Impact of FDI in Retail Sector in India

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A research work that aims to predict the impact of FDI in Indian retail sector by studying comparable countries

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  • The United Nations Conference on Trade and Development (UNCTAD)The primary objective of the UNCTAD is to formulate policies relating to all aspects of development including trade, aid, transport, finance and technology. The Conference ordinarily meets once in four years.
  • Impact of FDI in Retail Sector in India

    1. 1. Foreign Direct Investments (FDI) in Retail sector in India Will the recently introduced FDI reforms in Retail sector benefit the Indian economy ? Author(s): Arvind PALANISAMY Harshal VED Master Thesis presentation - FDI in Retail sector in India Mentor: Prof. Dr. Vanessa STRAUSS-KAHN 1
    2. 2. Agenda • Motivation • Overview: India's retail sector – Organized and unorganized retailing – Why India persisted with unorganized sector for so long? • Timeline: India’s FDI policies – Pre-liberalization period – 1991-2010 Reform trends – Factors leading to opening up of retail sector • Implications of FDI reforms – A brief about Regression model – Will reforms actually aid in minimizing the Current Account Deficit (CAD)? • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 2
    3. 3. • Motivation • Overview: India's retail sector • Timeline: India’s FDI policies • Implications of FDI reforms • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 3 Agenda
    4. 4. • Opening of retail sector to Foreign investments by the Government of India – A Decision that government had delayed for almost 20 years – The most important pro-growth reform since 1991 – Possible impact on the employment of 8% of working population (400 million) – Could revive India's sluggish growth and narrow the Current Account Deficit Significance the current reforms hold 4Master Thesis presentation - FDI in Retail sector in India
    5. 5. • Motivation • Overview: India's retail sector • Timeline: India’s FDI policies • Implications of FDI reforms • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 5 Agenda
    6. 6. • The unorganized retail – Kirana Stores (Mom & Pop stores) • Family owned, operate with help of casual labor • Sell Food grains, milk products and vegetables • Offer unique credit facility, form personal relations – Street vendors, push cart and street hawkers • Sell fruits and vegetables door to door • Execute perfect price discrimination • Major Challenges • Limited Storage facilities • Managing Working Capital on a day to day basis Unorganized Retail: 95% of $410 billion market 6Master Thesis presentation - FDI in Retail sector in India
    7. 7. • The organized retail • Hypermarkets, Supermarkets and mini-stores • Employ 500,000 people (almost all in urban areas) • Dominated by corporate houses (no prior experience of retailing) • Would welcome foreign capital and technology expertise to attain profits • Major Challenges • Achieving profitability (especially in food and grocery segment) • Logistic and infrastructure development, Tax rules, regulatory requirements • Competition from kirana stores and street vendors Organized Retail: Showing 15-20% CAGR 7Master Thesis presentation - FDI in Retail sector in India
    8. 8. • Motivation • Overview: India's retail sector • Timeline: India’s FDI policies • Implications of FDI reforms • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 8 Agenda
    9. 9. • FDI policies post independence • Focus on shielding sectors (textile, food processing, agriculture, footwear manufacturing) providing mass employment to low skilled labor • Foreign investments encouraged in high tech sectors (chemicals, electronics, industrial machinery, metallurgy) • 15-20% higher tax rates for foreign companies • Restrictions imposed on foreign companies to limit their share in equity capital of their Indian subsidiaries 9Master Thesis presentation - FDI in Retail sector in India 1947-91: A sense of fear and distrust
    10. 10. 10Master Thesis presentation - FDI in Retail sector in India 1991: Major economic crises
    11. 11. • FDI policies post 1991 • The government of India gradually allowed investments in IT, Telecommunications, Energy, Banking and Insurance sector • No major reforms regarding land and labor laws were passed • India missed its own growth target of 7.5% in decade following 1991 • Emergence of India as IT hub further diminished the need for strong reforms in other sectors (agriculture, retail, manufacturing) 11Master Thesis presentation - FDI in Retail sector in India 1992-2010: Gradualist approach
    12. 12. • Why is FDI in retail being pushed now? • Growth rates recorded in last 2 years are well below 8% mark • Immediate need of foreign capital to fund audacious social programs • Downgrade of India’s sovereign outlook from stable to negative • Big opportunity in wake of slowdown in the US and Europe • Is this the right way to go ? • Will FDI solve India’s CAD woes ? • What impact will it have on traditional retailers? 12Master Thesis presentation - FDI in Retail sector in India Current state: All time high CAD (5% of GDP)
    13. 13. • Motivation • Overview: India's retail sector • Timeline: India’s FDI policies • Implications of FDI reforms • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 13 Agenda
    14. 14. Brief: Regression Model • Model • Estimated FDI in retail retrospectively for 4 years (2008-11) • Used Fixed Effects Panel Data Analysis • Source: FDI Determinants • Analyses of FDI determinants in developing countries,by Recep Kok and Bernur Acikgoz Ersoy (2009) • UNCTAD: World Investment Report, 2012 • Choice of comparable countries • Limitations • Availability of Segmented Data • Causality tests Master Thesis presentation - FDI in Retail sector in India 14
    15. 15. Explanatory Indicators chosen I Master Thesis presentation - FDI in Retail sector in India 15
    16. 16. Master Thesis presentation - FDI in Retail sector in India 16 Explanatory Indicators chosen II
    17. 17. Master Thesis presentation - FDI in Retail sector in India 17 Model(s) with high correlation coefficients
    18. 18. • Favorable Indicators • Gross Savings, (as % of GDP) • Cash surplus/deficit (% of GDP) • Current account balance (BoP, current US$) • Detrimental Indicators • Vulnerable employment(as % of total) • Unexpected results - Explained • GDP per capita growth (annual %) • Population in urban agglomerations of more than 1 million (% of total population) • Unexpected results - Unexplained • Corporate Tax Rates (% of profits) • Inflation, GDP deflator (annual %) Master Thesis presentation - FDI in Retail sector in India 18 Inferences about the indicators used
    19. 19. Master Thesis presentation - FDI in Retail sector in India 19 FDI in retail reduces India’s CAD by 15%
    20. 20. • Motivation • Overview: India's retail sector • Timeline: India’s FDI policies • Implications of FDI reforms • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 20 Agenda
    21. 21. • Impact of FDI on traditional retailers in Indonesia • Share of traditional markets fell from 88% in 1997 to 50% 2010 • Stores selling niche products or those located outside vicinity of supermarkets were not affected • Other possible factors for decline of traditional retail • High rents and lack support from local administration • Absence of large parking spaces and irregular cleaning • Why are kirana stores in India better off ? • No regulatory requirements • Unique credit facility • Ease of access to customers • Less or no competition from other kirana stores Master Thesis presentation - FDI in Retail sector in India 21 Kirana stores are better placed to face competition
    22. 22. • Motivation • Overview: India's retail sector • Timeline: India’s FDI policies • Implications of FDI reforms • Impact of FDI on traditional markets: Evidence from Indonesia • Conclusion Master Thesis presentation - FDI in Retail sector in India 22 Agenda
    23. 23. • Opening up of retail sector needs to be backed up by: • Infrastructure Development • Urban Planning • Further Tax and labor reforms • Regulating timings and location of supermarkets • Credit facilities for the Kirana stores and street vendors Master Thesis presentation - FDI in Retail sector in India 23 Need for further reforms
    24. 24. Q&A Session Master Thesis presentation - FDI in Retail sector in India 24
    25. 25. Appendix Master Thesis presentation - FDI in Retail sector in India 25
    26. 26. • Model built upon existing data rather than forecasted data • Minimize forecasting errors on top of the assumptions taken earlier Master Thesis presentation - FDI in Retail sector in India 26 Why we chose to predict retrospectively?
    27. 27. Fixed Effects Panel Data Analysis • ‘i’ and ‘t’ are indices for individuals and time • ‘y’ is the dependent variable, i.e., Net FDI inflow in retail sector that is regressed against the independent variables • ‘x’ represents independent variables like Literacy Rate, GDP Growth, etc ... • ‘Є’ represents the error matrix • ‘a’ and ‘b’ are regression coefficients Master Thesis presentation - FDI in Retail sector in India 27
    28. 28. Why Fixed Effects model? We use the Fixed Effect model here under the assumption that the individual errors (specific to countries) are not random variations and indeed reflect the intrinsic nature of the data respective to individual countries. Master Thesis presentation - FDI in Retail sector in India 28
    29. 29. Master Thesis presentation - FDI in Retail sector in India 29 Analyses of FDI determinants in developing countries (2009)
    30. 30. UNCTAD's Investment Report 2012 Master Thesis presentation - FDI in Retail sector in India 30
    31. 31. Choice of Comparable Countries • Hungary, • Korean Republic, • Turkey, • Mexico, • Slovak Republic, • Slovenia, • Chile, • Estonia and • Czech Republic The choice of comparable countries is purely subjective based on factors including but not limited to, GDP growth, level of corruption, technological advances, ease of doing business, strength of legal system, and a series of other factors that would explicitly aid/deter foreign entrants to invest capital in the domestic retail market. Master Thesis presentation - FDI in Retail sector in India 31

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