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Title: Foreign Direct Investment in Retail in India: Good or Bad?

Name: Amit Rohilla*, Manoj Bansal** Official Address: *Department of Commerce, Gargi College (University of Delhi), Siri Fort Road, New Delhi-110049 ** Department of Commerce, R. K.S. D. (P. G.) College (E), (Kurukshetra University, Kurukshetra), Ambala Raod, Kaithal-136027 Email id: *rohilla_amit@yahoo.co.in; ** manoj.bansal.5686@facebook.com Phone/fax number of author(s): *+91-8860-82-8731; **+91-9812-39-4945 A brief biographical note of the author(s): Amit Rohilla [M. Com., MBA (Finance), M.Phil. (Finance)] is currently Assistant Professor of Commerce at the Gargi College, University of Delhi, Delhi. Earlier he has worked as a Lecturer in R.K.S.D. (P.G.) College, Kaithal (Haryana). He is an active researcher and a teacher with an experience of more than 4 years in commerce and management. He has four papers to his credit out of which one has been published in South Asian Journal of Marketing and Management Research (SAARJ). He has also attended five seminars and one workshop. His area of interest is Finance and Marketing.

Electronic copy available at: http://ssrn.com/abstract=2163952

Title of the page: Foreign Direct Investment in Retail India: Good or Bad? Abstract: Indian retail industry is a sunrise sector and many global players are willing to enter this. Indian retail industry is one of the pillars of the Indian Economy. Since 1991, when the policy of the liberalization was introduced by the Indian Government, FDI has been a highly controversial issue. From the last 3-4 years our Government is talking about the FDI in retail sector as there are some growth drivers for this sector. But, if the Government decides to open up the doors for FDI in this sector then some consequences will be there. No doubt that FDI plays a very important role in the development of any economy but this development always has two aspects i.e. positive and negative. Experiences of FDI in retail of various countries like China, Russia, Thailand, etc. have been good. We are of the opinion that FDI should be allowed in retail sector in a phased manner but before that all the issues pertaining to this must be resolved. JEL Codes: E65, M3, O2 Keywords: Foreign Direct Investment, Globalisation, Organized Retailing, Sunrise Sector, Strategic Issues and Prospects, Unorganized Retailing.

Electronic copy available at: http://ssrn.com/abstract=2163952

Foreign Direct Investment in Retail India: Good or Bad?


By Amit Rohilla, Assistant Professor, Department of Commerce, Gargi College, University of Delhi South Campus, New Delhi Manoj Bansal, Lecturer Department of Commerce, R.K.S.D. (P.G.) College (E), (Kurukshetra University) Kaithal-136 027 Haryana

ABSTRACT
Indian retail industry is a sunrise sector and many global players are willing to enter this. Indian retail industry is one of the pillars of the Indian Economy. Since 1991, when the policy of the liberalization was introduced by the Indian Government, FDI has been a highly controversial issue. From the last 3-4 years our Government is talking about the FDI in retail sector as there are some growth drivers for this sector. But, if the Government decides to open up the doors for FDI in this sector then some consequences will be there. No doubt that FDI plays a very important role in the development of any economy but this development always has two aspects i.e. positive and negative. Experiences of FDI in retail of various countries like China, Russia, Thailand, etc. have been good. We are of the opinion that FDI should be allowed in retail sector in a phased manner but before that all the issues pertaining to this must be resolved.

1. INTRODUCTION
First of allwhat is retailing? It is an interface between the manufacturer and the individual consumer buying for personal consumption. This excludes direct interface between the producer and institutional buyers such as the government and other bulk customers. A retailer is one who stocks the manufacturers goods and is involved in the act of selling it to the

individual consumer, at a margin of profit. So in a nutshell it can be said that, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. Indian Retail Reflections
Ranked 2nd amongst developing markets, ahead of China. Ranked 5th amongst the 30 Emerging Marketsattractive for new retailers to enter. Largest youth population in the world-(around 80 per cent). Over 867 million people below 45 years of age! Median age 24. Indian English Linguals more than the Europe put together. The Real consumers middle class, catching the attention of the world (over 300 million). Over 600 million Effective Consumers. India to emerge as one of the Largest Consumer Markets of the world.

(KSA Technopak Study, 2005-06)

Retailing in an important social institution because about 30 per cent of what a customer spends, goes on products & services that they buy from retailers. Indias retail sector is globally recognized as the sunrise industry. Trade is an important activity providing interface between the producer and consumer. The value of trade (inclusive of wholesale and retail in the organized and unorganized sectors) in Indias GDP at constant prices has grown from Rs. 433,967 crore in 2004-5 to Rs. 742,621 crore in 2010-11, at a CAGR of 9.4 per cent. As per the CSOs QE, the growth rate in 2010-11 was 9.1 per cent. The share of trade in GDP has been slightly above 15 per cent in the last six years (15.4 per cent in 2010-11). With a high GDP growth in the last five years, and high growth in consuming population, the retail business is of late being hailed as one of the sunrise sectors in the economy. A.T. Kearney, an international management consultancy firm, has identified India as one of the topmost retail destinations. Since 2006, India has been allowing FDI in single brand retail to the extent of 51 per cent. In January 2012, the government removed restrictions on FDI in the single brand retail sector, allowing 100 per cent FDI. The retail industry is definitely one of the pillars of the Indian economy (Economic Survey, 2011-12) (see TABLE 1).

TABLE 1: SHARE OF DIFFERENT SERVICES CATEGORIES IN GDP AT FACTOR COST (CURRENT PRICES)
2006-07 Trade, hotels, & restaurants Trade Hotels & restaurants Transport, storage, & communication Railways Transport by other means Storage Communication Financing, insurance, real estate, & business services Banking & insurance Real estate, ownership of dwellings, & business services Community, social, & personal services Public administration & defence Other services Construction Total services (excluding construction) Total services (including construction) 61.0 61.2 62.4 63.0 63.3 64.4 52.9 52.7 53.9 54.7 55.1 56.3 12.8 5.2 7.6 8.2 12.5 5.1 7.4 8.5 13.3 5.8 7.5 8.5 14.5 6.7 7.9 8.2 14.3 6.3 7.9 8.2 8.1 14.2 9.3 9.6 10.3 10.4 10.6 14.8 5.5 15.1 5.5 15.9 5.6 15.8 5.4 16.4 5.8 16.9 8.2 0.9 5.7 0.1 1.5 8.0 1.0 5.6 0.1 1.4 7.8 0.9 5.5 0.1 1.4 7.8 1.0 5.3 0.1 1.5 7.7 0.8 5.4 0.1 1.4 17.1 15.4 1.7 2007-08 17.1 15.4 1.7 2008-09 16.9 15.3 1.5 2009-10@ 16.6 15.1 1.4 2010-11* 16.9 15.4 1.5 2011-12** 25.2 #

Computed from Central Statistical Office (CSO) data. @ Provisional Estimates (PE) * Quick Estimates (QE) ** Advance Estimates (AE) # Includes the share of both Trade, Hotels, & Restaurants and Transport, Storage & Communication for 2011-12

Retail trading companies have witnessed a decline in sales growth in 2010-11 by 12 per cent and so far in 2011-12 by 9.4 per cent. A sharp rise in prices of branded apparels, due to the imposition of 10.3 per cent excise duty as well as a rise in prices of yarn and fabrics, led to lower consumer spending and this has hit the sales volumes of garment retailing

companies. However, during 2012-13 sales are expected to grow by 15.7 per cent. PAT during 2011-12 is expected to show an impressive growth of 53.1 per cent and during 201213 is expected to grow by 34.4 per cent (Economic Survey, 2011-12). There is very high potential for retail productivity improvement. Therefore there is an opportunity for the retailers to secure a good position in the market on the other hand; the organized retail sector in India is growing continuously, so there may be a number of initiatives in the near future. Companies may go for the expansion along with the strategic measures to ensure the profitability. Government may also take some steps to maintain the growth of this sector. One such initiative is to welcome the foreign players in this sector through foreign direct investment. FDI is there in India since 1991 when Indian Government announced the policy of liberalization. Since its inception there has been a remarkable growth in the FDI inflows in the country. The total amount of FDI in India came to around US$ 42.3 billion in 2001, in 2002 this figure stood at US$ 54.1 billion, in 2003 this figure came to US$ 75.4 billion, and in 2004 this figure increased to US$ 113 billion. This shows that the flow of foreign direct investment in India has grown at a very fast pace over the last few years (http://business.mapsofindia.com) (see GRAPH 1). GRAPH 1: FDI FLOW IN INDIA IN LAST FEW YEARS
120 100 Billion US$ 80 60 75.4 54.1 42.3 113

40
20 0

2001

2002 Year

2003

2004

According to the latest data released by the Department of Policy and Promotion (DIPP) the FDI inflow during 2008-09 (from April 2008 to March 2009) stood at approximately US$ 27.3 billion. According to the study conducted by UNCTAD India has achieved a substantial 85.1 per cent increase in FDI flows in 2008. This is the highest increase across all countries whereas global flows have declined by 14.5 per cent (UNCTAD, 2008). In recent years the avenues of the FDI have been shifted from export driven manufacturing, natural resources and infrastructure to other areas such as services, construction, tourism, off shore services and retailing. According to a study conducted by the World Bankcumulative FDI in the retail sector in the 20 largest developing countries amounted to US$ 45 billion in 1998-2002 (it is about 7 per cent of the total of these countries). The study also showed that in countries like Brazil, Thailand and Poland there was significant FDI in retailing after the liberalization. Needless to say, but FDI has obviously proved to be very beneficial for the overall development of the Indian economy and inter alia has resulted in increased capital flow, improved technology, notable management expertise and favourable access to international markets (Gupta, 2010).

2. GROWTH DRIVERS IN INDIA FOR RETAIL SECTOR


The pace of growth in retail in India is very fast and it is expected that it will grow up to US$ 833 billion by the year 2013 and US$ 1.3 trillion by 2018 (at a compounded annual growth rate of 10%). As the country has got a high growth rate, the consumer spending has also gone up and is also expected to go up further in the future. In the last four years, the consumer spending in India climbed up to 75%. As a result, the Indian retail industry is expected to grow further in the future days. By the year 2013, the organized sector is also expected to grow at a CAGR of 40% (see GRAPH 2).

GRAPH 2: ORGANIZED INDIAN RETAIL-THE OPPORTUNITY


700

600
Billion US$ 500 400 300 200 100 0 2006 2010 Year 300

637

427

2015

The key factors that drive growth in retail industry are Young demographic profile (Average age of an Indian homeowner has fallen to 27 from 40 years in the last decade), increasing consumer aspirations, growing middle class income, improving demand from rural markets, housing boom (An estimated 2.5 million new homes are required every year), rising incomes and improvements in infrastructure are accelerating the retail growth. Increase in relocation of people for professional & other reasons. Liberalization of the Indian economy, increase in per capita income and the advent of double income families also helping in the growth of retail sector. Further preferences of consumers are also changing, and they are becoming quality conscious and shifting their culture from the traditional retail stores to malls. They now prefer international brands like Nike, Apple, McDonalds, etc. instead of local brands like Campa, Vico, etc. Internet revolution is making the Indian consumers more accessible to the growing influences of domestic and foreign retail chains. Many online stores are there like, Flipkart, Ebay, Rediff, etc. Satellite T.V. channels are in reach of everybody nowadays and are helping in creating awareness about global products for local markets. For example, some TV channels are there which sells products are-HomeShop18, IndiaToday, etc. 47% (approximately) of the population of India is under the age of 20; and this may be increase up to 55% by 2015. This young population is tech-savvy watch, more than 150

satellite TV channels, and show very high propensity to spend, will immensely contribute to the growth of the retail sector in the country. Some other factors are growth of nuclear families set up leading to shift in preference of home decoration, increase in urbanization and changing fashion concepts, increase in number of working women, hence change in the outlook and tastes as also emergence of dual income households.

3. CONSEQUENCES OF FDI IN RETAIL


3.0. Why India is Attracting Global Retailers?
There are many reasons why India is attracting foreign players. And important point is that there are a lot of employment opportunities in retail sector in India. Indian retail industry occupies the second place, after agriculture, so far as employment is concerned. Presently 1.71 lakh persons (public sector) and 5.06 lakh persons (private sector) are directly engaged in the organized wholesale and retail sector (Economic Survey-Statistical Appendix, 201112). According to Associated Chambers of Commerce and Industry of India (ASSOCHAM), the retail sector will create 50,000 jobs in the next few years. According to the US Census Bureau, the young population in India will constitute 53per cent of the total population by the year 2020 and 46.5 per cent of the population by the year 2050and it is much higher than countries like the US, the UK, Germany, China etc. Indias demographic scenario is likely to change favourably, and therefore, the scenario for the organized retail will also change favourably. No doubt, major organized retailers have a far lesser reach in Indian market than in other developed countries, the first-mover advantage of some retail players will contribute to the sectors growth. There is a very huge industry with no large players. Some Indian large players have entered just recently like Reliance, Trent, etc. Moreover, India can support

significant players averaging US$1 billion in Grocery and US$0.3-0.5 billion in apparel within next ten years. In addition to these, improved standards of living and continuing economic growth, growing spending power and increasing number of conscious customers aspiring to have quality and branded products in India are also attracting to global retail players to enter the Indian market. The transition will open multiple opportunities for companies and investors. According to some industry experts, organized retail business in India is expected to increase from 5 per cent of the total market in 2008 to 14-18 per cent of the total retail market and reach US$ 450 billion by 2015 (McKinsey&Company, 2008). Furthermore, during 201012, around 55 million square feet (square feet) of retail space will be ready in Mumbai, National Capital Region (NCR), Bengaluru, Kolkata, Chennai, Hyderabad and Pune. Besides, between 2010 and 2012, the organised retail real estate stock will grow from the existing 41 million square feet to 95 million square feet (Knight Frank India, May 2010). So there is a golden opportunity for foreign players to enter the Indian market. Growth rates of the industry both in the past and those expected for the next decade coupled with the changing consumer trends such as increased use of credit cards, brand consciousness, and the growth of population under the age of 35 are factors that encourage a foreign player to establish outlets in India (Kalathur, 2009). India thus continues to be among the most attractive countries for global retailers. Foreign direct investment (FDI) inflows between April 2000 and April 2010, in single-brand retail trading, stood at US$ 194.69 million, according to the Department of Industrial Policy and Promotion (Ministry of Commerce and Industry, 2003). The Indian Council of Research in International Economic Relations (ICRIER), which was appointed to look into the impact of BIG capital in the retail sector, has projected the

worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of big money in the retail sector would in the long run not harm interests of small, traditional, retailers (Mukherjee & Patel, 2006). A number of international retail players are thus looking at this opportunity to swarm this seemingly nascent sector and exploit its unexplored potential. Consider the following plans of various companies: 1. Leading watchmaker Titan Industries Limited plans to invest about US$ 21.83 million for opening 50 premium watch outlets Helios in next five years to attain a sales target of US$ 87.31 million. 2. British high street retailer, Marks and Spencer (M&S) plans to significantly increase its retail presence in India, targeting 50 stores in the next three years. M&S currently operates 17 stores in India through a joint venture (JV) with Reliance Retail. 3. Chinese retail major, Yishion has entered the Indian market and plans to have at least 125 points of sales, including exclusive stores and multi-brand outlets, across India by 2012. First exclusive store in New Delhi has been opened in September 2010. 4. Spains Inditex, Europes largest clothing retailer opened the first store of its flagship Zara brand in India in June 2010. It further plans to open a total of five Zara outlets in India. 5. Bharti Retail, owner of Easy Day storesupermarkets and hypermarketsplans to invest about US$ 2.5 billion over the next five years to add about 10 million square feet of retail space in the country by then, according to a company spokesperson. 6. Raymond Weil plans to invest US$ 883,665 in India during 2010, according to Olivier Bernheim, President and CEO, Raymond Weil. However, it is not out of place to mention here that the government policies towards FDI are only hindering all the plans that do not make this a fairy tale for foreign players.

3.1. Challenges in Indian Retail Sector for Global Retailers


In India the retailing industry has a long way to go and to become a flourishing industry, retailing needs to cross various obstacles. Following are the challenges: 1. Organized retail sector will face the competition from unorganized sector. The Indian retail sector is full of the unorganized retailing with the dominance of small and medium enterprises as opposed to the presence of few giant corporate retailing outlets. 2. The trading sector is highly fragmented, with a large number of intermediaries who operate at a strictly local level and there is no barrier to entry, so far as the structure and scale of these operations are concerned (Singhal, 1999). 3. The tax structure in India favours small retail business as maximum retailers are sole owners of the business and under the present tax regime tax rates are favourable for the individual tax payers. Its not in the case of organized retail as these businesses established in the company form and has to pay huge taxes, which is negligible for small retail business. Thus, the cost of business operations is very high in India. 4. There is absence of infrastructure facilities for the organized retailers like developed supply chain and integrated IT management. This absence of adequate infrastructure facilities, lack of trained work force and low skill level for retailing management further makes the sector quite complex. 5. Rapid price changes, low margins, high cost of real estate, threat of product obsolescence and heterogeneous consumer groups are the other challenges that the retail sector in India is facing. 6. In India Government regulations and policies and real estate prices will affect the retail industry.

7. Consumer spending pattern is not consistent and there is no consistent increase all over the globe, so this may also pose problems for the retail sector. Consumer spending may further contact as banks are very cautious in lending nowadays. 8. Organized retailers have been facing a difficult time in attracting customers from traditional kirana stores, especially in the food and grocery segment. 9. This long impending approval includes a set of riders for the foreign investors, aimed at ensuring the foreign investment makes a genuine contribution to the development of Indian infrastructure and logistics, at the same time facilitating integration of small retailers into the upgraded value chain. These riders could complicate potential FDI investments, acting as a damper. Some of the key riders are: (see TABLE 2): TABLE 2: RIDERS FOR THE MULTI-BRAND AND SINGLE-BRAND RETAIL
Parameters Ownership/ investment requirement Investment towards back-end infrastructure Multi-brand retail Minimum investment of US$ 100 million by the foreign investor At least 50% of the investment by the foreign company to be in backend infrastructure1 Stores to be restricted to cities with a population of one million or more Location of stores (53 cities as per 2011 Census); given constraints around real estate, retailers are allowed to set up stores within 10 km of such cities At least 30% of manufactured items Sourcing procured should be through domestic small and medium enterprises (SMEs) In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from domestic SMEs and cottage industries artisans and craftsmen Products to be sold should be of a single brand Sales (only those brands which are branded during manufacturing) only; sold under the same brand name internationally Approval of State While the proposals on FDI will be sanctioned by the Centre, approvals from each Single-brand retail The foreign investor should be an owner of the brand

Governments required

State Government would be required

(Ghosh, Ray, & Shah, 2011), ICRA

4. ROLE AND IMPACT OF FDI IN INDIAN RETAIL SECTOR


Whatever decision is being taken by anyone there are always two aspects of it and allowing FDI in retail in India is not an exception. This section throws light on both the aspects of the FDI in retail in India.

4.0. Some Positive Aspects


In the battle between the advocators and opponent of unrestrained FDI flows in the Indian retail industry, the interests of the consumers have been disregarded. Therefore, interests of consumers at large in relation to the interests of retailers must be considered first of all. Interestingly, in contradiction to the recommendations of the Parliamentary Committees report, the Economic Survey 2008-09 raised hopes of all those looking for a favourable response of the government on the subject. While, the Economic Survey has made a strong case for opening up the FDI for multi-brand retail, it has recommended a gradual opening of the sector. Improving the investment environment would require FDI in multi-format retail, starting with food retailing. Initially the FDI could be allowed subject to the setting up a modern logistics system, perhaps jointly with other organised retailers. A condition could also be put that it must have, for five years say, wholesale outlets where small, unorganised retailers can also purchase items to facilitate transition(India Retail Biz, Allowing FDI in retail will enlarge scope, bring fresh capital, and increase competition, say industry leaders, Welcoming Survey, 2009) and (Gupta, 2010). The recommendation of the Survey made excited most of the organized retailers. Investment Commission in July, 2006, suggested that 49% FDI shall be allowed in the Indian

retail sector without any restrictions on the number of outlets or location of stores. The Commission also opined that foreign investment would help in improving the retail and supply chain infrastructure, and generate large-scale employment in the country. In addition, the Indian retailers could experience some of the best operational practices of these international retailers. Ultimately, the benefit will reach to the consumers in the form of product variety, lower price and efficient services. The recommendations of the Investment Commission proved to be very promising and paved the way for a positive feedback to the global retailers towards the Indian retail sector (Business Insights International, 2009). The global retailers have advanced management practices inventory management and have new technologies which can improve productivity and efficiency in retailing. Adoption of integrated supply chain management by global retailers is likely to lower down the prices. FDI in retailing will assure the customer service, quality of product and better shopping experience. They promote the linkage of local suppliers, farmers and producers, to global market and this will ensure a profitable and reliable market to these local players. Therefore, FDI in retail would undoubtedly enable India to integrate its economy with that of the global economy. FDI will help to overcome boththe lack of experience in organized retailing as well as lack of trained manpower. FDI in retail would reduce cost of intermediation and entail setting up of integrated supply chains that would minimize wastage, give producers a better price and benefit both producers and consumers. From the stand point of consumers, organized retailing would help reduce the problem of adulteration, short weighing and substandard goods (Bhukta, 2009). Moreover, with the free flow of finance in conjunction with advent of healthy inflow of FDI, the supermarkets and hypermarkets will be in a better position than small retailers to make shopping a pleasant experience by making investments in much needed infrastructure facilities like parking lots, coffee shops, ATM machines, etc. It can thus be safely contended

that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience. Moreover, it is to be noted that the small retailers will still remain in their business because of their location near the residential societies. Allowing FDI in the retail sector would lead to a substantial increase in the countrys GDP and overall economic development. It will also help in integrating the Indian retail market with that of the global retail market. It will provide better paying employment, which the unorganized sector (kirana and other small time retailing shops) have failed to provide. Apart from this, by allowing FDI in retail trade, India will significantly grow in terms of standards of quality and consumer expectations. The interest of the consumers should take precedence over the interest of the retailers and consequently FDI in retail should be permitted.

4.1. Some Negative Aspects


4.1.0. Queue of Big Giants with Bags Full of Foreign Exchange ArmoursWaiting for Opening up of Doors of Indian Retail Industry and Ready to Present Competition to Local Retailers1 TABLE 3: WAL-MART VS. INDIAN RETAIL
Wal-Mart The largest retailer in the world with annual turnover-$ 256 billion and annual growth-1213%
1

Indian Retailer Had a turnover of Rs.1,86,075 only Only 4% of the 12 million retail outlets were larger than 500 square feet in size Total turnover of the unorganized retail

Net Profit in 2004-$ 9,000 million

This section throws light on the various challenges which FDI may present in retail trade in India.

Employing more than 1.4 million persons More than 4,800 stores and more than 1,400 are outside USA Average size of a Wal-Mart is 85, 000 square feet Average turnover per store was about $ 51 million and turnover per employee was averaged at $ 1,75,000

sector was Rs.7,35,000 crores Employing 39.5 million persons

In 2004 the return on assets was 9% and return on equity was 21% (Wal-Mart_Corporation, 2004)

From the perusal of the above (see TABLE 3) one can imagine the situation when a big firm like Wal-Mart comes to India. Would the Indian Organized Retail sector be able to cope up with the competition given by such big giants? Would the Indian Organized Retail sector be able to suffer the losses whereas the big firms like Wal-Mart have deep pockets full of billions and are able to sustain the losses for many years till the competition is wiped out? Where the unemployed persons will go? These are some questions which are sufficient enough to make us think of challenges which these giants can put before us. Further India has 35 towns each with a population over 1 million. If Wal-Mart were to open an average Wal-Mart store in each of these cities and they reached the average WalMart performance per storewe are looking at a turnover of over Rs.80,330 million with only 10,195 employees. Extrapolating this with the average trend in India, it would mean displacing about 4,32,000 persons. If large FDI driven retailers were to take 20% of the retail trade, as the now somewhat hard-pressed Hindustan Unilever Limited anxiously anticipates, this would mean a turnover of Rs.800 billion on todays basis. This would mean an employment of just 43,540 persons displacing nearly eight million persons employed in the unorganized retail sector. Now from the perusal of the above discussion there are sufficient grounds that prudence should go in to the policy making. Rather we seem to moving towards a policy steamrolled

obviously by vested interests acting in concert with the CII & FICCI. We need to take a deep hard look at FDI in the retail sector. In this context we must be concerned about the statement the Finance Minister, Mr. P. Chidambaram, made while making the mid-year review for 2004-05. On retail, the review notes that creating an effective supply chain from the producer to the consumer is critical for development of many sectors, particularly processed and semi-processed agro-products. In this context, it says, the role that could be played by organized retail chains, including international ones merits careful attention.

(Chidambaram, 2004) 4.1.1. FDI in Retail Sector! The recent initiatives of Government for opening up of retail sector for Foreign Direct Investment become a very sensitive issue. Arguments are there on both sides. It is a well known fact that FDI can have some positive results on the economy not in short-term but in the long-term. Further it triggers a series of reactions that leads to the greater efficiency and improvement of standard of living. The supporters of FDI in retail trade argue that it brings benefits to consumers in term of price reduction, increased and improved selection base, high quality technique of the foreign players in the market. Further it can increase the domestic consumption level. Those who oppose the FDI in retail trade argue that the FDI brings the modern retailing culture and thus displace the labour up to great extent and destroy the traditional retail sector. Unless we are able to provide ample jobs in the manufacturing sector we should not think of a policy which results in elimination of jobs in the unorganized retail sector. In India the primary task of the Government is to provide livelihood to the mass and not create so called efficiency of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI (which have been the proposed figures till

date) will have immediate and dire consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy; will render millions of small retailers jobless by closing the small slit of opportunity available to them. Imagine if Wal-Mart, the worlds largest retailer sets up operations in India at prime locations in the 35 metro cities and towns that house more than 1 million people(Census, 2001). The supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at extremely low prices that will most likely undercut those in nearby local stores selling similar goods. Wal-Mart would be more likely to source its raw materials from abroad, and procure goods like vegetables and fruits directly from farmers at preordained quantities and specifications. This means a foreign company will buy big from India and abroad and be able to sell lowseverely undercutting the small retailers. Once a monopoly situation is created, this will then turn into buying low and selling high. Further this will disintegrate the already established supply chain. As Nick Robbins wrote in the context of the East India Company,by controlling both ends of the chain, the company could buy cheap and sell dear (Robbins, 2004). From the above discussion it is clear that how the entry of a single big giant like WalMart can destroy the whole economy. The examples of various countries like China, Malaysia and Thailand are there who first opened up the retail sector for FDI and then they enacted various laws to restrict the fast expansion on foreign malls and hypermarkets (Tarun & Vijay, 2004). No doubt that a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer, but somebody should not stop an Indian retailer from growing bigger. Further it is the right of consumer to buy the best thing at the lowest rate but this is privilege for an individual consumer and it cannot, in any

circumstance, override the responsibility of any society to provide economic security for its population. Obviously collective well-being must take precedence over individual benefits. Opening the retailing sector to FDI means, dislocating millions from their occupation, and pushing a lot of families below the poverty line. This will increase efficiency but it is beneficial in developed countries but not in developing countries like India. This will increase social tension in a developing country like India where still millions of people are seeking for a gainful employment. Further, how to accommodate this dislocated and unemployed work force? There is a slowdown in the manufacturing industry so we cant move this workforce over there. So far as agriculture is concerned-60% workforce is busy over there. All sectors are already full, so which sector is there to absorb this unemployed work force? (see TABLE 4) (FICCI & NSS) TABLE 4: SECTORAL GDP, EMPLOYMENT & GROWTH RATES (%)
Cumulative average Sectors Share % in GDP (2004) Employment Growth Rate during 1994-2004 Agriculture Industry Service 22.10 21.70 56.20 (FICCI & NSS) 60.50 16.80 22.70 2.70 6.53 7.90

GRAPH 3: SECTORAL GDP, EMPLOYMENT & GROWTH RATES (%)


70 60 Percentage 50 40 30 20 10 0 Share % in GDP (2004) Employment Cumulative average Growth Rate during 1994-2004 Service 56.2 60.5

22.1 21.7

22.7 16.8 2.7 6.53 7.9

Agriculture

Industry

From the perusal of the TABLE 4 and GRAPH 3 it is clear that service sector contributes 56% of our GDP and over the last 5 years, service sectors contribution to the increase of GDP has been 63.9%. Does it signify that ours is developed economy because this much contribution of service sector to the GDP is a sign of a developed economy? We have to rethink. The problem is that unlike other counties like China where the manufacturing sector accounts for a significant share in the GDP, in India this is not so (only 23.1% of GDPsee TABLE 5 and GRAPH 4) and moreover the growth of the manufacturing sector is very slow and below the estimates of the Government. TABLE 5: INDIAN ECONOMY: SECTORAL SOURCES OF GROWTH (% CONTRIBUTIONS TO INCREASE IN GDP)
Sectors Agriculture & allied sectors Manufacturing, construction & quarrying Services (Rao, 2004) 1992-93 to 1996-97 20.30 30.90 48.80 1997-98 to 2003-04 13.00 23.10 63.90

GRAPH 4: INDIAN ECONOMY: SECTORAL SOURCES OF GROWTH (PERCENTAGE CONTRIBUTIONS TO INCREASE IN GDP)
70 60 Percentage Growth 50 40 30 20 10 0 20.3 13 30.9 23.1 48.8 63.9

Agriculture & allied sectors

Manufacturing, construction & quarrying


1997-98 to 2003-04

Services

1992-93 to 1996-97

Now, if Government thinks that retail is the only thing that can increase the GDP then Government should not forget that retailing is an activity which does not boost the GDP itself but it is a process of value addition. If there are no goods being manufactured then how one can sold them in the market through the retailing process. This underlines the importance of the manufacturing in the country. Only until the tardy growth of the manufacturing sector is addressed properly and its productivity chart starts to look prettier, could one begin thinking of dislocating some of the retailing workforce into this space. 4.1.2. Experience of FDI in Retail Trade in Various Countries 4.1.2.1. Experience of FDI in Retail Trade in China (FICCI-ICICI, 2005) FDI in retailing was permitted in China for the first time in 1992. Foreign retailers were initially permitted to trade only in six Provinces and Special Economic Zones. Foreign ownership was initially restricted to 49%.

Foreign ownership restrictions have progressively been lifted and, and following Chinas accession to WTO, effective December, 2004, there are no equity restrictions.

Wholesale and retail projects forms part of the Catalogue for Encouraged Foreign Investment Industries (Annexure 1).

Retail trade in China has been growing since 1992. Employment in the retail and wholesale trade increased from about 4% of the total labour force in 1992 to about 7% in 2001. The number of traditional retailers also increased by around 30% between 1996 and 2001.

In 2006, the total retail sale in China amounted to USD 785 billion, of which the share of organized retail amounted to 20% (ICRIER, 2008).

Some of the changes which have occurred in China, following the liberalization of its retail sector, include (CII-PwC, 2008): o Over 600 hypermarkets were opened between 1996 and 2001 o The number of small outlets (equivalent to kiranas) increased from 1.9 million to over 2.5 million o Employment in the retail and wholesale sectors increased from 28 million people to 54 million people from 1992 to 2001.

China is witnessing robust economic growth and increasing urban and rural incomes are fuel consumption level in this vast and complex retail environment. According to Euromonitor, retail sales in China, which amounted to nearly USD 554 billion in 2003, were expected to grow rapidly to reach USD 900 billion by 2009 (CII-PwC, 2008).

Chinas retail sector registered growth in 2007. The nominal growth of Chinas retail sales of consumer goods accelerated to 16.8% in 2007, up from 13.7% in 2006. Total

retail sales amounted to 8,921 billion Yuan, of which the wholesale and retail trade sector grew nominally by 16.7%, to reach 7,504 billion Yuan. Chinas promising consumer market has led to huge foreign interest. FDI in the countrys retail and wholesale trade climbed in 2007. There were 6,338 new foreign retail and wholesale enterprises in 2007, up by 35.9% year-on-year. The actual utilized foreign direct investment value amounted to 2.68 billion US dollars, up by 49.6%. Chinas retail and wholesale trade sector has witnessed impressive growth in foreign direct investment, among others. 4.1.2.2. Experience of Thailand in Opening Retail Sector to FDI Thailand is frequently referred to as a country in which FDI had an adverse effect on the local retailers. It permits 100% foreign equity, with no limit on the number of outlets. For the retail business, it has a capital requirement of TBH100 million and TBH20 million for each additional outlet, while it has a capital requirement of TBH100 million for each wholesale outlet. The factual position, as reflected in the Report of ICRIER, is as follows: Wet market and small family owned grocery stores dominated the Thai Retail industry. Modern retail outlets by local Thai people came to prominence during the economic boom in the early 1990s. Prior to 1997, no foreign investment was allowed and hence the retail sector faced limited competition and thus had few incentives to upgrade their operation. With the start of the Asian crisis in 1997, the entry ban on foreign players was removed. Within a short span of time, the foreign players expanded their operations

significantly and marginalised the local retailers who were already suffering from a recessionary trend of economy. Many local players had to close down their business. Entry of foreign players in a recessionary economy adversely impacted all segments wholesalers, manufacturers and domestic retailers in the short run. However, entry of the foreign players had certain positive effects also, such as: (i) It led to the development of organised retailing and Thailand has now become an important shopping destination; (ii) It encouraged growth of agro-food processing industry and enhanced the exports of Thai-made goods through networks of the foreign retailers. 4.1.2.3. Experience of Russia (ICRIER, 2008) The Russian supermarket revolution has occurred only in the 2000s. It is still a fragmented sector in a country with a population of 140 million. Very high growth rates have been recorded. In 2002, sales by the top-15 chains totalled US$2.7 billion; by 2006, sales by those chains had soared to US$19.2 billion. The share of the top-3 chains was 40 per cent in 2002 and 54 per cent in 2006, with the lead domestic chains acquiring many small regional and local chains. The foreign share of sales was 33 per cent in 2002 and 35 per cent in 2006 only inching up and spreading over 8 foreign chains among the top 15. The two largest companies are Russian, but the origin of the capital, even of the Russian companies, is usually a mix of domestic and foreign. 4.1.2.4. Experience of Chile (ICRIER, 2008) The Chilean supermarket sector is a case of a take-off driven by domestic capital, followed by nascent multinationalization, followed by abrupt demultinationalization The supermarket sector in Chile was launched in the 1990s, with the backing of domestic capital.

Late in the 1990s, the number two and number three global chains entered: Carrefour and Ahold. By 2002, those two companies had 13 per cent of the US$4.6 billion in total sales of the top-eight chains. However, by 2006 their share had plummeted to zero per cent of the US$12.6 billion in total sales of the top eight (growing at a pace similar to Chinas); the Chilean subsidiaries of two foreign chains had been bought by the top-two Chilean chains in 2003. Today those top-two chains have 65 per cent of the market. The three market leaders, all domestic, are expanding rapidly into other Latin American countries in mergers and acquisitions, becoming regional multinationals. The domestic capital was based in a combination of domestic bank credit and real estate, commercial, and financial services. These were the tertiary sector ripple effects of the fundamental boom in copper and wood products, and the fruit and fish boom. 4.1.2.5. Experience of Indonesia (ICRIER, 2008) Indonesia permits 100% foreign equity in retail business, with no limit on the number of outlets. It also does not impose any capital requirements. The take-off of modern retail in Indonesia in the 1990s primarily involved domestic chains. The current leading chain, Matahari, is indicative. Matahari started as a small shop in 1958, grew into a chain of department stores, and was then purchased by a giant banking and real estate conglomerate, Lippo Group, in 1997, just before the crisis. The crisis created a sharp dip in modern retail sales, which began recovering in the 2000s. Matahari doubled its sales between 2002 and 2006, becoming a billion-dollar chain by 2006. The share of foreign chains (one European and one Hong Kong) in the top-seven chains is now 40 per cent. However, because the sector is still fragmented, foreign chains do not have more than a 20 per cent share, similar to the situation in China.

5. ISSUES TO BE RESOLVED BEFORE ALLOWING FDI IN RETAIL


1. Should FDI in multi brand retail be permitted? If so, should a cap on investment be imposed? If so, what should this cap be? 2. To develop the retail trade in food grains, other essential commodities and multibrand retail in general; should FDI be leveraged for creating back-end infrastructure? To ensure that foreign investment makes a genuine contribution to the development of infrastructure and logistics, should it be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of back end infrastructure, logistics or agro processing? 3. It is necessary to encourage only genuine players in this sector and avoid a situation where retail outlets are run through working capital support from financial

institutions. Should a minimum threshold limit for investment in backend infrastructure logistics be fixed? If so, what should this financial threshold be? 4. To develop our rural sector, should conditionalities be put on the FDI funded chains relating to employment? For example, should we stipulate that at least 50% of the jobs in the retail outlets should be reserved for the rural youth? 5. Similarly, to develop our SME sector through local sourcing, should we stipulate that a minimum percentage of manufactured products be sourced from the SME sector in India? 6. How best can small retailers be integrated into the upgraded value chain? Can they be provided access to the logistics/ supply chain set up by the FDI funded retailers? Should it be stipulated that a minimum percentage of the latters sales should be made to retailers through special wholesale windows? 7. As a part of a calibrated reform process, should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced with regard to availability of real-estate in such cities for setting up such ventures, should an area of 10 kilometres around the municipal/urban agglomeration limits of such cities be included within the definition of the city? 8. Will any of the conditionalities mentioned above be inconsistent with our commitments under the agreement on TRIM at WTO? If not, to ensure national treatment, can such conditionalities be extended to all retail chains in India above a

certain size? Will such extended conditionalities be consistent with Article 301 of the Constitution? 9. What additional steps should be taken to protect small retailers? Should an exclusive legal and regulatory framework be established to protect their interests? Is a Shopping Mall Regulation Act required? Does this require intervention at national level or should this be left to the States? 10. The present public distribution system provides a valuable safety net to vulnerable sections of society. To ensure that the integrity of the PDS system is not weakened and buffer stock is maintained at the desired level, should Government reserve the right of first procurement for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level? 11. How should compliance be ensured with the above stipulations? Should a centralized agency, to be nominated by the State Governments concerned, be empowered to grant permissions to every outlet to be opened? The onus of proving compliance with these conditions could rest with the concerned retail chain. The chains could submit an annual statement to such State Government agency providing proof of compliance. Should this agency be empowered to monitor compliance of the present cash and carry outlets too? 12. The penalty for non-compliance could include cancellation of approvals as well as denial of future permissions for such activities. What additional penalties could be levied? Should civil penalties be imposed? Or criminal? Or both?

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