Perception of Small Retailers towards new FDI Policy of Retailing in India- A study of Gwalior Region

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1 Perception of Small Retailers towards new FDI Policy of Retailing in India- A study of Gwalior Region Mrs Pooja Jain Asst. Professor, Vikrant Group of Institutions Gwalior pooja007jain@gmail.com ABSTRACT This paper provides detailed information about the perception of retailers in retailing industry in India. On November 24, 2011, the Union Cabinet of the Indian government approved a proposal of allowing 51 percent FDI in the multi-brand retailing in India and 100 percent FDI in the single-brand retailing, subject to certain conditions. This paper focus to the government's policy on FDI in retailing and tries to examine it pros and cons while examining the perceptions of small retailers on the government's decision. The main objectives of this paper is to examine the impact of FDI in retail on various small retailers, to analyze the market situations and perception of retailers on new FDI policy retailing in India. This study based on primary data. For the purpose of the analysis of data, as a tool graphical presentation and analysis by the statements of retailers. This study reveals that the Indian government has installed the implementation of this proposal which has temporarily take away the wishes of the global retail players. Allowing FDI may not be as bad as some of us feel. But the policy must be well-drafted for which a countrywide perception study of the retailers of retailing is solicited. KEYWORDS: F D I, Retailing, Perception, Retailers INTRODUCTION

2 The retail industry in India is the second largest employer with an estimated 35 million people engaged by the industry. There has been opening of Indian economy to foreign organization for foreign direct investment through organized retail. The union government has sanctioned 51% foreign direct investment in multi-brand like Wal-Mart, Carrefour, Tesco and up to 100% in single brand retail like Gucci, Nokia and Reebok. Foreign direct investment is the sum of equity capital, reinvestment of earnings and other long or short term capital as shown in the balance of payments. It usually involves participation in management, joint venture, transfer of technology and expertise. SINGLE BRAND RETAIL Single brand implies that foreign companies would be allowed to sell goods sold internationally under a single brand, viz., Reebok, Nokia and Adidas. FDI in Single brand retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets. MULTI BRAND RETAIL FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items FDI POLICY WITH REGARD TO RETAILING IN INDIA The new policy shall provide a significant boost to the $28 Bn Indian organized retail market which is expected to reach $260 Bn by With sluggish growth in the developed markets across the globe and Indian retailers being bogged down by high debt and high cost of expansion, the new policy presents a win-win situation for both foreign and Indian retailers. The stock markets also reflected the positive outlook for the sector, by pushing up some retail stocks by up to 30% within 2 days of the announcement. The policy will positively impact a wide cross section of the Indian population. Consumers are expected to save 5-10% on their regular household spend and get a wider choice of products. Farmers will get 10-30% higher

3 remuneration for their produce as back end infrastructure investment will emirate the middlemen. The infusion of capital and setting up of new stores will also provide a boost to real estate as well as create 3-4 million new jobs in retail and a further 4-6 million jobs in logistics, contract labour, security, etc. PROSPECTED CHANGES IN FDI POLICY FOR RETAIL SECTOR IN INDIA THE GOVERNMENT (LED BY DR.MANMOHAN SINGH, ANNOUNCED FOLLOWING PROSPECTIVE REFORMS IN INDIAN RETAIL SECTOR 1. India will allow FDI of up to 51% in multi-brand sector. 2. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores, up from previous cap of 51%. 3. The retailers (both single and multi-brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers. 4. All retail stores can open up their operations in population having over1million.out of approximately 7935 towns and cities in India, 55 suffice such criteria 5. 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. 6. The opening of retail competition (policy) will be within parameters of state laws and regulations. Entry Options For Foreign Players prior to FDI Policy Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had been operating in the country. Some of entrance routes used by them have been discussed in sum as below:- 1. Franchise Agreements It is an easiest track to come in the Indian market. In franchising and commission agents services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for

4 entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lactose, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route. 2. Cash And Carry Wholesale Trading 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers 3. Strategic Licensing Agreements Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. 4. Manufacturing and Wholly Owned Subsidiaries. The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. THE PROS OF FDI IN RETAILING } It reduces the gap between farm prices and retail prices. } Gives best management practices from all over the world. } Big retail chains will invest in supply chains which will reduce wastage, estimated at 40 percent in the case of fruits and vegetables } Small and medium enterprises will have a bigger market, along with better technology and branding } It will bring much-needed foreign investment into the country, along with technology and global best-practices } It will actually create employment than displace people engaged in small stores } It will induce better competition in the market, thus benefiting both producers and consumers } To achieve expected growth in India GDP: India is targeting for its GDP to grow by 8to10percent per year. This requires raising the rate of investment as well as generating

5 demand for the increased goods and services produced. } Provide an aid to Indian agriculture to become lowest cost source of farm produce. } To bring trade balance and to increase liquidity by the way of foreign exchange reserves. CONS OF FDI IN RETAILING IN INDIA } Threats on organized and unorganized retail players. } Replacement of established national brands by the brands of the retail gains. For e.g. WalMart is committed to buying the best goods at the cheapest prices to give its customers the best value for money. That is why it sources so heavily from China. 70% of merchandise in Wal-Mart contains components made in China. Even though Walmart may not continue heavy operations in china but would continue heavy sourcing from china market to cater to the world markets at lower prices. Low prices of Chinese products can easily convince Indian price consciousness mentality. Acceptance towards Chinese brands can create a direct threat on Indian established brands providing best quality products with reasonable prices. } It may bring down prices initially, but fuel inflation once multinational companies get a stronghold in the retail market. } Small and medium enterprises will become victims of predatory pricing policies of multinational retailers. } It will disintegrate established supply chains by encouraging monopolies of global retailers LITERATURE REVIEW A publication of the World Bank and the International FinanceCorporation, 2009 The International Bank for Reconstruction and Development / The WorldBank indicate Foreign direct invest ment assists in increasing the income that is generated through revenues realized through taxation. It also plays a crucial role in the context of rise in the productivity of the host countries. In case of countries that make foreign direct investment in other countries this process has positive impact as well. In case of these countries, their companies get an opportunity to explore newer markets and thereby generate more income and profits.

6 An article by Koshy Joseph,Partner, Joseph and Joseph Law Offices FDI IN RETAIL SECTOR Copyright 2006, describes 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, however, retail has been as issue deliberated over in view of its expected effect on several sections of the economy, particularly small businesses. However, the said decision of the government permitting FDI in retail has drawn a lot of flak from the leftist and the opposition parties. The gates have opened for multinationals interested and looking forward to set a foot in the booming retail business in India. Singh, Dr. Mandeep, Associate professor of Economics, The Earth Institute of Columbia University in his article Foreign Direct Investment in Retailing in India Its Emergence & Prospects published on 3 rd August, 2010 says Since the Indian retail sector is highly fragmented and domestic retailers are in the process of consolidating their position, the opening up of FDI regime should be in phased manner over 5 to 10 years time frame so as to give the domestic retailers enough time to adjust changes. FDI should not be allowed for multi brand stores in near future, as Indian retailers will not be able to face competition with these stores immediately. At present it is also not desirable to increase FDI ceiling to more than 51% even for single premium brand stores. It will help us to ensure check and control on business operations of global retailers and to protect the interests of domestic players. However, the limit of equity participation can be increased in due course of time as we did in telecom, banking and insurance sectors. The strategy of opening up should be backed by appropriate reform measures. India can learn from the experiences of other developed and developing countries and develop its own strategies, laws and regulations that would be in the best interest of the country. OBJECTIVES The sheer potential of Retail sector and its contribution in Indian economy highlights the

7 relevance of this paper. The objectives of paper are : 1. Pros and cons of FDI in retail. 2. To analyze the positive and negative impacts of the reforms to be undertaken. 4. To assess the market situations and perception of retailers on FDI new policy 5. To review the challenges to be faced by FDI s while investing in India. METHODOLOGY Sample size of 250 retail enterprises from different areas of the city Gwalior. This research also covers different categories of retailers according to sales turnover of Rs.5 thousand to 10 thousand, between Rs. 10 thousand to Rs 50 thousand, Rs 50 thousand to 1 lakh and above Perceptions of Small Retailers on the new FDI policy in Retailing in India S. No Statement Satisfied(%) Dissatisfied( %) 1 Big store affects my sales Big store impact on size of industry Neutral(%) 3 Big store would be main competitor of small retailers 4 Big store have quality improvement and branding of the product 5 Smaller outlets have problems because of the presence of big retailers 6 Average expenditure of customer would decrease because of Big retailers 7 Small retail outlet has different attraction than Big retail 8 store Big retailers have different varieties of products 9 Smaller retailers have own strategy to attract customers 10 Oppose the FDI in multi-brand retail in India

8 1 Perception towards Impact on Sales Majority of respondents are of the view that the decision of opening of the FDI in retail would impact positively in the form of sales because, 53% of the respondents opinion that they have no impact on the growth of sales of the product would, 31 % of the respondents perceive the impact on growth of sales 16% of the respondents are neutral. 2 Perception towards Impact on Size of Industry, Business/ Capacity Addition On the aspect of the possible impact on the size of the industry, business and capacity addition, 40% majority of the respondents say that size of the industry, business/capacity addition impact on small retailers, 35% respondents say size of industry, business create no impact on small retailers. 3 Perception towards Impact on Qualitative improvements and branding of the products Small retailers has some fear over the quality improvements and branding of the products, they perceived that the opening up of retail would lead to highly impact on small retail because 72% respondents feel that big retailers have quality improvements and branding of the products

9 4 Perception towards different varieties of products Small retailers has some fear over the varieties of products, they perceived that the opening up of retail would lead to highly impact on small retail because 54% respondents feel that big retailers have different varieties of products than us. 5 Perception towards strategy to attract customers Around 48% of the respondents expect the impact of FDI in retail in the SME sector to be positive because they have no fear about customers, they have own strategy to attracts customers 6 Perception towards competition Majority of respondents are of the view that the decision of opening of the FDI in retail would impact positively in the field of competition. Around 33% of the respondents feel that the decision would have a negative impact in terms of competition. ANALYSIS AND FINDINGS OF THE STUDY This study is based on a large sample size of 250 retail enterprises covering different area of the city Gwalior. According to retailers sales turnover of Rs.5 thousand to 10 thousand, between Rs. 10 thousand to Rs 50 thousand, Rs 50 thousand to 1 lakh and above from different areas. This study confirms that almost 96% of the respondents from retail sector are aware of the Government s earlier decision to allow 100% FDI in single brand retail and 51% FDI in multibrand retail and also of the latest notification. On the question how the retail industry consider entry of MNC retailers as a threat or opportunity, majority of respondents (66.7%) see it as an opportunity for their sector while around 21 % of respondents perceive it as a threat. About 12.5 percent of respondents are of the opinion that the decision would have little or no impact on their company. This study has also tried to find out the perception of retailers to the impact of the opening of FDI in retail in terms of different growth indicators / parameters like sales, size of the industry, employment, branding and achieving other efficiencies: -

10 CONCLUSION From the above discussion, it can be drawn that though the small retailers are not so apprehensive about the big stores, some feel allowing FDI may not be as bad as some of us feel but they oppose allowing FDI in retailing in India. This may be because they are not well informed about the pros and cons of the proposed policy change. FDI in retailing should not be seen as just another policy decision because it has a direct impact on agriculture sector as well. Farmers will get 10-30% higher remuneration for their produce as back end infrastructure investment will emanate the middlemen. But the policy must be well-drafted for which a countrywide perception study of the retailers of retailing is solicited. REFERENCES 1. Bartels F. L. and Pass C. L., 2000, International Business: A competitiveness Approach, Singapore: Prentice Hall. 2. Bartels F. L., 2009, Regional Integration in Africa: implications on South-South FDI,Presentation submitted to the Expert Meeting, Trade and Development Board, UNCTAD. Geneva, 4-5 February (India s Foreign Investment Policy, Amitendu Palit, July 2009, IFRI, accessed on 3rd December Foreign direct investment- Types and methods, available at wiki/ Foreign_direct_investment, accessed on 3rd December Dr. Sameena Khan & Fayaz Ahamed., (2011), Foreign Direct Investment in India: Challenges and Opportunities in Multi-brand Retail Sector, International Journal Of Research In Commerce And Management, 2(1), pp Foreign direct investment, available at /news/ _1_inflows-fdi-foreign-direct-investment, accessed on 31st November, FDI in Retail An idea whose time has come, Images Retail, July 2011, pp

FDI IN RETAIL: AN INDIAN PERSPECTIVE

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