ASIAN JOURNAL OF MANAGEMENT RESEARCH Online Open Access publishing platform for Management Research

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1 Online Open Access publishing platform for Management Research Copyright by the authors - Licensee IPA- Under Creative Commons license 3.0 Research Article ISSN ABSTRACT Impact of foreign direct investment on Indian small retailers Nupur Goel 1, Ashwani Mahajan 2 1- Research Scholar, Mewar University, Rajasthan, India 2- Department of Economics, PGDVA College, Delhi, India nupurgoel82@gmail.com In India, the retail industry is second largest employer after agriculture. Recorded by NSSO 64 th Round , retail trade employed 7.2% of the total workers and offers job to 33.1 million. India s retail trade is largely in the hand of unorganized retailers and India retail sector is still in nascent stage. Earlier, only 51 percent FDI was allowed in single brand retail but now Government has shown the green light to foreign players up to 100 percent in single brand retail but in multi brand retail it is only 51 percent allowed. An attempt has been made in this paper, to discuss the condition and perception of Small Retailers (known as Kiryana shopkeepers in India) towards Foreign Direct Investment in retail. This study tries to find out the actual position of small retailers of Delhi NCR (India) through interview and questionnaire. To that end, the responses analyzed with the help of statistical software SPSS and provides graphical representation. The study designed suggestions for the welfare of small retailers, manufacturers and government. The study concludes that all small retailers should stand in unity to face the challenge given by Foreign Direct Investment. The policy makers should rethink about the future of small retailers. So the existing retailers can get the chance to rise and stabilize properly, in place of establishing new foreign firms. Keywords: Kiryana shopkeepers, foreign direct investment, organized retail, un-organized retail, unity. 1. Introduction Nobody can deny that India is an agriculture land that employs the huge group of people and after that retail sector is the only sector employing millions of people and largest service sector in terms of GDP. Retailing in India accounts about 15% of its GDP. It is estimated that 40 million Indians are earning their lives from this sector. India has a group of youngsters with 35% of India s population being under 14 years of age and more than 60% of the population under the age group (15-60) is working. This working group of population is converted in an attractive consumer and placing India as the main destination for foreign retail players (Census of India, 2001). In India retail sector is the single largest place for jobless persons. Foreign Direct Investment with new strategies entering this segment will have negative impact on Indian Retail sector, which is growing promptly even though Indian retail segment has the space to create more employment directly or indirectly. Initially, policy makers were not so eager to know about the impact of Foreign Direct Investment on Indian economy. Even many service sectors have been allowed foreign direct investment earlier. But as government of India started to give the value to foreign players and opened 100% FDI in single brand and 51% FDI in multi brand retail (with conditions), many small retailers have started to protest against FDI in retail and 429

2 policy makers also became alert. During 2006 FDI was not allowed in Multi brand retail and only 51% FDI was permitted in single brand, that time foreign players were entering through automatic route as franchise, wholesale and cash & carry. Indian Retail sector has confined opportunity of bank finance and the national commission should focus on the issues related to Indian retail sector and to design new policies and strategies to cope up with foreign retailers (Guruswamy, Sharma, Mohanty, & Korah, 2005). The level of FDI inflows in India is one tenth of that of china. India may not need to increase FDI because of the system and formation of India s manufacturing and service sectors. Also India has a large group of educated engineers and researchers those can adopt and reestablish imported technology to suit local market condition (Balasubramanyam & Sapsford, 2007). ICRIER reported that FDI in retail would speed up the growth of organized retail formats (Mukherjee & Patel, 2005) and the entry of organized retail is transforming the logistics industry. This will create significant externalities across the economy(joseph, Soundararaja, Gupta, & Sahu, 2008). Many studies show the adverse impact of FDI in retail, a study shows major decline in business (Kalhan, 2007). The government of India should examine the constraints faced by traditional retailers(sarma, 2005). This research paper tries to find out the impact of Foreign Direct Investment on local market e.g. road side market, weakly market, and mom pop shop. Indian retail sector is divided into two sectors as organized retail and unorganized retail. The organized retailers comprise traders who take legal approval 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 Kiryana 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 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. Figure 1: Position of India retail market 2. Foreign direct investment policy in Indian retail sector FDI refers to capital inflows from foreign countries that invest in the production size of the economy and are usually approved other forms of external investment and their returns depend on the performance of the projects and operations financed by the investors. FDI also 430

3 promote international businesses and transfer of technology, knowledge and skills. It is an important issue for Indian government, small retailers and for unemployed group Scenario of FDI in retail in India In 1997, the Indian government allowed 100 percent Foreign Direct Investment in cash and carry stores under the automatic routes. In 2006, Government allowed 51 percent FDI in single brand retail. After that, in December 2011, Government of India allowed 100 percent FDI in single brand. As Indian government approved it, Multinational brands Carrefour, IKEA and others were eager to enter the Indian market. In September 2012, 51 percent FDI was allowed in multi-brand retail with some conditions. According to the Government of India s notification, 51 percent of FDI in multi-brand is permitted under following conditions (1) State Acceptance: Foreign retailers can set up their multi-brand stores after the acceptance the state government. Foreign retailers have to follow the rules and regulations made by the government. (2) Minimum Investment: Foreign investors have to invest minimum amount of US$100 billion. (3) Backend Investment: Foreign players have to invest 50 percent of total investment in backend infrastructure. (4) Procurement: Foreign players have to take minimum 30 percent procurement from small industry. (5) Location: Cities with more than 1 million of population may set up these types of retail outlet. 3. Objective of study To study the impact of FDI on local market e.g. road side market, weakly market, and mom pop shop. 3.1 Study methodology Both secondary and primary source of data were used to fulfill the objectives of the study. Secondary data has been collected from articles, journals, books and internet. Information for primary data obtained from Kiryana shopkeepers and hawkers were analyzed by statistical tool SPSS. 3.2 Questionnaire construction A questionnaire was developed to measure the perception of Kiryana retailers and hawkers towards the impact of foreign direct investment and organized retailers on unorganized retailers. 3.3 Data collection and sample size A structured questionnaire was used to collect the primary data. The questionnaire was distributed to kiryana shopkeepers and hawkers in Delhi-NCR. In all more than 110 questionnaires were distributed but only 100 questionnaires were included in the study, rest were dropped for being incomplete. 4. Survey results and graphical analysis A questionnaire was administered to the shop owners. The first part sought basic information about the respondent s business as size, location, ownership and establishment of outlet. The second part of the questionnaire collects data to know about the effects of organized retail 431

4 outlets on the business style and profit of small retail outlet. The third part of the questionnaire sought important information as the impact of FDI can close down the traditional retailer s outlets and the respondent s view regarding the limitations for foreign players. 4.1 Part 1: Basic information about respondents Table 1: Floor space Frequen cy Percen t Hawkers Less than 100 sq.ft Vali d More than 300 sq.ft Val id Near shopping complexes Table 2: Location Freque ncy Perce nt Cumulativ e colony market wholesale market Road side market Table 3: Ownership Frequen cy Percen t Self Vali d Father & grandfather Partnership Others

5 Table 4: Establishment of outlet Frequency Less than 5 year year vyear More than 15 years Table 5: Employment Frequenc y Vali d Self-employed & Family members Family members and Employees Distributio n of sample shops/haw kers by floor space Table 6: Statistics Type of Location Pattern of ownership Establishm ent of outlet Pattern of Employment N Missi ng Mean Median Std. Deviation The survey results presented in Table 1 to 5 shows the basic information of respondents. If we exclude the hawkers who have no shop floor area, then 60 percent of the sample represents shops and establishments less than 200 Sq. ft. in size (Table 1). Only 10 percent of sample outlets show the floor area more than 200 Sq. ft but less than 300 Sq. ft (Table 1). 45 percent Kiryana shops of sample survey are near big shopping complexes (Table 2). Table 3 shows the pattern of ownership, 45 percent kiryana stores and Hawkers have been established 433

6 by their grandfather and father. 39 percent outlets are running their outlet from more than 15 years (Table 4). 62 percent outlets had no employees other than family members (Table 5). Part 2: Business Information of respondents Figure 2: Business Information Table 7: Q. 1 any changes in business after opening new big store. Frequency Yes No Table 7: Q.2Any effect on your business due to organized retail chains like Reliance, Easy Day etc. Frequency Yes No percent of the respondents reported that there are many changes in their business after opening new big stores nearby and 30 percent of respondents are not finding any changes in business (Graph 1). 75 percent of the respondents replied that organized retail chains like Reliance, Easy Day are affecting the small shops as they have their own brand and selling their products with new business strategies. 25 percent of respondents have no impact of them (Graph 2). 25 percent of the respondents do not have adverse impact on business profit but 75 percent of the respondents have negative impact on their business profit (Graph 3). 55 percent of the respondents have been changed the way to carry business because of high competition with giant retailers but due to the shortage of capital 45 percent respondents are enable to change the style of business (Graph 4). 434

7 Figure 3: Business Information Table 8: Q.3 Any adverse impact on your business profit. Frequency Yes No Q.4 Have you changed the way to carry your business due to competition from organized retailers? Frequency Yes No Part 3: Perception of Retailers Figure 4: Business Information 435

8 Table 9: Q.5 Are you planning to change your business line as foreign players has interest in Indian retail industry? Frequency Yes No Q.6 Do you think the presence of organized retailers will close traditional retail outlet. Frequency Yes No In Graph 5, 55 percent of respondents are planning to change their business line because falling sale day by day and 45 percent of respondents denied to change their business line because they do not have much money and skills to do other work. 60 percent of the respondents answered that the presence of organized retailers will close the traditional retail outlets because foreign players are offering many offers and discounts on products. Also they are buying all products in bulk at low margin (Graph 6). Figure 5: Business Information Table 10: Q.7 should government impose more limitations for foreign players to invest in Indian retail market? Frequency Yes No

9 Impact of foreign direct investment on Indian small retailers Table 11: Q.8 What is the main reason for the closure of small outlets? Competition form organized retailers Frequen cy Reduced Margins percent of respondents replied that the government should impose more and strict limitation for foreign players to invest in Indian retail market as China has the regulations and norms for foreign players (Graph 7). Last graph 14 represents that 72 percent of respondents answered that the main reason for the closure of small outlets is competition from organized retailers and 28 percent of respondents replied that small retailers have to close their outlets due to low profit margins (Graph 8). 5. Suggestions and Conclusion The scenario of Indian retail industry is going to be change as foreign players got permission to enter in this segment. According to the above study, FDI in retail will effect small retailers as well as domestic organized retail sector. Under these conditions the following suggestions are designed for small retailers, manufacturers and the government. 1. Kiryana stores should change their presentation and temperament. They should renovate their shop according to market demand. Small retailers should give more alternative options of products to consumers. Addition of new brands, facility of home delivery and cash credit, can help them to cope up with foreign players. Kiryana retailers should study about the market demand and keep the products according to consumer s income. Most importantly small retailers of any area should buy the products together in bulk so that they can get the products at low margin from manufacturer and can increase their profit level. Government has started many schemes for the benefit of small-medium enterprises so that they can take loan facility. 2. Government should provide the proper technical assistance to shopkeepers and should impose more rules and regulations on foreign retailers so that they cannot create the monopoly situation in the market. 3. The wholesalers will be affected by the entry of foreign players & domestic organizational players because they will buy all things directly from manufacturers. So wholesalers also should go for collective purchases. For government and Policy makers, it is important to understand how retailing works in our country and what role it plays in the lives of its citizens. In India, retailing sector is grasping to jobless and uneducated citizens also. This sector is like forced employment sector. Above study also presents, small retailers are closing down their shops because of loss and competition. So instead of opening the door for foreign players they should maintain manufacturing segment as well as retail segment. Introduce new bank loan facilities for them 437

10 so that small retailers also get chance to improve their quality of outlet. As we know that unity has power, all small retailers have to go together to face this challenge. 6. References 1. Balasubramanyam V., & Sapsford D. (2007), Does India need a lot more FDI? Economic and political weekly, pp Census of India. (2001). Statistics on Demographic and Socio-Economic Characteristics. Retrieved 10th June, 2015, from 3. Guruswamy M., Sharma K., Mohanty, J. P., & Korah T. J. (2005), FDI in India's Retail Sector: More Bad than Good? Economic and Political Weekly, pp Joseph M., Soundararaja M., Gupta M., & Sahu S. (2008), Impact of organized retail on the unorganized sector: ICRIER Working Paper 222. New Delhi: Indian Council for Research on International Economic Relations. 5. Kalhan A. (2007), Impact of malls on small shops and hawkers. Economic and Political Weekly, pp Mukherjee A., & Patel N. (2005), FDI in retail sector, India: Academic Foundation. 7. Sarma E. A. S. (2005), Need for Caution in Retail FDI. Economic and Political and Weekely. 438