FDI IN RETAIL: AN INDIAN PERSPECTIVE

Transcription

1 FDI IN RETAIL: AN INDIAN PERSPECTIVE Somesh Kumar 1, Nishant Chaturvedi 2 1,2 Assistant Professor, IIMT College of Management Greater Noida ABSTRACT The recent wave of reforms by the Government to incentivize Foreign Direct Investment (FDI) in various sectors is bringing a new zeal to the investment climate in India. One of the most debated reforms is the policy for allowing 51 per cent FDI in multi-brand retail. India has the highest retail density in the world, with 12 million small shops catering to 209 million households. India has a high potential market with accelerated retail growth of 15-20% expected over the next five years. However, a significant decrease of 60% (amounting to $24.2 billion) of FDI was noticed in 2010, when compared to This appeared to be mainly because most the Indian rural and small towns' retail markets are unorganized (Moghe, 2012). The Indian retail sector is highly fragmented and weighted towards unorganized retailers which is 93% of the market and only 7% by organized retailers but is quickly growing and organized retail market is expected to reach 20% by 2020 (Kearney Report, 2011). According to A.T. Kearney Global Retail Development Index (GRDI) 2012, India ranks fifth after Brazil, Chile, China and Uruguay. India is treated as a high potential market with accelerated retail market growth of 15 to 20 percent expected in the coming 5 years, supported by a GDP growth of 6 to 7 percent, which will considerably increase disposable income and rapid urbanization. The changing FDI climate has provided an interesting dynamic international retailers' entry and expansion plans in India (Kearney Report, 2012). Unorganized retail operates at low cost and small size format. These include the local kirana shops, owner manned general stores, paan/beedi shops, the local mom and pop store convenience stores, hand cart and pavement vendors, etc. In the last 10 years there has been significant development from small unorganized family owned retail formats to organized retailing. This effect of branded retailing can already be seen with Now FDI in Multi-Brand retailing is permitted in 2012.Prior to this move the l Indian households have traditionally enjoyed the convenience of calling up the corner grocery "kirana" store. Till 1980 the retail trade continued in the unorganized sector. Afterwards with the entry of big players like Reliance, Tata s, Bharati, Big Bazzar, organized retail sector came in to existence. And the competition started becoming intense. The permission of FDI will impact the structure of retail industry in India. Its implications will be on customers, small retailers, farmers and the general public. On this backdrop an attempt is made in this Paper to analyze the impact of FDI on various parties involved. Keywords: Foreign direct investment (FDI), Retail Sector, Single brand retailing and multi brand retailing, organized Retail, Unorganized Retail, and Economic Growth I. INTRODUCTION 397 P a g e

2 The recent wave of reforms by the Government to incentivize Foreign Direct Investment (FDI) in various sectors is bringing a new zeal to the investment climate in India. One of the most debated reforms is the policy for allowing 51 per cent FDI in multi-brand retail. India has the highest retail density in the world, with 12 million small shops catering to 209 million households. India has a high potential market with accelerated retail growth of 15-20% expected over the next five years. However, a significant decrease of 60% (amounting to $24.2 billion) of FDI was noticed in 2010, when compared to This appeared to be mainly because most the Indian rural and small towns' retail markets are unorganized (Moghe, 2012). The Indian retail sector is highly fragmented and weighted towards unorganized retailers which is 93% of the market and only 7% by organized retailers but is quickly growing and organized retail market is expected to reach 20% by 2020 (Kearney Report, 2011). According to A.T. Kearney Global Retail Development Index (GRDI) 2012, India ranks fifth after Brazil, Chile, China and Uruguay. India is treated as a high potential market with accelerated retail market growth of 15 to 20 percent expected in the coming 5 years, supported by a GDP growth of 6 to 7 percent, which will considerably increase disposable income and rapid urbanization. The changing FDI climate has provided an interesting dynamic international retailers' entry and expansion plans in India (Kearney Report, 2012). Unorganized retail operates at low cost and small size format. These include the local kirana shops, owner manned general stores, paan/beedishops, the local mom and pop store convenience stores, hand cart and pavement vendors, etc. In the last 10 years there has been significant development from small unorganized family owned retail formats to organized retailing. This effect of branded retailing can already be seen with Now FDI in Multi-Brand retailing is permitted in Prior to this move the l Indian households have traditionally enjoyed the convenience of calling up the corner grocery "kirana" store.till 1980 the retail trade continued in the unorganized sector. Afterwards with the entry of big players like Reliance,Tata's,Bharati, Big Bazzar,organized retail sector came in to existence. And the competition started becoming intense. The permission of FDI will impact the structure of retail industry in India. Its implications will be on customers, small retailers, farmers and the general public. On this backdrop an attempt is made in this Paper to analyze the impact of FDI on various parties involved. 1.1 Indian Retail Sector: An Overview Mckinsey& Company (May 2007) studied that the Indian retail market size is estimated to be US$ 450 billion. Retailing accounts for 14 to 15% of its GDP and constitutes as one of the top five retail markets in the world by economic value. Also with 1.2 billion people, India is one of the fastest growing retail markets in the world. According to Economist (2012), market reforms in November 2011 provided for retail innovation and also introduced competition with multi-brand retailers. Global giants such as Carrefour, Walmart and Tesco and single brand giants such as IKEA, Nike, and Apple had not planned strategic entry into India. According to The Financial Times (2012), because of the 30% requirement, IKEA announced in January that it will not open stores in India sooner. Fitch believes that this requirement will significantly delay but might not prevent brand majors from Europe, USA and Japan to open up stores in India. 398 P a g e

3 The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sect oral policy/ sect oral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (=FIPB') would be required. India will allow FDI of up to 51% in.multi-brand. sector. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores, up from previous cap of 51%. FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route. The retailers (both single and multi-brand) 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 must bring minimum investment of US$ 100 million. Half of this must be invested in back-end infrastructure facilities such as cold chains, refrigeration, transportation, packaging etc. to reduce post-harvest losses and provide remunerative prices to farmers. The opening of retail competition (policy) will be within parameters of state laws and regulations. According to a recent survey by UNCTAD India is projected as the second most attractive destination for FDI (only after China) for multinational corporations during the years As per the data, the sectors such as telecom, services, infrastructure and computer hardware and software attract the FDI the most. The leading sources of FDI are from the economies such as the US, the UK, Singapore and Mauritius. The Indian retail market is currently unorganized and highly fragmented, with an estimated mn outlets countrywide. The overall retail market is expected to grow at a CAGR of about per cent by , with the organized retail market expanding at percent. Table 1: Share of Organised Retail in India Year Total Retail (in billion INR) Organized Retail (in billion INR) Share of Organized 0.70% 1.80% 3.50% 5.00% 7.00% 10.00% Retail (%) Source: Table 1 depicts the growth of the share of organized retail in the overall retail in India over years. From the table, it can be clearly understood that, in India, the growth of organized retail has been steadily rising 399 P a g e

4 since 1999 and is expected to continue in the years to come. This growth can be attributed to changes in FDI policy in retail trade. 1.2 Single-Brand Retailing Under single-brand retailing, the foreign investor or brand owner can invest up to 51 per cent in an Indian company with prior Government approval. The Indian company can undertake retailing of single brand products which are branded at manufacturing stage. These products should be such that they are sold internationally in at least one country other than India. The exhaustive list of products to be sold under the single brand umbrella needs to be intimated to the Government at the time of approval, and any addition to products or product categories requires fresh approval or amendment. In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership, but imposed the requirement that the single brand retailer source 30 percent of its goods from India. Indian government continues the hold on retail reforms for multi-brand stores. In June 2012, IKEA announced it has applied for permission to invest $1.9 billion in India and set up 25 retail stores. Fitch believes that the 30 percent requirement is likely to significantly delay if not prevent most single brand majors from Europe, USA and Japan from opening stores and creating associated jobs in India. 1.3 Multi-Brand Retailing Whenever the issue of opening up of multi-brand retailing to FDI crops up, a number of concerns are expressed, such as protecting the interests of the small retailers and the still under-developed retail sector of India. The Government has long been represented to allow the Indian organized retail sector to first develop and be ready to face competition from the large multinationals before opening up this sector for foreign investors. In 2008, the Government contemplated opening up the retail sector and allowing 100 per cent FDI in singlebrand retail trading and 51 per cent FDI in multi-brand retailing. However, it did not succeed due to fierce opposition from its allies and the Left parties as well as the local trade associations. The Department of Industrial Policy and Promotion,in July 2010, released a discussion paper on FDI in multi-brand retail trading. This paper brings out an overview of the current situation in the retail sector along with discussion for and against the permissibility of FDI in multi-brand retailing. It clarifies that: (a) the retail sector is the second largest employer after agriculture; (b) it could lead to unfair competition and large scale exit of domestic retailers, and; (c) the retail sector is under-developed and at a nascent stage and may need to grow up before opening up for FDI. According to India Retail Report 2013, modern Retail has seen a significant growth in the past few years with large scale investments made by Indian corporate houses mostly in food sector retailing. The market size has been estimated to be USD 400 Billion market. Through Franchisee/Joint Venture route, foreign retailer giants and apparel brands including luxury brands have entrenched themselves in India in the last few years. 400 P a g e

5 Few retailers have been designing plans to start their Cash & Carry business to have a market presence and create brand awareness. Indian retail landscape has changed since 2004 since the time world woke up to the potential of retailing in India in a significant way. The market is still fragmented dominated by small shops, the largest network of retailers in the world from street Hawkers to Luxury malls. The market size is growing at 10% each year but 90% of it is unorganized. The highly diverse nature of Indian customer favours local retailers to succeed. However, 70% of India is still rural and lacks proper infrastructure. For any organized retailing to flourish, metro cities are too overcrowded and lack adequately built shopping centres, high street and mall spaces. New urban areas are coming up in cities without proper planning to create adequate space for shopping. The Mall sizes in India are half in terms of area occupied as per the International standards of building any mall. The suppliers and manufactures help in ensuring that retailing remain fragmented as this ensures the bargaining power with them rather than with retailers as has been case with dominant retailers. (Wal-Mart, Tesco, Carrefour, Best Buy and others) Share of Modern Retail Growth % Est.2015 Est. (In Rs.Cr) (In Rs.Cr) (In Rs.Cr) Growth % Total Retail 21,19,634 28,50, ,80, Modern Retail 1,38, , Share% of Modern Retail Source: Retail Intelligence Services (IRIS) Research, India Retail Report 2013 II. ADVANTAGES OF FDI IN RETAIL SECTOR IN INDIA 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. There are so many advantages of FDI in retail sector. 401 P a g e

6 2.1 Boost Economic Life: Due to foreign companies entering into retail sector, new infrastructure will be built thereby bolstering the jagging real estate sector. In turn, banking sector will also grow as the funds needed to build infrastructure will be provided by banks. A remarkable inflow of FDI in various industrial units in India has boosted the economic life of country. 2.2 Job Opportunities: It has been estimated according to government, that approximately ten million jobs will be created mostly in retail and real estate sectors. 2.3 Beneficial for Farmers: By FDI, farmers might get contract farming, where they will be able to supply an organized retailer based upon demand and will get a better price; easy credit availability will help to tackle the problem of farmer suicides. 2.4 Beneficial for consumers: Consumers will get variety of good quality products at low prices compared to market rates and will be able to choose from various international brands at one place. 2.5 Increase level of competition: FDI increases 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. 2.6 Infrastructure facilities: Allowing FDI might help India have better logistics and storage technologies resulting in avoiding wastage. Due to FDI foreign companies will invest around $ 100 million in India. Thereby, infrastructure facilities, refrigeration technology, transportation sector will get a boost. 2.7 Cheaper Production facilities: FDI will assure operations in production cycle and distribution. Due to economies of operation, production facilities will be available at a cheaper rate and thus resulting in availability of variety products to the ultimate consumers at a reasonable and cheaper price. 2.8 Availability of new technology: FDI allows transfer of skills and technology from abroad. 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. 2.9 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 well-versed with globally valued skills Other benefits: Inflation is controlled. Tax revenue collected by the government can be used for infrastructure development. India will become more integrated with regional and global economies in terms of quality standards and consumer expectations. Increased efficiency Cost reduction Implementation of IT in retail. 402 P a g e

7 III. DISADVANTAGES OF FDI IN RETAIL IN INDIA 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. There are so many disadvantages of FDI in retail sector. 3.1 Impact on the Kirana shops: The unorganized market provides the second largest employment opportunities to 3.95 million people. It is argued that opening FDI in retail sector will have an impact on sales in the unorganized sector. As a result of this, employment provided by the unorganized sector will be affected. Small retailers and other Kirana Stores may close down. 3.2 Limited Employment opportunities: It is said that FDI might provide employment opportunities, but it is argued that it cannot provide employment opportunities to semi-illiterate people. This argument gains more importance because in India, large number of semi-illiterate people is present. 3.3 Fear of lowering of prices: There is a fear that allowing FDI in retail would result in lowering of prices, as FDI will bring in good technology, supply chain etc. If prices are lowered, then it will lower the margin of unorganized players also. As a result of this, the unorganized market will be affected. This in turn will have an impact on the employment opportunities provided by the unorganized market. 3.4 FDI in retail will drain out the country s share of revenue to foreign countries, which may cause negative impact on India s economy. 3.5 Fears that domestic organized retail sector might not be competitive enough to tackle international players might not only result in loss of market share for them but in closure of their units. 3.6 There is a possibility of small business owners and workers from other functional areas, as lot of people are involved in unorganized retail business, may lose their jobs. 3.7 Supermarkets will establish their monopoly in the Indian market. Due to supermarkets fine tuning and higher accessibility they will be able to buy goods at lower prices and therefore will be able to sell at lower prices to consumers. This will result in closing of many small retailers. 3.8 Other disadvantages: Giving rise to cut throat competition rather than promoting incremental business. Promoting cartels and creating monopoly. Increase in real estate prices. Profit distribution, investment ratios are not fixed. It can expand only by destroying traditional retail sector. It is true that it is in the consumer s best interest to obtain his goods and services at the lowest possible price. But collective well being should take precedence. 1.9 Negative impacts on Indian Market to be noted: FDI will lead to job losses. Small retailers and other small Kirana store owners will suffer a large loss. Giant retailers and Supermarkets like Walmart, Carrefour, etc. will displace small retailers. 403 P a g e

8 Supermarkets will establish their monopoly in the Indian market. Because of supermarket s fine tuning, they will get goods on low price and they will sell it on low price than small retailers, it will decrease the sell of small retailers. Jobs in the manufacturing sector will be lost because foreign giants will purchase their goods from the international market and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail. Although, our country had made a condition that they must source a minimum of 30% of their goods from Indian micro and small industries, we can t stop them from purchasing goods from international markets as per WTO law. So after coming to India, they can reduce this 30% by litigating at the WTO. Foreign companies will get acclaim capital from our country. Outflow of Capital. Local producers will suffer or go vanished completely due to competition with foreign brands. IV. CONCLUSION The concept of FDI is now a part of India s economic future but the term remains vague to many, despite the profound effects on the economy. FDI means Foreign Direct Investment in which foreign investors can make investment in India. FDI in India s retail sector has both advantages as well as disadvantages. It is advantageous to the government as the tax revenue collected can be used for infrastructure development, not only this it will be beneficial to the farmers and consumers also to a large extent. It will also provide job opportunity which is a crucial factor for developing countries. On the other hand it will cause cut throat competition specially in the organized retail sector promoting cartels, creation of monopolies, increase real estate prices etc. Increased competition will be beneficial as everyone will try to make its product better from others to increase their profits which will ultimately result in quality products at reasonable prices. Opponents of FDI in retail argue that it will bring major job losses but frankly it will cause only redistribution of jobs with some drying up (like middlemen) and new ones sprouting up. The argument that farmers will suffer due to creation of monopolies is weak. Stores like Wal-Mart and Tesco are very few, on the outskirts of cities (to keep real estate costs low) and can t intrude in the local territory of local kiranas. REFERENCES [1]. Department of Industrial Policy & Promotion and Foreign Exchange Management Act 1999 [2]. "Retailing in India Unshackling the chain stores". The Economist. 29 May [3]. Economic and Political Weekly VOL XLVII NO.52 DCE page no.103. [4]. DIPP Discussion Paper on FDI in Retail in India [5]. Agarwal, P. (2011). Foreign Direct Investment in Indian Retail Sector - An Analysis: Availablefrom: (Accessed on February 18, 2014). [6]. Foreign Direct Investment in Developing countries, Lake District, September 13th? 14th,2002.Lancaster University Management School, Working paper P a g e

9 [7]. Dr. Sameena Khan &FayazAhamed., (2011), Foreign Direct Investment in India: Challenges and Opportunities in Multi-brand Retail Sector, International Journal Of Research In Commerce And Management, pp [8]. Economic Survey ( ). Available from: articles.economictimes.indiatimes.com/ / news/ _1_multi-brand-mandatorysourcing-retail-sector ( Accessed on February 22, 2014). [9]. Accessed on February 18, 2014). 405 P a g e