Name: BIPUL PURKAIT Course Name: Retail Management Course Code: OMR Date: 21.12.

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FDI IN RETAIL
The decision of permitting foreign direct investment (FDI) in the retail sector has been a debate in India for a considerable period of time. FDI has been permitted in several sectors by the government of India. Retail, however has been as issue in view of its expected effect on several sections of the economy, particularly small businesses. The main motive behind this is to provide more jobs and improve the economy of the country. The UPA government on 24th November 2011 allowed foreign retailers to foreign retailers to own a 51% stake in the multi-brand retail sector, paving the way for global groups such as Walmart, Carrefour and Tesco to open supermarkets in India. It also allowed 100% FDI in single-brand retail, a decision that will encourage companies such as Swedens Ikea and clothing retailers Gap and H&M to set up shop on their own in India. Until now, foreign firms were allowed only 51% stake in single-brand retail, though they were allowed to own 100% of back-end cash-and-carry operations that primarily serve wholesalers.

Advantages of allowing FDI in Retail

Everyone will have their share of the big pie The size of the Indian retail market is estimated at $450 billion, of which the organised retail accounts for only 6% or $27 billion. Studies project the market size at $1250 billion by 2020, and the share of organised retail at 21%. In the current retail market, nearly 35 per cent of goods worth some $157 billion, are sourced from small and medium enterprises. As the retail market grows, goods worth $300 billion will be sourced from them. The global retail chains will also find huge potential in local procurement in India. According to CII companies like Tesco, Wall-Mart and Carrefour have already been sourcing locally goods worth $725 billion from India. With the FDI coming in the above figures will rise exponentially and with help the SMEs, farmers, and the Indian economy in the long run. In China, retail revenues of Wallmart, Carrefour and Tesco grew from $5 billion in 2005 to $16 billion in 2010. In the same period, their combines buying from China for export grew from $24 billion to $56 billion1. Most of the countrys 600 million farmers are small and marginal and has to depend on the mandi system to sell their produce. The farmers complain because they loses 10 per cent of value to commissions, 10 per cent on quality issues and 5 per cent to cost of transporting goods from farms to the mandis. Thus selling to the retail chains farmers will earn upto 2025% more and consumers will also end up paying 10-15%.

Think Consumer Think Employment, Business Today, 25th December 2011

Building backend infrastructure Experts say FDI in multi-brand retail will strengthen Indias inefficient food distribution system, which causes food wastage, and in turn, leads to high food inflation. India has a high malnutrition rate and high food inflation because of wastage of food. India loses around 30% to 40% of its farm produce, because of lack of refrigerated transportation and cold storage. The wastage of food creates an artificial scarcity, which in turn increases the prices of food articles. The government expects FDI in retail will bring in foreign retailers such as Wal-Mart to open in India, the investments they make in supply chain and logistics could bring down food wastage and subsequently food inflation, which has been hovering around 10.5%, since last one year. Backend infrastructure mainly means cold chains and logistics. There are just 5,500 standalone cold storage facilities, 80% of which hold only potatoes. Government statistics put the waste of produce at 18-20 per cent 2. The domestic retail companies lack both in infrastructure and financial capital, required to build the backend of the supply chain. Thus, coming of the foreign players will give the industry the required impetus for further growth. Besides reducing food wastage, the policy would also result in creation of millions of jobs over a three-year period in areas such as packaging, canning and transportation. According to our commerce minister Anand Sharma, the reforms will result in creation of about 4 million direct jobs and 5-6 million indirect jobs in logistics, security etc.

Benefits to Farmers Experts also believe that with the entry of foreign retailers, farmers will gain from better market access and farmers income will go up. In fact, farmers have already benefited from direct purchase from farms by cash and carry retailers such as Bharti Wal-Mart, which have stores in Punjab. Farmers say that such direct purchase gives them better returns than selling their produce in the local mandi. Payments for the produce procured from farms are directly credited to the farmers accounts, which free them from commission agents, who usually act as middlemen between farmers and the retailers. On an average farmers get 10-12 per cent better prices than mandi rates depending on the quality of the produce. They save another 5-6 per cent on transport costs if they had to take their produce to the mandis. Farmers say selling at the mandi is fraught with risk and arbitrariness as the farm produce is often sold through auctions and fixed-bundle rates rather than by weight. Thus mandi merchants regularly cheats farmers on weights and they come back with less money than expected. Till now Wallmart have started their back-end operations in Punjab in collaboration with Bharti Retail. The farmers near Amritsar who supply to Wall-Mart, thinks leaders across the nation are politicising the matter without looking at the actual impact. According to them their conditions have improved with big retailers coming to Punjab, they will certainly not complain if FDI gives them more bargaining power3.

SMEs will become competitive

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Try, Try, Try Again, Business World, 19th December 2011 The Devil in the Retail?OUTLOOK, 12th December 21, 2011

FDI can help SMEs supply in large volumes, increase quality and become a vendor to international players and increase the quality of products and become cost competitive in global arena. Traditional trade will continue to have its own place and should not decline. Even in the last three years when modern retail has grown 24 per cent, unorganised retail has continued to grow, although at a slower rate of 10-12 per cent. In 1990s when de-reservation of small-scale industries (SSIs) was introduced in India, there was speculation around the eventual decline of SSIs. Since then several studies have shown that the sector continues to demonstrate a healthy growth in the number of units, output and employment. As an example, the growth for the early period of liberalization (1993-1994 to 1998-1999) which was 16 per cent, fell slightly for the next 5 years (1998-1999 to 20042005) to 12 per cent, before accelerating to 19 per cent in the last 5 years (2004-2005 to 2008-2009). Similarly, the employment generated by registered SSIs grew at 6 per cent in the pre-liberalisation era 1979-1980 and 1989-1990, at 4 per cent in the first decade of the postliberalisation era (1993-1994 to 2003-2004), and accelerated to 19 per cent in the last 5 years (2003-2004 to 2008-2009)4. Small retailers will evolve and become more competitive by adding new product lines and brands, better display, renovation of the store, introduction of self-service, enhanced home delivery, more credit sales, acceptance of credit cards, etc. Consumers will remain the king This would result in wider choice for the consumers with better competition. It also would lead to assurance of quality with greater transparency and easier monitoring of adulteration, counterfeit products and traceability. And as a result, the consumer will get better quality products, the retailers would be forced to put their infrastructure in place to get improved quality, and since there would be too many wooing the farmers to sell off their produce, the farmers too would get better prices for their yield. Government efforts to safeguard the weak The government has built in sufficient safeguards to allay fears of farmers and small retailers. Commerce minister Sharma said the new rule would only apply to cities with a population of more than one million people. India has about 42 such cities. Foreign retailers will have to invest a minimum of $100 million and half of this would have to be invested in back-end infrastructure such as cold storage and refrigerated transport by them. The government will have the first right to procure farm products and foreign companies investing more than 51% in single-brand retail stores must source at least 30% of the manufactured and processed products from small-scale Indian companies, a government statement quoting the commerce minister said. The government has also clarified that FDI in retail will benefit consumers, because it will increase competition among retailers, which will improve quality of products and lower prices. Currently, there is a huge gap between the retail price that is paid by a consumer and the price at which the product is procured from the farmers. The government will also earn an additional income of $20-$30 billion through taxes, as monitoring and transparency will improve.
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http://www.rediff.com/business/slide-show/slide-show-1-how-fdi-in-retail-will-helpconsumers-farmers-economy/20111129.htm

FDI in Retail put on hold in spite of all the advantages

The government on 6th December11 froze plans to allow foreign firms into Indias retail sector, bowing to protests from ally Trinamool Congress, DMK and the opposition, on pressure to put other planned reform measures on notice, potentially dealing a severe blow to the UPAs authority. The decision comes as a huge setback to the governments efforts to regain the initiative and dispel impressions of indecision and policy paralysis. For more than a year, the Manmohan Singh government has been clobbered by accusations of corruption, which have made it defensive and slowed down decision making. The recent move to allow up to 51% foreign investment in multi-brand retail and up to 100% in single-brand retail had been projected as a big reform push, and the latest backtracking could reinforce fears among investors and industry that the government lacks stamina or room to take politically tough decisions.

Impact on small producers and farmers Though large, organised retail outlets tend to attract consumers by offering a diverse range of products at a single location, there is tendency to standardise each of the products on offer. This involves close interaction with the supplier and changes in the farming practices, often leading to rising costs for the producer and necessitating increased access to working capital. This is to the extent that, the big retail chains, the buyer has more bargaining power in front of the producer and as a result squeezes margins out of them. Since a few buyers (large retail chains) dominate the market, the prices paid to and returns earned by the small suppliers would be diminishing. Dependence on a few buyers could mean that when the market is down the producer is forced to bear a disproportionate share of the burden through measures such as delay in payments. Indian agriculture still depends on monsoons very heavily, such changes can severely damage livelihoods. Indian agriculture constitutes of farmers of different types and sizes engaged in production5. The larger farmers have easy access to official credit will benefit from the transformation in retail. It is the story of these farmers that are often reported when the case is made out that farmers favour FDI-led large retail. But when the global retail chains are allowed to source their supplies from anywhere in the world, both the smaller and the larger farmers will be subject to competition from the cheapest global sources. In times to come, the farmers earnings will come under pressure. Lower prices for the consumer may be initially very attractive but in the long run when the existing intermediaries are being competed out, the retailers will increase their margins, especially when domestic supply falls short.

The supply chain

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Retreat on Retail, Frontline, December 30 2011

In the supply chain various members of the pre-existing supply chain will be rendered redundant, varying from street vendors, kirana stores to mediun and large wholesale dealers. The dealers will be rendered irrelevant by the might of the large retail chains to contract and procure directly from the farmers. The immediate effect will be loss of employment in small and unorganised retail trade as well as in segments of wholesale trade. According to National Sample Survey Organisations survey, wholesale and retail trade provided 44 million jobs out of a total of 459 million jobs. It is also of no doubt that the impact of foreign-invested retail would be restricted to only urban areas, since its entry as of now is restricted to urban cities with a population of over 1 million. Thus majority of employment will be in urban areas, thus it will not address the rural unemployment. Political ploy of delivering attention According to the opposition the sudden push for FDI in retail is a masterstroke by the government to shed its image of political paralysis and divert attention from other recent embarrasments like the 2G scam. The BJP says the FDI furore was to dilute L. K. Advanis attempts to take centerstage again on the issues of price rise and black money.

CONCLUSION The Indian government in principle should allow FDI in retail only if it reaches to a conclusion that it will be of benefit to India as a nation. Only then it will be able to pass the bill in the parliament, with help of the majority in the house. The most strong argument is the FDI in retail will result in joblessness. But in reality when the big retail chain set up shop here they will be hiring a lot of people. There's likely to be a redistribution of jobs with some drying up (like that of middlemen) and some new ones sprouting up. The government needs to weighs its pros and cons in deciding which options is best suitable for the nation. But it is obvious that more no. of jobs will be created than the no. of middlemen losing their jobs, because these few middle men control a large part of the business and earn heavy commissions acting as carrying agents in the food chain. Thus in my opinion if I have to choose between the two, is that its better for a middleman to lose his job so that ten new jobs can be created. These middlemen can also find a place in the new business model and continue to earn a living instead of controlling the business and earning huge profits. In this process not only the consumers will benefit but also the farmers will get their due. Fears of small shopkeepers getting displaced are vastly exaggerated. When domestic majors were allowed to invest in retail, both supermarket chains and neighbourhood pop-and-mom stores coexisted. It's not going to be any different when FDI in retail is allowed. The opening up of the sector will mean entry of retail players resulting in high competition, giving consumers a better deal, both in prices and choices. Mega retail chains need to keep price points low and attractive - that's the USP of their business. This is done by smart procurement and inventory management. Good practices from which Indian retail can also learn and prosper. The argument that farmers will suffer once global retail has developed a virtual monopoly is also weak. It's very unlikely that global retail will ever become monopolies. Stores like WalMart, Carrefour or Metro are by few, on the outskirts of cities, and can't intrude into the
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territory of local kiranas. A consumer might visit a Wallmart or a Carrefour one a month, but for daily needs he will need his kirana shop to continue doing business. Thus from present 6%, organised retail will grab a greater portion of the pie but the remaining will be server by the traditional kirana shops. Thus both will co-exist in the market, although their roles and share of the market may change, creating more value for the consumers and good times for the farmers. BIBLIOGRAPHY

www. rediffmail.com www. timesofindia.com www. ibnlive.in.com www. stockmarkets review.com www.payhindu.com www.legalindia.in http://articles.economictimes.indiatimes.com