Ashwin khandelwal 2011uce1091 B.Tech III yr.

C-1
FDI (FOREIGN DIRECT INVESTMENT) IN RETAIL TRADE IN INDIA
Introduction
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is “investment in a foreign country
through the acquisition of a local company or the establishment there of an operation on a new (Greenfield)
site. International Monetary Organization (IMF) and Organization for Economic Cooperation and
Development (OECD) define FDI as a category of cross border investment made by a resident in one economy
(the direct investor) with the objective of establishing a ‘lasting interest’ in an enterprise (the direct investment
enterprise) that is resident in an economy other than that of the direct investor. Besides, International Bank for
Reconstruction and Development (IBRD) and United Nations Conference on Trade and Development
(UNCTAD) also provide definition of Foreign Direct Investment. To put in simple words, FDI refers to
capital inflows from abroad that is invested in or to enhance the production capacity of the economy.
In India, FDI is allowed in a large number of sectors. Some of them are given below:
• Telecom – 100%
• Courier services- 100%
• Asset reconstruction- 100%
• Single brand retail- 100%
• Tea plantation- 100%
• Credit information companies- 74%
• Insurance- 49%
• Oil refining- 49%
• Power exchanges- 49%
• Stock exchanges- 49%
• Civil aviation -49%
• Defense production- 26%

Foreign Direct Investment under the Industrial Policy 1991 and thereafter under different Foreign Trade
Policies is being allowed in different sectors of the economy in different proportion under either the
Government route or Automatic Route. In Retailing, presently 51 per cent FDI is allowed in single brand retail
through the Government Approval route while 100 per cent FDI is allowed in the cash-and-carry (wholesale)
formats under the Automatic route. Under the Government Approval route, proposal for FDI in ‘Single Brand
Product Retailing’ are received in the Department of Industrial Policy and Promotion, Ministry of Commerce
& Industry. Automatic route dispenses with the need of multiple approvals from Government and/or
regulatory agencies (Government of India or the RBI).

FDI and retail market of India
India’s large and ever growing population coupled with a paucity of profitable economic opportunities make
“labour intensive” activities like Agriculture and Retailing a major source of subsistence for the teeming
millions especially the poor unskilled labour, superfluous labour and the educated unemployed. Therefore,
any change that tend to disturb the existing configuration of these two sectors have a bearing on the life of
millions of these people and raises sharp public outcry and to that extent FDI in Agriculture and Retailing has
always been a contentious issue. Of late, the Government of India has expressed its desire to bring the Multi-
Brand retailing within the ambit of FDI, and in the process has put in train a debate on its possible outcome.
There are a vast number of reasons why introduction of FDI in retail market seems to be a curse.

Loss of jobs on huge numbers for poor and uneducated self-employed people.
Corporations predict that a total of 2 million jobs will be created when they infiltrate India's economy. But,
on the other side of coin, there are 86 million people in India, however, whose jobs depend on the retail sector,
which intervention of big business will destroy through forcing small businesses to close and killing local
economies. It is obvious that gain of jobs of 2 million people and loss of 86 million people will result in net
job loss of 84 million people.

Deteriorating quality of product
Big businesses will monopolize their respective markets in India by destroying all small competitors, and then
they will be in complete control of prices, so it will ultimately come at a cost. Also, after monopolizing,
product quality will stop mattering, since all small businesses whose products competed in quality would be
destroyed. Also, vegetables and fruits that will be imported from outside India will be not fresh and stale due
to long distance transportation and constant refrigeration. Introduction of FDI of major corporations in India
will lead to detrimental effects, such as unemployment, destruction of local economies, and the consumers of
India will not benefit.

Intervention of big businesses destroy and kill local economies India most of the local areas and villages
Big businesses will destroy local economies by displacing many people affiliated with small businesses,
including shopkeepers, hawkers, vendors, and workers. . It is estimated that less than 4% of Indian retailers
have shops larger than 500 square feet. Given this rickety state of Indian unorganized retailing, there are
serious apprehensions that the flow of organized foreign capital with its associated baggage of humungous
infrastructure, bulging financial power professional managerial staffs etc., would sound the death knell for the
Indian retailing industry. As against most Indian retailers’ less than 500 square feet premises, the average size
of a store of Wall-mart (American Retailing Giant) is 85000 square feet and has an average annual turnover
of $51 million as opposed to an average Indian retailer’s paltry turnover of Rs.1 86, 000. Further, it is feared
that the international retailing giants will resort to predatory pricing to acquire monopolies. These retailing
giants with their sprawling business cutting across different continents and deep pockets will be able to sustain
loss till their competitors are wiped out.

Both cities and villages will be severely affected
Establishment of large foreign businesses in metropolitan cities would have to affect neighbouring villages
and towns, since products will be branched off to them. When FDI hit Thailand, 60,000 small shops closed.
Through market saturation, large corporations are able to create widespread impact in an economy.

Adverse effect on farmers
First of all, once they come the farmers who now have several middleman to sell their goods they will have
only a few retail stores to sell in future. Usually that means price he gets will not be as competitive as it is
today.
Second the same supermarkets may not actually give the best products grown in India to Indians.
Third they can alter the food habits of the nation. Instead of eating fresh foods we will all be eating canned
foods soon!

Conclusion:
FDI has been a booming factor that has bolstered the economic life of India, but on the other hand it is also
being blamed for ousting domestic inflows. FDI is also claimed to have lowered few regulatory standards in
terms of investment patterns: The disadvantages of foreign direct investment occur mostly in case of matters
related to operation, distribution of the profits made on the investment and the personnel. One of the most
indirect disadvantages of foreign direct investment is that the economically backward section of the host
country is always inconvenienced when the stream of foreign direct investment is negatively affected. The
various disadvantages of foreign direct investment are understood where the host country has some sort of
national secret – something that is not meant to be disclosed to the rest of the world. It has been observed that
the defence of a country has faced risks as a result of the foreign direct investment in the country. At times it
has been observed that certain foreign policies are adopted that are not appreciated by the workers of the
recipient country. Foreign direct investment, at times, is also disadvantageous for the ones who are making
the investment themselves. Foreign direct investment may entail high travel and communications expenses.
The differences of language and culture that exist between the country of the investor and the host country
could also pose problems in case of foreign direct investment. Another major disadvantage of foreign direct
investment is that there is a chance that a company may lose out on its ownership to an overseas company.
This has often caused many companies to approach foreign direct investment with a certain amount of caution.
It is thus can be concluded that this is not at all an appropriate time for introducing FDI. The Govt. first need
to improve its rickety conditions of retail market and agriculture. Not only this, social security also need to be
strengthen and then allow FDI to be introduced, first at lower share in market and then change the share
according to the conditions developed.
THANK YOU