Foreign Direct Investment in Multi-Brand Retail

BY: Akanksha Gupta & Jincy Chacko Geevarghese MBA- Sem II Dept of Business Management Sinhgad Academy of Engineering, Pune E-Mail ID: akanksha25191@gmail.com jincygeevarghese90@gmail.com

Abstract:Indian retail industry is one of the sunrise sectors with huge growth potential. According to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. However, in spite of the recent developments in retailing and its immense contribution to the economy, retailing continues to be the least evolved industries and the growth of organised retailing in India has been much slower as compared to rest of the world. Undoubtedly, this dismal situation of the retail sector, despite the ongoing wave of incessant liberalization and globalization, stems from the absence of an FDI encouraging policy in the Indian retail sector. In this context, the present paper attempts to analyse the strategic issues concerning the influx of Foreign Direct Investment in the Indian retail industry. Moreover, with the latest move of the government to allow FDI in the multibrand retailing sector, the paper analyzes the reason why foreign retailers are interested in India, the strategies they are adopting to enter India and their prospects in India. The findings of the study point out that FDI in multi- brand retail would undoubtedly enable India Inc to integrate its economy with that of the global economy. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but should be significantly encouraged.

Keywords:
Organised retail Sunrise sector Globalisation Foreign Direct Investment Strategic Issues and Prospects

INTRODUCTION 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. Infact, 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. AN OVERALL VIEW The historical background of FDI in India can be traced back with the establishment of East India Company of Britain. British capital came to India during the colonial era of Britain in India. However, researchers could not portray the complete history of FDI pouring in India due to lack of abundant and authentic data. Before independence major amount of FDI came from the British companies. British companies setup their units in mining sector and in those sectors that suits their own economic and business interest. After Second World War, Japanese companies entered Indian market and enhanced their trade with India, yet U.K. remained the most dominant investor in India. Further, after Independence issues relating to foreign capital, operations of MNCs, gained attention of the policy makers. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources. In the early nineties, Indian economy faced severe Balance of payment crisis. Exports began to experience serious difficulties. There was a marked increase in petroleum prices because of the gulf war. The crippling external debts were debilitating the economy. India was left with that much amount of foreign exchange reserves which can finance its three weeks of imports. The outflowing of foreign currency which was deposited by the Indian NRIs gave a further jolt to Indian

economy. In this critical face of Indian economy the then finance Minister of India Dr. Manmohan Singh with the help of World Bank and IMF introduced the macro economic stabilization and structural adjustment programm. As a result of these reforms India open its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign investors. Further, under the new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment through single window system from the Prime Ministers Office. The foreign equity cap was raised to 51 percent for the existing companies. Government had allowed the use of foreign brand names for domestically produced products which was restricted earlier. India also became the member of MIGA (Multilateral Investment Guarantee Agency) for protection of foreign investments. Government lifted restrictions on the operations of MNCs by revising the FERA Act 1973. New sectors such as mining, banking, telecommunications, highway construction and management were open to foreign investors as well as to private sector.

OBJECTIVES
The study covers the following objectives: 1. To study the trends and patterns of flow of FDI. 2. To assess the determinants of FDI inflows. 3. To evaluate the impact of FDI on the Economy.

RESEARCH METHODOLOGY
DATA COLLECTION : This study is based on secondary data. The required data have been collected from various sources i.e. various Bulletins of Reserve Bank of India, Country Reports on Economic Policy and Trade Practice- Bureau of Economic and Business Affairs. It is a time series data and the relevant data have been collected for the period 1991 to 2008.

TRENDS AND PATTERENS OF FDI INFLOWS

One of the most prominent and striking feature of todays globalised world is the exponential growth of FDI in both developed and developing countries. In the last two decades the pace of FDI flows are rising faster than almost all other indicators of economic activity worldwide. Developing countries, in particular, considered FDI as the safest type of external finance as it

not only supplement domestic savings, foreign reserves but promotes growth even more through spillovers of technology, skills, increased innovative capacity, and domestic competition. Now a days, FDI has become an instrument of international economic integration.

FDI INFLOWS IN THE WORLD

One of the most prominent and striking feature of todays globalised world is the exponential growth of FDI in both developed and developing countries. In the last two decades the pace of FDI flows are rising faster than almost all other indicators of economic activity worldwide. Developing countries, in particular, considered FDI as the safest type of external finance as it not only supplement domestic savings, foreign reserves but promotes growth even more through spillovers of technology, skills, increased innovative capacity, and domestic competition. Now a days, FDI has become an instrument of international economic integration.

TRENDS AND PATTERNS OF FDI FLOW IN THE WORLD

The liberalization of trade, capital markets, breaking of business barriers, technological advancements, and the growing internationalization of goods, services, or ideas over the past two decades makes the world economies the globalised one. Consequently, with large domestic market, low labour costs, cheap and skilled labour, high returns to investment, developing countries now have a significant impact on the global economy, particularly in the economics of the industrialized states. Trends in World FDI flows (Table -3.1 and Chart-3.1) depict that developing countries makes their presence felt by receiving a considerable chunk of FDI inflows. Developing economies share in total FDI inflows rose from 26% in 1980 to 40% in 1997.

Years/ Countries World FDI

1990- 96 95 225.3

97

98

99

00

01

02

03

04

05

06

07

386. 478. 694 1 1 .5 57.1 56

1088. 1492 735. 716. 632. 648. 958. 1411 1833 3 1 1 6 1 7 .3 82.2 68.4 76.5 69.9 58.6 63.8 66.7 68

Developed 64.4 Economies share in the World FDI Developing 33 Economies share in world FDI

69.7 77.1

39.5 39.9 27

20.7

15.9

27.9 21.7 26.3 36

33

29.3

27.3

SHARE OF INDIA IN WORLD FDI Years/ Countries World FDI Developed Economies share in the World FDI Developing Economies share in world FDI 199095 225.3 64.4 96 386. 1 57.1 97 478. 1 56 98 694 .5 69.7 99 1088. 3 77.1 00 01 02 03 04 05 06 07

1492 735. 716. 632. 648. 958. 1411 1833 1 1 6 1 7 .3 82.2 68.4 76.5 69.9 58.6 63.8 66.7 68

33

39.5

39.9

27

20.7

15.9

27.9 21.7 26.3

36

33

29.3

27.3

TRENDS AND PATTERNS OF FDI FLOW IN INDIA Economic reforms taken by Indian government in 1991 makes the country as one of the prominent performer of global economies by placing the country as the 4th largest and the 2nd fastest growing economy in the world. India also ranks as the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower. Continued economic liberalization since 1991 and its overall direction remained the same over the years irrespective of the ruling party moved the economy towards a market based system from a closed economy characterized by extensive regulation, protectionism, public ownership which leads to pervasive corruption and slow growth from 1950s until 1990s. Indias economy has been growing at a rate of more than 9% for three running years and has seen a decade of 7 plus

per cent growth. India exports were worth 25016 Million USD in December of 2011. Exports amount to 22% of Indias GDP. India imports were worth 37753 Million USD in December of 2011. The actual FDI inflows in India is welcomed under five broad heads: ( i ) Foreign Investment Promotion Boards (FIPB) discretionary approval route for larger projects, (ii) Reserve Bank of Indias (RBI) automatic approval route, (iii) acquisition of shares route (since 1996), (iv) RBIs non resident Indian (NRIs) scheme, and (v) external commercial borrowings (ADR/GDR) route. An analysis of the last eighteen years of trends in FDI inflows (Chart-3.5 and Chart-3.6) shows that there has been a steady flow of FDI in the country upto 2004, but there is an exponential rise in the FDI inflows from 2005 onwards.

FDI in Retail: Current Status 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.

Foreign direct investment in multi-brand retailing is not yet permitted in India; for single brand retailing, FDI has been allowed since 2006 up to 51%. Total FDI inflow into single brand retailing from April 2006 to March 2010 has been 194.69 million USD (or Rs 901.64crore) accounting for 0.21% of the total FDI inflows in the period mentioned above. As per the Indian Council for Research on International Economic Relations (ICRIER) study 4.1 percent of our total retail turnover in 2006 -07 came from organized retail.

Entry Options For Foreign Players prior to FDI Policy

Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had 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. Spencer, have entered Indian marketplace by this route. 2. Cash And Carry Wholesale Trading Players such as, Nike and Marks and

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 licenses 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 apparel brand has entered India through this route with an agreement with Pyramids. 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 authorized 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.

FDI in Multi Brand Retail

The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesnt suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous kirana store Importantly, there is a complete ban on foreign investment in multi-brand, front-end retail. This has resulted in keeping all the giant corporate backed retailers of the world like Walmart (USA), Carrefour (France), Tesco (UK), and Metro (Germany), who are very keen to foray into Indias retail sector, away from entering into the country. All of these retailers, therefore, to make their presence felt in the country, have either tied-up or trying to tie-up with local corporate, to offer their services for back-end operations like sourcing, logistics, inventory management, among others, for front-end, multi-brand retail operations of such corporate.

Advantages of FDI in Multi-brand Retail

Multi-brand retail, if way:

allowed, is expected to transform the retail landscape in a significant

Firstly, the organized players would bring in the much needed investment that would spur the further growth of the sector. This would be particularly important for sustenance of some of the domestic retailers that dont have the resources to ride out the storm during an economic slump such as the case with Vishal, Subhiksha and Koutons, which couldnt arrange for funds to sustain their growth.

The technical know-how, global best practices, quality standards and cost competitiveness brought forth through FDI would augur well for the domestic players to garner the necessary support to sustain their growth.

India has also been crippled by rising inflation rates that have refused to come within accepted levels. A key reason for this has been attributed to the vastly avoidable supply

chain costs in the Indian food and grocery sales which has been estimated to be a whopping US$ 24 Bn. The infrastructure support extended to improve the backend processes of the supply chain would enable to eliminate such wastages and enhance the operational efficiency.

FDI in multi-brand retail would in no way endanger the jobs of people employed in the unorganised retail sector. On the contrary, it would lead to the creation of millions of jobs as massive infrastructure capabilities would be needed to cater to the changing lifestyle needs of the urban Indian who is keen on allocating the disposable income towards organised retailing in addition to the local kirana stores. Thesestores would be able to retain their importance owing to their unique characteristics of convenience, proximity and skills in retaining customers. Also, these would be more prominent in the Tier-II and Tier-III cities where the organised supermarkets would find it harder to establish themselves.

The numerous intermediaries would be restricted and therefore, the farmers would get to enjoy a bigger share of the pie.

FDI in multi-brand retail is therefore a necessary step that needs to be taken to propel further growth in the sector. This would not only prove to be fruitful for the economy as a whole but will also integrate the Indian retail sector with the global retail market.It is not a question of how it will be done but when.

Bottlenecks
1. Limited investment in supply chain logistics is a major dampener for the emerging retail industry in India. Being the second biggest global products of fruits and vegetables (around 180 million MT) India possesses a miniscule integrated cold-chain infrastructure, with a total capacity of 23.6 million MT, 80 percent of which is used for storing potatoes. 2. Post harvest losses of agricultural produce account for over Rs.1trillion annually, of which 57 % are avoidable wastage. Absence of proper storage infrastructure constricts the supply of perishable agricultural commodities to distant markets. A weak supply chain makes Indian horticultural products non-competitive in the international export market.

3. The government holds that, despite the huge food subsidy burden borne by it, an inefficient public procurement and distribution system has failed to tame in the spiraling food inflation mostly due to undersupply. FDI inflow into cold chain infrastructure has been insignificant in view of its absence in retailing. 4. Wholesale-regulated markets in India reportedly lack pricing transparency. A World Bank study has shown that the average price received by a farmer for a typical horticultural product is only 12 to 15 percent of the retail price paid by the consumer. In countries with organized retail, farmers get a greater share of the final price, as compared to those without it. 5. Challenges faced by the sector also include shortage of trained manpower (mostly at mid-management level), limited availability of bank finances and non-availability of cheap real estate. 6. Lack of requisite infrastructure in the form of roads, ports , cold chains and electricity have prompted the retail chains to procure their supplies from multiple vendors, thereby increasing costs and prices.

Reasons for Preventing FDI

There are a multitude of reasons being floated around to prevent the liberalisation of the FDI norms for Indian retail:

Primary among these is the concern regarding the kirana stores as well other locally operated stores being adversely affected by the entry of global retail giants such as Walmart, Carrefour and Tesco. As these brands would come with advanced capabilities of scale and infrastructure in addition to having deep pockets, it is argued that this would result in the loss of jobs for lakhs of people absorbed in the unorganised sector.

There has also been a debate over the kind of employment that would be generated as it is assumed that semi-skilled people would not be absorbed into the system. As majority of the workforce in India falls in this category, doubts have been parlayed about the value that would be generated by opening up the sector.

Fears have also been raised over the lowering of prices of products owing to better operational efficiencies of the organised players that would affect the profit margins of the unorganised players.

Instability surrounding the political arena with a number of scams of varying magnitudes doing the rounds has also led to a sense of uncertainty among foreign investors.

FDI Policy Suggestions

An ICRIER study on organized retailing in India has made some interesting recommendations for promoting a symbiotic coexistence between the organized and unorganized retailing sectors. These include:1. Facilitation of cash and carry outlets for sale of goods to the unorganized retail sector. 2. Direct procurement of produce from farmers through co-operatives run by unorganized retailers. 3. Credit Inflow from micro-credit institutions and banks for unorganized retailers. 4. Creation of farmers co-operatives for directly selling wares to organized retailers . 5. A simplified uniform licensing regime for the retail sector. 6. An empowered Competition Commission for checking predatory pricing and collusive behavior by big retailers. 7. Modernization of the Agriculture Produce Market Committee (APMC) Markets. 8. FDI regime should be gradual over a 3 to 5 year timeframe to give the domestic industry enough time to adjust to the changes. In the initial stage FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3 to 5 years depending on the growth of the sector. 9. The study urges the policy makers to focus more on attracting diverse types of FDI. 10. The policy makers should design policies where foreign investment can be utilised as means of enhancing domestic production, savings, and exports; as medium of

technological learning and technology diffusion and also in providing access to the external market.

Conclusion
India started out as a mixed economy with a socialistic bent. Post 1991, it has aggressively moved towards a liberalized regime. Globalization propelled urbanised growth has resulted in high GDP growth rates but failed to promote pyramid. In this light, the government should come out with a policy statement laying down the roadmap for modern retail and allowing foreign investment in retail. If FDI in Retail industry is allowed, it will help domestic players to capitalise MNCs players supply chains and distribution network experiences. The grant of industry status will help companies borrow at lower costs, and will also bestow them fiscal incentives etc. Furthermore, the country has benefited from large foreign investment flows in recent years. These flows, especially FDI, need to be encouraged through an appropriate policy regime (Mukherjee &Patel 2006). 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. an inclusive growth for the population. The trickle down of economic benefits has failed to percolate to the bottom

References:
1. FDI in Multi-brand Retail: The Next Big Thing in Reforms, but Roadblocks Persist: India Knowledge@Wharton 2. Retailing in India, Wikipedia 3. Foreign Direct Investment in Indian Retail Sector An Analysis: Pulkit Agarwal, Isha Tyagi 4. FDI in Retailing Is it the need of the hour: L.Dhamayanthi, S.Pradeep Kumar 5. Businessgyan.com Single Brand Retail by Tomu Francis 6. Moneycontrol.com Supermarket FDI Plan moving very fast