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Introduction

Nations are opening up the doors of all the permissible sectors of their economy,
generously, to not just their national players, but also to foreign nationals, in order to boost
the countries economic and social progress and in due course the Gross Domestic Product
(GDP). In other words, the progression of globalization and liberalization has led to the
emergence of the world as a single giant promising market.
India is not oblivious to the rapid developments taking place in the global market and
has emerged as one of the prime destinations for the investment of funds from an impressive
number of foreign investors.
The advent of FDI in India was witnessed during the end of 1990s when the Indian
national government announced a number of reforms which aimed at helping in the process
of liberalization and deregulation of the Indian economy. The Government of India's wise
policy regime and a healthy business environment have also ensured that foreign capital keep
flowing into the country. The government has taken numerous initiatives in recent years.
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 towards opening 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 percent ownership was allowed under the Government approval
route. It was brought under the automatic route in 2006. 51 percent investment in a single
brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in
India.

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Retail sector in India


Retail sector in India is reflected in sprawling shopping centers, multiplex- malls and
huge complexes which offer shopping, entertainment and food all under one roof. The
concept of shopping has altered in terms of format and consumer buying behavior, which has
ultimately created a revolution in shopping. The factors that are driving the growth of the
organized retail sector in India are:

Falling real estate prices

Increase in disposable income and customer aspiration

Increase in expenditure for luxury items

The increase in the young working population in India

Hefty pay-packets

Nuclear families in urban areas

Increasing working-women population

Low share of organized retailing

The Indian retail industry has experienced high growth over the last decade with a
noticeable shift towards organized retailing formats. The industry is moving towards a
modern concept of retailing.
Organized retailing refers to trading activities undertaken by licensed retailers, that is,
those who are registered for sales tax, income tax, etc. These include the corporate-backed
hypermarkets and retail chains, and also the privately owned large retail businesses.
Unorganized retailing on the other hand, refers to the traditional formats of low-cost retailing,

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for example, the local kirana shops, owner manned general stores, paan/beedi shops,
convenience stores, hand cart and pavement vendors, etc.

Evolution of India Retail


S.No.
1

Format
Historic/Rural Reach

Shop types
Weekly Markets

Village Fair

Traditional/Pervasive Reach

Melas
Convenience stores

Government Supported

Mom& Pop Kiranas


PDS Outlets

Khadi Stores

Cooperatives
Exclusive Brand Outlets

Hyper/Super markets

Department Stores

Shopping Malls

Modern Formats/International

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Foreign Direct Investment


FDI is the process whereby residents of one country (the home country) acquire
ownership of assets for the purpose of controlling the production, distribution and other
activities of a firm in another country (the host country). IMF Definition: Foreign direct
investment is the category of international investment that reflects the objective of obtaining
a lasting interest by a resident entity in one economy in an enterprise resident in another
economy. The lasting interest implies the existence of a long-term relationship between the
direct investor and the enterprise and a significant degree of influence by the investor on the
management of the enterprise.
One of the most striking developments during the last two decades is the spectacular
growth of FDI in the global economic landscape. This unprecedented growth of global FDI in
1990 around the world make FDI an important and vital component of development strategy
in both developed and developing nations and policies are designed in order to stimulate
inward flows. In fact, FDI provides a win win situation to the host and the home countries.
Both countries are directly interested in inviting FDI, because they benefit a lot from such
type of investment. The home countries want to take the advantage of the vast markets
opened by industrial growth. On the other hand the host countries want to acquire
technological and managerial skills and supplement domestic savings and foreign exchange.
Moreover, the paucity of all types of resources viz. financial, capital, entrepreneurship,
technological know- how, skills and practices, access to markets- abroad- in their economic
development, developing nations accepted FDI as a sole visible panacea for all their
scarcities. Further, the integration of global financial markets paves ways to this explosive
growth of FDI around the globe.

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FDI refers to foreign capital investment to enhance the production capacity of an


economy. Recognizing the need to attract foreign funds for the growing retail sector in India,
the Government has liberalized the exchange control norms to permit foreign direct
investment. The Government has put in place a policy framework on Foreign Direct
Investment, which is transparent, predictable and easily comprehensible. This framework
may be updated every year, to capture and keep pace with the regulatory changes. The
Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce & Industry,
Government of India makes policy pronouncements on FDI through Press Notes/Press
Releases which are notified by the Reserve Bank of India as amendments to the Foreign
Exchange Management.

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Does India Need FDI In Retail?


India continued to believe more in subsidizing than in reducing waste or adding value
to the output. This has led to continued rural poverty, except in some isolated pockets. One
problem is that a huge proportion of perishable agricultural output like fruits and vegetables
is left to rot in the fields in the absence of cold storages and transport infrastructure, and
becomes a dead loss to the economy. An all too visible manifestation of the inefficiencies is
the huge disparity between the price which the producer gets and the price the consumer pays
-- sometimes as high as 10-20 times! Clearly, what is needed is an efficient supply chain
backed by improved infrastructure, cold storages, packing and transportation. And, the
traditional system of distribution, ending with the mom and pop shops or the street-side
vegetable seller, is just not capable of creating it.
This brings us to the third blind spot: distribution and retailing. First, umpteen indirect
taxes hamper a smooth chain. Again, for decades, financing of manufacturing was considered
virtuous while finance for trade or consumption was discouraged. The middlemen were,
broadly speaking, thought to be parasites standing between the producer and the consumer,
contributing little to economic growth or output. The fact is that the circle of economic
activity cannot be completed until what is produced reaches the consumer and, therefore,
efficient distribution and retailing are very important. To quote just one example, can India
imagine a vibrant automobile sector without an efficient distributor and service network and,
indeed, vehicle finance? Or a fast growing and needed housing sector without availability of
housing finance?
The entry of the organized sector in retail trade is capable of mitigating, if not solving,
the huge waste involved in the current system, simultaneously paying better prices to the

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producer and lower prices for the consumer. This is manifest to anybody visiting some of the
newer supermarkets in urban/metropolitan India: the produce is cleaner, fresher, well-packed,
and often cheaper than the vegetable seller on the street. This is possible because of the far
more efficient distribution system which organized retail chains are employing, by cutting
layers of middlemen. One very positive sign is that a way seems to have been found for the
corporate sector to enter the rural economy through contract farming -- almost every day one
sees major corporate names making forays in the area. If the huge margin between producer
and consumer prices is one attraction, they are also perhaps inspired by what Pepsi succeeded
in doing for the potato farmer in Punjab, partly to fulfil the export obligations imposed on it
when it entered India.
Recent indications that the government is considering foreign direct investment in
retail trade have sparked off a debate on the advisability and consequence of this policy.
Retail trade takes place through five types of outlets -- kirana shops, more modern retail
shops, departmental stores, supermarkets, and hypermarkets. Kirana shops and retail shops
are a feature of our landscape. Every village and town has them. They are usually familyowned and managed. Most kirana shops store goods unpacked in bulk containers, from which
they are measured or weighed out in paper packets by the owner. When towns become cities,
departmental stores appear. Supermarkets are the next stage in the evolution of retailing. They
are viable only in the bigger cities. The fear expressed by some people is that allowing FDI in
retail trade and the entry of international retailers could lead to a diminution of kirana shops
and retail stores. It is worthwhile analyzing the advantages and disadvantages of the proposed
policy of allowing FDI in retail trade.
One key point is that Indian government must differentiate between the interests of
consumers, who constitute our population of nearly 1,100 million, from the interests of
retailers, who may number over one million. It is obvious that the interests of the consumer

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should take precedence over those of the retailer. FDI in retail and the development of larger
stores and supermarkets have the following advantages from the point of view of consumers:
FDI will provide access to larger financial resources for investment in the retail sector
and that can lead to several of the other advantages that follow;
The larger supermarkets, which tend to become regional and national chains, can
negotiate prices more aggressively with manufacturers of consumer goods and pass
on the benefit to consumers. They can lay down better and tighter quality standards
and ensure that
With the availability of finance, the supermarkets can invest in much better infrastructure
facilities like parking lots, coffee shops, ATM machines, etc. All this will make shopping a
pleasant experience. The supermarkets offer a wide range of products and services, so the
consumer can enjoy single-point shopping. The argument that the advent of FDI and
supermarkets will displace a large number of kirana shops is similar to the argument used
during the era of industrial licensing, which was meant to protect small-scale industries. But
eventually the inefficiencies and quality standards of the protected small-scale companies
become apparent even to socialist politicians and licensing was abolished. Small-scale
industries have not died. Instead, they have learnt to co-exist as suppliers to large-scale
industries.
In the case of retail trade, the kirana shops in large parts of the country will enjoy built-in
protection from supermarkets because the latter can only exist in large cities. On the other
hand, the ability of supermarkets to demand pricing and quality standards from manufacturers
will benefit even kirana shops, who can even buy from the supermarkets to sell the same
products in smaller towns and villages. It can be argued that since the advantages cited above
are due to the scale of operations rather than the involvement of foreign capital, why should
India allow FDI in retail trade? The case for FDI has more to do with the confidence and

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willingness to invest large amounts in a short period as well as the expertise based on
experience.
Even a modest chain of 200 supermarkets, to be set up all over India in selected towns
and cities in the next three years, will require an investment of about Rs 2,000 crore (Rs 20
billion), at the rate of Rs 10 crore (Rs 100 million) per supermarket to cover the infrastructure
and working capital. Each supermarket may take 2 or 3 years before it becomes profitable.
There is a risk that a few of them may even fail. How many Indian entrepreneurs will be
willing and able to commit this level of investment and undertake the risks involved? That is
where the international experience and skills that may come with FDI would provide the
confidence and capital. Apart from this, by allowing FDI in retail trade, India will become
more integrated with regional and global economies in terms of quality standards and
consumer expectations. Supermarkets could source several consumer goods from India for
wider international markets. India certainly has an advantage of being able to produce several
categories of consumer goods, viz. fruits and vegetables, beverages, textiles and garments,
gems and jewellery, and leather goods. The advent of FDI in retail sector is bound to pull up
the quality standards and cost-competitiveness of Indian producers in all these segments. That
will benefit not only the Indian consumer but also open the door for Indian products to enter
the wider global market. It is therefore obvious that India should not only permit but
encourage FDI in retail trade. Just as in the case of most products, the brand name of the
supermarket chain is a strong element in its growth and success.
People have confidence in names like Sainsbury, Asda, Marks & Spencer, etc. just as they
have confidence in Indian brands like the Tatas and Godrej. A possible outcome can be that
Indian groups with strong local brand quality like the Tatas will collaborate with international
supermarket chains like Sainsbury, to set up supermarket chains in India. It will be unwise for
a government to interfere in this process.

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Forms of Foreign Capital Flowing into India


The various Forms of Foreign Capital Flowing into India has helped to bring in huge
amounts of FDI into the country, which in its turn has given a major boost to the Indian
economy. The government of India made several changes in the economic policy of the
country in the early 1990s. This led to the deregulation and liberalization of the Indian
economy and also increased the flow of foreign direct investment into the country.
The Forms of Foreign Capital Flowing into India include:
1. NRI deposits, which are made in profitable foreign currency accounts.
2. Portfolio flow of capital that are made by institutional foreign investors that make
investments in India's debt and stock markets.
3. Investments that are being made by the foreign investors in the commercial banks of
India.

Sectors FDI is allowed in


It is to be noted that FDI in India is liberally allowed in all sectors including the
services sector, except a few sectors where FDI is either absolutely forbidden on the grounds
of national interest, or, other sectors where the existing and notified sectoral policy does not
permit FDI beyond a ceiling. Moreover, FDI for all the permissible items/activities can be
brought in through the Automatic Route under powers delegated to the Reserve Bank of India
(RBI), and for the remaining items/activities through Government approval, which is
accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).

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Forms of investment
Further, it is to be noted that Indias FDI Policy allows for investment only in the following
form of investments, namely,
1. Through financial alliance
2. Through joint schemes and technical alliance
3. Through capital markets, via Euro issues
4. Through private placements or preferential allotments.

Benefits of Foreign Direct Investment in the retailing sector


Gradual opening up of the retail segment for FDI will work to the advantage to
government, consumers and existing retailers in the following manner:
1. Generate huge employment for the semi-skilled as well as illiterate population, which
will ultimately increase the per capita income and increased tax paying population.
2. Indirect employment generation channel by training and employing people in the
transportation and distribution sectors such as drivers, mechanics etc.
3. Increased investment in technology in the form of cold storage chains, food
processing sector etc. will decrease the wastage to a considerable amount.
4. Traditional retailers can use this situation in their favor by taking franchisees of the
mega players of this industry.
5. The indirect benefits like better roads, online marketing, expansion of telecom sector
etc. will give a big push to other sectors like agriculture, small and medium size
enterprises.
6. The consumer gains from the wide variety of choices and a more diversified basket of
prices available under one roof.
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7. The huge tax revenue generated from these retail giants will gradually wipe out the
ugly looking fiscal and revenue deficits.

Division of Retail Industry Organised and Unorganised


Retailing
The retail industry is mainly divided into:- 1) Organised and 2) Unorganised 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, on the other hand, refers to the traditional formats of low-cost
retailing,

for

example,

the

local kirana shops,

owner

manned

general

stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the
unorganized retailers. The organized retail however is at a very nascent stage. The sector is
the largest source of employment after agriculture, and has deep penetration into rural India
generating more than 10 per cent of Indias GDP.

FDI Policy in India


FDI as defined in Dictionary of Economics (Graham Bannock et.al) 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
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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 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.

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

Brand products, subject to Press Note 3 (2006 Series)


c)

FDI is not permitted in Multi Brand Retailing in India.

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Entry Options for Foreign Players prior to FDI Policy


Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players
ha\d been operating in the country. Some of entrance routes used by them have been
discussed in sum as below:-

1.

Franchise Agreements

It is an easiest track to come in the Indian market. In franchising and commission agents
services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank
of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for
entrance of quick food bondage opposite a world. Apart from quick food bondage identical
to Pizza Hut, players such as Lacoste, 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
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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.

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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, 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.
But, what is a brand?
Brands could be classified as products and multiple products, or could be
manufacturer brands and own-label brands. Assume that a company owns two leading
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international brands in the footwear industry say A and R. If the corporate were to obtain
permission to retail its brand in India with a local partner, it would need to specify which of
the brands it would sell. A reading of the government release indicates that A and R would
need separate approvals, separate legal entities, and may be even separate stores in which to
operate in India. However, it should be noted that the retailers would be able to sell multiple
products under the same brand, e.g., a product range under brand A Further, it appears that
the same joint venture partners could operate various brands, but under separate legal entities.
Now, taking an example of a large departmental grocery chain, prima facie it appears that it
would not be able to enter India. These chains would, typically, source products and,
thereafter, brand it under their private labels. Since the regulations require the products to be
branded at the manufacturing stage, this model may not work. The regulations appear to
discourage own-label products and appear to be tilted heavily towards the foreign
manufacturer brands.
There is ambiguity in the interpretation of the term single brand. The existing policy does
not clearly codify whether retailing of goods with sub-brands bunched under a major parent
brand can be considered as single-brand retailing and, accordingly, eligible for 51 per cent
FDI. Additionally, the question on whether co-branded goods (specifically branded as such
at the time of manufacturing) would qualify as single brand retail trading remains
unanswered.

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Rationale Behind Allowing FDI in Retail Sector


FDI can be a powerful catalyst to spur competition in the retail industry, due to the
current scenario of low competition and poor productivity.
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. FDI in single-brand retailing was
permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94
proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of
US$196.46 million under the category of single brand retailing was received between April
2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the
period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended
4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shoppers Stop Ltd rose
2.02% and Trent Ltd, 3.19%. The exchanges key index rose 173.04 points, or 0.99%, to
17,614.48. But this is very less as compared to what it would have been had FDI upto 100%
been allowed in India for single brand.
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 liberalising this sector in a phased manner.

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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. It would also help bring about
improvements in farmer income & agricultural growth and assist in lowering consumer prices
inflation.
Apart from this, by allowing FDI in retail trade, 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.
Lastly, it is to be noted that the Indian Council of Research in International Economic
Relations (ICRIER), a premier economic think tank of the country, which was appointed to
look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail
sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that
investment of big money (large corporates and FDI) in the retail sector would in the long
run not harm interests of small, traditional, retailers
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 inter alia 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.
Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the
American Chamber of Commerce in India, The Retail Association of India (RAI) and
Shopping Centers Association of India (a 44 member association of Indian multi-brand
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retailers and shopping malls) favour a phased approach toward liberalising FDI in multibrand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.
The international retail players such as Walmart, Carrefour, Metro, IKEA, and
TESCO share the same view and insist on a clear path towards 100 per cent opening up in
near future. Large multinational retailers such as US-based Walmart, Germanys Metro AG
and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry
ventures in India, have been demanding liberalisation of FDI rules on multi-brand retail for
some time.
Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be
freely allowed but per contra should be significantly encouraged. Allowing FDI in multi
brand retail can bring about Supply Chain Improvement, Investment in Technology,
Manpower and Skill development, Tourism Development, Greater Sourcing From India, Up
gradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size
and Benefits to movement through greater GDP, tax income and employment generation.

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Procedure for Receiving Foreign Direct Investment in an


Indian Company
An Indian company may receive Foreign Direct Investment under the two routes as given
under:
1. Automatic Route - FDI is allowed under the automatic route without prior approval
either of the Government or the Reserve Bank of India in all activities/sectors as
specified in the consolidated FDI Policy, issued by the Government of India from time
to time.
2. Government Route - FDI in activities not covered under the automatic route requires
prior approval of the Government which are considered by the Foreign Investment
Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance. The
Indian company having received FDI either under the Automatic route or the
Government route is required to comply with provisions of the FDI policy including
reporting the FDI to the Reserve Bank.

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Initiatives by the Government


The government has taken various steps to further facilitate and augment the inflow of
foreign investment into India.
1. The government would soon remove the compulsory disinvestment clause on
overseas companies in major sectors like food processing and chemicals, a move
aimed at simplifying foreign direct investment (FDI) rules further. The Finance
Ministry is weighing the proposal after the Department of Industrial Policy and
Promotion (DIPP, which formulates FDI policy) suggested waiving the clause for all
companies that have decided on divestment.
2. The government may allow 49 per cent FDI in segments such as gems & jewellery
and apparel after National Council of Applied Economic Research (NCAER), which
studies the effects of multi-brand retail in India, submits its report.
3. Restructuring the Foreign Investment Promotion Board (FIPB).
4. The Foreign Direct Investment (FDI) up to 100 per cent is permitted under the
automatic route in most of the sectors.
5. Establishment of the Indian Investment Commission to act as a one-stop shop
between the investor and the bureaucracy.
6. Progressively raising the FDI cap in other sectors like telecom, aviation, banking,
petroleum and media sectors among others.
7. Removal of the investment cap in the small scale industries (SSI) sector.
8. Companies will now require only an FIPB approval for investments up to US$ 231.90
million (Rs 1,000 crore). Clearance from Cabinet Committee of Economic Affairs

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(CCEA) will be imperative only for investments above US$ 231.90 million (Rs 1,000
crore).

FDI Restrictions
FDI Restrictions in Indian Sectors have been imposed on a few sectors by the Indian
government. The various Indian Sectors having restrictions of foreign direct investment are
atomic energy, Nidhi company, betting and gambling, chit fund business, plantation or
agricultural activities, real estate business, business in transferable development rights, lottery
business, retail trading ,railway transport, mining of chrome, zinc, gold, diamonds, copper,
iron, gypsum, manganese, and sulfur and ammunition and arms.
FDI Restrictions in Indian Sectors have been imposed in order to protect the interests of the
country, as these sectors either relate to national security or sensitive enough to keep apart the
foreign companies. Foreign direct investment restrictions in Indian sectors have also been
imposed in order to allow the domestic companies to make more profits with less
competition, than that of in the presence of rivalry international firms.

Government Policies
Till now FDI up to 100 per cent was allowed for cash and carry wholesale trading and export
trading under the automatic route, and FDI up to 51 per cent was allowed in single-brand
products, with prior government approvals. However, the Government recently passed a
cabinet note and permitted FDI up to 51% in multi brand retailing with prior Government
approval and 100% in single brand retailing thus further liberalizing the sector. This policy
initiative is expected to provide further fillip to the growth of the sector.

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1995-World Trade Organizations general agreement on trade in services, which


include both whole sale and retailing services, came into existence
1997-FDI in cash and carry (wholesale) with 100% right allowed under the
government approval route
2006- FDI in cash and carry (wholesale) brought under automatic route
Up to 51% investment in single brand retail outlet permitted
2011 ( Dec) -100% FDI in single brand retail permitted
Preconditions with permitting 51% FDI in mulit brand retailing:
Minimum investment of $100 million.
50% of the investment is to be in backend infrastructure development.
30% of all raw materials have to be procured from India's small and medium
industries.
Permission to set up malls only in cities with a minimum population of 10 lakh.
Government has the first right to procure material from the farmers.
Products should be sold under the same brand internationally.
Foreign investor should be the owner of the brand.
FDI in single brand retail implies that a retail store with foreign investment can only sell one
brand. For example, if Adidas were permission to retail its flagship brand in India, those
stores could only sell products under brand name Adidas. For Adidas to sell product under
Reebok, which it own, separate government permission and Reebok product must be then
sold in separate store. FDI in multi brand retail generally refers to selling multiple brands
under one roof.

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Critical Analysis of the Events Affecting the Future of


Indian Retail Sector
It is submitted that though the recommendation of the panel were not binding upon
the Government; the same outrageously did the intended harm. In other words, the direct
result of the media hype of the recommendations of the Panel was the abrupt stoppage of all
the progressive investment plans of various corporate giants all across the globe, who were
desirous of investing an irresistible amount of capital in the Indian markets, in order to
establish their brand name.
Indian retail lost FDI of up to Rs 400 crore (Rs 4 billion) in the fiscal year because of
recommendations by the Parliamentary Panel on Commerce, which opposed further leeway
to the entry of international retail brands in the country.
The iconic $ 31-billion Scandinavian home products giant, IKEA, put on hold its
plans to set up 25 showrooms across the country foreign investment of around $ 1 billion.
IKEA told its stakeholders that Indian investment rules do not encourage it to go ahead with
its investment plans at least not in the near future.

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Moreover, Carrefour, Cartier, Armani, Tesco and UK-based Currys and Sports Direct
International were also be some of the foreign retail players to cut down their investment in
India following the governments FDI policy on retail.
The ban even extended to the big domestic corporate heavyweights retailers like
Reliance, Bharti, Aditya Birla Group owned Moreand Pantaloons Group owned Big
Bazaar to trade in grocery, fruits and vegetables.

Even though no decision was taken by the government on the recommendations given
by the panel; the direct ramifications of the recommendations have been evident considerable
Loss of FDI, managerial expertise, and jobs for the Indian retail industry along with sacrifice
of the consumers interest and welfare.
It is interesting to note here that in contradiction to the recommendations of the
Parliamentary Committees, then ruling UPA government had raised hopes of all those who
were looking for a favorable response of the government on the subject.

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Implications of FDI in Indian Retail Industry


Before going into the possible effect of FDI on different stakeholders, I would like to
discuss the effect of the entry and expansion of large organized Indian retailers such as the
Reliance fresh in Bangalore, Hyderabad and a small town Guntur in the state of Andhra
Pradesh. The observations are based on visits ( Murali Patibandla ) to the Reliance stores and
field interview of small vendors located within five kilometer radius of the location of the
Reliance store. The Reliance fresh stores operate both large stores and relatively small ones
depending on the real estate available in the areas populated with middle income and richer
consumers. They stack up with food grains both in large quantity and smaller quantity
packets, processed foods of all kinds, fresh vegetables and fruits and some stores have fresh
meat and fish set up separately from the main store. Vegetables, fruits and meat products are
brought in everyday while the processed foods and food grains are stacked up in relation to
turnover. They ensure the products meet the grading and quality requirements both at the
procurement and final sale stages. The prices in the Reliance stores on average are cheaper by
about 5 to 10 percent compared to nearby Kirana stores and fruit and vegetable vendors in
Bangalore. Apart from this, consumers have wider choice of products than those available in
Kirana stores. The entry of the Reliance stores led to closure of middle scale grocery stores,
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which are relatively modern compared to Kirana stores, located in the radius both in the
metros and the small town. Kirana stores and vegetable and fruit vendors observed that their
business dropped by 20 percent with the advent of the Reliance fresh stores within the radius.
Textbook economics shows that a monopolist could undertake price discrimination to
maximize producers surplus: perfect price discrimination of charging a different price from
different consumers depending on their willingness to pay; second order price discrimination
of charging different prices depending on the quantity of purchase and third degree price
discrimination of charging different prices from segmented markets depending on price
elasticity of demand. 13
However, as I observed in Bangalore, small and medium scale vendors are able to
exercise a certain form of perfect price discrimination of quoting higher price to a customer
who looks rich (with cars) and lower price from a customer who appears poorer. Secondly,
they could exercise third degree price discrimination of charging higher prices in the rich
localities and lower prices in the poorer areas. The ability of small vendors to exercise perfect
price discrimination has declined with the entry of the large organized retailers as the richer
consumers with cars and refrigerators prefer to buy from the large players with diverse
product choices. The main market that remained with the small vendors is the daily income
earners who buy small quantities for their everyday needs. The Reliance fresh stores sell both
large quantity packages at discount and also small quantity items of say rice, wheat powder,
lentils and vegetables at a cheaper rate than the small vendors. However, poor consumers
inability to incur costs of going to the Reliance fresh makes them to buy from the small
vendors. A few small Kirana stores in the Bannerghatta road of Bangalore procure large
quantities of food grains and dry foods from the Reliance stores on a weekly basis and sell to
costumers with a mark-up of 5 to 10 percent. Apart from this, the small Kirana stores which
are densely located with each other have developed cooperative agreements with each other

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and avoid price competition. The following issue is how does the entry of foreign players
effects the market dynamics? The possible effect of allowing FDI is improvements in supply
chain technologies, technological and informational externalities to local players and
competitive dynamics that could benefit consumers and suppliers. The press reports show that
in the year 2011 the Pantaloon Retails net profits increased 69 percent to Rs 1.42 billion on
net sales of Rs 122.1 billion which means the company was able to make supernormal profits
at the cost of consumers and suppliers.

Wall-Marts Entry in India


The first issue would be Wal-Marts ability to adapt its low cost and price model to
Indias institutional and infrastructure conditions and overtime how its operations change the
landscape of the retail industry in India. Wal-Mart has to modify the U.S model of
establishing large stores outside the cities. Furthermore, at present there are large barriers for
trade within the country- different tax regime of the states and infrastructure conditions. Just
to give an example, it is easier to bring apples from Australia to Bangalore than getting them
from the Himachal Pradesh state. This means Wal-Mart has to adopt the supply chain for the
different regions of the country than for the whole country. In other words, certain elements
of the supply chain could be standardized at the national level and others have to be adapted
to regional requirements
As mentioned earlier, Wal-Marts supply chain is highly efficient in terms of linking
sales pattern at the front end to its warehouses and the producers. One of the important issues
is 18 creating linkages with large number of Indian manufacturers and farmers spread across
the country which poses difficulties in inventory management if it faces problems of high
transaction costs of contracts, delivery time, and quality control. Wal-Mart has to invest
significant amount of resources in cultivating long term relationship with the suppliers and
helping them in quality and delivery control mechanism.
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Wal-Marts practices is that it drives supplier firms to be cost-effective especially if


the suppliers become dependent on the large buyer. On the other hand, if supplier firms in
India learn from Wal-Mart in improving production and delivery practices, they could
improve their bargaining by diversifying their sales to other large retailers or even by selling
in the international markets. If Wal-Mart is able to adapt its supply chain to Indian conditions,
it could benefit both large and relatively small Indian retailers by expanding the market
through improving know-how of large number of vendors in the country. This was what
happened in the auto-component industry in India especially in regard to the first-tier
producers as a result of entry of TNCs in the automobile industry (Patibandla, 2006, Okada,
2009).
Macroeconomic policies aimed at curbing food inflation result in perverse outcomes.
If we take the example that the Reserve Bank of India increases interest rates to curb
economic activity that is expected to curb food inflation, this results in unemployment so that
demand for food from the poor goes down. This is a perverse outcome. The main way to
reduce food inflation is to reduce the supply inelasticity- increase in agricultural productivity,
allowing free trade across the country and adoption of efficient supply chain that reduces the
wastage. To cater to the growing demand for food, large retailers have to invest significant
amount of resources in building backend infrastructure- warehouses, cold storages and
linkages with large number of farmers. If Indias policy makers fail to facilitate this, food
inflation will keep increasing.
On the employment side, modernization of the retail sector through the entry of large
retailers will have some disruptive effects in the short run that there will be some direct job
losses especially unskilled labor and generation of jobs for semi-skilled labor. Most of the
jobs that are created in the large retailers such as the Reliance are workers with basic
computer and English language skills

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Turnover per employee for the retail sector in India is about Rs. 340,000 per annum.
The turnover per employee for Wal-Mart International is about Rs. 9,971,057 which is 29
times that of the unorganized sector in India. If foreign players capture 10 per cent share by
2015, that will turn out to be Rs. 189660 million with employment of 19000 employees
replacing about 0.55 million in the unorganized sector (Ray et al, 2012). A study by Price
Water Cooper (2011) shows every 50,000 square feet of development creates direct
employment for 200 people. Based on these estimates 1.5 million jobs will be created in the
frontend retail activities by 2015. Apart from this, 10-20% more jobs will be for backend
activities. The direct employment will be close to 1.8 million. This does not take into account
of net effect of employment through expansion of markets, and incomes. If output expands
through modernization of the retail, it will increase real incomes (and savings) and generates
employment in other sectors. In the case of wage levels, the 20 organized retail sector has to
adhere to the labor market regulations which means workers will be better off than being
employed in the unorganized.
As mentioned earlier, close to 30 per cent of manufacturing exports of China are
accounted by Wal-Mart. If Wal-Mart is able to replicate its global supply chain practice in
India it can source manufacturing exports from India which will generate employment. China
is transforming into a middle-income country with a per capital income of about $ 5000. This
will increase wage costs in the manufacturing. This is where India can take advantage by
letting the manufacturing industry to move to India by improving infrastructure, literacy rates
and reducing transaction costs of business

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Modi's Make in India mantra: FDI is First Develop India


Launching his government's ambitious project to make India a manufacturing hub,
Prime Minister Narendra Modi on September 25, 2014 promised effective and easy
governance to help achieve high growth and creation of jobs.
The ambitious scheme, which also puts in place the logistics and systems to address in
a timely manner queries of potential investors, was unveiled with the slogan make in India.
This was done to prevent scores of Indians/ industrialists leaving the country to seek
opportunities elsewhere. People have lost faith in Indian manufacturing and themselves. A
number of steps have already been taken by the Modi government to make it easier to do
business in India along with the removal or relaxation of foreign equity caps in several areas.
The processes of applying for licenses has been made online, it is 24/7. The validity of such
licenses has also been extended to three years
We want to make India a global destination for manufacturing. It has a huge potential
to be so is a recent statement given by Nirmala Sitharaman. World class infrastructure will
serve as the impetus from manufacturing. The government has identified 25 sectors in which
India can be world leaders. It has also created a dedicated team to hand hold investors from

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across the world. They are constructing dedicated freight and industrial corridors and smart
cities.
Finance and Defense Minister Arun Jaitley also announced that India would increase
foreign direct investment (FDI) in India's domestic military-industrial sector from 26% to
49% to boost materiel development and manufacturing

Latest Initiatives
The Reserve Bank of India (RBI) has allowed overseas investors, including foreign
portfolio investors (FPIs) and non-resident Indians (NRIs), to invest up to 26 per cent in
insurance and related activities via the automatic route. "Effective from February 4, 2014,
foreign investment by way of FDI, investment by foreign institutional investors (FIIs)/FPIs
and NRIs up to 26 per cent under automatic route shall be permitted in insurance sector," as
per the RBI.
The RBI has allowed a number of foreign investors to invest, on repatriation basis, in
non-convertible/ redeemable preference shares or debentures which are issued by Indian
companies and are listed on established stock exchanges in the country. The investment will
be within the overall limit of US$ 51 billion allocated for corporate debt. Long-term investors
who are registered with Securities and Exchange Board of India (SEBI) will also be deemed
as eligible investors.
In an effort to bring in more investments into debt and equity markets, the RBI has
established a framework for investments which allowsFPIs to take part in open offers,
buyback of securities and disinvestment of shares by the Central or State governments. Under
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a new scheme named 'Foreign Portfolio Investment', the RBI said portfolio investors, which
includes FIIs and qualified foreign investors (QFIs) registered as per SEBI guidelines, will be
called registered foreign portfolio investors (RFPIs).

Conclusion
Evidently, there is no national consensus on allowing FDI in retail. Advocates tout it as
the much-needed major policy push that could arrest the economic downturn, bring in not
only foreign funds but advanced technology and expertise, create infrastructure, offer better
prices to farmers, generate ancillary industries and create millions of jobs. However, sceptics
present a doomsday scenario: it will wipe out small farmers and traders result in job losses
and open the floodgates for cheap goods from countries like China, adversely impacting
Indian industry. While both arguments have some validity, the two sides err on the side of
extremes. FDI in retail is not an unmitigated disaster as projected by some, nor a magic wand
leading to instant economic growth. If allowed with professional circumspection and
safeguards and viewed dispassionately, it is in the country's national interest to allow FDI in
retail. Opening up the telecom sector to foreign investment worked by bringing a
communication revolution that embraces everyone. Similarly, foreign investment in the
automobile industry ended the long wait for outdated scooters and cars and led to leading
global companies vying to sell the latest models in India. When Pizza Hut, Domino's,
McDonald's, Wimpy, Burger King, KFC and other such international brands were allowed,
there were orchestrated demonstration in many cities; they were painted as anti-people and
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anti-Indian enterprises. We were told Haldirams, Bikanerwalas, Nirulas, Nathus and their ilk
will vanish. All these Indian chains have multiplied their outlets, diversified their production
line, upgraded their packing and presentation, and are doing roaring business. In fact, some of
the largest MNCs like McDonald's, Pizza Hut and Dominos have been forced to Indianise
their offerings. Where else in the world would you find a McDonald burger with paneer and
potato patties and coriander sauce? While many starve, millions of tons of grain rot for want
of adequate storage facilities. Ask how farmers in Punjab feel when their produce is not
picked up and lies unsold. Can they negotiate higher prices? When the mercury rises, fruit
don't last more than two days. TV channels often show how adulterated ghee, milk made out
of detergent, mangoes and papayas ripened with masala, vegetables and fruit injected with
dangerous concoctions are flooding the market. Who is to blame? FDI in retail? No one
should underestimate the ingenuity of ordinary hawkers and small grocery owners. They
know how to reach out to their potential customers. Today, in many areas of Delhi, vegetable
vendors present their carts, laden with fresh stuff straight from the farm, as early as 6:00 am.
Many joggers and walkers find it convenient to pick up their daily requirement of vegetables
from these vendors. In the evening, they move near temples where devotees find it a blessing
to shop for fruit and vegetables at the temple gates. Small grocery shops realize the value of
home delivery, small stores also reduce a rupee or two on most items. This demand-andsupply relationship will remain unchanged notwithstanding the entry of bigwigs like Tesco,
Carrefour and Wal-Mart. Many of the foreign brands would come to India if FDI in
multi brand retail is permitted which can be a blessing in disguise for the
economy.

The government has added an element of social benefit to its latest plan for calibrated
opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign
retailers who first invest in the back-end supply chain and infrastructure would be allowed to
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set up multi brand retail outlets in the country. The idea is that the firms must have already
created jobs for rural India before they venture into multi-brand retailing. It can be said that
the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the
disadvantages attached to it and the same can be deduced from the examples of successful
experiments in countries like Thailand and China; where too the issue of allowing FDI in the
retail sector was first met with incessant protests, but later turned out to be one of the most
promising political and economic decisions of their governments and led not only to the
commendable rise in the level of employment but also led to the enormous development of
their countrys GDP. Moreover, in the fierce battle between the advocators and antagonist of
unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been
blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to
be considered and addressed while deliberating upon the captioned issue is the interests of
consumers at large in relation to the interests of retailers. It is also pertinent to note here that
it can be safely contended that with the possible advent of unrestrained FDI flows in retail
market, the interests of the retailers constituting the unorganized retail sector will not be
gravely undermined, since nobody can force a consumer to visit a mega shopping complex or
a small retailer/sabji mandi. Consumers will shop in accordance with their utmost
convenience, where ever they get the lowest price, max variety, and a good consumer
experience.
The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of
Indian economy at one point of time or the other would be embraced by liberalization,
privatization and globalization. FDI in multi-brand retailing and lifting the current cap of
51% on single brand retail is in that sense a steady progression of that trajectory. But the
government has by far cushioned the adverse impact of the change that has ensued in the
wake of the implementation of Industrial Policy 1991 through safety nets and social
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safeguards. But the change that the movement of retailing sector into the FDI regime would
bring about will require more involved and informed support from the government. One
hopes that the government would stand up to its responsibility, because what is at stake is the
stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In
short, the socio economic equilibrium of the entire country.

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Bibliography
Websites :

www.Legalserviceindia.com

www.Manupatra.com

www.Scribd.com

www.cci.in

www.rbi.org.in

www.dipp.nic.in

www.legallyindia.com

www.icsi.edu

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