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BY: Akanksha Gupta & Jincy Chacko Geevarghese MBA- Sem II Dept of Business Management Sinhgad Academy of Engineering, Pune E-Mail ID: email@example.com firstname.lastname@example.org
However. Moreover. the strategies they are adopting to enter India and their prospects in India. According to the Investment Commission of India. with the latest move of the government to allow FDI in the multi-brand retailing sector. in spite of the recent developments in retailing and its immense contribution to the economy. Thus. despite the ongoing wave of incessant liberalization and globalization.brand retail would undoubtedly enable India Inc to integrate its economy with that of the global economy. retailing continues to be the least evolved industries and the growth of organised retailing in India has been much slower as compared to rest of the world. Keywords: Organised retail Sunrise sector Globalisation Foreign Direct Investment Strategic Issues and Prospects . Undoubtedly. the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. the paper analyzes the reason why foreign retailers are interested in India. this dismal situation of the retail sector. the present paper attempts to analyse the strategic issues concerning the influx of Foreign Direct Investment in the Indian retail industry. In this context. as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but should be significantly encouraged. stems from the absence of an FDI encouraging policy in the Indian retail sector.Abstract:Indian retail industry is one of the sunrise sectors with huge growth potential. The findings of the study point out that FDI in multi.
Further. the integration of global financial markets paves ways to this explosive growth of FDI around the globe. Moreover. Indian economy faced severe Balance of payment crisis. Further. after Independence issues relating to foreign capital. the paucity of all types of resources viz. This unprecedented growth of global FDI in 1990 around the world make FDI an important and vital component of development strategy in both developed and developing nations and policies are designed in order to stimulate inward flows. yet U. The outflowing of foreign currency which was deposited by the Indian NRI’s gave a further . gained attention of the policy makers. However.INTRODUCTION One of the most striking developments during the last two decades is the spectacular growth of FDI in the global economic landscape. India was left with that much amount of foreign exchange reserves which can finance its three weeks of imports. In the early nineties. technological knowhow. operations of MNCs. researchers could not portray the complete history of FDI pouring in India due to lack of abundant and authentic data. The ‘home’ countries want to take the advantage of the vast markets opened by industrial growth. access to markets. capital. Japanese companies entered Indian market and enhanced their trade with India. There was a marked increase in petroleum prices because of the gulf war. skills and practices. After Second World War.K.abroad. financial. because they benefit a lot from such type of investment. developing nations accepted FDI as a sole visible panacea for all their scarcities. FDI provides a win – win situation to the host and the home countries.in their economic development. Infact. AN OVERALL VIEW The historical background of FDI in India can be traced back with the establishment of East India Company of Britain. Exports began to experience serious difficulties. Both countries are directly interested in inviting FDI. entrepreneurship. Before independence major amount of FDI came from the British companies. Keeping in mind the national interests the policy makers designed the FDI policy which aims FDI as a medium for acquiring advanced technology and to mobilize foreign exchange resources. remained the most dominant investor in India. British capital came to India during the colonial era of Britain in India. The crippling external debts were debilitating the economy. British companies setup their units in mining sector and in those sectors that suits their own economic and business interest. On the other hand the ‘host’ countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange.
Bureau of Economic and Business Affairs. under the new foreign investment policy Government of India constituted FIPB (Foreign Investment Promotion Board) whose main function was to invite and facilitate foreign investment through single window system from the Prime Minister’s Office. To study the trends and patterns of flow of FDI. Developing countries. The foreign equity cap was raised to 51 percent for the existing companies. 2. New sectors such as mining. telecommunications. 3. India also became the member of MIGA (Multilateral Investment Guarantee Agency) for protection of foreign investments. in particular. considered FDI as the safest type of external finance as it . In the last two decades the pace of FDI flows are rising faster than almost all other indicators of economic activity worldwide. various Bulletins of Reserve Bank of India. Government had allowed the use of foreign brand names for domestically produced products which was restricted earlier. Manmohan Singh with the help of World Bank and IMF introduced the macro – economic stabilization and structural adjustment programm. Country Reports on Economic Policy and Trade Practice. RESEARCH METHODOLOGY DATA COLLECTION : This study is based on secondary data. To evaluate the impact of FDI on the Economy. As a result of these reforms India open its door to FDI inflows and adopted a more liberal foreign policy in order to restore the confidence of foreign investors. To assess the determinants of FDI inflows. In this critical face of Indian economy the then finance Minister of India Dr. The required data have been collected from various sources i. OBJECTIVES The study covers the following objectives: 1. Further. Government lifted restrictions on the operations of MNCs by revising the FERA Act 1973. TRENDS AND PATTERENS OF FDI INFLOWS One of the most prominent and striking feature of today’s globalised world is the exponential growth of FDI in both developed and developing countries.e. highway construction and management were open to foreign investors as well as to private sector. banking.jolt to Indian economy. It is a time series data and the relevant data have been collected for the period 1991 to 2008.
developing countries now have a significant impact on the global economy. cheap and skilled labour. Now a days.not only supplement domestic savings. FDI has become an instrument of international economic integration. In the last two decades the pace of FDI flows are rising faster than almost all other indicators of economic activity worldwide. with large domestic market. in particular. FDI INFLOWS IN THE WORLD One of the most prominent and striking feature of today’s globalised world is the exponential growth of FDI in both developed and developing countries.1) depict that developing countries makes their presence felt by receiving a considerable chunk of FDI inflows. Now a days. Developing economies share in total FDI inflows rose from 26% in 1980 to 40% in 1997. particularly in the economics of the industrialized states. foreign reserves but promotes growth even more through spillovers of technology. or ideas over the past two decades makes the world economies the globalised one. capital markets. . considered FDI as the safest type of external finance as it not only supplement domestic savings. technological advancements. Developing countries. and domestic competition. high returns to investment. Trends in World FDI flows (Table -3. increased innovative capacity.1 and Chart-3. skills. skills. and domestic competition. foreign reserves but promotes growth even more through spillovers of technology. and the growing internationalization of goods. breaking of business barriers. TRENDS AND PATTERNS OF FDI FLOW IN THE WORLD The liberalization of trade. Consequently. services. low labour costs. FDI has become an instrument of international economic integration. increased innovative capacity.
public ownership which leads to pervasive corruption and slow growth from 1950s until 1990s.1 82.4 96 386. 958.9 27.7 26.7 99 00 01 02 03 04 05 06 07 1088.4 76.Years/ Countries World FDI 1990.8 66.1 97 478.9 21.5 57. 632.1 39.4 76.2 68.3 64.3 36 33 29.9 58.9 27.6 63.9 27 20. 1 56 98 694 . 648.7 77. 1411 1833 3 1 1 6 1 7 .7 68 Developed 64. 478. 1492 735.3 386.8 66.3 27. 648.3 27.7 15.2 68. 1411 1833 3 1 1 6 1 7 .96 95 97 98 99 00 01 02 03 04 05 06 07 225. India exports were worth 25016 Million USD in .6 63. 716.5 39. 716.7 15.3 77. Continued economic liberalization since 1991 and its overall direction remained the same over the years irrespective of the ruling party moved the economy towards a market – based system from a closed economy characterized by extensive regulation. 958. 632.5 69.1 56 1088. protectionism.3 82.9 58.9 21.7 68 33 39.7 26.3 SHARE OF INDIA IN WORLD FDI Years/ Countries World FDI Developed Economies share in the World FDI Developing Economies share in world FDI 199095 225.3 36 33 29. 1492 735. India also ranks as the 11th largest economy in terms of industrial output and has the 3rd largest pool of scientific and technical manpower.5 69.4 Economies share in the World FDI Developing 33 Economies share in world FDI 69.9 27 20. 1 57.3 TRENDS AND PATTERNS OF FDI FLOW IN INDIA Economic reforms taken by Indian government in 1991 makes the country as one of the prominent performer of global economies by placing the country as the 4th largest and the 2nd fastest growing economy in the world.5 39. 694 1 1 .5 69. India’s economy has been growing at a rate of more than 9% for three running years and has seen a decade of 7 plus per cent growth.
Foreign direct investment in multi-brand retailing is not yet permitted in India. FIPB) for retail trade of ‘Single Brand’ products. FDI in Retail: Current Status FDI Policy with Regard to Retailing in India It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities. (ii) Reserve Bank of India’s (RBI) automatic approval route. subject to Press Note 3 (2006 Series). a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.64crore) accounting for 0.1 percent of our total retail turnover in 2006 -07 came from organized retail.e. b) FDI up to 51 % with prior Government approval (i. An analysis of the last eighteen years of trends in FDI inflows (Chart-3.December of 2011. and (v) external commercial borrowings (ADR/GDR) route. India imports were worth 37753 Million USD in December of 2011. As per the Indian Council for Research on International Economic Relations (ICRIER) study 4. Entry Options For Foreign Players prior to FDI Policy .6) shows that there has been a steady flow of FDI in the country upto 2004. (iii) acquisition of shares route (since 1996). The actual FDI inflows in India is welcomed under five broad heads: ( i ) Foreign Investment Promotion Board’s (FIPB) discretionary approval route for larger projects. but there is an exponential rise in the FDI inflows from 2005 onwards.69 million USD (or Rs 901. c) FDI is not permitted in Multi Brand Retailing in India.21% of the total FDI inflows in the period mentioned above. Exports amount to 22% of India’s GDP. FDI has been allowed since 2006 up to 51%.5 and Chart-3. for single brand retailing. Total FDI inflow into single brand retailing from April 2006 to March 2010 has been 194. (iv) RBI’s non – resident Indian (NRI’s) scheme.
Strategic Licensing Agreements Some foreign brands give exclusive licenses and distribution rights to Indian companies. the Spanish apparel brand has entered India through this route with an agreement with Pyramids. Through these rights. etc. Cash And Carry Wholesale Trading 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. 2006. or enter into shop-in-shop arrangements or distribute the brands to franchisees. existent Indian retailers.Although prior to Jan 24. . 2. etc. Reebok. own outlets. therefore. Nike and Marks and Spencer. FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Players such as. Nike India Private Limited. internal distributors. Indian companies can either sell it through their own stores. FDI was not authorized in retailing. Adidas. allowed to do retail. Mango. Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary. most general players had been operating in the country. The foreign brands such as Nike. Franchise Agreements It is an easiest track to come in the Indian market. In franchising and commission agents’ services. For instance. 4. Metro AG of Germany was the first significant global player to enter India through this route. The wholesaler deals only with smaller retailers and not Consumers. These companies have been authorized to sell products to Indian consumers by franchising. Manufacturing and Wholly Owned Subsidiaries. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are. 3. have entered Indian marketplace by this route. Some of entrance routes used by them have been discussed in sum as below:1.
it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. front-end retail. Advantages of FDI in Multi-brand Retail Multi-brand retail. Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store Importantly. to make their presence felt in the country. who are very keen to foray into India’s retail sector. have either tied-up or trying to tie-up with local corporate. quality standards and cost competitiveness brought forth through FDI would augur well for the domestic players to garner the necessary support to sustain their growth. logistics. which couldn’t arrange for funds to sustain their growth. if allowed. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. The technical know-how. therefore. the organized players would bring in the much needed investment that would spur the further growth of the sector. The paper doesn’t suggest any upper limit on FDI in multi-brand retail. Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. A key reason for this has been attributed to the vastly avoidable . inventory management. and Metro (Germany). This would be particularly important for sustenance of some of the domestic retailers that don’t have the resources to ride out the storm during an economic slump such as the case with Vishal. If implemented. India has also been crippled by rising inflation rates that have refused to come within accepted levels. Tesco (UK). is expected to transform the retail landscape in a significant way: Firstly.FDI in Multi Brand Retail The government has also not defined the term Multi Brand. Department of Industrial Policy and Promotion (DIPP). This has resulted in keeping all the giant corporate – backed retailers of the world like Walmart (USA). among others. Subhiksha and Koutons. there is a complete ban on foreign investment in multi-brand. multi-brand retail operations of such corporate. Carrefour (France). for front-end. to offer their services for back-end operations like sourcing. All of these retailers. In July 2010. global best practices. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart. away from entering into the country.
FDI in multi-brand retail would in no way endanger the jobs of people employed in the unorganised retail sector. it would lead to the creation of millions of jobs as massive infrastructure capabilities would be needed to cater to the changing lifestyle needs of the urban Indian who is keen on allocating the disposable income towards organised retailing in addition to the local kirana stores. 3. with a total capacity of 23. A weak supply chain makes Indian horticultural products non-competitive in the international export market. This would not only prove to be fruitful for the economy as a whole but will also integrate the Indian retail sector with the global retail market.supply chain costs in the Indian food and grocery sales which has been estimated to be a whopping US$ 24 Bn. Thesestores would be able to retain their importance owing to their unique characteristics of convenience. Post harvest losses of agricultural produce account for over Rs. Also. an inefficient public procurement and distribution system has failed to tame in the . of which 57 % are ‘avoidable wastage’. 2. 80 percent of which is used for storing potatoes. these would be more prominent in the Tier-II and Tier-III cities where the organised supermarkets would find it harder to establish themselves. Being the second biggest global products of fruits and vegetables (around 180 million MT) India possesses a miniscule integrated cold-chain infrastructure. The infrastructure support extended to improve the backend processes of the supply chain would enable to eliminate such wastages and enhance the operational efficiency.6 million MT. proximity and skills in retaining customers. despite the huge food subsidy burden borne by it. Bottlenecks 1. FDI in multi-brand retail is therefore a necessary step that needs to be taken to propel further growth in the sector. On the contrary. Limited investment in supply chain logistics is a major dampener for the emerging retail industry in India. Absence of proper storage infrastructure constricts the supply of perishable agricultural commodities to distant markets. The government holds that. the farmers would get to enjoy a bigger share of the pie.It is not a question of ‘how’ it will be done but ‘when’. The numerous intermediaries would be restricted and therefore.1trillion annually.
In countries with organized retail.spiraling food inflation mostly due to undersupply. limited availability of bank finances and non-availability of cheap real estate. as compared to those without it. cold chains and electricity have prompted the retail chains to procure their supplies from multiple vendors. doubts have been parlayed about the value that would be generated by opening up the sector. FDI inflow into cold chain infrastructure has been insignificant in view of its absence in retailing. 6. Wholesale-regulated markets in India reportedly lack pricing transparency. 5. 4. farmers get a greater share of the final price. . it is argued that this would result in the loss of jobs for lakhs of people absorbed in the unorganised sector. Challenges faced by the sector also include shortage of trained manpower (mostly at mid-management level). A World Bank study has shown that the average price received by a farmer for a ‘typical horticultural product’ is only 12 to 15 percent of the retail price paid by the consumer. Reasons for Preventing FDI There are a multitude of reasons being floated around to prevent the liberalisation of the FDI norms for Indian retail: Primary among these is the concern regarding the kirana stores as well other locally operated stores being adversely affected by the entry of global retail giants such as Walmart. ports . Carrefour and Tesco. There has also been a debate over the kind of employment that would be generated as it is assumed that semi-skilled people would not be absorbed into the system. Lack of requisite infrastructure in the form of roads. As these brands would come with advanced capabilities of scale and infrastructure in addition to having deep pockets. As majority of the workforce in India falls in this category. Fears have also been raised over the lowering of prices of products owing to better operational efficiencies of the organised players that would affect the profit margins of the unorganised players. thereby increasing costs and prices.
3. and exports. Direct procurement of produce from farmers through co-operatives run by unorganized retailers. The policy makers should design policies where foreign investment can be utilised as means of enhancing domestic production. 6. In the initial stage FDI up to 49 per cent should be allowed which can be raised to 100 per cent in 3 to 5 years depending on the growth of the sector. Modernization of the Agriculture Produce Market Committee (APMC) Markets. Instability surrounding the political arena with a number of scams of varying magnitudes doing the rounds has also led to a sense of uncertainty among foreign investors. savings. 5. 2. as medium of technological learning and technology diffusion and also in providing access to the external market. 7. Facilitation of cash and carry outlets for sale of goods to the unorganized retail sector. The study urges the policy makers to focus more on attracting diverse types of FDI. FDI Policy Suggestions An ICRIER study on organized retailing in India has made some interesting recommendations for promoting a symbiotic coexistence between the organized and unorganized retailing sectors. 10. Conclusion . 4. A simplified uniform licensing regime for the retail sector. 8. FDI regime should be gradual over a 3 to 5 year timeframe – to give the domestic industry enough time to adjust to the changes. Creation of farmer’s co-operatives for directly selling wares to organized retailers . 9. Credit Inflow from micro-credit institutions and banks for unorganized retailers. An empowered Competition Commission for checking predatory pricing and collusive behavior by big retailers. These include:1.
but Roadblocks Persist: India Knowledge@Wharton 2. Isha Tyagi 4. The grant of industry status will help companies borrow at lower costs.com – Supermarket FDI Plan moving very fast . If FDI in Retail industry is allowed. Thus. FDI in Multi-brand Retail: The Next Big Thing in Reforms. it has aggressively moved towards a liberalized regime. FDI in Retailing – Is it the need of the hour: L. References: 1. need to be encouraged through an appropriate policy regime (Mukherjee &Patel 2006). as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged.Dhamayanthi. especially FDI. the government should come out with a policy statement laying down the roadmap for modern retail and allowing foreign investment in retail. it will help domestic players to capitalise MNCs players supply chains and distribution network experiences. Globalization propelled urbanised growth has resulted in high GDP growth rates but failed to promote an inclusive growth for the population. Businessgyan. Foreign Direct Investment in Indian Retail Sector – An Analysis: Pulkit Agarwal. These flows. Furthermore. and will also bestow them fiscal incentives etc. The ‘trickle down’ of economic benefits has failed to percolate to the bottom pyramid. Wikipedia 3. Moneycontrol.com – Single Brand Retail by Tomu Francis 6. Post 1991. S. the country has benefited from large foreign investment flows in recent years. Retailing in India.India started out as a mixed economy with a socialistic bent.Pradeep Kumar 5. In this light.