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FOREIGN DIRECT INVESTMENT IN RETAIL INDUSTRY: INDIA ABHIRAJ PATEL (IM-2K8-001) AVIJIT SINGH THAKUR (IM-2K8-14) ANKUR PANDEY (IM-2K8-007)
About the Presentation This presentation deals with the Current Issue of allowing 51% Foreign Direct Investment in Multi-Brand Retail Trading (MBRT) in India. It includes all the possible aspects relating with the Business Environment, that will certainly effect the entire business of Retail Industry in India, once it gets implemented.
What is MBRT Allowing giant retailers like Wal-Mart, Carrefour (France ), Metro (Germany), Tesco (United Kingdom), Lidl Stiftung & Co (Germany) etc. to set up operations in the country. (Wal-Mart Annual Revenue: US$ 446.950 billion; employing about 2.2 million (2012). In contrast, the Indian Retail Sector is accounting for about 12% of GDP – Rs. 10,38,000 crores, employing about 5 crores. In due course of time while the relationship with the producers will be that of “Oligopsony” and with the consumers, it is likely to be one of “Oligopoly”.
What is MBRT Giant retailers like Wal-Mart can source 70% of the products/goods from anywhere in the world resulting in the decimation of the not so competitive manufacturing sector and loss of job to millions of workers; and even the agricultural sector would be crippled. The decimation of „Forced Employment‟ Sector (Retail) may have an unbearable human cost for sizeable population of the country. The poor and the unemployed/underemployed may become poorer and strive for their survival.
Before Launching MBRT The Govt. should make the Manufacturing Sector competitive – In China, the manufacturing sector‟s contribution is around 60% of GDP (In India, it is only about 20%) Strengthen the agricultural sector – Micro Credit system, etc. Strengthen the quasi-judicial machinery and ensure their proper functioning – This to a great extent can act as a major disincentive for those who sell defective goods and is likely to enhance the competitiveness of goods made by Indian manufacturers.
Before Launching MBRT Enhance investment to strengthen the infrastructure, including refrigerated storage facilities, which could ensure better price for the farmers and fresh produce for the consumers. Strengthen the PDS so as to protect the „aam admi’ from inflation and to ensure adequate off- take from the villages. Strengthen the CCI so that the monopolistic tendencies of the Companies can be monitored and curbed. Introduce a Regulatory mechanism for prescribing support price.
Rationale of Liberalization Lack of adequate shortage facilities cause heavy loses to farmers in terms of wastage in quality in general, and of fruits and vegetables in particular. Post harvest losses of farm produce, especially of Fruits, vegetables and other perishables, have been estimated to be over Rs. 1 Trillion per annum, 57% of which is due to avoidable wastage and the rest due to avoidable cost of storage and commission. Leveraging Foreign Investment in supply chain Infrastructure.
Rationale of Liberalization Indian farmer realizes only 1/3 of the total price paid by the final consumer as against 2/3rd with higher degree of retail. A World Bank study of 2007 demonstrates that the average price a Farmer receives for Horticulture produce is barely 12 to 15% of what is paid at he retail outlet. Lack of investment in the logistics of retail chain creating inefficiencies in the food supply chain.
Rationale of Liberalization Tough India is the second largest producer of Fruits and Vegetables (about 200 Million MT), it has very limited integrated cold-chain infrastructure, with only 5386 stand-alone Cold Storage, Having a total capacity of 23.6 million MT, 80% of this is used only for Potatoes.
Rationale of Liberalization As per some Industry estimates, 35-40% of fruits and vegetables and nearly 10% of food grains in India are wasted. Tough FDI is permitted in cold chain to the extent of 100%, through the automatic route. In the absence of FDI in front end retail, investment flows in to this sector is insignificant. An 11th plan working group has estimated a total investment of Rs.64,312 crores in Agricultural infrastructure. A storage capacity of 35 Million tones has been assessed, requiring an estimated investment of Rs.7687 crores during the 11th plan.
Employment Opportunities Indirect employment generated on the supply chain to feed this retail business will add millions of jobs. Huge investments In the retail sector will see the gainful employment opportunities In agro- processing, sorting, marketing, logistic management and the front end retail business. Industry estimates suggests employment of one person per 350-400 sq. feet of retail space, about 1.5 Million jobs will be created in the front end alone in the next five years.
Employment Opportunities Assuming that 10% extra people are required, for the back-end, the direct employment generated by the organized retail sector in India over the coming 5 years will be close to 1.7 million jobs.
Impact on Food Inflation The opening of Multi Brand Retail will also have salutary Impact on food inflation as it would contribute to savings to the food which perishes on account of inadequate infrastructure.
Supply Chain Efficiencies Foreign Retail Majors have Gained decades of experience, Technologies and Management practices which will ensure supply chain efficiencies.
Prices for the Farmers In the present dispensation, there is a complex chain of procurement involving several middlemen. FDI in retail will create the enabling environment that will ensure direct procurement, at least of horticultural produce from farmers to enable them secure remunerative price.
Rationale for enhancing FDI ceilingto 100% in single brand retailtrading The current cap of 51% confers a right to pass all ordinary resolutions, while enhancing cap to 100% will confer full ownership and control. In the last 5 years, under the current regime of 51% in Single Brand Retail, FDI of only 44.45 Million USD have been received, constituting barely 0.03% of total FDI Inflows. Globally, SBR follow a business model of 100% ownership and global majors have been reluctant to establish their presence in a restrictive policy enviornment.
Condition of 30% sourcing fromsmall scale sector. It will ensure that SME sector including craftsman, artisans, handicrafts and cottage industry benefits specially in industries like textiles, gems and jewellery and leather and jute.
Conditions FDI in single brand retail may be permitted up to 100% with govt. approval. Products should be sold under the same brand internationally i.e. Products should be sold under the same brand in one or more countries other than India.
Conditions „Single Brand‟ Product-Retailing would cover only products which are branded during manufacturing. In respect of proposals involving FDI beyond 51%, 30% sourcing would mandatorily have to be done from SMEs/Villages, Cottage Industries, Craftsmen and Artesians.
Existing policy FDI in Multi Brand Retail Trading (MBRT) is prohibited. FDI, up to 51%, in the Single Brand Retail Trading (SBRT) sector, is permitted, under the government/FIPB route.
FDI policy in other Countries All these Countries have allowed 100% FDI: China Russia Thailand Indonesia
Some more facts… At least 30% of procurement of manufactured/ processed products shall be sourced from „small Industries‟ Retail sales outlets may be set-up in those states which have agreed or agree in future to allow FDI in retail under this policy. The establishment of the retail sales outlets will be in compliance of applicable state laws/ regulations, such as the shops and establishments act, etc.
Some more facts… A high level group under the minister of consumer affairs may be constituted to examine various issues concerning internal trade and make recommendations for internal trade reforms. Fresh Agricultural produce, including fruits, Vegetables, Flowers, Grains, Pulses, Fresh Poultry, Fishery and Meat products, May be unbranded.
Some more facts… Govt. will have the first right to procurement of Agricultural Products. Retail sales location may be set up only in cities with a population of 10 lakh. As per 2011 census only 53 cities qualify for FDI in multi brand retail out of nearly 8000 towns and cities. At least 50% of total FDI bought in shall be invested in „Backend infrastructure‟
Some more facts… Minimum amount to be brought in as FDI, by the foreign investor would be US $100 Million. The foreign investor should be the owner of the brand. The FDI in MBR is being opened in 53 cities only with population 1 million and for the rest of the country, current policy regime will apply.
Some more facts… The CM of Delhi, Assam, Maharashtra, Andhra Pradesh, Rajasthan, Uttarakhand, Haryana, Manipur, Jammu & Kashmir and Madhya Pradesh; The Union Territory of Daman and Diu and Dadra And Nagar Haveli have expressed support for the policy.
Some more facts… Retail locations will be restricted to conforming areas as per the master/ zonal plans of the concerned cities and provision will be made for requisite facilities such as transport facilities and parking. FDI in Multi brand retail Trade (MBRT) may be permitted up to 51%, with govt. approval.