FDI in Retailing

FDI has been widely seen as one of the most positive forces in the recent
economic globalization, with the supposed potential to transform productive structure in
developing countries and bring about economic convergence across the different regions
of the world. It has been one of the great belief that foreign investment and FDI in
particular could and would transform the world by brining more capital-scarce economies
and causing great change in the productive structure of the developing economies.
As a developing country, FDI continuous to play an important role. It is an opportunity to
make India a manufacturing hub for textile, automobiles, steel, metals and petroleum
products, etc for the world market. Foreign financial analysts have concluded that India
provides maximum return on investments, more than even hina. !hus FDI is superior to
other forms of foreign capital like portfolio investment, loans and commercial borrowings
Divisions of Retail Sector:
!he retail industry can be divided into,
organized large,
unorganized and
informal sector enterprises.
"rganized retailers comprise traders who possess legal permissions or licenses to
undertake the activity, are registered with sales tax#$A! etc. %uch enterprises are super
markets, hypermarkets, retail chains, and also the privately&owned large retail businesses.
At present, it is gradually gaining in importance, and slowly eating in to the business of
second category of retailers.
!he 'norganized retail trade enterprises mean all those local kirana ( general shops,
family managed registered under the %hops and )stablishment Act *s+, administered by
the local authorities. !heir number is very large and this category of enterprises dominate
Indian scenario with a whopping ,- per cent estimated share in the total establishments.
!he third category of retailers includes small shops such as tiny grocery and
vegetable shops run from a room of a house, paan#beedi kiosks *often selling a variety of
items, like small toothpaste tubes, tooth brushes, soaps, pouches of shampoo, etc+, way&
side vendors, and hand carts operating without any licenses.
FDI in Retail Trade:
!he government of India has permitted any foreign multinational through FDI, to
invest in India up to ./0 in 1oint venture for the retail of its exclusive# branded product.
!his permits investment in retail with respect to branded retail, meaning confined to a
single brand.
India had /.2 crore */2 million+ kirana shops and by next week, the number had
moved up to 34 million kirana stores and by the 5rd of December, it had shot up to .4
million kiranas. 6early 2../ million people are employed in the retail trade enterprise
sector, 3/.- per cent of total non&agricultural establishments7 falls under the category of
retail trade category.
Foreign Retailers have started operations in India through various
routes:
*i+ 1oint ventures where the Indian firm is an export house8
*ii+ Franchising *eg. 9entucky Fried hicken, 6ike+8
*iii+ sourcing of supplies from small&scale sector8
*iv+ :cash and carry7 operations *;iant in <yderabad, =etro in >angalore+
*v+ 6on&store formats ? direct marketing *Amway+.
In February 2442, the world7s largest retailer, @al&=art, opened a global sourcing
office in >angalore. In 6ovember 244A, it announced its entry under a 1oint venture with
the Indian orporation >harti. !his is a preliminary step by @al&=art pending the
removal of all restrictions on FDI in retail trade.
Different Characters of Indian Retail Trade:
!he Indian trading sector is very different from that of the developed countries. In
the developed countries, products and services normally reach consumers from the
manufacturer#producers through two different channelsB
*a+ through independent retailers and,
*b+ directly from the producer
In the latter case, the producers establish their own chains of retail outlets, or develop
franchises.
In India, less than three per cent of the retail transactions are done in the
organized sector8 and this is pro1ected to increase to /.&24 per cent by 24/4.!o date, the
organized sector is restricted to metropolises. !he second mode is found in a few national
firms and some subsidiaries of global firms. Indian wholesale trade too is not organized.
!he few government initiatives *such as the formation of >oards for tea, coffee, and
spices, and the %tate !rading orporations+ have largely become defunct by now, and
private initiatives have mostly remained localized.
%mall and medium enterprises dominate the Indian retail scene. !he trading sector
is highly fragmented, with a large number of intermediaries. %o also, wholesale trade in
India is marked by the presence of thousands of small commission agents, stockiest and
distributors who operate at a strictly local level.
!he retail sector acts as an important shock absorber for the present social system.
!hus when a factory shuts down rendering workers 1obless8 or peasants find themselves
idle during part of the year or get evicted from their land8 or the stagnant manufacturing
sector fails to absorb the fresh entrants into the 1ob market, the retail sector absorbs them
all. A skilled labourer turns into a street hawker, a farmer turns to delivering milk packets
door to door, an educated unemployed youth hawks newspapers and a better off
unemployed person starts a telephone booth and retails telecom cards as an :add on7
service. @hen *in exceptional cases+ the factory reopens, or harvesting time arrives, some
of these new entrants leave the retail trade and return to their respective employments.
!hus, after agriculture, the incidence of under&employment is probably highest in the
Indian retail sector. !here are nearly /2 million retail outlets. %mall retailers operating in
the unorganized sector dominate the trade.
The Source of the Pressure for Allowing FDI in Retail:
*i+ C"nly a few global firms possess proprietary expertise in retail trade. !hey would not
transfer their expertise to local firms unless they were allowed to operate in the domestic
market.D
*ii+ C!he government needs FDI to meet its foreign exchange reEuirements.D
*iii+ C"nly global retailers can satisfy the rising and varied demands of Indian
consumers.D
Father than internal :pull7, the reason that the ;overnment is interested in pushing
FDI in retail trade is external pressure. Foreign firms are interested in the growing Indian
market of the better&off8 India is an emerging procurement site for global retailers,
especially for handicraft products *including textiles+ and semi&processed local food
items8 the profitability of ma1or retail firms in the developed countries is declining, and
capital is looking for better pastures8 and new rules in international trade encourage
movement of FDI across nations to maximize return on investment
Pros and cons of FDI in Retail Trade:
Disadvantages:
It will lead to closure of tens of thousands of mom&and&pop shops across the
country and endanger livelihood of 34 million people.
It may bring down prices initially, but if multinational companies get a stronghold
in the retail market.
Farmers may be given remunerative prices initially, but eventually they will be at
the mercy of big retailers.
%mall and medium enterprises will become victims of predatory pricing policies
of multinational retailers.
It will disintegrate established supply chains by encouraging monopolies of global
retailers.
Advantages:
It will abolish intermediaries and thereby helping them get more money for their
produce.
It will help in bringing down prices at retail level and calm inflation.
>ig retail chains will invest in supply chains which will reduce wastage, estimated
at 34 percent in the case of fruits and vegetables.
%mall and medium enterprises will have a bigger market, along with better
technology and branding.
It will bring much&needed foreign investment into the country, along with
technology and global best&practices.
It will actually create employment than displace people engaged in small stores.
It will induce better competition in the market, thus benefiting both producers and
consumers.
Effect of FDI in Retail Trade:
<ow many kirana shop owners will get out of business if @al&=art, arrefour,
!esco and other foreign retailers are allowed to set up hypermarkets in @est >engalG
%ince 9olkata is the only city in @est >engal with a population of more than one million,
HforeignD hypermarkets can only be set up in 9olkata. >y any measure, ;reater 9olkata
can only have a maximum of 24 more hypermarkets.
!hese 24 hypermarkets cannot displace more than /344 kirana stores *I4 kirana
stores per hypermarket+. !here will be absolutely no change in employment as about
I-44 people will get employed by the HforeignD hypermarkets. ertainly, the /344 kirana
shops are not employing more than I-44 people. %o, no one will lose 1obs, period.
"n the contrary, the I-44 employees of the HforeignD hypermarkets will have
benefits such as JF, )%I and insurance. !hey will have far better training in personality
development and selling skills, thus making them far more marketable. Does the kirana
provide them all of this?
!he 24 HforeignH hypermarkets in 9olkata are expected to do sales of Fs./-.3-
billion per year. At an average //0 $A! rate, they will contribute Fs./.-5/ billion in
$A!. In all probability, zero $A! is being collected from the /344 kirana shops that they
might displace. !hatKs a 2..0 increase in @est >engalKs $A! collections.