Jforeign direct investment i.e fdi in retail of india

7/29/2019 Jforeign direct investment i.e fdi in retail of india

1/37

MUMBAI UNIVERSITY

PROJECT ON

A STUDY OF AN ANALYSIS OF ICICI PRUDENTIAL LIFE INSURANCE

POLICY MASTER IN COMMERCE

(M.COM. IN ACCOUNTANCY)

SEMESTER: II

ACADEMIC YEAR 2012-13

SUBMITTED BY

MISS. CHETTIAR PRIYANKA RAJENDRAN

ROLL NO: 6278

GUIDED BY

PROF. S V RANE

PARLE TILAK VIDYALAYA ASSOCIATIONS

MULUND COLLEGE OF COMMERCE

MULUND (W) MUMBAI - 80


2/37

DECLARATION

I the undersigned, Miss Chettiar Priyanka Rajendran, a student of Mulund College of Commerce

Stud ying in M.com [Accountancy] Semes ter-II , h ereb y de clare that the proje ct work prese nted i

this report is my original work.

This work has not been previously submitted to any other university for any other

examination.

Date: __ th Feb., 2013

Place: Mumbai

--------------------------

(Chettiar Priyanka Rajendra


3/37

CERTIFICATE

I, Mr. / Ms. ________________________, hereby certify that Miss Chettiar Priyanka Rajendran, a st udent o

Mulund College Of Commerce Studying in M.com [Accountancy] Semester-II, has completed

project on topic, A Study of an Analysis of ICICI Prudential Life Insurance Policy, in the academic year 2012-

2013.

The information submitted is true and original to the best of my knowledge.

Signature of Project Guide Signature of Principal

Signature of Co- ordinator Signature of External Guide


4/37

ACKNOWLEDGEMENT

At outset, we would like to thank the institutions for having provided us with an opportunity to carry out a

project of this magnitude that helped me satisfy my curiosity as far as my area of interest was concerned.

The essence of this project i.e. its contents have been compiled with help of varied sources of secondary

database, but we would specially like to acknowledge the support, suggestions and feedback received from my

Project Guide.

First of all, I would like to express my deepest gratitude to my supervisor Professor S V Rane , who guided me

and assisted me to accomplish my dissertation in the last six months. I have benefited from his academic

knowledge and personal encouragement and also made great progress through his valuable advices. When I

encountered some problems, he is very patient and supportive. Meanwhile, I would like to express my gratitud

to my parents and my friends for supporting my studies during this journey. Their endless love and support giv

me strong confidence to face future work and life after the study. All my gratitude cannot be expressed in

words, without any of them I could not get the present achievement.

Also my faculty member Prof. S V Rane guide and suggest me about the project. A lot of other people have als

contributed directly and indirectly to completion of this project would not have seen light of the day. Our heart

felt gratitude to all of them.


5/37

INDEX

Sr No. Particulars Page No.

1 Introduction 1

2 Policy in India 10

3 Limitations 16

4 Recent scenario 22

5

6

Recommendations

Boon / Curse

27

31

7 Case Study 33

8 Conclusion 38

9 Bibilography 39


6/37

Introduction

Marketing is an assessment, ascertainment, and fulfillment of consumer needs and desire into products and

services through planning and creating demand for companies products, serving the consumer demand through

planned physical distribution with the for help of marketing channels expanding the marketing even in the face

of keen competition. As a corporate state of mind which insists integration and co-ordination of all marketing

functions in welded with all co-operative functions, with a basic objective of maximizing long range corporate

profits and satisfy the customer needs and wants.

The Creation of customer implies three things:-

1) Development of product through technical and market research on which afford salesopportunities.2)

Persuading the customer to buy through advertisement and sales promotion.3) Making the product available in

form at a price, time and place the customer want. Marketing research is the function, which links the consume

/ customer and public to the marketer through information used to identify and define marketing opportunities

and problems. Objective of marketing research may be primary to gather information from different customer

attitudes and opinions. The insurance sector in India has come a full circle form being an open competitive

market to nationalization and back to a liberalized market again. Tracing the developments in the Indian

insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.


7/37

HISTORY

FDI Policy in India

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country throug

the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To p

in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the productio

capacity of the economy.

Foreign Investment in India is governed by the FDI policy announced by the Government of India and th

provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in th

regard had issued a notification, which contains the ForeignExchange Management (Transfer or issue

security by a person resident outside India) Regulations, 2000. This notification has been amended from time t

time.

The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewin

the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notifie

through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy an


8/37

Promotion (DIPP).The foreign investors are free to invest in India, except few sectors/activities, where prio

approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required.

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued

October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of tradin

activities.

a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic rout

b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand product

subject to Press Note 3 (2006 Series).FDI is not permitted in Multi Brand Retailing in India.

Entry Options For Foreign Players prior to FDI Policy

Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players ha\d been operating

the country. Some of entrance routes used by them have been discussed in sum as below:-

1. Franchise Agreements

It is an easiest track to come in the Indian market. In franchising and commission agents services, FDI (unless

otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign

Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world.

Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks

as good as Spencer, have entered Indian marketplace by this route.

2. Cash And Carry Wholesale Trading

100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assis

local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of

Germany was the first significant global player to enter India through this route.

3. Strategic Licensing Agreements

Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these right

Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements


9/37

distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route wi

an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pv

Ltd

4. Manufacturing and Wholly Owned Subsidiaries.

The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturin

are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorise

to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlet

etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has

wholly owned subsidiary, Nike India Private Limited.

FDI in Single Brand Retail

The Government has not categorically defined the meaning of Single Brand anywhere neither in any of i

circulars nor any notifications.

In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB

approval and subject to the conditions mentioned that (a) only single brand products would be sold (i.e., retail o

goods of multi-brand even if produced by the same manufacturer would not be allowed), (b) products should b

sold under the same brand internationally, (c) single-brand product retail would only cover products which a

branded during manufacturing and (d) any addition to product categories to be sold under single-brand wou

require fresh approval from the government.

While the phrase single brand has not been defined, it implies that foreign companies would be allowed to se

goods sold internationally under a single brand, viz., Reebok, Nokia, Adidas. Retailing of goods of multip

brands, even if such products were produced by the same manufacturer, would not be allowed.

Going a step further, we examine the concept of single brand and the associated conditions:

FDI in Single brand retail implies that a retail store with foreign investment can only sell one brand. F

example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could on


10/37

sell products under the Adidas brand and not the Reebok brand, for which separate permission is required.

granted permission, Adidas could sell products under the Reebok brand in separate outlets.

But, what is a brand?

Brands could be classified as products and multiple products, or could be manufacturer brands and own-lab

brands. Assume that a company owns two leading international brands in the footwear industry say A an

R. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need

specify which of the brands it would sell. A reading of the government release indicates that A and R woul

need separate approvals, separate legal entities, and may be even separate stores in which to operate in Indi

However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g

a product range under brand A Further, it appears that the same joint venture partners could operate variou

brands, but under separate legal entities.

Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able

enter India. These chains would, typically, source products and, thereafter, brand it under their private label

Since the regulations require the products to be branded at the manufacturing stage, this model may not wor

The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreig

manufacturer brands.

There is ambiguity in the interpretation of the term single brand. The existing policy does not clearly codif

whether retailing of goods with sub-brands bunched under a major parent brand can be considered as singl

brand retailing and, accordingly, eligible for 51 per cent FDI. Additionally, the question on whether co-brand

goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail tradin

remains unanswered.

FDI in Multi Brand Retail

The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail sto

with a foreign investment can sell multiple brands under one roof.


11/37

In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated

discussion paper on allowing FDI in multi-brand retail. The paper doesnt suggest any upper limit on FDI

multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish the

footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retaile

including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocer

directly to consumers in the same way as the ubiquitous kiranastore.

Foreign Investors Concern Regarding FDI Policy in India

For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make

any difference. They would have preferred that the Government liberalize rules for maximizing their royalty an

franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their

returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, ar

unlikely to shift from the preferred route right away.

For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner.

The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market

and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business

groups which decided to diversify into retail to cash in on the boom in the sectorcorporates such as Tata

through its brand Westside, RPG Group through Food world, Pantaloon of the Raheja Group and Shoppers

Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the busine

but looking to diversify, as many business groups are doing?

An arrangement in the short to medium term may work wonders but what happens if the Government decides t

further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate th

agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotia

its joint venture agreements carefully, with an option for a buy-out of the Indian partners share if and whe

regulations so permit. They must also be aware of the regulation which states that once a foreign compan

enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint ventu

with another Indian company or set up its own subsidiary in the same field without the first partners consen

if the joint venture agreement does not provide for a conflict of interest clause. In effect, it means that foreig


12/37

brand owners must be extremely careful whom they choose as partners and the brand they introduce in Indi

The first brand could also be their last if they do not negotiate the strategic arrangement diligently.

Concerns for the Government for only Partially Allowing FDI in Retail Sector

A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Honb

Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on Foreign an

Domestic Investment in Retail Sector, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made a

in-depth study on the subject and identified a number of issues related to FDI in the retail sector. Thes

included:

It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially th

small family managed outlets, leading to large scale displacement of persons employed in the retail secto

Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the reta

sector would not be absorbed there.

Anotherconcern is that the Indian retail sector, particularly organized retail, is still under-developed and in

nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow an

consolidate first, before opening this sector to foreign investors.

Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large glob

retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sect

employs an enormous percentage of Indian population after the agriculture sector; secondly that the glob

retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power

reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causin

discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while th

profit margins of such retail chains would go up.


13/37

Limitations

LIMITATIONS OF THE PRESENT SETUP

Infrastructure

There has been a lack of investment in the logistics of the retail chain, leading to an inefficient mark

mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it h

a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a tot

capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and henc

perishable horticultural commodities find it difficult to link to distant markets, including overseas market

round the year. Storage infrastructure is necessary for carrying over the agricultural produce from productio

periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy loss

to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in col


14/37

chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to th

sector has not been significant.

Intermediaries dominate the value chain

Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated marke

governed by State APMC Acts, have developed a monopolistic and non-transparent character. According

some reports, Indian farmers realize only 1/3rd

of the total price paid by the final consumer, as against 2/3rd

b

farmers in nations with a higher share of organized retail.

Improper Public Distribution System (PDS)

There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on foo

subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of gre

concern. The absence of a farm-to-forkretail supply system has led to the ultimate customers paying

premium for shortages and a charge for wastages.

No Global Reach

The Micro Small & Medium Enterprises (MSME) sector has also suffered due to lack of branding and lack

avenues to reach out to the vast world markets. While India has continued to provide emphasis on th

development of MSME sector, the share of unorganised sector in overall manufacturing has declined fro

34.5% in 1999-2000 to 30.3% in 2007-08. This has largely been due to the inability of this sector to access late

technology and improve its marketing interface.

Rationale behind Allowing FDI in Retail Sector

FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of lo

competition and poor productivity.

The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indian

spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods i

India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then an

May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FD

inflow of US$196.46 million under the category of single brand retailing was received between April 2006 an


15/37

September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by a

much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchang

Shares of Shoppers Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchanges key index rose 173.04 point

or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% bee

allowed in India for single brand.

The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the India

partner foreign players get local market knowledge, while Indian companies can access global be

management practices, designs and technological knowhow. By partially opening this sector, the governme

was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and cou

demonstrate Indias intentions in liberalising this sector in a phased manner.

Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the count

& its productive use, in a manner likely to promote the welfare of all sections of society, particularly farme

and consumers. It would also help bring about improvements in farmer income & agricultural growth and assi

in lowering consumer prices inflation.

Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standard

and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards an

cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not on

permit but encourage FDI in retail trade.

Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER),

premier economic think tank of the country, which was appointed to look into the impact of BIG capital in th

retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER h

also come to conclusion that investment of big money (large corporates and FDI) in the retail sector would

the long run not harm interests of small, traditional, retailers.

In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not onl

lead to a substantial surge in the countrys GDP and overall economic development, but would inter alia al

help in integrating the Indian retail market with that of the global retail market in addition to providing not ju


16/37

employment but a better paying employment, which the unorganized sector (kirana and other small tim

retailing shops) have undoubtedly failed to provide to the masses employed in them.

Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber

Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 4

member association of Indian multi-brand retailers and shopping malls) favour a phased approach towar

liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent t

start with.

The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view an

insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US

based Walmart, Germanys Metro AG and Woolworths Ltd, the largest Australian retailer that operates

wholesale cash-and-carry ventures in India, have been demanding liberalisation of FDI rules on multi-bran

retail for some time.

Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per cont

should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Cha

Improvement, Investment in Technology,Manpower and Skill development,Tourism Development, Great

Sourcing From India,Upgradation in Agriculture, Efficient Small and Medium Scale Industries, Growth

market size and Benefits to govemment through greater GDP, tax income and employment generation.

Prerequisites before allowing FDI in Multi Brand Retail and Lifting Cap of Single Brand Retail

FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. Le

alone foreign capital will seek ways through which it can only multiply itself, and unthinking application

capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap betwee

the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored

such a way that it results in a win-win situation for India. This can be done by integrating into the rules an

regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi bran

retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labo


17/37

dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make

genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage

FDI should be spent towards building up of back end infrastructure, logistics or agro processing unit

Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rur

sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it ca

be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certa

amount of farm produce be procured from the poor farmers. Similarly to develop our small and mediu

enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be source

from the SME sector in India. PDS is still in many ways the life line of the people living below the poverty lin

To ensure that the system is not weakened the government may reserve the right to procure a certain amount o

food grains for replenishing the buffer. To protect the interest of small retailers the government may also put i

place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing

acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable th

retailers in the unorganized sector to expand and improve their efficiencies. If Government is allowing FDI,

must do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat fro

creating some back-end infrastructure.

Further, To take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail an

Multi- Brand Retail, the following recommendations are being proposed [19]:-

Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retaileare not able to dislocate small retailers by unfair means.

Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of smaretailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.

Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entiretail sector.

Formulation of a Model Central Law regarding FDI of Retail Sector.Back-end logistics must for FDI in multi-brand retail
http://cdn.legalindia.in/wp-includes/js/tinymce/plugins/paste/pasteword.htm?ver=327-1235#_ftn19http://cdn.legalindia.in/wp-includes/js/tinymce/plugins/paste/pasteword.htm?ver=327-1235#_ftn19


18/37

The government has added an element of social benefit to its latest plan for calibrated opening of the mult

brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the bac

end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The ide

is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.

It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh th

disadvantages attached to it and the same can be deduced from the examples of successful experiments

countries like Thailand and China; where too the issue of allowing FDI in the retail sector was first met wit

incessant protests, but later turned out to be one of the most promising political and economical decisions

their governments and led not only to the commendable rise in the level of employment but also led to th

enormous development of their countrys GDP.

Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the India

retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of th

arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue

the interests of consumers at large in relation to the interests of retailers.

It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FD

flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravel

undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sab

mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest pric

max variety, and a good consumer experience.

The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at on

point of time or the other would be embraced by liberalization, privatization and globalization.FDI in mul

brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression o

that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in th

wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the chang


19/37

that the movement of retailing sector into the FDI regime would bring about will require more involved an

informed support from the government. One hopes that the government would stand up to its responsibilit

because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, an

manufacturing. In short, the socio economic equilibrium of the entire country.

Recent Scenario

1] Today, India is perceived as one of the most favorable global investment destinations. In the wake of

liberalization, even the Indian retail sector has scaled an impressive growth curve over the last decade, with

considerable consumer acceptance for organized retailing formats, particularly in the urban areas.

Notwithstanding the above performance, the organized retail segment is still in a nascent stage with global

retailers entering India only in the last few years, constrained by regulations allowing entry primarily through

cash and carry operations. Complex corporate structures and the fact that intermediaries obtain a

disproportionate share of value in the supply chain have always deterred foreign investments in the retail arena


20/37

2] The Indian retail industry is the fifth largest in theworld. Comprising of organized and unorganized sectors,

retail industry is one of the fastest growing industries in India, especially over the last few years. With growing

market demand, the industry is expected to grow at a pace of 25-30% annually. The Indian retail industry is

expected to grow from Rs. 35,000 crore in 2004-05 to Rs. 1,09,000 crore by the year 2010 and hence is the mo

promising emerging market for investment. In 2007, the retail trade in India had a share of 8-10% in the GDP

(Gross Domestic Product) of the country, while it rose to 12% in 2009 and reached 22% by 2010. Unorganized

retailing is by far the prevalent form of trade in India constituting 98% of total trade, while organized trade

accounts only for the remaining 2% and this is projected to increase to 15-20 per cent by 2010.

3] Nonetheless the organized sector is expected to grow faster than GDP growth in next few years driven by

favorable demographic patterns, changing lifestyles, and strong income growth. In this context the present pape

attempts to review the issues and implications of FDI inflows in to the Indian retail sector. Question of FDI in

Indian Retail Sector: Should it be allowed? Issues and Implications of FDI in Indian retailing sector.. India is a

nation of shopkeepers. The country has around 12 million stores, which means one store for every 100

customers. Retailing in India is at a very interesting era as various factors are bringing about the big bang effec

to retail. The creation of malls across the country and new high-streets had suddenly urged traditional retailers

modernize themselves. Development of retail is happening across tier 1, 2 and 3 cities and this makes chain

store retail interesting. Now with FDI in retail likely to become a reality, the shopkeepers landscape will

change even further. Its only imperative that the Indian retail has benchmarks of excellence that will catapult

the industry into the global arena.

4] The main fear of FDI in retail trade is that it will certainly disrupt the livelihood of the poor people engaged

in this trade. The opening up of big markets to foreign sponsored departmental outlets will not necessarily

absorb them; rather they may try to establish the monopoly power in the country.

5] The 51% foreign direct investment (FDI) will obviously have a negative impact on small retailers, but it wi

benefit the consumers as they will have wider choices Foreign direct investment in Indian retail sector: Issues

and implications 281 at competitive prices. It will accelerate the retail market growth and provide more


21/37

employment opportunities. The FDI Bill will definitely have a positive impact on the retail industry and the

country by attracting more foreign investments. With big retail giants coming to India, it will surely improve o

back-end storage and procurement process. Once these multi-chain retailers establish themselves, they will

create infrastructure facilities, which will also propel the existing infrastructure. The farmers will be benefited

from FDI as they will be able to get better prices for their products. The elimination of the intermediate channe

in the procurement process will lead to reduction of prices for consumers. By allowing 51% foreign investmen

in the Indian market, it will teach the local retailers about real competition and help in insuring that they give

better service to Indian consumers. It is obviously good for local competition. The impact on local kirana shop

will not be affected. The kirana stores operate in a different environment catering to a certain set of customers

and they will continue to find new ways to retain them.

6]There is ambiguity in the interpretation of the term single brand. The existing policy does not clearly codify

whether retailing of goods with sub-brands bunched under a major parent brand can be considered as single-

brand retailing, and accordingly eligible for 51 percent FDI. Additionally, the question on whether co-branded

goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail trading

remains unanswered.FDI in Single and Multi-Brand Retail Sectors

Foreign Direct Investment under the Industrial Policy 1991 and thereafter under different Foreign Trade Policie

is being allowed in different sectors of the economy in different proportion under either the Government route

or Automatic Route. In Retailing, presently 51 per cent FDI is allowed in single brand retail through the

Government Approval route while 100 per cent FDI is allowed in the cash-and-carry (wholesale) formats unde

the Automatic route. Under the Government Approval route, proposal for FDI in Single Brand Product

Retailing are received in the Department of Industrial Policy and Promotion, Ministry of Commerce &

Industry. Automatic route dispenses with the need of multiple approvals from Government and/or regulatory

agencies (Government of India or the RBI). Of late, the Government of India has expressed its desire to bring

the Multi-Brand retailing within the ambit of FDI, and in the process has put in train a debate on its possible

outcome. Unlike FDI in single brand retailing which pertains to brand loyal and a relatively small high income

clientele, FDI in multi-brand retailing would have direct impact on a vast spectrum of population and thus a


22/37

sensitive issue. Left alone foreign capital will seek ways through which it can only multiply itself, and

unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and

deepen the hiatus between the rich and the poor. Thus the proliferation of foreign capital into multibrand

retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by

integrating into the rules and regulations for FDI in multibrand retailing certain inbuilt safety valves. For

example FDI in multibrand retailing can be allowed in a calibrated manner with social safeguards so that the

effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreig

investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated th

a percentage of FDI should be spent towards building up of back end Infrastructure, logistics or agro processin

units. One of the justifications for introducing FDI in multi-brand retailing is to transform the poverty stricken

and stagnating rural sphere into a forward moving and prosperous rural sphere. To actualize this goal it can be

stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain

amount of farm produce be procured from the poor farmers. Similarly, to develop the small and medium

enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be sourced

from the SME sector in India. Public Distribution System is still in many ways the life line of the people living

below the poverty line. To ensure that the system is not weakened the government may reserve the right to

procure a certain amount of food grains for replenishing the buffer. The government may also put in place an

exclusive regulatory framework to protect the interest of small retailers. It will ensure that the retailing giants d

resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolv

suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies.The

Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point

of time or the other would be embraced by liberalization, privatization and globalization. FDI in multibrand

retailing is in that sense a steady progression of that trajectory. But the government has by far cushioned the

adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991

through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI

regime would bring about will require more involved and informed support from the government. One hopes

that the government would stand up to its responsibility, because what is at stake is the stability of the vital


23/37

pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of th

entire country.

7] Rationale Behind Allowing FDI in Retail SectorFDI can be a powerful catalyst to spur competition in the

retail industry, due to the current scenario of low competition and poor productivity. The policy of single-brand

retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money

shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-

brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 9

proposals have been received. Of these, 57 proposals have I.J.E.M.S., VOL.3(3) 2012: 280-283 ISSN 2229-

600X282 been approved. An FDI inflow of US$196.46 million under the category of single brand retailing wa

received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the

period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441

on the Bombay Stock Exchange. Shares of Shoppers Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The

exchanges key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it

would have been had FDI up to 100% been allowed in India for single brand.

8] The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian

partnerforeign players get local market knowledge, while Indian companies can access global best

management practices, designs and technological knowhow. By partially opening this sector, the government

was able to reduce the pressure from its trading partners in bilateral/multilateral negotiations and could

demonstrate Indias intentions in liberalizing this sector in a phased manner.

9] Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the

country, & its productive use in a manner likely to promote the welfare of all sections of society, particularly

farmers and consumers. It would also help bring about improvements in farmers income & agricultural growth

and assist in lowering consumer prices inflation.

10] Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standard

and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and


24/37

cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only

permit but encourage FDI in retail trade. Lastly, it is to be noted that the Indian Council of Research in

International Economic Relations (ICRIER), a premier economic think tank of the country, which was

appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail

sector to reach $496 billion by 2011-12 and ICRIER has also come to the conclusion that investment of big

money (large corporates and FDI) in the retail sector would in the long run not harm interests of small

traditional retailers.

11] Further, to take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail

and MultiBrand Retail, the following recommendations are being proposed

10 Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retailers

are not able to dislocate small retailers by unfair means. Extension of institutional credit, at lower rates, by

public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for

assisting small retailers to upgrade themselves. Enactment of a National Shopping Mall Regulation Act to

regulate the fiscal and social aspects of the entire retail sector. Formulation of a Model Central Law regardin

FDI of Retail Sector.

Recommendations

The few recommendations for formulation of policies by government:

Much of the Indian retail trade (particularly grocery) still has traditional features: small family-run shops and

street hawkers dominate the situation in most of the country. However, the retail trade in India is now

undergoing an intensive structural change which could cause irreversible damage to local commodity supply

chains and competition. The existing regulations are not adequate to fulfil the new 49requirements. India can

learn (and perhaps forestall loss of genuine competition and product variety) from the experience of south-east

Asian countries which are improving regulatory frameworks and some advanced retailing economies like


25/37

Germany which are already considered more successful regulators in this sector. German competition policies

content and implementation are significant for India to the extent that they are different from other advanced

retailing countries like the US and Great Britain. German policy now proactively aims to preserve small and

medium competitors in retail sector.Policies for Competitiveness with Inclusiveness in the Supermarket

Revolution.As the supermarket revolution proceeds in developing countries, governments have several options

for helping small farmers participate in supermarket channels (or gain access to viable alternatives) and

traditional retailers coexist or compete with the modern retail sector.

Option 1:Regulate Modern Retail? To the extent developing countries have regulated modern retail; their goal

has been to reduce the speed and scope of its spread. The regulations have mainly limited the location and hour

of modern retail. On balance, theseregulations have done little to limit supermarket spread, partly because

although regulations tend to targe large-format stores (and thus not limit small traditional stores), modern retail

comes in a wide variety of formats, including neighbourhood stores and convenience stores.Few developing

countries have a pro-traditional or prosmall retail policy. Instead they usually take a laissez-faire approach to

small shops and hawkers and make minimum initial public investments in open and covered municipal market

A number of developing countries even have policies that encourage the development of supermarkets and

regulate wet-markets in order to modernize commerce, lower food prices and congestion, and increase public

hygiene and economic competitiveness.Finally, in the early stages of supermarket spread, the supermarket

sector is relatively fragmented (weakly concentrated), and farmers and processors thus have a wide range of

potential buyersamong supermarket chains and between the modern and traditional sectors. In the advanced

stage of supermarket spread, however, the sector becomes concentratedfor example, in Latin America four t

five chains typically control about 75percent of a sector that in turn controls an average of 55percent of food

retail. At that stage it is important for governments and the private sector to enforce competition policies.

Option 2: Upgrade Traditional Retail. A number of good examples of programs to upgrade traditional retail

exist. Of particular interest are those of East and Southeast Asia, such as in China, Hong Kong, the Philippines


26/37

Singapore, and Taiwan. In most of these countries, the programs in question are municipal, sometimes under a

national umbrella policy. The programs have several elements in common:50

Governments involved in these programs have a broad tent approachthat is, they allow development of

supermarkets as well as traditional retailers.

They are proactive: the Hong Kong Consumer Councils dictum of managing and facilitating changerath

than leaving wet-markets to flounder and collapse, characterizes all the East and Southeast Asian approaches

studied. They promote traditional retailer modernization and competitiveness. Singapores approach is to

cherish but upgrade and modernize.Hong Kongs policy is to retain but modernize.

They accept the social and market role of wet-markets, hawkers, and small traditional shops but encourage

them to locate in non-congested areas and on fixed sites (to increase hygiene and tax payment) and to improve

their physical infrastructure. They also train the operators in business skills, food safety, and hygiene.

They experiment with privatizing wet-market management in some cases (such as in China and Hong Kong).

Option 3: Upgrade Wholesale Markets to Serve Retailers and Farmers Better. Small shops and wet-market stal

operators typically source food products from wholesale markets, which typically buy from small farmers.

Upgrading wholesale markets infrastructure and services is thus important to the whole traditional supply

chain. Private-sector actors are helping traditional retailers (and supermarket independents and chains) obtain

the services and products they need.Examples are modern cash-and-carry chains that act as wholesalers,

likeBharti/Wal-mart in India, Metro in China, and Makro in Pakistan. But governments and wholesaler

associations also need to invest in upgrading wholesale markets in order to maximize access by farmers and

retailers. Such programs have been undertaken in China and Mexico.

Option 4: Help Farmers Become Competitive Suppliers toSupermarkets. Private-sector programs are emerging

to help small farmers get the assets and services they need to supply supermarket channels. Metro, for example

has direct procurement links to fish and vegetable farmers in China. Agrifood businesses in India, like ITC,

Tata, Godrej, Reliance, and DSCL Hariyali , have rural business hubs that offer consumables, farm inputs, and

technical assistance and procure output from farmers.Governments need to supplement private efforts with


27/37

public investments inimproving farmers access to assets, services, training, and information. Some of these

assets are public goods, such as regulations on retailer-supplier relations to promote fair commercial practices,

wholesale market upgrading, market information, and physical infrastructure such as cold chains and roads.

Other assets are semi-51 public or private goods, such as assistance with market linkages between small farmer

cooperatives and supermarket chains; training in postharvest handling; and credit facilities for making on-farm

investments in assets needed to meet quality and volume requirements, such as irrigation and greenhouses.

Option 5: Urban Planning Laws. The state of urban planning in India is such that there is as yet no ceiling on th

size or number of retail outlets that may be started in a designated commercial zone. The ministry of urban

development at the central level has no jurisdiction over urban area planning in the states except in the case of

exceptional laws pertaining to the coastal regions, forests, the Delhi region and union territories. It is clear that

land use laws/zoning laws are not the most commonly used regulatory devices against large format retailing an

at present the land use laws in urban centres are in the most pliant condition since the local governments

implement them and they are most susceptible to omission and commission on behalf of real estate developers

who, in turn, share a common interest with corporate retailers.What is needed is to include regulations for the

establishment of big retail projects in States Regional Planning documents. When municipalities allow big reta

projects, they are scrutinised to ensure that they meet the requirements of regional planning.The position of the

neighbouring municipalities thus needs to be strengthened by a new law (that has been introduced to adjust

German building law with European regulation). New big retail projects are now checked to assess their

influence on thelocal supply. Investors in retail have to prove that their project will not end up affecting retail

shops in the same or neighbouring municipality, and smaller shops in the neighbouring municipalities will not

close down due to the new competition. The proposal of not allowing FDI in retail initially to major cities, SEZ

as well as certain sectors; and also not allowing in cities with population of less than 1million is move in right

direction.

Option 6: Regulation of misleading statements andadvertisements. The law against dishonest competition

(referred to as unfair trade practices in India) forbids a number of marketing practices which are regarded as


28/37

dishonest.These include misleading statements or advertisements about business circumstances, especially the

nature, origin, manner of manufacture or the pricing of goods or commercial services or the size of the availabl

stock. In a recently reported case in India a leading corporate retailer, Subhiksha claimed in advertisements tha

its prices were the lowest compared to rivals like Big Bazar, DMART, and Apana Bazar,etc. Big Bazar filed a

case against the advertisements and the Advertising and Standards Council of India is understood to have given

its verdict in April 2007. However, the verdict has not been made public as yet.52

Option 7: Regulatory Framework to avoid monopolistic practices. The possible monopolistic/ monopsonistic

tendencies of the large retailers (fears of predatory behaviour and abuse of dominance) would have to be

proactively dealt to ensure competition in the market. Appropriate policy formulation can also aide this cause,

was done during the telecom sector liberalisation with the National Telecom Policy mandating that each circle

should have at least 4-6players. It is to be understood that free and fair competition in procurement of farm

produce is the key to farmers enhanced remuneration.

FDI in retail is a boon for India

Foreign direct investment (FDI) refers to foreign capital that is invested to enhance the production capacity of

the economy. However, FDI in retail is different from the investment in corporate, manufacturing or

infrastructure sectors. Retail can be single or multi brand and may be described as a sale to the ultimate

consumer at a margin of profit.

While the FDI in single-brand retailing was allowed earlier, FDI in multi-brand retailing is being allowed now.

This means a retail store with foreign direct investment can sell multiple brands under one roof. So, it is the lin


29/37

between the producer/manufacturer and the individual consumer. India had to open up the retail trade sector to

foreign investment as she is a signatory to the World Trade Organizations General Agreement on Trade &

Services, which includes wholesale and retail services.

The Indian retail sector is highly fragmented with around 97 per cent of its business being run by unorganized

retailers. Organized retail is still at a nascent stage. With the entry of FDI, the retail sector will become

organized. Foreign investment in food-based retailing would ensure adequate flow of capital into the country

and its productive use.

It will promote welfare of farmers by agriculture growth and thereby increasing their income level. At present,

intermediaries, known by different names in different parts of the country, flout the business ethics, prices lack

transparency and the due share of farmer is not paid to him. Regulated markets have also developed

monopolistic character. Indian farmers, at present, realize only 1/3rd of the final price paid by the consumer as

against 2/3rd realized by farmers in the countries with a greater share of organized retail. FDI will assist in

reducing the dominance of value chain by intermediaries.

FDI in retail will make the consumer happy as well. In the absence of intermediaries, the consumer will end up

paying lower price for a better product. Besides, in the unorganized sector, consumer has to argue and fight a lo

in case he has to return some faulty product to the retailer. This process will be standardized.

It will serve as an antidote to inflation. The producer will get direct payment from the retailer and the same wil

be higher than what he was getting earlier due to the foul play by intermediaries. In accordance to the provision

made, any company going for 51% partnership in retail will have to tie up with a local partner. This will

improve the income levels of all concerned and will make economy flourish with quality branded products at a

lower price.

FDI will improve investment in logistics of the retail chain, leading to an efficient market mechanism. India is


30/37

one of the biggest producers of fruits and vegetables (more than 180 million tonne). However, it does not have

strong integrated cold-chain infrastructure with only around 5,400 cold storages having total capacity of about

24 million tonne. The irony is that 80% of the capacity is used only for preservation of potatoes. Perishable

horticultural commodities find it difficult to link to distant markets, including overseas markets. FDI will

become a catalyst in avoiding distress sale and erosion & wastage in quality and quantity of the produce.

Foreign direct investment in the retail sector will spur competition as the current scenario is of low competition

and poor productivity. India will flourish in terms of quality standards and consumer expectations.

Fears that the entry of FDI in multi-brand retail may cause unemployment as foreign firms may not procure

material from domestic producers and may import the same from international market are unfounded as the

entry of big companies like Reliance and Tata has substantially improved the life standard of farmers and

villages from where they are procuring. The present public distribution system will also be strengthened with

better products and storage facility. Even the FDI retail may be assigned this job. Allowing FDI in multi-brand

retail will bring about supply chain improvement, investment in technology, manpower & skill development,

upgrade in the agriculture sector, and benefits to the government through greater GDP and tax income. The

organized sector will also lay stress on producing more and will generate more employment in production.

Case Study

FDI in Indian Retail: The Big Benefits Will Come Tomorrow, Not Today

Published: September 20, 2012 in India Knowledge @Wharton

The Indian governmentrecently announced aslew of reforms, including allowing foreign

direct investment (FDI) in multi-brand retail up to a level of 51%. A policy requiring that

single-brand retail multinationals source 30% of products and materials from small

businesses and craftsmen was changed to mandating that the same amount come from
http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4703http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4703http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4703http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4703http://knowledge.wharton.upenn.edu/india/article.cfm?articleid=4703


31/37

Indian firms. In this op-ed, Johns Hopkins University professorRavi Aron, who is a senior fellow at

Wharton'sWilliam and Phyllis Mack Center for Technological Innovation, argues that opening up FDI will no

only lead to a greater variety of products for sale and increased consumer choice, but also penetrate deep into

the hinterland of Indian economic activity and do much to improve the country's "shunned sectors" --

infrastructure and logistics.

The direct FDI impact in the short term from retail chains will be modest. If you look at the numbers -- as per

[financial information services firm] CEIC Data -- FDI in 2008 was in the ballpark of US$35 billion and

declined in 2009 and 2010. FDI in 2011 came in at around US$27 billion or so. So if we ask the question: Will

international retail chains in the shorter term -- an 18-to-24 month horizon -- bring in US$8 billion to get back

on track, the answer is probably not.

Large retail chains when they venture abroad do so in three phases. In Phase One, they often set up a test

case/pilot project. This can be done through a partnership with local chains (with risk and revenue sharing), or

few flagship stores that serve as brand broadcasters. The chains employ this initial-phase entry strategy to learn

lessons about the local markets. They assess demand, test merchandizing strategies and set up operational

capabilities. In this phase, they bring in some investment to cover their set-up costs and for establishing their

sourcing (supply) footprint. This usually takes 18-to-24 months.

In the second phase, firms expand their demand footprint; they open more stores and increase both the scale of

operations (volume of products sourced) and scope of products that they feature. There is considerable

investment in this phase in the form of real estate acquisition, putting in operational infrastructure, establishing

sourcing relationships, establishing supply chains and massive logistics capabilities. This is volume-independe

investment -- that is, investment meant to gear up for volumes of business to come, but not calibrated to the

current volume of business.

In the third phase, the investment keeps pace with the rate of expansion. As volumes grow and urban and semi

urban retail locations get saturated, companies look for new locations and bring in investment that is calibrated
http://carey.jhu.edu/faculty_research/Faculty_Bios/ravi_aron.htmlhttp://carey.jhu.edu/faculty_research/Faculty_Bios/ravi_aron.htmlhttp://carey.jhu.edu/faculty_research/Faculty_Bios/ravi_aron.htmlhttp://mackcenter.wharton.upenn.edu/http://mackcenter.wharton.upenn.edu/http://mackcenter.wharton.upenn.edu/http://mackcenter.wharton.upenn.edu/http://carey.jhu.edu/faculty_research/Faculty_Bios/ravi_aron.html


32/37

to growth in volumes. It is in the second phase and the third phase -- which come after the initial 18-to-24

months -- that large investments manifest themselves.

Other Impacts

The arrival of foreign retail chains has twofold impact. First, those companies set up supply chains and logistic

capabilities, spurring significant improvements in the infrastructure needed to source, ship, store and deliver

products (covering all aspects of value chain and supply chain activities, including storage, warehousing, and

information-intensive operations). Second, their entry and expansion induce domestic competitors to invest in

infrastructure and logistics, as well as greatly speed up the emergence of product standards (especially in

perishables and personal consumables), and begin the process of bypassing monopoly buyers and traders that

dominate procurement in many product categories today.

For these reasons, foreign investment in retail has an impact that goes beyond its direct investment impact. It is

a force multiplier that induces even more investment from competitors.

Impact on Mom-and-Pop Retailers

FDI is often opposed on the grounds that it will put mom-and-pop stores out of business. This is very unlikely

for several reasons.

The big-box retailers, when they venture into developing markets, do not use the same business model as they

do in the U.S. Walmart -- the most iconic of these companies and the one most often cited as a threat to Indian

mom-and-pop stores -- is by no means the lowest-price retailer in China. Walmart U.S. is based on "everyday

low prices." The firm has an activity system that is meant to help Walmart compete as a cost leader. The

company began by locating in rural areas and then moved to suburban and semi-urban areas in the U.S. In

China, the rural areas and semi-urban areas are not where the money is. Consumers in China -- unlike their

American counterparts living in suburbia - do not drive miles and do bulk purchasing, nor do they have massiv

storage facilities at home. In India, China, Brazil, Indonesia, Thailand and Mexico, the vast majority of educate


33/37

middle and upper classes live in the cities (and not in semi-urban and rural areas) where real estate is very

expensive and population density is high.

The foreign retail chains will need to make very expensive real estate investments. They will have a very high

variable cost of operation. Their fixed, volume-independent costs are also likely to be much higher than the

mom-and-pop convenience stores. These chains will operate with price points that are much higher than those

featured by the mom-and-pop shops.

These firms' real competition will be the domestic multi-brand retailers. A recent study by the CII and Boston

Consulting Group estimated the size of organized retail of US$28 billion in 2010 to be 6% to 7% of the total

retail market in India. The study predicted that the size of retail -- total retail sector size, not just organized reta

-- would grow to US$1.25 trillion by 2020 if the efficiencies that typically come from greater competition and

modernization of retail supply systems were to be unleashed. Under this scenario, the study predicts that the siz

of organized retail could grow to US$260 billion or about 20.8% of the total market. So even under this

scenario, the idea that a fractional segment that accounts for 20.8% of the total economic activity of a sector ca

drive the remaining 79% of that sector out of business does not stand the scrutiny of reason.

The CII/BCG study also estimates that if the organized retail sector is not modernized -- the "as is" economic

scenario, as the study calls it -- the size of the sector will be about US$170 billion. This underperforms the

earlier scenario by about 35% or so. That difference could be a job creation deficit of about 1.4 million jobs wi

an even higher potential loss of economic product since organized retail pays better than local, scale-deprived

mom-and-pop establishments. This is without taking into consideration other jobs that would not be created in

economic activities that span infrastructure and logistics.

Supply Footprint: Traders -- Not Farmers -- Beware

The foreign retail chains will have a more significant impact on traders that dominate procurement of

commodities and perishables, including grains and cereals. It is not surprising that these traders are the most

virulent opponents of FDI in retail (the main opposition party that derives its support from the trading castes an


34/37

traders has openly stated that "traders' interests will be harmed by FDI in retail"). Indian farmers and many oth

rural producers are at the mercy of large and well-organized monopsony buyers. Very often these traders

dominate geographies and account for nearly all procurement in their geographies. In many states, the food

ministry determines who it will buy from and this is usually a small number of traders who in turn dominate

direct procurement from farmers in their geographies. These are economic fiefdoms that they dominate and

exploit. When the Carrefours, Walmarts and Tescos set up direct procurement mechanisms where sophisticated

procurement systems are put in place and information about demand (prices, product varieties and quantities

demanded) becomes more easily available, it becomes more difficult for the middlemen to dominate local

geographies and restrict competition. The emergence of these supply chains that drive transparency of

information will bring significantly more competition in sourcing.

The CII-Boston Consulting Group study found that an Indian tomato farmer earns about 30% or even less of th

final price paid by the consumer (in developed countries, that percentage can be as much as 70%). For this

reason alone, farmers and producers should welcome this development (and for this reason alone, traders oppo

it). Indeed, the Indian Farmer and Industrial Alliance (IFIA), a joint venture of the Consortium of Indian

Farmers Associations (CIFA), recognized the potential benefits of eliminating middlemen and has expressed it

support for opening the retail sector to foreign investment.

As with any other sector, the entry of foreign players introduces competition that will benefit some and will

work to the detriment of others. The beneficiaries in this case are the Indian consumers, the lower middle class

which will benefit from the well-paying jobs that will be created, and the producers of goods -- including

farmers -- that have been at the mercy of middlemen and monopsony buyers and trader monopolies. As usual,

the interests that are threatened have sought to portray this move as detrimental to India. In another time, it was

said in the U.S. that "what was good for [General Motors] was good for America." It took some time for that

belief to lose its status as an axiomatic truth. It is time that India reexamined its axiomatic beliefs. After all, the

East India Company left more than 100 years ago.


35/37

Conclusion

A Start Has Been Made

Walmart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale) business, which runs the

Best Price stores. It plans to have 15 stores by March and enter new states like Andhra Pradesh , Rajasthan,

Madhya Pradesh and Karnataka.

Duke, Wallmarts CEO opined that FDI in retail would contain inflation by reducing wastage of farm output as

30% to 40% of the produce does not reach the end-consumer. In India, there is an opportunity to work all the


36/37

way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-

consumer, Duke said, adding, that a similar trend was noticed when organized retail became popular in the US

Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a

blessing in disguise for the economy.

In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only

lead to a substantial surge in the countrys GDP and overall economic development, but would inter alia also

help in integrating the Indian retail market with that of the global retail market in addition to providing not just

employment but a better paying employment, which the unorganized sector have undoubtedly failed to provide

to the masses employed in them. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not jus

be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can

bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill Development,

Tourism Development, Greater Sourcing from India, Up-gradation in Agriculture, Efficient Small and Medium

Scale Industries, Growth in market size and Benefits to Government through greater GDP, tax income and

employment generation.

Bibliography

Websites:-

www.Legalserviceindia.com www.Manupatra.com www.Scribd.com www.cci.in www.rbi.org.in www.dipp.nic.in
http://www.legalserviceindia.com/http://www.manupatra.com/http://www.scribd.com/http://www.cci.in/http://www.rbi.org.in/http://www.dipp.nic.in/http://www.dipp.nic.in/http://www.rbi.org.in/http://www.cci.in/http://www.scribd.com/http://www.manupatra.com/http://www.legalserviceindia.com/


37/37

www.legallyindia.com www.icsi.edu www.retailguru.com

Reports/ Research Papers

A.T. Kearneys Report on Indian Retail, 2008 FDI Consolidated Policy Dr.R.KBalyan FDI in Indian Retail- Beneficial or Detrimental-research paper Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search Dipakumar Dey-Aspects of Indian Economy-Google search

Newspapers

The Economic Times
http://www.legallyindia.com/http://www.icsi.edu/http://www.retailguru.com/http://www.retailguru.com/http://www.icsi.edu/http://www.legallyindia.com/

Documents

Jforeign direct investment i.e fdi in retail of india