FOREIGN DIRECT INVESTMENT IN RETAIL: OPPORTUNITIES OR CHALLENGES

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1 FOREIGN DIRECT INVESTMENT IN RETAIL: OPPORTUNITIES OR CHALLENGES Nupur Goel 1, Dr. Ashwani Mahajan 2 1 Research Scholar, Mewar University, Rajasthan,(India) 2 Department of Economics, PGDVA College, Delhi, (India) ABSTRACT A small sample survey for analyzing the impact of foreign direct investment on retail sector especially, on unorganized retail sector in Delhiis conducted and the results shows the high impact on business in terms of profit declination, increasing rate of unemployment and establishing the monopolistictype of situation in the Indian retail market. Only 30% of the sampled small shops are found positive and immune to the impact because of their adaption capability with market sentiments, good understanding of customer lifestyle and purchasing habits and have courage to follow new style of marketing e.g. promotional offers, product discounts and cash credit facility. Keywords: Employment,Foreign Direct Investment, Organized Retailers, Un-Organized Retailers, Supply Chain I. INTRODUCTION The discussion paper Foreign Direct Investment in Multi-Brand Trading set up by the Department of Industrial Policy and Promotion (DIPP) in 2010 sketches the various faces of Indian retail sector as its size, nature, growth of retail sector and its social and economic significance besides the limitations of present set up. It explores the positive and negative implications of foreign direct investment in retail sector based on the description of many committees/researchers and academic bodies etc. The Indian Council for Research on International Relations (ICRIER) has published the report on FDI in Retail Sector INDIA in June 2005 strongly support that FDI should be allowed in retailing, for speeding up the growth of retail in organized formats [1]. On contrary, The Centre for policy Alternatives (CPAS) with its study FDI in India s Retail Sector: More Bad than Good was the first in striking out the assume benefits of the entry of foreign players into Indian retail segment. Moreover, according to this study, unorganized retail, accommodating more than 40 million residents, will face job turmoil even though it is perceived that FDI will provide platform for new jobs with better working environment. It is also showed that there is a huge gap between job creation and job seekers due to huge number of adversely affected people[2].many studiesanalyze the impact of FDI on the growth of the developing countries and employment generation. They showed that the flow of FDI has a positive correlation with economic growth but do not reflect the mechanism to generate employment in India especially for un-skilled persons. A study shows thatsmall shops and hawkers in Mumbai are adversely affected by the malls anddecline in sales of groceries, fruits and vegetables, processes foods, garments, shoes, electronics and electrical products, ultimately threatening 50 per cent of them with closure or a major decline in business[3]. The retail sector is a highly sensitive one because of its immense contribution to the economy [4]. Decisions regarding FDI in this 31 P a g e

2 sector should not therefor be taken in haste. In India, unorganized sector plays an important role in the retail sector. The department of consumer affairs or any other concerned ministry commission should a more detailed study of that sector and the implications of the entry of foreign players for both organized and unorganized sectors. The study should focus on the direct and indirect employment potential of each of these sectors. All segments of the Indian economy could be affected by the entry of large corporate giants in the Multi-Brand Retail Business. The liberalization of FDI for Multi-Brand retail sector would affect unorganized small retailers by giving rise to monopolies of large corporate houses with respect to pricing and availability of products [5]. It is critically analyzed the decision of previous Indian Government to open retail sector for FDI in single brand and Multi brand category and it s likely to have impact on various components of Indian economy [6]. A T Kearney, the well-known International Management Consultant, recently identified India as the Second most attractive Retail Destination globally from among thirty emergent markets. Retail sector has the contribution of 14 per cent to the GDP and employing 7 per cent of the total workforce in the country[7]. Retail sector in India is anticipated to grow around percent annually. The contribution of retail industry to GDP of India was between 8-10 percent in 2007, and reached the figure of 22 percent by 2010[8]. The decision by the previous Government of India to allow 100 per cent FDI in Single-brand retail and 51 percent in Multibrand retail has generated a lot of interest amongst all the stakeholders but many conflicts also arise as the loss of Small Retailers. We cannot deny that unorganized retailers have main role in India Economy. If foreign retailers take place in Indian market, it is very difficult to save the traditional market because foreign players will come with new strategies for capturing the huge retail market. In beginning, foreign players will sell their product at low margin to attract Indian consumers. After establishing their feet they can create the monopoly situation in front of the Indian retail market. In 2007, India was ranked the twelfth largest consumer market and is expected to be the fifth-largest consumer market by 2025 after the US, Japan, China and the UK [9]. Indian consumers have made the country an attractive market for foreign retailers. Foreign players always want to capture this market segment. India has a large group of consumers and retailers. India ranks fourth worldwide (after Brazil, Uruguay and Chile) and first among emerging Asian markets as an attractive destination for foreign retailers [10]. The Previous Indian government realizes that growing consumerism can help sustain high economic growth. As a result, the previous Indian government formulated a Brand-based Retail FDI policy. But the outcome of 2014 general election created an immense expectation from the new Government. A person, group or organization has different interest and expectation from the new government of India. According to Bhartiya Janta Party vice president More discussion is needed on FDI in retail with a view to introducing safeguards to protect small neighborhood stores. This paper tries to examine the impact of organized retail on unorganized retail and analyze the effect of FDI on employment. 1.1 Retailing Structure in India Retailing is the largest private industry in India and second largest employer in the Indian economy. Indian retail industry is one of the fastest growing industries in India. Indian retail sector is divided into two sectors as organized retail and unorganized retail. The organized retailers comprise traders who possess legal permissions or licenses to undertake the activity, are registered with sales tax or VAT etc. Such enterprises are super market, hypermarket, and retail chains. By unorganized retail trade enterprises we mean all those local Kirana and general shops, family managed-mom pop shops, paan/beedi shops, vegetable shops run from a room of a house. Their number is very large. In India, unorganized sector contributes around 92% of retail trade but organized sector contributes only 8%. India s retail trade is largely in the hand of the unorganized retailers. An 32 P a g e

3 unorganized retailer selling vegetable, fruits and daily need things on a cart or a more stationary wayside shopkeeper selling grocery and food items shows the majority of retail traders in India. These unorganized vendors occupy not more than square feet of space at best and earning money with very less margin. Most of the small vendors are unable to fulfill their daily needs. But, these faceless, voiceless small vendors around 15 million in all, constitute a huge group of the country s retail business. Small retailers are facing many rules and regulations relating to land use, workers rights, quality standards, taxation etc. Being unorganized, they have no access to bank loans. 1.2 Foreign Direct Investment Foreign direct investment or foreign investment refers to the net inflows of investment to acquire a lastingmanagement interest (10% or more) in an enterprise operating in an economy other than that of the investor. FDI is defined under dictionary of economics as- Investment in a foreign country through the acquisition of a local company or the establishment thereof an operation on a new site. It refers to capital inflow from foreign countries. There are two types of FDI: (a) Inward foreign direct investment and (b) Outward foreign direct investment. Single brand- Single brand implies that foreign companies can sell their products under a single brand; as Reebok, Nokia and Adidas. FDI in single brand retail implies that a retail store with foreign investment can only sell one brand. Multi brand- FDI in multi brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. This is not the first time that India has invited foreign retailers to set up their business. In 1997, the government allowed 100 percent FDI in cash and carry wholesale stores under the automatic route. In 2006, Government allowed 51 percent FDI in single brand retailing, although with prior approval from government. After that, In December 2011, the government fully (100 percent) opened up FDI in single brand retail stores. Many international retail brands such as IKEA and Carrefour were eager to enter the India market. 51 percent FDI in Multi-brand retail was proposed in September 2012, with parliamentary approval in December Many politicians have been welcomed the decision of previous government, however on the other side many of small retailers have caused protest against foreign direct investment in retail. According to the Government of India s notification, 51 percentof FDI is permitted under following conditions. 1. State Acceptance: Stores may be set up in those states which allow FDI in multi brand retail under this policy. Such stores will be subject to compliance with applicable state laws and regulations. 2. Minimum Investment: The minimum amount that the foreign investors have to invest is US$ 100 billion. 3. Backend Investment: At least 50 percentof total FDI brought in shall be invested in backend infrastructure within three years of first tranche of FDI.Backend infrastructure includes capital expenditure on all activities, excluding that on front end units, for instance, it includes investment made towards processing, manufacturing, distribution, quality control, design improvement, packaging, logistics, storage, ware house and agriculture market produce. Expenditure on land cost and rentals will not be counted for the purpose of backend infrastructure. 4. Procurement: At least 30 percentof the procurement of manufactured and processed product purchased shall be sourced from small industry globally with investment in plant and machinery not exceeding USD 1 million. 33 P a g e

4 5. Location: Retail sales outlet may be set up in cities with population of more than I million according to 2011 census and may also cover area of 10 km around municipal/ urban agglomeration limits of such cities. Only 53 cities in India qualify under this criterion. 6. Agriculture produce: First right of procurement lies with the government. II. OBJECTIVE OF STUDY The purpose of this study is to find out as followings (1)To analyze the impact of organized retail on unorganized retail. (2) To analyze the effect of FDI in retail on employment. 2.1 Study Methodology To gather the required information for this study, both secondary and primary source of data were used. Secondary data has been collected from journals, magazines, news articles, books, internet and other documented materials. Information for primary data obtained from Kiryana shopkeepers and hawkers were analyzed by using Pie chart. 2.2 Questionnaire Construction To measure the perception of Kiryana retailers and hawkers towards the impact of foreign direct investment and organized retailers on unorganized retailers, a questionnaire was developed. 2.3 Data Collection The Primary data was gathered by administrating a structured questionnaire with more than 110 kiryana shopkeepers and hawkers in Delhi-NCR. 2.4 Sampling and Sample Size The selection of the Shop keepers and Hawkers were based on the convenient sampling, according to the availability of shop keepers in a particular time period of the survey. In all more than 110 questionnaires were distributed but only 100 questionnaires were included in the study, rest were rejected due to incomplete information or did not return from the viewers. III. DATA INTERPRETATION AND GRAPHICAL ANALYSIS Q.1. Are you aware about mall? 100 respondents 79 answered in Yes and 21 respondents answered in No, which implies that majority of the respondents are aware about the Mall. The remaining respondents who are not aware about Mall are mostly the vegetable vendors. Q.2. Do you know unorganized retail sector? The respondents were asked to answer in Yes or No. 85% respondents are aware from unorganized retail sector and only 15% respondents don t know about the unorganized retail sector. It shows that unorganized retail sector is well known sector in India. In India Unorganized retail sector comprises around 92%. Q. 3. Do you know about Foreign Direct Investment? 100 respondents 72% respondents answered in Yes and 28% respondents answered in No, which implies that 60% of the respondents are aware about FDI and 40% have not heard about FDI. 34 P a g e

5 Q. 4. Are you concerned about mall culture? 100 respondents 55% respondents answered in Yes and 45% respondents answered in No, which implies that majority of the respondents are concerned about mall culture and only 45% have not showed their concerned about the mall culture. Q. 5. Have you experienced any impact on your current business? 100 respondents, 70% respondents answered in Yes and 30% respondents answered in No, which implies that more than 70% of the respondents are in the opinion that opening of mall has very negative impact upon their sale. The reason behind this impact upon the small shopkeepers is that consumer wants to buy all things under one roof. Shopping in Mall is an entertainment and prestigious issue for them. Q.6. Do you have the fear that FDI in retail will close small shop? The respondents were asked to answer in Yes or No. from out of 100 respondents, 65% respondents answered in Yes and 35% respondents answered in No, Which implies that 65% respondents have the fear to close the small shop. According to these 65% respondents, now they are selling their products at very low margin and the most of consumers are moving to organized sectorfor buying their daily need things also. Q. 7. Do you think FDI in retail will increase job opportunity? 100 respondents surprisingly 64 respondents were answered in No and only 38 respondents were answered in 35 P a g e

6 Yes, which implies that near about 64% of the sample taken are not in favor of the opinion that introduction of FDI or big Mall will create job for both educated and uneducated people in direct and indirect way. Q.8. Can foreign players create monopoly situation in India? The respondents were asked to answer in Yes or No. from the table and consecutive graph it is clear that out of 100 respondents 62% respondents were answered in Yes and they were agree with it that foreign players will createthe situation of monopoly in front of Indian retail market but 38% respondents were answered in No. They told that foreign players cannotcreate the monopoly situation. Q.9. There are various questions being raised on this controversial issue that FDI in retail will create more unemployment in the unorganized retail sector? 71% respondents answered that FDI in retail will create more unemployment and employment will be affected because unorganized retail sector is very huge in India and most of uneducated persons are earning from this sector but 29% respondents answered that FDI in retail will not affect employment. IV. INTERPRETATION OF DATA ANALYSIS The above analysis was done to find out the view of unorganized retailers upon organized retailers in awake of allowing FDI in retail which can create the critical situation in front of unorganized, hawkers, pavements and mom-pop shops (kiryana stores). Questions were asked about impact of organized retail on their small mom-pop shop, fear of closure of shops due to big retailers; majority of respondents were agreed that organized retailers have the negative impact on their current business( on kiryana stores) and they also have the fear of closure of the small retail shops. Small retailers has the fear that the consumers are attracting towards to organized retail segment because they have the good market strategies such as offers, discounts on branded products. A middle class or lower class consumer always try to increase his/her buying capacity and organized retailers can do it very easily because they buy all products in bulk at low margin cost, also they have money power. On the other hand retailers were asked the question about the job opportunity and impact on employment. Majority of respondents answered, it is very difficult to provide the job all unorganized retailers. Around 92% retailers are earning from this sector and most of them are not skilled, educated and don t have an idea about market strategies. How can they join the organized retail sector? This is a very big issue. At the end, neither they can run their mom-pop shop nor can they join organized retail. FDI in retail will create more unemployment in India. An organized retailer will contact directly to farmer or producer to buy the products at low cost and will provide them good price of products. We cannot deny that in this situation farmers and producers will get good price but once organized retailer will establish their feet in to 36 P a g e

7 the Indian market they will create MONOPOLY situation. On the other hand; Traders, commission agent, wholesaler and retailers cannot stand in this supply chain. It will create unemployment. This supply chain can be spoil by Foreign Direct Investment in retail. V. CONCLUSION The Traditional Farm Produce Supply Chain Need for a more comprehensive study- More discussion is needed on FDI in retail. According to the above study FDI in retail can damage the position of kiryana shops and can increase the unemployment. Meanwhile, the government should examine the constraints faced by traditional retailers and other players in the supply chain and also focused on the direct and indirect employment potential of eachsectors. Foreign Direct Investment can create challenges in front of Indian small retailers. It is not the right time to compare India with any other developed country as China because they have strict rules and regulations in place to stop internal migration and the Chinese per capita GNP is almost double that of India s. It is suggested that policymakers should boost up to Indian retail segment without foreign players. Foreign direct investment is not an opportunity for Indian Retail Market. REFERENCES [1] A. Mukherjee and N. Patel, FDI in retail sector, India: Academic Foundation, [2] M. Guruswamy, K. Sharma, J. P. Mohanty, and T. J. Korah, "FDI in India's Retail Sector: More Bad than Good?," Economic and Political Weekly, pp , [3] A. Kalhan, "Impact of Malls on Small Shops and Hawkers," Economic and Political and Weekely, June 2, [4] E. A. S. Sarma, "Need for Caution in Retail FDI," Economic and Political and Weekely, November [5] M. Joseph, M. Soundararaja, M. Gupta, and S. Sahu, "Impact of organized retail on the unorganized sector," ICRIER Working Paper 222. New Delhi: Indian Council for Research on International Economic Relations2008. [6] D. Moghe, "Critical Study of Foreign Direct Investment in India retail sector," Journal of Research in Commerce and Management, [7] S. Arvind, "Indian Retail: The Road Ahead," Retail biz, www. etretailbiz. com, [8] R. U. Devi, "An Analytical Study On The Role Of Foreign Direct Investment In Indian Retail Sector," The International Journal of Management, vol. 2, [9] McKinsey and Company, ""The Bird of Gold : The Rise of India s Consumer Market," McKinsey Global Institute,2007. [10] T. A. Kearney, "Retail Global expansion: A portfolio of opportunities," USA: Chicago, P a g e