FDI in Retail sector in India


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FDI in Retail sector in India

  1. 1. FDI in Retail in India
  2. 2. Let’s get the Basics Right….• ‘Retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale), A sale to the ultimate consumer - Interface between the producer and the individual consumer buying for personal consumption• Organized retailing - Trading activities undertaken by licensed retailers, those who are registered for sales tax, income tax, etc., these include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses• Unorganized retailing - Traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores etc.• FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy
  3. 3. How FDI can come in India?1. Franchise Agreements :• Easiest track & FDI is allowed with the approval of the RBI under the FEMA• Pizza Hut, Mango, Nike, Marks & Spencer and many more2. Cash And Carry Wholesale Trading -• 100% FDI is allowed in wholesale trading• Wholesaler deals only with smaller retailers and not Consumers• Metro AG was the first global player to enter India through this route3. Strategic Licensing Agreements• Foreign brands give exclusive licences and distribution rights to Indian companies & through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees• Mango an agreement with Piramyd, Mumbai4. Manufacturing and Wholly Owned Subsidiaries• Foreign brands that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail• For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Pvt ltd
  4. 4. FDI in Retail - Some quick Facts• Indian retail sector is highly fragmented with 97 % of its business being run by the unorganized retailers• Largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP• FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership• Between then and May 2010, a total of 94 proposals have been received - Of these, 57 proposals have been approved• An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period
  5. 5. India Retail – The Story So Far & Growth Outlook• India retail market is estimated at US$ 470 Bn in 2011, accounting for ~35% of GDP and is expected to grow to US$ 675 Bn by 2016, @ CAGR of 7.5%• Organized retail market is estimated at US$ 26 Bn and accounts for ~6% of the overall retail market for 2011 & projected to grow to US$ 84 Bn by 2016, @CAGR of 26% Organized Retail Penetration Level USA 85% 675 France 80% 470 Japan 66% 310 Malaysia 55% Brazil 36% Russia 33% China 20% 2006 2011 2016 India 5% Sources : The Retailers, Ernest & Young, Jan 2009 ; Working Paper no. 222, ICRIER & Technopak Analysis: Emerging Trends in Indian Retail and Consumer: 2011
  6. 6. GDP growth and Organized Retail  Indian companies  Future Group  Reliance Retail  Bharti  ShoppersStop  Pyramid  Aditya Birla Group  Subhiksha Retail, GDP growth Organized Retail in 2010  Spencer Group• FDI in Single Brand Retail was permitted in 2006, to the extent of  Tata – Westside, 51% and now opened to 100%• FDI in Cash & Carry whole sale retailing was permitted, to the extent  Tata – Chroma of 100% under the Government approval route, in 1997• NO FDI in multi-brand stores ( like Wal-Mart)• Trends indicate that the FDI would open up in retail sector, however political consensus has to be reached before that happens
  7. 7. Foreign Player’s view & Government Proposal• Environment not conducive enough • Only 51% FDI in single brand retailing • Many retailers (e.g.. IKEA) unwilling to enter without 100% FDI)• Insufficient data on consumer behavior• Focus in India only on growth and not profitability• Scope for private labels (only 4% in Asia compared to 17% in western markets) Recently Proposed: FDI in Multi Brand Retail is opened up to 51%, with the following conditions: 1) Minimum investment of US$ 100 million 2) 50% of US$ 100 million to be invested in the back-end infrastructure 3) 30% of sourcing to be done from small scale industries 4) Stores can be opened only in cities with a minimum population of 1 million 5) States will have freedom to decide entry of international retailer with 51% FDI
  8. 8. Today & Tomorrow in FDI in Retail Source: http://www.hindustantimes.com/business-news/WorldEconomy/A-guide-to-FDI-in-retail/Article1-775717.aspx
  9. 9. Why Shall we Allow FDI in Retail? (1/2)A. Competition : • Catalysts to spur competition & innovation in retail industry • Ensure highly efficient-low margin business modelB Consumers • Improved product availability, quality & reduce wastages • Consumers to get best products and services at reasonable priceC. Back End & Supply Chain Improvement : • Inadequate storage facilities cause heavy losses to farmers • 25%-30% of F&V and 5%-7% of food grain in India are wasted • An 11th plan working group has estimated a total investment of Rs 65 K crore in agriculture infrastructures • Food inflation and fluctuation in food prices can be controlled
  10. 10. Why Shall we Allow FDI in Retail? (2/2)D. Better Realization for Farmers : • Today, Intermediaries dominate the value chain • Indian farmers realize only 1/3rd of the total price paid by the final consumer against 2/3rd by farmers in nations with a higher share of organized retail • FDI to ensure better realization for farmers & producersE. Economic Growth : • Sourcing from India will increase & Exports to get significant boost • India can also become a shopping destination for the world • Sectors like Textile and handicraft will get a significant boostF. Low Cost Products - With more foreign companies investing in retail,consumers will get more choices and will have to spend less - A good news -especially when the inflation is bent upon climbing up and upG. Employment Will Increase - Govt says lot many jobs will be created forpeople - In India, where unemployment is a major problem, foreigncompanies that come to India, will offer jobs to Indians
  11. 11. Why Shall we not Allow FDI in Retail? (1/2)• Job Losses: Retail industry in India is the second largest employer after agriculture, Any game changing situation can lead to heavy job losses particularly in rural areas and small cities• Power of Scale: Unfair competition and abilities of big retailers to sustain losses can lead to large scale exit of domestic retailers, especially the small family managed outlets• Prefer Localization: Indian retail sector including organized sector is still under-developed and in a nascent stage, It is critical that the retail sector is allowed to grow and consolidate first, before opening to foreign investors• Reduction in employment: Indian Retail Labor productivity is 6 to 8 % of U.S. – Mckinsey Study, this means Indian Retail employs 100 people when U.S. Retail employs 6 – 8 people• A study conducted in USA revealed that for every one job created by Wal- Mart, the community loose 2 jobs
  12. 12. Why Shall we not Allow FDI in Retail? (2/2) The Thai Government, which very magnanimously opened its door to invite thelarge retailers, now has created a separate fund to provide financial assistance to the local retailers China Daily has quoted a Wall Street Journal report that mentions a Chinese supplier being forced to lay off staff because Wal-Mart has been ruthlessly pressing down on the supplier’s margin Indonesia & Malaysia have specified zones within which foreign retailers may operateIn Japan, such retailers need to seek the views of small local stores regarding their proposed new locations. Additionally, zoning laws have been imposed, this compels the foreign retailers to go outside the city limits etc.So, if multinational retailers were to recruit 1,000 people, close to 15,000 currently employed personnel would land up losing their jobs. India remains one of the few markets untouched by this frenzy
  13. 13. Pros and Cons of allowing FDI in retail Benefits of FDI in retail Drawbacks of FDI in retail Inflow of investment and funds.  Would give rise to cut-throat Improvement in the quality of competition rather than promoting employment. incremental business. Generating more employment.  Promoting cartels and creating Increased local sourcing. monopoly. Provide better value to end consumers.  Increase in the real estate prices. Investments and improvement in the  Marginalize domestic entrepreneurs. supply chains and warehousing.  The financial strength of foreign players Franchising opportunities for local would displace the unorganized players. entrepreneurs.  Absence of proper regulatory guidelines Growth of infrastructure. would induce unfair trade practices like Increased efficiency. Predatory Cost reduction. Implementation of IT in retail. Stimulate infant industries and other supporting industries.
  14. 14. Conclusion• Prolong Denial: Most of the consumers in India, particularly in urban areas, are exposed to benefits and experience of organized retail, It will be difficult to deny the same benefits and experience to balance consumers for a very long period• Coexistent: India is a big and growing market. Both unorganized and organized sectors can sustain together• Level Playing Field: Policy makers to ensure a level playing field for small retailers, Better credit availability to unorganized retailers from banks and micro-finance institution through innovative banking• Gradual opening of retail sector to give domestic industry enough time to adjust to the changes• Clear guidelines on investment in Infrastructure and Export commitments for International Retailers would help all stakeholders to benefit• Sole Solution: FDI in Retail is not the only solution for growth of Retail in India
  15. 15. Conclusion – Final Words• ICRIER has also come to 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• Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 % to start with• 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, Upgradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to govemment through greater GDP, tax income and employment generation
  16. 16. Thank you