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The scenario of FDI in retail in India

The FDI has grown in significant manner in the economy over last 20 years. This has resulted in
FDI playing a big role in the development of economy. FDI plays a good role in the progress of
country through factors like improvement in technology, skills of managers and potential of
various sectors. The rise in buying power, an increase in the number of brands for a product has
resulted in the modernization of retail. The Indian market has been growing in a constant manner
which is the reason for willingness to invest in a sector by foreign retailers and domestic


International capital flows have increased a lot in India where the private cash flows had a better
growth compared to official capital flows over last two decades due to lessening of government
regulations on trade and financial markets, mergers and acquisitions across various countries,
investors willingness to invest in abroad, improvement at fast rate in modern communication.
Because of features like non debt creating, non-volatile and returns is directly dependent on the
projects financed by the investor. FDI is beneficial in every way for both host and home
countries. There are big markets opened by industrial growth and home country look to take
advantage of that and host country look for various skills like technological, managerial which
acts like a companion to domestic savings and foreign exchange.


The objectives of the study are to take a look at what is the retail scenario in current India. To
analyze where FDI can face its challenges in Indian single and multi-brand retail market. The
paper is written with the help of illustrative arguments, case studies and inquisitive logic from
journals, various research papers, books and newspapers.

Through modes like franchising and exporting many foreign companies have already entered
into Indian market. They are looking to bring upsurge in their operations in India by changing
their entry to FDI. However, working on the following recommendations can result in
liberalization of FDI in retail.

 In areas like Less fragile sectors and in sectors where domestic companies have firm
establishment the FDI should be allowed in the beginning.
 Entry of foreign firms must be accompanied by social safeguards so that labor dislocation
doesn’t leads into negative results.
 The government should take responsibility to improve sectors like manufacturing. If
manufacturing becomes stronger, the employees which are removed from retail industry
can be placed there.
 There is a need for studying the problems which are emerging in retail sector which
should also realization of certain set of requirements on foreign retailers in the areas like
imported goods, merchandise manufactured in domestic manner, procurement of farm
produce. The requirement should specify factors like minimum space, size and other
details like standards in storage and construction.


Policy makers, economists and social thinkers have debated and discussed a lot on how to
cost and benefits in allowing the entry of FDI in single and multi-brand retail in India.
studies show that allowing large retailers into the country will always give more benefits
than costs. The retail employment has increased through entry of Walmart in United
States but contrasting evidence shows that each Walmart worker has replaced
approximately 1.4 retail workers resulting in 2.7% reduction in retail employment.
The UK competition commission has found that entry of major players has resulted in
burden of cost increases in supply chain is now falling heavily on small suppliers like
farmers. Major firms pressurize farms to grow only single crops to minimize the factor of
risk. The Indian government however suggests that from small and medium domestic
enterprises retail firms should source a percentage of manufactured products. Major
employment potential can be created among rural and semi urban youth. The opening up
of retail sector to FDI plays an important role for small and medium enterprises.
Impact of Foreign Direct Investment on Indian Economy


Foreign direct investment (FDI) as a strategic component of investment is needed by India for
achieving the economic reforms and maintains the pace of growth and development of the
economy. The pace of FDI inflows in India initially were low due to regulatory policy framework
but there is a sharp rise in investment flows from 2005 towards because of the new policy has

The study tries to find out how FDI seen as an important economy of Indian economic growth by
stimulating domestic investment, increasing human capital formation and by facilitating the
technology transfers.

The main purpose of the study is to investigate the impact of FDI on economic growth in India.


Foreign Direct Investment (FDI) is fund flow between the countries in the form of inflow or
outflow by which one can able to gain some benefit from their investment whereas another can
take the opportunity to improve or increase the productivity and find out better position through
performance. The effectiveness and efficiency depends upon the investors perception, if the
investment with the purpose of long term then it is contributes positively towards economy on the
other hand if it is for short term for the purpose of making profit then it may be less significant.

Depending on the industry sector and type of business, a foreign direct investment may be an
attractive option. Any decision on investing is thus a combination of an assessment of internal
resources,competitiveness,and market analysis and market expectation.

The FDI may also affect due to the government trade barriers and policies for the foreign
investments and leads to less or more effective towards contribution in economy as well as GDP
of the economy.
Review of Literature

This section reviews the study on the relation between FDI and economic activities in India. One
school of thought argued that FDI has a negative impact on the growth of India because FDI flows
mainly towards the primary sector which basically promoted the less market value. However,
another school of thought argued that FDI inflows into the core sectors is assumed to play a vital
role as a source of capital, management and technology in countries transaction economies.

In the comparative study of FDI and economic growth for Indian and Canada found that India does
not figure very much in the investment plans of Canadian firms due to lack of information of
investment opportunities in India. Despite India offering a large domestic market and low labor
costs due to restricted FDI regime, high imports tariffs, exit barriers for firms, stringent labor
laws,centralised decision making processes and a very limited scale of export processing zones
makes India an unattractive investment location.

The new economic liberalization policy in 1991 the FDI inflow in India in depth in the last fourteen
years makes the country progress in both quantity and the way India attracted FDI.According to
2005, United Nation Conference on Trade and Development report on world investments prospects
India has been ranked at the third place in global foreign direct investment in 2009 and will
continue to remain among top five attractive destinations for international investors 2010-11.

Policy Initiatives

The government of India has released a comprehensive FDI policy document effective from April
1, 2010.Furthermore, the government has allowed the foreign Investment Promotion Board
(FIPB),under the ministry of Commerce and Industry, to clear FDI proposals of upto US$ 258.3
million.US$ 129.2 million were put up before the Cabinet Committee of Economic Affairs for

During April 2010,Mauritius invested US$ 568 million in India, followed by Singapore which
invested US$ 434 million according to the latest data and Japan that invested US$ 327 million
released by DIPP.
The importance of FDI received special impetus towards the end of 1992 when the Foreign
Institutional Investors (FIIs) such as pension funds, mutual funds, investment trusts, assets
management companies, nominee companies institutional portfolio managers were permitted to
invest directly on the Indian stock market.

In order to have a flow of FDI,India maintained the double Tax Avoidance Agreement (DTAA)
with nearly 70 countries of the world. India has signed 57 Investment Treaties.

State wise FDI inflows show that Maharastra,Delhi,karnataka,Gujrat and Tamil Nadu together
accounted more than 75% of inflow during 2000-2010 because of the infrastructural facilities and
favorable business environment provided by these states. Despites troubles in the worlds economy.
India continued to attract FDI inflows mainly because Government of India open-up with flexible
investment regimes and policies proves to be the place for the foreign investors in finding the
investment opportunities in the country.


Foreign Direct Investment (FDI) as a strategic component of investment is needed by India for its
sustained economic growth and development through creation of jobs,expansion of existing
manufacturing industries, short and long term project in the field of healthcare,education,research
and development R&D etc.

Government should design the FDI policy in such a way where FDI inflows can be utilized as
means of enhancing domestic production, savings and exports through the equitable distribution
among states by providing much freedom to states, so that they can attract FDI inflows to their
own level.

FDI can help to raise the output, productivity and exports at the sectoral level of the Indian

Therefore for further opening up of the Indian economy, it is advisable to open up the export
oriented sectors and higher growth of the economy could be achieved through the growth of these
Impact of FDI on GDP: a comparative study of China and India

1. Effect of FDI on economic growth of China and India.
2. Issues of structural change in economy (1993-2009).
converted into
3. Basic Growth Model Modified Growth Model.

GDP Human Capital

(dependant variable) (independant variable)

Growth Model

Gross Capital Formation

Labour Force
& FDI (independant
(independant variable)

4. 1% increase in FDI would lead to: (OLS method of regression)

 0.07% increase in GDP of China
 0.02% increase in GDP of India
5. China’s growth is more affected by FDI than India’s growth.

Literature review

Compared to other research works, the relationship between FDI and growth has drawn
great attention of scholars.Chadee and schlicting(1997) analyzed some aspects of FDI in
Asia pacific region and they came to conclusion that FDI has proved to be beneficial for
all economies in that region.Borensztein,etal(1998) through a study of 69 developing
nations also confirmed that FDI is beneficial to these countries if they have the ability to
upgrade themselves into latest technology. The world Investment Report UNCTAD
(1999) also came up with the idea of some econometric models which will tell us about
the impact of FDI on growth. According to Ram and Zhang(2002),FDI gives smooth
access to the world markets, it plays major role in the host’s country goal in achieving
globalization.Li and Liu(2004) that the relationship between FDI and growth is now
being increasingly derived internally through the panel data on 84 countries from the year
1970 to 1999.Lee(2005) says that economic development can only happen if foreign
direct investment is supported by trade liberalization. Hasan and Rand (2006) implied
that FDI always play an important role in economic growth
but the extent to which it will benefit a country depends on the trade policies, skills of
labor force and absorptive capabilities. Herzer et al..(2007) with the help of data of 28
developing countries has implied that there is no long term or short term effect of FDI on
growth. Even a positive unidirectional long term effect from FDI to GDP is nonexistent
in these countries.


 The following research methods have been used:

 Multiple Regression
 Model Proposed
 Data Collection

Multiple Regression: The general purpose of multiple regression is to learn about the relationship
between several independent or predictor variables and a dependent or criterion variable.

Model Proposed: For the purpose of model building, basic production function was started.

Data Collection: The data set was collected from the databank of World Bank and has been
matched against the data available on the sites of UNCTAD (United Nations Conference on Trade
and Development)
The given research paper aims to investigate the effect of FDI on economic growth of China and
India. The study took in consideration the issue of structural change in the economy by choosing
the appropriate time period with the help of literature review. First of all a modified growth
model was built from the basic growth model. The growth model consisted of the factors like,
GDP, Human Capital, Labor Force, FDI and Gross Capital Formation. Out of these factors GDP
was a dependent one followed by rest factors as independent variables. After performing the
Ordinary Least Square method of regression it was found that study confirms FDI promoting
economic growth, and further provides an estimate that 1% increase in FDI would result in
0.07% increase in GDP of China and 0.02% increase in GDP of India. We also found that
China’s growth is more affected by FDI than India’s growth and FDI is not as much
significant as other variables to predict growth. The study also provides possible reasons behind
China’s great show of FDI and the lessons India should learn from China for better utilization of
FDI. The majority of the foreign investors preferred China over India for investment
opportunities as China has a bigger market size than India, offers easy accessibility to export
market, government incentives, developed infrastructure, cost-effectiveness, and macro-
economic climate. India on the other hand has talented management system, rule
of law, transparent system of work, cultural affinity and regulatory environment.

With globalization, developing countries, especially in Asia had immense surge of FDI inflows
during past 2 decades. Although India entered late into the market of FDI, though it has sustained
its destination for foreign investors. This research paper is about the impact of FDI on the Indian
Economy. The research paper stress on policy implications from the analysis.

Sectoral Performance through inflows of Foreign Direct Investment (FDI) was found by Kumar
and Karthika. Many countries use FDI to accelerate economic growth. It ensures large capital,
increase production level and also enhance employment opportunities Balasubramanyam and
Sapford published article “ Does India need a lot more FDI” . They did comparison of FDI
between India and China and found that FDI in India is 1/10 th of that of China. But because of
the structure of India and its manufacturing and service sectors . India might not need more FDI
.Bajpai and Jeffrey published “ Foreign Direct Investment in India : Issues and Problems” to
identify issues with country’s current FDI. India offers large domestic market yet its far from
satisfactory in attracting FDI. Various reasons for less FDI in India are restricted FDI, high
import tariffs, exit barriers for firms, poor infrastructure etc.

With the increase in FDI, India is also facing some challenges and improvements are still
possible. India focuses on social and environment stability with increase in political gains.

With the liberalization of the market, FDI has become more investor friendly. This made India
reach to top 3 global investment destinations as stated by U.N. Also, FDI helped a lot in
establishing new companies, had a positive impact on the economy. Benefits technology and
domestic capital.