Foreign Direct Investment in Retail: Myths and Realities

GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477Volume 4, Number 3 (2012)

FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR:MYTHS AND REALITIES

Anurag AnandResearch Scholar,

Centre for Studies in Economics and Planning,School for Social Sciences,

Central University of Gujarat, India.Email: [email protected]

ABSTRACT

Foreign Direct Investment (FDI) is a kind of an important factor in the process of

globalization as it intensifies the interaction between states, regions and firms. To accelerate

the pace of economic progress, employment generation and consumer awareness in India,

there is need for investment which can be fulfilled by FDI in retail. The long awaited scheme

to allow FDI in retail sector has been approved by the Cabinet on September 2012 by some

proposals that investment in multi-brand retailing has to be minimum investment of US$ 100

of which 50 per cent to be spent on rural marketing and rural infrastructure. One of the

impacts of FDI in retail will hopefully be to improve the logistical infrastructure, so that it

can help the farmers and the households in food prices, easy market access for their products,

reduction in the role of intermediaries. From the consumer’s welfare point of view, it is also

helpful because of competition and market awareness. In long run, it will be helpful for the

farmers. This paper try to examine myths and realities of FDI in retail and how it is going to

effects retailer’s position and emerging urban facilities to rural India. It also tries to explore

the role of organised retail sector in India. This paper is mainly based on secondary data.

Secondary data will be collected from various Reports of Ministry of Commerce, Economic

Survey, RBI Bulletin, World Investment Reports, Books and Articles etc.

Key Words: FDI, Retail, Rural Welfare, Investment, Consumer Awareness.


INTRODUCTION

Foreign Direct Investment (FDI) is a kind of an important factor in the process of

globalization as it intensifies the interaction between states, regions and firms. It is a kind of

strategic instrument of development policy. FDI is not simply a transfer of capital but the

transfer of package in which capital, management and new technology are combined. It

generates employment, influences income distribution and generates foreign exchange. So we

can say that FDI increases competition pressures to the local firms that result in an

improvement in technical and allocate efficiency. India has consistently been classified as

one of the most attractive investment destinations by reputed international rating

organisations with a vast reservoir of skilled and cost. Developing countries like India need

substantial foreign inflows to achieve the required investment to accelerate economic growth

and development, it will fulfil by FDI in retail. It can act as a catalyst for domestic industrial

development. Further, it helps in speeding up economic activity and brings with it other

scarce productive factors such as technical knowhow and managerial experience, which are

equally essential for economic development. It will also help to increase consumption and

proper volume growth.

The retail industry in India is of late often being hailed as one of the sunrise sectors in the

economy. AT Kearney, the well-known international management consultancy, recently

identified India as the ‘second most attractive retail destination’ globally from among thirty

emergent markets. It has made India the cause of a good deal of excitement and the cynosure

of many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of

the total workforce (only agriculture employs more) in the country, the retail industry is

definitely one of the pillars of the Indian economy. The recent decision of the Government of

India on permitting FDI up to 51% in the multi-brand retail has raised hopes for speedy

modernisation of organised retail sector in the country. Expansion of organised retailing

requires supporting infrastructure such as storage facilities, assured electricity supply,

transport and communication network which can be provided mainly through public

investment or through public-private partnership.

REVIEW OF LITERATURE

Foreign Direct Investment (FDI) occupies a special place in the connection between

economic development and globalization. FDI brings scarce capital and technology from rich


to poor countries. An additional factor that may prevent a country from reaping the full

benefits of FDI is imperfect and underdeveloped financial markets (OECD 2002). E A S

Sarma (2005) said,the retail industry of India is largely in the hands of the unorganised

sector. Khor Chia Boon (2001) said in his study,“Foreign Direct Investment and Economic

Growth” investigates the casual relationship between FDI and economic growth. So in this

case FDI should not be restricted to certain branded product types or store formats. Swapna

S. Sinha (2007) in his thesis,” Comparative Analysis of FDI in China and India: Can

Laggards Learn from Leaders?”andit is found that India has grown due to its human capital,

size of market, rate of growth of the market. Ashoka, Mody. (2007) said in his book,

“Foreign Direct Investment and the World Economy” FDI is thrice blessed. It brings scarce

capital where capital needed and productive. Nagaraj,R. (2011)observed that foreign

investment is now seen as a source of scarce capital, technology and managerial skills that

were considered necessary in an open, competitive world economy. Kumar, N. (2002) said,

FDI as a widely perceived important resource for expediting the industrial development of

receiving or host economy. Most developing countries, therefore, have a welcoming attitude

towards MNEs and FDI.

OBJECTIVE OF THE STUDY

To study how FDI in Retail Affects Indian Farmers.

To Examine Rural Development through FDI in Multi-Brand Retail.

METHODOLOGY OF THE STUDY

This study is mainly based on secondary data. Secondary data has been used from various

Reports of Ministry of Commerce and Industry, Economic Survey, RBI Bulletin, World

Investment Reports, Books, Articles and online database of Indian Economy.

FOREIGN DIRECT INVESTMENT IN INDIA

Foreign Direct Investment (FDI) is a predominant and vital factor for influencing the

contemporary process of global economic development. Foreign Investment in India is

governed by the FDI policy announced by the government of India and the provision of the

Foreign Exchange Management Act (FEMA) 1999. FDI is generally defined as “A form of

long term international capital movement, made for the purpose of productive activity and

accompanied by the intention of managerial control or participation in the management of


foreign firms”. It is a kind of cross-border transfer of resources including process and product

technology, managerial skills, marketing and distribution know-how and human capital. FDI

generates employment, influences income distribution and generates foreign exchange.

Indian retail needs FDI in retail because there is not enough capital being invested by the

Indian companies. The reasons for this are obvious- quite a few Indian retailers have

disappointed all possible funding institutions, be it private equity, stock market, or the banks.

Indian retailers have failed to satisfy any of them and thus the foreign capital inflow has

almost dried up for the sector.

UNDERSTANDING RETAIL SECTOR IN INDIA

Indian retail sector is a kind of business enterprises of the economy. It is the 5th largest retail

destination and the second most attractive market after China for investment in the globe after

Vietnam as reported by AT Kearney’s 7th annual Global Retail Development Index (GRDI),

in 2011. The growing popularity of Indian retail has resulted in increasing awareness of

quality products and brands. As a whole we can say that Indian retail sector has made life

convenient, easy, quick and affordable. It is undergoing metamorphosis1. Till 1990s retail

continued in the form of kiranas that is unorganised retailing but after 1990s branded retail

outlets like Food World, Nilgiris and local retail outlets like Apna Bazar came into existence.

Now big players like Reliance, Tata’s, Bharti, ITC and other reputed companies have entered

into organised retail business (Gupta, 2012). The retail sector is mainly divided into two

parts- 1) Organised retail and 2) Unorganised retail. Organised retail refers to trade activities

undertaken by licensed retailers that are those who are registered for sales tax, income tax,

etc. These include the corporate-backed hypermarkets and retail chains, and also the privately

owned large retail businesses. With over 12 million retail outlets, India has the highest retail

outlets density in the world. This sector witnessed significant development in the past 10

years from small unorganized family owned retail formats to organized retailing.

Unorganised retail refers to the traditional formats of low-cost retailing like the local kirana

shops, owner manned general stores, paan-beedi shops, convenience stores and hand cart.

The Indian retail sector is highly fragmented with 97% of its business being run by the

unorganised retailers. The key factors that drive growth in retail sector are young

demographic profile, increasing consumer aspirations, growing middle class incomes and

improving demand from rural markets. Also, rising incomes and improvements in

1 When a metamorphosis occurs, a person or thing develops and changes into something completely different.


infrastructure are enlarging consumer markets and accelerating the convergence of consumer

tastes.

FDI IN MULTI-BRAND RETAILING: FARMER’S WELFARE POINT OF VIEW

India is the second largest producer of fruits and vegetables; it has a very limited cold-chain

infrastructure. Lack of adequate storage facilities causes heavy losses to farmers, in terms of

wastage in quality and quantity of produce in general, and of fruits and vegetables in

particular.

According to the FDI policy norms, the minimum investment by a foreign retailer should be

$100 billion, and 50% of this amount has to be channelled into the development of back-end

infrastructure in the first three years. This minimum investment can typically fund the

establishment of around one million sq. ft. of front-end store space, equivalent to 10-15

hypermarkets or department stores. In a pan-Indian survey conducted over the weekend of

December 3, 2011, an overwhelming majority of consumers and formers in and around 10

major cities across the country supported retail reforms. Over 90% of consumers said FDI in

retail will bring down prices and offer a wider choice of goods. Nearly 78% of farmers said

they will get better price for their produce from multi-brand stores. Various farmers

associations in India have also announced their support for retail reforms. These include All

India Vegetable Growers Association (AIVGA), Bharat Krishak Samaj, Consortium of Indian

Farmers Associations (CIFA), and Sharad Joshi’s Shetkari Sanghatana. On December 4,

2011, Deepak Parekh, Ashok Gulati and many other economic policy leaders in India had

described putting investment and innovation in retail on hold for the sake of vested interests

as unfair and detriment to the vast majority in India. They had urged farmers, consumers and

common people to raise their voice against this false drama of apprehension against foreign

investment and modernising trade in organised retailing. The recent decision of the

Government of India on permitting FDI up to 51% in the multi-brand retail has raised hopes

for speedy modernisation of organised retail sector in the country through its technological

up-gradation, resulting in improved competitiveness-necessary for sustaining high growth of

the economy. On all account farmers, apart from other non-form enterprises and consumers

in general, would benefit generally from the development of organised retail, especially in

view of the policy requirement of substantial investment in back-end infrastructure much of

which would go into areas like rural warehousing and cold chains benefitting the Indian

agriculture.


Benefit to farmers-

7-10% higher price to farmers than what they get from mandi.

3-4% incentive for the quality of produce farmers deliver to Bharti Wal-Mart based

on customer requirement.

Expert’s advice on better crop planning and management.

FDI IN MULTI-BRAND RETAIL AND RURAL DEVELOPMENT: MYTHS AND

REALITIES

FDI in retail will hopefully be to improve the logistical infrastructure, so that it can help the

farmers and the household in food prices. In longer run, it will be helpful for inflation, growth

in economy and rural income. Recently the Government of India announced 51% FDI in

multi-brand retail; in this case there are some procedures/conditions for foreign investors-

1. FDI in multi-brand retail trading permitted in all products under Govt. Approval

route.

2. Minimum FDI to be brought in by foreign investors US$ 100 million.

3. There should be 50% foreign investment to be invested in villages for infrastructure

development.

4. At least 30% in value of procurement to be from small industries/villages and cottage

industries, artisans and craftsman, whose total investment in plant and machinery not

exceeding US$ 1 million.

5. Retail stores can be established in cities across the county, with a minimum

population of 10 lakhs.

6. Smaller States have the right to make their decision for allow FDI in retail.

7. No retail trading by e-commerce by companies with FDI engaged in multi-brand

retail trading.

8. Govt. has first right to procurement of agriculture products.

Myth-The retail sector will be controlled by foreign stores.

Reality- The FDI-backed stores can only operate in cities and every state has the freedom to

allow or disallow FDI-backed retail investment.

Myth-Farmers will be exploited and will lose their fields and crops to foreign investors.

Reality-Farmers will not be exploited because farmers will receive better remuneration for

their produce & will benefit from additional job opportunities resulting in overall


improvement in their quality of life. So that permitting FDI in retail is likely to open new

opportunities for farmers, particularly for those dealing in fruits and vegetables. Some studies

shows that profit realisation by farmers can increase up to 60% when the produce is sold

directly to organised retailers, as compared with selling through Mandies.

Myth- Kirana stores and small retailers will lose.

Reality- Retailers will benefit from existing policy of sourcing their requirements from

wholesale cash & carry stores at a discount. Some countries such as China, Thailand,

Indonesia, Brazil, Singapore, Argentina & Chile where there are no caps for FDI and where

there are no conditions, small retail stores have flourished, leading to more employment.

Myth- Another big myth is about potential job losses in the traditional retail sector that

employs unskilled and unemployable people. But the reality is that, do we wish to secure

these low-paid dead-end jobs, or should we try to create well-paying jobs with a certain

growth path for individuals.

DISCUSSION AND FINDINGS

Over 80% of farmers now are small and marginal with increasing participation of women.

Their awareness of the marketing problems in the new context as well as their bargaining

power while negotiating with more powerful buyers like organised wholesalers and retailers

need to be raised by organising them into sales cooperatives. In this case FDI in retail can

bring in latest technology and supply chain management into the country and therefore the

nation’s youth will benefit from numerous employment opportunities in this sector. Increase

in Multi-brand retail stores will increase Growth in agro-processing industry. Transform rural

India through improved agro processing and cold chain and new manufacturing opportunities

will open for the nation’s micro, small and medium enterprises. Those who are opposing FDI

in retail on the grounds that lakhs of small traders will lose out are making big mistake. They

are forgetting that the loss for these traders will be more than compensated by the gains to

hundreds of millions of consumers and farmers who will benefit from cutting out these

middlemen.

CONCLUSION

FDI would lead to a more comprehensive integration of India into worldwide market.

Approval of 51% FDI in multi-brand retail is a kind of another revolutionary leap for Indian

economy. Although consumers have largely benefited from retail chains, the expected


benefits have not reached farmers. This is mainly because domestic players have failed to

create adequate back-end infrastructure to provide foe seamless flow of produce from farm to

fork. Multi-brand retail chains are equipped with experience, skills and technology, and have

built good supply chains. In India there is need to build the capacity for aggressively

marketing its products at the global level. As long as we can build the capacity of

aggressiveness and competitiveness, FDI is not a dangerous thing.

REFERENCES

1. Mehta, S. Pradeep “FDI in retail will benefit all” (2012). Business Line news paper

dated-August 8, 2012.

2. Gupta, Amisha. “Foreign Direct Investment in Retail Sector: Strategic Issues and

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3. Singhal, Arvind. (2009): “Indian Retail: The road ahead” Retail biz, available at

www.etretailbiz.com, last visited 14th Oct.2010.

4. Mukherjee, Arpita and Patel, Nitisha. “FDI in retail sector: India”, Academic

Foundation, New Delhi . (2005).

5. Singh, A.K. andAgarwal, P.K. “ Foreign Direct Investment: Big Bang in Indian

Retail” VSRD-IJBMR, Vol. 2 (7), 2012, 327-337, (2012). Available online-

www.vsrdjournals.com accessed on 11-10-2012.

6. Kearney, A. T. “Retail Global Expansion: A Portfolio of Opportunities” (2011).

Available online- http://www.atkearney.com/documents/10192/3903b4b7-265c-484e-

932c-50169e5aa2f3 accessed on 18-10-2012.

7. The Hindu “No easy ride for foreign retailers” by Jehani, B. Dated- October 22,

2012. Allahabad.

8. The Times of India “Govt. clears 51% FDI in retail, 49% in aviation” by Times view

dated September 17, 2012.

9. www.rbi.ac.in

10. www.dipp.in Ministry of Commerce and Industry, Govt. Of India.

Documents

Foreign Direct Investment in Retail: Myths and Realities