A

RESEARCH PAPER

ON

FDI in Indian Retail –

Beneficial or Detrimental

AUTHORS AND AFFILIATIONS:

Dr.R.K.BalyanDean &Director IBMR ,Ahmedabad

Ms. Praneti ShahFaculty Member,N.R.Institute of Business Management (GLS-MBA)Near Law garden, Ahmedabad. Contact No: 9925702534(M)E-mil: pranetishah@gmail.com

Ms.Charmi ShahFaculty Member,Shri Chimanbhai Patel Institute of Management & ResearchOpp. Karnavati Club,Ahmedabad Contact No: 9925105125(M)E-mil: charmikshah@gmail.com

FDI in Indian Retail - Beneficial or Detrimental

ABSTRACT:

Even though organized retail sector in India is at the infant stage , India has today become a budding target for FDI. India today offers the most persuasive investment opportunity for mass merchants and food retailers looking to expand overseas as Indian economy is growing at a raid pace with consumers having high purchasing power. With a robust economy experiencing unrelenting growth, India has exerted a pull and an irresistible enticement to companies looking to expand their scope of operations. FDI is a sturdy source for the intensification of retailing and will create enormous opportunities for innovation in retail sector in India but at the same time it is quite likely that a section of the domestic retailing industry will be severely hurt due to the entry of foreign retailers. In this paper researchers have tried to accentuate both the thoughts in detail and concluded the most constructive view on FDI in Indian retailing.

In this paper researchers have tried to coverWhat makes India attractive to foreigners?Why FDI in retail – Arguments in favor of FDI in retail Why not FDI in retail- Arguments against of FDI in retailFinal 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 integrated our Indian economy with the world. Retailing in India is progressively inching its way toward becoming the next boom industry. It has emerged as one of the most dynamic and fast paced industries accounting for over 10 per cent of the country's GDP. This growth has become major attraction for foreigners to enter in India. *1

The challenge to the retail on the other hand is the requirement of heavy initial investments which 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 the lifestyle of consumer segment , increasing per capita income and emerging technologies in operations 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 large and growing middle-income group of over 300 million, making it a strong emerging market. *2

*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 top 20 countries as per their growth. Based on the data of GRDI analysis top five countries are analyzed to identify the market potential. Table 1 Global Retail Development Index 2007GRDI Rank

Country Region Parameters – weight age GRDI ScoreCountry

riskMarket attractiveness

Market saturation

Time pressure

25% 25% 30% 20%1 India Asia 67 42 80 74 922 Russia Eastern

Europe 62 52 53 90 89

3 China Asia 75 46 84 84 864 Vietnam Asia 57 34 76 59 745 Ukraine Eastern

European 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 in terms of retail growth followed by Russia and china in 2007 which was ranked 2 th in 2004 after Russia . 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 role because it is labor intensive industry. The appropriateness of the country depends upon best combination of Growth –Development and Labor as main resource. considering this further analysis is done with the help of retail labor index and position of India is analyzed. Table 2 Retail 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 8510 China Asia 76 44 85 71------ Vietnam Asia Not ranked among top 15 countries------ Russia Eastern

Europe Not ranked among top 15 countries

------ Ukraine Eastern Europe

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 costThe above table depicts that India is fourth in terms of labor growth among fifteen countries in 2007. Thus it can be concluded that India is enjoying better position than other competing countries 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 comparative analysis is done of the year 2006 and 2007 Table 3 Comparative analysis of GRDI index and labor index 2007

2007 2006Country Region GRDI

index rank Labor index rank

GRDI index rank

Labor index rank

India Asia 1 4 1 8China Asia 3 10 5 10Russia Eastern Europe 2 ----(above 15) 2 13Vietnam Asia 4 ----(above 15) 3 ----(above 15)Ukraine Eastern

European 5 ----(above 15) 4 9

Figure 1

Now it can be concluded that in the 2006 India was first in growth index and eighth in labor index. In growth Russia was second but its labor growth was not considerable as it secured thirteenth rank. China secured fifth rank in growth and tenth in labor. But comparing labor other than china and Russia Ukraine enjoyed better position. So for the comparison Vietnam can not be considered as it has not secured rank in top fifteen in labor index. The analysis shows that 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 top fifteen countries but first among the top five GRDI Rated countries with the rank 4 followed by china. In 2007 between all four countries India is at top in growth and improved upon its labor index. Russia is still second in growth but labor growth is diminishing. Opportunities are available with labor challenges in Russia which may not give appropriate returns to the new entrant. In china and Ukraine labor challenges at moderate level but opportunities are

comparatively lesser than India. So it can be concluded that India is the most resourceful country considering labor as the main resource for retail operations followed by China and this is the reason 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&5Figure 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 the development. After 1995 looking at the growth trend of India and china other countries also came in the competition. In 2003 all the countries entered in peaking (growth ) stage of the industry 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 is very near to attain maturity stage so no longer attracting global countries. India has achieved maximum 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 for the 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 an

average of 8.5% p.a. till 2015, change in Demographics which constitutes More than 50% of the population is less than 25 years of age and strong growth is expected to continue in this age bracket which is the major consuming class and the Indian urban population is projected to increase from 28% to 40% of the total population by 2020 and incomes are simultaneously expected to grow in these segment are contributing factors towards India’s attraction *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%20G reat%20Indian%20Retail%20Story.pdf

Role of FDI in Indian retail trade

In January 2006, the Government relaxed FDI (foreign direct investment) controls on retailing to allow foreign retailers to participate directly in the Indian market for the first time by allowing equity ownership in `single brand' retailing. Thus, foreign entities are now allowed to operate their stores, but only if they are single-brand stores and only up to 51 per cent ownership. The impact 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 is encouraging now for these global majors is the new policy thrust, which intends to further liberalize 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 rate of investment as well as generating demand for the increased goods and services produced.

Growth in Indian GDP and Retail trade.

Table 3

1990 1995 2000 2002 2003 2004 2005 2006

The above data shows that retail trade has maximum contribution in India’s GDP. Remarkable growth in Indian GDP is mainly because of significant increase in trade in last three years. 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 (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 to 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 to keep 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. Because of the extremely fragmented distribution network, no major farm-support distribution or storage firm has emerged and has prevented the establishment of sufficient logistical infrastructure including cold chains from the farms to retail stores. It is estimated that more than 35 per cent of the agricultural output in this country is wasted because of inadequate infrastructure. *5

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. For all the charges against big retailers like Wal-Mart, it is an established fact that it is the rapid expansion of organized retailers, which helped control inflation 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 supply chains to gradually replace the presented disorganised and fragmented retail market. India wastes nearly Rs 50,000 crore in the food chain itself. These international retail outlets can help develop the food processing industry which requires $28 billion of modern technology and infrastructure.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 entrepreneurship for retail value chain.*6

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 for 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 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 margin of profit. Example is given in the exhibit –1. China after 1994 attained trade balance and major contributor can be considered as foreign investment as there is increase found in foreign investment after 1994 only. So India should focus on foreign investment 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 Indian trade. 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 the State 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 economic achievements. The foreign exchange reserves has helped to increase imports, a reasonable growth 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 China’s economy is totally contributed to foreign direct investment.

Case study of China-Positive impact of FDI

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

From the above graph it can be clearly concluded that when china was leading in retail trade in the world in 2003-2004 , merchandise trade contributed to the maximum level in the GDP growth which is found increasing at an increasing rate.

GROWTH IN TRADE DUE TO MERCHANDISE EXPORTS

CONTRIBUTION TOWARDS FOREIGN EXCHANGE RESERVES

Further maximum revenue generated from exports of merchandise. 2006 onwards India is leading in growth of retail sector so India should also adopt the same strategy of exporting to improve GDP.In 2004 USA was the major export partner of China followed by HongKong, Japan, Souh koria and Germany.

CONTRIBUTION TOWARDS INFLATION CONTROL

In the year 1994 inflation rate of china was double than India. After 1994 foreign inflow increased in china and due to that inflation rate constantly diminished in china The main factor attributed toward this is control over gate prices due to end to end distribution network established by foreign giants.

GROWTH IN GDP DUE TO MERCHADISE TRADE

A foreign exchange reserve is more than seven times of India and contributing towards cash inflow. China’s economy is enjoying strong external positions, with ample foreign exchange reserves 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 the country nay lead to growth and development of the country by removing shortage of money supply.

In trade of china maximum contributor is merchandise trade. After 1994 stability is found in trade due to maximum involvement of foreign traders. Before 1994 trade contribution was found negative to the GDP contributing towards trade deficit. After 1994 trade contribution brought positive inflow and has strengthen trade balance. 1994 onwards contribution of trade is found in positive only thus we can say that foreign investment contributed toward stability in trade. Exhibit 1 Source:Deutsche Bank Research .October 2005

How FDI is detrimental to India:

TRADE BALANCE

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

India still predominantly houses the traditional formats of retailing, that is, the local kirana shop, paan/beedi shop, hardware stores,weekly haats, 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 and only 4% of them being larger than 500 square feet in size. Compare this with the figure of just 0.9 million in the US, yet catering to more than 13 times 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 2001 they 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 in their operation can easily grab the market share by using their expertise and create a threat to the business of unorganized players who can not compete with their infrastructure, technology etc and 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 promoting business of overall industry. Their economies of scale will allow them to reduce their margin to provide value for money products in the beginning to grab the market share which is not possible for 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 still at the nascent stage in India.

Huge spread of retail chain stores

Financially strong giants will spread their function at multiple location to cater to maximum markets 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

Foreign players may create monopoly by providing products at discounted rates in the beginning to grab the market share by displacing domestic giants. and after getting good market or monopoly in the market may create a cartel of global giants to exploit the customers by inducing price 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 the domestic 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

Exhibit 2: Comparison between Wal-mart and Indian retail industry Instead of comparing total global retail industry with Indian retail industry, lets

compare 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 than the size of Indian retail industry (estimated at about $180 billion) and almost 100 times 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 existing shopping mall in India.

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

New stores opened annually by Wal-Mart are about 420, much higher than all organized 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 Indian retail industry (one of the most fragmented in the world) employs about three million people.

Wal-Mart has around 30,000 suppliers throughout the world and more than 600,000 SKU's on its web site, a number that cannot be compared.

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

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

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

None of the Indian organized retailer has ventured overseas where as Wal-Mart is now 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 such multinational retail chains in the retail trade sector to the local 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 customers the best 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 heavy operations 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 price

consciousness mentality. Acceptance towards Chinese brands can create a direct threat on Indian established 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 be concluded that to keep pace with the forecast of Indian GDP, government should encourage foreign investment . To avoid its negative impact on local players regulatory framework should be redesigned. Government should encourage FDI on gradual basis like currently it is allowed for 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 the

form 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 our poor supply chain demands end to end distribution network to reduce gate prices. For that there is a need of global established giant. So FDI should be allowed but in the form of joint venture to protect our interest part.

FDI should not be encouraged in the product categories where Indian players are already established and FDI is only detrimental. E.g. Cosmetic products do not need FDI because entry of foreign players would replace Indian established brands with international brands. It would be a direct threat to our big giants HUL, P&G, Johnson & Johnson who are 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 products where it has capacity to produce at the lowest rates. Encouragement to textile export can tremendously contribute towards development of our textile sector. Foreigners would get attracted due to lower prices. Thus FDI should be allowed to source or import from India not 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 departmental store etc. with the help of different formats it has successfully covered almost all the locations 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 are able to develop maximum number of supermarkets not hypermarkets because of heavy investment. 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.

*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 DelhiReserve 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

Indian industry and consumer