PROJECT REPORT ON

FDI IN RETAIL
By
SAURABH SHARMA
PG20112202

IILM Institute for Higher Education GURGAON

FDI basically is Foreign Direct Investment. In simple terms it can be defined as investment made by the foreign companies or foreign government in India. It is mainly dealing with monetary matters. FDI is a popular mode of entering in another countrys economy. FDI in retail is one of the steps taken by our government recently which has drawn attention of almost everybody. FDI is the most debated issue among the government, the Opposition, industrialists, academics, media and the public. It has been favored by few but opposed by many. But the government thinks that it is a big step towards improvement of our economic situation and will benefit the country in long run. Even after the strong opposition by opposing parties government has not changed their decision and the decision to bring FDI in retail stands still. The reason why countries seek FDI is mainly because the domestic capital is not enough for economic growth and also it brings technical expertise and knowledge.

WHAT IS FDI?
FDI- Foreign Direct Investment FDI is a vital ingredient of the globalization efforts of the world economy. Globalization offers an unparalleled opportunity for developing countries like India to attain quicker economic growth through trade and investment. It is made by foreign countries in order to establish wholly
owned companies or to manage them or to purchase shares of companies in another country. It can be of two types-

1) Horizontal invest in same type of industry. 2) Vertical- financial collaboration with market unit or suppliers of input in that country. METHODSThe foreign direct investor may acquire voting power of an enterprise in an economy through any of the following methods: -by incorporating a wholly owned subsidiary or company anywhere -by acquiring shares in an associated enterprise -through a merger or an acquisition of an unrelated enterprise -participating in an equity joint venture with another investor or enterprise

ADVANTAGES OF FDI-

Employment generation and increase in production. Help in capital formation by bringing fresh capital. Helps in transfer of new technologies & management skills. Increases competition within the local market and this brings higher efficiencies. Contributes to international integration by promoting exports. Increases tax revenues. Promotes innovation. Development in supply chain infrastructure, reduced wastage. Improved quality.

Thus FDI favors consumers by improving quality and lowering prices and favors economy by increased flow of foreign currency in the country, more employment, latest technology and improved infrastructure.
DISADVANTAGES OF FDI-

Local population may be displaced out of their jobs if they are unable to cope with the technologically advanced foreign firms. Domestic companies fear that they may lose their ownership to overseas company. Small enterprises fear that they may not be able to compete with world class large companies and may ultimately be edged out of business. Large giants of the world will try to monopolize and take over the highly profitable sectors. Such foreign companies invest more in machinery and intellectual property than in wages of the local people. Government has less control over the functioning of such companies as they usually work as wholly owned subsidiary of an overseas company.

SECTORS WHERE FDI IS NOT ALLOWED IN INDIA Atomic Energy Lottery Business Gambling and Betting Business of Chit Fund Agricultural (excluding Floriculture, Horticulture, Development of seeds, Animal Husbandry, Pisciculture and cultivation of vegetables, mushrooms, etc. under controlled conditions and services related to agro and allied sectors) and Plantations activities (other than Tea Plantations) Housing and Real Estate business (except development of townships, construction of residential/commercial premises, roads or bridges to the extent specified in notification Trading in Transferable Development Rights (TDRs). Manufacture of cigars , cheroots, cigarillos and cigarettes , of tobacco or of tobacco substitutes

FDI PERCENTAGE IN DIFFERENT SECTORS-

26% FDI is permitted in Defense Newspaper and media Petroleum refining Pension sector

49% FDI is permitted in-

Banking Cable network DTH Infrastructure investment Telecom Insurance (Enhanced from 26% to 49% in October, 2012)

51% is permitted in Multi-Brand Retail (Since September 2012) Petro-pipelines

74% FDI is permitted in Atomic minerals Science Magazines /Journals Petro marketing Coal and Lignite mines Telecom

100% FDI is permitted in Single Brand Retail Advertisement Airports Cold-storage BPO/Call centers E-commerce Energy (except atomic) export trading house Films Hotel, tourism Metro train

Mines (gold, silver) Petroleum exploration Pharmaceuticals Pollution control Postal service\ Roads, highways, ports. Township Wholesale trading

RETAIL INDUSTRY IN INDIARetailing is the most active and attractive sector of last decade. The emergence of retailing in India has more to do with the increased purchasing power of buyers, especially postliberalization, increase in product variety, and increase in economies of scale, with the aid of modern supply and distributions solution. -Retail industry in India is one of the fastest growing. -Contributes 14% to the national GDP and employs 7% of the total workforce. -The retail industry is divided into organized and unorganized sectors. -Organized trade employs roughly 5 lacs people whereas the unorganized retail trade employs nearly 3.95 crores. In my point of view FDI in retail can have some advantages as well as disadvantages to the consumers, producers and the economy.

Background and Recent Developments for FDI in Retail SectorAs part of the economic liberalization process set in place by the Industrial Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of steps:

o 1995 : World Trade Organisations (WTO) General Agreement on Trade in Services, o

which includes both wholesale and retailing services, came into effect 1997 : FDI in cash and carry (wholesale) with 100% rights allowed under the government approval route;

o 2006 : FDI in cash and carry (wholesale) was brought under automatic approval o o
route; Upto 51% investment in single brand retail outlet permitted, subject to Press Note 3 (2006 series) 2011 : 100% FDI in Single Brand Retail allowed 2012 : On Sept. 13, Government approved the allowance of 51 percent foreign investment in multi-brand retail, [ It also relaxed FDI norms for civil aviation and broadcasting sectors]

51% FDI IN MULTI BRAND RETAIL

Minimum investment of $100 million. 50% of the investment is to be in backend infrastructure development. 30% of all raw material has to be procured from India's small and medium industries. Permission to set up malls only in cities with a minimum population of 10 lacs. Government has the first right to procure material from the farmers. Products should be sold under the same brand internationally. Foreign investor should be the owner of the brand .

100% FDI IN SINGLE BRAND RETAILING Products to be sold should be of a single brand only. Products should be sold under the same brand internationally (i.e. products should be sold under the same brand in one or more countries other than India). Single brand product-retail trading would cover only products which are branded during manufacturing. The foreign investor should be the owner of the brand.

Possible advantages of FDI in retail can be Will improve infrastructure and reduce wastage. Farmers will get a better price, easy credit availability will help tackle the problem of farmer suicides. Can generate huge employment. Can control inflation to some extent. The consumer gains from the wide variety of choices and a more diversified basket. Can increase investment in technology. Huge tax revenue can be generated.

Possible disadvantages of FDI in retail sector can be-

Foreign Players can displace the unorganized retailers because of their superior financial strengths. It can only expand by destroying the traditional retail sector. Foreign retail firms have deep pockets and can cause even the organized retail sector to go out of business. Increase in real estate prices. Will try to monopolize and when monopoly situation is created will buy low and sell high. Can cause even the organized retail sector to go out of business since these foreign players like WAL-MART have deep pockets.

IMPACT OF FDI ON INDIAN ECONOMYToday there is a huge growth in working population in India and the disposable incomes are rising. Lot of changes are visible in consumers lifestyle today. Also the rural markets are developing. Thus there is a huge scope for foreign players to enter in the Indian market and make good amount of money. Also there is a huge relaxation in the policies today as compared to the past which has also enabled foreign players to enter in the Indian market. The decision of allowing FDI in retail has been largely opposed in the country. Yes, it s true that it may have some ill effects on our economy but there is no denying the fact that it will also benefit the economy and consumers by eliminating wastages and technological advancement. As discussed above the ill effects of allowing FDI in retail can be that small enterprises may not be able to compete with world class large companies and may ultimately be edged out of business. Also it will dislocate millions from their occupation and thus pushing families below the poverty line. Also it cannot provide employment to semi-literate people which form the majority of our population. Another major disadvantage can be that money will not stay in India, It'll go to the home country of the foreign investor. With Indian retail chains, at least the money will stay in India. Supermarkets will typically sell everything from vegetables to the latest electronic gadgets, at extremely low prices which might result into monopoly. Also there will be subsequent rise in real estate prices.

OPINIONS/RECOMMENDATIONS But I still believe that the advantages FDI brings to the table easily outnumber the disadvantages. Some of the advantages like technology up-gradation and minimizing wastage can really prove fruitful to the economy. Also infrastructure which is the backbone of a stronger economy will be largely improved. Farmers will get a better price from these foreign players

which will help improve their condition. Also for consumers there will be considerably low prices of the product because of the cut-throat competition and consumers will have a lot to choose from since the diversity of the products will be large. Government will be benefited by increased GDP, greater exports and increased tax revenues which in turn will benefit all of us. Also as per the government 1 million (10 lakh) employment will be created in next three years and billion dollars will be invested in Indian market. My opinion on allowing FDI in retail is that it can be a big step forward towards achieving the economic growth and stability in the country. Also the positive aspects of FDI easily outnumber its negative aspects. But also government needs to take good care of how well it is implemented because allowing FDI in retail only solves half the problem and remaining rests on how well it is implemented. Government should design the FDI policy such a way where FDI inflow can be utilized as means of enhancing domestic production, savings and exports through the equitable distribution among states. FDI can help to raise the output, productivity and export of the Indian economy. So, we should concentrate on the positive part and try to remove the hurdles that are in the path of successful implementation of FDI policy. And instead of fighting whether the decision is correct or not we should sit, talk and try to eliminate the negative aspects if any of this decision and thus design policies that can eliminate all the disadvantages. This is the time we should grab the opportunity by both hands and think of a better future for our country. Also I recommend that the government should provide additional incentives to foreign investors to invest in states where the level of FDI inflows is quite low otherwise those states will feel left out. The policy makers should design policies where foreign investment can be utilized as means of enhancing domestic production, savings, and exports and also as medium of technological learning and diffusion.