Introduction..• FDI refers to capital inflow from abroad that is invested in or to enhance the production capacity of economy.• Retail as sale of final consumption in contrast to sale for further sale or processing (i.e. wholesale), A sale to ultimate consumer, interface between the producer & the individual consumer buying for personal consumption.• Organized Retailing, Trading activities undertaken by licensed retailer, those who are registered for sales tax income tax etc., this include corporate backed hypermarket and retail chains, and also privately owned large retail businesses• Unorganized Retailing, Traditional form of low cost retailing, for example the low cost Kirana stores, owner manned general stores etc.
How FDI can come in India??Franchise Agreement, the easiest way & FDI is allowed with the approval of RBI under FEMA.Mango, Pizza hut, Domino’s, Nike etc.Cash & Carry Wholesale Trading, 100% FDI is allowed in wholesale trading, wholesalers deal withsmall retailers not consumers. Metro AG was the first MNC to enter India through this way.Strategic Licensing Agreements, foreign brands give an exclusive license & distribution rights toIndian company & through these rights, Indian company can sell either in their own store or enterinto shop in shop agreements or distribute brands to franchisees, Mango an agreement withpyramid, Mumbai.Manufacturing & Wholly Owned Subsidies, Foreign brands that have wholly owned subsidies inmanufacturing are treated as and are therefor allowed to do retails. Nike entered throughexclusive licensing agreement with sierra enterprise but now wholly owned subsidies. Nike IndiaPvt. Ltd.
FDI in Retail: Facts• In terms of market potential based on PPP, India is the 5th largest economy in the world, 3rd largest GDP in Asia continent• India retail sector is highly fragmented with 97% of its business being run by the unorganized sectors.• Largest source of employment after Agriculture.• Has deep penetration into rural India generating more than 10% of India’s GDP.• FDI in single brand retailing was permitted in 2006, up to 51% of ownership.• Between 2006 & may 2010, total of 94 proposals have been received & 57 proposal have been approved.• FDI inflow of 196.46million$ under single brand retailing was received between April 2006 & September 2010, comprising 0.16% of total FDI inflow during these period.• Investment of 500ml$ are expected to India in next 5 years in major economic factors & 250ml$ is expected in infrastructure sector alone.• Total estimated investment opportunity in retail India is 5-6bl$ in next 5years, Certain sectors that promise high growth are food & grocery, durables, clothing, furniture, pharmacy, footwear, leather, jewelry & watches.
India Retail: Growth Outlook• India retail market is estimated 470bn$ in 2011, accounting for 35% of GDP, and is expected to grow to 675bn$ by 2016, @ CAGR of 7.5%• Organized retail market is estimated at 26bn$ & accounts for 6% of the overall retail market for 2011 & projected to grow 84bn$ by 2016. @ 26% of CARG
GDP Growth & Organized Retail• FDI in single brand was permitted in 2006 to extent of 51% and now open to 100%.• FDI in carry & cash whole sale retailing was permitted to the extend of 100% under government approval route in 1997• No FDI in multi brand store for example wall mart.• Trends indicate that the FDI would open up in retail sector, however political consensus has to be reached before that happens..• Indian companies..• Future group, reliance retail, Bharti, shopper’s stop, pyramid, Aditya Birla group, subhiksha, spencer group, Westside, Chroma,
Foreign Companies View & Government Proposal• Only 51% FDI in single brand retailing, many retailers unwilling to entre without 100% FDI.• Insufficient data of consumer behavior• Focus in India only on growth not productivity• Scope for private labels only 4% in India compare to 17% in western market.• FDI in multi brand is opened to 51% with following conditions…• Minimum investment of 100ml$• 50% of 100ml$ to be invested in back end infrastructure.• 30% of sources to be done from small scale industries• Stores can be opened only in cities with minimum population of 1ml• States will have freedom to decide entry of international retailer with 51%FDI
Why shall we allow FDI??• Inflow of funds & investment• To inspire competition and innovation in retail industry.• Ensure highly efficient and law margin business model.• Improved product quality, availability and reduce wastage.• Consumers to get best products & services at reasonable price.• Food inflation and fluctuation in food prices can be controlled.• FDI to ensure better realization for farmers & producers.• Sourcing from India will increase & exports to get significant boost.• Sectors like textiles & handicraft will get significant boost.• Consumers will get more choices & will have to pay less, A good news when inflation is bend upon climbing up and up.• Employment can also be increased.• Stimulate infant industry & other supporting industries• Growth of infrastructure.
Why shall we not allow FDI?• Game changing situation in retail industry can lead to heavy job losses particularly in rural areas & small cities.• Unfair competitions & ability of big retailers to sustain losses can lead to large scale exits of domestic retailers & small family managed outlets.• It is critical that retail sector is allowed to grow & consolidate first before opening to foreign investor.• Absence of proper regulatory guidelines would induce unfair trade practices.• Promoting cartels & creating monopoly.• Increase in real estate price• Marginalize domestic entrepreneur
FDI: World Scenario• Thai government which opened its door to large retailers, now had created separate funds to provide financial assistance to local retailers• China daily has quoted A Wall Street journal report that mention Chinese suppliers being forced to lay off staff because Wall mart has been ruthlessly pressing down on supplier’s margin.• Malaysia & Indonesia have specified zones with in which foreign retailers can operate• In Japan such a retailer need to seek the view of small local stores regarding their proposed new locations, Additionally Zoning law has been imposed, this compels foreign retailers to go outside city limits etc.• foreign companies invest in U.S. businesses, it not only provides jobs, but relatively high- paying jobs – indeed, up to 30% higher paying. Encouraging more FDI and expanding the number of countries that invest in the United States would potentially lead to more economic growth and create even more new, high-paying U.S. jobs.
FDI in Retail: Today & Tomorrow
Conclusion• Most of consumer in India particularly in urban areas are exposed to benefits and experience of organized retail, if will be difficult to deny the same benefit & experience to balance consumer for very long time period.• India is big & growing market, both organized and unorganized sectors can sustain together.• Policy makers to ensure level of playing field for small retailer, better credit availability to unorganized retailers from bank and micro finance institution for innovative banking.• Gradual opening of retail sector to give domestic industry enough time to adjust to the changes• Clear guideline on investment in infrastructure and export commitment for international retailers would help all stakeholder to benefit.• FDI in retail is not the only solution for growth in India .• FDI in long run not harm interest of small & traditional retailers.• Allowing FDI can bring supply chain improvement investment in technology, manpower and skill development, tourism department greater sourcing from India, up gradation in agriculture, efficient small & medium scale industries, growth in market size & benefit to government through grater GDP, tax income & employment generation.
References• Data: the retailers, emest & young, Jan 2009, working paper no.222 & techno park analysis: emerging trends in Indian retail & consumer,2011.• Image: http://www.hindustantimes.com/business-news/WorldEconomy/A-guide-to-FDI-in- retail/Article1-775717.aspx.