FDI IN RETAIL: ISSUES, OPPURTUNITIES AND CHALLENGES IN INDIAN

ECONOMY

G.Deepika, Associate Prof.

The growth of FDI in the global economy over the last two decades has made it an integral part
of the development strategy of both the developed and developing nations. It acts as a major
catalyst in the development of a country through up-gradation of technology, managerial skills
and capabilities in various sectors. India’s vast middle class and its almost untapped retail
industry are key attractions for global retail giants wanting to enter newer markets. The growing
Indian market has attracted a number of foreign retailers and domestic corporations to invest in
this sector. Rise in purchasing power, growing consumerism and brand proliferation has led to
retail modernization in India. However, in the past decade there has been development of
organized retailing, which has encouraged large private sector players to invest in this sector.
With high GDP growth, increased consumerism and liberalization, India has been portrayed as
an attractive destination for FDI in retailing. The paper examines in detail the various factors
contributing to the growth of retail sector, its impact on the various aspects of the economy and
and the challenges to overcome in future.
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INTRODUCTION

The word retail is derived from the French word retailer, meaning to cut a piece off or to break
bulk. In simple terms, it implies a first-hand transaction with the customer. Retailing can be
defined as the buying and selling of goods and services. The retail industry has contributed to the
economic growth of many countries and is undoubtedly one of the fastest changing and dynamic
industries in the world today. Retailing is the largest private sector industry in the world
economy with the global industry size exceeding $6.6 trillion. In 2006, the Indian government
eased retail policy for the first time, allowing up to 51 per cent FDI through the single brand
retail route. 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. In Nov, 2011,
the Cabinet cleared the bill to raise foreign direct investment to 51% in multi-brand retail and
100% in single brand. The government allowed 100 percent FDI in single brand retail in January
2012.

Vivek Vardhini School of Business Management, Jambagh.

Overview of the Indian Retail Industry

The Indian retail sector consists of two main sectors:

The unorganized sector is dominated by a large number of small retailers consisting of the local
kirana shops, owner manned general stores, chemists, footwear shops, apparel shops, paan &
beedi shops, hand-cart hawkers, pavement vendors etc

Organized retail is reflected in sprawling shopping centers, multiplex-malls & huge complexes
which offer shopping, entertainment and food all under one roof. The last 3-4 years have
witnessed the entry of a number of organized retailers opening stores in various modern formats
in metros and other important cities. Organized retailing has begun to tap the enormous market
but its share is small. A number of large business houses have entered the retail business with
very ambitious expansion plan.

India is rated the fifth most attractive emerging retail market estimated to be $ 200 billion, of
which organized retailing (i.e. modern trade) makes up 3 percent or $ 6.4 billion. Multiple
drivers leading to a consumption boom include favorable demographics, growth in income,
increasing population of women, raising aspirations and sale of value added goods among others.
Organized retailing in India has been largely an urban phenomenon with affluent classes and
growing number of double-income households particularly in the cities of south and west of
India because of differences in consumer buying behavior, cost of real estate and taxation laws.

Rural markets are emerging as a huge opportunity for retailers reflected in the share of the rural
market across most categories of consumption. For example ITC is experimenting with retailing
through its e-Choupal and Choupal Sagar rural hypermarkets. HLL is using its Project Shakti
initiative leveraging women self-help groups to explore the rural market.
Factors driving the growth of Indian Retail industry

Indian economy is growing at the rate of 8%, indicating a prosperous future. The consistent
economic growth resulted in a decent rise in income level of the middle class resulting in the
revolution of the retail industry. Many International brands have entered the market. With the
growth in organized retailing, unorganized retailers have brought drastic changes in their
business models, many factor are responsible for the growth of retail sector. These are:

1. The recent economic growth has led to greater disposable incomes for the Indian middle
class, which currently comprises 22% of the total population. Disposable incomes are
expected to rise at an average of 8.5% p.a. by 2015.

2. More than 50% of the population is less than 25 years of age and strong growth is
expected to continue in this age bracket.

3. The Indian urban population is projected to increase from 28% to 40% of the total
population by 2020 and incomes are simultaneously expected to grow in these segment.
Because of improvements in infrastructure and enhanced availability of retail space,
shopping malls and super markets are growing at a very faster rate.

4. Expansion in the education sector has led to growing awareness and demands of the
youth regarding the brand culture in the country. It is estimated that teenagers (aged 17 to
20 years) spend around 42% on apparel, books, footwear and mobiles phones.

5. Rising disposable incomes in middle class and lower middle class with increase in
employment opportunities for young adults in IT & IT enabled sectors, nuclear family
along with increasing working women population and dual income in family are the
major cause of retail growth in India Accelerated urbanization in India has ushered in
drastic changes in the consumption pattern.

6. Emergence of new social classes and expansion of middle and upper middle
classes, substantial rise in the income of the people and growth of the nuclear
 family system have brought in a great deal of change in the attitude of
consumers. India’s population predominantly consists of youth who are more
brand-conscious and are ready to pay a premium for quality, environment and
brands. People are keen to spend on lifestyle. Today, the typical Indian consumer
expects everything to be available under a single roof. All this makes India a very
attractive destination for foreign investment in retail sector.

Advantages of FDI in Retail

Changing Demographics: Indian retail market is rated fifth most attractive and has come forth
as one of the most dynamic and fast paced industry with several players entering the market.
Considering the changing lifestyles, increase in income, purchasing power and favorable
demographics, organized retail sector is expected to grow stronger than GDP growth in the next
five years en with food and apparel retailing considered as key drivers of growth.

Superior supply chain: The global retailers have advanced management know how in
merchandising and inventory management and have adopted new technologies which can
significantly improve productivity and efficiency in retailing. As multinational players are
spreading their operation, regional players are also developing their supply chain differentiating
their strategies and improving their operations to counter the size of international players. This
all will encourage the investment and employment in supply chain management.

Quality and cost: Rural Indian markets provide a vast unexplored opportunity for the
multinational giants to venture into the retail market. Retail giants such as Wal-Mart, Carrefour,
Tesco and 350 other global retail companies have well established operations in many countries
for over 30 years and are helping to keep check on the food inflation through their competitive
practices, greater variety and reasonably priced products to the customers

Increased transparency: It is estimated that an average Indian farmer realises only one-third of
the price which a final consumer pays. Free and fair retail competition does indeed lead to
sharply lower inflation than current levels, small farmers get better prices, jobs created by
organized retail pay well, and healthier food becomes available to more households. With the
eviction of intermediaries, the prices of the commodities can be automatically checked
benefitting the farmers and producers at large.

Elimination of malpractices and inefficiencies: Inbuilt inefficiencies and wastage in

distribution and storage account for as much as 40% of food production not reaching the
consumers. Fifty million children in India are malnourished. Cost-conscious organized retail
companies will avoid waste and loss, making food avail able to the weakest and poorest segment
of Indian society, while increasing the income of small farmers.

Creation of a capital base: India needs huge capital to build its infrastructure (hospitals,
housing and schools) for its growing population. Indian economy is small with limited surplus
capital and constant budgetary deficits. Global investment capital through FDI is necessary
without which it is simply not possible for Indian investors or Indian government to fund this
expansion, job creation and growth at the rate India needs.

Boost up competition: Welcoming the FDI in retail industry can prove advantageous for India
as it increase the competition in retail chain at domestic level. The competition always demands
the innovation and differentiation resulting in quality goods. As the competition increases, the
competitor is compelled to serve quality of goods at competitive and reasonable prices.

ISSUES AND CHALLENGES OF FDI IN RETAIL

Threat to domestic retailers: The existing retailing scenario is characterized by the presence of
a large number of fragmented family owned businesses, who would not be able to survive the
competition from global players. Indian retailers have argued that since lending rates are much
higher in India, Indian retailers, especially small retailers, are at a disadvantageous position
compared to foreign retailers who have access to International funds at lower interest rates. High
cost of borrowing forces the domestic players to charge higher prices for the products. Further,
as the manufacturing sector has not been growing fast enough, the persons displaced from the
retail sector would not be absorbed there.
Predatory pricing strategy: Global retailers might resort to predatory pricing. Due to their
financial clout, they often sell below cost to penetrate in the new markets. They can afford to
lower the prices in initial stages in order to wipe-out the competition and become a monopoly
and later on raise the prices. Once the domestic players are wiped out of the market, foreign
players enjoy a monopoly position which allows them to increase prices and earn profits.

Remittance of profits: FDI in retail trade would not attract large inflows of foreign investment
since very little investment is required to conduct retail business. Goods are bought on credit and
sales are made on cash basis. Hence, the working capital requirement is negligible. On the
contrary; after making initial investment on basic infrastructure, the multinational retailers may
remit the higher amount of profits earned in India to their own country.

Unequal competition: Some fear that, if FDI is allowed in retailing then it would result in
lowering of prices because FDI will result in good technology, supply chain, etc. If prices were
lowered then it would lower the margin of unorganized players. As a result the unorganized
market will be affected.

OPPORTUNITIES OF FDI IN RETAIL

 It is expected that FDI in Multi-Brand Retail Sector will bring in the latest cutting-
edge technologies to India that would benefit a host of sectors in our economy such as
retail traders, farming, cooperative, service sector in non corporate enterprises and end
consumers.

 The Global Retail Majors are known for their quality, service and technology of highest
standards. Infrastructural facilities and assured markets for the farm produce are the
prerequisites for the growth of rural agricultural sector. Farmers are likely to get
benefited through investments in infrastructure such as cold storage and other
machinery so that they can mitigate their post harvest loss and thereby get assured
and enhanced income.
 Most farmers tend to prefer wheat and traditional crops if they don’t find adequate market
for cash crops. FDI in Multi-Brand Retail can create market for cash crops and may
move the farmers to grow commercial products like fruits, vegetables depending on
the suitability to the soil and climatic conditions of that area. Bharti-Wal-Mart, a joint
venture between India’s Bharti Enterprises and US-based Wal-Mart Stores, has plans to
buy farm produce directly from over 35,000 small and medium farmers in India by 2015.

 Investment in infrastructure will help in reducing the intermediaries and thus will reduce
the gap between prices paid by the consumers and prices received by the farmers.
Development of back-end infrastructure can cut the wastage of farm output, time
and can improve quality. Improved facilities will enable farmers increase their income.

 Micro, Small and Medium Enterprises are expected to be benefited since the
foreign companies will approach them for the know-how local tastes and
merchandise preferences. Investments in back-end infrastructure will lead to more
efficient retail trade and thus it can be felt that FDI in Multi-Brand Retailing will
definitely aid in developing world-class supply chain for the retail sector in India.

 As multinational players are spreading their operation, regional players are also
developing their supply chain differentiating their strategies and improving their
operations to counter the size of international players. This all will encourage the
investment and employment in supply chain management.

 The move to allow FDI in India may increase the chances of achieving a double
digit economic growth as it can attract global retail stalwarts such as Walmart, Tesco,
HomeDepot, Carrefour etc. to participate in retailing in India. Experts opine that
India's agrarian infrastructure would massively develop as the foreign companies
must invest in infrastructural facilities such as cold storage and logistics to support
their operations.
  FDI in retailing can easily assure the quality of product, better shopping experience and
customer services. Entry of large low-cost retailers and adoption of integrated supply
chain management by them is likely to lower down the prices. Consumers will be entitled
to experience variety, high- quality merchandise, and superior customer service at
reasonable price.

CONCLUSION

With the domestic markets constituting the ever-growing middle class of over 350 million
people, of which the young market will comprise of 65 per cent of the population under the age
of 35 years who are well educated, economically active with rising per capital income, retailers
venturing the Indian market must ensure that they have considered the opportunities and the
challenges to maximize their returns. Retailers who are cost effective, with scalable and
sustainable business models and who are willing to understand and adapt to the Indian
sensibilities are more likely to succeed in the future.
Moreover FDI in retailing should not be seen as just another policy decision because it has a
direct impact on agriculture sector as well. The World Bank attributes the opening of the retail
sector to FDI to be beneficial for India in terms of price and availability of products as it would
give a boost to food products, textiles and garments, leather products, etc., to benefit from large-
scale procurement by international chains; in turn, creating jobs opportunities at various levels.
References

1. DIPP Discussion Paper on FDI in Retail in India 2010.

2. Kotler , Philip, “Marketing Management”, Pearson Education , New Delhi.

3. Shukla, R. (2010). How India Saves Earns Spends and Saves: Unmasking the Real India,
SAGE Publications India Private Limited and NCAER.

4. http://www.economywatch.com/foreign-direct-investment/

5. http://www.dnb.co.in / Indian Retail Industry/ overview. Asp

6. http://www.going - global.com

7. articles / understanding foreign direct investment. htm.