FDI AND ITS IMPACT ON THE

RETAIL SECTOR IN INDIA

Remember the time when going to cafe coffee day was a luxury and now if you don’t
walk into office with a starbucks to-go coffee cup you aren’t the cool one. That is
simply Foreign Direct Investment playing its charm on the Indian mindset.
Foreign Direct Investment is an investment made by an outside country in the host
country having most of the ownership and controlling power. For a host country it
can provide a source of new technologies, capital, processes, products,
organizational management, skills, and a strong impetus to the economy. FDI in
India has been on the rise since 2014 and steadily has been finding its growth.
The retail sector in India is one of the biggest contributors to the economy in terms of
revenue and contributes about 15% towards its GDP. It provides the second highest
rate of employment after agriculture. The retail sector in India is vast and has huge
scope for development as majority of the constituents are of the unorganised sector.
The organized retail sector refers to the trading activities undertaken by licensed
retailers who are registered under the GST Act. These include our big guns like Big
Bazaar, Star Bazaar, D-Mart etc. The unorganised sector refers to the traditional
formats of low cost retailing aka, the kiranasotre down our road, pan/beedi shops,
handcart and street vendors.
FDI in Retailing
Walking into a Lifestyle showroom gives you so many options of different brands
under one roof. That is multi-brand retailing. The cabinet has approved a 51% FDI in
multi-brand retail in India opening doorways to mega retail chains like Wal-Mart and
Tesco.
What’s a single-brand retail chain? It is expected to sell all its products under only
one label across its stores. Think Levi’s, Starbucks, or Zara.There are a few strings
attached, though. If an MNC operates a single-brand retail chain, the product must
also be sold under the same brand name globally. Our country has approved a
100% FDI in single-brand retail. That means if you have always fancied the furniture
at IKEA and wished you could have the portable furniture in our tiny home spaces it
is going to happen soon enough.
The Impact
It is advantageous to the government as the tax revenue collected can be used for
infrastructure development. It will also be beneficial to the farmers and consumers by
a great extent. On the other hand it will cause cut throat competition especially in the
organised retail sector promoting formation of cartels, monopolies, increase prices
etc. The notion that it will cause loss of job is actually perceived incorrectly. It will
cause re-distribution of jobs with some drying up (like middlemen) and new ones
sprouting up.
Those against:
– It will lead to closure of tens of thousands of mom-and-pop shops across the
country and endanger livelihood of 40 million people
– It may bring down prices initially, but fuel inflation once multinational companies
get a stronghold in the retail market
– Farmers may be given remunerative prices initially, but eventually they will be at
the mercy of big retailers
– Small and medium enterprises will become victims of predatory pricing policies of
multinational retailers
– It will disintegrate established supply chains by encouraging monopolies of global
retailers
Those in favour:
– It will cut intermediaries between farmers and the retailers, thereby helping them
get more money for their produce.
– It will help in bringing down prices at retail level and calm inflation
– Big retail chains will invest in supply chains which will reduce wastage, estimated
at 40 percent in the case of fruits and vegetables.
– Small and medium enterprises will have a bigger market, along with better
technology and branding.
– It will bring much-needed foreign investment into the country, along with
technology and global best-practices.
– It will actually create employment than displace people engaged in small stores.
– It will induce better competition in the market, thus benefiting both producers and
consumers.
Why should you care?
If you are a retail seller in India selling homogeneous products there is a high chance
you will have a shift in your supply curve due to the reducing demand. However you
can beat the competition by being a supplier to the big guns itself, reducing the
margins but increasing the quantity. If you are a heterogeneous product seller like
selling Kolhapuri Chappals online or home-grown products that have its USP in
India, FDI is not going to affect you on a large scale and you can continue the normal
business process, and also take advantage of FDI and tap on the niche markets
accordingly.
FDI growth hits 5-year low in 2017-18
Foreign direct investment (FDI) in India seems to be petering out with the inflows growth rate recording a five-
year low of 3 per cent at USD 44.85 billion in 2017-18.

According to the latest data of the Department of Industrial Policy and Promotion (DIPP), FDI in 2017-18 grew by
only 3 per cent to USD 44.85 billion.

Foreign inflows in the country grew by 8.67 per cent in 2016-17, 29 per cent in 2015-16, 27 per cent in 2014-15,
and 8 per cent in 2013-14.

Impact of FDI on the employment sector

of India
By Arijit Shankar Chaudhury and Saptarshi Basu Roy Choudhury on April 30, 2018

Foreign Direct Investment (FDI) can be contemplated as one of the most

decisive catalysts of generating employment in India. Opening up of trade barriers
in India post trade liberalization in the year 1991 has witnessed the influx of FDI at
a great extent. Focus on nationalized industries, import substitution and tariff raj
were by far the major factors that had plagued the employment generation
mechanism before liberalization. However, the scenario transformed drastically
post liberalization (Someshu, 2010).

Notion of win-win proposition at the inception

Unemployment was rampant before 1991 and there was a huge gap between
demand and supply of jobs in the market. Due to unemployment, labour was cheap
and abundant. Removal of trade barriers presented a massive opportunity for the
foreign nations to foray into the Indian market. The local workforce also embraced
the opportunity of FDI influx for making good fortune. Thus, the FDIinflow could
be regarded as a win-win proposition on all fronts (Someshu, 2015). However, the
impact of FDI on all the sectors of the Indian economy has not been evenly
distributed. Different sectors witnessed different fates.

Mixed impacts on different sectors

The influx of FDI in India increased significantly after 1991 and rose to the peak
in the year 2008. Majority of the existent literature on FDI in India revealed that
there is a positive correlation between FDI and GDP (Gross Domestic Product).
On average the net inflow of FDI as a percentage of GDP has hovered around 2%.
This has significantly contributed to the growth and development of various sectors
of the economy. However, the relationship between FDI and employment is very
different. The figure below plots FDI as a percentage of GDP and employment for
the post reform years.

Figure 1: FDI inflow from 1991 to 2016 & unemployment rate in India (Source: World Bank)

Figure above reveals that the aggregate impact of FDI on employment is not
uniform. One of the major reasons for this is that the inflow has been majorly in
brownfield projects (mainly start-ups) which failed to maintain job generation in a
steady manner. Apart from that, another reason is that in India, the income
inequality has been pretty high for which the aggregate impact has not been
positive throughout (Someshu, 2010). This mixed trend has been validated in the
literature by a panel data analysis of the impact of FDI on employment in India
(Rizvi & Nishat, 2009). Using a pooled estimation of Seemingly Unrelated
Regression (SUR), they found that FDI did not impact employment generation in a
significant way for the period 1985 to 2008. Employment to population average is
reported to be below the OECD (Organisation for Economic Co-operation and
Development) average during the last decade (OECD, n.d.). According to the
data, there is lesser effect of FDI towards creation of employment as compared to
other BRCIS countries Brazil, Russia, China and South Africa.
Impact on the primary sector
India has always been an agrarian economy and the three sectors that are
dominantly present in India are primary sector, secondary sector and tertiary
sector. The primary sector is basically the agricultural sector, the secondary sector
is the industrial sector and the tertiary sector is the service sector.

The involvement of primary sector in output generation in India has been the
highest and not much has been done to transform the agricultural sector
via FDI. There has been no significant impact of FDI on the sector (Mehra, 2013,
p. 36).

Impact on the secondary sector

There is a significant positive correlation between FDI inflows and growth and
development of the secondary and tertiary sectors (Mehra, 2013, p. 36). The
secondary or the industrial sector received a massive thrust from FDI. The
employment generation has been also brisk. In the first decade of trade
liberalization i.e. from 1991 to 1999, the industries that received
maximum FDI inflows in secondary sector were automobile, air and sea transport,
railways and ports. The automobile industry by far has received the maximum
boost from FDIgiving employment to approximately 25 million people directly
and indirectly in the year 2016 rising from only 1.8 million people in the year 1991
(Samal & Raju, 2016). The transportation industry includes air & sea transport,
passenger car, ports and allied industries. As a whole, it received an aggregate of
9% of total FDI between 1991 and 1999. Following the transportation industry, the
industry that received 8% of the aggregate FDI inflow is electric equipments. It
includes materials like computer software and hardware, electrical equipments and
associated products (Sutradhar, 2014, pp. 8-9).

Impact on the tertiary sector

One of the major areas of growth and employment in the nation via theFDI route is
the tertiary sector. The ‘software revolution’ or ‘Information Technology (IT)
revolution’ in India can be attributed majorly to the FDI inflow in India. Before
2000-01, software business and communication services fell under the category of
miscellaneous services. The software industry in India in the current scenario is the
vehicle of enormous employment. Furthermore with FDI inflow, the net exports
from sectors like IT/ ITeS gained a massive pace. IT/ ITeS has triggered the export
promotion mechanism in India considerably post liberalization.

A new dimension to the trajectory of employment was developed with the inflow
of FDI in the software industry. The BPO (Business Process Outsourcing)
industry, an integral part of IT/ ITeS sector provided mass scale employment to the
Indian youth. The Indian youth got a fresh lease of life through ‘BPO boom’ as
bagging a job with a handsome salary after passing out of college has become a
sought after trend. As per the data of the Reserve Bank of India (RBI), in the year
2011-12, the aggregate revenue from the BPO sector has been $ 87.6 billion. It
employed 2.8 million people directly and around 8.9 million people indirectly.
With respect to proportions of national GDP, the development and growth of
revenues from IT/ ITeS sector grew from 1.2% in 1997-98 to around 7.5% in
2011-12 (Sutradhar, 2014, pp. 17-18). The growth remains vibrant in the current
scenario also.

Bottom-line
The impact of FDI on employment in India is phenomenal. Beyond reasonable
doubt, the unconstrained flow of FDI has accelerated the growth dynamics of the
nation generating enormous employment especially in the tertiary sector. The
agricultural sector has not been significantly transformed by the FDI inflow.
However, the long-run implications are uncertain. Is the quick generation of jobs in
BPO sectors snatching away the skills of the Indian youth? Is the less dominance
of FDI on agricultural sector is not so harmful for the sector’s socio-economic
benefit in the future? These questions need judicious justifications both from short-
run as well as from long run perspectives.

Foreign direct investment in the

manufacturing sector of India
By Indra Giri on September 14, 2016

Indian liberalisation began in early 1990s’ leading to gain in momentum of foreign

direct investment inflows into the country. However it was only after 2000 that the
investment became significantly higher (Bibek Rya Chaudhuri, Pradyut Kumar,
2013). During the initial phase of liberalisation inflows of the foreign direct
investment in manufacturing sector was highest as compared to the service sector.
However over the period of time service sector has emerged as the major sector
attracting most of the foreign investment (Akhtar, 2013).

Foreign investment is considered as an important sector especially for the

manufacturing sector of the developing countries as foreign investors tend to bring
with it the capital, technology and skills needed for industrial development. Until
1991, India did not have enough savings to meet the capital requirements.
Moreover, the licensing agreements as well as capital goods imports also did not
give it the requisite industrial technology. But with the inflow of foreign funds
after 1991 certain gaps with regard to capital, technology for industrial
development have been fulfilled.

Trends in foreign direct investment in

manufacturing sector since 1991
The total inflow of foreign direct investment in India was around US$ 1.7 billion
during 1990-2000 which has increased to US $324 billion during 2000 – 2014
(DIPP, 2016). In pre-liberalisation era, the manufacturing sector used to receive the
maximum foreign investment. However the share has declined from 85% in 1990
to 48% in 1997. In post reform period, the inflow of foreign funds was mainly in
the form of mergers and acquisitions (Kumar, 2005) and there has been an increase
in foreign direct investment in the capital intensive sectors of manufacturing
(Kunal Sen, n.d.).
 Inflow of foreign direct investment in manufacturing sector in India (Source: Reserve Bank of India,
2014).

In 2009, there was a decrease in foreign direct investment in manufacturing sector

following the global financial crisis of 2008. Due to mergers and acquisitions, only
few industries like electrical and electronic equipment received higher investments
during that period (Madem, Gudla, & Rao, 2012). Though, for period after 2000 as
a whole, there has been an increase in foreign direct investment in manufacturing
sector despite economic crisis of 2008-2010. However, there is sharp decline in the
flow of investments in manufacturing after 2012. The institutional factors that
reduce investor confidence could be the reason of moderation (Sharma & Singh,
2013).

Major manufacturing industries attracting

foreign direct investment
Among the various manufacturing industries in India, major industries attracting
foreign direct investment includes:

 foods and beverages (6.66%),

 transport equipment (6.73%),
 machinery and machine tools (5.29%),
 electrical goods and machinery (8.31%),
 chemicals and allied products (8.91%) (Kumar, 2005).

Figure 2 shows two of the industries which attract the highest amount of foreign
investment in the period 2003-04 to 2013-14. The Metallurgical industry which
was not able to attract foreign investment before 2000 has become one of the major
sectors to receive foreign investment after 2000.
Inflow of foreign direct investment in metallurgical industry (Source: Department of Industrial Policy and
Promotion).

Since 2000, automobile industry has seen a steep increase in the inflow of foreign
investment (US $11048.18 million in period 2000-2014) due to the provision of
100% foreign direct investment in this sector (Rajeswari & Akilandeswari, 2015).
There has been extensive inflow of foreign investement in pharmaceutical industry
on account of multinational pharmaceutical corporations outsourcing of various
functions like research and development (Sagar, 2013).

Foreign technology collaboration agreements and

foreign direct investment
The foreign technology collaboration agreements (FTCA) is an effective way to
attract foreign direct investment. Thus showing an increase in the inflow of foreign
direct investment in the manufacturing sector. In the period 1991-2000, out of the
total approved proposals, electrical equipment has a maximum of 10% share.
Similarly share of other industries include:

 chemicals (other than fertilizers) 5%,

 metallurgical industries (5.8%),
 good processing (3.5%),
 electrical equipment (including software) (10%),
 textiles (1.4%),
 paper and paper products (1.3%) and
 industrial machinery had 0.9% share (Nagaraj, 2003).
As per Azhar & Marimathu (2012), between 2000 to 2010 more than 8000 foreign
technology collaborations agreements were approved by the Reserve Bank of
India, Secretariat for Industrial Approvals and Foreign investment promotion
board. Electrical equipments, chemicals, industrial machinery, metallurgical
industry, drugs and pharmaceuticals recorded 15.6%, 11.2%, 10.8%, 5% and 3.6%
respectively of the total approvals. As per RBI 2015 manufacturing had received
70.1% and 77.5% of total foreign technology collaboration agreement approvals in
2010-12 and 2012 -14 respectively.

FDI equity inflows in chemicals other than fertilisers (Figures in USD million. Source: Department of
Industrial Policy and Promotion).

Policies before 1991

Since independence several policies for foreign investment came up in tandem
with the requirements of the same. After independence, India had adopted import
substituting industrialisation, thus encouraging limited foreign investment in order
to help the Indian domestic industries to develop without facing any competition
(Sharma & Singh, 2013). As the Indian machinery and manufacturing sector
developed, the Indian government adopted more restrictive policies in the late
1960s’. These policies included not permitting proposals without technology
transfer involving more than 40% foreign ownership (Kumar, 2005). As per
Foreign Exchange Regulation Act (FERA) 1973 except for high priority and high
technology sectors, tea plantations etc, foreign equity holdings were allowed upto
40% (Kumar, 2005).

However during the early 1980s’, the Indian government started developing
separate Special Economic Zones (SEZs). Delicensing and liberalisation of imports
of capital goods and technology was adopted via a series of new policies, namely
Industrial Policy Technology Policy of 1983 (Sharma & Singh, 2013).

Policies after 1991

India’s reforms speeded up with the introduction of Indian Economic Reforms of
1991, whereby attempts were made to integrate the Indian economy with the rest
of the world. As part of these reforms, business expansion was aimed by removing
the restriction in foreign investment and liberalising trade. New sectors were
opened to foreign owned companies with certain sectoral caps and automatic
clearance to direct investment. Similarly ownership levels of foreign equity at
50%, 51%, 74% and 100% were brought into picture for various sectors (Kumar,
2005). Government also introduced two different routes namely the automatic
route and Government’s approval routes for foreign investment.

Similarly for the protection of foreign investors various bilateral and Multilateral
Investment Guarantee Acts (MIGA) were introduced (Sharma & Singh, 2013).
However, there was a cap for foreign direct investment in some sectors like
defence equipment (26%) and small scale industries (24%)(Kumar, 2005). In 1991
the Indian government introduced Foreign Exchange Management Act (FEMA).
This made easier to do business in India by removing a series of restrictions and
simplifying the process which made India one of the major destinations for the
foreign investors (Majumdar, 2008).

Foreign direct investment scenario after 2001

In 2000 the Indian government removed 22 consumer good industries from
dividend balancing and export obligations on foreign investors (Kumar, 2005).
During the period of 2006-07, 51% of foreign direct investment was permitted in a
single brand retailing which was further pushed to 100% in 2012. Similarly 51%
foreign direct investment in multi brand retailing was permitted in the same year
(Sharma & Singh, 2013). Starting from 2001, a negative list approach was used for
liberalisation along with the automatic route for all other activities and relaxation
in equity caps (Bibek Rya Chaudhuri, Pradyut Kumar, 2013).

Thus, it is evident that on account of the liberalised policies adopted by the Indian
government, there has been a significant surge in foreign direct investments in the
manufacturing sector of India. There are several factors responsible to attract such
high foreign investment in the manufacturing sector. A study conducted on foreign
direct investment by Chaudhuri et al, (2013) concluded that foreign direct
investment in manufacturing sector in India is negatively affected by tariffs, import
intensity and low R&D intensity. On the other hand foreign investment is
positively related to sectors where market imperfections give way to higher profits.