Implications of FDI in Indian Retail

Abstract

Retailing is the largest private sector industry in the world economy with the global
industry size exceeding $12,104 billions. More than 70% of retailing in developed
countries is organized. Globally, there has been significant change in the retail sector
over the past two decades with the entry of global retailers.
The Indian retail industry is of enormous size ($300billions) with nearly 10% of GDP,
employing 21 million persons which are 7% of the labour force. But the trade in
India is fragmented, unorganised, not networked and individually small. The 15
million kirana shops constitute the unorganised sector (96%) leaving the rest to the
organised retailing. The Indian retail sector has little capital for expansion or credit to
receive. Government had decided to partially open the retail sector by announcing 51
percent FDI in single brand retailing. However FDI in multiple brand retailing is
strictly prohibited. Instead of shedding tears for indigenous trade and resisting FDI
into the industry, it is high time for the congress Govt to over rule the political
opposition to FDI in trade in the true spirit of a globalised nation and should fully
open its retail market to foreign investors in order to drive economic growth.

Methodology: This paper attempted to highlight the implications of FDI in Indian

retail on the basis of secondary information gathered from diversified sources which
include literature survey, news paper articles and the internet.

Introduction

The retail industry of today is characterized by hyper competition, convergence and

constant change. The market for retail malls and services is exploding and new actors
are continuously entering the market. The rapid advancements and changes in this
industry provide companies with business opportunities as well as challenges due to
an increasingly complex environment in terms of competition and technology.
Globally, there has been significant change in the retail sector over the past two
decades. Much of the rapid growth in organised retail business in the developing
countries is due to the entry of global retailers.

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Indian retail industry is the largest industry in the private sector employing around 7%
of total labour force and contributing to over 10% of the country's GDP.
It is six times bigger than Thailand and five times larger than South Korea and
Taiwan. India is in the midst of a retail boom.

Indian Retail at a Glance

• Known as a Nation of Shop keepers with around 12million retail outlets

• The share of unorganised sector is around 96%
• The current worth of Indian retail is USD 300billion &expected to grow to
USD 450- 600 billion by 2010
• Food & Grocery constitutes about71%of total retail sales
• Growth rate since 2004 is 25% - 30 %
• Contributes to GDP around 10%
• Second largest employer after agriculture contributing to 7% of total labour
force & expected to generate 2.5 million new jobs by 2010.
• Government policy intiatives on FDI:
a) Single brand retailing upto 51% subject to Govt. approval
b) Cash & carry wholesale trade 100 %on automatic route
• FDI inflows into the industry for the year 2008-09 amount to US$ 27.3
billion

It has experienced a significant transformation in the past decade from small

unorganised family owned to organised retailing. Indian business houses and
manufacturers are setting up organised retail formats while venture capitalists and real
estate are investing in retail infrastructure. It has grown modern with multi- stored
malls, huge shopping centres, and sprawling complexes which offer food, shopping,
and entertainment all under the same roof. In the Indian retailing industry, food is the
most dominating sector and is growing at a rate of 9% annually. The branded food
industry is trying to enter the India retail industry and convert Indian consumers to
branded food .It is expected to rise 25% yearly being driven by strong income growth,
changing lifestyles, and favourable demographic patterns. The Indian Retail Industry
is gradually moving ahead towards becoming the next boom industry.

While the macro outlook appears bright, the problems are astronomical for Indian
retail industry. The unorganised retailing still constitute a mega 96% of total
retailing in the country with 12million retail outlets, making it highly fragmented, not
networked and individually small. It has little capital for expansion or credit to
receive. There is no reliable cold chain; transport logistics are appalling, there is a
huge lack of managerial talent, there is no consistency for quality and quantity of
supply.. Thus organizing the retail sector is the need of the hour.

FDI in Indian Retail

Given this background, the paper also would like to bring out the rosy side of Indian
retail. India is being seen as a potential gold mine for retailing by investors all over
the world. With a robust economy experiencing unrelented growth, the country is
enticing global companies looking to expand overseas. The latest research has rated
India as the top destination for an attractive emerging retail market. (AT Kearney’s

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GRDI for 2008, India ranks second to Vietnam. It topped the list in the year 2007.)
Recent Ernst &Young study predicted Mumbai and Bangalore to be the next
promising global centres along with Shanghai for retailing. India’s vast middle class
and the country’s untapped retail industry are the key attractions for global retail
giants wanting to enter Indian markets. The WTO has also been planning to withdraw
tariff and trade privileges provided to India under the new General Agreement on
Tariffs and Trade if FDI is not allowed.

The brands planning an India entry include The Pizza Company and Spicchio Pizza
(both pizza chains from Thailand), Coffee Club from Australia, Lolita Fashion, a
Japanese brand, Revive Juice Bars from the UK, Mrs Fields Cookies and Jamba Juice
from the US, and Jules- French fashion brand. One can not ignore the WALMART‘s
back door entry in wholesale operations in Indian retail.

All the above factors and more importantly the major markets which are hit by retail
slump attracted many national and international players to enter this sector in a big
way. Several brands are targeting grade B and C cities rather than expanding in
metros, as smaller cities are more brand hungry and retail is not yet hit these cities.
With the presence of limited brands in Indian markets the country holds big
opportunity for these brands as this would also help them re-route inventories and
orders to new markets and keep their sagging sales volume intact

Importance of FDI in retail

FDI in retail and the development of larger stores and supermarkets have the
following advantages from the point of view of consumers and other stake holders.

• The larger supermarkets, which tend to become regional and national chains,
can negotiate prices more aggressively with manufacturers of consumer goods
and pass on the benefit to consumers.
• They can lay down better and tighter quality standards and ensure that
manufacturers adhere to them.
• Many consumer goods manufacturers will find that supermarkets account for an
increasing share of their sales and will be afraid of losing this valuable and
reliable customer to competition.
• The fact that a well-known chain of supermarkets sources from a manufacturer
becomes a stamp of quality.
• With the availability of finance, the supermarkets can invest in much better
infrastructure facilities like parking lots, coffee shops, ATM machines, etc. All
this will make shopping a pleasant experience.
• The supermarkets offer a wide range of products and services, so the consumer
can enjoy single-point shopping.
• The kirana shops in large parts of the country will enjoy built-in protection from
supermarkets because the latter can only exist in large cities.

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 • The ability of supermarkets to demand pricing and quality standards from
manufacturers will benefit even kirana shops, who can even buy from the
supermarkets to sell the same products in smaller towns and villages.
• With FDI in retail trade, India will become more integrated with regional and
global economies in terms of quality standards and consumer expectations.

The benefits for India from a liberal FDI policy on investments in the retail sector are
beyond just benefiting the billion-strong Indian consumer population, or merely
creating incremental job opportunities. Allowing FDI in retail would contribute to a
multiple impact not only in retail sector but also in many other activities such as
manufacturing, food processing, packaging and logistic services. The largest benefit
in the medium term is a strong up-gradation of India’s agriculture and small and
medium manufacturing sectors. FDI will also facilitate Indian manufacturing to get
integrated with the global supply chain. Another positive rub-off of this improved
supply chain will be a better product basket from India for exports. Tax compliance
would be greatly facilitated through a more organised retail network in India,
generating more revenue for the central and state governments. Finally, it is
acknowledged that retailing has a strong bearing on tourism. Singapore, Hong Kong
and Dubai are the examples.

Policy on FDI in Indian Retail

Even 60years after Independence, policy-makers in India continue to be xenophobic.

Fears of foreign imperialism have not yet receded and continue to be a barrier for the
entry of foreign enterprises into retailing. India has opened almost the entire
manufacturing sector to FDI, including the most sensitive Defence equipment
manufacturing. But, ironically, a less sensitive and significant contributor to economic
growth, viz retail trade has been excluded from the liberalisation. More importantly
India is today the only major economy that still does not permit liberally FDI in retail
trade. 35 of the world's top 70 retailers have already entered China and set up
business. They have helped boost exports.

At present, India allows 100 percent FDI in cash-and-carry wholesale trading and
export trade in the sector. In the year 2006 the government had decided to partially
open the retail sector by announcing 51 percent FDI in single brand retailing subject
to government’s approval .But at the moment, the entry of retail giants of multiple
brands like Wal-Mart is not allowed. Global luxury brands such as Fendi, Louis
Vuitton, Nike, Llardo, Rino Greggio, Damro, Etam, Zegna and Lee Cooper were
among the first to get FDI permission under the single brand retail window.

Current FDI Scenario in Indian retail

Due to India's restrictive policy on FDI the flow of funds and technology is
constrained and the retail sector remains fragmented, unorganised, small sized and
lost its competitiveness. Most retail outlets are family-owned and offering limited
products and finance facilities. Even banks are reluctant to provide finance facilities
to the retail sector, which is considered non-viable due to its small size. Change is
happening, but only in the metros and big cities.

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The foreign direct investment (FDI) inflows during 2008-09 (from April 2008 to
March 2009) stood at approx. US$ 27.3 billion, according to the latest data released
by Department of Policy and Promotion (DIPP). FDI inflows for the last quarter alone
of 2008-09 stood at approx. US$ 6.2 billion.

A trade facilitation body UK-India Business Council (UKIBC) survey has ranked
Pune as the most suitable place for British investments in India. The survey report,
titled ‘Opportunities for UK Plc in Emerging Cities in India’, also rated eight other
cities—Ahmedabad, Chandigarh, Jaipur, Goa, Indore, Kochi, Nagpur and Vadodara—
as the most conducive destinations for UK investments in India.

Among 23 FDI (foreign direct investment) proposals worth US$ 119.6 million cleared
by the Government recently are Damas LLC’s (single-brand retail) plans to establish a
joint venture company with Gitanjali Lifestyle Ltd for retail trading of jewellery and
related accessories, Lazard India Mauritius’s FDI contribution of US$ 26.5 million,
FT Singapore’s plans to make investment up to 100 per cent in the issued and paid-up
capital of Financial Times India, FIM Bank, Malta (US$ 5.3 million FDI), Era Infra
Engineering (US$ 7.4 million) and Hyatt Group company – HP India Holdings Ltd,
Mauritius’s plans to establish hotels, in a joint venture with Emaar MGF for US$ 26.5
million.

As India does not allow FDI into multi-brand retail, mega US stores such as Wal-
Mart have entered the country only for wholesale trading known as 'Cash and Carry'.
Hyatt Group Company – HP India Holdings has tied up with Emaar MGF to form
‘Aashirwad Conbuild Ltd’, which will have foreign equity at 26 per cent
corresponding to an investment of US$ 26.5 million-US$ 31.8 million over the next
five years, while the 74 per cent will be held by Indian partner.

The Bharti Wal-Mart joint venture has finally opened its first cash-and-carry store,
nearly two years after announcing its plans, and intends to open 15 such wholesale
stores in the next three years. Two European retail majors, Tesco and Carrefour, have
announced similar plans while the German group Metro has already established an
Indian presence. Dow Jones & Co Inc is pumping in foreign direct investment of US$
458,114 in setting up the wholly owned subsidiary in India.

Implications of the current policy initiatives

With the new regulations in place, the debate is that what will happen to these small
stores? Will the entry of global retailers wipe out these local stores or will it make no
impact? If we take China's example, the FDI in retail has little or no impact on the
local retailers and they still dominate the retail sector. Secondly, the decision may not
trigger the FDI flow as such as single brand retailers who wanted to be in India like
Nike and Reebok are already here through franchise and may find it tough to find
local partners willing to invest in business.

However opening up of the retail sector to the FDI has been fraught with political
challenges and also opposition from small traders. Some of their arguments include
the following.

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 • The global retailers will put thousands of small local players and fledging
domestic chains out of business.
• Would give rise to cut-throat competition rather than promoting incremental
business.
• Promoting cartels and creating monopoly.
• Increase in the real estate prices.
• Marginalize domestic entrepreneurs.
• The financial strength of foreign players would displace the unorganized
players.
• Absence of proper regulatory guidelines would induce unfair trade practices
like Predatory pricing.

The arguments against FDI in Indian retail market are similar to the arguments used
during the era of industrial licensing, which was meant to protect small-scale
industries. . But eventually when licensing was abolished small-scale industries have
not died. Instead, they have learnt to co-exist as suppliers to large-scale industries.

The political bosses have to see the reality and make others understand that the risk to
the local grocer or kirana shop is the same from a Giant or a Big Bazaar, or Star India
Bazaar, as it would be from a Tesco, or a Sainsbury. For example, ready-made
garments have displaced the family tailor (but not tailoring), horse buggies or Tongas
have made way for the automobiles (but not reduced travel), and dharamshalas have
been replaced by hotels (but not the cuisine). Practically in no developed or
developing country have ‘global’ retailers wiped out the local retail industry. Even if
FDI was allowed, it would take considerable time for any effects to surface. The
mom-&-pop and the Large-format stores will continue to be there. Carrefour, for
instance, took 15 years to break even in China. Therefore, nothing will change
overnight.

But it has to be understood that change will bring with it a lot of upheaval and
"teething problems." The local retail players, large as well as small, need to be given
support and time to adjust to a changed environment.

Thus the arguments for and against FDI in retailing in the country are purely based
on perceptions of such parties and also the experiences of other countries in this
regard as there has not been sufficient data to support or oppose it. However various
stake holders of retailing industry would love to drag China and Thailand as case in
point to support or oppose FDI in Indian retail. More academic and industrial research
is needed to make any claims in this area. But by not allowing FDI in retail sector the
Government would be cutting down an investment model.

FDI into retail may affect certain strata of the society in the short run but in the
long run the benefits are going to have positive impact on various sectors of the
economy. However to turn it into a reality all stake holders need to work as a cohesive
group to produce the desired results. In the nutshell what one would say is it is time
now for us to shake off the last vestiges of Soviet-style socialism and comply happily
with the WTO mandate and permit FDI in retail trade. However FDI should be
encouraged with strict, feasible and mutually beneficial regulatory environment to

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keep pace with the forecast of GDP; and the issue is not whether FDI should be
allowed but the way industry and the Government handle it.

The Indian consumer and the poor farmer will be the two biggest gainers from FDI in
Indian retail sector. Even the recently tabled Economic Survey of India recommends
full opening of country’s retail market to foreign investors in order to drive economic
growth.

Recommendations

Given this back drop, the policy initiatives of the government and any further policy
changes affecting retail prospects become very sensitive issues and the government is
supposed to move very cautiously keeping in mind the interests of small shopkeepers
and the demands of globalisation of trade and commerce. Some of the
recommendations forwarded by the academia and the industry worth a mention are
listed below.

o The Government and the RBI should evolve suitable lending policies to enable
retailers in the organised and unorganised sectors to expand and improve
efficiencies.
o A national regulatory agency needs to be constituted to study the problems
associated with FDI into the industry and to suggest measures to cope with
FDI.
o Entry of foreign players must be gradual with social safeguards in the sense
that such a policy initiative must add to economic activity and social welfare.
Entry may be permitted by format type and number of stores. In fact FDI
should be permitted only in joint venture format in such product categories
where the threat perception is very high. Similarly FDI should not be
permitted in those product categories where Indian players are already well
established. For some product categories FDI should be permitted for sourcing
only but not for selling in the Indian market.
o India may follow Chinese model which took12 years to open the retail sector
completely to FDI.
o Efforts should be made to improve manufacturing sector so as to absorb the
dislocated workers from the unorganised retail sector due to FDI.
o In addition the government, the regulatory authorities and the industry should
also make efforts to remove the following deficiencies which will go a long
way in making Indian retail much more organised and competitive
o Regulations restricting real estate purchases, and cumbersome local laws.
o Absence of developed supply chain and integrated IT management.
o Lack of trained work force.
o Low skill level for retailing management.
o Intrinsic complexity of retailing – rapid price changes, constant threat of
product obsolescence and low margins

In the end the logical conclusion is that any strategy in the direction of FDI should
ensure that domestic players are not unduly displaced and sufficient opportunities are
available for the growth of domestic players. At the same time the government should

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not let go a glorious opportunity offered by the largely untapped and highly promising
retail sector.

References:

1. A.T. Kearney’s Report on Indian Retail, 2008.

2. Mukherjee Arprita/ Nitisha Patel “FDI in Retail Sector- India,pg 37-45
3. Nitin Malhotra “Indian Retail Sector—A PRIMER, ICFAI University press
4. Dr.R.KBalyan “FDI in Indian Retail- Beneficial or Detrimental-research paper
5. B.Congnizance.-.The IIT An E-Magazine, Google search
6. l.Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search
7. Dipakumar Dey-Aspects of Indian Economy-Google search
8. Swapna Pradhan-‘Retailing Management- text & cases, Tata McGraw Hill
9. P.Vanita, G.Prakash Raj -FDI In Indian Retail-research paper www/
jeyabal.com
10. Mohan Guruswamy, Kamal Sharma, Maria Mini Jos –“FDI in Retail-111”
www/India watch.org
11. The Evolving Retail Market in India- www/icsc.org
12. The Economic Times

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