GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)

FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR: MYTHS AND REALITIES

Anurag Anand Research Scholar, Centre for Studies in Economics and Planning, School for Social Sciences, Central University of Gujarat, India. Email: anand.anurag34@gamil.com

ABSTRACT Foreign Direct Investment (FDI) is a kind of an important factor in the process of globalization as it intensifies the interaction between states, regions and firms. To accelerate the pace of economic progress, employment generation and consumer awareness in India, there is need for investment which can be fulfilled by FDI in retail. The long awaited scheme to allow FDI in retail sector has been approved by the Cabinet on September 2012 by some proposals that investment in multi-brand retailing has to be minimum investment of US$ 100 of which 50 per cent to be spent on rural marketing and rural infrastructure. One of the impacts of FDI in retail will hopefully be to improve the logistical infrastructure, so that it can help the farmers and the households in food prices, easy market access for their products, reduction in the role of intermediaries. From the consumers welfare point of view, it is also helpful because of competition and market awareness. In long run, it will be helpful for the farmers. This paper try to examine myths and realities of FDI in retail and how it is going to effects retailers position and emerging urban facilities to rural India. It also tries to explore the role of organised retail sector in India. This paper is mainly based on secondary data. Secondary data will be collected from various Reports of Ministry of Commerce, Economic Survey, RBI Bulletin, World Investment Reports, Books and Articles etc.

Key Words: FDI, Retail, Rural Welfare, Investment, Consumer Awareness.

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)

INTRODUCTION Foreign Direct Investment (FDI) is a kind of an important factor in the process of globalization as it intensifies the interaction between states, regions and firms. It is a kind of strategic instrument of development policy. FDI is not simply a transfer of capital but the transfer of package in which capital, management and new technology are combined. It generates employment, influences income distribution and generates foreign exchange. So we can say that FDI increases competition pressures to the local firms that result in an improvement in technical and allocate efficiency. India has consistently been classified as one of the most attractive investment destinations by reputed international rating organisations with a vast reservoir of skilled and cost. Developing countries like India need substantial foreign inflows to achieve the required investment to accelerate economic growth and development, it will fulfil by FDI in retail. It can act as a catalyst for domestic industrial development. Further, it helps in speeding up economic activity and brings with it other scarce productive factors such as technical knowhow and managerial experience, which are equally essential for economic development. It will also help to increase consumption and proper volume growth. The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as the second most attractive retail destination globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy. The recent decision of the Government of India on permitting FDI up to 51% in the multi-brand retail has raised hopes for speedy modernisation of organised retail sector in the country. Expansion of organised retailing requires supporting infrastructure such as storage facilities, assured electricity supply, transport and communication network which can be provided mainly through public investment or through public-private partnership.

REVIEW OF LITERATURE Foreign Direct Investment (FDI) occupies a special place in the connection between economic development and globalization. FDI brings scarce capital and technology from rich

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) to poor countries. An additional factor that may prevent a country from reaping the full benefits of FDI is imperfect and underdeveloped financial markets (OECD 2002). E A S Sarma (2005) said,the retail industry of India is largely in the hands of the unorganised sector. Khor Chia Boon (2001) said in his study,Foreign Direct Investment and Economic Growth investigates the casual relationship between FDI and economic growth. So in this case FDI should not be restricted to certain branded product types or store formats. Swapna S. Sinha (2007) in his thesis, Comparative Analysis of FDI in China and India: Can Laggards Learn from Leaders?andit is found that India has grown due to its human capital, size of market, rate of growth of the market. Ashoka, Mody. (2007) said in his book, Foreign Direct Investment and the World Economy FDI is thrice blessed. It brings scarce capital where capital needed and productive. Nagaraj,R. (2011)observed that foreign investment is now seen as a source of scarce capital, technology and managerial skills that were considered necessary in an open, competitive world economy. Kumar, N. (2002) said, FDI as a widely perceived important resource for expediting the industrial development of receiving or host economy. Most developing countries, therefore, have a welcoming attitude towards MNEs and FDI.

OBJECTIVE OF THE STUDY To study how FDI in Retail Affects Indian Farmers. To Examine Rural Development through FDI in Multi-Brand Retail.

METHODOLOGY OF THE STUDY This study is mainly based on secondary data. Secondary data has been used from various Reports of Ministry of Commerce and Industry, Economic Survey, RBI Bulletin, World Investment Reports, Books, Articles and online database of Indian Economy.

FOREIGN DIRECT INVESTMENT IN INDIA Foreign Direct Investment (FDI) is a predominant and vital factor for influencing the contemporary process of global economic development. Foreign Investment in India is governed by the FDI policy announced by the government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. FDI is generally defined as A form of long term international capital movement, made for the purpose of productive activity and accompanied by the intention of managerial control or participation in the management of

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) foreign firms. It is a kind of cross-border transfer of resources including process and product technology, managerial skills, marketing and distribution know-how and human capital. FDI generates employment, influences income distribution and generates foreign exchange. Indian retail needs FDI in retail because there is not enough capital being invested by the Indian companies. The reasons for this are obvious- quite a few Indian retailers have disappointed all possible funding institutions, be it private equity, stock market, or the banks. Indian retailers have failed to satisfy any of them and thus the foreign capital inflow has almost dried up for the sector. UNDERSTANDING RETAIL SECTOR IN INDIA Indian retail sector is a kind of business enterprises of the economy. It is the 5th largest retail destination and the second most attractive market after China for investment in the globe after Vietnam as reported by AT Kearneys 7th annual Global Retail Development Index (GRDI), in 2011. The growing popularity of Indian retail has resulted in increasing awareness of quality products and brands. As a whole we can say that Indian retail sector has made life convenient, easy, quick and affordable. It is undergoing metamorphosis 1. Till 1990s retail continued in the form of kiranas that is unorganised retailing but after 1990s branded retail outlets like Food World, Nilgiris and local retail outlets like Apna Bazar came into existence. Now big players like Reliance, Tatas, Bharti, ITC and other reputed companies have entered into organised retail business (Gupta, 2012). The retail sector is mainly divided into two parts- 1) Organised retail and 2) Unorganised retail. Organised retail refers to trade activities undertaken by licensed retailers that are 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. With over 12 million retail outlets, India has the highest retail outlets density in the world. This sector witnessed significant development in the past 10 years from small unorganized family owned retail formats to organized retailing. Unorganised retail refers to the traditional formats of low-cost retailing like the local kirana shops, owner manned general stores, paan-beedi shops, convenience stores and hand cart. The Indian retail sector is highly fragmented with 97% of its business being run by the unorganised retailers. The key factors that drive growth in retail sector are young demographic profile, increasing consumer aspirations, growing middle class incomes and improving demand from rural markets. Also, rising incomes and improvements in

When a metamorphosis occurs, a person or thing develops and changes into something completely different.

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) infrastructure are enlarging consumer markets and accelerating the convergence of consumer tastes.

FDI IN MULTI-BRAND RETAILING: FARMERS WELFARE POINT OF VIEW India is the second largest producer of fruits and vegetables; it has a very limited cold-chain infrastructure. Lack of adequate storage facilities causes heavy losses to farmers, in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. According to the FDI policy norms, the minimum investment by a foreign retailer should be $100 billion, and 50% of this amount has to be channelled into the development of back-end infrastructure in the first three years. This minimum investment can typically fund the establishment of around one million sq. ft. of front-end store space, equivalent to 10-15 hypermarkets or department stores. In a pan-Indian survey conducted over the weekend of December 3, 2011, an overwhelming majority of consumers and formers in and around 10 major cities across the country supported retail reforms. Over 90% of consumers said FDI in retail will bring down prices and offer a wider choice of goods. Nearly 78% of farmers said they will get better price for their produce from multi-brand stores. Various farmers associations in India have also announced their support for retail reforms. These include All India Vegetable Growers Association (AIVGA), Bharat Krishak Samaj, Consortium of Indian Farmers Associations (CIFA), and Sharad Joshis Shetkari Sanghatana. On December 4, 2011, Deepak Parekh, Ashok Gulati and many other economic policy leaders in India had described putting investment and innovation in retail on hold for the sake of vested interests as unfair and detriment to the vast majority in India. They had urged farmers, consumers and common people to raise their voice against this false drama of apprehension against foreign investment and modernising trade in organised retailing. The recent decision of the Government of India on permitting FDI up to 51% in the multi-brand retail has raised hopes for speedy modernisation of organised retail sector in the country through its technological up-gradation, resulting in improved competitiveness-necessary for sustaining high growth of the economy. On all account farmers, apart from other non-form enterprises and consumers in general, would benefit generally from the development of organised retail, especially in view of the policy requirement of substantial investment in back-end infrastructure much of which would go into areas like rural warehousing and cold chains benefitting the Indian agriculture.

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) Benefit to farmers 7-10% higher price to farmers than what they get from mandi. 3-4% incentive for the quality of produce farmers deliver to Bharti Wal-Mart based on customer requirement. Experts advice on better crop planning and management.

FDI IN MULTI-BRAND RETAIL AND RURAL DEVELOPMENT: MYTHS AND REALITIES FDI in retail will hopefully be to improve the logistical infrastructure, so that it can help the farmers and the household in food prices. In longer run, it will be helpful for inflation, growth in economy and rural income. Recently the Government of India announced 51% FDI in multi-brand retail; in this case there are some procedures/conditions for foreign investors1. FDI in multi-brand retail trading permitted in all products under Govt. Approval route. 2. Minimum FDI to be brought in by foreign investors US$ 100 million. 3. There should be 50% foreign investment to be invested in villages for infrastructure development. 4. At least 30% in value of procurement to be from small industries/villages and cottage industries, artisans and craftsman, whose total investment in plant and machinery not exceeding US$ 1 million. 5. Retail stores can be established in cities across the county, with a minimum population of 10 lakhs. 6. Smaller States have the right to make their decision for allow FDI in retail. 7. No retail trading by e-commerce by companies with FDI engaged in multi-brand retail trading. 8. Govt. has first right to procurement of agriculture products. Myth-The retail sector will be controlled by foreign stores. Reality- The FDI-backed stores can only operate in cities and every state has the freedom to allow or disallow FDI-backed retail investment. Myth-Farmers will be exploited and will lose their fields and crops to foreign investors. Reality-Farmers will not be exploited because farmers will receive better remuneration for their produce & will benefit from additional job opportunities resulting in overall

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) improvement in their quality of life. So that permitting FDI in retail is likely to open new opportunities for farmers, particularly for those dealing in fruits and vegetables. Some studies shows that profit realisation by farmers can increase up to 60% when the produce is sold directly to organised retailers, as compared with selling through Mandies. Myth- Kirana stores and small retailers will lose. Reality- Retailers will benefit from existing policy of sourcing their requirements from wholesale cash & carry stores at a discount. Some countries such as China, Thailand, Indonesia, Brazil, Singapore, Argentina & Chile where there are no caps for FDI and where there are no conditions, small retail stores have flourished, leading to more employment. Myth- Another big myth is about potential job losses in the traditional retail sector that employs unskilled and unemployable people. But the reality is that, do we wish to secure these low-paid dead-end jobs, or should we try to create well-paying jobs with a certain growth path for individuals.

DISCUSSION AND FINDINGS Over 80% of farmers now are small and marginal with increasing participation of women. Their awareness of the marketing problems in the new context as well as their bargaining power while negotiating with more powerful buyers like organised wholesalers and retailers need to be raised by organising them into sales cooperatives. In this case FDI in retail can bring in latest technology and supply chain management into the country and therefore the nations youth will benefit from numerous employment opportunities in this sector. Increase in Multi-brand retail stores will increase Growth in agro-processing industry. Transform rural India through improved agro processing and cold chain and new manufacturing opportunities will open for the nations micro, small and medium enterprises. Those who are opposing FDI in retail on the grounds that lakhs of small traders will lose out are making big mistake. They are forgetting that the loss for these traders will be more than compensated by the gains to hundreds of millions of consumers and farmers who will benefit from cutting out these middlemen.

CONCLUSION FDI would lead to a more comprehensive integration of India into worldwide market. Approval of 51% FDI in multi-brand retail is a kind of another revolutionary leap for Indian economy. Although consumers have largely benefited from retail chains, the expected

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) benefits have not reached farmers. This is mainly because domestic players have failed to create adequate back-end infrastructure to provide foe seamless flow of produce from farm to fork. Multi-brand retail chains are equipped with experience, skills and technology, and have built good supply chains. In India there is need to build the capacity for aggressively marketing its products at the global level. As long as we can build the capacity of aggressiveness and competitiveness, FDI is not a dangerous thing.

REFERENCES 1. Mehta, S. Pradeep FDI in retail will benefit all (2012). Business Line news paper dated-August 8, 2012. 2. Gupta, Amisha. Foreign Direct Investment in Retail Sector: Strategic Issues and Implications (2010). IJMMR, Volume-1, Issue 1(December, 2010) ISSN-2229-6883. 3. Singhal, Arvind. (2009): Indian Retail: The road ahead Retail biz, available at www.etretailbiz.com, last visited 14th Oct.2010. 4. Mukherjee, Arpita and Patel, Nitisha. FDI in retail sector: India, Academic Foundation, New Delhi . (2005). 5. Singh, A.K. andAgarwal, P.K. Foreign Direct Investment: Big Bang in Indian Retail VSRD-IJBMR, Vol. 2 (7), 2012, 327-337, (2012). Available onlinewww.vsrdjournals.com accessed on 11-10-2012. 6. Kearney, A. T. Retail Global Expansion: A Portfolio of Opportunities (2011). Available online- http://www.atkearney.com/documents/10192/3903b4b7-265c-484e932c-50169e5aa2f3 accessed on 18-10-2012. 7. The Hindu No easy ride for foreign retailers by Jehani, B. Dated- October 22, 2012. Allahabad. 8. The Times of India Govt. clears 51% FDI in retail, 49% in aviation by Times view dated September 17, 2012. 9. www.rbi.ac.in 10. www.dipp.in Ministry of Commerce and Industry, Govt. Of India.