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2000 to March 2010, FDI inflows of nearly USD 1.8 billion (INR 7 ,799 crore) were received in the sector. This comprised 1.54 percent of the total FDI inflows received during the period1. farmers in terms of wastage in quality and quantity of produce. As per some industry estimates – 25-30 percent of fruits and vegetables and 5-7 percent of food grains in India are wasted3. Though FDI is permitted in cold-chain to the extent of 100 percent, through the automatic route1; in the absence Single-brand retail In 2006, FDI in single-brand retailing was permitted to the extent of 51 percent. Since then, a total of 94 proposals have been received till May 2010, of which 57 proposals were approved. An FDI inflow of nearly USD 194 million (INR 900 crores) was received between April 2006 and March 2010, comprising 0.21 percent of the total FDI inflows during the period, under the category of single brand retailing .
of FDI in retailing, FDI flow to the sector has not been significant. Intermediaries dominate the value chain Due to a number of intermediaries involved in the chain, norms are flouted and pricing lacks transparency. According to some reports, Indian farmers realize that only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail4. According to a study commissioned by the World Bank, a farmer receives around 12–15 percent of the price the consumer pays at a retail outlet5 for a typical horticulture product.
Share of Retail Trade About 40 percent of the country’s total GDP of USD 1 trillion comes from retail sales to Indian consumers. The local, one-off corner stores account for more than 94 percent of this total retail sales of around USD 400 The government recently released a discussion paper to allow FDI in multi-brand retail trading. Currently, FDI in multi-brand retail trading is prohibited. billion2.
Rationale for FDI in retail trading
FDI in the retail sector could bring various benefits for the country, such as:
• Improvement in the supply chain
Limitations of the present set-up
Infrastructure There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. India has a very limited integrated cold-chain infrastructure, with only 5,386 stand-alone cold storages, having a total capacity of 23.6 million MT., 80 percent of which is used only for potatoes1. Thus, lack of adequate storage facilities have caused heavy losses to
infrastructure by bringing in technical know-how and capital: FDI can be a powerful catalyst to spur competition in the retail industry. It can bring about an improvement in the supply chain infrastructure, investment in technology, up-gradation in agriculture, manpower and skill development and may also lead to an improvement in the overall productivity
Cash and carry wholesale trading In 1997 FDI in cash and carry wholesale , trading was first permitted, to the extent of 100 percent, under the Government approval route. It was brought under the automatic route in 2006. Between April,
1 Discussion Paper on Foreign Direct Investment (FDI) In Multi-Brand Retail Trading 2 “Open the doors to organised retail” – The Economic Times dated 30 July 2010 3 Annual Report 2006-07 Ministry of Agriculture, Department of Agriculture and Cooperation , 4 ICRIER Report on Impact of Organized Retailing on the Unorganized Sector, May 2008 5 Mattoo, A., D. Mishra, and A. Narain. 2007 “From competition at home to competing abroad: A case study of India’s horticulture” .
with no limit on the number of outlets. For instance. it has a capital requirement of TBH 100 million and TBH 20 million for each additional outlet. etc. According to Euromonitor. Since then. the profit realization for farmers selling directly to the organized retailers is expected to be much higher than that received from selling in the mandis • Benefits to customers in the form of better quality of products and lower prices: Past trends indicate that by and large consumers have benefited from organized retail in the domestic market. through the removal of structural inefficiencies: Farmers were found to benefit significantly from the option of direct sales to organized retailers. Further. In 200708. the government may FDI policy in retail trading in other comparable countries6 China permitted FDI in retailing up to 49 percent for the first time in 1992 and restricted it to six provinces and SEZs. Singapore and Indonesia without limits on equity participation. Report No 531. For the retail business. working on some sort of arrangement with local ‘kirana’ stores. China’s retail and wholesale trade sector has witnessed impressive growth in foreign direct investment. there may be a few riders wherein the entities may have to fulfill certain requirements such as minimum investments in the back-end infrastructure. opening of the FDI has led to the development of a large organized retail industry and the entry of major players in the market. All rights reserved. retail trade employed 7 percent of . . were expected to grow rapidly to reach USD 900 billion by 2009. There are no equity restrictions since then. Following its accession to WTO. is still underdeveloped and in a nascent stage and therefore it is important that the domestic retail sector is allowed to grow and consolidate first. a Swiss entity. before opening this sector to foreign investors. However. Apart from the above mentioned countries. unfair competition and ultimately result in large-scale exit of domestic retailers. it encouraged the growth of agro-food processing industry and enhanced the exports of Thai-made goods through networks of the foreign retailers. entry of the foreign players had led to the development of organised retailing and Thailand has now become an important shopping destination. which amounted to nearly USD 554 billion in 2003. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). 6 Discussion Paper on Foreign Direct Investment (FDI) In Multi-Brand Retail Trading 7 NSSO. Thus. The number of traditional retailers also increased by around 30 percent between 1996 and 20016. Calibrated opening up of the sector Keeping in view various factors such as political situation and resistance from the trade associations. leading to large scale displacement of persons employed in the retail sector Threat to the organized retail sector players in the domestic sector The Indian retail sector. particularly organized retail. Argentina. Our View The move will in all likelihood lead to an increase in the FDI flow in the sector. Concerns Major concerns which have been expressed with regard to opening of the retail sector for FDI: May lead to unemployment The retail sector in India is the second largest employer after agriculture. FDI is permitted in the retail sector in Brazil.1 million persons8.• Improvement in farmer income Thailand permits 100 percent foreign equity. while Malaysia has equity caps in this regard. Entry of foreign players in a recessionary economy adversely impacted all segments – wholesalers.2 total workers and provided job opportunities to 33. manufacturers and domestic retailers in the short run. Already. In addition. while it has a capital requirement of TBH 100 million for each wholesale outlet. In many of these countries. among others. the foreign ownership restrictions have been lifted effective from December 2004. It may also lead to 7 choose to open up the sector with limited foreign equity ownership.Principal and Subsidiary employment ratio and population in 2007-08 © 2010 KPMG. global retail majors such as Walmart and Carrefour have evinced keen interest in the Indian retail market. 2007-08 8 Estimates using NSSO. retail sales in China. the employment in the retail and wholesale trade has increased from about 4 percent of the total labour force in 1992 to about 7 percent in 2001. Employment and Unemployment Situation in India. caps on scale. especially the small family managed outlets.
In absolute employment generation opportunities and better experience for Indian consumers in the long-run. They may set up a direct linkage with farmers to start with. the employment in both retail and wholesale trade increased from 4 percent in 1992 to about 7 percent in 2001 post the opening up of the retail sector10. they will still need to be supported by the government. the permit to set up multi-brand retail outlets may provide competition to existing organised retail stores and kirana stores. Employment In China. consumer goods. terms. There are still instances in the developed markets (such as the US) where the retail sector is largely organised and significantly developed. however their farming community is still supported by the government through direct income support in various forms including subsidies. years of established relationship. relative to other verticals such as merchandising. However. etc. The increase in organised retail will also see a lead to newer employment opportunities both directly and indirectly. chains may enter into some sort of an arrangement with the local kirana stores rather than setting up their own large distribution networks at the outset which will be a challenge in itself. a Swiss entity. it will still not lead to complete Farm income The improved cold chain and storage infrastructure will no doubt lead to a reduction in losses of agriculture produce. Emergence of newer business models Although. the entry of foreign players can also lead to skill development. To conclude. however managing the same on an end-toend basis is a difficult task as has been the experience of domestic retail majors. warehousing and distribution channels thereby leading to improvement in the supply chain infrastructure in the longrun. Thus. credit. the opening up of the multibrand retail sector to foreign players will be a step in the right direction as this could bring about a number of benefits in terms of improved infrastructure. Nestlé. etc. an Indian Partnership and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”). they may have to adopt a business model which is more conducive to the local business environment as India is a price sensitive market and has its own set of dynamics when compared to other markets world-wide. global majors such as Wal-mart. to be seen. etc9.Improvement in the overall supply chain infrastructure Rise in the organized retail whether domestic or through entry of foreign players will lead to an increase in investments in both forward and backward infrastructure such as cold chain and storage infrastructure. Also. It may also urge the Indian players both in organized and un-organized formats to re-think their business plans to become more efficient and remain competitive. it translated in an increase from 28 million people to 54 million during the same period. . Further. P&G. The value proposition of the kirana stores – the convenience of location. Pepsi. The agricultural vertical has proved to be a weak link for the domestic organised retail thus far. there is a possibility of new progressed business models emerging wherein the large retail 9 Open the doors to organised retail” – The Economic Times dated 30 July 2010 10 Discussion Paper on Foreign Direct Investment (FDI) In Multi-Brand Retail Trading © 2010 KPMG. India’s economy is also in a growth phase and will see both organized and unorganized retail sector growing along with other allied sectors. Agricultural supply chain There has been a considerable talk on how organised retail will contribute to the supply chain of agricultural produce as this vertical is challenging to manage. It may also lead to removal of intermediaries in the retail value chain and curtail other inefficiencies. will this actually result in higher income for a farmer remains replacement of such kirana stores. – will be difficult to replicate even by the large retail chains. Carrefour and Tesco are expected to bring a global scale in their negotiations with the MNCs such as Unilever. All rights reserved. even if there is an improvement in the farm income. On the contrary. home delivery. For foreign players entering India. efficient processes. Even domestic players such as Reliance and pantaloon are have found it difficult to manage9. Coke.
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