FDI in Retail Sector: A case study

By Anusha G ( NA11B011): 

 Retailing is one of the pillars of Indian economy and accounts for 14 to 15 percent of the country's GDP. The Indian retail market is estimated to be US $ 500 billion and one of the top five retail markets in the world by economic value.

 The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing

 Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

 Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture. The retail industry – both organized and unorganized employs about 40 million Indians (3.3% of Indian population).

History:

In 1997, India allowed foreign direct investment (FDI) in cash and carry wholesale with prior government approval. The approval requirement was relaxed, and automatic permission was granted in 2006. Between 2000 to 2010, Indian retail attracted about $1.8 billion in foreign direct investment, representing a very small 1.5% of total investment flow into India.
Before 2011, India had prevented innovation and organized competition in its consumer retail industry. Because of unorganized retail, in a nation where malnutrition remains a serious problem, food waste is rife. Over 30% of food staples and perishable goods produced in India spoils because of poor infrastructure and small retail outlets.
Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets, to sell multiple products from different brands directly to Indian consumers. Even single-brand retail was limited to 51% ownership and a bureaucratic process.
On 14 September 2012, the government of India announced the opening of FDI in multi-brand retail, subject to approvals by individual states. On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand retail and 100% in single brand retail in India. The government managed to get the approval of multi-brand retail in the parliament despite heavy uproar from the opposition. Some states will allow foreign supermarkets like Walmart, Tesco and Carrefour to open while other states will not. This decision was welcomed by economists and the markets, but caused protests and an upheaval in India's central government's political coalition structure.
The opening of retail industry to global competition is expected to spur a retail rush to India. It has the potential to transform not only the retailing landscape but also the nation's ailing infrastructure. A Wall Street Journal article claims that fresh investments in Indian organized retail will generate 10 million new jobs and about five to six million of them in logistics alone; even though the retail market is being opened to just 53 cities out of about 8000 towns and cities in India.

Controversy over allowing Foreign retailers:
  • Entry of global retailers like Walmart can wipe off independent small retailers ( kirana stores ) and leave millions of Indians jobless
  • Global retailers after eliminating local competition , can exercise monopolistic power to raise product prices. It is argued this was the case of the soft drinks industry, where Pepsi and Coca-Cola came in and wiped out all the domestic brands.
  • FDI in retailing can upset the import balance as international retailers may prefer to source their products globally
  • Work will be done by Indians, profits will be enjoyed by foreigners.
  • Like the East India Company, global retailers could enter India as a trader and then take over politically
Supporters Claim:
  • Organised retail will need workers. In addition, millions of additional jobs will be created during the building of and the maintenance of retail stores and other retail supporting organizations.
  • Competition between global retailers will keep prices in check and ensure quality products
  • Global integration can potentially open export markets for Indian farmers and producers. Beyond capital, the Indian retail industry needs knowledge and global integration. Global retail leaders, some of which are partly owned by people of Indian origin, can bring this knowledge.
  • With 51% FDI limit in multi-brand retailers, nearly half of any profits will remain in India. Any profits will be subject to taxes, and such taxes will reduce Indian government budget deficit.
  • Indian small shops employ workers without proper contracts, making them work long hours. Many unorganized small shops depend on child labour. A well-regulated retail sector will help curtail some of these abuses
      The advantages outweigh the disadvantages of allowing unrestrained FDI in the retail sector. Other Asian countries like China, Malaysia, Taiwan, Thailand and Indonesia see foreign retailers as catalysts of new technology and price reduction; and they have benefited by welcoming FDI in retail. In Indonesia and China, the issue of allowing FDI in the retail sector was first met with incessant protests, but allowing such FDI led to GDP growth and a rise in the level of employment. India too will benefit by integrating with the world, rather than isolating itself.  

In a pan-Indian survey conducted in 2011, overwhelming majority of consumers and farmers in and around ten major cities across the country supported the retail reforms. Over 90 per cent of consumers said FDI in retail will bring down prices and offer a wider choice of goods. Nearly 78 per cent of farmers said they will get better prices for their produce from multi-format stores. Over 75 per cent of the traders claimed their marketing resources will continue to be needed to push sales through multiple channels, but they may have to accept lower margins for greater volumes.


The entry of FDI in multi brand retail in India can be growth enhancing only if proper safeguards are in place and the market environment is regulated.

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