Power of Buyers:
Individually, consumers have very little bargaining power with retail stores. It is very difficult to bargain with the clerk at Big Bazaar for better price on grapes. But as a whole if customers demand high-quality products at bargain prices, it helps keep retailers honest. Taking this from Porters side of the coin we can say customers have comparatively high bargaining power in unorganized sector than in organized sector. As the customer will demand products from organized units he will be more focused towards quality aspect.

Availability of Substitutes:
The tendency in retail is not to specialize in one good or service, but to deal in wide range of products and services. This means what one store offers is likely to be same as that offered by another store. Thus threat from substitutes is high.

Competitive Rivalry:
Retailers always face stiff competition and must fight with each other for market share and also with unorganized sector. More recently, they have tried to reduce cut throat pricing competition by offering frequent flier points, memberships and other special services to try and gain the customers loyalty. Thus retailers give each other stiff but healthy competition which is evident from their aggressive marketing strategies and segment policies.


FDI in Retail

SWOT analysis of retail sector.

Strengths: around 33-35% of GDP as compared to around 20% in USA. an extremely high growth rate of approximately 46%. -3%, thereby creating lot of potential for future players. force in India, which is right now limited to unorganized sector only. Once the reforms get implemented this percentage is likely to increase substantially.

Weaknesses (limitation): found that India is least competitive as well as least saturated markets of the world. 97% as compared to US, which is only 20%. dia is very low as compared to its international peers. India is not considered as reputed profession and is mostly carried out by the family members (self-employment and captive business). Such people are not academically and professionally qualified. retailers: the retail sector in India does not enjoy industry status in India, thereby making difficult for retailers to raise funds.

Opportunities (benefits): will need more workers. According to findings of KPMG , in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post reforms and innovative competition in retail sector in that country. check on the prices (inflation):Retail giants such as Walmart, Carrefour, Tesco, Target and other global retail companies already have operations in other countries for over 30 years. Until now, they have not at all become monopolies rather they have managed to keep a check on the food inflation through their healthy competitive practices.


FDI in Retail

the intermediaries operating as per mandi norms do not have transparency in their pricing. According to some of the reports, an average Indian farmer realises only one-third of the price, which the final consumer pays. l be evicted, hence directly benefiting the farmers and producers: the prices of commodities will automatically be checked. For example, according to Business Standard, Walmart has introduced Direct Farm Project at Haider Nagar in Punjab, where 110 farmers have been connected with Bharti Walmart for sourcing fresh vegetables directly. due to organization of the sector, 40% of the production does not reach the ultimate consumer. According to the news in Times of India, 42% of the children below the age group of 5 are malnourished and Prime Minister Dr.Manmohan Singh has termed it as national shame. Food often gets rot in farm, in transit and in state-run warehouses. Cost conscious and highly competitive retailers will try to avoid these wastages and losses and it will be their endeavour to make quality products available at lowest prices, hence making food available to weakest and poorest segment of Indian society. building up the infrastructure for the growing population: India is already operating in budgetary deficit. Neither the government of India nor domestic investors are capable of satisfying the growing needs (school, hospitals, transport etc.) of the ever growing Indian population. Hence foreign capital inflow will enable us to create a heavy capital base. economic issues will be focused upon: many Indian small shop owners employ workers, who are not under any contract and also under aged workers giving rise to child-labour. It also boosts corruption and black money.

Threats: This will lead to massive job loss as most of the operations in big stores like Walmart are highly automated requiring less work force. -out competition: they can afford to lower prices in initial stages, become monopoly and then raise prise later. isfy the whole domestic demand. and then took over politically.


FDI in Retail


(1) Small retailers will not be crowded out, but would strengthen market positions by turning innovative/ contemporary. (2) Growing economy and increasing purchasing power would more than compensate for the loss of market share of the unorganised sector retailers. (3) There will be initial and desirable displacement of middlemen involved in the supply chain of farm produce, but they are likely to be absorbed by increase in the food processing sector induced by organised retailing. (4) Innovative government measures could further mitigate adverse effects on small retailers and traders. (5) Farmers will get another window of direct marketing and hence get better remuneration, but this would require affirmative action and creation of adequate safety nets. (6) Consumers would certainly gain from enhanced competition, better quality, assured weights and cash memos. (7) The government revenues will rise on account of larger business as well as recorded sales. (8) The Competition Commission of India would need to play a proactive role.

Thus from developed countries experience retailing can be thought of as developing through two stages. In the first stage, modern retailing is necessary in order to achieve major efficiencies in distribution. The dilemma is that when this happens it inevitably moves to stage two, a situation where an oligopoly, and quite possibly a duopoly, emerges. In turn this implies substantial seller and buyer power, which may operate against the public interest. The lesson for developing countries is that effective competition policy needs to be in place well before the second stage is reached, both to deter anticompetitive behaviour and to evaluate the extent to which retail power is being used to unfairly disadvantage smaller retailers and their customers. The sources of retail power need to be understood to ensure that abuses of power are curbed before they occur. The more important debate lies in the parameters of competition policy. The benefits brought by modern retailers must be acknowledged and not unduly hindered. While it is true that some dislocation of traditional retailers will be felt, time will prove that the hardship brought will not be substantial. Competition law is being created and adopted across Asia but in the immediate future its impact is not expected to be large. Competition laws only become vital as time passes and retail becomes concentrated in the hands of a few powerful companies, whether or not these companies are foreign or domestic.


FDI in Retail

In conclusion, the issue that India must grapple with now is the impact of reduced competition brought about by retailer concentration will have on various stakeholders and the ways in which competition laws and policy can deal with this growth of power before it is too late. The new Competition Act, 2002 has all the required provisions. It would, anyhow, depend on how it is implemented.


FDI in Retail