THE IMPACT OF FDI IN RETAIL TRADE

1 Executive Summary
This report is on the FDI in India. The objective is to study the impact of FDI on Indian
economy. It integrates and summarizes the FDI inflows, FDI Outflows, Net FDI and various
sectorial information about FDI in India.
It also integrates various analysis and recommendations with the aim of learning from past
policy and thereby improving future policy. The evidence is presented in a series of charts
which are backed up by statistical analysis
INTRODUCTION
Foreign Direct Investment (FDI) is fund flow between the countries in the form of inflow or
outflow by which one can able to gain some benefit from their investment whereas another can
exploit the opportunity to enhance the productivity and find
out better position through performance. The effectiveness and efficiency depends upon the
investors perception, if investment with the purpose of long term then it is contributes positively
towards economy on the other hand if it is for short term for the purpose of making profit then it
may be less significant. Depending on the industry sector and type of business, a foreign direct
investment may be an attractive and viable option. Any decision on investing is thus a
combination of an assessment of internal resources, competitiveness, and market analysis and
market expectations.The FDI may also affect due to the government trade barriers and policies
for the foreign investments and leads to less or more effective towards contribution in economy as
well as GDP of the economy. The studies try to find out the implications which affect the
economic scenario and also measure the level of
predominance by the factors for economic contribution to India.
Contextual Background
After independence in India 1947, FDI gained attention of the policy makers for acquiring
advanced technology and to mobilize foreign exchange resources. In order to boost the FDI
inflows in the country Indian government allowing frequent
equity participation to foreign enterprises apart from provides many incentives such as tax
concessions, simplification of licensing procedures and de-reserving some industries like drugs,
fertilizers, aluminum etc. But due to significant outflow
of foreign reserve in the form of remittances of dividends, profits, royalties etc in 1973
government of India set up Foreign Investment Board and enacted Foreign Exchange Regulation
Act in order to regulate flow of FDI to India. Further
Government of India set up Foreign Investment Promotion Board (FIPB) for processing of FDI
proposals in India. The Board is the apex inter-ministerial body of the Central Government that
deals with proposals relating to FDI into India
for projects or sectors that do not qualify for automatic approval by the Reserve Bank of India
(RBI) or are outside the parameters of the existing FDI policy.
It could be observed that there has been a steady build up in the actual FDI inflows in the preliberalization period in table-1. But measures introduced by the government to liberalize
provisions relating to FDI in 1991 increased FDI Rs.2705 crores in 1990 to Rs.123378 crores in
2010. The list of investing countries to India reached to 150 in 2010 as compared to 29 countries
in 1991. Nevertless, still a lions share of FDI comes from only a few countries.
FDI AND INDIAN ECONOMY

4.0 INTRODUCTION
Nations progress and prosperity is reflected by the pace of its sustained economic
growth and development. Investment provides the base and pre-requisite for economic growth
and development. Apart from a nations foreign exchange reserves, exports, governments
revenue, financial position, available supply of domestic savings, magnitude and quality of
foreign investment is necessary for the well being of a country. Developing nations, in particular,
consider FDI as the safest type of international capital flows out of all the available sources of
external finance available to them. It is during 1990s that FDI inflows rose faster than almost all
other indicators of economic activity worldwide. According to WTO 83, the total world FDI
outflows have increased nine fold during 1982 to 1993, world trade of merchandise and services
has only doubled in the same. Since 1990 virtually every country- developed or developing, large
or small alike- have sought FDI to facilitate their development process. Thus, a nation can
improve its economic fortunes by adopting liberal policies vis--vis by creating conditions
conducive to investment as these things positively influence the inputs and determinants of the
investment process. This chapter highlights the role of FDI on economic growth of the
country.
4.1 FDI AND INDIAN ECONOMY
Developed economies consider FDI as an engine of market access in developing and less
developed countries vis--vis for their own technological progress and in maintaining their own
economic growth and development. Developing nations looks at FDI as a source of filling the
savings, foreign exchange reserves, revenue, trade deficit, management and technological gaps.
FDI is considered as an instrument of international economic integration as it brings a package
of assets including capital, technology, managerial skills and capacity and access to foreign
markets. The impact of FDI depends on the countrys domestic policy and foreign policy. As a
result FDI has a wide range of impact on the countrys economic policy. In order to study the
impact of foreign direct investment on economic growth, two models were framed and fitted. The
foreign direct investment model shows the factors influencing the foreign direct investment in
India. The economic growth model depicts the contribution of foreign direct investment to
economic growth.
Foreign direct investment (FDI) in India has played an important role in the development of the Indian
economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability,
growth and development. This money has allowed India to focus on the areas that needed a boost and
economic attention, and address the various problems that continue to challenge the country.India has
continually sought to attract FDI from the worlds major investors. In 1998 and 1999, the Indian national
government announced a number of reforms designed to encourage and promote a favorable business

FDIs are permitted through financial collaborations,

through private equity or preferential allotments, by way of capital
markets through euro issues, and in joint ventures. FDI is not permitted
in the arms, nuclear, railway, coal or mining industries.A number of projects have
environment for investors.

been implemented in areas such as electricity generation, distribution and transmission, as well as the
development of roads and highways, with opportunities for foreign investors.The Indian national government
also granted permission for FDIs to provide up to 100% of the financing required for the construction of
bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5
million.Currently, FDI is allowed in financial services, including the growing credit card business. These also
include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in

private banks, although there is condition that these banks must be multilateral financial organizations. Up to
45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS)
sector can also be purchased.

Interview
1)A recent interview with the small grocery shop-owner round the corner of my house gave me a
common mans perspective of the impending doom for him and similar shop-owners all around
India, especially the metros and the upcoming cities. To drive home the point the interviewee has
been called The thread for his future hangs by a thin thread, the decision to allow FDIs into
retail has been put on hold by the Indian Government, what the final outcome is may save or
break the thread. For lack of better translation and to bring out the context of the interview,
malls or retail markets have been called as super-shops.
Me: Do u know about FDIs and their interest in retail, and the recent decision by the
Government and how it affects you?
The Thread: No son, I m not sure what FDIs mean, although recently there was a meeting of the
shopkeepers union, the leader did say something, but it was unclear to me.
Me: You must have heard of names like Big Bazaar and Subhikhsha, do they mean anything to
you?
The Thread: Oh yes, sure ! One of my customers the other day was muttering something on the
phone about how inconvenient it is for him to buy grocery from my shop and how he wished
there was one of those in our city. When I asked him what was wrong, he told me that there are
certain super-shops where one can find all their shopping requirements under one roof, huge
shops with low prices. I was shocked to hear that. I sell my products at the minimum possible, so
that I can both support my family and yet keep the shop in favour with customers. How can they
be selling at prices lower than I do? I am afraid if one of those big shops opens up in this city, I
am ruined.
Me: This means you know a lot about retail, yes, there are air-conditioned super shops with huge
areas where one finds all their shopping requirements, and since these shops acquire material at
much bigger size than yours, they get cheaper cost prices, thus their pricing is lower than yours.
Now foreign companies want to enter this sector, companies like Wal-Mart, and change the retail
sector. The government has put the decision on hold, how do you feel about this?
The Thread (A smile, almost an ear to ear one, a welcome change over his wrinkled face): Bless
this Government; at least they stopped foreign companies entering. Had those foreign companies
come, they would have opened their super-shops all over the place, even in small cities like ours.

My business is already slow, that would have finished my shop. What would I have done? What
would I have done, I cant learn a new trade at this age, ah! May be begging is my future.
Me: Please dont say so, you are sure to find a job in those super-shops even if they do open here!
The Thread: Look son, they want young people, salesman who will entice the customers into
buying stuff that they do not even need. Plus, if a foreign company comes in, theyll have strict
employment rules, theyll expect knowledge of English. I dont know English, son! I will never get
a job there. May be when they are building the place, Ill go work as a majdoor. But what after
the work ends, what shall I do?
Me (desperate to cheer up the man): Dont worry, the decision is on hold, and it is unlikely that
the decision will be reversed soon. You dont have much to worry.
The Thread (hands me the groceries I had asked for): Thank you son! You gave me a bit of a
shake-up. I must start thinking, hopefully you can still buy from my shop after those places open,
and I give the best prices you know.
As I headed out of the shop, I realised how drastically the life of such shopkeepers might change
if Wal-mart enters India. It is obvious that the present generation prefers retail-shopping and
with the current companies like Reliance and Big-Bazaar in the market, there is a fine balance
between small shops and retails markets. However, if other players enter the market, a pricing
war may all but wipe out any chance that small shop-owners have of surviving in this race. A
huge amount of people are looking at slow businesses or potential close-down if the Government
does not take proper actions to protect their interests.
2) interview of a Kirana shop owner in my locality .After all, his is going to be the worst affected class by this
Foreign Direct Investment in our country and more precisely into our lives.Following is the conversation I had
with Bittoo, owner of the kirana store near my house.
Bittoo: Welcome brother, tell me what do you want ?
Me: I just want ten minutes of you, just wanted to know what you guys think about this FDI thing.He initially
refused me, but after much persuasion he finally agreed to give me his lifes first interview!
Me: So Bitoo, tell me what do you and other shop owners think about this FDI in retail?
Bittoo: Actually ,if you see there are quite a few existing retail chains like Big Bazaar, Big Apple and some
others that affect our business by 20-30%,2 years ago , scenario was totally different. It was only about us. We
faced competition only from our fellow shopkeepers. But since the origin of these retail chains in our country we
have suffered a lot and you can imagine our condition 2 years from now, when FDI will be in full flow.

Me: It indeed is very true, but have you ever thought as if what was the reason behind that 20-30% dip in your
sales?
Bittoo: See, what we now have is middle class and that too is rising very fast, what they get there is cheaper
rates, lots of offers and better facilities.
Me: So, you know it all, better facilities is the sole reason behind it and after FDI this will grow much more than
what it is now !
Bittoo: Thats why we are renovating our shop. We want to attract more customers.
Me: Tell me, do you remember any of your customers who some time ago buy his household requirements from
you only, but then shifted to these retail chains?
Bittoo: There are quite a few of them but we also have those customers who still buy all useful stuff from our
shop only.
Me: These are like two sections that come to your shop. One, who are liable grandma types who buys everything
fromBittoo ki dukaan and two, who are not so liable and goes to where they find best deals.
Bittoo: Yes, but the second section of customers are on a decline.
Me: Then you may have to come up with new and innovative offers everyday!
Bittoo: True! To operate your shop like a retail chain does. Owning a shop will not be as simple as this is in
present. You may have to come up with new offerings everyday.
Me: Thank you for your time Bitoo, I hope FDI is not going to affect you much.That was a hope against hope. If
now only is his business dips 20-30 percent, soon this figure will increase, if he does not come up with better
offers and facilities.
Bittoo is a bigger shopkeeper than what we normally have in small towns and even in metropolitans. He is only
going to see a decrease in his sales but the real harm will be done to small shopkeepers who has shops in smaller
streets and that too in their households only. Their sales will not only dip but they may well have to shut their
shops

up

as

there

will

be

stiff

competition

from

outside plus they dont have capital like Bitoo, who may well survive after introduction of FDI in India
3)is FDI in retail sector good for india?

Yeah I agree that FDI is good for India if it is implemented properly.As it will reduce unemployment rate in India
by creating a large amount of job vacancies.It will provide goods at their best cheap prices because of neck
cutting competition so to be in the market.N It will provide benefit to farmers by removing the inter mediators
used to bring there stuff to market.As FDI will be allowed so there will be huge foreign investment so it will
develop Indian infrastructure.Improve n bring new technologies to India.As well as make rupee strong since
there will be more demand of rupee in market. !So I think that FDI is good but need to be implemented properly

n government need to learn how to manage it to keep our economy growing.As the fate of this policy That it is
GOOD OR BAD is in hands of Indian Government And Time.

------------------------------------------------------------------------------------------------------------HOW WILL BE FDI

PROFITABLE ?????
1. More job creation.2. Middle man reduction.3. Reduction of commodity price.4. Injection of new technology.
In long run, it may be the big cause of our destruction. When these foreign retail industry enter in our county,
they will sale their product cheap rate as far as possible to capture the market. As a result Indian made market
product will loose their values as a result small scale industries may shut down their businesses. Slowly but
gradually we will be more prefer foreign product as it will cheap and latest. A time may be seen where we will be
completely depend on foreign product. We will not be self-reliant. Our development will depend on foreign
investment. It will badly affect our economy and development.There will be absence of middle man in
agricultural. But if foreign investor work like a monopolist way.There will be increase in job opportunity in retail.
What it means, except some all employees will be sales boys and sales girls.From these things, I want to know
you that, India is going to be a dependent county. China also accepted FDI in retail but they had made some
favorable condition for country while giving permission to FDI. But India has not apply any condition while
giving permission to FDI in retail.

------------------------------------------------------------------------------------------------------------As we know that the

coin have two side the same thing is also there FDI have there own advantage and disadvantage???
First I want to focus on Advantages of FDI when its came to India:.
1. The consumers are got product on very cheaper price.2. Quality of Product will be increases.3. Consumer have
lot of choice on very low cost.4. Our supply chain will increases because farmer direct sell there product to the
whole sell there is no intimidatory in between.5. Wastage of goods can be reduced.6. India Technology will be
increase.7. Demand of real estate will increase because they need to big space and whole sell store.8. FDI
promise that they buy 50% of product from the India.9. FDI said they provide 10 million jobs in next 3 year.10.
India revenue will increase.
Disadvantage of FDI:
1. It is direct effect to the small retailer. There demand will decrease.2. They take money India to there own
country.

references
1. Ministry of Finance, Report of the economic survey,
Government of India, New Delhi (2003-04)
2. Weisskof T.E., The impact of foreign capital inflow on
domestic savings in underdeveloped countries, Journal of
International Economics, 2, 25-38 (1972)

3. Sahoo D. Mathiyazhagan M.K. and Parida P., Is Foreign

Direct Investment an engine of growth? Evidence from the
Chinese economy, Savings and Development, 4, 419-439
(2002)
4. Nayak D.N., Canadian Foreign Direct Investment in India:
Some observations, Political Economy Journal of India, 8,
51-56 (1999)
5. Srivastava S., What is the true level of FDI flows to India?,
Economic and Political Weekly, 19, 1201-1209 (2003)
6. Basu P., Nayak N.C. and Vani A., Foreign Direct
Investment in India: Emerging Horizon, Indian Economic
review, 25, 255-266, (2007)
7. Weisskof T.E., The impact of foreign capital inflow on
domestic savings in underdeveloped countries, Journal of
International Economics, 2, 25-38 (1972)