NECESSITIES OF FDI IN MULTI BRAND RETAILING IN INDIA

77 NECESSITIES OF FDI IN MULTI BRAND RETAILING IN INDIA Prof. Dr. Vishnu H. Fulzele, Associate Professor, Dept. of Commerce, SRK/MBBI College, Thane, India ABSTRACT Retailing consists of all business activities involving the sale of goods and services to ultimate consumers. Retailing involves a retailers traditionally a store or a service establishment, dealing with consumers who are acquiring goods and services for their own use rather than for resale. Indian retail sector is growing fast and its employment potential is growing fast. The retail scene is changing really fast. Retail sector has seen significant changes in the last decade. Since India has embraced LPG, and signed on WTO agreement, multinational retail giants have entered in this sector. In 1997, FDI in cash and carry (wholesale) with 100% ownership was allowed, and in the year 2006, 51% investment in a single brand retail trade (SBRT) outlet was permitted. On 24th November 2011, the GOI raised the limit in SBRT from 51 percent to 100 percent and on September 15, 2012, has announced to allow up to 51 per cent in FDI in MBRT for the international retailers to set up shops in India. Retail sector is the 2 nd largest employer in India after agriculture. Indian retail is one the sunrise sectors with huge growth potential. The retail industry in India is expected to grow at a rate of 14 % by 2013. According to the investment commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. The business in the organized retail sector of India is to grow most and faster at the rate of 15-20%. FDI in retailing as a strategic component of investment plays important role for sustainable economic growth and development in India. FDI is necessary for infrastructural development, non debt capital inflow, to reduce and control inflation, improving supply chain management and logistic, creation of employment opportunities, technical know-how, good quality of goods and services at cheaper prices to customers, expansion and development of small scale industries and SMEs and better price to farmers. Indeed, FDI is a significant factor influencing the level of economic growth in India. It provides a sound base for economic growth and development by enhancing the financial position of the country. It also contributes to the GDP and foreign exchange reserves of the country. FDI in multi brand retail will start better integration of Indian economy into the global markets. In this context, the present paper attempts to analyse the necessities of FDI in multi-brand retailing in India, with the latest move of the government to allow FDI in the multibrand retailing sector. The study points out that FDI in retail would undoubtedly enable India to integrate its economy with that of the global economy. The objectives of the present paper are: (1) To discuss the nature and need of opening up of FDI in multi-brand retail in India. (2) To study the present scenario of retailing in India. (3) To analyse the need of retailing in India related to various sectors/ areas or groups.. Keywords: FDI, Retail Sector, MBRT, SBRT, Necessities of FDI in India

78 Introduction: Retailing involves a set of business activities that adds value to the products and services sold to the final consumer for their use. Foreign Direct Investment (FDI) in retailing is an important and leading source of non-debt inflows of capital and provides opportunities to host countries to enhance their economic development and opens new opportunities to home countries to optimize their earnings by employing ideal resources. FDI in multi-brand retail trading (MBRT) implies a retail store with a foreign investment, can sell multiple brands under one roof. MBRT is the process of selling or marketing of two or more widely similar, competing and sometimes substitute products by the same firm under different brands. Since India has embraced LPG, and signed on WTO agreement, entry to multinational giants has been allowed in this sector. In 1997, FDI in cash and carry (wholesale) with 100% ownership was allowed, and in the year 2006, 51% investment in a single brand retail trade (SBRT) outlet was permitted. In July 2010, Department of Industrial Policy and Promotion (DIPP 2010), recommended FDI in MBRT. On 24 th November 2011, the GOI raised the limit in SBRT from 51 percent to 100 percent and on September 15, 2012, has announced to allow up to 51 per cent in FDI in MBRT for the international retailers to set up shops in India. Now global players with multi-brands can offer a range of household items and grocery directly to consumers in the same way as the ubiquitous kirana stores, which may change the face of the Indian retail sector. There are more than 14 million retailing shops in the country. These outlets are run by family members, rarely employing one or more persons. Number of shopping malls is expected to increase at a CAGR of more than 18.9 per cent from 2007 to 2015. The Indian retail sector is estimated to be Rs. 18,673 billion and it accounts for around 15 percent of GDP and 8 percent of total employment after the agriculture sector in the year 2012. There is turnover about $250 billion every year, and is expected to reach to $660 billion by the year 2015. The business in the organized retail sector of India is to grow most and faster at the rate of 15-20%. The sector is highly fragmented with about 96 percent of the stores in the unorganized sector. The retail sector is highly fertile and profitable to the foreign investors of all over the world. Taking the above description into consideration, the present paper is carried out to discuss the necessities of FDI in retailing in India. Research Methodology: Statement of the Problem: Now a day, too much discussion is going on FDI in MBRT in Indian economy. It is a matter of discussion in the parliament and survival of the present government. This article focuses why there is need and necessities of FDI in retailing. An attempt is made through this article to discuss the benefits to be derived by various concerned groups / areas. Objective of the Present Paper: The present study is conducted to know the following facts related to FDI in MBRT in present scenario. (1) To discuss the nature and need of opening up of FDI in multi-brand retail in India. (2) To study the present scenario of retailing in India. (3) To analyse the need of retailing in India related to various sectors/ areas or groups. Collection of data and information: The descriptive research methodology has been used to collect the data. To evaluate the overall position of the FDI in MBRT in India, the data and information collected is from secondary sources, i.e. from books, magazines, newspapers journals, and websites. Interpretation of the data is more qualitative terms than on quantitative terms. Tools and Techniques used for Presentation: The collected data has been presented in tables and percentage. Significance of the Study: The article will help to know the benefits that can be availed from the FDI in MBRT. Present study tells how the

79 various parties are going to get gains from the FDI in MBRT in present scenario. Review of literature: Fulzele (2012) examined the impact of FDI in retailing in India on employment, consumers, capital inflow, infrastructure, farmers and retailers. Ranjan, (2010) suggested some recommendations to the retail industry as well as to the government to take adequate steps in order to face challenges raised at the time of entry of global retailers. Dey (2007), took note of certain issues related to FDI in India. Gupta (2010), her findings are FDI in the buzzing Indian Retail should not just be freely allowed but should be significantly encouraged. Mittal (2012) argued that the small family retailers will simply be overwhelmed by the entry of foreign organised retailers is a myth that has been blown out of proportion. Pant (2011) outlined some general issues about FDI. Malik (2012) concluded that Indian consumers are more concerned about service quality, store convenience, product quality and availability of new products in retailing. Pai (2011) says, the opening of multibrand retail is expected to bring down inflation and inflow of foreign funds may help finance the current account deficit. Nayyar (2011) welcoming the FDI in retail says the primary benefit to farmers from the growth of organised retail is a higher price for their produce. Guruswamy (2007) says that the retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. Growth And Trend of Indian Retailing: In the year 1997, 100% FDI was permitted in cash and carry wholesale trading. Indian government announced a number of reforms in the process of liberalization of the economy. Since its inception there has been a remarkable surge in the FDI inflows in the country. There was retail business of 201, 204, 238, 278, 321, 368 and 421 billion $ in the year 1998, 2000, 2004, 2008 and 2010 respectively. (Kearney) Turnover and trend of retailing is shown in following table. Table: 1: Trends, Turnover and Share of Retailing in India (Figures in crore Rupees) Year Total Retailing *Growth over Organised #Growth over Share of Orgnised Turnovers last year, in % sector turnover last year, in % Retailing 2005 12,20,000 40,000 3 % 2006 13,80,000 13.11% 55,000 37.50% 4 % 2007 15,80,000 14.92% 75,000 36.36% 5 % 2008 18,10,000 14.55% 95,000 26.66% 6 % 2009 19,40,000 7.18% 1,10,000 15.78% 7 % 2010 21,25,000 9.53% 1,40,000 27.27% 7 % 2011 23,55,000 10.82 % 1,75,000 25.00 % 8 % 2012 26,40,000 12.10 % 2,20,000 25.71 % 9 % 2013 29,50,000 11.74 % 2,75,000 25.00 % 11 % 2014 32,65,000 10.67 % 3,45,000 25.45 % 12 % 2015 36,25,000 11.02 % 4,25,000 23.18 % 13 % 2016 39,95,000 10.20 % 5,30,000 24.70 % 14 % 2017 44,95,000 12.51 % 6,70,000 26.41 % 15 % 2018 50,35,000 12.01 % 8,40,000 25.37 % 17 % 2019 56,15,000 11.51 % 10,50,000 25.00 % 19 % 2020 62,40,000 11.13 % 13,10,000 24.76 % 21 % (Source: Veerendra Talegaonkar, Loksatta, Mumbai, 5/12/2011, pp 11.) */# compiled by researcher. From the above table it seems that the total turnover in the year 2011 was Rs. 23,55,000 crore and in the year 2020 it will cross 62,40,000 crore, in the same period retailing turnover in the organised sector amounted to Rs. 175,000 crore and it will touch to Rs.13,10,000 crores. Share of the organised retailing in the year 2011, is 8% and it will touch 21% in the year 2020. At present growth of turnover of retailing is 10 percent and in the next 10 years it is estimated to increase 11

80 percent every year. In case of organised retailing, growth would be more than 25% every year up to 2020. Necessities of FDI In India: India needs large amount of foreign exchange through FDI in retailing to sustain and enhance its economic growth. There are number of issues to opening of the retail sector for FDI. FDI in India is expected to benefit the concerned, which are discussed as under. Growth and Development of Farmers: India has 600 million farmers. They are getting only one fourth of price, what is sold in the market. They are compelled to sell their crop at whatever price they can get. The Govt. says that farmers will gain out of this investment due to omitting out of middlemen. The mandi system does not favour farmers because they lose 5% of the value in transportation, 10% in broker commission and 10% in quality parameters. A better cold storage would help to prevent the existing loss of 34% of fruits and vegetables due to inefficient systems. FDI in retail will be instrumental in the pricing, for farmers. FDI would provide an impetus for them to set up modern supply chains, with refrigerated vans, cold storage and more efficient logistics. The biggest beneficiary would be the farmers who will be able to improve their productivity by selling directly to large organised players. FDI is expected to push up this issue and restructure supply chain, making it smother and faster. This in turn may boost farm exports significantly. (Sengupta 2011) Generating New Employment: The retail sector also acts as an important employment absorber for the present social system. One of the principal reasons behind the explosion of retail and its fragmented nature in the country is the fact that retailing is probably the primary form of disguised unemployment / underemployment in the country. Table 2: Share of Retailing in Total Employment. Country Share Of Retail in Total employment India 07.00 % China 06.00 % Poland 12.00 % Brazil 15.00 % USA 11.70 % Korea 18.00% UK 11.00% Malaysia 07.00% (Source: FDI in Retail Sector in India, Arpita Mukherjee, Nitisha Patel, ICRIER Publication pp.31) Table 2 shows the share of retail in Indian employment, which is one of the lowest of all the countries mentioned. Total retail employment in India, both organized and unorganized, account for about 6% of Indian labor work force. Retail sector in India can be expanded using FDI which would create larger employment that the unorganised retailing has failed. In India, where unemployment is a major problem, foreign companies that come to India, in retrial sector will boost the economy and create more jobs. According to Indian staffing federation (ISF) this sector will create as many as 10 million jobs, around 4 million direct jobs and almost 6 million indirect jobs including contractual employment within a span of 10 years.( business-standard 2012) If output expands through modernization of the retail, it will increase real incomes (and savings) and generate employment in other sectors also. Benefits To Consumers: Entry of foreign retailers would eliminate middlemen and consumers will get fresh vegetable, goods and services at cheaper prices. The global retailers have advanced know how, inventory management, new technologies, quality of product and customer services that would result to lower down the prices by improve productivity and efficiency. Due to entry of global players in retailing would result in the cut-throat competition and price war. Ultimately,

81 consumers would enjoy benefits in terms of a wide range of world-class products and services at competitive prices. Capital Inflow: FDI in retail trade would attract large inflows of foreign investment and likely to promote the welfare of all sections of society. (Agrawal 2011) Government decided to attract foreign capital inflow of $590 billion to the economy; also investors are mandated to make investment of atleast $100 million including infrastructural facilities. As we know that we require huge foreign capital for our comprehensive and sustainable growth and development. If we allow FDI in retailing, would bring interest free capital in the economy. Considering the principle of capital formation and multiplier effect of economics there will be positive impact on the economy. Infrastructure Development: India is the second largest producer of fruits and vegetables and it has a very limited integrated cold-chain infrastructure. This leads to about 30% losses in certain perishable agricultural output in India, on average, every year. (kpmg) Foreign investment makes a genuine contribution to the development of Indian infrastructure and logistics. It was projected that by 2010, 500 new malls would come-up. Allowing FDI in retail can bring about supply chain improvement, investment in technology, manpower and skill development, tourism development, greater sourcing from India, upgradation in agriculture, efficient small and medium scale industries, growth in market size and employment generation. Between 2010 and 2012, the organised retail real estate stock will grow from the existing 41 million sq ft to 95 million sq ft. (Knight) Development of SSIS: FDI in retailing seems to have had a positive impact on the small manufacturers who now work in with large ones to work for modern retailers. Small and medium enterprises dominate the Indian retail scene. In respect of proposals involving FDI beyond 51 percent, 30 percent sourcing would mandatorily have to be done from domestic SMEs and cottage industries artisans and craftsmen. It is an evident that government of India, made compulsory to purchase materials and semi-finished goods from SMEs that would result to grow and prosper the SSI sector. Improving Retailing Services: There would no immediate impact on the existing retail sector, due to entry of organised retailers. Local retailers are expected to remain a key element in the ecosystem in the foreseeable future, with their ability to offer door step service and convenient access. The ICRIER has found that though initially, small stores located in the vicinity of big malls have seen a drop in scales and profit. Besides, the advantages of neighborhood kirana stores such as proximity, leverage on credit sales, and bargaining choice of customers, home delivery and convenient shop timing would remain even after entry of big retail chains. In this regard, a study conducted by Venkateshwarlu (2007) to see the impact of malls on retail trade.36 percent of the retailers feel that there is not much impact, 24 percent opine that there is scope for healthy competition, 22 percent say that there would be cut in margin because of such malls. During the last ten years number of malls and organised retailing shops have been opened, it is evident that no kirana shop has been closed up. Inflation Control: Investments in cold-storage and warehousing will ease supply-side pressures that have driven inflation close to a double-digit. The Govt. advocated that there is need to open the retail sector for global players to control food price inflation, which is in double digit over several years. Farmers directly sell their produce to retailers, thereby reducing margins for middlemen, investments in cold-storage and warehousing will ease supply-side pressures that have driven inflation. Thus FDI will reduce inflationary pressure. Inflow of Technical Know How: Giant in retailing will bring their technology and technical know-how. The inflow of technology and technical know-how is said to be a natural migration along with the global players in retailing. This would transform into Indian technological advancement, production improvements, better quality of goods and services, low cost,

82 generation of exports, and hastening of manufacturing employment. Improved Supply Chain Management: FDI is expected to restructure the supply chain, making it smoother and faster. Improved supply chain contributes to savings in food wastages which has been rampant on account of inadequate infrastructure. (Ghosh) FDI in retail would reduce cost of intermediation and entail setting up of integrated supply chains that would minimize wastage, give producers a better price and benefit both producers and consumers. An efficient supply chain may augment its linkage to the global supply chain. This in turn may boost farm export significantly. Cost Reduction The global retailers have advanced management know how in merchandising and inventory management and have adopted new technologies which can significantly improve productivity and efficiency in retailing. The entry of large low-cost retailers and adoption of integrated supply chain management by them is likely to lower down the prices. Big players in retailing will direct purchases from farmers and SSIs which result to elimination of middlemen. This will bring down the cost of produce and services. Grwoth of GDP: Table 3: Share of Retailing in GDP across Different Countries Countries GDP % India 14 USA 10 China 8 Brazil 6 (Source: Ranjan, Poorva, (2010). Compiled by R. Gopal and Manjulkar Pradeep, FDI in Indian retail Sector: Boon or Bane Retail Management: An Indian Perspective Excel Books, New Delhi, pp.453) It is widely acknowledged that FDI can have some positive results on the economy that would lead to greater efficiency and improvement of living standards. According to the ICRIER, India is expected to grow at a CAGR of over 13% till 2012. In the year 2007 retail sales reached Rs 13,300 billion and amounting to around 33% of India s GDP at current market prices. According to the Central Statistical Organisation (CSO) estimates, the total retail trade constituted 13.0% of country s GDP in 1999-2000. In the year 2011 it has gone up to 15 percent.in light of the above, it can be concluded that allowing healthy FDI in the retail sector would lead to a substantial surge in the country s GDP and overall economic development. Real Estate: The real estate retail industry will benefit immensely due to increase in demand and increased investor confidence and the country will flourish in terms of quality standards and cost competitiveness of Indian producers in all the segments. Government Exchequer: The organised retail sector facilitates the generation of tax revenues through building of a sophisticated supply chain. This impacts the logistics, transportation, warehousing and other service sectors, which will contribute to the exchequer through payment of indirect taxes, specifically the service tax. Strengthening India s Position a Sourcing Hub to the World: Global retailers have been sourcing from India for years and their retail presence in the Indian market will enhance exports from India, as they develop and leverage relationship with local suppliers. Most global retailers who have entered India have expressed their intention to source and export a range of product from the country. The extent of sourcing from India will increase when global retailers are allowed to operate in the Indian market. The extent of

83 sourcing from India will increase when global retailers are allowed to operate in the Indian market. (pwc) Conclusions: Today each and every nation is trying to liberalize its economic policies in order to attract FDI to enhance a substantial level of economic and social development. Indian retail sector is in a boom period and attracting global retail giants due to its market opportunities. It can be observed from the above analysis that an entry of the global players in retailing leads to inflow of latest technical know how, establishment of well integrated supply chains, availability of quality products at cheaper prices to consumers, development of SSIs and SMEs, creation of more jobs, interest free capital, benefits to farmers, controls inflation and contributes for capital formation to increase nation s GDP. Taking into consideration, above necessities, FDI in retailing cannot be avoided in India. References.: [1] http://dipp.nic.in/discussionpapers/dp_fdi_multibrandretailtrading_06july2010.pdf Discussion Paper on FDI in Multi Brand Retail Trading, [2] Fulzele, Vishnu, H. (2012), Impact of FDI in Retailing in India, The Horizon, A Biannual Research Journal, April, Volume V, No.1pp 142-144., ISSN- 2229-4554. [3] Ranjan, Poorva, (2010). FDI in Indian retail Sector: Boon or Bane Retail Management: An Indian Perspective Compiled by R. Gopal and Manjulkar Pradeep, Excel Books, New Delhi, pp.453-461. [4] Dey, Dipankar (2007). FDI in India s Retail Trade; Some Additional Issues. Aspects of India s Economy. Vol. 43, July, pp 1.http://papers.ssrn.com [5] Gupta Amisha (2010) FDI in Indian Retail Sector: Some Strategic Issues and Implications. IJMMR, Volume 1, No. 1, December, pp 55-67. www.skirec.com [6] Mittal Rajan Bharti (2012), A lost opportunity Seminar 629, January, pp 55-58. [7] Pant, Manoj (2001), Who s Scared of Retail FDI. The Economic Times, 9/12/2011, pp 16. [8] Malik, Manju (2012), A Study on Customers Satisfaction towards Service Quality of Organized Retail Stores in Haryana, Indian Journal of Marketing, February, Volume 42, no 2, page no 51 to 60. [9] Pai, V.T. (2011). Finally FDI Arrives in Retail- Comes with Wholesale Issues, Monthly Economic Digest, December, Volume. XLI, no. 2, pp 41-46. [10] Nayyar, Dhiraj (2011), UPA s Bitter Harvest, India Today, December 19, pp 46. [11] Guruswamy, Mohan; Sharma, Kamal; Mohanty, Jeevan Prakash and Thomas J. Korah (2007) FDI in India s Retail Sector: More Bad than Good? www.cpasind.com [12] Kearney, Retail in India- a CII-Kearney Report, adopted from Sahoo, Debajani and Mishra, Hari, Govind (2008). Organised Retail in India: A Case study of Bal-Wart IJM, January, Volume 38, No 1, pp.41. [13] Talegaonkar, Veerendra Loksatta, Mumbai, 5/12/2011, pp -11. [14] Sengupta, Debashish, Ray Titus, (2011). A Comparative Study on FDI in Retail: A Boon or A Bane? Indian Journal of Marketing, April, Volume 41, No 4, pp.15. [15] www.business-standard.com./india.18/09/2012. [16] Agrawal, Pulkit and Tyagi, Esha, FDI in Indian Retail Sector An Analysis http://www.legallyindia.com [17] KPMG (2010). "FDI in Multi-Brand Retail Trading". http//www.in.kpmg.com. [18] Knight Frank, India 2010, 'India : Organised Retail Market 2010', May 2010. Venkateshwarlu, H., and Rajani, C.V., (2007). Small Vs Mall, Indian Journal of Marketing, Vol.37, October, pp. 29-33. [19] Ghosh, Anjan; Ray, Subrata and Shah, Kinjal (2011). Indian Retail Industry. www.icra.in [20] www. pwc.com/india. Winning in India s retail sector. [21] Rastogi, Shruti and Anand, Swati (2011). Analysis of FDI in Multi-Brand Retail in India: Legal Perspective. "Pragyaan: Journal of Law" Volume1,Issue 1, December, pp.38-44. [22] Hurne, Laxmikant and Khawas Patil S. G. (2012) Proposed FDI in Multi-Brand Retailing:Will it Heat the Indian Unorganized Retail Sector?, Review Of Research, Vol.1,Issue.VI, March; 12pp.1-4. ISSN:-2249-894X. ****