8/3/2019 FDI impact in Indian Retail

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Introduction

India being a signatory to World Trade Organisation’s General Agreement on Trade in

Services, which include wholesale and retailing services, had to open up the retail trade sector 

to foreign investment. Retail trade contributes around 10-11% of India’s GDP and currently

employs over 4 crores of people. There is a lot more growth in the sector which is untapped

and which can contribute to the national economic growth.

Factors necessitates FDI in retail sector 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

rate of investment as well as generating demand for the increased goods and services

 produced. Exporting can be the way of generating the demand. China retail witnessed role of 

export in GDP and by that way contribution of retail trade in its GDP. The global retailers

taken together buy about $60 billion of goods each year from China for exports. Contrast this

with India where less than $1 billion of exports are accounted for by global retailers (mostlymetro dairy farm). Clearly, the scope of exports through the global retailers is enormous.

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 attributedto the following.

1. Rising capacity constraints - As a very large percentage of farmers in this country

either have 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

distribution system. Inefficiencies and lack of proper infrastructure in logistics leads to high

 prices mainly in food sectors.

The only people who are benefited from this are the intermediaries, at a very high cost to the

farmers and consumers. To bring about a structural change in this system, the layers of 

intermediaries need to be cut down. This can be achieved only by allowing large companies

who have the ability to set up end-to-end distribution and logistics networks by deploying the

latest technology and information systems.

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 supply

chains to gradually replace the presented disorganised and fragmented retail market.

Provide an aid to Indian agriculture to become lowest cost source of farm produce

India is enjoying strong base of agriculture and is one of the lowest cost providers of farm products. Low cost would become attraction to the foreign retailers would increase their sourcing from India once they establish the required infrastructure and become the medium

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for our farm produce to reach global markets, which would provide an momentum to thegrowth of Indian agriculture through export.

To bring trade balance:

In India trade is imbalanced as bringing out deficit in trade 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 marginof profit.

To increase liquidity by the way of foreign exchange reserves

India is in strong need of reserves to meet government’s expenditure and trade requirements.Fiscal deficit and total public sector debt is increasing which is creating hindrance for Indiantrade.

Negative impact of FDI in retail sector in India

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. India still predominantly houses the traditionalformats of retailing, that is, the local kirana shop, paan/beedi shop, hardware stores, weeklyhaats, convenience stores, and bazaars, which together form the bulk. Most importantly,Indian retail is highly fragmented, with about 11 million outlets operating in the country andonly 4% of them being larger than 500 square feet in size.

Threat on organized retail players

1. Marginalize the domestic players:

 Entry of global players would increase internal rivalry among the players than promoting

 business of overall industry. Foreign players may create monopoly by providing products atdiscounting rates.

2. Huge spread of retail chain stores

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

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

and suppliers loyalty only towards them will help them to create competitive edge over 

domestic players.

Replacement of established national brands by the brands of the retail giants.

Wal-Mart is committed to buying the best goods at the cheapest prices to give its customersthe best value for money. That is why it sources so heavily from China. 70% of merchandisein Wal-Mart contains components made in China. Acceptance towards Chinese brands cancreate a direct threat on Indian established brands providing best quality products with

reasonable prices.

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