FDI in Retail in India
A prospect or peril for India?
Dr. Mihir K. Mahapatra
Abhishek Singh (PGDM 12122)
Arun K. P (PGDM 12129)
Juhi Lalwani (PGDM 12141)
Rheetam Mitra (PGDM 12156)
Shreetha T. S. (PGDM 12176)
Table of Contents
INTRODUCTION ........................................................................................ 02
RETAIL SCENARIO IN INDIA ...................................................................... 03
HIGHLY FRAGMENTED INDIAN RETAIL SECTOR ........................................ 04
PROSPECT OF INDIAN REAL SECTOR ........................................................ 05
Economic growth .................................................................................. 05
Demographics ....................................................................................... 05
Urbanization. ........................................................................................ 05
Credit availability .................................................................................. 05
FDI IN RETAIL IN INDIA ............................................................................. 07
POSITIVES OF FDI IN RETAIL ..................................................................... 08
Strengthen infrastructure ..................................................................... 08
Improve supply chain ............................................................................ 09
Better warehousing............................................................................... 09
Greater employment opportunities ...................................................... 10
PERILS OF FDI IN RETAIL ........................................................................... 11
The role of the small retailers................................................................ 13
Involved workforce – Muslims going to be hurt the most .................... 14
Procurement Clause – Tweaking the rules…………………….……..............17
Livelihood Issues……………………………………………..…………………………. 18
Lessons from the past…..……………………………………………………………. 18
SUMMARY & CONCLUSION…………………………………………………………… 20
Page 1 of 23
Retailing in India is one of the pillars of its economy and accounts for 14 to 15 per cent of its
GDP. The Indian retail market is estimated to be US$ 450 billion and one of the top five
retail markets in the world by economic value. India is one of the fastest growing retail
markets in the world, with 1.2 billion people.
India's retailing industry is essentially owner manned small shops. In 2010, larger format
convenience stores and supermarkets accounted for about 4 per cent of the industry and
these were present only in large urban centers. India's retail and logistics industry employs
about 40 million Indians (3.3% of Indian population).
Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand
retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or
any retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic
In November 2011, India's central government announced retail reforms for both multibrand stores and single-brand stores. These market reforms paved the way for retail
innovation and competition with multi-brand retailers such as Walmart, Carrefour and
Tesco, as well single brand majors such as IKEA, Nike, and Apple. The announcement
sparked intense activism, both in opposition and in support of the reforms. In December
2011, under pressure from the opposition, Indian government placed the retail reforms on
hold till it reaches a consensus.
In January 2012, India approved reforms for single-brand stores welcoming anyone in the
world to innovate in Indian retail market with 100% ownership, but imposed the
requirement that the single brand retailer must source 30 per cent of its goods from India.
Indian government continues the hold on retail reforms for multi-brand stores.
On 14 September 2012, the government of India announced the opening of FDI in multibrand retail, subject to approvals by individual states. This decision has been welcomed by
economists and the markets, however has caused protests and an upheaval in India's
central government's political coalition structure. On 20 September 2012, the Government
of India formally notified the FDI reforms for single and multi-brand retail, thereby making it
effective under Indian law.*
On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand
retail in India. The Feds managed to get the approval of multi-brand retail in the parliament
despite heavy uproar from the opposition. Some states will allow foreign supermarkets like
Walmart, Tesco and Carrefour to open while other states will not.
Page 2 of 23
RETAIL SCENARIO IN INDIA
Most Indian shopping takes place in open markets or millions of small, independent grocery
and retail shops. Shoppers typically stand outside the retail shop, ask for what they want,
and cannot pick or examine a product from the shelf. Access to the shelf or product storage
area is limited. Often the shopkeeper substitutes the product, claiming that it is similar or
equivalent to the product the consumer is asking for. The product typically has no price
label in these small retail shops; although some products do have a manufactured suggested
retail price (MSRP) pre-printed on the packaging. The shopkeeper prices the food staple and
household products arbitrarily, and two consumers may pay different prices for the same
product on the same day. Price is sometimes negotiated between the shopper and
shopkeeper. The shoppers do not have time to examine the product label, and do not have
a choice to make an informed decision between competitive products.
India's retail and logistics industry, organized and unorganized in combination, employs
about 40 million Indians (3.3% of Indian population)*. The typical Indian retail shops are
very small. Over 14 million outlets operate in the country and only 4% of them being larger
than 500 sq. ft. (46 m2) in size. India has about 11 shop outlets for every 1000 people. Vast
majority of the unorganized retail shops in India employ family members, do not have the
scale to procure or transport products at high volume wholesale level, have limited to no
quality control or fake-versus-authentic product screening technology and have no training
on safe and hygienic storage, packaging or logistics. The unorganized retail shops source
their products from a chain of middlemen who mark up the product as it moves from farmer
or producer to the consumer. The unorganized retail shops typically offer no after-sales
support or service. Finally, most transactions at unorganized retail shops are done with cash,
with all sales being final.
Until the 1990s, regulations prevented innovation and entrepreneurship in Indian retailing.
Some retails faced complying with over thirty regulations such as "signboard licenses" and
"anti-hoarding measures" before they could open doors. There are taxes for moving goods
to states, from states, and even within states in some cases. Farmers and producers had to
go through middlemen monopolies. The logistics and infrastructure was very poor, with
losses exceeding 30 per cent.
Page 3 of 23
HIGHLY FRAGMENTED INDIAN RETAIL SECTOR
The retail sector in India is highly fragmented and organized retail in the country is at a very
nascent stage. There are about 12 million retail outlets spread across India, earning it the
epithet of a “nation of shopkeepers.” More than 80% of these 12 million outlets are run by
small family businesses which use only household labour. Traditionally, small-store (kirana)
retailing has been one of the easiest ways to generate self-employment, as it requires
limited investment in land, capital and labour. Consequently, India has one of the highest
retail densities in the world at 6% (12 million retail shops for about 209 million
households).India’s peers, such as China and Brazil, took 10-15 years to raise the share of
their organized retail sectors from 5% when they began, to 20% and 38% respectively.*
India too is moving towards growth and maturity in the retail sector at a fast pace. Retail is
amongst the fastest growing sectors in the country. India ranks 1 st, ahead of Russia, in terms
of emerging markets potential in retail and is deemed a ‘Priority 1’market for international
Indian market has high complexities in terms of a wide geographic spread and distinct
consumer preferences varying by each region necessitating a need for localization even
within the geographic zones. India has highest number of outlets per person (7 per
thousand) Indian retail space per capita at 2 sq. ft. (0.19 m2)/ person is lowest in the world.
Indian retail density of 6 per cent is highest in the world. 1.8 million households in India
have an annual income of over 45 lakh (US$81,900).#
*The Great Indian Retail Story by Ernst & Young
Page 4 of 23
PROSPECT OF INDIAN REAL SECTOR
India’s GDP, which currently stands at USD 690 billion, is slated to touch US$740 billion by
the end of 2006. India is the world’s 4th largest economy as regards GDP (in PPP terms) and
is expected to rank 3rd by 2010, just behind the US and China. The country is on the brink of
becoming an economic powerhouse ready to unleash its largely untapped potential for
those who are willing to take the right step forward. In the retail sector, in spite of a 1.07
billion strong population, the target consumer base for most retailers in India stands at
about 405 million. Of this, about 30 million have a combined purchasing capacity of US$230
billion. The country’s 6 million ‘rich’ population shops worth USD 28.36 billion every year.
Indians with an ability to spend over USD 30,000 a year (in PPP terms) on conspicuous
consumption represent 2.8% of the entire population. But with a population base of 1.07
billion people, this number amounts to 30 million people, a market next only to USA, Japan
While consumer demand is driving retail growth, it is in turn being driven by the following
Economic growth: This has meant greater disposable incomes for the booming
Indian middle class, which currently comprises 22% of the total population. This
figure is expected to increase to 32% by 2010. Disposable incomes are expected to
rise at an average of 8.5% p.a. till 2015.
Demographics: More than 50% of the population is less than 25 years of age and
strong growth is expected to continue in this age bracket.
Urbanization: The Indian urban population is projected to increase from 28% to 40%
of the total population by 2020 and incomes are simultaneously expected to grow in
Credit availability: Retail loans have doubled in the last three years to reach US$38.7
billion by 2005.
India has 209 million households, of which the 6 million classified as ‘rich’, have annual
incomes of over US$4700 and 75 million, classified as ‘consuming’, have annual incomes
between US$1000 - US$4700. Over half of these ‘rich’ families live in Delhi, Mumbai and
Bangalore and spend around US$18 billion annually. 62% of the market for premium
products in India is also concentrated in these three cities. 85% of India’s retail market is
also concentrated in the country’s 8 largest cities. An estimated 1 million households at the
top of India’s income map constitute the ‘super-rich’ in the country. Growing by 20% every
year, this segments’ buying behaviour is in line with its corresponding international
segments. While this segment is worth targeting for high-end premium products, it is not
the key driver of the organized retail sector. The real driver of the Indian retail sector is the
bottom 80% of the first layer and the upper half of the second layer of the income map.
Page 5 of 23
This segment of about 40 million households earns USD$4,000 – US$10,000 per household
and comprises salaried employees and self-employed professionals. This segment is
expected to grow to 65 million households by 2010 and is currently the key driver behind
explosive growth in passenger car sales (US$5 billion in 2004) and mobile phone penetration
(over 70 million).*
The top 6 Indian cities - Mumbai, Delhi, Chennai, Kolkata, Bangalore and Hyderabad - are
the darlings of India’s exploding economy. They represent 6% of the population, but
contribute 14% of India’s GDP.# They are the centers of business, finance, politics and the
emerging sunrise industries such as IT, pharma and ITeS, which have put India on the global
map. These cities are also the barometer of India’s economic development and most foreign
investors have flocked here.
Besides the 6 metros, India has 61 other cities with populations greater than 0.5 million –
these cities represent 80% of India’s population and contribute about 14% to the country’s
GDP. Even though the 6 metros have the greatest concentration of India’s wealth, the other
61 cities have consistently outpaced the metros in growth rates since 1995. These cities are
witnessing higher incomes and a fundamental change in consumer mindset. Increasing
awareness levels in Tier II cities are eroding the earlier difference between metros and Tier
II cities in terms of ‘urban aspirations.’ International brands increasingly relying on Tier II
cities to drive growth are Nokia, Pizza Hut, Ford, Reebok and Adidas.
* The Great Indian Retail Story - Ernst & Young
The Great Indian Retail Story - Ernst & Young
Page 6 of 23
FDI IN RETAIL IN INDIA
In November 2011, when the UPA government announced in Parliament that it had cleared
the entry of big retail chains like Wal-Mart and Tesco into India through 51 per cent FDI in
multi-brand retail, it justified the decision saying that FDI in retail will boost food security
and benefit farmers’ livelihoods. But the assurance that FDI in retail would ease inflation did
not resolve the political crisis the government was facing; it deepened it. Parliament was
stalled for several days of the Winter Session after which the government was forced to
withdraw its decision.
The story of FDI in retail goes back to 2005 when Prime Minister Manmohan Singh signed an
agriculture agreement with the US, along with the nuclear agreement. On the board of the
US-India Knowledge Initiative in Agriculture, as it is called, sit Monsanto (the world’s leading
producer of GM seed), ConAgra (among the world’s big agribusiness along with Cargill) and
Wal-Mart (the world’s biggest retail giant). Protests had prevented Wal-Mart’s entry into
retail, but in 2007 it did get a backdoor entry through a joint-venture with Bharti (their
stores go by the names of Easyday and Best Price Modern Wholesale). No backend
infrastructure has been built so far, one of the other claims of the government about why
we need retail giants.
“The way the UPA government tried to ram through the decision on FDI in retail — without
consulting the Opposition parties, or even its allies — was clearly undemocratic. But the
decision itself is also flawed. It illustrates a disconnect between an ideology based on
market fundamentalism which is the leaning of the present government, and the Indian
reality of small farms and small retail. There is also a disconnect between that ideology with
its codeword of “reform”, and the crisis that market fundamentalism is facing, worldwide as
well as in India. If anything needs reform, it is the failed paradigm of corporate
globalisation.” – Dr. Vandana Shiva on FDI in Retail Sector in India.@
The sectors where FDI is already allowed are witnessing major decline. This is due to India’s
instability in the political arena, depreciating rupee value, inflation, decline in growth rate
etc. along with global economic uncertainties. India’s Foreign Direct Investment (FDI)
inflows declined to a nearly two-year low of USD 1.05 billion in November 2012 against
US$2.53 billion in November 2011. Sectors which received large FDI inflows during the eight
months of the current fiscal include services (US$3.63 billion), hotel and tourism (US$3.13
billion), metallurgical (US$1.26 billion), construction (US$1.01 billion) and automobile
(US$760 million). India received maximum FDI from Mauritius (USD 7.2 billion), Japan
(US$1.56 billion), Singapore (US$1.5 billion) the Netherlands (US$1.09 billion) and the UK
The previous low was recorded in January 2011 when the FDI inflows slipped to US$1.04
billion. The inflows had aggregated to US$36.50 billion in 2011-12 against US$19.42 billion
in 2010-11 and US$25.83 billion in 2009-10.#
Commentary by Dr. Vandana Shiva on FDI in Retail in India
* The Hindu Business Line
The Hindu Business Line
Page 7 of 23
POSITIVES OF FDI IN RETAIL
With the intention of signalling a strong commitment to reforms, the UPA government has
announced a hike in the price of diesel and liberalisation of foreign direct investment (FDI)
in multi-brand retail, justifying the measures as growth-enhancing and inflation-dampening.
They have been termed bold by India’s corporate sector and burdensome by an Opposition
united across the ideological spectrum. In his speech to the nation on September 20, the
Prime Minister stated that the government’s move is motivated by concern for the ordinary
One of the pre-requisites of the success of FDI in any sector is infrastructure. Poor condition
of infrastructure in terms of power, road, logistics etc. hampers the growth opportunities. It
increases operating costs which in turn results in reduced profit margin. This aspect is surely
worth considering before coming to any conclusion as such.
In December 2011, over 300 million Indian citizens had no access to electricity. Over one
third of India's rural population lacked electricity, as did 6% of the urban population. Of
those who did have access to electricity in India, the supply was intermittent and unreliable.
In 2010, blackouts and power shedding interrupted irrigation and manufacturing across the
country. The per capita average annual domestic electricity consumption in India in 2009
was 96 kWh in rural areas and 288 kWh in urban areas for those with access to electricity, in
contrast to the worldwide per capita annual average of 2600 kWh and 6200 kWh in the
European Union. India has a road network of over 4,245,429 kilometres (2,637,987 mi) in
2012, the third largest road network in the world. At 0.66 km of roads per square kilometer
of land. Adjusted for its large population, India has less than 4 kilometers of roads per 1000
people, including all its paved and unpaved roads. In terms of quality, all season, 4 or more
lane highways, India has less than 0.07 kilometers of highways per 1000 people, as of 2010.
These are some of the lowest road and highway densities in the world. For context, United
States has 21 kilometers of roads per 1000 people, while France about 15 kilometers per
1000 people - predominantly paved and high quality in both cases. In terms of all season, 4
or more lane highways, developed countries such as United States and France have a
highway density per 1000 people that is over 15 times as India.
Having the statistics with us, we can say that FDI in Retail may improve the condition of the
basic infrastructure by the way of investment from the government or the private side.
From the past experience we can say that opening up FDIs in sectors like construction,
tourism etc. resulted in better growth and efficiency in those sectors.
Page 8 of 23
Improve supply chain
India is the world’s largest producer of fruits and vegetables, has the largest area under
wheat, rice and cotton and is the second-largest producer of rice and wheat. That is the
good news. But, at the other end of the spectrum, India loses about Rs 50,000 crore
annually just on account of frail post-harvest infrastructure. A major scoop of these farm
losses can be traced to a feeble supply chain system that includes storage, transportation
and distribution. Inadequate warehouses and cold storages and poor road and rail
transportation are some of the red flags in the Indian logistics landscape.
Experts indicate that this could beef up the existing logistics infrastructure to a significant
extent, which could translate into better prices for farmers and consumers. However, there
is one rider. Retailers feel that unless there is a seamless implementation of this programme
across states, robust supply chain architecture cannot be built. If some states chose not to
open up FDI in their retail sectors, there would be a break in the chain.
Organised food retailing in India still accounts for less than two per cent of the total food
market, according to a recent study by Nabard. Estimates indicate that the size of this
segment is Rs 19,400 crore, as against the total food market of Rs 12,45,000 crore. By 2020,
this segment is estimated to grow to Rs 62,000 crore, the study points out. Indeed, direct
procurement by retailers in the new format is seen to deliver better deals, both for the
farmers and producers, especially due to improvements in supply chain operations. In a
paper presented during a recent Confederation of Indian Industries (CII) seminar, Sunitha
Raju from the Indian Institute of Foreign Trade, points out that direct procurement format
resulted in an increase in farmers’ net income by eight per cent, while consumers paid six
per cent less and transportation wastage fell by seven per cent. This could further improve if
supply chain logistics is strengthened.
Inadequate warehousing is one of the biggest bottlenecks in the entire supply chain
structure. Statistics show that at 108 million tonnes (MT), the present agriculture
warehousing capacity is short of the requirement by about 25 MT. A major portion of this is
with Food Corporation of India (32 MT), Central Warehousing Corporation (10 MT) and
State Warehousing Corporation (21.30 MT). The fact that the Government needs to further
incentivise this sector to attract private players is indicated by the fact that in the last ten
years hardly 35 million tonnes capacity has been created by the private sector.
In this context, the Andhra Pradesh Government has taken an initiative to bring out a
separate agri-warehousing policy. “The new policy is part of the State Government’s
*The Hindu Business Line
The Hindu Business Line
Page 9 of 23
initiative to have an additional 50 lakh million tonnes of warehousing capacity in the next
three to four years through public-private participation. We expect to finalise it in the next
one or two months,” I.Y.R Krishna Rao, Special Chief Secretary (Agriculture Marketing), said.
CII estimates that the shortfall in warehousing capacity for the next five years is expected to
be about 40 million tonnes at current rate of production. However, the Government is
targeting to create about 35 million tonnes of new capacity in the next five years, involving
an investment of Rs. 14,390 crore. The shortfall is even more acute for cold storage
facilities. There are an estimated 5,400 cold storages with a total capacity of about 25
million tonnes. Nearly 80 per cent of this is used for potatoes. Further, these are available in
only nine per cent of the markets. It is estimated that to expand cold chain facilities to
handle 40 per cent of the food and vegetables in the next five to six years would require an
investment of a whopping Rs. 55,000 crore.
Greater employment opportunities
Though this argument was refuted many times, by many economists, in many countries
including USA, the Government of India claims otherwise. One of the rationale it gave
behind allowing FDI in Retail was better employment opportunities especially in the
organised sector. India’s unorganised sector is highly penetrated and complex. Labour is
mostly human and accountability is minimal. The poor segment of the retail sector is very
difficult to bring under the radar. Moreover, the minimum wage rates set by the
government is often tinkered with, resulting in poor living condition. Bringing in FDI will
effect in more employment and better human indexes.
“FDI in multi-brand retail to boost food processing industry”
The Government of India said FDI in multi-brand retail would boost the growth of the food
processing industries and invited private players to invest in this sector to tap the huge
potential. "The steady emergence of the organised food retail and the decision to allow FDI
in multi-brand retail will surely take the Indian food processing industry to greater heights,"
Minister of State for Agriculture and Food Processing Tariq Anwar said at the Third
International Potato Expo 2012 organised by Indian Chamber of Commerce.
Potato and potato-based products, which contributes 85 per cent of the USD 3 billion Indian
snack market, would be a major contributor to the growth in the food processing sector, he
added. "I would urge the Indian Chamber of Commerce to rope in investors and
entrepreneurs interested to set up processing units for potato and also other food items,"
Anwar said, adding that Food processing Ministry is providing fiscal incentives for setting up
projects. The Minister said that the government is targeting to increase the level of
processing of perishable items from 6 per cent to 20 per cent, value-addition from 20 per
cent to 35 per cent and share in global food trade from 1.5 per cent to 3 per cent by 2015.
*The Indian Express
Page 10 of 23
“FDI in multi-brand retail to push growth: Goldman Sachs”
“FDI in retail is necessary to push GDP growth and deal with high current account deficit,
besides bringing in technological improvements into the sector” - US investment banking
giant Goldman Sachs.
"Every 1.7 dollar of foreign investment can generate one dollar of GDP growth, which is the
lowest amount, simply because it has so many different linkages as opposed to putting in an
additional dollar in banking," Goldman Sachs India Managing Director and Chief Economist
Tushar Poddar said after announcing its India outlook for 2013. He said that in the mediumterm there are several benefits of FDI in retail to the economy. "There is very high current
account deficit, so we need FDI, we need inflows.
PERILS OF FDI IN RETAIL
Before dogging deep into the rationale of FDI in Retail we must understand a few fundamental
issues that are inclusive and have cascading effect in Macroeconomic perspective.
Firstly, price rise is driven by commodification of food and speculation on food commodities.
Industrialization and globalisation of food and agriculture has transformed food from a
source of life into a commodity, and as a commodity, food is divorced from its sources —
the seeds, the soil, the farmer — and from its end use as nourishment for our bodies.
Industrialisation of agriculture and commodification of food is justified on grounds of
producing more food and reducing hunger. However, industrial agriculture wastes and
destroys resources — the soil, the water, the biodiversity — which produce food. The book,
American Wasteland, by Jonathan Bloom, reveals that the US wastes 50 per cent of the
£591 billion of food it grows a year. Industrialisation of food also degrades and denitrifies
food. We, therefore, have a dual malnutrition crisis — the crisis faced by one billion people
who do not get access to food, and another two billion who have access to industrial food
but not to healthy food and suffer from food-related diseases such as obesity diabetes and
hypertension. Industrialisation, thus, creates hunger. And by increasing the costs of
production, it creates a negative economy, locking farmers and food producers into debt. In
the Third World, debt translates into hunger. Hunger is also created by the commodification
of food. The industrial model of food production is producing commodities, not food. More
commodities do not mean less hunger, but more. And when food becomes a commodity it
becomes an object of speculation for profits, robbing the poor of their entitlements.
*The Indian Express
Page 11 of 23
As a commodity it does not matter what food is used for. Food can be transformed into feed
for animals in factory farms, or into fuel to run cars. Seventy per cent of the food grain in
the US is used to feed animals, 30 per cent to feed cars. The proposed increase through FDI
will take this to 40 per cent, creating a conflict between feed and fuel, and pitting both
against food. This diversion of food to feed and fuel competes with the food needs of the
poor. It creates food scarcity and contributes to the rise in food prices.
Secondly, the entry of big corporations into the food chain polarises prices, decreasing the
share of the farmer and increasing the retail costs. This polarisation of prices is structural;
corporations make their profits through vertical integration and controlling the entire food
chain. They buy cheap from farmers and sell at high cost when they have a monopoly. The
control of big retail over the food system has brought down the farmers’ share to as little as
two per cent. Before liberalisation, the difference between wholesale prices and retail prices
was a mere six per cent.
After the removal of Quantitative Restrictions, which opened up India to dumping of
subsidised products, wholesale prices started to go down while retail prices continued to
climb. The entry of retail giants will further push wholesale prices down, without taming the
price rise. It is not the number of middlemen that matters but the size of a middleman. A
giant retailer is a giant middleman. It might be a single player, but it harvests super profits at
the cost of society. That is how the Walton family, which owns Wal-Mart owns US$100
billion of personal wealth, which is equivalent to the wealth of the bottom 30 per cent of
the US society. You do not accumulate that kind of money by paying farmers higher prices
and bringing consumers cheaper products. Wal-Mart and Tesco are not friends of farmers as
is being projected by the government and corporate spokesmen.
The Financial Times said on November 28, 2011: “A consolidated retail sector would require
consolidated agriculture to supply.” Consolidation means concentration, concentration
means displacement of small farmers, destruction of small farmers means deepening both
the food crisis and the agrarian crisis. Big retail means big agribusiness. About 250,000
farmers have already committed suicide in India since 1997 because of increasing
monopolies on seeds and chemicals, rising costs of inputs and deepening debt. Big retail will
uproot small farmers, as it has done worldwide. India’s future cannot be “retail dictatorship”
and “seed dictatorship”. It has to be “retail democracy” and “food democracy”, based on
small retail and small farms.
Whatever the merits of the official case there is one issue that remains controversial: the
impact that liberalisation would have on existing players operating in the fields where
foreign presence is to be expanded. That question is particularly important in retail, which is
known to be populated by small players, who often enter this activity because of lack of
opportunities in the commodity producing sectors. Returns earned by these enterprises are
extremely low since, given the lack of social security; they need to engage in something to
Now, we should understand the most likely effects and consequences of FDI in Retail based
on facts, figures and history. The effects of allowing deep-pocket retail giants are
undoubtedly macroeconomic and hence we should analyse it on a subjective basis.
Page 12 of 23
The role of the small retailer
The government’s claim is of course that large retail would not encroach on the areas of
operation of the small and existing players, and that this has also been partly guaranteed by
the requirement that foreign retailers will only be allowed to operate in cities with a
population of more than 1 million. However, this is just the first step, as is clear from the
provision that in states where there are no cities that match this population size, the state
governments can choose where to allow foreign chains to operate. It is no doubt true that
big retail will not seek to cater to small, dispersed and remote markets. But cities and large
towns other than the major metropolitan centres are bound to be targets for a system that
requires scale to garner adequate profits. This has generated interest in the role that small
players play in India’s trade. Unfortunately, the evidence is limited. One source of recent
evidence on the role of the unorganised sector in trade (including wholesale trade and
repair facilities) is a recent survey report from the National Sample Survey Organisation
relating to 2010-11, which provides information on both employment and gross value added
in enterprises engaged in trade. It also provides information on certain structural features of
Data on aggregate value added in trade, covering both the organised and unorganised
sector is estimated and included in the National Accounts Statistics for that year. And
employment in the trading sector as a whole is available for 2009-10 from the large sample
survey on employment and unemployment conducted by the NSS. While these different
sources are not strictly comparable in terms of both coverage and time, some broad orders
of magnitude relating to the relative importance of the organised sector in trade can be
gleaned from these numbers. What emerges from these data sources is that the
unorganised sector in trade accounts for more than three-fourths (78.1 per cent) of
employment in the sector as a whole in the country. On the other hand, gross value added
in the unorganised enterprises engaged in trade amounts to just 22 per cent of the value
added in the trading sector as a whole in the country. Thus, the unorganised trading sector
does indeed provide for employment for a substantial majority engaged in the sector,
though with net earnings that are clearly very much lower than in the organised sector.
Page 13 of 23
So, if the expansion of the organised segment in the retail trade, which would be
accelerated by the entry of foreign investors and chains with deep pockets, does adversely
affect the unorganised sector, the impact on employment and already fragile livelihoods can
be damaging in both scale and intensity. The government’s argument is that restricting
organised retail to the urban areas would substantially reduce its impact on the unorganised
sector. However, 55 per cent of even the unorganised trading enterprises are located in
urban areas. There are an estimated 18.8 million people engaged in the unorganised trade
in the urban areas. In particular, an overwhelming majority (82 per cent) of units in the
nature of “establishments”, which (as opposed to “own account enterprises” of the selfemployed) employ at least one hired worker on a fairly regular basis, are located in the
urban areas. These are the units that are likely to be subject to competition from the
organised sector, resulting in possible loss of employment and livelihood.
Thus the evidence does point to the strong likelihood of an adverse fall-out of the policy of
pushing organised retail, domestic and foreign, in the name of improving the quality of the
supply chain. That evidence has to be assessed in the light of international experience,
especially in similarly placed developing countries, which suggests that employment losses
can indeed be substantial. Official claims that FDI in retail would spur growth and augment
employment choose to ignore that evidence, given the focus on attracting and appeasing
Involved workforce – Muslims going to be hurt the most
The general belief is that Muslims came into India with their invasion of the sub-continent
and the formation of the Mughal Empire from the early 16th century.
However, historical facts show that Arab traders visited the Malabar coast of Kerala as early
as the 7th century, brought Islam with them, and engaged the local population in a robust
and profitable trade in pepper and other spices. They intermarried with the local people and
this resulted in the evolution of the large Muslim Maplah community of Kerala.
The Muslims of India thus have a rich tradition of engaging in trading activities for over
1,300 years. Trading is amajor source of sustenance for them all across the country.
However, their trading activities in Kerala were rudely interrupted by the arrival of the
Portuguese, in the early 16th century. As often happened in those times, the Portuguese
attacked, looted and set fire to the town of Calicut. The Mappila community lost the spice
trade — and a whole lot more — that they had carefully built over centuries to the invaders.
We can review this with the help of the Government’s study of the status of the minority
community conducted by the Sachar Committee. Appointed in 2005 by the Prime Minister,
the Sachar Committee was commissioned to prepare a report on the social, economic and
educational condition of the Muslim community of India. The committee’s extensive report
was presented to Parliament on November 30, 2006. The classification of Wholesale and
Retail trade employs 17 per cent of the working Muslim population, compared with 8 per
cent for Hindus and 10 per cent for other minorities. The Muslim community is twice as
Page 14 of 23
likely as the majority community to be engaged in trading and retail, the source of their
livelihood that going to be affected by FDI.
A category of employment related to Wholesale and Retail Trade is Transport, Storage and
Communication. This category employs 6 per cent of all Muslim workers, compared with 4
per cent of all Hindus. At an all-India level, there are an estimated 16 million people in this
category who are under threat by retail FDI. The likely impact on this group is not even
under any consideration from any quarter.
If we try to look at the worker participation rate and applying it to the population, we can
estimate the actual number of workers by socio-religious category and by employment
category. 20 per cent of the people engaged in Wholesale and Retail trade are Muslims,
although they represent only 13 per cent of the total population, and just 11 per cent of
total worker population. There is thus a disproportionate dependence of the Muslim
community on Wholesale and Retail Trade. Of course in sheer size, the majority Hindu
community has nearly four times the number of people as Muslims engaged in wholesale
and retail trade.
Page 15 of 23
If one looks at Muslims by States, it will be no surprise that the top three States in terms of
Muslim population — UP, West Bengal and Bihar — have promptly said they will not
entertain FDI in retail in their States. The leaders of these States know their voters and the
state of this community. The Congress-run government of Kerala, where one-fourth of the
population is from this community, has also refused to agree to FDI in retail. The problem
arises in States such as Maharashtra, Assam, Andhra, J&K, Rajasthan, Delhi and Haryana that
have agreed to FDI in retail.
The Government claims to have put in safeguards in the policy. Unfortunately, such claims
ring hollow since the rules are easily changed by administrative notifications and everyone is
aware of how lobbies are adept at getting this done.
Whenever it is pointed out that huge numbers of people will be displaced by the
multinationals for whom the doors have been thrown open in retail, even educated and
Page 16 of 23
responsible people blithely argue that such people will have to be retrained and redeployed.
What are the possibilities of this happening for the Muslim community? With nearly twothird of the literate Muslims just at the Upper Primary School level — the highest proportion
at this level among all communities — it will be well near impossible for those displaced to
find any other employment.
FDI in retail is an issue that will have a major impact on all communities. This is going to be
one case where everyone will have to come together to send a clear message to the
Government on what is acceptable and what is not. This is already evident in the united
opposition of all political parties to this development.
Procurement Clause – Tweaking the rules
The Department of Industrial Policy & Promotion (DIPP) Press Note 5 (2012 series) issued on
October 20, said that 30 per cent of the value of procurement of manufactured/processed
products purchased by multi-brand retail giants, should be sourced from Indian ‘small
industries’ with a total investment in plant and machinery not exceeding $1 million.
This valuation refers to the value at the time of installation, without providing for
depreciation. Besides, if, at any point of time, this valuation is exceeded, the industry would
not qualify as ‘small industry’ for this purpose. The other stipulation is that the procurement
requirement would have to be met, in the first instance, as an average of five years’ total
value of the manufactured/processed products purchased, beginning April 1, of the year
during which the first tranche of FDI is obtained. Thereafter it would have to be met on an
annual basis. The rationale for this clause is that the FDI entry should benefit small-scale
Again, the rider that at least 50 per cent of total FDI brought in should be invested in ‘backend infrastructure’ within three years of the first tranche of FDI (the minimum amount to be
brought in as FDI by the foreign investor would be $100 million) that covers capital
expenditure on all activities such as processing, manufacturing, distribution, design
improvement, quality control, packaging, logistics, storage, warehouse, agriculture market
A moot point is that the rules provides for self-certification by the company to ensure
compliance of the twin conditions, “which could be cross-checked, as and when required”.
The onus is on the purchaser to fulfil the conditions that may be duly ‘certified by statutory
auditors’ through self-certification. Big foreign companies with deep pockets would find it
facile to manufacture such certification from complaisant auditors to play ball with them,
instead of scouring the country to obtain the requisite supply from MSEs. It would not be off
the mark to note that policy reservation for small-scale industries (SSIs) which later
morphed into MSEs, was set off in 1967.
But over the years and particularly after India’s liberalisation of trade and industrial policies
in 1991, 887 items had been de-reserved from time to time. With the last deletion in 2010,
Page 17 of 23
the number of items in the reserved list has been brought down to 20, which cover only
food and allied industries, wood and wood products, paper products, other chemicals and
chemical products, glass and ceramics, mechanical engineering excluding transport
equipment such as steel almirah, rolling shutters, padlocks, stainless steel utensils and
domestic utensils-aluminium. This was stated by the Minister for Micro, Small & Medium
Enterprises K. H. Muniyappa in Rajya Sabha on December 10.
With the space for MSMEs thus reduced, can they be expected to provide 30 per cent of the
requirements of multi-brand retail stores, comprising assorted goods and items? Apart from
the 30 per cent mandatory reservations which may be easily circumvented, the rest of the
70 per cent can be imported from cheaper sources such as China and Bangladesh, further
harming domestic industry.
Already, the air is rife with troubling tidings that Wal-Mart is being subjected to inquiry
under the Foreign Corrupt Practices Act, US, into the allegations of potential violations in
certain countries, including India.
Following the uproar in Parliament, the Government has been compelled to set up an
inquiry committee under a retired judge. The Reserve Bank has said that issues related to
Bharti Wal-Mart/Cedar Support Services Ltd and Flipkart Online Services Pvt Ltd,
respectively, have been referred to the Directorate of Enforcement for further probe. This
was stated in the Lok Sabha on December 3 by Minister of Commerce and Industry Anand
Unorganised retailing in India encompasses low-cost retailing, for instance, the local kirana
shops, owned and operated general stores, pan/beedi shops, convenience stores, hand cart,
pavement vendors that one is inured to here. Organised retail chains such as Pantaloon,
Shoppers’ Stop, Marks & Spencer, Hyper City, Trent, Reliance Retail, Subhiksha constitute
only five per cent of the total retail market. India’s retail business provides livelihood
security to lakhs of self-employed people. Without providing manufacturing-driven job
opportunities to millions, the Government would be fostering social problems of huge
dimensions, if it believes FDI in retail would deliver.
Lessons from the past
Why focus on Walmart? It is world’s most powerful retailer; it has ‘spent’ a lot to get the
UPA nod for FDI in retail. Even as lobbyists here celebrate Walmart, it has become
untouchable where it was born, in the US. Why is Walmart so hated in the US? “Walmart
will devastate local businesses,” say New York trade unions and local communities. The
mass protesters at Los Angeles too cited the same reason: “small business will close down”;
and screamed “Walmart has no heart and no morals. We don’t want you in Los Angeles.”
Page 18 of 23
Yet, the Government of India certifies Walmart and its competitor cousins as compassionate
to small retailers and farmers. It promises they will employ millions here. The evidence in
the US is to the contrary. According to the Atlanticcities article, Walmart entered in Austin
neighbourhood of Chicago in 2006. And by 2008, some 82 of the 306 small shops had closed
down. The Economic Development Quarterly study found the closure rate around Walmart
location at 35-60 per cent. Walmart radiated closure of 20 per cent of drug stores every mile
from its stores; and 15 per cent home furnishing, 18 per cent hardware and 25 per cent toy
stores. Studies in the US nail the UPA lie that FDI in retail will not hurt small shops. On job
creation, a latest report (January 2010) titled ‘Walmart’s Economic Footprint’ prepared for
the New York City Public Advocate says that Walmart kills three local jobs for every two it
creates. So the job creation argument too is a lie. The third justification that the ‘farmers
will get better prices’ is a clever lie, and so needs a closer look. It suppresses the vital fact
that Walmart does not buy, or pay, over the counter. It buys the nation’s next harvest in
futures market and fixes farm prices. It also imports cheap goods — from China — and
destroy local production like it has done in the US. Take the first case, with the recent
experience of the US and the world.
Rice prices in the US and world markets shot up by three times in April 2008 as compared to
January 2007. It was then that the US President George W Bush made the funny remark that
prices had gone up because the newly prosperous Indians had begun eating more! What
was the truth? The USA Today (April 23, 2008) and CNN (April 24, 2008) quoted the
California Rice Commission and USA Rice Federation as denying shortage of rice and saying
there was enough stock. Why then were prices rising? It was because, said the CNN, Sams
Club (Walmart’s wholesale division), holding huge stocks, was pushing up the prices. US
farmers accused speculators and futures market for the high prices. It was not farmers who
traded in farm futures. Investment funds accounted for 40 per cent of wheat futures trade
in the US in January 2008, which rose to 60 per cent by April. Wheat futures that was $4 a
bushel in early 2007, rose to $14 per bushel in April 2008. The US farmer, who had sold his
harvest in futures market, lost and Walmart, which had bought the futures, gained. Even if
some farmers had some stocks Walmart, which had stocked at cheaper prices, refused to
buy at higher prices, pointed out the media.
Look at it this way. If the US farmers get remunerative prices from Walmart why does the
US, with two per cent farming population, grant annual farming subsidies of $20 billion and
the European Union, for its five per cent farming population, gift a subsidy of $74.5 billion
annually. The experience of the US and West nail all three justifications for the FDI in retail
as lies. Foreign direct investment in retail will incrementally hit the 12 million family retailers
in India; it will not help farmers; it will cut jobs. Even more dangerous, it will destroy the
rural food security.
Two of UPA government’s reports — of the Planning Commission Working Group on
Agriculture for the XI Plan (2007-2012), and the 19th report of the Standing Committee of
Parliament on Food (2006-2007) to Parliament — themselves nail the lie that Walmart will
link farm-gate to its gate and make Indian farmers rich. The reports describe the farm-gate
thus: a total of 59 million of farming families (32 crore rural people) live on subsistence
farms of five acres or less (while US farms are 250 times and the Australian, 4000 times,
Page 19 of 23
larger); about 60 per cent of food products is barter-exchanged and consumed by farmers
and farm labour, and as seed and animal feeds within villages; only 40 per cent move out of
villages for commercial marketing. Even if a small part of the large local needs is drawn by
an efficient Walmart from the farm gate to its gate, that will mean urban pricing in rural
areas that will destroy the food security of two-thirds of Indians in villages.
The Montek Ahluwalia-led Planning Commission report laments that ‘the marginal farmers
are certainly goingto stay for a long time’ and ‘what happens to them has implications for
the entire economy.” However, the small farmer is no waste. He is more efficient. His
productivity a third higher, than in large farms. Small farmers use one-third of the total
cultivated area and produce 41 per cent of nation’s food and 110 million tonnes of milk. If
large ones replace them, the nation’s food production will fall by 7 per cent. The reformers
do not know that recent global researches have confirmed that economy of scale that
applies to industries does not apply to agriculture, where small ones are more efficient than
SUMMARY & CONCLUSION
Nobel laureate American economist Joseph Stiglitz said that FDI in multi-brand retail in India
would promote instability due to exploitative and corrupt practices adopted by MNCs to
monopolise the retail markets in any country. "The FDI in retail can promote instability by
way of the exploitative and corrupt ways of the MNCs to hold sway over retail markets,"
Stiglitz said. "India must take into account a prospect of instability before allowing FDI in
multi-brand retail," he said while delivering a lecture on "Redefining Capitalism" here.
MNCs will bring in corruption and exploitation of labour force after setting up shops in India,
he said. Pointing that the retail giant Wal-Mart bribed officials at various levels in Mexico to
monopolise the retail market there, he said, "May be, you want to learn bribery. But I don't
understand what India is trying to get out by allowing FDI in multi-band retail." Stiglitz said it
would bring exploitation of the labour force and promote corruption. "FDI can bring with it
capital, technology, know-how, training and access to market and can promote growth and
job creation. But the foreign firms can be even more efficient at exploitation, in one way or
the other," he said.
Denouncing the pro-FDI in retail theory that it will improve the supply chain and enhance
welfare of the farmers, producers and consumers, Stiglitz painted a gloomy picture of the
retail scenario in India. "Some of the MNCs are noted for their poor labour relations,
workers' exploitation, discrimination and bribery," he said after pointing to the widespread
agitation by the people of Mexico against the retail giant Wal-Mart recently.
More than two decades after the first wave of reforms were introduced in the year1991; the
country’s socio-economic health has by no means become better. In the midst of these
galloping problems, the announcement by the UPA government about FDI in multi brand
retail comes not as a relief but as a matter to be given a serious thought. The debate so far
is threefold: (a) one section which is drooling over the reforms and projecting huge surge of
Page 20 of 23
investment in infrastructure and thereby increment in the employment levels. (b) The
second group is the one which is sceptical about the opening of markets for foreign retail
giants like Walmart, Carrefour, Kmart etc. not because they fear that it would affect the
overall development of the economy. Rather, this group fears competition from the big
foreign companies which have deep pockets to procure products from the world market.
Thus, it would affect their profits by a huge margin. (c) The third group comprises of the
unorganized retail sector which fears its elimination from the market in the long run.
Various claims made by UPA seem to fall flat on any reason if we take into consideration the
outcomes of previous reforms. Employment in formal sector has not increased by any count
since 1991, informalization of labour in the formal sector is a clear indication of this fact.
Productivity in agriculture, where almost 54 per cent of the population is dependent has
declined. It is no longer a profitable venture as the input costs have gone up in the post
green revolution phase. Rise in the phenomena of rural to urban migration, rural non-farm
employment, farmer suicides, show what precarious condition agriculture has landed into.
Gradual shift of the economy from agriculture to industry, as expected in the prospects of
reforms, has proven to be a fallacy. Instead, the existing industries have become more
capital intensive leading to the displacement of labour on a mass scale. Trade liberalisation
has given the global players a free hand to rein the economy. As a consequence rate of
inflation is rising unchecked as the price of crude oil is fluctuating globally. These examples
showcase that reforms and liberal policies have not led to the overall development of the
In the light of the above observations, announcement of FDI in multi brand retail does not
give much hope. The Indian retail sector is not only very vast but also varied in its
composition. The huge population of the country, the rise of the middle class and its
purchasing power and a huge market for foreign investment in India are factors that have
invoked the interest of the foreign investors. But, it becomes imperative to see what this FDI
would entail for the retail sector when it is analysed by keeping the informal economy at the
centre of the debate.
When only 4 per cent of the retail trade in India comes under the organized retail it
becomes essential to evaluate or assess the viability of FDI taking into consideration not this
4 percent but the 96 per cent which belongs to the unorganized retail sector. The
unorganized retail sector is not a homogeneous category, it comprises of peddlers, street
vendors, kiosks, push-cart vendors, weekly traders. It is not unknown that the majority of
those engaged in retailing at the lower end of the economy depend on the small and
medium enterprises for their supplies. It has been reiterated time and again, by many
economists, how and under what conditions the unorganized sector has risen to
such heights in India and other developing countries via the route of the neo-liberal regime.
Indian retail market is quite diverse in terms of scale, culture and structure. Some reasons
for this diversity can be attributed to the divide that exists between rural and urban India.
Traditional forms of marketing (neighbourhood markets, mandis, and periodic/weekly
markets) coexist with modern day markets (supermarkets, hypermarkets, Single brand
Decline of the rural economy coupled with lack of employment in the manufacturing sector
(organized sector) created a vast pool of surplus labour in the country in the post reform
Page 21 of 23
period. This multitude of labour started migrating to urban centres in search of employment
and many of them landed up with self-employment in the service sector of which retailing
forms a huge part. Annihilation of small scale and self-employed lower middle class will lead
to large scale poverty and destitution because the unorganised sector is absorbing the
shocks of migration and rural distress. It manages by catering to middle classes in the
metropolis. If this market is gone, they will all be unemployed.
The adverse impact of the FDI would befall the unorganized retail sector with great intensity
if the State makes more stringent rules of zoning and regulation. I have been researching
the local weekly markets of Delhi for the past three years. These markets are very
prominent feature in all parts of Delhi and NCR. There are around twelve hundred weekly
markets of which only one fourth are recognized by the Municipal Corporation of Delhi
(consequence ofzoning). Approximately 2.5 million people are employed through these
markets. This figure would just double if we take in to account additional employment that
is created around these markets. Various own account and household enterprises are
producing commodities on a daily basis for such low end markets. Local weekly markets
provide a very easy channel of distribution of commodities produced not only in local small
scale industries but also in the neighbouring States. For instance, rubber chappals and shoes
made in Agra, sarees made in Surat, hosiery made in Coimbatore, woollens made in
Ludhiana are all sold at affordable prices here in these very markets. FDI in multi brand
retail would either displace various wholesale markets or the size of such markets would
shrink. Today the local markets run on capital which has a fluid or floating nature. But with
the coming of multi brand retail stores this floating capital would freeze and small retailers
and vendors will be evicted from the market. It is argued by the government that FDI in
retail would create employment opportunities. But employment for whom is the crucial
question? It would create employment for those who are educated and have professional
“Taking cue from my observation in the weekly markets of Delhi I would argue that majority
of those now employed in these markets have minimal education and have no professional
degrees apart from their marketing knowledge. Now if FDI in multi brand retail comes, it is
not in any way going to benefit these traders if they lose their sole means of survival.” Suvrata Chowdhary, PhD student at the Centre for the Study of Social Systems, JNU.
Page 22 of 23
“FDI in multi-brand retail can strengthen supply chain links” – The Hindu Business Line
“ED probing Bharti Walmart, Flipkart cases: Govt” – The Hindu Business Line
“Dangers posed by FDI in retail” - The Hindu Business Line
FDI In Indian Retail Sector: Analysis Of Competition In Agri-Food Sector
“FDI in multi-brand retail to boost food processing industry” – The Indian Express
“Retail FDI: Bane or boon for farmers?” – The Indian Express
“Retail FDI supported by farmers, will benefit them and consumers: Manmohan Singh” –
The Indian Express
The FDI Report 2012 – FT Business
The Great Indian Retail Story – Ernst & Young
“Reform in name only” – The Indian Express
“The FDI cliff” – The Indian Express
Page 23 of 23