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FDI in India's retail sector: problems and prospects

Introduction "No power on earth can stop an idea whose time has come" said Manmohan Singh, the then Finance Minister of India, quoting Victor Hugo while presenting the Union Budget 199495, making a reference to the Indian economy's unlimited potential. If Dr. Manmohan Singh were to use the quote again today, he would probably apply it in the context of the promise contained in the India's retail sector. The Indian retail market, which was largely unorganized till the 1980s has undergone an immense transformation in post-liberalization era. However, valued at $ 450 billion, the Indian retail sector is still relatively small by global standards, with giants like Wal-Mart alone reporting over US $ 315 billion (approx) in global sale. India is estimated to have around 15 million retail outlets, making it the country with the highest retail outlet density in the world. A.T. Kearney, a well known international management consultancy, in the year 2009, identified India as the most attractive retail destination in the world. With a significant contribution to the national GDP (10 percent) and employment (8 percent, second largest employer after agriculture) this sector can definitely be referred as one of the pillars of the Indian economy. Retailing is the interface between the producer and the individual consumer, buying for personal consumption. This excludes direct interface between the manufacturer and the institutional buyers, such as the government and other bulk customers. A retailer is one who stocks producer's goods and is involved in the activity of selling it to the individual consumers, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. The retailing is divided into organized and unorganized sectors. Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate backed hypermarkets, supermarkets, departmental stores, shopping malls etc. Unorganized retailing, on the other hand, refers to traditional format of low cost retailing and it includes local kirana shops also known as 'mom and pop' stores, ownermanned general stores, paan-beedi shops, hand cart and pavement vendors. Unorganized retailing is by far the most prevalent form of trade in India and is highly fragmented in nature--constituting 95 percent of total retail trade.

The Indian retail sector is at an inflection point, with organized retail poised for an approximately 11.5 percent (CAGR). Size of organized retail market (5 percent) in 2009 is $ 35 billion which is expected to $ 155 billion by 2015 with average annual growth rate of 35 percent in organized retail. Having emerged as the world's most attractive destination for global retail, India still faces alarming issues that pose serious hurdles to the growth opportunities that the retail sector promises to the country's economic progress. The critical challenges are relating to the infrastructure (cold chains, warehousing and logistic infrastructure) and the policy issues (industry status for retail, relaxing licensing, permit and registration norms), etc. India is currently facing world's most dynamic combination of highly informed and demanding consumer on one hand, and a rapidly increasing consumption level on the other. The average consumer today is richer, younger and more aspirational in his/her needs than ever before. The greater education level has increased the awareness among the consumers and they are becoming more demanding and discerning. Another prospect of retail sector in India is the young working population, hefty pay-packages, alongwith increasing working women population. Consumers now value convenience and choice at par with getting value for their hard-earned money. Growing consumer demand and the consequent responses of leading business houses have created a more complex and competitive market place--one that requires each firm to be more adaptive to consumers need and more aggressive at exploiting their unique capabilities to meet those needs. In the context of Indian consumer, companies have multiple challenges and opportunities for them. Retailing in India is slowly moving its way towards becoming the next boom industry as the concept of shopping has altered in terms of format and consumer buying behaviour. Policy on FDI in Retil Trading The Indian economy was opened to the world in 1990s with the implementation of economic reforms. Thereafter foreign capital has started flowing into the country in the form of foreign direct investments and foreign institutional investments. In spite of the fears expressed from various quarters, India has managed to do well and has been witnessing a very respectable growth rates in its GDP after liberalization. Though Foreign Direct Investments were allowed by the Indian government in many sectors but restricted in certain sensitive sectors like agriculture, railways, atomic energy, retail etc. Of these, retail sector is considered to be the most promising and profitable by the foreign investors. As per the Statement on Industrial

Policy dated 24th July 1991, FDI in the trading sector was permitted up to 51 percent only in the trading companies, primarily engaged in export activities. In 1997 FDI up to 100 percent was permitted under the FIPB (Foreign Investment Promotion Board) route in case of trading companies. It was brought under the automatic route in 2006. It included exports, bulk imports with ex-port/ex-bonded warehouse sales, cash and carry wholesale trading. As a part of liberalization process in the year 2000, FDI was allowed in other permissible modes of trading as per the Export-Import Policy. FDI up to 51 percent is permitted in Single brand product retailing, with prior Government approval, from 2006 onwards. Since then, a total of 94 proposals have been received till May, 2010. Of this, 57 proposals were approved. The proposals received and approved related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, life-style products etc., covering highend items. An FDI inflow of US $ 194.69 million (Rs. 901.64 crore) was received between April, 2006 and March, 2010, comprising 0.21 percent of the total FDI inflows during the period, under the category of single brand retailing. The overall inflow of FDI in the sector between April, 2000 to March, 2010, was US $ 1.779 billion (Rs. 7799 crore). This comprised 1.54 percent of the total FDI inflows received during the period. In a new strategy being drawn by Department of Industrial Policy and Promotion (DIPP) (2009-10), FDI in single brand retail could be hiked to 74 percent from 51 percent. This measure will benefit international brands, which have set up their shops in the country through joint ventures and franchises. Though foreign investment in multi-brand retail is banned, the government is also considering opening it for foreign retailers. In effect, the government proposes to relax the norms with regard to foreign participation in multibrand retail by opening up the specialized sectors, while keeping grocery and consumer goods retail out of bounds. However, the Left Parties are opposed to any relaxation of FDI norms for the retail sector. A recent survey done by the United Nations Conference on Trade and Development (UNCTAD) on 300 international retailers found that more than a quarter of them have either opened or are planning to open their stores in India if the country relaxes the norms further. The DIPP has seen this relaxation of FDI norms as an opportunity to boost the domestic industry by linking the new norms to domestic sourcing. If a foreign investor from the single-brand retail space decides to have FDI above 51 percent, it will have to source 50 percent of the projected sales from the country. In case the investor

is not able to fulfill this condition within the stipulated five-year period, it will have to divest his equity to 51 percent. Moreover, for FDI up to 51 per cent in the single-brand retail space, the products will have to be sold under the same brand name internationally and will have to be branded during the manufacturing process. Recently, the new rules issued by the Industry Ministry on FDI in wholesale trade have caused consternation among Indian business houses with big plans for retail joint ventures such as Bharti- Wal Mart, TataTesco and Future group- Carrefour. As per the new rule, sales to 'group companies' should not exceed 25 percent of cash and carry company's turnover and should only be for 'internal use'. This cap of 25 percent has restricted the foreigner investors from selling bulk of their goods to Indian-owned retailers selling to consumers. The rule also requires cash and carry companies to maintain elaborate records of daily sales. FDI in retailing has become a sensitive issue with the arguments both in favour and against. Though its widely acknowledged that FDI can have some positive results in the form of greater integration, price reduction and improved selection, brought about by technology and know-how of foreign players in the market. But the most important factor against FDI is that it will lead to a displacement of traditional retailers. No doubt it is in the interest of the consumer but it cannot in any circumstances, override the responsibility of a society and government to provide economic security to its population. Experience of other Developing Nations A look at how the other developing nations of the world have dealt with the issue of FDI in retail trade will give a fair idea of the problem and the various possibilities. Most Asian countries had permitted FDI in retailing. China in December 2004 lifted all restrictions on the number or location of retail outlets and FDI up to 100 percent is permitted. Malaysia permits FDI up to 70 percent in the retail trade sector and proposals for FDI beyond 70 percent are considered on a case-to-case basis. Thailand, Indonesia and Brazil also permit 100 percent FDI in retail sector. The sector is booming in Eastern Europe and a growing number of other emerging markets. Growth is particularly strong in the new EU members and Asia, including China, Malaysia and Vietnam. It also extends to countries like Chile, Brazil, Turkey, Morocco, Saudi Arabia and South Africa. In many of these emerging markets, growth is fuelled by an expanding urban class with rising household incomes. UNCTAD research shows the benefits are plentiful in these countries. This includes substantial productivity enhancements in retailing, particularly in supply chain management and in-country logistics. Brazilian producers, for example, are now part of the global supply chains of Carrefour and

WalMart, lower prices for food and clothing have apparently helped in controlling inflation. In China, the introduction of global retailers has not only stimulated demand for local goods to stock hypermarket shelves but has also provided new conduits for exports, by integrating Chinese producers into multinational supply chains. Wal-Mart alone plans to hire 150,000 employees in China over the next five years. China's agriculture exports to the US nearly trebled from $3.86 billion in 1999 to $9.96 billion in 2004. India on the other hand has made only a marginal progress, with its farm exports to America rising from $3.19 billion to just $4.28 billion in the same time period. In Vietnam, the market presence of global retailers has helped raise the quality of goods provided by local suppliers to international standards. In Saudi Arabia and other Gulf countries, modern retailing has been associated with the building and operation of large shopping malls, with knock-on benefits for the local construction and security sectors. Pick'n Pay, South Africa's largest supermarket chain, reportedly provides training to small retailers setting up their own Pick'n Pay Family Stores. It apparently helps local producers comply with quality standards and invests 7 percent of its net profits in corporate social responsibility. In many of the developing nations retrenched labour has been re-tooled and made more productive. Why FDI in retail trade is needed for India The retail revolution that has ushered in modern retailing is yet to make significant inroads into almost 15 million kirana outlets throughout the length and breadth of the country. Organized retail today accounts for less than 5 percent of India's retail business, but is bound to grow, forcing its choices on the government and upon itself. China's experience and those of other Asian countries that recently modernized their retail sector can provide valuable insight on what choices make sense. Taiwan opened up its retail to foreigners in the 1980's without creating a regulatory environment for the emergence of strong retail sector. Predictably, foreign companies dominate Taiwanese retail today. In contrast Japan's distribution network and regulatory environment have been inhospitable to foreign retailers and the Japanese pay today for this absence of competition with some of the highest retail prices in the world. South Korea and China managed the process of foreign entry more gradually, initially encouraging joint venture between domestic and foreign retailers before loose regulations on FDI in retail were brought in, both countries now have the benefit of vibrant domestic retail sector, and the competition between domestic and foreign retailers has yielded low prices and good service. India is already following China's example, initially encouraging joint ventures between foreign and domestic retailers before allowing 100

percent FDI in organized multi-brand retail. This gradual opening up will preserve a vibrant domestic retail sector in the long term, providing country with a solid foundation of domestic expertise and human capital. FDI in retail trade would contribute to a multiplier impact on the economy not only in the retail sector but also in many other activities such as manufacturing, food processing, packaging and logistic services. Further pointed out that far from leading to an influx of imported goods, foreign companies would source most of their items domestically and would in fact, use quality Indian products to stock thousands of their outlets in foreign countries, thus giving a fillip to our manufacturing as well as exports. One of the biggest fears expressed by the opponents of FDI in retail trade is the loss of employment of millions of small Indian traders. Organized retailing would generate employment, both direct and indirect, as notwithstanding the capital intensity of modern retail business, it continues to be labour intensive as well. It would also lead to creation of indirect employment in support activities throughout the supply chain, starting from producers to packaging, storage, transport and other logistic services. Further modern retailers are a major source of relatively secure employment, particularly for women and low-skilled workers. Unlike the informal retail sector, many of these jobs involve regular working hours and a number of social benefits. Another argument against FDI is that the larger multinational retailers will wipe out the small Indian retailers. However the situation is quite different. In a bid to broaden and deepen their consumer connect, many foreign retailers are inviting locallyprominent retailers to share space with their stores, hoping to benefit from the traditional ties that consumers share with well known local brands and shops. Bengali caterer "Bijoli Grill" in Kolkata entered Spencer's through shop-in-shop format in 2009 and it earned a net profit of Rs 2 lakh across three outlets in a month. Similarly, "Bhagyalakshami Butter and Gulkand" shared space with the Future Group in Bangalore and reported increase in its revenue. Recently, a series of pilot projects launched by big retailers in collaboration with Micro Finance Institution (MFIs) has demonstrated that how giants and dwarf can co-exist and even fuel each other's growth. The MFIs not only provides credit, but also double up as valuable intermediaries that collects orders from the kirana stores, source the merchandise from big retailers and delivers it at the kirana's doorstep. The MFIs do not charge any interest, they receive commission from the retailer, for whom this is a small price in order to win new markets and grow faster. If this experiment succeeded it could enable the large retailers to look inquisitively into vast rural market, helping kirana's becoming more efficient,

giving consumer the benefit of lower prices and building a thriving retail ecosystem where both the foreign and domestic retailer can flourish. In addition, it might soften the resistance to FDI in retail. One segment of our society that toils to provide basic needs, and yet languishes on a pittance, is the agricultural segment. In spite of the fact that farmers are responsible for putting food on our plates the typical Indian farmer is a poor man. Reforms in agriculture sector are needed in the way agricultural produce is procured, stored and marketed. This calls for huge investment in the supply and distribution chains and most importantly, competition in the supply chain where the farmer decides to whom to sell and at what prices. India can attain huge savings by merely improving the supply chain. Some 20-40 percent of all fruits and vegetables grown in the country go waste due to poor transportation, storage and handling infrastructure. Also, for every rupee that an Indian consumer spends, the farmer gets only 20-22 paise, as against 70-80 paise in developed markets. If large retailers, whether domestic or foreign, directly source through farmers, realizations will go up for the farmers, consumers will have to pay less and the retailers will get higher margins. This fact has been supported by several studies (ICRIER 2008, CRISIL Report 2010). The global retailers taken together buy about $60 billion of goods each year from China for exports whereas in case of India it is less than $1 billion, that too, mostly from metro dairy farms. The MSMEs (Micro Small and Medium enterprises) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5 percent in 1999-2000 to 30.3 percent in 2007-08. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface. Conclusion Thus, any policy initiative taken by the government must add to economic activity and social welfare. 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. The government should not let go a glorious opportunity offered by the largely untapped and highly promising retail sector. At the same time it should ensure that the

interests of the local retailers are duly protected. If done so the Indian retail sector will turn out to be a real blessing for the nation's economy as a whole. References A. T. Kearny (2009): 'Global Retail Development Index' www.grdi.atkearny.com Bussinessworld Marketing Whitebook (2009-2010): The Financial Express, February, 2. CII Report on Indian Retail (2006): 'Retail in India-getting Organized to Drive Growth'. Department Related Parliament Standing Committee on Commerce (2009): Ninetieth Report on FDI in Retail Sector www.rajyasabha.nic.in Dey Dipankar (2006): 'FDI in India's Retail Trade: Few Missing Issues in the Current Debate' http://papers.ssrn.com/so13/papers.cfm?abstract_id=874707. Discussion paper on FDI in Multi-Brand Retail (2010): DIPP, Ministry of Commerce, Government of India www.dipp.gov.in Guruswamy Mohan, Kamal Sharma, Jeevan Prakash Mohanty, Thomas. J. Korah (2005): "FDI in India's Retail Sector, More Bad than Good" Economic and Political Weekly, Vol. XL. No. 7. Kalhan Anuradha and Martin Franz (2009): Regulation of Retail: Comparative Experience", Economic and Political Weekly, Vol. XLIV. No. 32. Kiran B. V (2005): 'FDI in Retailing --Long Overdue' www.icmrindia.org/articles/FDI. Mathew Joshep, Soundraraja, Sahu and Gupta (2008): 'Impact of Organized Retailing on Unorganized Retail', ICRIER working paper no. 222 www.icrier.org Mukherjee Wrintankar, Aulakh (2010): "Retail Goliaths, Davids give each other Business", The Economic Times.

Sanwal Deepankar, Mitra (2006): 'Indian Retail on the Fast Track', study by FICCI. Subbiah, A. Jeyakumar (2009): "Indian Organized Retail Sector Growth, Opportunities and Challenges", Monthly Public Opinion Survey. Sudhir, K. (2010): "Road Ahead for Organized Retail" The Economic Times, March 17. Tripathi Purnima, S. (2009): "Retail Debate", Frontline Magazine, Vol. 26, Issue 15.