FDIinIndianRetail AnExhaustiveAnalysis

Foreign Direct Investment in India's Retail Sector
An exhaustive analysis of factors influencing the FDI debate 2009
An All India Retail Research Report
Abstract
In 2006 the Government has promoted limited FDI in single-brand retailing and has considered opening up further in a phased system with emphasis on joint ventures with domestic players, evident with the highly controversial Wal-Mart joint venture with Bharti. Studying other countries such as China, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate is also on the agenda of the Indian Government. The Indian media regularly discusses the issues of FDI in Retailing. The Hindu Business Line's opinion on the 'Great FDI in Indian Retail debate', is that organized retail at present accounts for a mere 4% per cent of the total market (2008) as against 20% in China and 40 % in Thailand and that there is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop in. This has created significant debate for allowing FDI regulations to open up, although little has changed for multi-brand retailing restrictions to date. Knight Frank revealed in their Market Review (Q3 2006) that the move by the Indian Government to allow FDI in real estate had been an opportune move and although multi-brand retailing is still not allowed, FDI in single-brand retailing has elicited heightened interest.
2 1
1. 2.
http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm Knight Frank 'Market Review' Quarter 3 2006
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Contents Page
Abstract Contents Table of Figures & Charts Chapter 1 - Introduction 1.1 Rationale 1.2 1.3 Report Aims & Objectives Layout of Study
02 03 05 06 07 08 09 10-14
Chapter 2 Study Methodology Chapter 3 Historical Perspective on FDI 3.0 Overview 3.0.1 Post Independence & Pre-reform 3.0.2 Post-reform 3.0.3 FDI in Retail Chapter 4 Policy Environment and Growth in Organized Retailing 4.1 Policy and Regulatory Environment 4.2 Growth in 'Organized Retailing Chapter 5 Arguments for and against FDI in Retailing 5.1 Arguments for FDI in Retailing 5.2 Arguments against FDI in Retailing
15-17 17 18-20 21-22
23-28 29-34
35-42 43-50
Chapter 6 Detailed analysis of factors and conditions attached to FDI 6.0 Survey Design & Sample 51-52 6.1 6.2 6.3 Questions (See Appendix II) Data Analysis Results & Findings 6.3.1 6.3.11 57-64 52 53-56
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Chapter 7 - Conclusion 7.0 Introduction 7.1 Indian market place and Policy & Regulation 7.2 7.3 Arguments for and against Policy Change Market sentiment and exploration of domestic retailer's thoughts
65 65-66 67-68 69-70 71-73 74 75-77 78-79 80-82 83
7.4 Recommendations (7.4.1 7.4.17 inclusive) 7.5 Further Research Appendix I Coding Key (open ended question interpretation) Appendix II Survey Questions Reference List Bibliography
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Table of figures & charts
1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.
Figure 1 Figure 2 Figure 3 Figure 4 Chart S1 Chart S2 Chart S3 Chart S4 Chart S5 Chart S6 Chart S7 Chart S8 Chart S9 Chart S10 Chart S11
20 29 30 51 53 53 54 54 54 55 55 55 56 56 56
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Chapter 1 - Introduction
India is without doubt a 'growth' economy and many consider it an attractive country to invest in, particularly in its rapidly growing and changing retail market. However, Foreign Direct Investment (FDI) is restricted in the retail sector, and despite many years of debate, the regulations are still only changing very slowly and there are still lots of uncertainties. AT Kearney (2009), the well-established international management consultancy, in their Annual Global Retail Index, ranked India as No. 1 out of 30 of the top emerging markets, and has done for some years. Foreign Investors are watching India, ready for a piece of the action in the retail market, but there are still plenty of uncertainties, restrictions and potential socioeconomic risks.
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This division of the retail sector, which has a very heavy weighting towards, unorganized, is just one of the issues contributing to the sensitive debate on FDI in India at the moment. What are the potential risks to the unorganized retail sector, and of course to the wider Indian economy? There are several groups who are strongly opposed to FDI in the Indian retail sector, but are their concerns unfounded? Equally, could FDI in retail be a disaster for the sector and the Indian economy? What reforms are necessary, if any, to protect the subcontinent's domestic retail sector and national interests?
India is a very diverse country and it is important to fully understand its nature. There is cultural and religious diversity like nowhere else in the world, a thriving democracy along with bureaucratic inconveniences and serious infrastructure deficiencies.
3.
2009 Global Retail Development Index, AT Kearney http://www.atkearney.com/images/global/pdf/2009_Global_Retail_Development_Index.pdf
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1.1 Rationale
From
street/cart
retailers
working
on
widely debated and heated issue in India's economic and political environment. However, the Government is gradually taking steps to open the sector. (KPMG 2009)
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pavements/roadsides and small family run businesses to international brands such as Rolex and Nike, the retail market in India is vibrant, colorful and highly fragmented.
We also wish to look at the issues which are Arvind Virmani (2005), the Director & Chief Executive of the Indian Council for Research on International Economic Relations (ICRIER) acknowledged when referring to FDI in India's retail sector that In spite of its importance, there has not been any extensive research in this area.
4
currently under discussion by the domestic players about FDI in India's retail sector, to establish an understanding of the reasoning behind current policy and the controversial viewpoints that keep India divided on FDI Retail policy. This research will provide recommendations for ways in which policy could be changed and improved to reduce the risks of FDI for India, and to benefit the domestic retailers and related industries as well as the economy as a whole. There is a desire to try to assist in facilitating the process of reform by providing a summary of the key issues and suggesting what regulatory reforms could be considered to help India resolve the issues that this report highlights. sector and the Indian economy? What reforms are necessary, if any, to protect the sub-continent's domestic retail sector and national interests?
It is this lack of independent research that specifically focuses on the retail sector that has inspired us to undertake this study so as to provide a balanced and independent review of current opinions/thoughts on FDI in Retail policy, and to assess the potential costs and benefits for the sector and India as a whole. As retailing in India is attracting the attention of many global players, the Indian Government is paying increased attention to the country's retail environment. FDI in retailing remains a
4. 5.
Mukherjee A & Patel, N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, quoted from foreword by A Virmani KPMG, 'Doing Business with India' Report, July 2009, page 85
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1.2 Report Aims & Objectives
The aim of this report is to provide an analysis of the arguments for and against FDI in India's retail sector, in order to provide recommendations on reforms to government policy that could reduce the risks of lifting restrictions on FDI in retail. The report's objectives are to investigate the Indian market place and review current policy and regulations with regards to foreign investors so as to gain an understanding of the current position on FDI, as well as an overview of the Indian system. This will be followed by an examination of the arguments both for and
against changing current policy and improving the regulatory environment. This will enable us to assess the key factors to be considered in making policy changes in the future. The next objective will then be to compare the thoughts and opinions of people working within or alongside India's domestic retail sector, via a survey, to interpret the domestic market sentiment towards foreign investment, and to explore thoughts on the issues faced by the sector. It will then be possible to consider what solutions could potentially resolve the issues and are supported by the majority of domestic retail players.
1.2 Layout of Report
Chapter 1 will present the problem and reason behind the study (rationale). It will set out the aims and objectives of the report and give an outline of what the report will involve. Chapter 2 will detail the approach and methods of research used to collect data for the survey. It will also look at data sources and the limitations of the research & data. Chapter 3 will provide a historical perspective starting with an overview of FDI in India. Chapter 4 will explain the current policy framework with respect to FDI in India and chart the growth of organized retailing in India. Chapter 5 will present arguments from both sides those who are for and those who are against FDI in retail in India. Chapter 6 will analyze the factors influencing FDI to a greater level of detail with the aid of a survey conducted amongst the domestic retail and allied industries in India. The survey results will be analyzed and interpreted, with the findings presented. Chapter 7 will present conclusions and recommendations based on the overall findings of the study.
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Chapter 2 - Study Methodology

2.0 Study Approach
This particular study on FDI in India's retail sector will utilize an inductive approach to the research, which should help to achieve the aim and objectives set out in Chapter 1. The investigation will allow us to form a reasoned opinion as to what government policy changes are required to make the opening up of FDI in retail as successful as possible for the domestic market and India's economy. To initiate this study, three questions were This study will be based predominantly on qualitative research techniques, using primary as well as secondary methods, in order to allow for an in-depth and insightful exploration of current issues surrounding FDI in India's Retail market, and to assist in gaining an understanding of the 'sentiment' in India towards foreign retailers and their potential impact on the retail sector and wider economy. There will be a certain amount of quantitative analysis undertaken with the data received from the proposed research survey, but this will be interpreted alongside 'qualitative' open-ended questions too, so as to offer more depth to the respondents' opinions. 1. What methods of FDI in retail are currently permitted and what is the policy? 2. What are the key issues concerning FDI policy change in India's retail sector? 3. How can policy help to reduce the risk of FDI in retail for India and its domestic markets? originally designed to help construct aims and objectives, and to provide some initial focus. The three questions were: The report hopes to establish if there is a genuine argument for government policy to change in favor of FDI in retail, to assess and make recommendations of changes to current policy, and to consider the risks to India's economy, society, and the unorganized retail sector, with a view to encouraging 'socially responsible investment'.
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2.1 Study Techniques
2.1.1 Types of Research

Primary research in the form of an internetbased survey was used to collect data of a qualitative open-ended nature, using a descriptive approach so that the report can analyze and interpret the Indian domestic retail market's sentiment towards FDI and how many people are in favor of various aspects, as well as ask what changes to policy and the sector they believe are necessary and why. The survey also includes quantitative 'closedended' questions for gathering data that can be analyzed and interpreted alongside the followup open-ended questions. Secondary research was carried out in the form of a literature review, to compare and contrast material and interpret the issues with a view to drawing conclusions and developing recommendations.
2.1.2 Literature Review

There is a reasonable amount of literature available on FDI in India, although it is by no means abundant in the specific area of Retail. Current policy is in a state of flux; hence a review of literature on the latest policy proposals and arguments for and against changing policy will be the back-bone of this study. It will enable accurate and relevant questions to be formulated for the proposed survey questionnaire and provide a good background understanding of the likely causes of any patterns and trends that may be revealed by the survey. It is important with a review such as this to ensure that the sources of information are reliable and trustworthy as possible. A broad range of opinions from institutional and corporate material, to academic and businessorientated literature as well and as the newspapers/online media internet
resources will be reviewed and each source was considered for its reliability, and potential to misconstrue the truth.
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2.1 Study Techniques
2.1.3 Survey Questionnaire

Qualitative survey questionnaires will take in to account possible language skill differences/difficulties in participants. By ensuring the questions are directly related to the objectives of this research will increase the quality of the results achieved and help to justify the use of this research technique. The structure should be so that bias is minimized with questions that do not lean towards encouraging a particular response from the participant. Coding will be required for analysis and interpretation of the open-ended questions. NB: For further information on the survey sample and design, please see Chapter 4. inherently have issues of 'interpretation' of results, due to the open-ended questions and subjective nature. It may also suffer complications with data inaccuracy, for example, if participants are unwilling to give honest opinions on their views of particular subjects, or through incorrect interpretation of sentiment in a participant's responses by the researcher. This can be minimized by ensuring that the questions are pre-planned well to ensure they gather the correct information that will help to answer the questions underlying this research, and that are clear and concise to
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2.2 Data Sources
2.2.1 Primary Data Sources

The primary data sources in this research were collected via an emailed survey questionnaire (see Appendix II). We designed a test survey to be emailed to a pre-selected 'test-sample'. The final survey was then sent out to a significant sample of Indian retailers and others in retail-related industries.
2.2.2 Secondary Data Sources 2.2.2.1 Internet

Searching the internet extensively the starting point of this research and provided some valuable secondary data. Website such as the Government of India's Ministry of Finance www.finmin.nic.in which provides information on current FDI policy through the Foreign Investment Promotion Board (FIPB), and also provides press releases and data and statistics have been useful. The report also references some small domestic industry group's website useful, and other trade lobby sites. Center for Policy One particular notable internet resource was the Alternatives (www.cpasind.com) which have provided particularly informative reports on some of the key issues with FDI in Indian Retail.
2.2.2.2 Academic Textbooks

There is a vast amount of literature on FDI in general; however there is less on FDI in India, and limited amounts that are specifically focused on the retail sector. The available text on general FDI were useful background research though, and the more specific texts such as 'FDI in Retail Sector India' by Arpita Mukherjee & Nitisha Patel and 'Multinationals in India' by Amar Nayak were utilized to a greater extent as this report considered them to be far more relevant to the debate on this research topic.
2.2.2.3 News Articles and Industry Reports

To obtain up to date information and opinions on the research topic it was necessary to refer to domestic and international news articles and gather a variety of industry reports and papers, for example the India Brand Equity Foundation (IBEF) report on India's Retail Market &
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Opportunities, and India FDI Watch's report in association with the Association of Community Organizations for Reform Now (ACORN). All of these helped to provide a wide and balanced understanding of the key issues of this research.
2.3 Limitations of Research Study
2.3.1 Survey Response Limitations

Due to the nature of the survey being internet/online-based, it was inevitable that this would have limitations on survey response; however this was counterbalanced by using a very large sample base. Survey responses were also potentially limited by the length of the survey and by language barriers.
2.3.2 Inconsistency of Data & Statistics available on India and FDI/ Retail
We noted that data available, particularly in relation to India's retail sector, was often inconsistent. However, for the purposes of this research being more of an exploratory nature, this did not have too much impact on the findings. Up-to-date data was also hard to source.
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Chapter 3 - Historical Perspective on FDI

3.0 Overview
It has been said that India has one foot grounded in time-honoured traditions and the other fervently striding into the entrepreneurial e-age. India truly does embrace diversity with a passion like very few places in the world. This study is focused on the retail sector and the 'current' Foreign Direct Investment (FDI) position in India, and it therefore seems logical to start in reasonably recent times. Retailing can normally be defined as the sale of goods or merchandise from a fixed location, such as a department store or kiosk, or by post, in small or individual lots
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Retailing in India is slightly different than in developed markets, in that it is divided in to organized and unorganized retail. Organized retail could be described as when trading is taking place under a License or through people that are registered for sales tax or income tax. Unorganized retail is India's more traditional style of low-cost retailing, for example, the local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, hand carts and pavement vendors.
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for
direct
consumption by the purchaser.
Before beginning however, let us briefly define 'Foreign Direct Investment', and 'Retailing', as they are the key focus of the entire study. Foreign Direct Investment can be defined as the Acquisition or construction of physical capital by a firm from one (source) country in another (host) country.7
6. 7. 8. 9.
Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, August 2003, page 32 http://www-personal.umich.edu/~alandear/glossary/f.html http://en.wikipedia.org/wiki/retailin Mohan Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Alternatives, CPAS (2005)
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3.0 Overview
Sathyaraj (2006) defines unorganised retailing more specifically as an outlet run locally by the owner or caretaker of a shop that lacks technical and accounting standardization. The supply chain and sourcing are also done locally to meet local needs.10
Radhika (2006) goes on to be more explicit about the differences, saying The major difference between organized and unorganized retailing lies in its number (chain) of store operations. An unorganized outlet may be just stand alone or can have [a] maximum of 2-3 outlets in a city, where as the organized outlets are "any retail chain (more than two outlets) which is professionally managed (even if its family run), has an accounting transparency and organized Supply Chain Management with centralized quality control and sourcing (certain parts can be locally made) can be termed as an "organized retailing" in India.11
India is a democratic Union of States and the Government operates through a parliamentary system. India has also been a member of the World Trade Organization (WTO) since 1995. The World Trade Organization is a place where member governments go, to try to sort out the trade problems they face with each other12 They are currently actively participating in the Doha Round which provides the mandate for negotiations on a range of subjects and other work. The negotiations include those on agriculture and services, which began in early 2000.13
10. 11. 12. 13.
Sathyaraj (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.html Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.htm World Trade Organisation - http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm World Trade Organisation - http://www.wto.org/english/tratop_e/dda_e/dda_e.htm
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3.0 Overview
India is the most populous democracy in the world, and is the second most populated country at 1.172 billion people, based on United Nation statistics as at 1st July 2009.
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estimated to make up the working age group (15-60). The large working-age population will no doubt translate to an attractive consumer base compared to other economies of the world, placing India as one of the main targets of the global retail players.15
It
has a largely young population with 35% of India's population being under 14 years of age and more than 60 per cent of the population is
3.0.1 Post Independence & Pre-Reform

There were half-hearted attempts made by the Rajiv Gandhi government in the mid-1980s to selectively open the economy to foreign trade and relax import restrictions, which did not have the intended consequence of stimulating investment and eventually pushed the balance of payments out of gear. Export growth had turned negative and for the first time Indian industrial production recorded negative growth.
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economic activity, isolation and poorly managed fiscal policy. By half way through 1991, the Indian government was about to default on its foreign currency loans; and its foreign exchange reserves were so low that India only had enough dollars for two weeks' worth of imports. Foreign finance had all but closed the door on India. The political problems that this position caused were immense and it was only the recognition of the fiscal problems that finally persuaded the politicians and bureaucrats to release their hold on the economy. The crisis brought around something totally unexpected; it brought around change from a completely uncompromising centralized system of control to a market-orientated system, where regulation in some of the key sectors of the economy was to be enforced independent of the government.
In 1990-91 the current account deficit was 3.1% and inflation was 12%. Things began to get out of hand and the government went to foreign lenders pledging gold held at the Reserve Bank of India (India's central bank) for short term loans so as to help get through the financial crisis. In 1990, just as China was beginning to become a popular place for investors, India was in the middle of economic agony after many years of over-zealous government control over
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14. 15. 16. 17.
Wikipedia - http://en.wikipedia.org/wiki/List_of_countries_by_population Census of India - http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 22 Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 7
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3.0 Overview
3.0.2 Post-Reform
Economic reform was now on the agenda after the financial disaster of 1991; and these reforms brought in three elements that India was never previously allowed to have: competition, entrepreneurship and the
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successive government has supported the reform process and tried to hasten things. Due to the ever decreasing role of the government in the economy, resource allocation began to be influenced by the markets, and as a result, prices & availability across the economy became competitive rather than monopolistic. The post-reform performance of the economy had been good, and between 1994 and1997 Gross Domestic Product (GDP) grew in real terms by over 7%, which placed India among the best-performing countries in the world. However, a study of the economic reforms and liberalisation of the Indian economy by Kalirajan and Sankar (2003) acknowledges this but highlights that whilst this economic growth is encouraging, there is no doubt that given the low per capita income the need for an accelerated growth rate becomes urgent. The inflation rate was on average at a high of 10.7% per annum in the first five years of the reform period, but gradually came down to less than 5% in the last few years.
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beginnings of world-class infrastructure.
The government of the time, Congress (led by Narasimha Rao), revealed a new 'industrial policy' and the Finance Minister when sending a memorandum dated 27th August 1991 to the International Monetary Fund (IMF), said The thrust will be to increase the efficiency and international competitiveness of industrial production and to utilize foreign investment and technology to a much greater degree than in the past, to improve the performance and rationalize the scope of the public sector, and to reform and modernize the financial sector so that it can more efficiently serve the needs of the economy (Cited by Datt and Sundharam, 2001:231)
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Between 1991 and 1999 as India moved away from a state controlled economy and slowly developed into a liberalized economy, each
18. 19. 20.
Chase, Aaron, 'An Investor's Guide to the Next Economic Superpower', John Wiley & Sons pte, Ltd 2006, page 11 Sagarika Dutt, 'India in a Globalized World', Manchester University Press, 2006, page 111 Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalization of the Indian Economy', MPG Books Ltd, 2003, page 40
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3.0 Overview
3.0.2 Post-Reform
The Indian National Congress with the support of the United Progressive Alliance have been in government since 2004 and were re-elected for a further term in May 2009. Although a more liberal approach to foreign investment in India has emerged in recent times, Kalirajan and Sankar (2003) argue that low overall productivity of investment, excessive fragmentation of markets, shortage of invertible funds, and the poor infrastructure may pose significant problems to sustained higher economic growth there is reason to believe that growth impulses from the first generation of reforms may have ebbed.
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a year. In 2005 and 2006 growth accelerated to over 8% and in 2007 it looked like it might be well over 9%.
23
Farndon (2007) discusses how the development of the Indian economy has been quite unconventional. the emergence He highlights a 'normal' of cheap the & low-cost which pattern of economic development starting with manufacturing to provide a broad base of employment for masses, subsequently encourages urbanization, and as this continues to grow, he notes a shift whereby higher value products that are more sophisticated emerge. Finally, service and high
The Indian government has clearly recognized this, and in the Finance Minister's Budget Speech for 1999-2000, it was stressed that there was a need to debate and make decisions in relation to the next wave of reforms to be put in place to ensure India's economic strength and to make it fully capable of competing successfully in the evolving world order. (cited by Kalirajan and Sankar 2003)
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tech industries start to emerge. Farndon (2007) highlights the issue of job insecurity in India, and how few people are employed in a recognized position. To explain, he uses the example that in 2006, India had a workforce of 470 million, but only 35 million of these (approx. 7%) were in formal, income tax paying positions and of this 35 million, the majority (21 million) are employed by the government. Essentially, a country with a
The liberalizations subsequently introduced by the Finance Minister (Manmohan Singh) have clearly been successful. Between 1991 and 2004, India's economy grew by an average of 6%
population of over a billion has hardly more income tax payers than the UK. All the rest some 435 million people work in what Indians call the 'unorganized sector'.
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21. 22. 23. 24.
Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 41 Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 4 Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 15-16 Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 18
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3.0 Overview
3.0.2 Post-Reform
India has shot straight into the third stage, with an economic boom that has relied almost entirely on high-tech and service industries. It does have a range of manufacturing industries, but they are remarkably small for a country of India's size and prosperity. There is no doubt that India's success in the IT world has transformed the country. A milestone was passed in 2003 when the software sector alone earned more money than the entire cost of the country's oil imports the factor that had brought the country to its financial knees in 1991. This meant that when the invasion of Iraq pushed oil prices up again, India was able to ride out the difficulties almost with equanimity
Economic Indicators between 2003 and 2008, and forecasts for 2009-10 are as below Figure 1
ECONOMIC INDICATORS- INDIA 2003-2010
03-07 Average Real GDP (% Growth) Inflation (% year-end) Fiscal Balance (% of GDP) Exports (% Growth) Imports (% Growth) Current Account (% GDP) Reserves (mth of imports) External Debt (% GDP)
Source: EDC Economics25
2008 7.4 8.2 -6.0 20.1 33.1 -3.6 7.6 14.0
2009 (forecast) 4.9 5.4 7.0 -8.0 -8.5 -4.0 7.7 14.6
2010 (forecast) 6.5 4.4 -4.8 10.6 12.1 -3.9 6.5 13.8
8.9 4.9 -3.8 24.3 30.7 -0.3 9.9 16.0
It is evident that 2009 is going to be a bad year in terms of Imports/Export Growth and GDP for India, but this is consistent with the global financial crisis that has been playing out during this research i.e. 2008-09. Looking at the data going back to 2003-07 however, GDP growth has been very healthy average at 8.9% per annum real growth, and despite a rise in inflation in 2008, this is now beginning to settle and is forecast to drop further.
25.
Peter Whelan, 'India Economics', EDC Economics, May 2009, page 1 - http://www.edc.ca/english/docs/gindia_e.pdf
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3.0 Overview
3.0.3 FDI in Retail

60+ years after independence India's Knight Frank revealed in their Market Review (Q3 2006) that the move by the Indian Government to allow FDI in real estate had been an opportune move and although multibrand retailing is still not allowed, FDI in singlebrand retailing has elicited heightened interest.
27
government is now starting to take a closer look at liberalising its foreign investment policies. In 2006 the Government has promoted limited FDI in single-brand retailing and has considered opening up further in a phased system with emphasis on joint ventures with domestic players, evident with the highly controversial Wal-Mart joint venture with Bharti. Studying other countries such as China, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate is also on the agenda of the Indian Government. The Indian media regularly discusses the issues of FDI in Retailing. The Hindu Business Line's opinion on the 'Great FDI in Indian Retail debate', is that organised retail as present accounts for a mere 2% per cent of the total market (2005) as against 20% in China and 40 % in Thailand and that there is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop in.
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The government has created a specific Board to deal with promotion of FDI in India and to be the sole agency to handle matters related to FDI. The 'Foreign Investment Promotion Board' (FIPB) as it is known, is chaired by the Secretary Industry (Department of Industrial Policy & Promotion or DIPP) within the office of the Prime Minister. Its key objectives are to promote FDI in India with investment promotion activities both domestically and internationally by facilitating investment in the country via international companies, NRIs (non-resident Indians) and other forms of foreign investors. The FIPB should review policy and puts appropriate institutional arrangements in place with transparent rules, guidelines, and procedures for investment promotion and approval.
This has created significant debate for allowing FDI regulations to open up, although little has changed for multi-brand retailing restrictions to date.
26. 27.
http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm Knight Frank 'Market Review' Quarter 3 2006
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3.0 Overview
3.0.3 FDI in Retail

The FIPB should meet every week, ensuring that the cases that are pending are dealt with quickly. It is there to ensure that the investors applying with FDI proposals receive a response on the Government's decision within six weeks. FDI proposals deposited with the board's secretariat should be put in front of the Board within 15 days. The Administrative Ministries must also make any comments either before and/or in the FIPB meeting. The overall aim is to provide a transparent effective and investor friendly single window providing clearance for investment proposals.28 When looking specifically at FDI in retail, India certainly has some 'political debates', Retail particularly regarding the potential risk of displacing labour in the retail sector. employs a huge number of people in the 'unorganised' sector, the majority of which does not have any skills. This has made retail a major political issue as there is pressure on the government to compensate the people who are displaced and provide alternative employment options.
28. http://finance.indiamart.com/investment_in_india/fipb.html
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Chapter 4 - Policy Environment and Growth of Organized Retail
4.1 Policy and Regulatory Environment

Alongside the Foreign Investment Promotion Board (FIPB) previously mentioned, there is also the Investment Commission which was established in December 2004 as part of the Ministry of Finance so as to facilitate and enhance investment in India. They make recommendations on policy and procedure to the Government and recommend projects that should be fast tracked through the approval process. They also assist in promoting India as an investment destination. The Investment Commission (2009) believes the Foreign Investment regime in India as one of the most transparent and liberal among Currently, an application must be made to either the FIPB or the Secretariat for Industrial Assistance (SIA) depending on which Approval route is being used, providing the proposed details of investment, the business plan, financial and foreign company information, etc. A declaration is also required to confirm whether the applicant has previous collaborations or trade mark agreements in India in the same sector/field to which the application relates (KPMG 2008)30 emerging and developing countries. Differential treatment is limited to a few entry rules, predominantly in some Services sectors.29
Foreign investment can be approved via one of two different routes:
a.
Automatic Approval route requires no prior approval, and filing of the investment details to the Reserve Bank of India (RBI) post-facto is literally for data records only. The automatic route is appropriate in any sector where there is no 'sector cap' i.e. sectors where 100% foreign ownership is allowed and some other specified sectors, for example <26% of an Insurance company.
b.
FIPB Approval route is for proposals where the shareholding is intended to be above a prescribed 'sector cap', or where the activity is one where FDI is currently not allowed, or where it is mandatory for the application to be approved by the FIPB (for example, sectors requiring an industrial licence.)
(Source: Investment Commission Website)
31
29. 30. 31.
http://www.investmentcommission.in/policies_and_laws.htm Investing in India, KPMG, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf http://www.investmentcommission.in/policies_and_laws.htm
23

In terms of the Retail sector, foreign investment is currently limited to 51% in single brand retail stores and 100% FDI in wholesale cash and carry. No multi-brand retailing is allowed. Subject to these equity conditions, a foreign investor can set up a registered company and operate under the same rules and regulations as an Indian company. Foreign investments are freely repatriable, and are regulated under the Foreign Exchange Management Act (1999) (FEMA), administered by the Reserve Bank of India's Exchange Control Department. Ernst & Young (2007) in their report on behalf of the India Brand Equity Foundation said: The Government is progressively undertaking reforms and liberalising the retail sector; thereby attracting significant foreign investments. The regulatory and supervisory policies are being reshaped and reoriented to meet the new challenges and opportunities in this sector. To facilitate easier flow of Foreign Direct Investments (FDI) inflow, instead of having to seek Foreign Investment Promotion Board (FIPB) approval, FDI up to 100 per cent is allowed under the automatic route for cash and carry wholesale trading and export trading. FDI up to 51 per cent is allowed, with prior Government approval for retail trade in 'Single Brand' products with the objective of attracting investment, technology and global best practices and catering to the demand for such branded goods in India. This implies that foreign companies can now sell goods sold globally under a single brand, such as in the case of Reebok, Nokia and Adidas. However, retailing of multiple brands, even if the goods are produced by the same manufacturer, is presently not allowed. Relaxation of FDI restrictions are being vigorously pursued by the business and trade coalitions and are expected to fall in place over the next 3-5 years.32
32.
IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in
24

In February 2009, the Department of Industry Policy & Promotion (DIPP) released a series of Press Notes on changes relating to foreign investment. Those of particular interest to this research are:Press Note 2 - 'Guidelines for calculation of total foreign investment Press Note 3 - 'Guidelines for transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities. Press Note 4 Clarificatory guidelines on downstream investment by Indian Companies'.
The Press Notes do not appear to have instigated amendments to the Foreign Exchange Management Act (FEMA), yet were supposed to come in to effect from the date of announcement, so this is clearly going to cause confusion.
Press Note 2 (2009) introduces the concept of ownership and control33 for the first time. It allows foreign-invested Indian companies to create and invest in downstream companies or associated businesses without the original investment being counted. John Elliott (July 2009), South Asia correspondent for the Financial Times comments that this legitimises cascading investments which have been used to bring foreign capital into sectors such as telecoms that need heavy investment. FDI limits here are bypassed by progressively adding foreign investment through tiers of subsidiary joint ventures so that, though official limits are exceeded overall, the rules are not technically broken.34
The government in a number of statements has said that areas such as multi-brand retailing (i.e. where FDI is totally banned) will not be affected by these Press Note changes. It is however questionable whether there is anything to stop a Joint Venture forming under a wholesale cash and carry operation, and then setting up sub-companies in, for example multi-brand retailing, but present this as an Indian owned and controlled business.
32.
IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in
25

As it stands today, there are a number of market entry methods available for retailers under current FDI policy, for which the most common methods are: Strategic License Agreements (agreement with domestic player) Cash & Carry Wholesale trading (100% ownership) Joint Ventures Franchising Distribution Manufacturing On a more general note of regulation, the governing Act overseeing foreign exchange is the Foreign Exchange Management Act (1999). The objective of this Act is to amend and consolidate the laws in relation to foreign exchange. Consideration also needs to be given to other policies and regulations that may affect FDI inflows in to India, for example labour or company law. An example is the Payment of Gratuity Act (1972) which provides for gratuity inter alia to employees in factories, plantations, shops, establishments, and mines in the event of superannuation, retirement, resignation, death or total disablement due to accident or disease.35 Cash and carry is a particularly attractive option for foreign investors as complete ownership (100%) is allowed in this format. Several global players including Wal-Mart and Metro have entered the Indian market through this method.
Cash and carry is a particularly attractive option for foreign investors as complete ownership (100%) is allowed in this format. Several global players including Wal-Mart and Metro have entered the Indian market through this method.
33. 34. 35.
Ministry of Commerce & Industry, 'Guidelines for calculation of total foreign investment', Press Note No. 2 (2009 series), Department of Industrial Policy & Promotion, February 2009, page 3 - http://siadipp.nic.in/policy/changes/pn2_2009.pdf Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html KPMG, Investing in India, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf
26

KPMG (2008)36 highlight just some of the key legislation that could have a potential impact on foreign investors setting up in India, as per below: Payment of Bonus Act 1965 Minimum Wages Act 1948 Shops & Establishment Act Contract Labour (Regulation and Abolition) Act 1970 Industrial Disputes Act 1947 Workman's Compensation Act Profession Tax Maternity Benefit Act 1961 Employees Provident Fund and Miscellaneous Provisions Act 1952 The Employees State Insurance Act 1948 Goods & Services Tax (GST) (Proposed for July 2010) state governments, with the Governments benefiting from the access to impressive revenues from land sales and tax collection from retail developments. Solutions to problems related to the lease rentals and protenancy laws, which significantly deter international investors, are being pursued by the Government, with initiatives like Special Economic Zones (SEZs), allotment
37
The India Brand Equity Foundation (IBEF) in 2007 has also said that The Government is expected to take a calibrated approach in land and rent reforms to improve the real estate regulatory environment and facilitate easy access to retail space for international investors. The Government is releasing large tracts of unused land for retail development in the Mumbai and National Capital Regions (NCRs). This is soon to be followed by other
of
Government controlled land etc.
36. 37.
Investing in India, KPMG, 2008, page 79 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf IBEF !India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 12 (www.ibef.in)
27

To provide confidence to investors and show commitment to a SEZ policy regime that is stable and focused on increasing economic activity and employment through the setting up of SEZs, a comprehensive draft SEZ Bill was prepared after extensive debate with stakeholders. The Special Economic Zones Act, 2005, was passed by Parliament in May 2005 and came into effect on the 10th February 2006, providing for a more streamline and simplified set of procedures and for 'one-stop' clearance on matters relating to central as well as state governments. The main objectives of the SEZ Act are: generation of additional economic activity promotion of exports of goods and services promotion of investment from domestic & foreign sources creation of employment opportunities development of infrastructure facilities The current policy is trying to encourage Joint Ventures in multi-brand retailing so as to boost the domestic retailer's growth in this area. However, there is also the risk that some foreign retailers will not be interested in investing unless they have 100% ownership and that the current policy will prevent them from choosing India as an FDI in Retail destination. In reality, this may present itself as 'back-door' multi-brand retailing through the use of the aforementioned 'cascading' sub-companies of Joint Ventures. Despite the current policy and regulatory environment not being 'perfect' for foreign investors, there are clearly moves towards improving the current position and facilitating FDI inflows without having a detrimental impact on various sectors of the economy.
28
4.2 Growth in 'Organized Retailing

Chaze (2006) looked at 'unorganized and organized sectors in India, in the context of retailing. He spoke of how the organized retailing sector was beginning to grow rapidly.
He states that organized retailing (versus the traditional Indian fare of stand-alone retail or department stores) has to be one of the most exciting growth industries in India today, with branded stores and malls thus far covering a miniscule 2% of the total market.
38
The Figure below shows how significant retail is to the Indian economy, contributing 39% of GDP, and yet organized retailing is still in an under-developed early stage at only 6% of total market (2005) when compared to other countries. It is clear from this data that India has a significantly lower percentage of organized retailing compared to other developing markets such as China with 20% of organized retail penetration, and Brazil with 75%. When compared to their respective retail sector contributions to GDP, India is higher at 39% than China and Brazil.
Retail is a significant contributor to indias GDP; however organized retail plays only a small role in that
Although retail is a significant contributor to Indias Economy ... Retail % Contribution to GDP (Yr 2005) 55 39 32 22 23 17 32 22 ... organized retailing is still at a very nascent stage in India Organized Retail Penetration (%)
85 75
20 6
USA
Brazil
South Africa
Vietnam China
India
USA
Brazil
South Africa
39
Vietnam China
India
Source: Confederation of Indian Industry & AT Kearney Report (2006)
38. 39.
Chaze, Aaron, India, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons (Asia) Pte Ltd, 2006, page 23 CII / AT Kearney, Retail In India: Getting Organized to Drive Growth', November 2006, page 5
29

Vietnam on the other hand is the only country in this figure with a higher GDP contribution at 55% (compared to India at 39%) as well as having a higher percentage of organized retail penetration at 22% (compared to 6% in India). Food and Beverages vertical constitutes the largest percentage share of the revenue at 74.41%, and yet only has 'organized' penetration of 0.98%, so is likely to be a target sector for foreign retailers. Figure 3 below shows the revenue and share of verticals, as well as the penetration of organized retail: Figure 3
Vertical
Value (US$ millions)
Share of Total Revenue (%)
Organised Retail Penetration (%) 0.98 16.39 17.04 8.76 6.19 3.56 32.84 13.08
Food & Beverages Clothing & Textile Consumer Durables Home Dcor Jewellery & Watches Beauty Care Footwear Books, Music & Gifts
Source: IBEF India
40
231,951 29,024 15,171 9,463 13,390 6,854 3,268 2,610
74.41 9.31 4.87 3.04 4.30 2.20 1.05 0.84
The Indian consumer behavior of preferring proximity to retail formats is also particularly pronounced in the food & beverages sector, with food, grocery and allied products largely sourced from the local stores or hand cart vendors very close to home.
40.
IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in)
30

Ernst & Young (2007) have said that prevalence of traditional retailing is highly pronounced in small towns and cities with primary presence of neighborhood 'kirana' stores, push-cart vendors, 'melas' and 'mandis'. Organized formats are only in the initial stages of adoption in these regions. Leading retail players in the industry are beginning to explore these markets and the rural consumers are slowly beginning to embrace the newer organized retail formats. With such a high level of unorganized retail employment in the country, it is understandable that the rapid growth of organized retailing naturally causes some concern for smaller industry and traditional retailers. It does however seem inevitable that organized retail will continue to see strong growth in India as rural (and urban) consumers begin to accept and adapt to new and modern retailing formats.
41
Modern/Organised retailing is growing at an aggressive pace in urban India, fueled by bourgeoning economic activity. Organized retail revenues are expected to increase from an estimated US$ 12.9 billion per annum in 200506 to more than US$ 43 billion by 2009-10. The sector is predicted to grow by 400 per cent, in value terms, by 2007-08. A large number of domestic and international players are setting up base and expanding their business with newer organized retail formats and intense competition driving innovation in formats.
42
Reliance Industries Limited (RIL), one of the largest domestic organized retailers in India, has set up a subsidiary of RIL called Reliance Retail Limited (RRL) to drive forward the groups growth in the organized retail sector, with its 'vision' to generate inclusive growth and prosperity for farmers, vendor partners, small shopkeepers and consumers.43
42. 43.
IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in) RIL Online http://www.ril.com/html/business/business_retail.html
31

According to RRL (2009)44, 27% of global GDP is attributed to retail, and in various developing markets organized retail contributes typically anywhere between 20% and 55% of GDP. Placing the Indian retail market at The growth of consumerism in India is one of the key drivers fuelling the organised retail growth. Pankaj Gupta (2006)46 highlights several demographic trends that are factors in the growth of organized retailing. India is, for example, experiencing rapid income growth so consumers have a greater ability to spend. There is growing urbanization and this urban population has both a higher propensity to spend, and a desire for convenience. India also has a growing 'young' population which has Allowing FDI 100% in retailing would no doubt significantly accelerate this growth. In fact, Reliance in recognising that strategic alliances are going to be a key driver to its retail business, in financial year 2007-08, established key joint ventures with international partners in apparel both the willingness and attitude to spend. Gupta also states that there is a trend for Indian consumers tending to 'buy now, save later' i.e. consumers are prepared to borrow money for today's consumption. approximately $300 billion, with a growth rate of 13% per year, RRL point out that presently, although by 2011. organized retailing is only approximately 5%, this is likely to grow to 10% Therefore, RRL have begun an implementation plan to create a high spec state of the art retail infrastructure, to include a strategy for opening multi-format stores such as convenience, hypermarket, speciality and wholesale stores. (clothing), synergistic optical and office product other businesses. Further, RRL will continue to seek opportunities
45
with
international players as well.
It seems fairly safe to assume that even without FDI, the organized retail sector in India is going to grow rapidly, and this is going to have some effect on the traditional unorganized retailers.
44. 45. 46.
RIL Online http://www.ril.com/html/business/business_retail.html http://www.ril.com/html/business/business_retail.html Pankaj Gupta, Organised Retail in India, The Next Growth Frontier, Tata Strategic Management, June 2006, page 2, (http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf)
32

Management consultant Rama Bijapurkar says the poorest fifth live a hand-to-mouth existence and are insignificant as consumers. The next fifth, aspirants, acquire the most basic consumer durables bicycles, fans and radios and learn to aspire for more. The third group, climbers, is hooked, but find that their desires far outrun their income, so they buy the cheapest goods. The fourth group, whom she calls the consuming class is of inveterate buyers; they weigh the price against what they get for it. The top fifth are the rich; they buy the best without looking at the price.
47
Sajjan Jindal said that providing industry status is the first basic step needed for reforming the Indian retailing sector.48 ASSOCHAM believe that the advantages of having an industry status are that it will allow a better focus on retailing development, fiscal incentives, and availability of organized financing and establishment of insurance norms.
49
They feel the development of the
retail sector can take place at a faster pace if there is a comprehensive legislation enacted. The legislation should be simple and have a futuristic approach. It should take into consideration the developments that are taking place in this arena worldwide. The legislation should provide broad parameters within which the retail sector should operate and dayto-day functioning and other modalities should be prescribed in the Rules. The underlying idea is to have minimum modifications in the Act in the future.
50
The Associated Chambers of Commerce and Industry of India (ASSOCHAM) are cited in a news-article at www.dare.co.in (an Indian platform for entrepreneurs and business owners), as supporting a proposal to give the retail sector formal 'industry status'. In a note by the Ministries of Commerce & Industry and Consumer Affairs, the Chamber President,
47. 48. 49. 50.
Kattuman, Paul A, recorded discussion - Judge Business School University of Cambridge, 23 September, 9.55am. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm
33

For retail operations under current Rules, need to apply for and obtain a series of licenses and permits. These range from basic trading licenses and product specific licenses, to pollution clearance, amongst others. Every retail outlet is required to obtain these, even if it is a part of a chain. These are irritants, [and] add time and cost to the process of establishing a retail chain51
Kattuman (2009), whilst citing Rama's view on consumption said the following:
Indians can be divided into a number of generations; those born before independence, the product of post-independence socialist India, and those who grew up after liberalization. Each has a different mind set and approach to consumption. As time passes, each generation will pass into history, and new generations will arise. consumption patterns. Their changing outlook has an influence on
51.
http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm
34
Chapter 5 - Arguments for and against FDI in Retailing
5.1 Arguments for FDI in Retailing

There are many who argue that FDI in retailing will be of benefit to India, and discussions are often seen in the Indian media. In fact, some even argue that if FDI in retail is not allowed, it could be harmful to India's retail sector. Tripathi (2009) the Director of Silk Hut (a midsized silk garment retailer in Hyderabad), has said "Industry experts believed that the technical edge offered by foreign companies is crucial for the survival of domestic retail companies in the [current] downturn.
52
both large and small, felt that it would be good to boost the economy by facilitating higher FDI inflows. These arguments for improvements in technology and increases in FDI inflows to boost economic growth are supported by other proponents of FDI in retailing. Singh & Banga (2008) undertook a research paper on the emergence & prospects of FDI in India's retailing, and highlighted that despite the developments in the industry in recent years and the large contribution to India's economy, "retailing continues to be the least evolved industries and the growth of organised retailing in India has been much slower as compared to the rest of the world One important reason for this is that retailing is one of the few sectors where FDI is not allowed.
53
Tripathi (2009) feels that it is essential that FDI be allowed in the retail sector at 100% equity, because this is likely to encourage domestic investment into the sector too, and generate further employment opportunities. In addition to this, he commented that during the economic downturn that is currently being experienced, most of the retail industry players,
52. 53.
Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 http://www.retailing360.com/article/8/2009062420090624193427218739345f/Barring-foreign-players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 http://bimtech-retail.com/downloads/FDI_RetailDude.pdf
35

Singh & Banga (2008) identify seven key reasons for opening up the retail sector to FDI. Firstly, they believe that the large global retail players have a far more advanced knowledge of management, particularly in inventory management and merchandising and are far more productive and efficient, utilizing new technologies to their advantage. Secondly, they argue that the foreign 'low-cost' big players will adopt an integrated supply chain management system which in turn should help to lower the price of products, benefitting consumers. Thirdly, Singh & Banga believe that FDI will ensure that products are good quality and that customer services improve, providing a better shopping 'experience'. Fourthly, it will encourage and promote the links between domestic/local suppliers, manufacturers and agricultural traders to global markets. Quality and safety standards of domestics will be improved by this as only those who meet strict standards are likely to be selected. It will also help in providing a profitable and reliable market for the domestic local players. Singh & Banga's fifth argument was that the foreign retailers would begin to spread their operations in India, and as this happened domestic players Singh & Banga (2008) concluded from their research that it was evident that "ever growing urban and rural markets in India represent an unprecedented and vast unexplored opportunity for retailing to all types of formats. Initially there may be certain reservations and apprehensions in allowing global players in India's retailing, but if they are allowed in a phased manner on the basis of a well conceived and chalked out policy, they are likely to lead to more investment in organized retailing and allied sectors. would develop their supply chain, create new strategies and improve operations to counteract the competition from foreign players, and this would inevitably encourage investment and employment in supply chain and back-end sectors. Joint Ventures between domestic 'organized' retailers and foreign players (such as Wal-mart & Bharti) would also help to ease the capital constraints of the domestics. Finally, it was highlighted that the development of new retail formats and sector modernization in general would be brought around by FDI.
36

With the above said, their research paper also advised that a number of points needed to be kept into consideration when opening up FDI: 1. 2. 3. The opening up of FDI should be phased, over a 5-10 year time frame so as to allow time for domestic retailers to adjust. FDI in multi-brand retailing should be kept restricted in the near future, as Indian retailers would not be able to face this competition immediately. It is not currently desirable for FDI to be above 51%, even in single brand retailing. This will allow checking and control of foreign retailer's business operations, and will help to protect the interests of domestic retailers. However, the sector cap (equity limit) could be increased in due course as it has been in the telecom, banking and insurance markets. 4. 5. Certain products that are sensitive should not be allowed, for example, arms/ammunition and military equipment. The excluded products should be expressly stated in policy. There should be restricted zones imposed by the government for the purposes of city planning. E.g. Supermarkets/Hypermarkets should be kept away from the city centers to protect the unorganized and small retailers who operate in these areas. One of the most publicized and well known studies was produced by the Indian Council for Research on International Economic Relations (ICRIER) in association with the Academic Foundation, who were asked by the Department of Consumer Affairs and the Government of India to undertake a research project in to this area of study, for which their findings were published in 2005 so as to encourage the debate of this important issue, and to enable the Government to begin drawing up key policy decisions. The ICRIER (2005) study revealed that many of those in favor of FDI believed that the opening up of the retail sector would be of benefit to India in terms of investment inflow, technical knowledge and skills. Those in favor argued that organized retailing requires heavy investment if it is to expand rapidly, and would require supply chain set-up and the introduction of information technology.
37
FDI would ease the capital constraint and foreign players would bring in best management practices that can be replicated by the domestic players. They would invest in supply chain, source products from India and provide a platform to domestic manufacturers to export their products in international markets through these retailers.
During the study by ICRIER (2005), groups of traders in the unorganized retail sector who had seen organized retailers locate in close proximity to them, were asked questions to find out if they had been adversely affected, and whether they had been displaced by the organized retailers' presence. According to the results, 65% of unorganized players felt that the growth of organized retailing has no major impact on their business. Another 25% said that they initially suffered some losses but had changed their business strategies to face the competition. The remaining 10% faced losses but have not changed their business practices. None of the unorganized players had to close down their operations.
54
The main findings of the ICRIER study revealed that FDI in retailing led to: 1. Increased speed of development in modern formats 2. Improved productivity and efficiency of the retail sector 3. Enhanced sourcing 4. Improved quality of employment no negative impact on employment if the economy is growing. 5. Encouraged investment in supply chain 6. Led to integration of suppliers, logistic service and retailers reduction in the number of intermediaries 7. Linked local suppliers, farmers, manufactures to global markets 8. Low cost global retailers likely to lower prices 9. Consumers are assured of product quality, better service & shopping experience.
54.
Mukherjee & Patel, FDI in Retail Sector India, Academic Foundation in association with ICRIER, 2005, page 120
38

The ICRIER (2005) study also reported that those in favour of FDI argued that the reality of the situation is that foreign retailers are already operating in India due to the loop holes in current policy and regulation, and that if FDI was opened up, this would help to improve the transparency of the regulatory system. This argument is supported by Dey (2007) , of the Research Unit for Political Economy (RUPE). Although FDI is restricted, Dey points out that the Government of India has taken a much more liberal approach to wholesale, commission agent services and franchising and this has resulted in many foreign retailers having already set up operations through a number of different routes. sourcing hub. For example, Pottery Barn, Ralph Lauren and Gap have all made India a key Wal-Mart, one of the world's largest retailers set up a global sourcing operation in Bangalore in 2002, and at the end of 2006, it entered a Joint Venture with the well known Indian corporation Bharti. "For the time being, Bharti is to own the chain of front-end retail stores, while the two firms will have an equal share in a firm that will engage in wholesale, logistics, supply chain and sourcing activities. This is seen as a preliminary step by Wal-Mart pending the removal of all restrictions on FDI in retail trade.
56 55
Although some of the above arguments supports FDI being introduced more formally to increase transparency to the regulations, the debate becomes even more complex and relevant when you consider the recent changes by the Government in the series of Press Notes released in February 2009 (as discussed in Chapter 3.1 Policy & Regulatory Environment). The Press Notes from Elliott's (2009) point of view "legitimise cascading investments.
57
It is
important that regulations are made clear so that the possibility of foreign retailers using these grey areas or loop holes to set up cascading businesses dressed up as Indian controlled and owned companies is eliminated. In our opinion this defeats the whole object of having FDI restrictions in place in the retail sector, and makes the entry of foreign retailers harder to control and monitor. In respect of single-brand retailing which is allowed up to 51% equity, Khatore and Parekh (2009) point out that "several major foreign single-brand retailers have already established their presence in India through the permissible franchise route. allowing 100% Thus, the policy of not investment appears
desynchronised, as outflow of funds from India in the form of franchise payments is permitted but inflow
58
of
foreign
investments
is
restricted.
55. 56. 57. 58.
Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th June 2009, page 1 http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm
39

Khatore and Parekh (2009) also argue that the growth projection that has been forecast for the Indian retail sector may not be achievable if the government does not act quickly in opening up single-brand and multi-brand retail sectors. Kumar (2006) argued that FDI in retail improves growth prospects. In an article in The Economic Times (August 2006) Kumar stated that there are predominantly 3 arguments against allowing FDI in the retail sector. The first was that it could hinder or prevent the domestic organized retailers from growing. Secondly, it would result in small retail stores closing and unemployment growing, and thirdly, that it would disrupt the social community and the given way of life. Kumar (2006) counters each of these The third argument on the disruption of social community and the given way of life has a stronger case. arguments individually, retorting that the first argument is out-of-date, because domestic players such as Reliance, Tata and various other large organized retailers have already grown and matured and that "these corporates don't need protectionActually, if these infants are protected any longer they have good chances of becoming delinquent adults. Soon enough, Kumar acknowledges that shopping centers & malls could potentially result in "greater urban anonymity and a complete breakdown of the bazaar culture and the disappearance of the 'down town' space that has its own charm. But, in France, Germany the Nordic countries and also other parts of Europe, experience has shown that local communities can thrive if they are empowered and involved in urban planning.
61
monopoly rents will begin to accrue and bad habits will get entrenched and it will then be more difficult to open the sector. clear head start.
59
Domestic
players have the best locations anyway and a
The second argument is also not substantiated, as Kumar argues that "liberalization of retail raises overall economic welfare and does not result in loss of employment. Some restructuring will take place but local markets will not close down. Both can coexist as they fulfil different needs and serve different clientele.
60
59. 60. 61.
Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms
40

Kumar (2006) concludes that FDI in retail will improve prospects of growth, will not harm equity and will ensure that monopoly rents are not encouraged, and therefore should be opened up immediately. Real estate consultant CB Richard Ellis also believe that the government needs to open up FDI in retail so as to bring in more investment and to help promote competition in the sector that has been hit hard by the current economic slowdown. The existing FDI rules are a constraint. There is need to open up the sector a bit more as it will facilitate fresh infusion of funds and also promote competition,
62
such as the 'mom and pop' stores, FDI would still bring significant benefits to the Indian consumer and give them value for money. "The standard of living of the people will increase and they will have a better lifestyle which will result in the development of the economy as a whole.
63
When looking at FDI from a general point of view, removed from the constraints of the retail sector focus of this report, it could be argued that FDI, if 'effective', will develop human capital. Subbarao (2008) discusses this in a research paper on FDI and Human Capital Development, saying that "effective FDI indulges in enhancement of human capital of the country.
64
said
Chairman of CB Richard Ellis's South Asia office. Mehta (2007) of the Birla Institute of Management Technology in giving an overview of the Indian retail market implied that regardless of the risks to traditional retailers
By 'effective' FDI, Subbarao
means investment that encourages the development of a country that fosters the development of each resident of the country.
62. 63. 64.
Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Infusion into Retail', 12th October 2009 http://www.indianrealtynews.com/retail-market/relax-norms-on-foreign-direct-investment-to-ease-fresh-infusion-into-retail.html Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology, 2007, page 2 http://bimtech-retail.com/article2.html Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 2
41

Subbarao (2008) also talks of other potential benefits to host countries, including the generation of employment, raising of The Financial Express (anonymous author, 2005) when discussing the arguments of those who are against FDI, said that there are no restrictions for Indian large corporates to enter into retail. Many domestic players have huge expansion plans and the ability to invest billions of dollars themselves. What is the difference between these domestic players expanding, or foreign investors joining and expanding in the Indian market? The Financial Express (2005) believed it could also be argued that organised retailing would have little detrimental effect on retailers if comparison is drawn from the impact of stores like Wal-Mart on small US retailers. Retail sales increased substantially overall; and although retail sales were adversely affected in areas such as clothing & groceries, there was an increase in sales of general merchandise, home furnishing, and food and drink. productivity, skills & technology transfer, improved infrastructure, increased incomes, enhanced exports, and contribution to the long-term development of developing economies. There is also the advantage to the Government of additional taxes. Taxes that are generated from the entry of foreign investors in a host country can be used by the Government to re-invest in human capital development. Even without taxes, a United Nations Conference on Trade and Development (UNCTAD) report in 1994 (cited by Subbarao (2008)) reported that foreign multi-national investors' "demand for highly trained graduates manifests itself in the form of financial support, particularly to business schools.
65
regards to whether FDI has lead to the enhancement of human capital.
Therefore,
it is likely that foreign retail investors will look to invest in human capital development as well as provide additional tax streams. With this said, Subbarao acknowledges that different countries have had different experiences with
India's retail sector is already undergoing a change propelled by evolving consumer demand and lifestyles, urban chaos and shortage of retail space, integration of markets, a need for revamping logistics, and above all, global competition. FDI may hasten this change, and even benefit SMEs. It would be better if FDI is allowed in phases, giving time for policy adjustments, and with appropriate riders on procurement to ensure that small producers gain from it. The debate must shift into the realm of 'how' instead of 'why'.
65.
Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 7
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5.2 Arguments against FDI in Retailing

When researching the justifications 'against' FDI in India's retail sector, it should be recognised that there have been many studies that have looked at the strengths and weaknesses of allowing FDI in developing countries in general, of which several of these have focused on India. Amar Nayak (2008) in his literature on multinationals in India discussed some of these studies to try to understand the impact of FDI on host countries. It was evident that the literature revealed a heterogeneous (varied) effect on host countries, and whilst some studies show that FDI has benefited a host country, many other studies show that they have either had a negative impact or no impact on host countries.
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companies in India.67 Other studies by N. Kumar (1990), S Kumar (1996), Myneni (2000) and Debroy (1996) were all identified by Nayak (2008) as showing positive benefits to the domestic companies and country as a whole. To the contrary, a number of highly compelling studies show that FDI has not been beneficial to host countries. Nair-Reichert and Weinhold (2001) studied the impact of FDI on over 24 countries in different stages of development and found that FDI had a heterogeneous impact. Country specific analyses of host
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countries show that FDI has not helped them in meeting their national objectives. Nayak (2008) Chakraborty and Basu (2002) had concluded from research that the Indian Government's trade liberalization policy had initially made a positive impact, but as a whole had tended to cause labour displacement. In fact, Nayak (2002, 2004, 2005) had concluded FDI on the whole in India has neither been effective for India nor for the foreign companies in India. (Cited by Nayak (2008)69 (Cited by
Nayak (2008) when discussing the literature that focused on India, pointed out that there were apparent positive and negative effects from FDI. For example, Johri (1983), by studying the business strategies of foreign multinational companies in the drug and pharmaceutical industry, showed that domestic companies benefited greatly by the investments of foreign pharmaceutical
66. 67. 68. 69.
Amar K.J.R. Nayak, 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008, page 13 Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13 Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13 Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 15
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Abrol (2005), the President of the Bombay Small Scale Industries Association is cited by the Financial Express website as having said various ministers of the present government are proposing FDI in retail. We believe multinational retail and World BankInternational Monetary Fund lobbies and some self-serving bureaucrats are supporting it. This proposal will create multiple East India Companies in our country and affect livelihoods of 1.2 crore (12 million) small retailers. Isn't the proposal anti- national?
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Mohan Guruswamy, Chairman of CPAS in New Delhi was the former Advisor to the Finance Minister, and a Harvard graduate. Along with several colleagues (K Sharma, J P Mohanty and Thomas J Korah) he produced a document titled 'FDI in India's Retail Sector, More Bad than Good?' Guruswamy et al (2003) highlighted that unorganised retailing accounted for approximately 98% (in 2003) of total trade, with organised retailing only having a share of 2% of the market. The size of the retail market is very hard to gauge, but estimates have placed it at around Rs 4,00,000 crores (US$ 86,021.50 million) which was forecast at the time to double by 2005. They acknowledged that domestic retail businesses that were 'corporate' owned, were only a small amount of the total market, but were growing at a rate of 40%. Federation of Indian Chambers of Commerce and Industry (FICCI) in 2003 estimated total retail business to be 44% of GDP, and food sales made up 63% of total retail sales. With food retail trade being a significantly large segment of India's GDP, and because of its huge employment potential, Guruswamy felt it deserved special attention.
Abrol is not alone in this view. There have been several parties who have spoken out strongly against FDI in Retail. The organisation 'India FDI Watch' argues why India should be kept Independent, and the Center for Policy Alternatives Society (CPAS), a privately funded think tank focused on the study and review of public policy in India, have produced a series of reports on the problems with FDI in Retail. The first in 2003, then in 2006, and a third in 2007. All have compelling arguments that require further consideration.
70.
Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1
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Guruswamy et al's (2003) first note was that even if FDI was not opened up, the growth of the domestic 'organised sector' alone would result in efficiency improvements and an increase in food retail sales activity, which would have a trickle down effect on employment and economic activity in rural locations. This raised the question of whether FDI was necessary at all in this sector, if there is enough domestic capital being injected in to the retail sector. The furious growth of the domestic corporate retailers would bring about enough investment.
Guruswamy et al (2003) talked of retail as a 'Forced Employment' sector in India. They argued that one of the main reasons behind the growth of retail and its fragmented nature was that
Retailing was probably the primary form of disguised unemployment/underemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many millions [of] Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store and thus, a retailer is born, seemingly out of circumstance rather than choice.
This would explain why India is so highly fragmented with estimates at the time of the above report suggesting in the region of 11 million outlets with only 4% of them being larger than 500 square feet in size. But unemployment is high and many of the unemployed people turn to very informal retailing to try and make some kind of living, with limited alternative employment opportunities.
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Dey (2007) recognized this problem also, and stated that "the retail sector [in India] acts as an important shock absorber for the present social system.71 When for example, a factory closes, or a peasant gets evicted from their land, or the stagnant manufacturing industry fails to soak up new entrants to the job market, then the retail sector manages to absorb them all. Skilled laborers end up as street hawkers, and educated youth turn to selling newspapers. A better off unemployed person might start telephone services and retail telecom cards. "Thus, after agriculture, the incidence of underemployment is probably highest in the Indian Interestingly, Guruswamy et al (2003) discussed a particular foreign retailer who has subsequently entered the Indian market in 'cash & carry' wholesale (Wal-mart) arguing that if they were to enter India, they could use predatory strategies to force out smaller competition and that this would create unemployment in the millions. retail sector Those displaced as a result of FDI in retail may not show up as an increase in visible unemployment72
It was calculated that on the basis that India had 35 towns with over 1 million people in each, and if Wal-mart opened an average store in each city and they performed as well as an average Wal-mart store employing just over 10,000 employees only, then by extrapolating the turnover and no. of employees alongside the average trend, it would be the equivalent of 432,000 people being displaced. The report expanded on this theory further arguing that if FDI retailers were to acquire say 20% of retail trade, this would equate to Rs. 800 billion of turnover, which would lead to the employment of just 43,540 people, but would displace approximately 8 million people employed in the unorganised retail sector.
71. 72.
Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 2 http://rupe-india.org/43/retail.html
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Centre for Policy Alternatives' (CPAS) first report by as detailed above, acknowledges that there are many good things that could come from FDI, and they have supported FDI in other areas where they feel the evidence suggests that it will benefit and grow the economy. For the retail sector, CPAS make a number of recommendations for issues that should be addressed before considering the opening up of the retail sector to foreigners. These recommendations are summarised below: 1. Bank Finance The government should create suitable lending policies so as to assist domestic organized and unorganized retailers to grow and improve their efficiency. These policies should encourage those in the unorganized sector to migrate to the organized sector. 2. National Commission A National Commission should be set up to carry out research in to the retail sector to help create policies that will support the sector if and when FDI arrives. 3. Conditions Conditions with regards to sourcing of farm produce, domestically manufactured merchandise and imported goods should be applied to large foreign retail companies. The conditions should encourage the sourcing of goods from India's domestic market. 4. Timescale / Safeguards The opening up of the retail sector should be slow and gradual so as to allow for the displacement of labor to be analyzed and policies amended where appropriate, with social safeguards in place. Ensure high entry costs for foreign retailers and implement regulations so that the retailer cannot use predatory tactics with their pricing to gain market share aggressively. 5. Manufacturing Sector In order to cope with the labor displacement, CPAS strongly suggest that the manufacturing sector must be improved, in the belief that this will offer some compensation for the displaced labor from the retail industry. 6. Co-operative Stores They recommend that the government should encourage co-operative stores so as to source and stock consumer goods/commodities from the small producers, in order to address the two problems of limited promotion and marketing ability, as well as assisting market penetration. 7. Agricultural Perishable Produce Commission (APPC) A Commission to ensure that procurement costs are fair for farmers of perishable commodities.
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8. Food Retail Sector a. Training to provide skills in transport, handling, storing, sorting, grading, hygiene, refrigeration equipment maintenance etc. b. Improve Infrastructure for retailing with focus on logistics and hygiene c. Creation of certification and price administration bodies to oversee regulation of quality and to assist with the upgrading of technical & human interface in the 'rural-to-urban supply chain'. d. Credit availability e. Implement cross integration of India's existing long food supply chains such as dairy, fish, fruit and veg to provide new products in new markets and help to improve consumer choice, and increase employment and economic activity.73 By undertaking their recommendations, CPAS believe that it will help to ensure that the domestic and foreign retailers are on equal ground, and that domestic retailers are not especially disadvantaged. "The small retailers must be given ample opportunity to be able to provide a more personalized service, so that their higher costs are not duly nullified by the presence of
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The research study undertaken by ICRIER (2005) revealed that those against FDI in retail argue that the entry of large multi-national retailers could upset India's import balance, as a number of these prefer to source globally (for example, from China) and may prefer this to sourcing from India. This view is supported by CPAS. In a recent study, CPAS's Chairman Guruswamy, Sharma & Jos (2007) suggest the potential problem of a 'China Pipeline'.
big
supermarkets
and
hypermarkets.
It argues that the efficiency of the large global retailers is due to their ability to procure goods globally from the cheapest possible source. They are able to force prices down purely by economies of scale, ie. purchasing such a large volume of any given item. China has "mastered the complexities of the procurement-logistics supply chain and do provide huge standardised volumes of quality household products at a low price within strict time schedules. Wal-Mart procures 18 billion worth of Goods from China giving it a ready pipeline through which cheaper goods can flow into the Indian economic hinterland.
73. Guruswamy, K Sharma, JP Mohanty, TJ Korah, FDI in India's Retail Sector; More Bad than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf 74. Guruswamy, K Sharma, JP Mohanty, TJ Korah, FDI in India's Retail Sector; More Bad than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf
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Those opposed also believe that foreign retail investors may use predatory pricing techniques, which are aggressive and can force out domestic players by selling at below cost until the domestics have been eliminated. Then the foreign retailers have a monopoly of the market and can increase prices and reap higher profits. This is not such an inconceivable concept, as it has happened elsewhere in the world which can be seen, for example in an article by the Institute for Local Self-Reliance pricing in the United States in 2000. The trading associations have pointed to the fact that retail trade does not require large amounts of investment to operate because goods are bought on credit and sales are mainly cash, and therefore the foreign retail investors will not bring large inflows of foreign investment. To the contrary, they argue that
75
"after making initial investment on basic infrastructure, the multinational retailers may remit the profits earned in India to their own country.76 India FDI Watch is a national coalition of labor unions, trade associations, environmentalists, NGOs and academics that have formed to block attempts by Prime Minister Singh's government to allow foreign direct investment in India's retail markets (www.indiafdiwatch.org). They have produced several reports that argue that India should say no to FDI in retail unless the foreign retailers "make satisfactory guarantees that would protect communities; insure the stability of existing small businesses and traders; guarantee fair wages and working conditions for their own employees and source employees along with union protection and agreements; and insure that a significant percentage of sourcing derives from the Indian market.
77
where Wal-mart were charged with predatory
75. 76. 77.
http://www.newrules.org/retail/news/walmart-charged-predatory-pricing Mukherjee A, Patel N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, page 118 http://indiafdiwatch.org/index.php?id=80
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One particular India FDI Watch campaign believed that there is pressure on the government from the IMF and World Bank to allow labour standards to be dictated by the demands of supply chain flexibility ie. 'hire and fire' policy. They argue that if the government is to change labour laws (as it has already proposed to do in 2005), then the safe guards that have been in place to protect India's labour force will be lost and the business environment will be far more conducive to FDI and global integration, as the model used by global retailers requires flexible labour markets to be present.
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interest79
The proposed GATS agreement
would provide that an investor would not be subject to the introduction of new barriers to investment in a host country, would be provided with post investment protection, protection against all material and intellectual property, effective protection t hr o ugh against direct expropriation as well as against indirect expropriation d i sc r i mi na t o r y treatment, a mechanism for compensation in the case of expropriation, a mechanism for the settlement of disputes, and the right to determine its own ownership structure and provisions for legal, regulatory
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and
administrative transparency. The same campaign report argued that Trans National Companies (TNCs) are trying to bring in changes through the World Trade Organisation's GATS (General Agreement on Trade in Services) to "safeguard their vested
This protection could be detrimental if India decides to open FDI in retail, and then find that it is not successful. It will be too late for the government to go back on any decision, as the GATS agreement may prevent them.
78. 79. 80.
India FDI Watch 'Keep India Independent!', 2009, Page 23 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf
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Chapter 6 - Detailed analysis of factors and conditions related to FDI
6.0 Survey Design & Sample

The survey sample consists of 70,000 people who have registered to receive 'The India Retail Newsletter', an e-web news service, which provides the latest news on the sector. The sample of people who are registered is made up of Retailers, Fast Moving Consumer Goods (FMCG) companies and manufacturers, franchisors and franchisees, retail service providers, real estate companies, software & IT companies, hardware and system manufacturers, consulting companies, Figure 4
Survey Sample by Industry
1% 1% 2% 1% 4%
headhunting institutions.
firms,
and
educational
Out of the 70,000 participants in the survey, there were 243 respondents. Figure 4 below shows the profile of the survey sample used to distribute the survey questionnaire, broken down by Industry. 91% of the chosen sample is employed in the Indian retail sector, and the remaining 9% are in inter-related industries and sub-sectors.
Retail FMCG / Apparel / Manufacturing Media Real Estate Information Technology Other
91% Retail
A survey sample of this size is more than is required for the purposes of obtaining a representative view of the domestic Indian retail sector. It covers not only participants who are within the retail trade directly, but also others within retail-related sectors (as detailed above) and therefore should provide the researcher with a balanced view from various viewpoints.
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6.0 Survey Design & Sample

The questionnaire was designed to contain both open and closed ended questions for a number of reasons. Open ended questions allow further clarification of the closed-ended responses, as well as allow for thoughts and ideas to be discovered that perhaps have not been considered in the literature review and in earlier stages of this research. The justification for using closed-ended questions was to counter-balance any mis-interpretation / lack of response in the qualitative areas. The questions were written after a preliminary review of the initial literature discovered during the early stages of the research. The closed ended questions would be able to provide a simple view of whether a particular respondent believed, for example, 'Yes, FDI should be opened up', or 'No, reforms policy are not necessary'. The open-ended questions were It was important to ensure that anonymity and privacy were considered throughout the survey, so as not to discourage participants, and to protect their personal views and opinions. Therefore, the preliminary data on the questionnaire i.e. name, occupation, sector etc were not compulsory. A 'respondent ID number' was allocated to each response when collated on to computer software so that specific respondent comments could be referred to in the analysis, and for ease of reference. then designed to link in to these closed questions and to draw out more detail, by encouraging respondents to give reasons as to why the felt a particular way, or what they would propose as solutions to a specific problem, for example, possible labour displacement.
6.1 Questions
Please see Appendix II for Survey Questions.
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6.2 Data Analysis

Below is a summary of the data results from the survey following analysis. There were 243 respondents in total, and 'no response' rates are recorded for those who answered some of the survey questions, but not the specific question that is being analysed. The following analysis charts display the results visually, but should be read in conjunction with Chapter 4.3 Results & Findings, and using the Coding Key in Appendix I where appropriate. Coding Key for interpretation.
No. of people aware of current FDI in Retail Policy
(Question 1)
No. of people 200 189
Each chart states if it requires the
180 160
140
120
100
80
60 48 40
20 6 0 Yes No No response
Chart S1
Should the Indian Government open up FDI restrictions in the Retail Sector ?
(Question 2)
No. of people 250
203 200
150
100
50
38
2 0 Yes No No response
Chart S2
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Coded Qualitative Analysis of Reasons why FDI should or should not be opened up in India
(Question 3 - please see Coding Key)
Coded Response X K J I H G F E D C B A 0 1 5 10 20 30 40 50 60 70 8 20 26 25 25 11 11 15 60 36
No. of respondents
Chart S3
Are you happy with the current FDI Retail policy as it is?
(Question 4)
No. of people 250
200
199
150
100
50
41
3 0 Yes No No response
Chart S4
What conditions should be imposed on foreign retailers if policy is changed?

(Question 5) None 13%
Only Allow FDI In Specific Cities/Areas 0%
Other Restrictions 8%
No Response 4% An Exclusion Of Specific Products For The Domestic Retailer 3% Equity Limits 4% A Minimum Investment Amount Requirement 8%
Only Allow Certain Retail Formats (Eg: Malls) 12% Certain Products Must Be Manufactured/Sourced In India By The Foreign Investor 31%
Only Allow Branded Products 17%
Chart S5
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Should Government reforms be made to support domestic retailers?

(Question 6)
No of People 180 170
160
140
120
100
80
70
60
40
Chart S6
Coded Analysis of Suggested Reforms to Protect Domestic Retailers

(Question 7 please see Coding Key)
Y 12% (no reforms necessary)
A 7%
B 3%
C 2%
D 1%
E 1% F 1% H 3% I 1%
G 3%
J 10% (Subsidy) X 35% (no response) N 1% Q T S R 3% 1% 3% 2% V 1% U 0.3% M 2% P 6% O 1%
K 0.3% L 1%
W 1%
Chart S7
Will lifting restrictions on FDI in retailing allow more investment, technical skills and consumer choice?
(Question 8)
No. of people 250 223
200
150
100
50
Chart S8
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Coded Analysis of Suggested Solutions to potential Labour Displacement problem

(Question 10 - Please see Coding Key))
A 5%
B 6%
X 40%
C 11%
D 28% F 8%
E 2%
Chart S9
Coded Analysis of the no. of people who believe the argument that "foreign retailers will not 'own a stake' and therefore will make little investment"
No. of people 200 182 180 160 140 120 100 80 60 40 25 20 0 FALSE (A) TRUE (B) Answer NO RESPONSE (X) 36
(Question 9 Please see Coding Key)
Chart S10
How many years should FDI policy be 'phased in' to allow domes tic industry & market to adjust?
(Question 11)
No of people 50 46 45 40 35 30 25 20 17 15 10 5 0 0 1 2 3 Years 4 5-6 7-10 10+ 9 39 43 38
27
Chart S11
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6.3 Results & Findings
6.3.1 Chart S1 (Question 1)

Are you aware of the current FDI in Retail Regulation & Policy? The first question revealed that 77.7% of respondents were aware of current FDI in retail policy, with 19.7% not being aware, and 2.6% of respondents giving 'no response'. This data shows that a significant amount of people within the domestic market place are paying an interest in the current policies and how these could influence their industry and country. The awareness was anticipated to be high, due to the very fact that the topic has been discussed in the Indian media many a time over the last decade.

Do you think the Indian Government should open up Foreign Direct Investment (FDI) restrictions in the Retail Sector? It was evident from the responses that a significant number of respondents would like to see the opening up of FDI in the retail sector.
83.5% of respondents said 'Yes', India should open up the FDI policy, whilst only 15.6% said 'No'.
A very small 'no response' rate was observed from this question at 0.9%. These results show a strong amount of support for the concept of opening up FDI, although the data analysis also highlights that there is still a small but significant (15.6%) group of people within the domestic industry who oppose the idea of opening up FDI.

Please give reasons for your answer to Question 2 Question 3 was an open ended question asking why participants thought FDI policy should or should not be opened up. Responses were analysed and coded according to common themes. 11 themes or categories were identified and allocated a code (please see Code Key in Appendix I for identification of categories / themes.)
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24.7% of respondents believed that opening up FDI in the retail sector would allow for improved skills, technology, innovation and best practices, as well as offer improvements to infrastructure, supply chain and logistics, an improved competitive environment which in turn would lead to consumer benefits. They also believe that it would increase employment and economic growth and bring investment to the domestic sector including related-sectors such as agricultural and manufacturing operations, This particular group of respondents (coded H) were 'particularly proFDI' and gave multiple reasons (as above) as to why the sector should be opened up. Even more revealing is that a further 45.3% of respondents mentioned either 1 or 2 of the above reasons for believing FDI should be opened up.
Therefore, 70% of respondents believe that one or more of the above reasons are justification for opening up FDI in the retail sector. This reflects a strong sentiment towards FDI, and is a sign that the domestic market feels positively about the widening of FDI policy and the benefits it could bring to the countries industry and wider economy.
A small number of respondents, 6.2%, made specific mention of the argument of allowing 'free market efficiency' to reign, and for there to be less 'protectionism' within the retail sector. 4.5% were against the idea of opening up FDI yet, because they felt that the domestic market was not developed enough yet. However, they also felt that in the future once the 'organized' retail had grown and reforms had taken place, it would be of benefit to the country to allow FDI in the sector. A further 4.5% of respondents felt strongly that FDI would be of no benefit and should not be allowed. The researcher anticipated the number of respondents in this group to be higher, given that 15.6% of respondents said 'no' to opening up FDI in Question 2 (see Chart S2). However, these figures could differentiate due to the fact that a 15.2% of participants did not respond or make any comments on Question 3.
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Are you happy with the current FDI Retail policy as it is? Question 4 was intended to obtain a view of whether the domestic market was happy with the current policies.
16.9% of people were satisfied with the policies as they are, while an overwhelming majority of 81.9% were dissatisfied with the policies as they stand today.
Only 1.2% of people did not respond to this question which is an acceptable level.

If FDI policy is to open up in the future, do you think any of the following conditions should be imposed on foreign retailers? Question 5 was a multiple-choice question, with a number of suggested conditions that could be imposed on foreign investors. Participants were asked to select a condition they felt should be imposed (if any). The most significant group of respondents (31%), were those who felt that foreign investors should have to source certain products from India. conditions imposed on FDI at all. In terms of retail formats, 12% believed that foreign retailers should only be allowed to operate in specific formats, for example, malls, and a further 8% felt that a minimum investment amount should be specified in policy. A smaller group of respondents (4%) felt that Equity limits should be put (or kept) in place (as currently imposed on single-brand retail at 51% equity) 3% of respondents supported the idea of excluding certain products to protect domestic players, and 8% felt that 'other restrictions/conditions' would be more appropriate than the options available for selection in the multiple-choice box in Question 5. The 'no response' rate on this particular question was 4%. 17% thought that only branded products should be allowed through FDI, while 13% of respondents felt that there should be no
The data from question 5 reveals a strong support for conditions that involve sourcing Indian products, and thereby growing the manufacturing/agricultural industries and India's GDP. Branded products and format restrictions were also supported by a number of respondents, but more surprising was the 13% of people who supported 'no conditions' at all.
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Do you think that government reforms need to be made to support domestic retailers so that they can face the foreign investment competition? The data collected from Question 6 revealed that 70% of respondents felt that reforms should be made by the government to ensure that the domestic retailers are supported. The other 28% of respondents felt that no reforms would be necessary to support the domestic retailers. The 'no response' rate was reasonably low at 2%. When interpreting this question alongside Chart S2 (Question 2), it is evident that although 83.5% of people felt that FDI should be opened up, 70% also felt that reforms were necessary to support domestic retailers.

Following Question 6, what reforms do you think should / should not be made? Question 7 was open-ended, and aimed to discover what reforms the survey participants believed would, or would not, help to support domestic retailers. The data was analysed and coded according to common themes or specific recommendations for reform, which consisted of 25 different coded categories from the 243 responses (please see Coding Key in Appendix I). 10% of the survey respondents recommended that the government provide subsidy to domestic retailers, specifically in the form of low-rate loans/bank finance. In contrast to this, 12% felt that no reforms were necessary in order to protect the domestic retailers. This group (coded 'Y') who commented that no reforms were necessary, had a tendency to also mention that their preference was for a 'free market' and that healthy competition would be preferred. There was also a tendency with these respondents to commenting that the domestic players, particularly small 'kirana / mom & pop' stores, would be able to survive alongside the foreign investors with out any issues. For example, one respondent said they [small retailers] will continue to exist, the kind of personalised service, decision taking speed etc of small retailers can't be matched by big retailers. (Respondent ID no. 94) 7% of respondents (coded 'A') suggested the government invest in, and provide for equal access to an organised wholesale & supply chain infrastructure, so that domestic retailers can become more efficient, bring down their costs and offer better value so as to be able to compete with foreign investors in the market place.
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Tax relief and tax incentives for domestic retailers was a suggested recommendation by 6% of respondent, 3% felt that implementing educational retail training initiatives would be of benefit. A further 3% recommended improving real estate regulations to facilitate the provision of land to domestics and to provide for allocation of land and city planning. Bureaucracy was raised as a concern, with 3% believing that there is a need to reduce administration and formalities for domestic players to facilitate, for example, exporting or opening a new retail outlet (which can require up to 30 licences).

Do you believe that lifting restrictions on FDI in retailing will allow more investment, technical skills and consumer choice? Question 8 specifically asked whether people agreed Yes or No to that lifting restrictions on FDI would allow more investment, technical skills and consumer choice in India.
91% of respondents answered 'Yes', believing that lifting restrictions would bring more investment, technical skills and consumer choices.
7% answered 'No', and there was a 2% 'no response' rate on this question. By comparing these results to Chart S2 (Question 2) it reveals that although 83.5% of people believed FDI should be opened up, we can see that a higher proportion of people (91%) believe it would bring increased investment, skills & consumer choice. This means that a number of respondents whilst having said 'no' they do not believe FDI should be opened up, clearly acknowledge that it would bring benefits to the economy/industry (in terms of investment & skills) and to society (in consumer choice).
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It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same. How can you counter this argument? Question 9 was an open ended question, which asked participants to counter the argument that 'foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same'. The responses were analysed and coded according to whether they believed the statement to be 'false' and disagreed - these respondents were able to counter the argument with solutions to prevent this from happening, or believed the statement to be 'true' and agreed these respondents offered no counter argument and could provide no solutions to this potential problem. (please see Coding Key Question 9, Appendix I) 75% of respondents believed the statement to be false, and provided simple solutions to the problems, or argued that it was not an issue of concern. One particular respondent said that Unless the foreign retailers really invest in India, they would not be able to reap the profits. Only long haul players will really benefit from the Indian market. (respondent ID no. 56) Another argued that It is not true. As such, retail needs heavy investments both front end and back end. It is unlikely that foreign investors can overlook this point and hence their financial involvement would be high. Yes, there is certainly a fear of 'flight of capital' after some time, which needs to [be] protected with proper regulations (respondent ID no. 98). An interesting thought was also considered by respondent ID no. 81; by constructing businesses and providing fair wages, isn't that a defacto investment? 10% believed the statement to be true. For example, respondent ID no. 141 said I am for [this] argument. I believe that fair returns should be in proportion to the investment made by the foreign investors. Also the money in India should be used for the welfare and development of India first. Respondent ID no. 53 also agreed with the statement, saying this argument has some validity. It is evident that the majority of people did not believe in the statement posed by Question 9. The responses analysed, conveyed strong support for the concept that foreign retailers will be looking to stay for the longer term in India (being that it has such huge retail market potential), and therefore will have to invest in improving infrastructure, supply chain, technology and skills for example, so as to make a success of their Indian operations.
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Can you think of any solutions to the potential problems of labor displacement in the unorganized retail sector if FDI regulations are opened up? Question 10 was an open ended question, where participants were asked to suggest ways in which they thought one of the key problems, labor displacement, could be resolved. The responses were analysed and interpreted, and coded according to general themes in response. Please see Coding Key, Question 10, Appendix I The data analysis revealed that 28% of the respondents believed that labour displacement simply wouldn't happen. For example, respondent ID no. 91 said I don't think that organized retail presents any threat of labour displacement in the unorganised retail sector. Rather it would provide better opportunities. To the contrary, 11% of respondents believed that there were no solutions to labour displacement, and that displacement was inevitable if FDI in retail was opened up. This is not to say that the participants were either for or opposed to FDI, but merely that labour displacement was not something they believed could be 'solved'. Analysing this against the number of people that believed FDI should be opened up in India (203 respondents), 12% of these respondents also thought that labour displacement was inevitable.
This could be interpreted to mean that this group has accepted labor displacement as one of the obvious risks of FDI, but that the benefits would outweigh the risks.
8% of respondents to question 10 argued that providing skills and comprehensive training to existing 'unorganized' retailers would allow them to upgrade their businesses and be innovative so as to continue employment in the retail sector without being displaced. A further 6% thought that foreign retailers should be asked to invest in retail related facilities first and foremost, to offer further employment in back-end services, manufacturing and farming, to compensate for the labor displacement. 5% believed of people believed the Government should be responsible for providing and controlling equal employment opportunities in both the growing 'organized' sector, and in back-end services. These respondents had a tendency to believe that labor laws were in need of upgrading to support .
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The final group of respondents consisted of 3% who believed that there should be compensation, rights and benefits provided to those that are displaced. No participant specified whether this should be from the Government, foreign retailers, or both. The analysis of Question 10 has revealed that the majority of people believe that either labor displacement will not happen at all against those who believe if labor displacement does happen, there is little that can be done to prevent it.

Over how many years do you think FDI policy could be phased in to allow domestic industries/markets to adjust successfully? Question 11 was a closed ended multiple choice question, asking participants to say over how long a period they thought FDI should be opened up to allow domestic retailers to adjust successfully (if at all). 16% of respondents believed phasing in would not allow for any successful adjustment of domestic retailers. This particular group believed also that the retail sector should be opened up imminently.
The majority of respondents, 48%, thought 1 to 4 years was adequate enough time to allow for the successful adaptation of domestic retailers, with a weighting toward 2-3 years being preferable.
A further 19% thought 5-6 years would be more appropriate, 7% believed 7-10 years, and a small minority at 3% thought that the phasing should be over a period greater than 10 years.
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Chapter 7 -Conclusion
7.0 Introduction
So as to draw conclusions from this study, it is appropriate to review the objectives that were set out earlier in Chapter 1:1) 2) 3) 4) To investigate the Indian retail market place and current policy & regulations with regards to Examine the arguments for and against changing current policy and improving the regulatory Compare the opinions of the Indian domestic retail sector so as to interpret market sentiment Consider what solutions could potentially resolve the issues and are supported by the
foreign investors. environment towards foreign investment, and to explore thoughts on the issues faced by the sector. majority of the domestic retail players.
7.1 Indian market place and FDI policy & regulations

It was clear from the literature review that India is a very unique market and has an extremely dominant 'unorganized' sector that is concerned about the introduction of FDI in the retailing sector. Since 1991, economic reforms have been underway to utilize more foreign investment and to become increasingly efficient and internationally competitive. India has come a long way in this regard, but there are still areas that require further reform and improvement. For example, there are issues with labour laws, real estate regulations as well as general economic problems such as high unemployment, inflation and 'jobless growth'.
Economic growth in India is good (with a 5 year average of over 8% real growth), and the retail industry contributes approximately 40% of this GDP, and yet still has a very under developed 'organized sector', and therefore offers exciting growth potential.
The Food & Beverages vertical has huge potential for the organised retail sector as to date less than 1% of this vertical has been penetrated by organized retailers. Clothing & Textiles also holds a fairly significant share of the retail markets revenue. We believe that these are the two most likely target sectors for foreign investors.
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7.1 Indian market place and FDI policy & regulations

Changing consumer patterns appear to be a large factor in the growth of the Indian 'organised' retail sector, with a burgeoning middle-class, and a growing young population with a willingness to spend. Consumer habits, desires and incomes are changing and demands for different retail formats are emerging. The retail sector in India does not have 'industry status' and that this causes difficulties for all concerned. Providing industry status would allow comprehensive legislation to be put in place to govern the running of the retail sector. This in turn would assist in accelerated growth of the retail sector and would remove a number of barriers that are currently slowing down growth, such as bureaucracy, formalities and lack of finance for retailers, for example. The literature review showed that current investment policy is already quite liberal towards FDI in many sectors, with only a few sectors (predominantly service sectors such as retailing) that are restricted. Retailing is The recent changes brought about through a series of Press Notes in 2009 have caused confusion over the policy, as the changes allow Joint Ventures to effectively create subcompanies (cascading). We believe this may encourage foreign investors to use this 'loop hole' to create sub-companies so that they can exceed FDI caps, and potentially enter areas such as multi-brand retailing through the 'back-door' without technically breaking the rules. There needs to be more clarity in this area of policy. The literature review revealed that although there are hurdles to be overcome in the policy and regulatory environment, the government seems to be working on various solutions, for example, Special Economic Zones. allowed via a number of methods such as franchising/joint venture, but 100% equity is only allowed in Wholesale Cash & Carry, and 51% in single-brand retailing. No multi-brand retailing is allowed by foreign investors.
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7.2 Arguments for & against changing policy and improving the regulatory environment.
Those in favour of FDI in Retail argue the following reasons:1. 2. 3. 4. 5. 6. The technical edge offered by foreign investors is crucial to the survival of domestic retailers, particularly in the current downturn. Knowledge & skills would be transferred. Allowing 100% FDI will encourage domestic investment in the sector Economic boost with increased FDI inflows Improve the standard of living of the country as a whole (enhanced Human Capital) Improve productivity and efficiency in management turn will lower prices for consumers and improve the infrastructure of the country. 8. 9. Increased FDI in Retail will ensure quality products and customer services Will promote links between domestic/local suppliers, manufacturers and agricultural traders with the global market 10. Sourcing / Exports from India would be enhanced. 11. Standards (quality, health & safety etc) & best practices would improve 12. Domestic players would develop new strategies to improve operations to counteract any competition from foreign players 13. Foreign retailers would encourage employment in back-end services 14. Improvements in quality of employment 15. Reduce the number of intermediaries 16. Joint Ventures would help to ease the capital constraints of domestic companies 17. Most acknowledged that phasing-in should be considered and that some restrictions would be required on equity limits, certain products, and certain 'zones' 18. Research suggests that 'unorganised' retailers have not been adversely affected by the location and growth of 'organised' retailers nearby. Those that were affected, tended to adopt new strategies to face competition 19. Improve transparency and prevent 'back-door' entry and 'loop holes'. 20. Not logical to have 51% restriction on single brand retailing when so many foreign single brand retailers have already entered through the franchise route. 21. Retail Growth forecasts may not be achievable without FDI stimulus 22. Additional taxes will be raised for the benefit of India 23. Contribution to the long-term development of the country (ie. investment in education, infrastructure etc)
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7. Foreign 'low-cost' retailers will set-up/adopt integrated supply chain management, which in
7.2 Arguments for & against changing policy and improving the regulatory environment.
Those against the opening up of FDI in the retail sector argue the following reasons:1. FDI has a heterogeneous effect on countries, ie. the results vary. Some studies have shown success of FDI in India, others have shown initial positive results but with a tendency on the whole towards causing labour displacement. 2. The fast growth of domestic 'organised' retailing (40% per annum) would result in efficiency improvements and increased retail sales which would in turn create employment and economic growth, raising the question of whether FDI was required in this sector at all. 3. Retail as a 'Forced Employment' the sector is one of the primary forms of 'disguised employment / under employment' which acts as a shock absorber for the present social system, soaking up unemployed people who have little alternative but to try and make some kind of living. 4. 5. 6. 7. 8. 9. Those displaced by FDI may not show up as a 'visible' increase in unemployment. Foreign retailers may use predatory strategies to force out smaller competition Various issues such as Bank Finance, conditions, safeguards, and improvements to Potential to upset the import balance, with the creation of a 'China Pipeline'. After minimal initial investment in basic infrastructure, Foreign investors may re-patriate profits back home. Foreign retailers should not be allowed until they make satisfactory guarantees to protect communities, support small businesses and traders, guarantee fair wages and working conditions, and ensure minimum sourcing from India. 10. Hire and Fire' Policy in labour law would be more conducive to an FDI environment, but would destroy the safeguards that are in place to protect the labour force. 11. Amendments to GATS Agreements could mean that any policy changes on FDI will be irreversible as investments will be protected and have immunity to new barriers to trade.
manufacturing sector are required to be addressed before FDI in Retail should be considered.
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7.3 Market sentiment and exploration of domestic retailers' thoughts.

The survey revealed that there is a strong market sentiment towards opening up FDI, with 83.5% of people supporting the opening of the sector. The domestic retailers who responded believe that FDI in retail will bring the benefit of skills transfer, technology, innovation and best practises as well as supply chain, infrastructure and logistics improvements. They also thought that it would increase employment and economic growth and draw more investment in to the domestic sector and sub-sectors. Overall, 70% of people believe that it would have a positive impact. This research has revealed that there is strong support for imposing a condition on foreign retailers to source certain products in India, as well as some interest in restricting FDI to branded products, and certain retail formats. A small percentage of people feel that India isn't quite ready to open up its foreign retail policy yet, but that it would be ready in the near future and should begin planning a 'phased system'. A minority (4%) believed there would be no benefits at all of allowing FDI and were against opening up policy.
Interestingly, it was found that 70% of people also felt that reforms should be made to support domestic retailers in the face of competition from FDI, whilst 28% felt that domestic retailers did not need reforms to support them.
The data collated from the survey highlighted a number of recommended reforms to support domestic retailers.
The reforms that were most commonly supported were, subsidies in the form of low-rate loans, provision of equal access to organized wholesale & supply chain infrastructure and tax relief for domestic retailers.
However, 12% of respondents felt that no support was necessary and that domestic retailers would support themselves. It was also suggested that bureaucracy and formalities be reduced as this was currently hindering domestic/foreign retailers and was restricting the growth of the sector.
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7.3 Market sentiment and exploration of domestic retailers' thoughts.

Over 20 recommendations for reform to support domestic retailers were gathered from the data analysis of the survey, for which the complete list is detailed in Chapter 4 & Appendix II. This research has shown that an overwhelming majority (91%) believe that FDI in retail will bring benefits in the form of further investment, skills and consumer choice. The study also ascertained that 75% of people felt that foreign retailers would make a long term commitment to investment in India and would not simply make minimal investment then 'repatriate profits'.
It is evident from the survey results that 28% of people do not support the view that allowing FDI will cause labour displacement. This compares to 12% who believe labour displacement is inevitable and 11% who believe there are no solutions to this problem. India's domestic market is clearly divided on whether there is even an issue of displacement.
We re-iterate that other countries have experienced varying results, and therefore there is no way of knowing whether labour displacement will be non-existent, mild or severe in Indian retail. One would imply that there is likely to be some displacement, but a well thought out plan and policy & regulatory system will minimize the risks here, and perhaps prevent it from happening all together. Survey respondents suggested the following ways in which labour displacement might be dealt with: Provide skills and comprehensive training to 'unorganised' retailers to allow them to evolve/innovate and remain employed in retail trade. Foreign retailers should invest in back-end services, manufacturing and farming initially to compensate for the labour displacement. Government should provide and control equal employment opportunities both in the organised' sector and in back-end services. Compensation, rights and benefits should be provided to those displaced.
Nearly 50% of people believe a 1-4 year phasing in period would allow domestic players to successfully adjust to foreign players, whilst 16% thought a phased system would not allow domestic retailers to adjust anyway. 19% believed a 5-6 year phasing in period would be more successful, while only 10% believed 7+ years was necessary.
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7.4 Recommendations
Based on the research carried out, we propose several recommendations for areas that have been highlighted as concerning for FDI in retail. These recommendations are by no means an exhaustive list but should serve as a framework for consideration of the various ways forward with policy change:-
7.4.1Recommendation 1
The government should revoke the recent Press Notes that relate to permitting cascading subcompanies, as these are only serving to provide a loop-hole for back-door entry by foreign retailers and are not promoting transparency within the policy.
7.4.2 Recommendation 2
We recommend that the retail sector is granted 'industry status' as soon as possible so that a legislative framework can be put in place for the control and management of the sector and its day to day operation.
Begin recording detailed statistical data of the sector, both foreign, and domestic organised and unorganised so that the impact of FDI when introduced can be closely monitored and policy finetuned accordingly.
Labour Laws need to be reviewed to be more in line with the requirements of retail sector employment.
Investment should be made by the government to improve the efficiency of the manufacturing sector so that this sector can grow and provide more employment opportunities going forward.
City Planning needs to be addressed so that development is in such a way that it protects the traditional trader areas and does not clutter the already densely populated city centers.
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7.4 Recommendations
Real Estate Regulations need to be considered for reform so as to facilitate access to land and property for use by the retail sector, and to provide equal access to space for both foreign and domestic players.
Certain sensitive products should be restricted from foreign retailing, so as to protect the traditional craftsmen and unorganised traders. The products to be restricted needs to be given thought and researched before any decisions are made.
The government should impose local employment quotas on foreign retailers, firstly to reduce the effects of any potential labour displacement, and secondly to encourage foreign retailers to provide training, skills and development to local people who without it would not be able to transfer to the 'organised' retail sector or back-end services.
Rules on re-patriation of foreign profits should be revised, to discourage (and restrict) 100% of profits from leaving India. Conditions imposed on requiring foreign retailers to invest a minimum amount in infrastructure and supply chain capabilities would be beneficial.
Consider providing Tax relief and/or subsidy by way of low rate loans to domestic retailers to provide support.
Implement a 'phased introduction' of FDI to the retail sector, say over 2-4 years, so as to provide gradual adjustment for the domestic players and to allow fine-tuning and adjustment of policy if issues arise.
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7.4 Recommendations
The government should reform price control policies to ensure that foreign retailers cannot sell below a minimum price, rather than the current Maximum Retail Price (MRP).
Conditions of minimum sourcing from domestic agricultural and manufacturing sectors should be imposed, so as to prevent the creation of a 'China Pipeline'.
Bureaucracy and formalities should be reduced by updating related legislation, for example, reducing the number of licences required by businesses to open a store. This should assist the domestic players in expanding and will help to streamline the efficiency of the sector.
Geographical restrictions for foreign investors need to be considered so as to reduce the impact, or prevent the fast expansion of retailers in to rural areas. Special Economic Zones need to be assessed with further research, to review their advantages and disadvantages to both India as a country, and to the foreign players.
Other related regulations such as copyright law, need to be updated and brought in to line with the needs of the future Indian retail sector.
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7.5 Further research
There are many areas that have been highlighted as requiring further research during this study. Each individual argument for and against almost requires an entire research project to itself so as to delve further into the complexities of each specific scenario, for example, Special Economic Zones which have not been possible to cover in any detail within this study could provide an interesting area of research so as to establish the advantages and disadvantages of operating under a SEZ system. Consumerism is an area that is worthy of further research so as to ascertain whether there is any correlation between changes in consumer dynamics and the emergence of organized retail in specific 'verticals'. The GATS Agreements and World Trade Organisation Doha Round would also be another interesting avenue of research. With the Doha Rounds to conclude in 2010, it would be interesting to investigate how this might impact foreign investment in the retail sector in India.
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Appendix I
Code Key for Open-ended Questions (3, 7, 9 & 10)

Question 3
A. Improve skills, technology, innovation and best practises B. Improve infrastructure, supply chain and logistics C. Both A & B (tendency to be more concerned with improvements in retail industry) D. Improved competition & consumer benefits E. Increase employment and economic growth F. Both D & E (tendency to be more concerned with consumers/society and the economy) G. Increase investment in the 'organised' retail sector (believe required for growth of domestic organised retail, including Agricultural/Manufacturing H. Commented on all of the above (A-G) (very pro-FDI, believe its "non-sense not to open FDI in retail") I. Believe in free market efficiency and less protectionism (respondents gave a sense of political disagreement and also had a tendency to agree with answer H i.e. Pro-FDI) J. FDI shouldn't be opened up 'yet', but should be in the future. (believes the domestic market is not ready/developed enough yet) K. FDI will not be of benefit. (Against FDI being opened up at all) X. No response / Uninterpretable response
Question 7
A. Invest in and provide for equal access to an organised wholesale & supply chain infrastructure B. Protect Certain Products/formats from FDI and consider keeping 'sector caps' C. Provide 'knowledge' and skills to existing domestic retailers to innovate and modernise D. Remove intermediary middlemen in the supply chain E. Price control regulations F. Copyright/trademark regulations G. Real Estate Regulations (including allocation of land / city planning legal framework) H. Bureaucracy - reduce admin and formalities (inc. exports, legal, business formation) I. Restrict FDI profits allowed to leave India J. Provide subsidy to domestic retailers (including low-rate loans/bank finance) K. Provide Platform for domestic retailer marketing L. Implement procedures for data collection/monitoring of global/Indian retail & FDI data
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Appendix I
Question 7
M. Compulsory local sourcing for FDI (including policy to protect manufacturers/farmers) N. Regulation/Checking to ensure international standards within retail sector O. Restrictions geographically on FDI (e.g.: Special Economic Zones) P. Tax relief / incentives for domestic retailers Q. Implement Educational Retail Training initiatives R. Require a percentage of Foreigner Investment to go in to Indian development projects S. Friendlier Labour Laws and Goods & Services Tax (GST) introduction across India T. Provide retail business with lawful 'industry status' U. Any reforms necessary to protect the domestic retailers V. Systematic study of each sector required to address reforms required W. Ensure a 'phased' introduction of FDI X. No Response / Uninterpretable / Misinterpreted the question Y. No reforms necessary. Free Market / Healthy Competition preferred
Question 9
A. Believed the statement to be 'false' and disagreed. Were able to counter the argument with solutions to prevent displacement from happening B. Believed the statement to be 'true' and agreed. Offered no counter argument, or were unable to provide solutions to prevent displacement happening X. No Response / Uninterpretable / Misinterpreted the question
Question 10
A. Government should provide and control equal employment opportunities in organised and backend services, and upgrade labour laws to support this. B. Foreign investors should be asked to invest in retail related facilities first, to offer further employment in, for example, manufacturing and farming industries. Includes requiring a fixed quota of employment of Indians by the foreign investor C. No - there are no solutions to the labour displacement that FDI will cause.
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Appendix I
Question 10
D. No - Don't believe labour displacement will happen (or will be very limited). E. Provide compensation / rights / benefits to those who are displaced. Includes reform of remuneration policy F. Provide skills training to allow existing retailers to upgrade/innovate so as to continue employment in the retail sector X. No response / Uninterpretable response / Misinterpreted the question
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Appendix II
Survey Questions
1. Are you aware of the current FDI in Retail Regulation & Policy? a. Yes b. No 2. Do you think the Indian Government should open up Foreign Direct Investment (FDI) restrictions in the Retail Sector? a. Yes b. No 3. Please give reasons for your answer to Question 2. 4. Are you happy with the current FDI Retail policy as it is? a. Yes b. No 5. If FDI policy is to open up in the future, do you think any of the following conditions should be imposed on foreign retailers? a. None b. Equity limits c. Only allow FDI in specific cities/areas d. A minimum investment amount requirement e. An exclusion of specific products for the domestic retailer f. Certain products must be manufactured/sourced in India by the foreign investor g. Only allow certain retail formats (e.g. Malls) h. Only allow branded products I. Other restrictions? (please specify) 6. Do you think that government reforms need to be made to support domestic retailers so that they can face the foreign investment competition? a. Yes b. No 7. Following Question 6, what reforms do you think should / should not be made?
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Appendix Appendix II
Survey Questions
8. Do you believe that lifting restrictions on FDI in retailing will allow more investment, technical skills and consumer choice? a. Yes b. No 9. It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same. How can you counter this argument? 10. Can you think of any solutions to the potential problems of labour displacement in the unorganised retail sector if FDI regulations are opened up? 11. Over how many years do you think FDI policy could be phased in to allow domestic industries/markets to adjust successfully? Please select '0' if you don't think phasing in would allow successful adjustment for domestic players. a. 0 b. 1 c. 2 d. 3 e. 4 f. 5-6 g. 7-10 h. 10+
Preliminary, non-compulsory fields were as follows:Name Title
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References Appendix
Nayak, Amar K.J.R. 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008 Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganizedretailing.html Whelan, Peter, 'India Economics', EDC Economics, May 2009, page 1 http://www.edc.ca/english/docs/gindia_e.pdf http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.newrules.org/retail/news/walmart-charged-predatory-pricin http://www.allindiaretail.com/ http://www.isixsigma.com/library/content/c000709a.asp http://www.answers.com/topic/triangulation?cat=technology http://www-personal.umich.edu/~alandear/glossary/f.htm http://en.wikipedia.org/wiki/retailing http://en.wikipedia.org/wiki/List_of_countries_by_population http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm http://www.wto.org/english/tratop_e/dda_e/dda_e.htm http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm http://finance.indiamart.com/investment_in_india/fipb.html http://www.ril.com/html/business/business_retail.html http://www.investmentcommission.in/policies_and_laws.htm
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Bibliography Appendix
Indian Council for Social Science Research, 'Towards a New Era: Economic, Social & Political Reforms', Har-Anand Publications PVT Ltd, 2001 Denoon, David B H, 'The Economic and Strategic Rise of China and India; Asian Realignments after the 1997 Financial Crisis', Palgrave Macmillan, 2007 Ray, Pradeep Kanta, FDI and Industrial Organization in Developing Countries: The Challenge of Globalization in India, Ashgate Publishing Ltd, 2005 Advanti & Co et al, The New India, Opportunities & Strategies for Foreign Investment, Asia Law & Practice, 1999 Kolanad, Gitanjali Culture Shock! A Guide to Customs and Eqiquette, Kuperard (London) Ltd, 1994 Todaro, Michael P, Economics for a Developing World, An Introduction to principles, probems and policies for development, Third Edition, Longman Singapore Publishers Pte Ltd, 1992 http://www.iariw.org/papers/2009/8b%20Kolli.pdf http://www.ncaer.org/downloads/indianeconomy/services/q2aug07.pdf (NCAER economic stats) http://www.ncaer.org/downloads/indianeconomy/forecast/q2aug07.pdf http://labour.nic.in/ http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf http://dipp.nic.in/manual/FDI_Manual_text_Latest.pdf http://siadipp.nic.in/policy/icrier_report_27052008.pdf http://siadipp.nic.in/policy/changes/pn6_2009.pdf http://www.edc.ca/english/docs/gindia_e.pdf http://www.cds.edu/download_files/wp311.pdf http://indiafdiwatch.org/fileadmin/WARNstorage/indiwm.pdf http://indiafdiwatch.org/fileadmin/India_site/FDI_Broch_1_.pdf http://www.bijapurkar.com/printerfriendly.php?filename=ct_cons_india_better.htm http://www.bijapurkar.com/printerfriendly.php?filename=ct_cons_india_better.htm http://www.bijapurkar.com/indiamyland/indi_celebrating_diversity.php http://www.livemint.com/2009/06/08185249/Parliamentary-panel-recommends.html http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1 http://www.indianrealtynews.com/category/retail-market/ http://bimtech-retail.com/downloads/FDI_RetailDude.pdf http://bimtech-retail.com/downloads/Retail_Twist_RetailDude.pdf http://bimtech-retail.com/downloads/RetailDude_Interview_1.pdf http://indiafdiwatch.org/fileadmin/WARNstorage/indiwm.pdf
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FDIinIndianRetail AnExhaustiveAnalysis

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Foreign Direct Investment in India's Retail Sector

An exhaustive analysis of factors influencing the FDI debate 2009

An All India Retail Research Report

http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm Knight Frank 'Market Review' Quarter 3 2006

15-17 17 18-20 21-22

65 65-66 67-68 69-70 71-73 74 75-77 78-79 80-82 83

Table of figures & charts

1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15.

2009 Global Retail Development Index, AT Kearney http://www.atkearney.com/images/global/pdf/2009_Global_Retail_Development_Index.pdf

1.2 Report Aims & Objectives

1.2 Layout of Report

Chapter 2 - Study Methodology

2.1 Study Techniques

2.1.1 Types of Research

2.1.2 Literature Review

2.1 Study Techniques

2.1.3 Survey Questionnaire

2.2 Data Sources

2.2.1 Primary Data Sources

2.2.2 Secondary Data Sources 2.2.2.1 Internet

2.2.2.2 Academic Textbooks

2.2.2.3 News Articles and Industry Reports

2.3 Limitations of Research Study

2.3.1 Survey Response Limitations

Chapter 3 - Historical Perspective on FDI

consumption by the purchaser.

10. 11. 12. 13.

3.0.1 Post Independence & Pre-Reform

14. 15. 16. 17.

beginnings of world-class infrastructure.

18. 19. 20.

21. 22. 23. 24.

ECONOMIC INDICATORS- INDIA 2003-2010

2008 7.4 8.2 -6.0 20.1 33.1 -3.6 7.6 14.0

8.9 4.9 -3.8 24.3 30.7 -0.3 9.9 16.0

3.0.3 FDI in Retail

http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm Knight Frank 'Market Review' Quarter 3 2006

3.0.3 FDI in Retail

Chapter 4 - Policy Environment and Growth of Organized Retail

4.1 Policy and Regulatory Environment

Foreign investment can be approved via one of two different routes:

29. 30. 31.

http://www.investmentcommission.in/policies_and_laws.htm Investing in India, KPMG, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf http://www.investmentcommission.in/policies_and_laws.htm

4.1 Policy and Regulatory Environment

4.1 Policy and Regulatory Environment

4.1 Policy and Regulatory Environment

33. 34. 35.

4.1 Policy and Regulatory Environment

Government controlled land etc.

4.1 Policy and Regulatory Environment

4.2 Growth in 'Organized Retailing

Source: Confederation of Indian Industry & AT Kearney Report (2006)

4.2 Growth in 'Organized Retailing

Value (US$ millions)

Share of Total Revenue (%)

231,951 29,024 15,171 9,463 13,390 6,854 3,268 2,610

74.41 9.31 4.87 3.04 4.30 2.20 1.05 0.84

4.2 Growth in 'Organized Retailing

4.2 Growth in 'Organized Retailing

international players as well.

44. 45. 46.

4.2 Growth in 'Organized Retailing

They feel the development of the