ADVANAGE AND DISADVANAGE OF FDI IN RETAIL SECTOR

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1 ADVANAGE AND DISADVANAGE OF FDI IN RETAIL SECTOR Dr. Mini Amit Arrawatia 1, Ms. Rashmi Sharma 2 1 Research Guide, 2 Research Scholar, Jayoti Vidyapeeth Women s University, Jaipur (India) ABSTRACT Retailing is the interface between the producer and the individual consumer buying for personal consumption. As such, retailing is the last link that connects the individual consumer with manufacturing and distribution chain. This paper tries to establish the need of the retail community to invite FDI in multi brand retailing. FDI inflows in Indian retailing, there are few issues to be addressed its pros and cons to be discussed, for the regularization of the different retailers working in different areas, etc. In spite of so many reasons behind allowing and not allowing FDI from entering our Indian borders, there are few examples of other developing countries who initially protested against the entry of foreign investment in retail sector and then, later on proved out to be the most effective decision in country s development and standing in the world. The Government recently announced FDI in retail; namely 51% in Multi Brand Retail and 100% in Single Brand; but fortunately or unfortunately had to roll back the same due to political opposition both within and outside the coalition. Foreign investment has always been constantly growing in the retail Sector. This is primarily due to the reason that foreign investors have always viewed the Indian Market as a potentially profitable market in addition to housing the second largest population in the world. The opening of the retail sector offers tremendous opportunities to the foreign Investors and gives them access to effectively more than a billion customers.this paper will put light on the advantages, disadvantages and challenges faced by FDI in retail in single and multi-brand. It typically takes the form of starting a subsidiary, acquiring a stake in venture in an existing firm or starting a joint venture in a foreign country.green-field investment, establishing an entirely new enterprise in the foreign market.fdi as an investment involving a long -term relationship and reflecting a lasting interest and control by a resident entity in one economy(parent investor) in an enterprise resident in an economy other than that of the foreign direct investor. I. FDI IN RETAIL SECTOR The retail industry is that sector of economy which consists of stores, commercial complexes, individual, agencies, companies and organizations. Etc. involved in the business of selling variety of finished products to the end-user consumers directly and indirectly. The goods in the retail industry are the finished products of all sectors of commerce and economy of a country. The retail sector in india is vast, and has huge potential for growth and development, as the majority of its constituents are unorganizrd. The retail sector of india handles about $ 250 billion every year, and is expected by economists to reach to $660 billion by the year 2015.The government led by Dr.Manmohan Singh announced 145 P a g e

2 new reform in Indian retail sector.the FDI in single brand retail which was earlier 51% has been increased to 100%.The FDI up to 51% is allowed in multi-brand retail stores. The retailers will have to source at least 30% of their goods from small and medium sized Indian suppliers.all retail stores can open up their operations in population having over 1million. Out of approximately 7935 towns and cities in India, 55 suffice such criteria.multi- brand retailers have to bring at least US$100million of investment. Out of which 50% will be used for infrastructure.the opening of retail competition should be within the parameters of state laws and regulations. II. ANALYSIS AND INTERPRETATION 2.1 SWOT Analysis of Retail Sector: Strengths Major contribution to GDP: the retail sector in India is hovering around 33-35% of GDP as compared to around 20% in USA. ï High Growth Rate: the retail sector in India enjoys an extremely high growth rate of approximately 46%. ï High Potential: since the organised portion of retail sector is only 2-3%, thereby creating lot of potential for future players. ï High Employment Generator: the retail sector employs 7% of work force in India, which is rite now limited to unorganised sector only. Once the reforms get implemented this percentage is likely to increase substantially Weaknesses (limitation): Lack of Competitors: AT Kearney's study on global retailing trends found that India is least competitive as well as least saturated markets of the world. ï Highly Unorganised: The unorganised portion of retail sector is only 97% as compared to US, which is only 20%. ï Low Productivity: Mckinsey study claims retail productivity in India is very low as compared to its international peers. ï Shortage of Talented Professionals: the retail trade business in India is not considered as reputed profession and is mostly carried out by the family members (self-employment and captive business). Such people are not academically and professionally qualified Opportunities (benefits): There will be more organization in the sector: Organized retail will need more workers. According to findings of KPMG, in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post reforms and innovative competition in retail sector in that country. ï Healthy Competition will be boosted and there will be a check on the prices (inflation): Retail giants such as Walmart, Carrefour, Tesco, Target and other global retail companies already have operations in other countries for over 30 years. Until now, they have not at all become monopolies rather they have managed to keep a check on the food inflation through their healthy competitive practices. ï Create transparency in the system: the intermediaries operating as per mandi norms do not have transparency in their pricing. According to some of the reports, an average Indian farmer realises only one-third of the price, which the final consumer pays. 146 P a g e

3 ï Intermediaries and mandi system will be evicted, hence directly benefiting the farmers and producers: the prices of commodities will automatically be checked. ï Quality Control and Control over Leakage and Wastage: due to organisation of the sector, 40% of the production does not reach the\ ultimate consumer. Cost conscious and highly competitive retailers will try to avoid these wastages and losses and it will be their endeavour to make quality products available at lowest prices, hence making food available to weakest and poorest segment of Indian society. ï Heavy flow of capital will help in building up the infrastructure for the growing population: India is already operating in budgetary deficit. Neither the government of India nor domestic investors are capable of satisfying the growing needs (school, hospitals, transport etc.) of the ever growing Indian population. Hence foreign capital inflow will enable us to create a heavy capital base Threats: Current Independent Stores will be compelled to close: This will lead to massive job loss as most of the operations in big stores like Walmart are highly automated requiring less work force. ï Big players can knock-out competition: they can afford to lower prices in initial stages, become monopoly and then raise prise later. ï India does not need foreign retailers: as they can satisfy the whole domestic demand. ï Remember East India Company it entered India as trader and then took over politically. 2.2 Advantages and Disadvantages of FDI in Retail Sector Advantages Government has encouraged by the economic policy 1991, has adopted retail reforms mainly as 100% FDI in the retail sector in India. It may benefit by bringing investment in complete backend infrastructure and helps rural and agricultural sectors with a better go to market scenario. They also safeguard the health of the Indian retail sector against competition from the player of global economy. India is ranked as the third most attractive nation for retail investment among 30 emerging markets with domestic companies like the Future Group, Tata s Westside, Reliance Fresh, Raheja Group and Bharti Retail competing for market share. Market liberalization sowing the seeds for a retail transformation that will bring more MNCs players and big Indian retail players which are looking to expand their operations which include Pantaloon, Reliance, Lifestyle, Food world, Raymond, Titan, Bata etc. Global player s access India market through the licensee/franchisee route includes McDonald s, Pizza Hut, Dominos, Levis Lee, Nike, Adidas etc Boost Economic Life This is one of the major sectors, which is enormously benefited from foreign direct investment. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. 2. Increase level of Competition FDI increase level of competition in market. They have to improve quality of products and service in order to stay in market. They enter into Indian market through Joint venture and collaboration. 147 P a g e

4 2.2.4 Maximum Opportunity FDI norms will open up strategic investment opportunity for global retailers, who have been waiting to invest in India. This may have a significant impact on the current arrangement of foreign players. Employees are wellversed with globally valued skills. FDI also ensured a number of employment opportunities to people by establishing industrial units in India Advance Technology Improved technology in the area of processing, grading, handling and packaging of goods and further developments in areas like electronic weighing, billing, barcode scanning etc. Further, transportation facilities can get a improved in the form of increased number of refrigerated vans and pre cooling chambers which can help bring down wastage of food. 2.3 Disadvantages FDI feels that liberalization would endanger retail sector and mainly affect the small retailers, farmers and consumer and give rise to monopolies adversely affect the pricing and availability of goods. The entry of large global retailers such as Wal-Mart wipes out local shops and millions of jobs. The global retailers would collude and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. It would lead to lopsided growth in cities, causing discontent and social tension elsewhere. Despite country wide speculation on the plight of various Stakeholders, trading associations, politicians, etc. have given various arguments for and against FDI in retailing. However, such arguments are largely based on perception and there has not been serious academic research in this area. Further, India s local enterprises will potentially receive an up gradation with the import of advanced technological and logistics management expertise from the foreign entities. In our view, the government has an opportunity to utilize the liberalization for achieving certain of its own targets- improve its infrastructure, access sophisticated technologies, generate employment for those keen to work in this sector.fdi would lead to a more comprehensive integration of India into the worldwide market and, as such, it is imperative for the government to promote this sector for the overall economic development and social welfare. III. CONCLUSION It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economic decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country's GDP. 148 P a g e

5 And also, 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. REFERENCES [1] AC Nielsen (2008): Consumer and Designer Brands. AC Nielsen, April [2] A.T. Kearney (2011): Retail Global Expansion: A Portfolio of Opportunities-2011 Global Retail Development Index, A.T. Kearney, 2011 [3] CBRE (2011): How Global is the Business of Retail. CB Richard Ellis, Global Research and Consulting, 2011 Edition. [4] Department of Industrial Policy and Promotion, Foreign Direct Investment (FDI) in Multi- [5] Brand Retail Trading, Discussion paper. Available at [6] Basker, Emek, 2005a. Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion, [7] Review of Economic Statistics, Vol. 87, No. 1, Pages [8] Basker, Emek, 2005b. Selling a Cheaper Mousetrap: Wal-Mart's Effect on Retail Prices, Journal of Urban Economics, Vol. 58, No. 2, pp [9] Chari, Anusha. and T.C.A. Madhav Raghavan: Foreign Direct Investment in India s Retail Bazaar: Opportunities and Challenges, March [10] Confederation of Indian Industry (2012): The Impact of FDI in Retail on SME Sector: A Survey Report. [11] Joseph, M., N. Soundararajan, M.Gupta and S. Sahu (2008): Impact of Organized Retailing on the Unorganized Sector, ICRIER, May, [12] Joseph, M. and Nirupama Soundararajan (2009): Retailing in India: A Critical Assessment, Academic Foundation, New Delhi. [13] Kalhan, Anuradha, (2007), Impact of Malls on Small Shops and Hawkers, Economic and Political [14] Weekly, Vol.42, No.22, pp [15] Kalhan, Anuradha and Martin Franz, (2009), Regulation of Retail: Comparative Experience, [16] Economic and Political Weekly, Vol.44, No.32, pp [17] Kulkarni Keerti, Kulkarni Ramakant and Kulkarni Gururaj A.(2012): Foreign Direct Investment In Indian Retail Sector: Issues And Implications, Indian Journal of Engineering and management Sciences, 2012; Vol. 3. [18] McKinsey & Company (2007): The Bird of Gold : The Rise of India s Consumer Market, McKinsey Global Institute, [19] Mukherjee, A, D. Satija, T.M.Goyal, M.K. Mantrala and S. Zou (2011): Impact of the FDI Retail Policy on Indian Consumers and the Way Forward, ICRIER Policy Series Aug,2011; No. 5. [20] Mukherjee, A. and Nitisha Patel (2005): FDI in Retail Sector: India, Academic Foundation, New Delhi. [21] Neumark, David, Junfu Zhang, and Stephen Ciccarella, The Effects of Wal-Mart on Local [22] Labor Markets, Journal of Urban Economics, Vol. 63, No. 2, pp P a g e

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