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A Conceptual Study on

Foreign Direct Investment in Retail Sector with reference to India.







Abstract
In the present era, Foreign Direct I nvestment (FDI) plays one of the major roles in the
development of economy of the country. FDI is a an economic tool for which strengthen of
domestic capital, productivity and employment and also plays a vital role in the up gradation
of technology, skills and managerial capabilities in various sectors of the economy. This
helps the Indian human resource to find better quality jobs and to improve their standard of
living. The present paper attempts to analyze significance of the FDI Inflows in Indian retail
Sector since 1991 under Foreign Exchange Management Act (FEMA) and relating the
growth of retail Industry FDI in generation of employment in terms of skilled and unskilled
manpower because, population of India in 2014 is estimated to be 1.27 billion .Supporters of
FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions
and improved selection, brought about by the technology and know-how of foreign players in
the market. This in turn can lead to greater output and domestic consumption. The opening of
big markets or foreign-sponsored departmental outlets will not necessarily absorb them;
rather they may try to establish the monopoly power in the country. However, so many
positive factors are also there in favour of FDI in Indian retail service.


Keywords: FDI, Economic Tools, Productivity and Employment, FEMA, Positive Factors,
Retail.




* B.Sankar Naik
B.Tech, MBA (HR), (Ph.D)
Research Scholar at SVU-Tirupathi,
Assistant Professor, Department of Management
Studies, Sir Vishveshwaraiah Institute of Science and
Technology, Madanapalle-517325.
E-Mail: naiksankar@gmail.com
Mob: +91- 9985401561 / 8464801561

** Dr .M. Reddy Naik
M.Com, MBA, Ph.D.
Assistant Professor
Government Degree and P.G College,
Puttur, Chittoor (Dst).

E-Mail:drreddinaik@gmail.com
Mob: +91-9966392458




Introduction
Foreign direct investment (FDI) is investment directly into production in a country by a
company located in another country, either by buying a company in the target country or by
expanding operations of an existing business in that country Consistent economic growth, de-
regulation, liberal investment rules, and operational flexibility are all the factors that help
increase the inflow of Foreign Direct Investment or FDI. FDIs require a business relationship
between a parent company and its foreign subsidiary. Foreign direct business relationships
give rise to multinational corporations. For an investment to be regarded as an FDI, the parent
firm needs to have at least 10% of the ordinary shares of its foreign affiliates. The investing
firm may also qualify for an FDI if it owns voting power in a business enterprise operating in
a foreign country.
Presently in many areas FDI is allowed like Education, Telecom, IT, Pharmacy etc. In some
of the areas FDI is allowed up to 100%. 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.
Foreign Direct Investment (FDI) in Retail:
Retail Sector in Indian is divided into two ways one is Organised and Un Organised,
Organised sated: includes licensed retailers, means who have registered themselves for VAT ,
Servives tax, Income Tax.These are generally privately owner large businesses like Westside,
Tanisq , Croma , Pantaloons, Reliance World, Shoppers Stop, Max and a lot more Un organ
sated : Traditional Kirana shops , General/Departmental shops etc. If we talk about statistics,
Market share of unorganised retail sector is 97% of the total retail sector as compared to
oraganised sector which accounts only for 3% . This data is even after the presence of
corporate giants like TATA , Reliance , K Rahega corp. group.WALMART (worlds largest
turnover company) with BHARTI Italian designer GIOGRGIO ARMANI with DLF Ltd. 2nd
biggest retailer Frances CARREFOUR by 2009. Britains MARKS & SPENCER wants to
expand in India. Imagine if Wal-Mart, the worlds biggest retailer sets up operations in India
at prime locations in the 35 large cities and towns that house more than 1million people. The
supermarket will typically sell everything, from vegetables to the latest electronic gadgets, at
extremely low prices that will most likely undercut those in nearby local stores selling similar
goods. Wal-Mart would be more likely to source its raw materials from abroad, and procure
goods like vegetables and fruits directly from farmers at preordained quantities and
specifications. This means a foreign company will buy big from India and abroad and be able
to sell low severely undercutting the small retailers. Once a monopoly situation is created this
will then turn into buying low and selling high.
Strategic Issues Concerning Retail Sector in India
In India, Retailing is the largest private industry in India and second largest employer
after agriculture. India has the highest retail outlets density in the world. The sector can
contribute to around 10 percent of GDP. With over 12 million retail outlets, this sector
witnessed significant development in the past 10 years from small unorganized family owned
retail formats to organized retailing. Liberalization of the economy, rise in per capita income
and growing consumerism has encouraged large business and venture capitalist in investing
in retail infrastructure. The importance of retail sector in India can be judged from following
facts (1) The retail sector provides 15% employment (2) India has world largest retail
network with 12 million outlets (3) Total market size of retailing in India is U.S $ 180
billion(4) Retail sector is the largest contributor to the Indian GDP (5) organized retail sector
is growing @ 28% per annum. (6) Current share of organized retailing is just 2% which
comes around to $3.6 trillion
Growth drivers in India for retail sector
The retail industry in India is currently growing at a great pace and is expected to go
up to US$ 833 billion by the year 2015. It is further expected to reach US$ 1.3 trillion by the
year 2018 at a CAGR of 10%. As the country has got a high growth rate, the consumer
spending has also gone up and is also expected to go up further in the future. In the last four
years, the consumer spending in India climbed up to 75%. The key factors that drive growth
in retail industry are young demographic profile, increasing consumer aspirations, growing
middle class incomes and improving demand from rural markets. Also, rising incomes and
improvements in infrastructure are enlarging consumer markets and accelerating the
convergence of consumer tastes. Liberalization of the Indian economy, increase in spending
per capita income and the advent of dual income families also help in the growth of retail
sector. Furthermore, the Internet revolution is making the Indian consumer more accessible to
the growing influences of domestic and foreign retail chains. Reach of satellite T.V. channels
is helping in creating awareness about global products for local markets. About 47% of
India's population is under the age of 20; and this will increase to 55% by 2015.
FDI Policy with regards to Retail Sector:
FDI Policy with regards to Retail Sector Keeping in mind the interest of welfare motion.
India has kept the retail sector closed for foreign investors in order to protect the interest of
15 million small retail store owners. Currently, the foreign investor can make investment as
per the following guidelines:- FDI up to 100% for cash and carry wholesale trading and
export trading allowed under the automatic routes. FDI up to 51% with prior Government
approval for retail trade of Single brand products. (Now 100% allowed vide notification
dated 01/ 11 /2012) FDI is not permitted in Multi Brand Retailing in India.


FDI in Retail Sector in other countries:
FDI in Retail Sector in other countries China, Thailand, Russia, and Indonesia. China First
permitted in 1992 with foreign ownership restricted to 49%, progressively lifted and now no
restrictions Over 600 hypermarkets opened between 1996 and 2011 The number of small
outlets (equivalent to kiranas ) increased from 1.9 million to over 2.5 million Employment in
the retail and wholesale sectors increased from 28 million people to 54 million people from
1992 to 2001 Impressive growth in retail and wholesale trade Referred to a country where
FDI had an adverse effect on local retailers Has a limited capital requirement for retail and
wholesale outlets Growth in agro-processing industry . Thailand is second.
Challenges of Retailing in India:
In India the retailing industry has a long way to go and to become a truly flourishing
industry, retailing needs to cross various hurdles. The first challenge facing the organized
retail sector is the competition from unorganized sector. Needless to say, the Indian retail
sector is overwhelmingly swarmed by the unorganized retailing with the dominance of small
and medium enterprises in contradiction to the presence of few giant corporate retailing
outlets. The trading sector is also highly fragmented, with a large number of intermediaries
who operate at a strictly local level and there is no barrier to entry, given the structure and
scale of these operations.
The tax structure in India favours small retail business. Organized retail sector has to
pay huge taxes, which is negligible for small retail business. Thus, the cost of business
operations is very high in India. Developed supply chain and integrated IT management is
absent in retail sector. This lack of adequate infrastructure facilities, lack of trained work
force and low skill level for retailing management further makes the sector quite complex.
This dismal situation of the retail sector undoubtedly stems from the absence of an FDI
encouraging policy in the Indian retail sector.
Recommendations
a). Safeguards Government should insist on Preparation of a legal and regulatory framework
and enforcement mechanism to ensure that large retailers are not able to dislocate small
retailers by unfair means. Extension of institutional credit, at lower rates, by public sector
banks, to help improve efficiencies of small retailers;
b).The Indian retail sector is severely constrained by limited availability of bank accounts.
The Government and RBI need to evolve suitable lending policies that will enable retailers in
the organized and unorganized sectors to expand and improve efficiencies.
c). When any problem comes a National Commission must be established to study the
problems of the Indian retail sector and to evolve policies that will enable it to cope with FDI
d). The proposed National Commission should evolve a clear set of conditionality on giant
foreign retailers on the procurement of farm produce, domestically manufactured
merchandise and imported goods.
e). Entry of foreign players must be gradual and with social safeguards so that the effects of
the labour dislocation can be analysed & policy fine tuned. Initially allow them to set up
supermarkets only in metros. Make the costs of entry high and according to specific norms
and regulations so that the retailer cannot immediately indulge in predatory pricing.
f). The government must actively encourage setting up of co-operative stores to procure and
stock their consumer goods and commodities from small producers. The government can also
facilitate the setting up of warehousing units and cold chains, thereby lowering the capital
costs for the small retailers.
g). Different Set up an Agricultural Perishable Produce Commission (APPC), to ensure that
procurement prices for perishable commodities are fair to farmers and that they are not
distorted with relation to market prices.

Limitations:
Some of the important like a lack of investment in the logistics of the retail chain,
leading to an inefficient market mechanism. Though India is the second largest producer of
fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain
infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6
million MT. ,80% of this is used only for potatoes. Lack of adequate storage facilities cause
heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and
of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of fruits,
vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57
per cent of which is due to avoidable wastage and the rest due to avoidable costs of storage
and commissions''. As per some industry estimates, 25-30% of fruits and vegetables and 5-
7% of food grains in India are wasted 10.According to some reports, Indian farmers realize
only 1/ 3rd of the total price paid by the final consumer, as against 2/ 3rd by farmers in
nations with a higher share of organized retail!". A study commissioned by the World Bank
attributes the export non-competitiveness of India's horticulture produce to its weak supply
chain. The study shows that the average price that the farmer receives for a typical
horticulture product is only 12-15 per cent of the price the consumer pays at a retail outlet.

Conclusion
Finally we conclude that FDI in multi-brand retail in India could potentially be a
mixed blessing for domestic players. According to World Bank, opening up the retail sector
to foreign direct investment (FDI) would be beneficial for India in terms of price and
availability of products. The Indian Council for Research on International Economic
Relations (ICRIER) has suggested phased opening-up of the retail industry, with 49 per cent
foreign direct investment allowed initially. While initially the small indigenous retailers
business would be impacted once modern retail enters the locality, this adverse impact is
expected to be short-lived and to weaken over time, it is expected to reap benefits in the
medium to long-term as it will help improve like balance sheet and liquidity profile of cash-
starved retailers with aggressive expansion plans, supply chain and back-end infrastructure
while reducing margins for middlemen through direct sourcing from farmers and. However,
once 100% FDI is allowed in retail that is when the landscape will become extremely
competitive. Further, the move needs to be monitored in the wake of the current opposition
by several political parties. The study strongly advocates that foreign direct investment
should be allowed in retailing since it would speed up the growth of organized formats.
Organized retailing has significant backward linkages through setting up of supply chains,
investment in food processing industry and manufacturing units increased productivity of
agriculture, growth of interlinked sectors such as tourism and IT. Consumers will also gain
from organized retailing since it leads to lower price, improves the quality of the product and
widens the choice of products available to them. The slow growth of organized retailing is
affecting the progress of allied sectors such as agriculture, food-processing industry etc.
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