FDI IN RETAIL SECTOR IN INDIA

Mayur Mehta 23/1/2014

TABLE OF CONTENTS

Overview of retail sector Division of retail industry

o o

Organized retailing Unorganized retailing

FDI and its benefits FDI

o o

Single Brand Retail Multi Brand Retail

Effects of FDI Issues immerged DELHI Issue

Current scenario in fdi retail

Advantages, disadvantages, conclusion

Overview of retail sector

Retailing in India is one of the pillars of its economy and accounts for 14 to 15 percent of its GDP The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value. India's retail industry is largest employer of India, employs about 44 million Indians (3.3% of Indian population)

DIVISION OF RETAIL INDUSTRY

The retail industry is mainly divided into :Organized retailing Unorganized retailing

ORGANIZED RETAILING
Organized retailing refers to trading activities undertaken by

licensed retailers, that is, those who are registered for sales tax, income tax, etc.
These includes,

the publicly traded supermarkets, corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

UNORGANIZED RETAILING
Unorganized retailing refers to the traditional formats of low-

cost retailing
for example,

the local corner shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart pavement vendors

ORGANISED VS UNORGANISED RETAIL AT GLOBAL LEVEL

US
Taiwan Malaysia Thailand Indonesia China India 0 20 40 60 80 100

Organised
Unorganised

THE INDIAN RETAIL MARKET

Supermarkets and similar organized retail accounted for just 4%

of the market
India has highest number

of outlets per person (7 per thousand), Indian retail space per capita at 2 sq ft (0.19 m2)/ person is lowest in the world, Indian retail density of 6 percent is highest in the world

CHALLENGES
To become a truly flourishing industry, retailing in India needs to cross some hurdles:

A McKinsey study claims retail productivity in India is very low compared to international peer measures. For example, the labor productivity in Indian retail was just 6% of the labor productivity in United States in 2010. Geographically dispersed population Absence of developed supply chain, and little use of IT systems Low skill level for retailing management

WHAT IS FDI ?

FDI is a direct investment into production or business in a country by an individual or company of another country
Mostly by buying a company in the target country or by expanding operations of an existing business in that country Such investments can take place for many reasons, including to take advantage of cheaper wages, special investment privileges (e.g. Tax exemptions) offered by the country.

WHY COUNTRIES SEEK FDI ?

Domestic capital is inadequate for purpose of economic growth Foreign capital is usually essential, at least as a temporary measure, during the period when the capital market is in the process of development Foreign capital usually brings it with other scarce productive factors like technical know how, business expertise and knowledge

WHAT ARE THE MAJOR BENEFITS OF FDI

Improves forex (system for dealing in the currencies

of other countries)position of the country Helps in transfer of new technologies, management skills Increases competition within the local market and this brings higher efficiencies Helps in increasing exports Increases tax revenues Employment generation and increase in production

WHAT IS SCOPE OF FDI IN INDIA? WHY WORLD IS LOOKING TOWARDS INDIA FOR FDI
India is the 3rd largest economy of the world. In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. Some of the major economic sectors where India can attract investment are as follows:Telecommunications, Apparels, Information technology, Pharma, Auto parts, Jewelry, Chemicals

WHY INDIA FOR RETAIL SECTOR?

We are the second highest producer of fruits and vegetables in the world but still we are not able to utilize it properly because of inadequate infrastructure facilities. It will reduce pre and post harvest wastage/losses and thus help control food inflation. It will create 1.5 million more jobs in 5 years. Apart from the huge number of indirect employment. It will increase competition which is always beneficial for the customer. It will remove the middleman from the equation. It will reduce costs which in turn will reduce prices.

BRIEF HISTORY

In January 2012, Indian government continues the hold on retail reforms for multi-brand stores.
On 14 September 2012, the government of India announced the opening of FDI in multi-brand retail, subject to approvals by individual states. This decision was welcomed by economists and the markets, but caused protests and an upheaval in India's central government's political coalition structure. On 20 September 2012, the Government of India formally notified the FDI reforms for single and multi brand retail, thereby making it effective under Indian law. On 7 December 2012, the Federal Government of India allowed 51% FDI in multibrand retail in India. The government managed to get the approval of multi-brand retail in the parliament despite heavy uproar from the opposition

FDI IN SINGLE BRAND RETAIL

In-principle approval granted for increase in FDI in single brand retail from 51% to 100% under the approval route. This is subject to, inter alia, the following conditions:

Products to be sold under the same brand internationally.

Foreign investor must be the owner of the brand.

Single brand retail would cover only products branded during manufacture.

For FDI above 51%, 30% sourcing must be from SMEs.

FDI IN MULTI BRAND RETAIL

Inprinciple approval has been granted for FDI in multi-brand retail up to route. This is subject to, inter alia, the following conditions:

51% under the approval

Minimum amount to be brought in by the foreign investor to be USD 100 million. At least 50% of the total FDI must be invested in back-end infrastructure (includes capital expenditure on all activities, excluding front-end units. Excludes expenditure on land cost and rentals). 30% procurement of manufactured/ processed products must be from SMEs. Government to have first right on procurement of agricultural products.

Retail sales locations may be set up only in cities with a population of more than 10 lakh as per 2011 Census and may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities.

DIFFERENT PARTIES AFFECTED

Farmers

Small Businesses

Consumers

Government

IMPACT ON FARMERS

Small farmer faces post-harvest losses at farm because of poor roads, inadequate storage technologies, inefficient supply chains and farmer's inability to bring the produce into retail markets Government claims India's post-harvest losses is 40%, on average, every year for each farmer, by an report by Ministry of Agriculture on post harvest losses it is from 0.3% to 18% Aim to provide farmers a remunerative price for crops in comparison to hard-bargaining Mandi agents . Farmers gets 1/3 in grains and 15% in horticulture "Direct Farm Project" in Punjab, where 110 farmers have been connected with Bharti Walmart for sourcing fresh vegetables hence reducing waste and bringing fresh produce

IMPACT ON CONSUMERS
Consumers stand to gain most because :

Check on rising retail inflation via competitive prices, stable prices, back hand infrastructure and proper supply chain Improvement in product quality Time reduction in product search Reduction in travel time in large cities to different location of specialty markets

IMPACT ON GOVERNANCE

FDI Reforms will lead to greater FDI inflows

Reducing Current Account Deficit (a negative net sales abroad)

Adoption of global best practices

Indian small shops employ workers without proper contracts. Many unorganized small shops depend on child labour. A well-regulated retail sector will reduce such cases

IMPACT ON SMES

Small manufacturers will benefit from condition of 30 per cent procurement from Indian small industries in single and multi-brand retail conditions Enabling them to get integrated with global retail chains like Walmart, Tesco etc. Opportunities for new contracts would enhance their capacity to export products from India and bring in more dollars for India

CONT..

Even domestic corporate houses were not prohibited from entering the retail sector. e.g. Reliance Fresh, Mahindra Retail, Big Bazar etc. The only difference in case of FDI is that ownership would become different. Rangarajan (Chairman economic Advisory Council) argues that : Large retailers would be restricted to metropolitan towns

SMALL BUSINESSES

Not much worries for Small Retailer/ Kiraanas

Rule : All multi-brand and single brand stores must confine their operations to 53-odd cities with a population over one million, out of some 7935 towns and cities in India. It is expected that these stores will now have full access to over 200 million urban consumers (20 crores)

ISSUES IMMERGED
ISSUE

1 : FDI will provide employment-A MYTH A Wall Street journal article claims 40 lakh people will be directly employed(refer : wiki). WalMart has 21 lakh employees worldwide. Their largest store has 214 employees. At this rate they have to open 18,000 stores in India. For Tesco or Carrefour, it is lesser; so there are 36,000 stores that need to be opened in 53 cities - that is 600 stores per city.
2: Small retailers will get affected 3: Fear of monopoly

ISSUE ISSUE

ISSUES IMMERGED
ISSUE ISSUE

4: Loss in jobs of middleman(who have prevailed since centuries and have never contributed in a positive way)
5: Middle man will be included due to bulk buying (reverse eg. of mother dairy)

ISSUE

5: Emergence Of Foreign Middlemen There are instances where there are no middlemen in India. For example, in the sugar sector, the sugarcane farmers are contracted by sugar mills to sell their produce directly to the mills. When FDI comes in India, MBR will act as new middlemen. To say that middlemen will no longer exist is totally wrong.

FUTURE PROSPECTUS
Today retail is US$ 450 billion if growth is 8%, it

will become US$ 1.3 trillion market by 2020.

Modern sector is 4% of US$ 20 billion if rate of

growth is 24 %, it will be US$ 200 billion market and unorganized sector will go to US$ 1.1 trillion

TWO DIFFERENT EXAMPLES

China : employment increased from 28 million to

54 million, doubled in 10 years, corner shops increased from 1.9 million to 2.5 million
Thailand : in Thailand 60% shut down in grocery

stores in 5 years

FDI RETAIL IN DELHI

On January 13, 2014 The Aam Aadmi Party (AAP) Government in Delhi has written to the Department of Industrial Policy and Promotion (DIPP) formally disapproving the setting up of Foreign Direct Investment-funded multi-brand retail stores in the State.
On January 21, 2014 Commerce and Industry Minister Anand Sharma on reacted bitterly to the letter written to the Department of Industrial Policy and Promotion (DIPP), Sharma went ahead warning the state government, States have the option to join. But it is not a revolving door. Policy has to have stability for investor confidence. It is interesting to watch Congress quarrel, yet the alliance does not fall apart

CURRENT SCENARIO IN FDI RETAIL-1

Tesco is the first global retailer to apply for multi-brand retailing after the government allowed 51 per cent FDI in the segment in September last year. On December 30, 2013 The Foreign Investment Promotion Board (FIPB) approved UK-based Tesco Plc's proposal to enter the Indian multi-brand retail segment in joint venture with Tata Group company with an initial investment of USD 110 million (about Rs 680 crore). Tesco will pick up a 50 per cent stake in Trent Hypermarket Ltd, a whollyowned subsidiary of Trent Ltd, a Tata group company. This investment, believed to be for the first three years of business, is likely to be increased later. For now, Tesco has plans to invest only in Karnataka and Maharashtra.

CURRENT SCENARIO IN FDI RETAIL-2

The joint ventureBharti Wal-Mart Pvt. Ltd.was set up to operate wholesale stores under the Best Price Modern Wholesale brand. It was not catering directly to retail consumers in the country. The American retail major Walmart and Bharti Enterprises decided to part ways in October last year, bringing an end to their six-year long partnership

In December 2013, Wal-Mart received the green signal from the Competition Commission of India (CCI) to purchase Bharti groups almost 50% stake in their Indian joint venture for wholesale stores business. On January 15, 2014 the retailer has registered a new company called Wal-Mart India Pvt. Ltd. in the country, according to the data available with the ministry of corporate affairs.

ADVANTAGES OF FDI
RICH

OPPORTUNITY.
FARMERS.

BENEFITS FOR

IMPROVED TECHNOLOGY AND LOGISTICS. REAL-ESTATE DEVLOPMENT.

IMPACT ON

DISADVANTAGES
Domestic
Small Large

companies may lose their ownership to overseas companies.

enterprise may not compete with the foreign players and may ultimately be edged out of business. giants of the world may monopolies the highly profitable sector.

CONCLUSION

In the final analysis, for India, FDI in multi-brand retail should be seriously considered by the government. Despite country wide speculation on the plight of small retailers, India needs to take a lesson from China where organized and unorganized retail seem to co-exist and grow together. In my view, the government has an opportunity to achieve certain of its own targets: improve its infrastructure, technologies, generate employment for those keen to work in this sector FDI would lead to a more comprehensive integration of India into the worldwide market and, as such, it is imperative for the government to promote this sector for the overall economic development and social welfare of the country. If done in the right manner, it can prove to be a boon and not a curse.

REFERENCES:ALLBANKINGSOLUTIONS.COM/BANKING-TUTOR/FDI-IN-INDIA.HTM EN.WIKIPEDIA.ORG/WIKI/RETAILING_IN_INDIA#CHALLENGES WWW.RBI.ORG.IN/SCRIPTS/FAQVIEW.ASPX?ID=26#1 EN.WIKIPEDIA.ORG/WIKI/FOREIGN_DIRECT_INVESTMENT SLIDESHARE.NET/ (NOT RELIABLE SOURCE)