15958632 FDI in Indian Retail Beneficial or Detrimental

8/8/2019 15958632 FDI in Indian Retail Beneficial or Detrimental

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A

RESEARCH PAPER

ON

FDI in Indian Retail

Beneficial or Detrimental

AUTHORS AND AFFILIATIONS:

Dr.R.K.Balyan

Dean &DirectorIBMR ,Ahmedabad

Ms. Praneti Shah

Faculty Member,

N.R.Institute of Business Management (GLS-MBA)Near Law garden,Ahmedabad. Contact No: 9925702534(M)E-mil: [email protected]

Ms.Charmi Shah

Faculty Member,Shri Chimanbhai Patel Institute of Management & ResearchOpp. Karnavati Club,Ahmedabad Contact No: 9925105125(M)

E-mil: [email protected]


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FDI in Indian Retail - Beneficial orDetrimentalABSTRACT:

Even though organized retail sector in India is at the infant stage , India has todaybecome a budding target for FDI. India today offers the most persuasive investmentopportunity for mass merchants and food retailers looking to expand overseas asIndian economy is growing at a raid pace with consumers having high purchasing

power. With a robust economy experiencing unrelenting growth, India has exerted apull and an irresistible enticement to companies looking to expand their scope ofoperations. FDI is a sturdy source for the intensification of retailing and will createenormous opportunities for innovation in retail sector in India but at the same time it isquite likely that a section of the domestic retailing industry will be severely hurt due tothe entry of foreign retailers. In this paper researchers have tried to accentuate both thethoughts in detail and concluded the most constructive view on FDI in Indian retailing.

In this paper researchers have tried to cover

What makes India attractive to foreigners?Why FDI in retail Arguments in favor of FDI in retailWhy not FDI in retail- Arguments against of FDI in retail

Final opinion of researchers about FDI in retail beneficial or detrimental

Growth of Indian retail industry in the last decade

Last decade has indeed witnessed tremendous growth in Indian retail industry and has integratedour Indian economy with the world. Retailing in India is progressively inching its way towardbecoming the next boom industry. It has emerged as one of the most dynamic and fast pacedindustries accounting for over 10 per cent of the country's GDP. This growth has become majorattraction for foreigners to enter in India. *1

The challenge to the retail on the other hand is the requirement of heavy initial investmentswhich leads to difficulty in achieving break even and this is the reason that many of these

players have not tasted success so far. However, the growing trend of he market, changes in thelifestyle of consumer segment , increasing per capita income and emerging technologies inoperations still promises success in the long run with achievement of economies of scale.

India is the fourth largest economy as far as purchasing power is concerned just behind, USA,Japan and China. Even though 25% of the population lives below poverty line, India has a largeand growing middle-income group of over 300 million, making it a strong emerging market. *2


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*1 http://www.marketresearch.com/product/print/default.asp?g=1&productid=1497236*2 http://www.ficci.com/media-room/speeches-presentations/2004/dec/dec3-real-ansal.htm

What makes India attractive to foreigners A comparative analysis

Growth and development of a particular industry is always a major attraction to the foreigners.GRDI represents countrywide yearly growth and development in retail sector. Index includes top20 countries as per their growth. Based on the data of GRDI analysis top five countries areanalyzed to identify the market potential.

Table 1Global Retail Development Index2007

GRDI

Rank

Country Region Parameters weight age

Country

risk

Market

attractiveness

Market

saturation

Time

pressure

GRDI

Score

25% 25% 30% 20%

1 India Asia 67 42 80 74 92

2 Russia EasternEurope

62 52 53 90 89

3 China Asia 75 46 84 84 86

4 Vietnam Asia 57 34 76 59 74

5 Ukraine EasternEuropean

41 43 44 88 69

Legend 0- high risk , low attractiveness, saturation, no time pressure

100 low risk, high attractiveness, not saturated , urgency to enter

The above table shows that India is ranked first with the score of 92 among twenty countries interms of retail growth followed by Russia and china in 2007 which was ranked 2 th in 2004 afterRussia . So we can say that in last three years India attained remarkable growth in retail trade.

Growth in the retail trade is not the only factor to be considered but labor plays important rolebecause it is labor intensive industry. The appropriateness of the country depends upon bestcombination of Growth Development and Labor as main resource. considering this furtheranalysis is done with the help of retail labor index and position of India is analyzed.

Table 2Retail Labor IndexLabor index

rank (out of

15 countries)

2007

Country Region Parameters weight age Retail labor

index score

Talent

availability

Talent

development

Labor

economies

40% 40% 20%

4 India Asia 77 81 86 85

10 China Asia 76 44 85 71------ Vietnam Asia Not ranked among top 15 countries

------ Russia EasternEurope

Not ranked among top 15 countries

------ Ukraine EasternEurope

Not ranked among top 15 countries

Legend 0- low talent availability, low talent development , high labor cost

100 high talent availability, high talent development, low labor cost


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The above table depicts that India is fourth in terms of labor growth among fifteen countries in2007. Thus it can be concluded that India is enjoying better position than other competingcountries in retail sector.______________________________________________________________________________

Table 1 Prepared based on http://www.atkearney.com/shared_res/pdf/GRDI_2007.pdf , Figure 1Table 2 Prepared based on http://www.atkearney.com/shared_res/pdf/GRDI_2007.pdf , Figure 5Giving importance to both the factors which are internally dependent on each other comparativeanalysis is done of the year 2006 and 2007

Table 3 Comparative analysis of GRDI index and labor index 2007

2007 2006

Country Region GRDI

index rank

Labor index

rank

GRDI

index rank

Labor index

rank

India Asia 1 4 1 8

China Asia 3 10 5 10

Russia Eastern Europe 2 ----(above 15) 2 13

Vietnam Asia 4 ----(above 15) 3 ----(above 15)Ukraine Eastern

European5 ----(above 15) 4 9

Figure 1

Now it can be concluded that inthe 2006 India was first ingrowth index and eighth in laborindex. In growth Russia wassecond but its labor growth was

not considerable as it securedthirteenth rank. China securedfifth rank in growth and tenth inlabor. But comparing labor otherthan china and Russia Ukraineenjoyed better position. So forthe comparison Vietnam can not be considered as it has notsecured rank in top fifteen inlabor index. The analysis showsthat in GRDI ranking India leads

in 2007 followed by Russia,china ,Vietnam and Ukraine. Comparing this with labor even though India is not first among topfifteen countries but first among the top five GRDI Rated countries with the rank 4 followed bychina. In 2007 between all four countries India is at top in growth and improved upon its laborindex. Russia is still second in growth but labor growth is diminishing. Opportunities areavailable with labor challenges in Russia which may not give appropriate returns to the newentrant. In china and Ukraine labor challenges at moderate level but opportunities arecomparatively lesser than India. So it can be concluded that India is the most resourceful country


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considering labor as the main resource for retail operations followed by China and this is thereason why foreigners are attracted towards Indian retail sector._____________________________________________________________________________Table3 http://www.atkearney.com/shared_res/pdf/GRDI_2006.pdf, Figure1&5

http://www.atkearney.com/shared_res/pdf/GRDI_2007.pdf , Figure 1&5

Figure 1 http://www.atkearney.com/shared_res/pdf/GRDI_2006.pdf, Figure6

Figure 2

Growth of Indian retail sector was at very nascent stage in 1995 .China was ahead of India in thedevelopment. After 1995 looking at the growth trend of India and china other countries alsocame in the competition. In 2003 all the countries entered in peaking (growth ) stage of theindustry in which again china was ahead followed by Hungary, India and Ukraine and Vietnam.In 2006 china entered in declining (Maturity-saturation) stage followed by Ukraine. Russia isvery near to attain maturity stage so no longer attracting global countries. India has achievedmaximum growth by 2006 and still growing at the peaking stages per analysis of 2007 still India

is in peaking stage. That is why India has become major attraction to foreigners

This clearly shows why foreigners have eye watch on India.

Other factors like Economic growth in terms of greater disposable incomes forthe booming Indian middle class, which currently comprises 22% of the total population.This figure is expected to increase to 32% by 2010. Disposable incomes are expected to rise at anaverage of 8.5% p.a. till 2015, change in Demographics which constitutes More than


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50% of the population is less than 25 years of age and strong growth is expectedto continue in this age bracket which is the major consuming class and the Indian urbanpopulation is projected to increase from 28% to 40% of the total population by 2020 and incomesare simultaneously expected to grow in these segment are contributing factors towards Indiasattraction *3___________________________

Figure2http://www.atkearney.com/shared_res/pdf/GRDI_2006.pdf,Figure7*3http://www.ey.com/Global/assets.nsf/Sweden/The_Great_Indian_Retail_Story/$file/The%20Great%20Indian%20Retail%20Story.pdf

Role of FDI in Indian retail trade

In January 2006, the Government relaxed FDI (foreign direct investment) controls on retailing toallow foreign retailers to participate directly in the Indian market for the first time by allowingequity ownership in `single brand' retailing. Thus, foreign entities are now allowed to operatetheir stores, but only if they are single-brand stores and only up to 51 per cent ownership. Theimpact of the consequent increase in FDI, in Indian retail, is expected to not just develop strong

backward linkages but also create a domestic supply chain of international standards. What isencouraging now for these global majors is the new policy thrust, which intends to furtherliberalize the FDI regime in Indian retail. *4

Arguments in favor of FDI

Factors necessitates FDI in India

To achieve expected growth in Indian GDP by encouraging export

India is targeting for its GDP to grow by 8 to 10 per cent per year. This requires raising the rateof investment as well as generating demand for the increased goods and services produced.

Growth in Indian GDP and Retail trade.

Table 3

The above data shows that retail trade has maximum contribution in Indias GDP. Remarkablegrowth in Indian GDP is mainly because of significant increase in trade in last three years.

1990 1995 2000 2002 2003 2004 2005 2006


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Exporting can be the way of generating the demand. China retail witnessed role of export in GDPand by that way contribution of retail trade in its GDP. The global retailers taken together buyabout $60 billion of goods each year from China for exports. Contrast this with India where lessthan $1 billion of exports are accounted for by global retailers (mostly metro dairy farm).Clearly, the scope of exports through the global retailers is enormous, indeed_______________.

Table3 www.adb.org/Documents/Books/Key_Indicators/2007/pdf/IND.pdf

*4http://www.thehindubusinessline.com/catalyst/2006/11/30/stories/2006113000040400.htm

To reduce gap between farm prices and final retail prices through structural change in

distribution - Inflation control mechanism

The gap between farm gate prices and final retail prices is very high in India. It is attributed tothe following

1. Rising capacity constraints - As a very large percentage of farmers in this country eitherhave marginal or small land holdings, they cannot build sufficient storage facilities tokeep their produce and on the other side demand is growing very high.

2. Highly fragmented distribution network-There are multiple layers in the distributionsystem. Inefficiencies and lack of proper infrastructure in logistics leads to high pricesmainly in food sectors. Because of the extremely fragmented distribution network, nomajor farm-support distribution or storage firm has emerged and has prevented theestablishment of sufficient logistical infrastructure including cold chains from the farmsto retail stores. It is estimated that more than 35 per cent of the agricultural output in thiscountry is wasted because of inadequate infrastructure. *5

The only people who are benefited from this are the intermediaries, at a very high cost to thefarmers and consumers. To bring about a structural change in this system, the layers ofintermediaries need to be cut down. This can be achieved only by allowing large companies whohave the ability to set up end-to-end distribution and logistics networks by deploying the latesttechnology and information systems. For all the charges against big retailers like Wal-Mart, it isan established fact that it is the rapid expansion of organized retailers, which helped controlinflation in the US over the last decade and sustain the economic momentum in recent years.

To acquire market-savvy, market-intelligent and best management practices

Retail giant houses such as Wal-Mart, Carrefour, Ahold, JC Penny can bring their better

managerial practices and IT-friendly techniques to cut wastage and set up integrated supplychains to gradually replace the presented disorganised and fragmented retail market. India wastesnearly Rs 50,000 crore in the food chain itself. These international retail outlets can help developthe food processing industry which requires $28 billion of modern technology andinfrastructure.Lack of latest technical expertise , is a major handicap for Indian business houses.Foreign direct investment can only pave the want for prosper and professional entrepreneurshipfor retail value chain.*6


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Provide an aid to Indian agriculture to become lowest cost source of farm produce Indiais enjoying strong base of agriculture and is one of the lowest cost providers of farmproducts. Low cost would become attraction to the foreign retailers would increase theirsourcing from India once they establish the required infrastructure and become the mediumfor our farm produce to reach global markets, which would provide an momentum to the

growth of Indian agriculture through export.___________________________________

*5 www.domainb.com/economy/general/2007/20070217_retail.htm - 19k -

*6 http://www.rediff.com/money/2005/feb/24swamy.htm

To bring trade balance:

In India trade balance is crying need of the hour. Trade is imbalanced as bringing out deficit intrade only. From the year 1980 to 2003 trade deficit is increased at an increasing rate. Foreign players can generate positive inflow of cash through export of trade items or cutting down

expenses of trade can increase the margin of profit. Example is given in the exhibit 1. Chinaafter 1994 attained trade balance and major contributor can be considered as foreign investmentas there is increase found in foreign investment after 1994 only. So India should focus on foreigninvestment because strong trade base can prosper the economy of India.

To increase liquidity by the way of foreign exchange reserves

India is in strong need of reserves to meet governments expenditure and trade requirements.Fiscal deficit and total public sector debt is increasing which is creating hindrance for Indiantrade. Foreign exchange reserve contributed greatly towards economic development in china.China's foreign exchange reserve reached 1.0663 trillion U.S. dollars at the end of 2006. China

became the world's largest foreign currency depositor in the first half of 2006. Figures from theState Administration of Foreign Exchange show that China's foreign exchange reserve stayed below one billion U.S. dollars before 1979.The huge reserve reflects China's economicachievements. The foreign exchange reserves has helped to increase imports, a reasonablegrowth of exports, and improvement in the quality of foreign investment.1*

Exhibit 1

The above stated benefits are supported with the statistics of china. As growth of Chinaseconomy is totally contributed to foreign direct investment.


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Case study of China-Positive impact of FDI

The Chinese economy is much more integrated with the world economy throughinternational trade and investment, which helps to explain its stronger rate of GDP growthduring most of the past 3 decades.

From the above graph it can be clearlyconcluded that when china was leading inretail trade in the world in 2003-2004 ,merchandise trade contributed to themaximum level in the GDP growth which isfound increasing at an increasing rate.

GROWTH IN TRADE DUE TO MERCHANDISE EXPORTS

Further maximum revenue generatedfrom exports of merchandise. 2006onwards India is leading in growth ofretail sector so India should alsoadopt the same strategy of exportingto improve GDP.In 2004 USA wasthe major export partner of Chinafollowed by HongKong, Japan, Souhkoria and Germany.

CONTRIBUTION TOWARDS INFLATION CONTROL

In the year 1994 inflation rate of chinawas double than India. After 1994foreign inflow increased in china and

due to that inflation rate constantlydiminished in china The main factorattributed toward this is control overgate prices due to end to enddistribution network established byforeign giants.


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A foreign exchange reserve is more than seven times of India and contributing towards cashinflow. Chinas economy is enjoying strong external positions, with ample foreign exchangereserves and it has low external debt as a percentage of GDP, and the ratio of short-term

external debt to foreign reserves is low. This brings liquidity for further transactions of thecountry nay lead to growth and development of the country by removing shortage of moneysupply.

In trade of china maximum contributor is merchandise trade. After 1994 stability is foundin trade due to maximum involvement of foreign traders. Before 1994 trade contribution

was found negative to the GDP contributing towards trade deficit. After 1994 tradecontribution brought positive inflow and has strengthen trade balance. 1994 onwardscontribution of trade is found in positive only thus we can say that foreign investmentcontributed toward stability in trade.Exhibit 1 Source:Deutsche Bank Research .October 2005

How FDI is detrimental to India:


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Threat on unorganized retail players:

Major impact of FDI is projected on local players mainly unorganized retail formats whichconsists of 97% share in total retail sales.Figure 4

India still predominantly houses the traditional

formats of retailing, that is, the local kiranashop, paan/beedi shop, hardware stores,weeklyhaats, convenience stores, and bazaars, whichtogether form the bulk. Most importantly, Indianretail is highly fragmented, with about 11million outlets operating in the country and only4% of them being larger than 500 square feet insize. Compare this with the figure of just 0.9million in the US, yet catering to more than 13times of the Indian retail market size.The Indian

retail industry was, and continues to be, highly fragmented. According to the global consultancy

firms AC Neilsen and KSA Technopak, India has the highest shop density in the world. In 2001they estimated there were 11 outlets for every 1,000 people. *7

The figure clearly shows that US, Taiwan and Malaysia spread of organized retail is maximum.Thus established players of the developed market who have already attain economies of scale intheir operation can easily grab the market share by using their expertise and create a threat to thebusiness of unorganized players who can not compete with their infrastructure, technology etcand by these way cannot meet requirements of customers.

Threat on organized retail players

Marginalize the domestic players:

Entry of global players would increase internal rivalry among the players than promotingbusiness of overall industry. Their economies of scale will allow them to reduce their margin toprovide value for money products in the beginning to grab the market share which is not possiblefor domestic players to reduce in comparison to global players because of huge investment.Majority of the Indian players have not attained even break even point as organized retail is stillat the nascent stage in India.

Huge spread of retail chain stores

Financially strong giants will spread their function at multiple location to cater to maximummarkets with full fledge infrastructure which is not possible for domestic player to cater._______

Figure 4 Source: Ernst &Young, The Great Indian Retail Story, 2006.*7 www.thehindubusinessline.com/2005/09/29/stories/2005092900181000.htm - 24k

Monopoly in the customer market and can be converted into cartel of global players


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Foreign players may create monopoly by providing products at discounted rates in the beginningto grab the market share by displacing domestic giants. and after getting good market ormonopoly in the market may create a cartel of global giants to exploit the customers by inducingprice hike and customers would not get any option than to purchase at the available prices.

Monopoly among suppliers

Global players may provide huge margin to suppliers to enjoy monopoly and to displace thedomestic players. This will help them to provide maximum number of brands to customers andsuppliers loyalty only towards them will help them to create competitive edge over domesticplayers

Exhibit 2: Comparison between Wal-mart and Indian retail industry

Instead of comparing total global retail industry with Indian retail industry, letscompare Wal-Mart alone with Indian retailers. Here are ten interesting facts:

The annual turnover of Wal-Mart (Sales in 2001 were $219 billion) is higher thanthe size of Indian retail industry (estimated at about $180 billion) and almost 100times more than the turnover of HLL (India's largest FMCG company).

The size of any Wal-Mart store is much higher than the size of any existingshopping mall in India.

Wal-Mart has over 4,800 stores (over 47 million square meters) where as none ofIndia's large format store (Shoppers' Stop, Westside, Lifestyle) have more than 10stores.

New stores opened annually by Wal-Mart are about 420, much higher than allorganized Indian retailers put together.

The sales per hour of $22 million are incomparable to any retailer in the world.

Number of employees in Wal-Mart are about 1.3 million where as the entire Indianretail industry (one of the most fragmented in the world) employs about threemillion people.

Wal-Mart has around 30,000 suppliers throughout the world and more than600,000 SKU's on its web site, a number that cannot be compared.

Daily customers are about 15.7 million (almost equivalent to Mumbai's entirepopulation).

Time between each Barbie Sale at Wal-Mart is just two seconds (same rate atwhich babies are produced in India!)

One-day sales record at Wal-Mart (11/23/01) $1.25 billion (roughly two third ofHLL's annual turnover).

None of the Indian organized retailer has ventured overseas where as Wal-Mart isnow in 10 countries and will expand to 21 countries in two years.Exhibit 2 source http://ranadeep.blog.com/753702

This gives an approximate estimate of the extent of loss that can be caused by the entry of suchmultinational retail chains in the retail trade sector to the local players.Replacement of established national brands by the brands of the retail giants.


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Wal-Mart is committed to buying the best goods at the cheapest prices to give its customers thebest value for money. That is why it sources so heavily from China. 70% of merchandise in Wal-Mart contains components made in China.*8 Even though Wal mart may not continue heavyoperations in china but would continue heavy sourcing from china market to cater to the world

markets at lower prices. Low prices of Chinese products can easily convince Indian priceconsciousness mentality. Acceptance towards Chinese brands can create a direct threat on Indianestablished brands providing best quality products with reasonable prices

Conclusion:

The above analysis shows that FDI has positive and negative effects on India economy. It can beconcluded that to keep pace with the forecast of Indian GDP, government should encourageforeign investment . To avoid its negative impact on local players regulatory framework shouldbe redesigned. Government should encourage FDI on gradual basis like currently it is allowedfor single brand. Product category wise clauses should be developed to allow FDI like

The product categories where it can create total threat, FDI should be encouraged in theform of Joint Venture only e. g. India is enjoying strong agriculture base.Encouragement to food grocery retail would create a threat to Indian agriculture but ourpoor supply chain demands end to end distribution network to reduce gate prices. For thatthere is a need of global established giant. So FDI should be allowed but in the form ofjoint venture to protect our interest part.

FDI should not be encouraged in the product categories where Indian players are alreadyestablished and FDI is only detrimental. E.g. Cosmetic products do not need FDI becauseentry of foreign players would replace Indian established brands with internationalbrands. It would be a direct threat to our big giants HUL, P&G, Johnson & Johnson whoare consistently providing qualitative products to consumers in all ranges. But craze of

international brand will induce consumers to switch to foreign brands. For some categories of products FDI should be permitted for sourcing only not selling in

Indian market. E.g. India need support to increase the market share of its Textile productswhere it has capacity to produce at the lowest rates. Encouragement to textile export cantremendously contribute towards development of our textile sector. Foreigners would getattracted due to lower prices. Thus FDI should be allowed to source or import from Indianot to sale in India.

Entry of foreign players should be restricted by the format type and number of stores.E.g. Wal mart store has its different format like Super centers, Discount departmentalstore etc. with the help of different formats it has successfully covered almost all thelocations of the city or country in which it has started its operations. Presence of such

giants at all the location can stop the local business. Indian organized retail players areable to develop maximum number of supermarkets not hypermarkets because of heavyinvestment. So foreign players should be allowed with limited number of stores only.

In nutshell FDI should be encouraged with strict , feasible and mutually beneficial regulations.


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*8 Planet Retail, December 2, 2005.

References :

Reports

Global retail development index/2005/2006/2007

Trade and foreign investment /comparing India and china/Stanford university/June1-3/2006

The great Indian retail story/Ernst & young report/Page 8/9/10

Foreign direct investment policy/April 2006

International Experience on Policy Issues/India vs China

/ Alan Rosling/Chairman, Jardine Matheson Group India/ FICCI Footfalls 15th

November 2002/New Delhi

Reserve bank of India/Financial highlights

http://worldbank.org/data/countrydata/aag/ind/ag.pdf

Websites

http://www.economywatch.com/foreign-direct-investment/fdi-india

http://www.indiafdiwatch.org/index.php?id=47

www.indiastatistics.com

Research papers

FDI in retailing :Challenges and Opportunities /Radhika vishvas &V.Murugaiah/third AIMS international conference on management

FDI in retail-II /Inviting more trouble/CPAS/Mohan Guruswami and Kamal Sharma/February 2006

E- Articles :

http://in.finance.yahoo.com/q/rr?s=WMT

http://walmart.windwhip.net/winca.htm Retailbiz/December 6/2006

http://www.rediff.com/money/2005/jul/22spec1.htm/ FDI in retail good news/T.Thomas

http://www.thehindubusinessline.com/iw/2005/12/18/stories/2005121800480600.htm/

FDI in retail will not displace labour /Mr B.S. Nagesh, CEO, Shoppers' Stop

http://indlaw.com/FDI in retail: Govt policy committed to safeguarding interests of Indianindustry and consumer


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