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Foreign Direct Investment in Indian Retail

Foreign Direct Investment in Indian Retail

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Indian Retail Industry Indian Retail Industry Document Transcript

  • Foreign Direct Investment in India's Retail Sector An exhaustive analysis of factors influencing the FDI debate 2009 An All India Retail Research Report
  • Abstract In 2006 the Government has promoted limited FDI in single-brand retailing and has considered opening up further in a phased system with emphasis on joint ventures with domestic players, evident with the highly controversial Wal-Mart joint venture with Bharti. Studying other countries such as China, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate is also on the agenda of the Indian Government. The Indian media regularly discusses the issues of FDI in Retailing. The Hindu Business Line's opinion on the 'Great FDI in Indian Retail debate', is that “organized retail at present accounts for a mere 4% per cent of the total market (2008) as against 20% in China and 40 % in Thailand” and that “there is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop 1 in”. This has created significant debate for allowing FDI regulations to open up, although little has changed for multi-brand retailing restrictions to date. Knight Frank revealed in their Market Review (Q3 2006) that the move by the Indian Government to allow FDI in real estate had been an “opportune move” and although “multi-brand retailing is still not allowed, FDI in single-brand retailing 2 has elicited heightened interest”. 1. http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm 2. Knight Frank – 'Market Review' Quarter 3 2006 02
  • Contents Page Abstract 02 Contents 03 Table of Figures & Charts 05 Chapter 1 - Introduction 06 1.1 Rationale 07 1.2 Report Aims & Objectives 08 1.3 Layout of Study 09 Chapter 2 – Study Methodology 10-14 Chapter 3 – Historical Perspective on FDI 3.0 Overview 15-17 3.0.1 Post Independence & Pre-reform 17 3.0.2 Post-reform 18-20 3.0.3 FDI in Retail 21-22 Chapter 4 – Policy Environment and Growth in Organized Retailing 4.1 Policy and Regulatory Environment 23-28 4.2 Growth in 'Organized’ Retailing 29-34 Chapter 5 – Arguments for and against FDI in Retailing 5.1 Arguments for FDI in Retailing 35-42 5.2 Arguments against FDI in Retailing 43-50 Chapter 6 – Detailed analysis of factors and conditions attached to FDI 6.0 Survey Design & Sample 51-52 6.1 Questions (See Appendix II) 52 6.2 Data Analysis 53-56 6.3 Results & Findings 6.3.1 – 6.3.11 57-64 03
  • Chapter 7 - Conclusion 7.0 Introduction 65 7.1 Indian market place and Policy & Regulation 65-66 7.2 Arguments for and against Policy Change 67-68 7.3 Market sentiment and exploration of domestic retailer's thoughts 69-70 7.4 Recommendations (7.4.1 – 7.4.17 inclusive) 71-73 7.5 Further Research 74 Appendix I – Coding Key (open ended question interpretation) 75-77 Appendix II – Survey Questions 78-79 Reference List 80-82 Bibliography 83 04
  • Table of figures & charts 1. Figure 1 20 2. Figure 2 29 3. Figure 3 30 4. Figure 4 51 5. Chart S1 53 6. Chart S2 53 7. Chart S3 54 8. Chart S4 54 9. Chart S5 54 10. Chart S6 55 11. Chart S7 55 12. Chart S8 55 13. Chart S9 56 14. Chart S10 56 15. Chart S11 56 05
  • Chapter 1 - Introduction India is without doubt a 'growth' economy and This division of the retail sector, which has a many consider it an attractive country to invest very heavy weighting towards, unorganized, is in, particularly in its rapidly growing and just one of the issues contributing to the changing retail market. However, Foreign sensitive debate on FDI in India at the moment. Direct Investment (FDI) is restricted in the retail What are the potential risks to the unorganized sector, and despite many years of debate, the retail sector, and of course to the wider Indian regulations are still only changing very slowly economy? There are several groups who are and there are still lots of uncertainties. strongly opposed to FDI in the Indian retail sector, but are their concerns unfounded? AT Kearney (2009), the well-established Equally, could FDI in retail be a disaster for the international management consultancy, in their sector and the Indian economy? What reforms Annual Global Retail Index, ranked India as No. are necessary, if any, to protect the sub- 1 out of 30 of the top emerging markets, and continent's domestic retail sector and national 3 has done for some years. Foreign Investors are interests? watching India, ready for a piece of the action in the retail market, but there are still plenty of uncertainties, restrictions and potential socio- economic risks. India is a very diverse country and it is important to fully understand its nature. There is cultural and religious diversity like nowhere else in the world, a thriving democracy along with bureaucratic inconveniences and serious infrastructure deficiencies. 3. 2009 Global Retail Development Index, AT Kearney – http://www.atkearney.com/images/global/pdf/2009_Global_Retail_Development_Index.pdf 06
  • 1.1 Rationale From street/cart retailers working on widely debated and heated issue in India's pavements/roadsides and small family run economic and political environment. businesses to international brands such as However, the Government is gradually taking Rolex and Nike, the retail market in India is steps to open the sector.” (KPMG 2009) 5 vibrant, colorful and highly fragmented. We also wish to look at the issues which are Arvind Virmani (2005), the Director & Chief currently under discussion by the domestic Executive of the Indian Council for Research on players about FDI in India's retail sector, to International Economic Relations (ICRIER) establish an understanding of the reasoning acknowledged when referring to FDI in India's behind current policy and the controversial retail sector that “In spite of its importance, viewpoints that keep India divided on FDI Retail there has not been any extensive research in policy. This research will provide 4 this area.” recommendations for ways in which policy could be changed and improved to reduce the It is this lack of independent research that risks of FDI for India, and to benefit the specifically focuses on the retail sector that has domestic retailers and related industries as well inspired us to undertake this study so as to as the economy as a whole. There is a desire to provide a balanced and independent review of try to assist in facilitating the process of reform current opinions/thoughts on FDI in Retail by providing a summary of the key issues and policy, and to assess the potential costs and suggesting what regulatory reforms could be benefits for the sector and India as a whole. considered to help India resolve the issues that this report highlights. sector and the Indian “As retailing in India is attracting the attention economy? What reforms are necessary, if any, of many global players, the Indian Government to protect the sub-continent's domestic retail is paying increased attention to the country's sector and national interests? retail environment. FDI in retailing remains a 4. Mukherjee A & Patel, N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, quoted from foreword by A Virmani 5. KPMG, 'Doing Business with India' Report, July 2009, page 85 07
  • 1.2 Report Aims & Objectives The aim of this report is to provide an analysis against changing current policy and improving of the arguments for and against FDI in India's the regulatory environment. This will enable us retail sector, in order to provide to assess the key factors to be considered in recommendations on reforms to government making policy changes in the future. policy that could reduce the risks of lifting restrictions on FDI in retail. The next objective will then be to compare the thoughts and opinions of people working within The report's objectives are to investigate the or alongside India's domestic retail sector, via a Indian market place and review current policy survey, to interpret the domestic market and regulations with regards to foreign sentiment towards foreign investment, and to investors so as to gain an understanding of the explore thoughts on the issues faced by the current position on FDI, as well as an overview sector. It will then be possible to consider what of the Indian system. This will be followed by an solutions could potentially resolve the issues examination of the arguments both for and and are supported by the majority of domestic retail players.
  • 1.2 Layout of Report Chapter 1 will present the problem and reason behind the study (rationale). It will set out the aims and objectives of the report and give an outline of what the report will involve. Chapter 2 will detail the approach and methods of research used to collect data for the survey. It will also look at data sources and the limitations of the research & data. Chapter 3 will provide a historical perspective starting with an overview of FDI in India. Chapter 4 will explain the current policy framework with respect to FDI in India and chart the growth of organized retailing in India. Chapter 5 will present arguments from both sides – those who are for and those who are against FDI in retail in India. Chapter 6 will analyze the factors influencing FDI to a greater level of detail with the aid of a survey conducted amongst the domestic retail and allied industries in India. The survey results will be analyzed and interpreted, with the findings presented. Chapter 7 will present conclusions and recommendations based on the overall findings of the study. 09
  • Chapter 2 - Study Methodology 2.0 Study Approach This particular study on FDI in India's retail The report hopes to establish if there is a sector will utilize an inductive approach to the genuine argument for government policy to research, which should help to achieve the aim change in favor of FDI in retail, to assess and and objectives set out in Chapter 1. The make recommendations of changes to current investigation will allow us to form a reasoned policy, and to consider the risks to India's opinion as to what government policy changes economy, society, and the unorganized retail are required to make the opening up of FDI in sector, with a view to encouraging 'socially retail as successful as possible for the domestic responsible investment'. market and India's economy. To initiate this study, three questions were This study will be based predominantly on originally designed to help construct aims and qualitative research techniques, using primary objectives, and to provide some initial focus. as well as secondary methods, in order to allow The three questions were: for an in-depth and insightful exploration of current issues surrounding FDI in India's Retail 1. What methods of FDI in retail are currently market, and to assist in gaining an permitted and what is the policy? understanding of the 'sentiment' in India 2. What are the key issues concerning FDI policy towards foreign retailers and their potential change in India's retail sector? impact on the retail sector and wider economy. 3. How can policy help to reduce the risk of FDI There will be a certain amount of quantitative in retail for India and its domestic markets? analysis undertaken with the data received from the proposed research survey, but this will be interpreted alongside 'qualitative' open-ended questions too, so as to offer more depth to the respondents' opinions. 10
  • 2.1 Study Techniques 2.1.1 Types of Research Primary research in the form of an internet- The survey also includes quantitative 'closed- based survey was used to collect data of a ended' questions for gathering data that can be qualitative open-ended nature, using a analyzed and interpreted alongside the follow- descriptive approach so that the report can up open-ended questions. analyze and interpret the Indian domestic retail Secondary research was carried out in the form market's sentiment towards FDI and how many of a literature review, to compare and contrast people are in favor of various aspects, as well as material and interpret the issues with a view to ask what changes to policy and the sector they drawing conclusions and developing believe are necessary and why. recommendations. 2.1.2 Literature Review There is a reasonable amount of literature be revealed by the survey. available on FDI in India, although it is by no It is important with a review such as this to means abundant in the specific area of Retail. ensure that the sources of information are Current policy is in a state of flux; hence a reliable and trustworthy as possible. A broad review of literature on the latest policy range of opinions from institutional and proposals and arguments for and against corporate material, to academic and business- changing policy will be the back-bone of this orientated literature as well as the study. It will enable accurate and relevant newspapers/online media and internet questions to be formulated for the proposed resources will be reviewed and each source was survey questionnaire and provide a good considered for its reliability, and potential to background understanding of the likely misconstrue the truth. causes of any patterns and trends that may 11
  • 2.1 Study Techniques 2.1.3 Survey Questionnaire Qualitative survey questionnaires will take in to account possible language skill inherently have issues of 'interpretation' of differences/difficulties in participants. By results, due to the open-ended questions and ensuring the questions are directly related to subjective nature. It may also suffer the objectives of this research will increase the complications with data inaccuracy, for quality of the results achieved and help to justify example, if participants are unwilling to give the use of this research technique. The honest opinions on their views of particular structure should be so that bias is minimized subjects, or through incorrect interpretation of with questions that do not lean towards sentiment in a participant's responses by the encouraging a particular response from the researcher. This can be minimized by ensuring participant. that the questions are pre-planned well to Coding will be required for analysis and ensure they gather the correct information that interpretation of the open-ended questions. will help to answer the questions underlying NB: For further information on the survey this research, and that are clear and concise to sample and design, please see Chapter 4. 12
  • 2.2 Data Sources 2.2.1 Primary Data Sources The primary data sources in this research were The final survey was then sent out to a collected via an emailed survey questionnaire significant sample of Indian retailers and others (see Appendix II). We designed a test survey to in retail-related industries. be emailed to a pre-selected 'test-sample'. 2.2.2 Secondary Data Sources 2.2.2.1 Internet Searching the internet extensively the starting have been useful. The report also references point of this research and provided some some small domestic industry group's website valuable secondary data. Website such as the useful, and other trade lobby sites. One Government of India's Ministry of Finance particular notable internet resource was the www.finmin.nic.in which provides information Center for Policy Alternatives on current FDI policy through the Foreign (www.cpasind.com) which have provided Investment Promotion Board (FIPB), and also particularly informative reports on some of the provides press releases and data and statistics key issues with FDI in Indian Retail. 2.2.2.2 Academic Textbooks There is a vast amount of literature on FDI in such as 'FDI in Retail Sector India' by Arpita general; however there is less on FDI in India, Mukherjee & Nitisha Patel and 'Multinationals in and limited amounts that are specifically India' by Amar Nayak were utilized to a greater focused on the retail sector. The available text extent as this report considered them to be far on general FDI were useful background more relevant to the debate on this research research though, and the more specific texts topic. 2.2.2.3 News Articles and Industry Reports To obtain up to date information and opinions Opportunities, and India FDI Watch's report in on the research topic it was necessary to refer to association with the Association of Community domestic and international news articles and Organizations for Reform Now (ACORN). All of gather a variety of industry reports and papers, these helped to provide a wide and balanced for example the India Brand Equity Foundation understanding of the key issues of this (IBEF) report on India's Retail Market & research. 13
  • 2.3 Limitations of Research Study 2.3.1 Survey Response Limitations Due to the nature of the survey being very large sample base. Survey responses were internet/online-based, it was inevitable that also potentially limited by the length of the this would have limitations on survey response; survey and by language barriers. however this was counterbalanced by using a 2.3.2 Inconsistency of Data & Statistics available on India and FDI/ Retail We noted that data available, particularly in this did not have too much impact on the relation to India's retail sector, was often findings. Up-to-date data was also hard to inconsistent. However, for the purposes of this source. research being more of an exploratory nature, 14
  • Chapter 3 - Historical Perspective on FDI 3.0 Overview It has been said that India has “one foot Retailing in India is slightly different than in grounded in time-honoured traditions and the developed markets, in that it is divided in to other fervently striding into the entrepreneurial organized and unorganized retail. Organized 6 e-age”. India truly does embrace diversity with retail could be described as when trading is a passion like very few places in the world. taking place under a License or through people that are registered for sales tax or income tax. This study is focused on the retail sector and the Unorganized retail is India's more traditional 'current' Foreign Direct Investment (FDI) style of “low-cost retailing, for example, the position in India, and it therefore seems logical local kirana shops, owner-manned general to start in reasonably recent times. stores, paan/beedi shops, convenience stores, 9 Retailing can normally be defined as “the sale of hand carts and pavement vendors.” goods or merchandise from a fixed location, such as a department store or kiosk, or by post, in small or individual lots for direct 8 consumption by the purchaser.” Before beginning however, let us briefly define 'Foreign Direct Investment', and 'Retailing', as they are the key focus of the entire study. Foreign Direct Investment can be defined as the “Acquisition or construction of physical capital by a firm from one (source) country in another (host) country.”7 6. Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, August 2003, page 32 7. http://www-personal.umich.edu/~alandear/glossary/f.html 8. http://en.wikipedia.org/wiki/retailin 9. Mohan Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Alternatives, CPAS (2005) 15
  • 3.0 Overview Sathyaraj (2006) defines unorganised retailing more specifically as “an outlet run locally by the owner or caretaker of a shop that lacks technical and accounting standardization. The supply chain and sourcing are also done locally to meet local needs.”10 Radhika (2006) goes on to be more explicit India is a democratic Union of States and the about the differences, saying “The major Government operates through a parliamentary difference between organized and system. India has also been a member of the unorganized retailing lies in its number World Trade Organization (WTO) since 1995. (chain) of store operations. An unorganized The World Trade Organization is a place outlet may be just stand alone or can have [a] “where member governments go, to try to sort maximum of 2-3 outlets in a city, where as out the trade problems they face with each the organized outlets are "any retail chain other”12 They are currently actively (more than two outlets) which is participating in the Doha Round which professionally managed (even if its family “provides the mandate for negotiations on a run), has an accounting transparency… and range of subjects and other work. The organized Supply Chain Management with negotiations include those on agriculture and centralized quality control and sourcing services, which began in early 2000.”13 (certain parts can be locally made) can be termed as an "organized retailing" in India.”11 10. Sathyaraj (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.html 11. Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.htm 12. World Trade Organisation - http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm 13. World Trade Organisation - http://www.wto.org/english/tratop_e/dda_e/dda_e.htm 16
  • 3.0 Overview India is the most populous democracy in the estimated to make up the working age group world, and is the second most populated (15-60). The large working-age population will country at 1.172 billion people, based on no doubt translate to an attractive consumer 14 United Nation statistics as at 1st July 2009. It base compared to other economies of the world, has a largely young population with 35% of placing India as one of the main targets of the India's population being under 14 years of age global retail players.15 and more than 60 per cent of the population is 3.0.1 Post Independence & Pre-Reform There were “half-hearted attempts made by the economic activity, isolation and poorly Rajiv Gandhi government in the mid-1980s to managed fiscal policy. By half way through selectively open the economy to foreign trade 1991, the Indian government was about to and relax import restrictions, which did not default on its foreign currency loans; and its have the intended consequence of stimulating foreign exchange reserves were so low that investment and eventually pushed the balance India only had enough dollars for two weeks' of payments out of gear. Export growth had worth of imports. turned negative and for the first time Indian industrial production recorded negative Foreign finance had all but closed the door on growth. “ 16 India. The political problems that this position caused were immense and it was only the In 1990-91 the current account deficit was 3.1% recognition of the fiscal problems that finally 17 and inflation was 12%. Things began to get out persuaded the politicians and bureaucrats to of hand and the government went to foreign release their hold on the economy. The crisis lenders pledging gold held at the Reserve Bank brought around something totally unexpected; of India (India's central bank) for short term it brought around change from a completely loans so as to help get through the financial uncompromising centralized system of control crisis. In 1990, just as China was beginning to to a market-orientated system, where become a popular place for investors, India was regulation in some of the key sectors of the in the middle of economic agony after many economy was to be enforced independent of the years of over-zealous government control over government. 14. Wikipedia - http://en.wikipedia.org/wiki/List_of_countries_by_population 15. Census of India - http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx 16. Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 22 17. Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 7 17
  • 3.0 Overview 3.0.2 Post-Reform Economic reform was now on the agenda after successive government has supported the the financial disaster of 1991; and these reform process and tried to hasten things. Due reforms “brought in three elements that India to the ever decreasing role of the government in was never previously allowed to have: the economy, resource allocation began to be competition, entrepreneurship and the influenced by the markets, and as a result, 18 beginnings of world-class infrastructure.” prices & availability across the economy became The government of the time, Congress (led by competitive rather than monopolistic. Narasimha Rao), revealed a new 'industrial policy' and the Finance Minister when sending a The post-reform performance of the economy memorandum dated 27th August 1991 to the had been good, and between 1994 and1997 International Monetary Fund (IMF), said “The Gross Domestic Product (GDP) grew in real thrust will be to increase the efficiency and terms by over 7%, which placed India among the international competitiveness of industrial best-performing countries in the world. production and to utilize foreign investment However, a study of the economic reforms and and technology to a much greater degree than liberalisation of the Indian economy by Kalirajan in the past, to improve the performance and and Sankar (2003) acknowledges this but rationalize the scope of the public sector, and to highlights that whilst this economic growth is reform and modernize the financial sector so encouraging, “there is no doubt that given the that it can more efficiently serve the needs of low per capita income the need for an the economy” (Cited by Datt and Sundharam, accelerated growth rate becomes urgent. The 2001:231) 19 inflation rate was on average at a high of 10.7% per annum in the first five years of the reform Between 1991 and 1999 as India moved away period, but gradually came down to less than 5% 20 from a state controlled economy and slowly in the last few years”. developed into a liberalized economy, each 18. Chase, Aaron, 'An Investor's Guide to the Next Economic Superpower', John Wiley & Sons pte, Ltd 2006, page 11 19. Sagarika Dutt, 'India in a Globalized World', Manchester University Press, 2006, page 111 20. Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalization of the Indian Economy', MPG Books Ltd, 2003, page 40 18
  • 3.0 Overview 3.0.2 Post-Reform The Indian National Congress with the support a year. In 2005 and 2006 growth accelerated to of the United Progressive Alliance have been in over 8% and in 2007 it looked like it might be 23 government since 2004 and were re-elected for well over 9%.” a further term in May 2009. Although a more liberal approach to foreign investment in India Farndon (2007) discusses how the development has emerged in recent times, Kalirajan and of the Indian economy has been quite Sankar (2003) argue that “low overall unconventional. He highlights a 'normal' productivity of investment, excessive pattern of economic development starting with fragmentation of markets, shortage of the emergence of cheap & low-cost invertible funds, and the poor infrastructure manufacturing to provide a broad base of may pose significant problems to sustained employment for the masses, which higher economic growth… there is reason to subsequently encourages urbanization, and as believe that growth impulses from the first this continues to grow, he notes a shift whereby 21 generation of reforms may have ebbed”. higher value products that are more sophisticated emerge. Finally, service and high The Indian government has clearly recognized tech industries start to emerge. this, and in the Finance Minister's Budget Speech for 1999-2000, it was stressed that Farndon (2007) highlights the issue of job there was a need to debate and make decisions insecurity in India, and how few people are in relation to the next wave of reforms to be put employed in a recognized position. To explain, in place to ensure India's economic strength he uses the example that in 2006, India had a and to make it “fully capable of competing workforce of 470 million, but only 35 million of successfully in the evolving world order”. (cited these (approx. 7%) were in formal, income tax 22 by Kalirajan and Sankar 2003) paying positions – and of this 35 million, the majority (21 million) are employed by the The liberalizations subsequently introduced by government. Essentially, “a country with a the Finance Minister (Manmohan Singh) have population of over a billion has hardly more clearly been successful. “Between 1991 and income tax payers than the UK. All the rest – 2004, India's economy grew by an average of 6% some 435 million people – work in what Indians 24 call the 'unorganized sector'”. 21. Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 41 22. Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 4 23. Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 15-16 24. Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 18 19
  • 3.0 Overview 3.0.2 Post-Reform “India… has shot straight into the third stage, with an economic boom that has relied almost entirely on high-tech and service industries. It does have a range of manufacturing industries, but they are remarkably small for a country of India's size and prosperity. There is no doubt that India's success in the IT world has transformed the country. A milestone was passed in 2003 when the software sector alone earned more money than the entire cost of the country's oil imports – the factor that had brought the country to its financial knees in 1991. This meant that when the invasion of Iraq pushed oil prices up again, India was able to ride out the difficulties almost with equanimity” Economic Indicators between 2003 and 2008, and forecasts for 2009-10 are as below Figure 1 ECONOMIC INDICATORS- INDIA 2003-2010 03-07 Average 2008 2009 2010 (forecast) (forecast) Real GDP (% Growth) 8.9 7.4 4.9 6.5 Inflation (% year-end) 4.9 8.2 5.4 4.4 Fiscal Balance (% of GDP) -3.8 -6.0 7.0 -4.8 Exports (% Growth) 24.3 20.1 -8.0 10.6 Imports (% Growth) 30.7 33.1 -8.5 12.1 Current Account (% GDP) -0.3 -3.6 -4.0 -3.9 Reserves (mth of imports) 9.9 7.6 7.7 6.5 External Debt (% GDP) 16.0 14.0 14.6 13.8 Source: EDC Economics25 It is evident that 2009 is going to be a bad year in terms of Imports/Export Growth and GDP for India, but this is consistent with the global financial crisis that has been playing out during this research i.e. 2008-09. Looking at the data going back to 2003-07 however, GDP growth has been very healthy average at 8.9% per annum real growth, and despite a rise in inflation in 2008, this is now beginning to settle and is forecast to drop further. 25. Peter Whelan, 'India Economics', EDC Economics, May 2009, page 1 - http://www.edc.ca/english/docs/gindia_e.pdf 20
  • 3.0 Overview 3.0.3 FDI in Retail 60+ years after independence India's Knight Frank revealed in their Market Review government is now starting to take a closer look (Q3 2006) that the move by the Indian at liberalising its foreign investment policies. Government to allow FDI in real estate had been In 2006 the Government has promoted limited an “opportune move” and although “multi- FDI in single-brand retailing and has brand retailing is still not allowed, FDI in single- considered opening up further in a phased brand retailing has elicited heightened 27 system with emphasis on joint ventures with interest”. domestic players, evident with the highly controversial Wal-Mart joint venture with The government has created a specific Board to Bharti. Studying other countries such as China, deal with promotion of FDI in India and to be the where restrictions were initially imposed on the sole agency to handle matters related to FDI. locations and formats in which foreign retailers The 'Foreign Investment Promotion Board' (FIPB) could operate is also on the agenda of the as it is known, is chaired by the Secretary Indian Government. Industry (Department of Industrial Policy & Promotion or DIPP) within the office of the Prime The Indian media regularly discusses the issues Minister. Its key objectives are to promote FDI of FDI in Retailing. The Hindu Business Line's in India with investment promotion activities opinion on the 'Great FDI in Indian Retail both domestically and internationally by debate', is that “organised retail as present facilitating investment in the country via accounts for a mere 2% per cent of the total international companies, NRIs (non-resident market (2005) as against 20% in China and 40 % Indians) and other forms of foreign investors. in Thailand” and that “there is a growing The FIPB should review policy and puts demand for modern retailing formats that offer appropriate institutional arrangements in place 26 a clean and hygienic environment to shop in”. with transparent rules, guidelines, and This has created significant debate for allowing procedures for investment promotion and FDI regulations to open up, although little has approval. changed for multi-brand retailing restrictions to date. 26. http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm 27. Knight Frank – 'Market Review' Quarter 3 2006 21
  • 3.0 Overview 3.0.3 FDI in Retail The FIPB should meet every week, ensuring that When looking specifically at FDI in retail, India the cases that are pending are dealt with certainly has some 'political debates', quickly. It is there to ensure that the investors particularly regarding the potential risk of applying with FDI proposals receive a response displacing labour in the retail sector. Retail on the Government's decision within six weeks. employs a huge number of people in the FDI proposals deposited with the board's 'unorganised' sector, the majority of which does secretariat should be put in front of the Board not have any skills. This has made retail a major within 15 days. The Administrative Ministries political issue as there is pressure on the must also make any comments either before government to compensate the people who are and/or in the FIPB meeting. The overall aim is displaced and provide alternative employment to provide a “transparent effective and investor options. friendly single window providing clearance for investment proposals.”28 28. http://finance.indiamart.com/investment_in_india/fipb.html 22
  • Chapter 4 - Policy Environment and Growth of Organized Retail 4.1 Policy and Regulatory Environment Alongside the Foreign Investment Promotion emerging and developing countries. Board (FIPB) previously mentioned, there is also Differential treatment is limited to a few entry the Investment Commission which was rules, predominantly in some Services sectors.”29 established in December 2004 as part of the Ministry of Finance so as to facilitate and Currently, an application must be made to either enhance investment in India. They make the FIPB or the Secretariat for Industrial recommendations on policy and procedure to Assistance (SIA) depending on which Approval the Government and recommend projects that route is being used, providing the proposed should be fast tracked through the approval details of investment, the business plan, process. They also assist in promoting India as financial and foreign company information, etc. an investment destination. A declaration is also required to confirm whether the applicant has previous collaborations or The Investment Commission (2009) believes trade mark agreements in India in the same the Foreign Investment regime in India as “one sector/field to which the application relates of the most transparent and liberal… among (KPMG 2008)30 Foreign investment can be approved via one of two different routes: a. Automatic Approval route requires no prior approval, and filing of the investment details to the Reserve Bank of India (RBI) post-facto is literally for data records only. The automatic route is appropriate in any sector where there is no 'sector cap' i.e. sectors where 100% foreign ownership is allowed and some other specified sectors, for example <26% of an Insurance company. b. FIPB Approval route is for proposals where the shareholding is intended to be above a prescribed 'sector cap', or where the activity is one where FDI is currently not allowed, or where it is mandatory for the application to be approved by the FIPB (for example, sectors requiring an industrial licence.) 31 (Source: Investment Commission Website) 29. http://www.investmentcommission.in/policies_and_laws.htm 30. Investing in India, KPMG, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf 31. http://www.investmentcommission.in/policies_and_laws.htm 23
  • 4.1 Policy and Regulatory Environment In terms of the Retail sector, foreign investment Direct Investments (“FDI”) inflow, instead of is currently limited to 51% in single brand retail having to seek Foreign Investment Promotion stores and 100% FDI in wholesale cash and Board (“FIPB”) approval, FDI up to 100 per cent is carry. No multi-brand retailing is allowed. allowed under the automatic route for cash and Subject to these equity conditions, a foreign carry wholesale trading and export trading. FDI investor can set up a registered company and up to 51 per cent is allowed, with prior operate under the same rules and regulations Government approval for retail trade in 'Single as an Indian company. Foreign investments are Brand' products with the objective of attracting freely repatriable, and are regulated under the investment, technology and global best Foreign Exchange Management Act (1999) practices and catering to the demand for such (FEMA), administered by the Reserve Bank of branded goods in India. This implies that India's Exchange Control Department. foreign companies can now sell goods sold globally under a single brand, such as in the Ernst & Young (2007) in their report on behalf of case of Reebok, Nokia and Adidas. However, the India Brand Equity Foundation said: retailing of multiple brands, even if the goods are produced by the same manufacturer, is “The Government is progressively undertaking presently not allowed. Relaxation of FDI reforms and liberalising the retail sector; restrictions are being vigorously pursued by the thereby attracting significant foreign business and trade coalitions and are expected investments. The regulatory and supervisory to fall in place over the next 3-5 years.”32 policies are being reshaped and reoriented to meet the new challenges and opportunities in this sector. To facilitate easier flow of Foreign 32. IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in 24
  • 4.1 Policy and Regulatory Environment In February 2009, the Department of Industry Policy & Promotion (DIPP) released a series of Press Notes on changes relating to foreign investment. Those of particular interest to this research are:- Press Note 2 - 'Guidelines for calculation of total foreign investment’ Press Note 3 - 'Guidelines for transfer of ownership or control of Indian companies in sectors with caps from resident Indian citizens to non-resident entities. Press Note 4 – ‘Clarificatory guidelines on downstream investment by Indian Companies'. The Press Notes do not appear to have instigated amendments to the Foreign Exchange Management Act (FEMA), yet were supposed to come in to effect from the date of announcement, so this is clearly going to cause confusion. Press Note 2 (2009) introduces the concept of “ownership and control”33 for the first time. It allows foreign-invested Indian companies to create and invest in downstream companies or associated businesses without the original investment being counted. John Elliott (July 2009), South Asia correspondent for the Financial Times comments that “this legitimises cascading investments which have been used to bring foreign capital into sectors such as telecoms that need heavy investment. FDI limits here are bypassed by progressively adding foreign investment through tiers of subsidiary joint ventures so that, though official limits are exceeded overall, the rules are not technically broken.”34 The government in a number of statements has said that areas such as multi-brand retailing (i.e. where FDI is totally banned) will not be affected by these Press Note changes. It is however questionable whether there is anything to stop a Joint Venture forming under a wholesale cash and carry operation, and then setting up sub-companies in, for example multi-brand retailing, but present this as an Indian owned and controlled business. 32. IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in 25
  • 4.1 Policy and Regulatory Environment As it stands today, there are a number of market Cash and carry is a particularly attractive option entry methods available for retailers under for foreign investors as complete ownership current FDI policy, for which the most common (100%) is allowed in this format. Several global methods are:- players including Wal-Mart and Metro have entered the Indian market through this method. · Strategic License Agreements On a more general note of regulation, the (agreement with domestic player) governing Act overseeing foreign exchange is · Cash & Carry Wholesale trading (100% the Foreign Exchange Management Act (1999). ownership) The objective of this Act is to amend and · Joint Ventures consolidate the laws in relation to foreign · Franchising exchange. Consideration also needs to be · Distribution given to other policies and regulations that may · Manufacturing affect FDI inflows in to India, for example labour or company law. An example is the Payment of Cash and carry is a particularly attractive option Gratuity Act (1972) which provides for “gratuity for foreign investors as complete ownership inter alia to employees in factories, plantations, (100%) is allowed in this format. Several global shops, establishments, and mines in the event players including Wal-Mart and Metro have of superannuation, retirement, resignation, entered the Indian market through this method. death or total disablement due to accident or disease.”35 33. Ministry of Commerce & Industry, 'Guidelines for calculation of total foreign investment', Press Note No. 2 (2009 series), Department of Industrial Policy & Promotion, February 2009, page 3 - http://siadipp.nic.in/policy/changes/pn2_2009.pdf 34. Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 – http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html 35. KPMG, Investing in India, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf 26
  • 4.1 Policy and Regulatory Environment KPMG (2008)36 highlight just some of the key legislation that could have a potential impact on foreign investors setting up in India, as per below: · Payment of Bonus Act 1965 · Minimum Wages Act 1948 · Shops & Establishment Act · Contract Labour (Regulation and Abolition) Act 1970 · Industrial Disputes Act 1947 · Workman's Compensation Act · Profession Tax · Maternity Benefit Act 1961 · Employees Provident Fund and Miscellaneous Provisions Act 1952 · The Employees State Insurance Act 1948 · Goods & Services Tax (GST) (Proposed for July 2010) The India Brand Equity Foundation (IBEF) in state governments, with the Governments 2007 has also said that “The Government is benefiting from the access to impressive expected to take a calibrated approach in land revenues from land sales and tax collection and rent reforms to improve the real estate from retail developments. Solutions to regulatory environment and facilitate easy problems related to the lease rentals and pro- access to retail space for international tenancy laws, which significantly deter investors. The Government is releasing large international investors, are being pursued by tracts of unused land for retail development in the Government, with initiatives like Special the Mumbai and National Capital Regions Economic Zones (SEZs), allotment of 37 (NCRs). This is soon to be followed by other Government controlled land etc.” 36. Investing in India, KPMG, 2008, page 79 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf 37. IBEF !India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 12 (www.ibef.in) 27
  • 4.1 Policy and Regulatory Environment To provide confidence to investors and show Despite the current policy and regulatory commitment to a SEZ policy regime that is environment not being 'perfect' for foreign stable and focused on increasing economic investors, there are clearly moves towards activity and employment through the setting up improving the current position and facilitating of SEZs, a comprehensive draft SEZ Bill was FDI inflows without having a detrimental impact prepared after extensive debate with on various sectors of the economy. stakeholders. The Special Economic Zones Act, 2005, was passed by Parliament in May 2005 The current policy is trying to encourage Joint and came into effect on the 10th February 2006, Ventures in multi-brand retailing so as to boost providing for a more streamline and simplified the domestic retailer's growth in this area. set of procedures and for 'one-stop' clearance However, there is also the risk that some on matters relating to central as well as state foreign retailers will not be interested in governments. investing unless they have 100% ownership and that the current policy will prevent them from The main objectives of the SEZ Act are: choosing India as an FDI in Retail destination. · generation of additional economic activity In reality, this may present itself as 'back-door' · promotion of exports of goods and services multi-brand retailing through the use of the · promotion of investment from domestic & aforementioned 'cascading' sub-companies of foreign sources Joint Ventures. · creation of employment opportunities development of infrastructure facilities 28
  • 4.2 Growth in 'Organized’ Retailing Chaze (2006) looked at 'unorganized and organized’ sectors in India, in the context of retailing. He spoke of how the organized retailing sector was beginning to grow rapidly. He states that “organized retailing (versus the traditional Indian fare of stand-alone retail or department stores) has to be one of the most exciting growth industries in India today, with branded stores and malls thus far covering a 38 miniscule 2% of the total market.” The Figure below shows how significant retail is to the Indian economy, contributing 39% of GDP, and yet organized retailing is still in an under-developed early stage at only 6% of total market (2005) when compared to other countries. It is clear from this data that India has a significantly lower percentage of organized retailing compared to other developing markets such as China with 20% of organized retail penetration, and Brazil with 75%. When compared to their respective retail sector contributions to GDP, India is higher at 39% than China and Brazil. Retail is a significant contributor to india’s GDP; however organized retail plays only a small role in that Although retail is a significant contributor ... organized retailing is still at a very to India’s Economy ... nascent stage in India Retail % Contribution to GDP (Yr 2005) Organized Retail Penetration (%) 55 85 75 39 32 22 23 17 32 22 20 6 USA Brazil South Vietnam China India USA Brazil South Vietnam China India Africa Africa 39 Source: Confederation of Indian Industry & AT Kearney Report (2006) 38. Chaze, Aaron, India, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons (Asia) Pte Ltd, 2006, page 23 39. CII / AT Kearney, Retail In India: Getting Organized to Drive Growth', November 2006, page 5 29
  • 4.2 Growth in 'Organized’ Retailing Vietnam on the other hand is the only country in this figure with a higher GDP contribution at 55% (compared to India at 39%) as well as having a higher percentage of organized retail penetration at 22% (compared to 6% in India). Food and Beverages vertical constitutes the largest percentage share of the revenue at 74.41%, and yet only has 'organized' penetration of 0.98%, so is likely to be a target sector for foreign retailers. Figure 3 below shows the revenue and share of verticals, as well as the penetration of organized retail: Figure 3 Vertical Value (US$ millions) Share of Total Organised Retail Revenue (%) Penetration (%) Food & Beverages 231,951 74.41 0.98 Clothing & Textile 29,024 9.31 16.39 Consumer Durables 15,171 4.87 17.04 Home Décor 9,463 3.04 8.76 Jewellery & Watches 13,390 4.30 6.19 Beauty Care 6,854 2.20 3.56 Footwear 3,268 1.05 32.84 Books, Music & Gifts 2,610 0.84 13.08 40 Source: IBEF India The Indian consumer behavior of preferring proximity to retail formats is also particularly pronounced in the food & beverages sector, with food, grocery and allied products largely sourced from the local stores or hand cart vendors very close to home. 40. IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in) 30
  • 4.2 Growth in 'Organized’ Retailing Ernst & Young (2007) have said that “prevalence “Modern/Organised retailing is growing at an of traditional retailing is highly pronounced in aggressive pace in urban India, fueled by small towns and cities with primary presence of bourgeoning economic activity. Organized neighborhood 'kirana' stores, push-cart retail revenues are expected to increase from an vendors, 'melas' and 'mandis'. Organized estimated US$ 12.9 billion per annum in 2005- formats are only in the initial stages of adoption 06 to more than US$ 43 billion by 2009-10. The in these regions. Leading retail players in the sector is predicted to grow by 400 per cent, in industry are beginning to explore these value terms, by 2007-08. A large number of markets and the rural consumers are slowly domestic and international players are setting beginning to embrace the newer organized up base and expanding their business with retail formats. “ With such a high level of newer organized retail formats and intense 42 unorganized retail employment in the country, competition driving innovation in formats.” it is understandable that the rapid growth of organized retailing naturally causes some Reliance Industries Limited (RIL), one of the concern for smaller industry and traditional largest domestic organized retailers in India, retailers. It does however seem inevitable that has set up a subsidiary of RIL called Reliance organized retail will continue to see strong Retail Limited (RRL) to drive forward the groups growth in India as rural (and urban) consumers growth in the organized retail sector, with its begin to accept and adapt to new and modern 'vision' to “generate inclusive growth and 41 retailing formats. prosperity for farmers, vendor partners, small shopkeepers and consumers.”43 42. IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in) 43. RIL Online http://www.ril.com/html/business/business_retail.html 31
  • 4.2 Growth in 'Organized’ Retailing According to RRL (2009)44, 27% of global GDP is (clothing), optical and office product attributed to retail, and in various developing businesses. Further, RRL will continue to seek markets organized retail contributes typically synergistic opportunities with other 45 anywhere between 20% and 55% of GDP. international players as well.” Placing the Indian retail market at approximately $300 billion, with a growth rate The growth of consumerism in India is one of of 13% per year, RRL point out that presently, the key drivers fuelling the organised retail although organized retailing is only growth. Pankaj Gupta (2006)46 highlights approximately 5%, this is likely to grow to 10% several demographic trends that are factors in by 2011. Therefore, RRL have begun an the growth of organized retailing. India is, for implementation plan to create a high spec state example, experiencing rapid income growth so of the art retail infrastructure, to include a consumers have a greater ability to spend. strategy for opening multi-format stores such There is growing urbanization and this urban as convenience, hypermarket, speciality and population has both a higher propensity to wholesale stores. spend, and a desire for convenience. India also has a growing 'young' population which has Allowing FDI 100% in retailing would no doubt both the willingness and attitude to spend. significantly accelerate this growth. In fact, Gupta also states that there is a trend for Indian Reliance in recognising that “strategic alliances consumers tending to 'buy now, save later' i.e. are going to be a key driver to its retail business, consumers are prepared to borrow money for in financial year 2007-08, established key joint today's consumption. ventures with international partners in apparel It seems fairly safe to assume that even without FDI, the organized retail sector in India is going to grow rapidly, and this is going to have some effect on the traditional unorganized retailers. 44. RIL Online http://www.ril.com/html/business/business_retail.html 45. http://www.ril.com/html/business/business_retail.html 46. Pankaj Gupta, Organised Retail in India, The Next Growth Frontier, Tata Strategic Management, June 2006, page 2, (http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf) 32
  • 4.2 Growth in 'Organized’ Retailing Management consultant Rama Bijapurkar says Sajjan Jindal said that “providing industry status “the poorest fifth live a hand-to-mouth is the first basic step needed for reforming the existence and are insignificant as consumers. Indian retailing sector.”48 The next fifth, aspirants, acquire the most basic consumer durables – bicycles, fans and radios – ASSOCHAM believe that the advantages of and learn to aspire for more. The third group, having an industry status are that it will allow a climbers, is hooked, but find that their desires better “focus on retailing development, fiscal far outrun their income, so they buy the incentives, and availability of organized cheapest goods. The fourth group, whom she financing and establishment of insurance 49 calls the consuming class… is of inveterate norms.” They feel the development of the buyers; they weigh the price against what they retail sector can take place at a faster pace if get for it. The top fifth are the rich; they buy the there is a comprehensive legislation enacted. 47 best without looking at the price.” The legislation should be “simple and have a futuristic approach. It should take into The Associated Chambers of Commerce and consideration the developments that are taking Industry of India (ASSOCHAM) are cited in a place in this arena worldwide. The legislation news-article at www.dare.co.in (an Indian should provide broad parameters within which platform for entrepreneurs and business the retail sector should operate and day–to-day owners), as supporting a proposal to give the functioning and other modalities should be retail sector formal 'industry status'. In a note prescribed in the Rules. The underlying idea is by the Ministries of Commerce & Industry and to have minimum modifications in the Act in the 50 Consumer Affairs, the Chamber President, future.” 47. Kattuman, Paul A, recorded discussion - Judge Business School University of Cambridge, 23 September, 9.55am. 48. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm 49. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm 50. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm 33
  • 4.2 Growth in 'Organized’ Retailing For retail operations under current Rules, need to apply for and obtain a series of licenses and permits. These range from basic trading licenses and product specific licenses, to pollution clearance, amongst others. Every retail outlet is required to obtain these, even if it is a part of a chain. “These are irritants, [and] add time and cost to the process of establishing a retail chain”51 Kattuman (2009), whilst citing Rama's view on consumption said the following: “Indians can be divided into a number of generations; those born before independence, the product of post-independence socialist India, and those who grew up after liberalization. Each has a different mind set and approach to consumption. As time passes, each generation will pass into history, and new generations will arise. Their changing outlook has an influence on consumption patterns.” 51. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm 34
  • Chapter 5 - Arguments for and against FDI in Retailing 5.1 Arguments for FDI in Retailing There are many who argue that FDI in retailing both large and small, felt that it would be good will be of benefit to India, and discussions are to boost the economy by facilitating higher FDI often seen in the Indian media. In fact, some inflows. even argue that if FDI in retail is not allowed, it could be harmful to India's retail sector. These arguments for improvements in Tripathi (2009) the Director of Silk Hut (a mid- technology and increases in FDI inflows to sized silk garment retailer in Hyderabad), has boost economic growth are supported by other said "Industry experts believed that the proponents of FDI in retailing. Singh & Banga technical edge offered by foreign companies is (2008) undertook a research paper on the crucial for the survival of domestic retail emergence & prospects of FDI in India's 52 companies in the [current] downturn.” retailing, and highlighted that despite the developments in the industry in recent years Tripathi (2009) feels that it is essential that FDI and the large contribution to India's economy, be allowed in the retail sector at 100% equity, "retailing continues to be the least evolved because this is likely to encourage domestic industries and the growth of organised retailing investment into the sector too, and generate in India has been much slower as compared to further employment opportunities. In addition the rest of the world… One important reason for to this, he commented that during the this is that retailing is one of the few sectors 53 economic downturn that is currently being where FDI is not allowed.” experienced, most of the retail industry players, 52. Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 - http://www.retailing360.com/article/8/2009062420090624193427218739345f/Barring-foreign-players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html 53. Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 – http://bimtech-retail.com/downloads/FDI_RetailDude.pdf 35
  • 5.1 Arguments for FDI in Retailing Singh & Banga (2008) identify seven key would develop their supply chain, create new reasons for opening up the retail sector to FDI. strategies and improve operations to Firstly, they believe that the large global retail counteract the competition from foreign players have a far more advanced knowledge of players, and this would inevitably encourage management, particularly in inventory investment and employment in supply chain management and merchandising and are far and back-end sectors. Joint Ventures between more productive and efficient, utilizing new domestic 'organized' retailers and foreign technologies to their advantage. Secondly, players (such as Wal-mart & Bharti) would also they argue that the foreign 'low-cost' big help to ease the capital constraints of the players will adopt an integrated supply chain domestics. Finally, it was highlighted that the management system which in turn should help development of new retail formats and sector to lower the price of products, benefitting modernization in general would be brought consumers. Thirdly, Singh & Banga believe that around by FDI. FDI will ensure that products are good quality and that customer services improve, providing Singh & Banga (2008) concluded from their a better shopping 'experience'. Fourthly, it will research that it was evident that "ever growing encourage and promote the links between urban and rural markets in India represent an domestic/local suppliers, manufacturers and unprecedented and vast unexplored agricultural traders to global markets. Quality opportunity for retailing to all types of formats. and safety standards of domestics will be Initially there may be certain reservations and improved by this as only those who meet strict apprehensions in allowing global players in standards are likely to be selected. It will also India's retailing, but if they are allowed in a help in providing a profitable and reliable phased manner on the basis of a well conceived market for the domestic local players. Singh & and chalked out policy, they are likely to lead to Banga's fifth argument was that the foreign more investment in organized retailing and retailers would begin to spread their operations allied sectors.” in India, and as this happened domestic players 36
  • 5.1 Arguments for FDI in Retailing With the above said, their research paper also advised that a number of points needed to be kept into consideration when opening up FDI: 1. The opening up of FDI should be phased, over a 5-10 year time frame so as to allow time for domestic retailers to adjust. 2. FDI in multi-brand retailing should be kept restricted in the near future, as Indian retailers would not be able to face this competition immediately. 3. It is not currently desirable for FDI to be above 51%, even in single brand retailing. This will allow checking and control of foreign retailer's business operations, and will help to protect the interests of domestic retailers. However, the sector cap (equity limit) could be increased in due course as it has been in the telecom, banking and insurance markets. 4. Certain products that are sensitive should not be allowed, for example, arms/ammunition and military equipment. The excluded products should be expressly stated in policy. 5. There should be restricted zones imposed by the government for the purposes of city planning. E.g. Supermarkets/Hypermarkets should be kept away from the city centers to protect the unorganized and small retailers who operate in these areas. One of the most publicized and well known The ICRIER (2005) study revealed that many of studies was produced by the Indian Council for those in favor of FDI believed that the opening Research on International Economic Relations up of the retail sector would be of benefit to (ICRIER) in association with the Academic India in terms of investment inflow, technical Foundation, who were asked by the Department knowledge and skills. Those in favor argued of Consumer Affairs and the Government of that organized retailing requires heavy India to undertake a research project in to this investment if it is to expand rapidly, and would area of study, for which their findings were require supply chain set-up and the published in 2005 so as to encourage the introduction of information technology. debate of this important issue, and to enable the Government to begin drawing up key policy decisions. 37
  • 5.1 Arguments for FDI in Retailing “FDI would ease the capital constraint and foreign players would bring in best management practices that can be replicated by the domestic players. They would invest in supply chain, source products from India and provide a platform to domestic manufacturers to export their products in international markets through these retailers.” During the study by ICRIER (2005), groups of The main findings of the ICRIER study revealed traders in the unorganized retail sector who had that FDI in retailing led to: seen organized retailers locate in close proximity to them, were asked questions to find 1. Increased speed of development in modern out if they had been adversely affected, and formats whether they had been displaced by the 2. Improved productivity and efficiency of the organized retailers' presence. According to the retail sector results, “65% of unorganized players felt that 3. Enhanced sourcing the growth of organized retailing has no major 4. Improved quality of employment – no impact on their business. Another 25% said negative impact on employment if the that they initially suffered some losses but had economy is growing. changed their business strategies to face the 5. Encouraged investment in supply chain competition. The remaining 10% faced losses 6. Led to integration of suppliers, logistic but have not changed their business practices. service and retailers – reduction in the None of the unorganized players had to close number of intermediaries down their operations.” 54 7. Linked local suppliers, farmers, manufactures to global markets 8. Low cost global retailers likely to lower prices 9. Consumers are assured of product quality, better service & shopping experience. 54. Mukherjee & Patel, FDI in Retail Sector India, Academic Foundation in association with ICRIER, 2005, page 120 38
  • 5.1 Arguments for FDI in Retailing The ICRIER (2005) study also reported that Although some of the above arguments those in favour of FDI argued that the reality of supports FDI being introduced more formally to the situation is that foreign retailers are already increase transparency to the regulations, the operating in India due to the loop holes in debate becomes even more complex and current policy and regulation, and that if FDI relevant when you consider the recent changes was opened up, this would help to improve the by the Government in the series of Press Notes transparency of the regulatory system. released in February 2009 (as discussed in Chapter 3.1 Policy & Regulatory Environment). 55 This argument is supported by Dey (2007) , of The Press Notes from Elliott's (2009) point of 57 the Research Unit for Political Economy (RUPE). view "legitimise cascading investments.” It is Although FDI is restricted, Dey points out that important that regulations are made clear so the Government of India has taken a much more that the possibility of foreign retailers using liberal approach to wholesale, commission these grey areas or loop holes to set up agent services and franchising and this has cascading businesses dressed up as Indian resulted in many foreign retailers having controlled and owned companies is eliminated. already set up operations through a number of In our opinion this defeats the whole object of different routes. For example, Pottery Barn, having FDI restrictions in place in the retail Ralph Lauren and Gap have all made India a key sector, and makes the entry of foreign retailers sourcing hub. Wal-Mart, one of the world's harder to control and monitor. largest retailers set up a global sourcing operation in Bangalore in 2002, and at the end In respect of single-brand retailing which is of 2006, it entered a Joint Venture with the well allowed up to 51% equity, Khatore and Parekh known Indian corporation Bharti. "For the time (2009) point out that "several major foreign being, Bharti is to own the chain of front-end single-brand retailers have already established retail stores, while the two firms will have an their presence in India through the permissible equal share in a firm that will engage in franchise route. Thus, the policy of not wholesale, logistics, supply chain and sourcing allowing 100% investment appears activities. This is seen as a preliminary step by desynchronised, as outflow of funds from India Wal-Mart pending the removal of all restrictions in the form of franchise payments is permitted 56 on FDI in retail trade.” but inflow of foreign investments is 58 restricted.” 55. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 – http://rupe-india.org/43/retail.html 56. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 – http://rupe-india.org/43/retail.html 57. Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 – http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html 58. Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th June 2009, page 1 – http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm 39
  • 5.1 Arguments for FDI in Retailing Khatore and Parekh (2009) also argue that the monopoly rents will begin to accrue and bad growth projection that has been forecast for the habits will get entrenched and it will then be Indian retail sector may not be achievable if the more difficult to open the sector. Domestic government does not act quickly in opening up players have the best locations anyway and a 59 single-brand and multi-brand retail sectors. clear head start.” Kumar (2006) argued that FDI in retail improves The second argument is also not substantiated, growth prospects. In an article in The Economic as Kumar argues that "liberalization of retail Times (August 2006) Kumar stated that there raises overall economic welfare and does not are predominantly 3 arguments against result in loss of employment. Some allowing FDI in the retail sector. The first was restructuring will take place but local markets that it could hinder or prevent the domestic will not close down. Both can coexist as they organized retailers from growing. Secondly, it fulfil different needs and serve different 60 would result in small retail stores closing and clientele.” unemployment growing, and thirdly, that it would disrupt the social community and the The third argument on the disruption of social given way of life. community and the given way of life has a stronger case. Kumar acknowledges that Kumar (2006) counters each of these shopping centers & malls could potentially arguments individually, retorting that the first result in "greater urban anonymity and a argument is out-of-date, because domestic complete breakdown of the bazaar culture and players such as Reliance, Tata and various other the disappearance of the 'down town' space that large organized retailers have already grown has its own charm. But, in France, Germany the and matured and that "these corporates don't Nordic countries and also other parts of Europe, need protection…Actually, if these infants are experience has shown that local communities protected any longer they have good chances of can thrive if they are empowered and involved in 61 becoming delinquent adults. Soon enough, urban planning.” 59. Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 – http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms 60. Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 – http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms 61. Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 – http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms 40
  • 5.1 Arguments for FDI in Retailing Kumar (2006) concludes that FDI in retail will such as the 'mom and pop' stores, FDI would improve prospects of growth, will not harm still bring significant benefits to the Indian equity and will ensure that monopoly rents are consumer and give them value for money. "The not encouraged, and therefore should be standard of living of the people will increase opened up immediately. and they will have a better lifestyle which will result in the development of the economy as a 63 Real estate consultant CB Richard Ellis also whole.” believe that the government needs to open up FDI in retail so as to bring in more investment When looking at FDI from a general point of and to help promote competition in the sector view, removed from the constraints of the retail that has been hit hard by the current economic sector focus of this report, it could be argued slowdown. “The existing FDI rules are a that FDI, if 'effective', will develop human constraint. There is need to open up the sector a capital. Subbarao (2008) discusses this in a bit more as it will facilitate fresh infusion of research paper on FDI and Human Capital 62 funds and also promote competition,” said Development, saying that "effective FDI Chairman of CB Richard Ellis's South Asia office. indulges in enhancement of human capital of 64 the country.” By 'effective' FDI, Subbarao Mehta (2007) of the Birla Institute of means investment that encourages the Management Technology in giving an overview development of a country that fosters the of the Indian retail market implied that development of each resident of the country. regardless of the risks to traditional retailers 62. Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Infusion into Retail', 12th October 2009 - http://www.indianrealtynews.com/retail-market/relax-norms-on-foreign-direct-investment-to-ease-fresh-infusion-into-retail.html 63. Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology, 2007, page 2 – http://bimtech-retail.com/article2.html 64. Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 2 41
  • 5.1 Arguments for FDI in Retailing Subbarao (2008) also talks of other potential regards to whether FDI has lead to the benefits to host countries, including the enhancement of human capital. generation of employment, raising of productivity, skills & technology transfer, The Financial Express (anonymous author, improved infrastructure, increased incomes, 2005) when discussing the arguments of those enhanced exports, and contribution to the who are against FDI, said that there are no long-term development of developing restrictions for Indian large corporates to enter economies. There is also the advantage to the into retail. Many domestic players have huge Government of additional taxes. Taxes that are expansion plans and the ability to invest billions generated from the entry of foreign investors in of dollars themselves. What is the difference a host country can be used by the Government between these domestic players expanding, or to re-invest in human capital development. foreign investors joining and expanding in the Even without taxes, a United Nations Indian market? Conference on Trade and Development (UNCTAD) report in 1994 (cited by Subbarao The Financial Express (2005) believed it could (2008)) reported that foreign multi-national also be argued that organised retailing would investors' "demand for highly trained graduates have little detrimental effect on retailers if manifests itself in the form of financial support, comparison is drawn from the impact of stores 65 particularly to business schools.” Therefore, like Wal-Mart on small US retailers. Retail sales it is likely that foreign retail investors will look increased substantially overall; and although to invest in human capital development as well retail sales were adversely affected in areas as provide additional tax streams. With this such as clothing & groceries, there was an said, Subbarao acknowledges that different increase in sales of general merchandise, home countries have had different experiences with furnishing, and food and drink. “India's retail sector is already undergoing a change propelled by evolving consumer demand and lifestyles, urban chaos and shortage of retail space, integration of markets, a need for revamping logistics, and above all, global competition. FDI may hasten this change, and even benefit SMEs. It would be better if FDI is allowed in phases, giving time for policy adjustments, and with appropriate riders on procurement to ensure that small producers gain from it. The debate must shift into the realm of 'how' instead of 'why'.” 65. Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 7 42
  • 5.2 Arguments against FDI in Retailing When researching the justifications 'against' FDI companies in India.”67 Other studies by N. in India's retail sector, it should be recognised Kumar (1990), S Kumar (1996), Myneni (2000) that there have been many studies that have and Debroy (1996) were all identified by Nayak looked at the strengths and weaknesses of (2008) as showing positive benefits to the allowing FDI in developing countries in general, domestic companies and country as a whole. of which several of these have focused on India. Amar Nayak (2008) in his literature on multi- To the contrary, “a number of highly compelling nationals in India discussed some of these studies show that FDI has not been beneficial to studies to try to understand the impact of FDI on host countries. Nair-Reichert and Weinhold host countries. It was evident that the (2001) studied the impact of FDI on over 24 literature revealed a heterogeneous (varied) countries in different stages of development effect on host countries, and whilst “some and found that FDI had a heterogeneous studies show that FDI has benefited a host impact. Country specific analyses of host country, many other studies show that they countries show that FDI has not helped them in 68 have either had a negative impact or no impact meeting their national objectives.” (Cited by 66 on host countries.” Nayak (2008) Nayak (2008) when discussing the literature Chakraborty and Basu (2002) had concluded that focused on India, pointed out that there from research that the Indian Government's were apparent positive and negative effects trade liberalization policy had initially made a from FDI. For example, “Johri (1983), by positive impact, but as a whole had tended to studying the business strategies of foreign cause labour displacement. In fact, Nayak multinational companies in the drug and (2002, 2004, 2005) had concluded “FDI on the pharmaceutical industry, showed that domestic whole in India has neither been effective for companies benefited greatly by the India nor for the foreign companies in India.” investments of foreign pharmaceutical (Cited by Nayak (2008)69 66. Amar K.J.R. Nayak, 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008, page 13 67. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13 68. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13 69. Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 15 43
  • 5.2 Arguments against FDI in Retailing Abrol (2005), the President of the Bombay Small Mohan Guruswamy, Chairman of CPAS in New Scale Industries Association is cited by the Delhi was the former Advisor to the Finance Financial Express website as having said Minister, and a Harvard graduate. Along with “various ministers of the present government several colleagues (K Sharma, J P Mohanty and are proposing FDI in retail. We believe Thomas J Korah) he produced a document titled multinational retail and World Bank- 'FDI in India's Retail Sector, More Bad than International Monetary Fund lobbies and some Good?' Guruswamy et al (2003) highlighted that self-serving bureaucrats are supporting it. This unorganised retailing accounted for proposal will create multiple East India approximately 98% (in 2003) of total trade, with Companies in our country and affect livelihoods organised retailing only having a share of 2% of of 1.2 crore (12 million) small retailers. Isn't the the market. The size of the retail market is very 70 proposal anti- national?” hard to gauge, but estimates have placed it at around Rs 4,00,000 crores (US$ 86,021.50 Abrol is not alone in this view. There have been million) which was forecast at the time to several parties who have spoken out strongly double by 2005. They acknowledged that against FDI in Retail. The organisation 'India domestic retail businesses that were 'corporate' FDI Watch' argues why India should be kept owned, were only a small amount of the total Independent, and the Center for Policy market, but were growing at a rate of 40%. Alternatives Society (CPAS), a privately funded Federation of Indian Chambers of Commerce think tank focused on the study and review of and Industry (FICCI) in 2003 estimated total public policy in India, have produced a series of retail business to be 44% of GDP, and food sales reports on the problems with FDI in Retail. The made up 63% of total retail sales. With food first in 2003, then in 2006, and a third in 2007. retail trade being a significantly large segment All have compelling arguments that require of India's GDP, and because of its huge further consideration. employment potential, Guruswamy felt it deserved special attention. 70. Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 – http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1 44
  • 5.2 Arguments against FDI in Retailing Guruswamy et al's (2003) first note was that economic activity in rural locations. This raised even if FDI was not opened up, the growth of the the question of whether FDI was necessary at all domestic 'organised sector' alone would result in this sector, if there is enough domestic in efficiency improvements and an increase in capital being injected in to the retail sector. The food retail sales activity, which would have a furious growth of the domestic corporate trickle down effect on employment and retailers would bring about enough investment. Guruswamy et al (2003) talked of retail as a 'Forced Employment' sector in India. They argued that one of the main reasons behind the growth of retail and its fragmented nature was that Retailing was “probably the primary form of disguised unemployment/underemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many millions [of] Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store… and thus, a retailer is born, seemingly out of circumstance rather than choice.” This would explain why India is so highly fragmented with estimates at the time of the above report suggesting in the region of 11 million outlets with only 4% of them being larger than 500 square feet in size. But unemployment is high and many of the unemployed people turn to very informal retailing to try and make some kind of living, with limited alternative employment opportunities. 45
  • 5.2 Arguments against FDI in Retailing Dey (2007) recognized this problem also, and retail sector… Those displaced as a result of FDI stated that "the retail sector [in India] acts as an in retail may not show up as an increase in important shock absorber for the present social visible unemployment”72 system.”71 When for example, a factory closes, or a peasant gets evicted from their land, or the Interestingly, Guruswamy et al (2003) stagnant manufacturing industry fails to soak discussed a particular foreign retailer who has up new entrants to the job market, then the subsequently entered the Indian market in 'cash retail sector manages to absorb them all. & carry' wholesale (Wal-mart) arguing that if Skilled laborers end up as street hawkers, and they were to enter India, they could use educated youth turn to selling newspapers. A predatory strategies to force out smaller better off unemployed person might start competition and that this would create telephone services and retail telecom cards. unemployment in the millions. "Thus, after agriculture, the incidence of under- employment is probably highest in the Indian It was calculated that on the basis that India had 35 towns with over 1 million people in each, and if Wal-mart opened an average store in each city and they performed as well as an average Wal-mart store employing just over 10,000 employees only, then by extrapolating the turnover and no. of employees alongside the average trend, it would be the equivalent of 432,000 people being displaced. The report expanded on this theory further arguing that if FDI retailers were to acquire say 20% of retail trade, this would equate to Rs. 800 billion of turnover, which would lead to the employment of just 43,540 people, but would displace approximately 8 million people employed in the unorganised retail sector. 71. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 – http://rupe-india.org/43/retail.html 72. Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 2 – http://rupe-india.org/43/retail.html 46
  • 5.2 Arguments against FDI in Retailing Centre for Policy Alternatives' (CPAS) first report by as detailed above, acknowledges that there are many good things that could come from FDI, and they have supported FDI in other areas where they feel the evidence suggests that it will benefit and grow the economy. For the retail sector, CPAS make a number of recommendations for issues that should be addressed before considering the opening up of the retail sector to foreigners. These recommendations are summarised below: 1. Bank Finance – The government should create suitable lending policies so as to assist domestic organized and unorganized retailers to grow and improve their efficiency. These policies should encourage those in the unorganized sector to migrate to the organized sector. 2. National Commission – A National Commission should be set up to carry out research in to the retail sector to help create policies that will support the sector if and when FDI arrives. 3. Conditions – Conditions with regards to sourcing of farm produce, domestically manufactured merchandise and imported goods should be applied to large foreign retail companies. The conditions should encourage the sourcing of goods from India's domestic market. 4. Timescale / Safeguards – The opening up of the retail sector should be slow and gradual so as to allow for the displacement of labor to be analyzed and policies amended where appropriate, with social safeguards in place. Ensure high entry costs for foreign retailers and implement regulations so that the retailer cannot use predatory tactics with their pricing to gain market share aggressively. 5. Manufacturing Sector – In order to cope with the labor displacement, CPAS strongly suggest that the manufacturing sector must be improved, in the belief that this will offer some compensation for the displaced labor from the retail industry. 6. Co-operative Stores – They recommend that the government should encourage co-operative stores so as to source and stock consumer goods/commodities from the small producers, in order to address the two problems of limited promotion and marketing ability, as well as assisting market penetration. 7. Agricultural Perishable Produce Commission (APPC) – A Commission to ensure that procurement costs are fair for farmers of perishable commodities. 47
  • 5.2 Arguments against FDI in Retailing 8. Food Retail Sector a. Training to provide skills in transport, handling, storing, sorting, grading, hygiene, refrigeration equipment maintenance etc. b. Improve Infrastructure for retailing with focus on logistics and hygiene c. Creation of certification and price administration bodies to oversee regulation of quality and to assist with the upgrading of technical & human interface in the 'rural-to-urban supply chain'. d. Credit availability e. Implement cross integration of India's existing long food supply chains such as dairy, fish, fruit and veg to provide new products in new markets and help to improve consumer choice, and increase employment and economic activity.73 By undertaking their recommendations, CPAS The research study undertaken by ICRIER (2005) believe that it will help to ensure that the revealed that those against FDI in retail argue domestic and foreign retailers are on equal that the entry of large multi-national retailers ground, and that domestic retailers are not could upset India's import balance, as a number especially disadvantaged. "The small retailers of these prefer to source globally (for example, must be given ample opportunity to be able to from China) and may prefer this to sourcing provide a more personalized service, so that from India. This view is supported by CPAS. In their higher costs are not duly nullified by the a recent study, CPAS's Chairman Guruswamy, presence of big supermarkets and Sharma & Jos (2007) suggest the potential 74 hypermarkets. problem of a 'China Pipeline'. It argues that the efficiency of the large global retailers is due to their ability to procure goods globally from the cheapest possible source. They are able to force prices down purely by economies of scale, ie. purchasing such a large volume of any given item. China has "mastered the complexities of the procurement-logistics supply chain and do provide huge standardised volumes of quality household products at a low price within strict time schedules. Wal-Mart procures £18 billion worth of Goods from China giving it a ready pipeline through which cheaper goods can flow into the Indian economic hinterland.” 73. Guruswamy, K Sharma, JP Mohanty, TJ Korah, “FDI in India's Retail Sector; More Bad than Good?” Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 - http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf 74. Guruswamy, K Sharma, JP Mohanty, TJ Korah, “FDI in India's Retail Sector; More Bad than Good?” Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 - http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf 48
  • 5.2 Arguments against FDI in Retailing Those opposed also believe that foreign retail "after making initial investment on basic investors may use predatory pricing infrastructure, the multinational retailers may techniques, which are aggressive and can force remit the profits earned in India to their own out domestic players by selling at below cost country.”76 until the domestics have been eliminated. Then the foreign retailers have a monopoly of the India FDI Watch is a national coalition of labor market and can increase prices and reap higher unions, trade associations, environmentalists, profits. This is not such an inconceivable NGOs and academics that have formed to block concept, as it has happened elsewhere in the attempts by Prime Minister Singh's government world which can be seen, for example in an to allow foreign direct investment in India's 75 article by the Institute for Local Self-Reliance retail markets (www.indiafdiwatch.org). They where Wal-mart were charged with predatory have produced several reports that argue that pricing in the United States in 2000. India should say no to FDI in retail unless the foreign retailers "make satisfactory guarantees The trading associations have pointed to the that would protect communities; insure the fact that retail trade does not require large stability of existing small businesses and amounts of investment to operate because traders; guarantee fair wages and working goods are bought on credit and sales are mainly conditions for their own employees and source cash, and therefore the foreign retail investors employees along with union protection and will not bring large inflows of foreign agreements; and insure that a significant investment. To the contrary, they argue that percentage of sourcing derives from the Indian 77 market.” 75. http://www.newrules.org/retail/news/walmart-charged-predatory-pricing 76. Mukherjee A, Patel N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, page 118 77. http://indiafdiwatch.org/index.php?id=80 49
  • 5.2 Arguments against FDI in Retailing One particular India FDI Watch campaign interest”79 The proposed GATS agreement believed that there is pressure on the would provide that an investor would not be government from the IMF and World Bank to subject to the introduction of new barriers to allow labour standards to be dictated by the investment in a host country, would be provided demands of supply chain flexibility ie. 'hire and with post investment protection, protection fire' policy. They argue that if the government against all material and intellectual property, is to change labour laws (as it has already effective protection against direct proposed to do in 2005), then the safe guards expropriation as well as against indirect that have been in place to protect India's labour expropriation t hr o ugh d i sc r i mi na t o r y force will be lost and the business environment treatment, a mechanism for compensation in will be far more conducive to FDI and global the case of expropriation, a mechanism for the integration, as the model used by global settlement of disputes, and the right to retailers requires flexible labour markets to be determine its own ownership structure and 78 present. provisions for legal, regulatory and 80 administrative transparency. The same campaign report argued that Trans This protection could be detrimental if India National Companies (TNCs) are trying to bring decides to open FDI in retail, and then find that in changes through the World Trade it is not successful. It will be too late for the Organisation's GATS (General Agreement on government to go back on any decision, as the Trade in Services) to "safeguard their vested GATS agreement may prevent them. 78. India FDI Watch 'Keep India Independent!', 2009, Page 23 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf 79. India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf 80. India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf 50
  • Chapter 6 - Detailed analysis of factors and conditions related to FDI 6.0 Survey Design & Sample The survey sample consists of 70,000 people headhunting firms, and educational who have registered to receive 'The India Retail institutions. Newsletter', an e-web news service, which Out of the 70,000 participants in the survey, provides the latest news on the sector. The there were 243 respondents. Figure 4 below sample of people who are registered is made shows the profile of the survey sample used to up of Retailers, Fast Moving Consumer Goods distribute the survey questionnaire, broken (FMCG) companies and manufacturers, down by Industry. 91% of the chosen sample is franchisors and franchisees, retail service employed in the Indian retail sector, and the providers, real estate companies, software & IT remaining 9% are in inter-related industries and companies, hardware and system sub-sectors. manufacturers, consulting companies, Figure 4 Survey Sample by Industry 1% 1% 2% 4% 1% Retail FMCG / Apparel / Manufacturing Media Real Estate Information Technology Other 91% Retail A survey sample of this size is more than is required for the purposes of obtaining a representative view of the domestic Indian retail sector. It covers not only participants who are within the retail trade directly, but also others within retail-related sectors (as detailed above) and therefore should provide the researcher with a balanced view from various viewpoints. 51
  • 6.0 Survey Design & Sample The questionnaire was designed to contain then designed to link in to these closed both open and closed ended questions for a questions and to draw out more detail, by number of reasons. Open ended questions encouraging respondents to give reasons as to allow further clarification of the closed-ended why the felt a particular way, or what they would responses, as well as allow for thoughts and propose as solutions to a specific problem, for ideas to be discovered that perhaps have not example, possible labour displacement. been considered in the literature review and in earlier stages of this research. The justification It was important to ensure that anonymity and for using closed-ended questions was to privacy were considered throughout the survey, counter-balance any mis-interpretation / lack so as not to discourage participants, and to of response in the qualitative areas. protect their personal views and opinions. Therefore, the preliminary data on the The questions were written after a preliminary questionnaire i.e. name, occupation, sector etc review of the initial literature discovered during were not compulsory. A 'respondent ID the early stages of the research. The closed number' was allocated to each response when ended questions would be able to provide a collated on to computer software so that simple view of whether a particular respondent specific respondent comments could be believed, for example, 'Yes, FDI should be referred to in the analysis, and for ease of opened up', or 'No, reforms policy are not reference. necessary'. The open-ended questions were 6.1 Questions Please see Appendix II for Survey Questions. 52
  • 6.2 Data Analysis Below is a summary of the data results from the survey following analysis. There were 243 respondents in total, and 'no response' rates are recorded for those who answered some of the survey questions, but not the specific question that is being analysed. The following analysis charts display the results visually, but should be read in conjunction with Chapter 4.3 Results & Findings, and using the Coding Key in Appendix I where appropriate. Each chart states if it requires the Coding Key for interpretation. No. of people aware of current FDI in Retail Policy (Question 1) No. of people 200 189 180 160 140 120 100 80 60 48 40 20 6 0 Yes No No response Chart S1 Should the Indian Government open up FDI restrictions in the Retail Sector ? (Question 2) No. of people 250 203 200 150 100 50 38 2 0 Yes No No response Chart S2 53
  • Coded Qualitative Analysis of Reasons why FDI should or should not be opened up in India (Question 3 - please see Coding Key) Coded Response X 36 K 11 J 11 I 15 H 60 G 20 F 26 E 25 D 25 C 8 B 1 A 5 0 10 20 30 40 50 60 70 No. of respondents Chart S3 Are you happy with the current FDI Retail policy as it is? (Question 4) No. of people 250 199 200 150 100 50 41 3 0 Yes No No response Chart S4 What conditions should be imposed on foreign retailers if policy is changed? (Question 5) None Only Allow FDI In Specific Other Restrictions 13% Cities/Areas 8% 0% No Response 4% An Exclusion Of Specific A Minimum Investment Amount Products For The Domestic Requirement Retailer 8% 3% Equity Limits 4% Only Allow Branded Products Only Allow Certain Retail 17% Formats (Eg: Malls) 12% Certain Products Must Be Manufactured/Sourced In India By The Foreign Investor 31% Chart S5 54
  • Should Government reforms be made to support domestic retailers? (Question 6) No of People 180 170 160 140 120 100 80 70 60 40 20 3 0 Yes No No response Chart S6 Coded Analysis of Suggested Reforms to Protect Domestic Retailers (Question 7 please see Coding Key) Y D A C E 12% 1% 7% 2% 1% (no reforms necessary) B 3% F 1% H G 3% 3% I 1% J 10% (Subsidy) X K 35% 0.3% (no response) L N 1% 1% M Q 2% T S R 3% W 1% 3% 2% P O 1% V 6% 1% 1% U 0.3% Chart S7 Will lifting restrictions on FDI in retailing allow more investment, technical skills and consumer choice? (Question 8) No. of people 250 223 200 150 100 50 15 5 0 Yes No No response Chart S8 55
  • Coded Analysis of Suggested Solutions to potential Labour Displacement problem (Question 10 - Please see Coding Key)) A 5% B 6% C 11% X 40% D 28% F 8% E 2% Chart S9 Coded Analysis of the no. of people who believe the argument that "foreign retailers will not 'own a stake' and therefore will make little investment…" No. of people (Question 9 Please see Coding Key) 200 182 180 160 140 120 100 80 60 40 36 25 20 0 FALSE (A) TRUE (B) NO RESPONSE (X) Answer Chart S10 How many years should FDI policy be 'phased in' to allow domes industry & market to adjust? tic (Question 11) No of people 50 46 45 43 40 39 38 35 30 27 25 20 17 15 10 9 8 5 0 0 1 2 3 4 5-6 7-10 10+ Years Chart S11 56
  • 6.3 Results & Findings 6.3.1 Chart S1 (Question 1) Are you aware of the current FDI in Retail Regulation & Policy? The first question revealed that 77.7% of respondents were aware of current FDI in retail policy, with 19.7% not being aware, and 2.6% of respondents giving 'no response'. This data shows that a significant amount of people within the domestic market place are paying an interest in the current policies and how these could influence their industry and country. The awareness was anticipated to be high, due to the very fact that the topic has been discussed in the Indian media many a time over the last decade. 6.3.2 Chart S2 (Question 2) Do you think the Indian Government should open up Foreign Direct Investment (FDI) restrictions in the Retail Sector? It was evident from the responses that a significant number of respondents would like to see the opening up of FDI in the retail sector. 83.5% of respondents said 'Yes', India should open up the FDI policy, whilst only 15.6% said 'No'. A very small 'no response' rate was observed from this question at 0.9%. These results show a strong amount of support for the concept of opening up FDI, although the data analysis also highlights that there is still a small but significant (15.6%) group of people within the domestic industry who oppose the idea of opening up FDI. 6.3.3 Chart S3 (Question 3) Please give reasons for your answer to Question 2 Question 3 was an open ended question asking why participants thought FDI policy should or should not be opened up. Responses were analysed and coded according to common themes. 11 themes or categories were identified and allocated a code (please see Code Key in Appendix I for identification of categories / themes.) 57
  • 6.3 Results & Findings 6.3.3 Chart S3 (Question 3) 24.7% of respondents believed that opening up FDI in the retail sector would allow for improved skills, technology, innovation and best practices, as well as offer improvements to infrastructure, supply chain and logistics, an improved competitive environment which in turn would lead to consumer benefits. They also believe that it would increase employment and economic growth and bring investment to the domestic sector including related-sectors such as agricultural and manufacturing operations, This particular group of respondents (coded H) were 'particularly pro- FDI' and gave multiple reasons (as above) as to why the sector should be opened up. Even more revealing is that a further 45.3% of respondents mentioned either 1 or 2 of the above reasons for believing FDI should be opened up. Therefore, 70% of respondents believe that one or more of the above reasons are justification for opening up FDI in the retail sector. This reflects a strong sentiment towards FDI, and is a sign that the domestic market feels positively about the widening of FDI policy and the benefits it could bring to the countries industry and wider economy. A small number of respondents, 6.2%, made specific mention of the argument of allowing 'free market efficiency' to reign, and for there to be less 'protectionism' within the retail sector. 4.5% were against the idea of opening up FDI yet, because they felt that the domestic market was not developed enough yet. However, they also felt that in the future once the 'organized' retail had grown and reforms had taken place, it would be of benefit to the country to allow FDI in the sector. A further 4.5% of respondents felt strongly that FDI would be of no benefit and should not be allowed. The researcher anticipated the number of respondents in this group to be higher, given that 15.6% of respondents said 'no' to opening up FDI in Question 2 (see Chart S2). However, these figures could differentiate due to the fact that a 15.2% of participants did not respond or make any comments on Question 3. 58
  • 6.3 Results & Findings 6.3.4 Chart S4 (Question 4) Are you happy with the current FDI Retail policy as it is? Question 4 was intended to obtain a view of whether the domestic market was happy with the current policies. 16.9% of people were satisfied with the policies as they are, while an overwhelming majority of 81.9% were dissatisfied with the policies as they stand today. Only 1.2% of people did not respond to this question which is an acceptable level. 6.3.5 Chart S5 (Question 5) If FDI policy is to open up in the future, do you think any of the following conditions should be imposed on foreign retailers? Question 5 was a multiple-choice question, with a number of suggested conditions that could be imposed on foreign investors. Participants were asked to select a condition they felt should be imposed (if any). The most significant group of respondents (31%), were those who felt that foreign investors should have to source certain products from India. 17% thought that only branded products should be allowed through FDI, while 13% of respondents felt that there should be no conditions imposed on FDI at all. In terms of retail formats, 12% believed that foreign retailers should only be allowed to operate in specific formats, for example, malls, and a further 8% felt that a minimum investment amount should be specified in policy. A smaller group of respondents (4%) felt that Equity limits should be put (or kept) in place (as currently imposed on single-brand retail at 51% equity) 3% of respondents supported the idea of excluding certain products to protect domestic players, and 8% felt that 'other restrictions/conditions' would be more appropriate than the options available for selection in the multiple-choice box in Question 5. The 'no response' rate on this particular question was 4%. The data from question 5 reveals a strong support for conditions that involve sourcing Indian products, and thereby growing the manufacturing/agricultural industries and India's GDP. Branded products and format restrictions were also supported by a number of respondents, but more surprising was the 13% of people who supported 'no conditions' at all. 59
  • 6.3 Results & Findings 6.3.6 Chart S6 (Question 6) Do you think that government reforms need to be made to support domestic retailers so that they can face the foreign investment competition? The data collected from Question 6 revealed that 70% of respondents felt that reforms should be made by the government to ensure that the domestic retailers are supported. The other 28% of respondents felt that no reforms would be necessary to support the domestic retailers. The 'no response' rate was reasonably low at 2%. When interpreting this question alongside Chart S2 (Question 2), it is evident that although 83.5% of people felt that FDI should be opened up, 70% also felt that reforms were necessary to support domestic retailers. 6.3.7 Chart S7 (Question 7) Following Question 6, what reforms do you think should / should not be made? Question 7 was open-ended, and aimed to discover what reforms the survey participants believed would, or would not, help to support domestic retailers. The data was analysed and coded according to common themes or specific recommendations for reform, which consisted of 25 different coded categories from the 243 responses (please see Coding Key in Appendix I). 10% of the survey respondents recommended that the government provide subsidy to domestic retailers, specifically in the form of low-rate loans/bank finance. In contrast to this, 12% felt that no reforms were necessary in order to protect the domestic retailers. This group (coded 'Y') who commented that no reforms were necessary, had a tendency to also mention that their preference was for a 'free market' and that healthy competition would be preferred. There was also a tendency with these respondents to commenting that the domestic players, particularly small 'kirana / mom & pop' stores, would be able to survive alongside the foreign investors with out any issues. For example, one respondent said “they [small retailers] will continue to exist, the kind of personalised service, decision taking speed etc of small retailers can't be matched by big retailers.” (Respondent ID no. 94) 7% of respondents (coded 'A') suggested the government invest in, and provide for equal access to an organised wholesale & supply chain infrastructure, so that domestic retailers can become more efficient, bring down their costs and offer better value so as to be able to compete with foreign investors in the market place. 60
  • 6.3 Results & Findings 6.3.7 Chart S7 (Question 7) Tax relief and tax incentives for domestic retailers was a suggested recommendation by 6% of respondent, 3% felt that implementing educational retail training initiatives would be of benefit. A further 3% recommended improving real estate regulations to facilitate the provision of land to domestics and to provide for allocation of land and city planning. Bureaucracy was raised as a concern, with 3% believing that there is a need to reduce administration and formalities for domestic players to facilitate, for example, exporting or opening a new retail outlet (which can require up to 30 licences). 6.3.8 Chart S8 (Question 8) Do you believe that lifting restrictions on FDI in retailing will allow more investment, technical skills and consumer choice? Question 8 specifically asked whether people agreed Yes or No to that lifting restrictions on FDI would allow more investment, technical skills and consumer choice in India. 91% of respondents answered 'Yes', believing that lifting restrictions would bring more investment, technical skills and consumer choices. 7% answered 'No', and there was a 2% 'no response' rate on this question. By comparing these results to Chart S2 (Question 2) it reveals that although 83.5% of people believed FDI should be opened up, we can see that a higher proportion of people (91%) believe it would bring increased investment, skills & consumer choice. This means that a number of respondents whilst having said 'no' they do not believe FDI should be opened up, clearly acknowledge that it would bring benefits to the economy/industry (in terms of investment & skills) and to society (in consumer choice). 61
  • 6.3 Results & Findings 6.3.9 Chart S9 (Question 9) It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same. How can you counter this argument? Question 9 was an open ended question, which asked participants to counter the argument that 'foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same'. The responses were analysed and coded according to whether they believed the statement to be 'false' and disagreed - these respondents were able to counter the argument with solutions to prevent this from happening, or believed the statement to be 'true' and agreed – these respondents offered no counter argument and could provide no solutions to this potential problem. (please see Coding Key Question 9, Appendix I) 75% of respondents believed the statement to be false, and provided simple solutions to the problems, or argued that it was not an issue of concern. One particular respondent said that “Unless the foreign retailers really invest in India, they would not be able to reap the profits. Only long haul players will really benefit from the Indian market.” (respondent ID no. 56) Another argued that “It is not true. As such, retail needs heavy investments both front end and back end. It is unlikely that foreign investors can overlook this point and hence their financial involvement would be high. Yes, there is certainly a fear of 'flight of capital' after some time, which needs to [be] protected with proper regulations” (respondent ID no. 98). An interesting thought was also considered by respondent ID no. 81; “by constructing businesses and providing fair wages, isn't that a defacto investment?” 10% believed the statement to be true. For example, respondent ID no. 141 said “I am for [this] argument. I believe that fair returns should be in proportion to the investment made by the foreign investors. Also the money in India should be used for the welfare and development of India first.” Respondent ID no. 53 also agreed with the statement, saying “this argument has some validity.” It is evident that the majority of people did not believe in the statement posed by Question 9. The responses analysed, conveyed strong support for the concept that foreign retailers will be looking to stay for the longer term in India (being that it has such huge retail market potential), and therefore will have to invest in improving infrastructure, supply chain, technology and skills for example, so as to make a success of their Indian operations. 62
  • 6.3 Results & Findings 6.3.10 Chart S10 (Question 10) Can you think of any solutions to the potential problems of labor displacement in the unorganized retail sector if FDI regulations are opened up? Question 10 was an open ended question, where participants were asked to suggest ways in which they thought one of the key problems, labor displacement, could be resolved. The responses were analysed and interpreted, and coded according to general themes in response. Please see Coding Key, Question 10, Appendix I The data analysis revealed that 28% of the respondents believed that labour displacement simply wouldn't happen. For example, respondent ID no. 91 said “I don't think that organized retail presents any threat of labour displacement in the unorganised retail sector. Rather it would provide better opportunities.” To the contrary, 11% of respondents believed that there were no solutions to labour displacement, and that displacement was inevitable if FDI in retail was opened up. This is not to say that the participants were either for or opposed to FDI, but merely that labour displacement was not something they believed could be 'solved'. Analysing this against the number of people that believed FDI should be opened up in India (203 respondents), 12% of these respondents also thought that labour displacement was inevitable. This could be interpreted to mean that this group has accepted labor displacement as one of the obvious risks of FDI, but that the benefits would outweigh the risks. 8% of respondents to question 10 argued that providing skills and comprehensive training to existing 'unorganized' retailers would allow them to upgrade their businesses and be innovative so as to continue employment in the retail sector without being displaced. A further 6% thought that foreign retailers should be asked to invest in retail related facilities first and foremost, to offer further employment in back-end services, manufacturing and farming, to compensate for the labor displacement. 5% believed of people believed the Government should be responsible for providing and controlling equal employment opportunities in both the growing 'organized' sector, and in back-end services. These respondents had a tendency to believe that labor laws were in need of upgrading to support . 63
  • 6.3 Results & Findings 6.3.10 Chart S10 (Question 10) The final group of respondents consisted of 3% who believed that there should be compensation, rights and benefits provided to those that are displaced. No participant specified whether this should be from the Government, foreign retailers, or both. The analysis of Question 10 has revealed that the majority of people believe that either labor displacement will not happen at all against those who believe if labor displacement does happen, there is little that can be done to prevent it. 6.3.11 Chart S11 (Question 11) Over how many years do you think FDI policy could be phased in to allow domestic industries/markets to adjust successfully? Question 11 was a closed ended multiple choice question, asking participants to say over how long a period they thought FDI should be opened up to allow domestic retailers to adjust successfully (if at all). 16% of respondents believed phasing in would not allow for any successful adjustment of domestic retailers. This particular group believed also that the retail sector should be opened up imminently. The majority of respondents, 48%, thought 1 to 4 years was adequate enough time to allow for the successful adaptation of domestic retailers, with a weighting toward 2-3 years being preferable. A further 19% thought 5-6 years would be more appropriate, 7% believed 7-10 years, and a small minority at 3% thought that the phasing should be over a period greater than 10 years. 64
  • Chapter 7 -Conclusion 7.0 Introduction So as to draw conclusions from this study, it is appropriate to review the objectives that were set out earlier in Chapter 1:- 1) To investigate the Indian retail market place and current policy & regulations with regards to foreign investors. 2) Examine the arguments for and against changing current policy and improving the regulatory environment 3) Compare the opinions of the Indian domestic retail sector so as to interpret market sentiment towards foreign investment, and to explore thoughts on the issues faced by the sector. 4) Consider what solutions could potentially resolve the issues and are supported by the majority of the domestic retail players. 7.1 Indian market place and FDI policy & regulations It was clear from the literature review that India is a very unique market and has an extremely dominant 'unorganized' sector that is concerned about the introduction of FDI in the retailing sector. Since 1991, economic reforms have been underway to utilize more foreign investment and to become increasingly efficient and internationally competitive. India has come a long way in this regard, but there are still areas that require further reform and improvement. For example, there are issues with labour laws, real estate regulations as well as general economic problems such as high unemployment, inflation and 'jobless growth'. Economic growth in India is good (with a 5 year average of over 8% real growth), and the retail industry contributes approximately 40% of this GDP, and yet still has a very under developed 'organized sector', and therefore offers exciting growth potential. The Food & Beverages vertical has huge potential for the organised retail sector as to date less than 1% of this vertical has been penetrated by organized retailers. Clothing & Textiles also holds a fairly significant share of the retail markets revenue. We believe that these are the two most likely target sectors for foreign investors. 65
  • Chapter 7 -Conclusion 7.1 Indian market place and FDI policy & regulations Changing consumer patterns appear to be a allowed via a number of methods such as large factor in the growth of the Indian franchising/joint venture, but 100% equity is 'organised' retail sector, with a burgeoning only allowed in Wholesale Cash & Carry, and middle-class, and a growing young population 51% in single-brand retailing. No multi-brand with a willingness to spend. Consumer habits, retailing is allowed by foreign investors. desires and incomes are changing and demands for different retail formats are The recent changes brought about through a emerging. series of Press Notes in 2009 have caused confusion over the policy, as the changes allow The retail sector in India does not have 'industry Joint Ventures to effectively create sub- status' and that this causes difficulties for all companies (cascading). We believe this may concerned. Providing industry status would encourage foreign investors to use this 'loop allow comprehensive legislation to be put in hole' to create sub-companies so that they can place to govern the running of the retail sector. exceed FDI caps, and potentially enter areas This in turn would assist in accelerated growth such as multi-brand retailing through the of the retail sector and would remove a number 'back-door' without technically breaking the of barriers that are currently slowing down rules. There needs to be more clarity in this growth, such as bureaucracy, formalities and area of policy. The literature review revealed lack of finance for retailers, for example. that although there are hurdles to be overcome in the policy and regulatory environment, the The literature review showed that current government seems to be working on various investment policy is already quite liberal solutions, for example, Special Economic towards FDI in many sectors, with only a few Zones. sectors (predominantly service sectors such as retailing) that are restricted. Retailing is 66
  • Chapter 7 -Conclusion 7.2 Arguments for & against changing policy and improving the regulatory environment. Those in favour of FDI in Retail argue the following reasons:- 1. The technical edge offered by foreign investors is crucial to the survival of domestic retailers, particularly in the current downturn. 2. Knowledge & skills would be transferred. 3. Allowing 100% FDI will encourage domestic investment in the sector 4. Economic boost with increased FDI inflows 5. Improve the standard of living of the country as a whole (enhanced Human Capital) 6. Improve productivity and efficiency in management 7. Foreign 'low-cost' retailers will set-up/adopt integrated supply chain management, which in turn will lower prices for consumers and improve the infrastructure of the country. 8. Increased FDI in Retail will ensure quality products and customer services 9. Will promote links between domestic/local suppliers, manufacturers and agricultural traders with the global market 10. Sourcing / Exports from India would be enhanced. 11. Standards (quality, health & safety etc) & best practices would improve 12. Domestic players would develop new strategies to improve operations to counteract any competition from foreign players 13. Foreign retailers would encourage employment in back-end services 14. Improvements in quality of employment 15. Reduce the number of intermediaries 16. Joint Ventures would help to ease the capital constraints of domestic companies 17. Most acknowledged that phasing-in should be considered and that some restrictions would be required on equity limits, certain products, and certain 'zones' 18. Research suggests that 'unorganised' retailers have not been adversely affected by the location and growth of 'organised' retailers nearby. Those that were affected, tended to adopt new strategies to face competition 19. Improve transparency and prevent 'back-door' entry and 'loop holes'. 20. Not logical to have 51% restriction on single brand retailing when so many foreign single brand retailers have already entered through the franchise route. 21. Retail Growth forecasts may not be achievable without FDI stimulus 22. Additional taxes will be raised for the benefit of India 23. Contribution to the long-term development of the country (ie. investment in education, infrastructure etc) 67
  • Chapter 7 -Conclusion 7.2 Arguments for & against changing policy and improving the regulatory environment. Those against the opening up of FDI in the retail sector argue the following reasons:- 1. FDI has a heterogeneous effect on countries, ie. the results vary. Some studies have shown success of FDI in India, others have shown initial positive results but with a tendency on the whole towards causing labour displacement. 2. The fast growth of domestic 'organised' retailing (40% per annum) would result in efficiency improvements and increased retail sales which would in turn create employment and economic growth, raising the question of whether FDI was required in this sector at all. 3. Retail as a 'Forced Employment' – the sector is one of the primary forms of 'disguised employment / under employment' which acts as a shock absorber for the present social system, soaking up unemployed people who have little alternative but to try and make some kind of living. 4. Those displaced by FDI may not show up as a 'visible' increase in unemployment. 5. Foreign retailers may use predatory strategies to force out smaller competition 6. Various issues such as Bank Finance, conditions, safeguards, and improvements to manufacturing sector are required to be addressed before FDI in Retail should be considered. 7. Potential to upset the import balance, with the creation of a 'China Pipeline'. 8. After minimal initial investment in basic infrastructure, Foreign investors may re-patriate profits back home. 9. Foreign retailers should not be allowed until they make satisfactory guarantees to protect communities, support small businesses and traders, guarantee fair wages and working conditions, and ensure minimum sourcing from India. 10. Hire and Fire' Policy in labour law would be more conducive to an FDI environment, but would destroy the safeguards that are in place to protect the labour force. 11. Amendments to GATS Agreements could mean that any policy changes on FDI will be irreversible as investments will be protected and have immunity to new barriers to trade. 68
  • Chapter 7 -Conclusion 7.3 Market sentiment and exploration of domestic retailers' thoughts. The survey revealed that there is a strong A small percentage of people feel that India isn't market sentiment towards opening up FDI, with quite ready to open up its foreign retail policy 83.5% of people supporting the opening of the yet, but that it would be ready in the near future sector. and should begin planning a 'phased system'. A minority (4%) believed there would be no The domestic retailers who responded believe benefits at all of allowing FDI and were against that FDI in retail will bring the benefit of skills opening up policy. transfer, technology, innovation and best practises as well as supply chain, infrastructure This research has revealed that there is strong and logistics improvements. They also thought support for imposing a condition on foreign that it would increase employment and retailers to source certain products in India, as economic growth and draw more investment in well as some interest in restricting FDI to to the domestic sector and sub-sectors. branded products, and certain retail formats. Overall, 70% of people believe that it would have a positive impact. Interestingly, it was found that 70% of people also felt that reforms should be made to support domestic retailers in the face of competition from FDI, whilst 28% felt that domestic retailers did not need reforms to support them. The data collated from the survey highlighted a number of recommended reforms to support domestic retailers. The reforms that were most commonly supported were, subsidies in the form of low-rate loans, provision of equal access to organized wholesale & supply chain infrastructure and tax relief for domestic retailers. However, 12% of respondents felt that no support was necessary and that domestic retailers would support themselves. It was also suggested that bureaucracy and formalities be reduced as this was currently hindering domestic/foreign retailers and was restricting the growth of the sector. 69
  • Chapter 7 -Conclusion 7.3 Market sentiment and exploration of domestic retailers' thoughts. Over 20 recommendations for reform to support domestic retailers were gathered from the data analysis of the survey, for which the complete list is detailed in Chapter 4 & Appendix II. This research has shown that an overwhelming majority (91%) believe that FDI in retail will bring benefits in the form of further investment, skills and consumer choice. The study also ascertained that 75% of people felt that foreign retailers would make a long term commitment to investment in India and would not simply make minimal investment then 'repatriate profits'. It is evident from the survey results that 28% of people do not support the view that allowing FDI will cause labour displacement. This compares to 12% who believe labour displacement is inevitable and 11% who believe there are no solutions to this problem. India's domestic market is clearly divided on whether there is even an issue of displacement. We re-iterate that other countries have experienced varying results, and therefore there is no way of knowing whether labour displacement will be non-existent, mild or severe in Indian retail. One would imply that there is likely to be some displacement, but a well thought out plan and policy & regulatory system will minimize the risks here, and perhaps prevent it from happening all together. Survey respondents suggested the following ways in which labour displacement might be dealt with:- · Provide skills and comprehensive training to 'unorganised' retailers to allow them to evolve/innovate and remain employed in retail trade. · Foreign retailers should invest in back-end services, manufacturing and farming initially to compensate for the labour displacement. · Government should provide and control equal employment opportunities both in the ‘organised' sector and in back-end services. · Compensation, rights and benefits should be provided to those displaced. Nearly 50% of people believe a 1-4 year phasing in period would allow domestic players to successfully adjust to foreign players, whilst 16% thought a phased system would not allow domestic retailers to adjust anyway. 19% believed a 5-6 year phasing in period would be more successful, while only 10% believed 7+ years was necessary. 70
  • 7.4 Recommendations Based on the research carried out, we propose several recommendations for areas that have been highlighted as concerning for FDI in retail. These recommendations are by no means an exhaustive list but should serve as a framework for consideration of the various ways forward with policy change:- 7.4.1Recommendation 1 The government should revoke the recent Press Notes that relate to permitting cascading sub- companies, as these are only serving to provide a loop-hole for back-door entry by foreign retailers and are not promoting transparency within the policy. 7.4.2 Recommendation 2 We recommend that the retail sector is granted 'industry status' as soon as possible so that a legislative framework can be put in place for the control and management of the sector and its day to day operation. 7.4.3 Recommendation 3 Begin recording detailed statistical data of the sector, both foreign, and domestic organised and unorganised so that the impact of FDI when introduced can be closely monitored and policy fine- tuned accordingly. 7.4.4 Recommendation 4 Labour Laws need to be reviewed to be more in line with the requirements of retail sector employment. 7.4.5 Recommendation 5 Investment should be made by the government to improve the efficiency of the manufacturing sector so that this sector can grow and provide more employment opportunities going forward. 7.4.6 Recommendation 6 City Planning needs to be addressed so that development is in such a way that it protects the traditional trader areas and does not clutter the already densely populated city centers. 71
  • 7.4 Recommendations 7.4.7 Recommendation 7 Real Estate Regulations need to be considered for reform so as to facilitate access to land and property for use by the retail sector, and to provide equal access to space for both foreign and domestic players. 7.4.8 Recommendation 8 Certain sensitive products should be restricted from foreign retailing, so as to protect the traditional craftsmen and unorganised traders. The products to be restricted needs to be given thought and researched before any decisions are made. 7.4.9 Recommendation 9 The government should impose local employment quotas on foreign retailers, firstly to reduce the effects of any potential labour displacement, and secondly to encourage foreign retailers to provide training, skills and development to local people who without it would not be able to transfer to the 'organised' retail sector or back-end services. 7.4.10 Recommendation 10 Rules on re-patriation of foreign profits should be revised, to discourage (and restrict) 100% of profits from leaving India. Conditions imposed on requiring foreign retailers to invest a minimum amount in infrastructure and supply chain capabilities would be beneficial. 7.4.11 Recommendation 11 Consider providing Tax relief and/or subsidy by way of low rate loans to domestic retailers to provide support. 7.4.12 Recommendation 12 Implement a 'phased introduction' of FDI to the retail sector, say over 2-4 years, so as to provide gradual adjustment for the domestic players and to allow fine-tuning and adjustment of policy if issues arise. 72
  • 7.4 Recommendations 7.4.13 Recommendation 13 The government should reform price control policies to ensure that foreign retailers cannot sell below a minimum price, rather than the current Maximum Retail Price (MRP). 7.4.14 Recommendation 14 Conditions of minimum sourcing from domestic agricultural and manufacturing sectors should be imposed, so as to prevent the creation of a 'China Pipeline'. 7.4.15 Recommendation 15 Bureaucracy and formalities should be reduced by updating related legislation, for example, reducing the number of licences required by businesses to open a store. This should assist the domestic players in expanding and will help to streamline the efficiency of the sector. 7.4.16 Recommendation 16 Geographical restrictions for foreign investors need to be considered so as to reduce the impact, or prevent the fast expansion of retailers in to rural areas. Special Economic Zones need to be assessed with further research, to review their advantages and disadvantages to both India as a country, and to the foreign players. 7.4.17 Recommendation 17 Other related regulations such as copyright law, need to be updated and brought in to line with the needs of the future Indian retail sector. 73
  • 7.5 Further research There are many areas that have been highlighted as requiring further research during this study. Each individual argument for and against almost requires an entire research project to itself so as to delve further into the complexities of each specific scenario, for example, Special Economic Zones which have not been possible to cover in any detail within this study could provide an interesting area of research so as to establish the advantages and disadvantages of operating under a SEZ system. Consumerism is an area that is worthy of further research so as to ascertain whether there is any correlation between changes in consumer dynamics and the emergence of organized retail in specific 'verticals'. The GATS Agreements and World Trade Organisation Doha Round would also be another interesting avenue of research. With the Doha Rounds to conclude in 2010, it would be interesting to investigate how this might impact foreign investment in the retail sector in India. 74
  • Appendix I Code Key for Open-ended Questions (3, 7, 9 & 10) Question 3 A. Improve skills, technology, innovation and best practises B. Improve infrastructure, supply chain and logistics C. Both A & B (tendency to be more concerned with improvements in retail industry) D. Improved competition & consumer benefits E. Increase employment and economic growth F. Both D & E (tendency to be more concerned with consumers/society and the economy) G. Increase investment in the 'organised' retail sector (believe required for growth of domestic organised retail, including Agricultural/Manufacturing H. Commented on all of the above (A-G) (very pro-FDI, believe its "non-sense not to open FDI in retail") I. Believe in “free market efficiency” and less protectionism (respondents gave a sense of political disagreement and also had a tendency to agree with answer H i.e. Pro-FDI) J. FDI shouldn't be opened up 'yet', but should be in the future. (believes the domestic market is not ready/developed enough yet) K. FDI will not be of benefit. (Against FDI being opened up at all) X. No response / Uninterpretable response Question 7 A. Invest in and provide for equal access to an organised wholesale & supply chain infrastructure B. Protect Certain Products/formats from FDI and consider keeping 'sector caps' C. Provide 'knowledge' and skills to existing domestic retailers to innovate and modernise D. Remove intermediary middlemen in the supply chain E. Price control regulations F. Copyright/trademark regulations G. Real Estate Regulations (including allocation of land / city planning legal framework) H. Bureaucracy - reduce admin and formalities (inc. exports, legal, business formation) I. Restrict FDI profits allowed to leave India J. Provide subsidy to domestic retailers (including low-rate loans/bank finance) K. Provide Platform for domestic retailer marketing L. Implement procedures for data collection/monitoring of global/Indian retail & FDI data 75
  • Appendix I Question 7 M. Compulsory local sourcing for FDI (including policy to protect manufacturers/farmers) N. Regulation/Checking to ensure international standards within retail sector O. Restrictions geographically on FDI (e.g.: Special Economic Zones) P. Tax relief / incentives for domestic retailers Q. Implement Educational Retail Training initiatives R. Require a percentage of Foreigner Investment to go in to Indian development projects S. Friendlier Labour Laws and Goods & Services Tax (GST) introduction across India T. Provide retail business with lawful 'industry status' U. Any reforms necessary to protect the domestic retailers V. Systematic study of each sector required to address reforms required W. Ensure a 'phased' introduction of FDI X. No Response / Uninterpretable / Misinterpreted the question Y. No reforms necessary. Free Market / Healthy Competition preferred Question 9 A. Believed the statement to be 'false' and disagreed. Were able to counter the argument with solutions to prevent displacement from happening B. Believed the statement to be 'true' and agreed. Offered no counter argument, or were unable to provide solutions to prevent displacement happening X. No Response / Uninterpretable / Misinterpreted the question Question 10 A. Government should provide and control equal employment opportunities in organised and backend services, and upgrade labour laws to support this. B. Foreign investors should be asked to invest in retail related facilities first, to offer further employment in, for example, manufacturing and farming industries. Includes requiring a fixed quota of employment of Indians by the foreign investor C. No - there are no solutions to the labour displacement that FDI will cause. 76
  • Appendix I Question 10 D. No - Don't believe labour displacement will happen (or will be very limited). E. Provide compensation / rights / benefits to those who are displaced. Includes reform of remuneration policy F. Provide skills training to allow existing retailers to upgrade/innovate so as to continue employment in the retail sector X. No response / Uninterpretable response / Misinterpreted the question 77
  • Appendix II Survey Questions 1. Are you aware of the current FDI in Retail Regulation & Policy? a. Yes b. No 2. Do you think the Indian Government should open up Foreign Direct Investment (FDI) restrictions in the Retail Sector? a. Yes b. No 3. Please give reasons for your answer to Question 2. 4. Are you happy with the current FDI Retail policy as it is? a. Yes b. No 5. If FDI policy is to open up in the future, do you think any of the following conditions should be imposed on foreign retailers? a. None b. Equity limits c. Only allow FDI in specific cities/areas d. A minimum investment amount requirement e. An exclusion of specific products for the domestic retailer f. Certain products must be manufactured/sourced in India by the foreign investor g. Only allow certain retail formats (e.g. Malls) h. Only allow branded products I. Other restrictions…? (please specify) 6. Do you think that government reforms need to be made to support domestic retailers so that they can face the foreign investment competition? a. Yes b. No 7. Following Question 6, what reforms do you think should / should not be made? 78
  • Appendix II Appendix Survey Questions 8. Do you believe that lifting restrictions on FDI in retailing will allow more investment, technical skills and consumer choice? a. Yes b. No 9. It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same. How can you counter this argument? 10. Can you think of any solutions to the potential problems of labour displacement in the unorganised retail sector if FDI regulations are opened up? 11. Over how many years do you think FDI policy could be phased in to allow domestic industries/markets to adjust successfully? Please select '0' if you don't think phasing in would allow successful adjustment for domestic players. a. 0 b. 1 c. 2 d. 3 e. 4 f. 5-6 g. 7-10 h. 10+ Preliminary, non-compulsory fields were as follows:- Name Title 79
  • References Appendix AT Kearney, 2009 Global Retail Development Index– http://www.atkearney.com/images/global/pdf/2009_Global_Retail_Development_Index.pdf Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006 CII / AT Kearney, Retail In India: Getting Organized to Drive Growth', November 2006 Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007 – http://rupe-india.org/43/retail.html Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 – http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007 Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 – http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1 Gupta, Pankaj, Organised Retail in India, The Next Growth Frontier, Tata Strategic Management, June 2006, page 2, (http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf) Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Alternatives, CPAS (2005) Guruswamy, Sharma, Mohanty & Korah, “FDI in India's Retail Sector; More Bad than Good?” Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 7 - http://cpasindia.org/reports/10-FDI- Retail-more-bad.pdf Guruswamy M, Sharma K, Jos, Maria, 'Implications of Wal Mart's Backdoor Entry' Centre for Policy Alternatives, New Delhi, 2007, page 1 http://indiafdiwatch.org/fileadmin/India_site/Implications-backdoor-entry_of_Wal-Mart.pdf IBEF !ndia, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007 (www.ibef.in) India FDI Watch 'Keep India Independent!', 2009, Page 23 http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Infusion into Retail', 12th October 2009 - http://www.indianrealtynews.com/retail-market/relax-norms-on- foreign-direct-investment-to-ease-fresh-infusion-into-retail.html Kalirajan, Kaliappa and Sankar, Ulaganathan, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003 Kaplowitz, MD et al, Oxford Journals, Public Opinion website, 2004 - http://poq.oxfordjournals.org/cgi/content/full/68/1/94 Kattuman, Paul A, recorded open ended email discussion - Judge Business School University of Cambridge, 23 September, 9.55am. (available upon request) 80
  • References Appendix Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th June 2009, – http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm Knight Frank – 'Market Review' Quarter 3 2006 KPMG, 'Doing Business with India' Report, July 2009, page 85 KPMG, Investing in India, 2008, page 32 – http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 – http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in- retail/articleshow/1882764.cms Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, August 2003 Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology, 2007, page 2 – http://bimtech-retail.com/article2.html Ministry of Commerce & Industry, 'Guidelines for calculation of total foreign investment', Press Note No. 2 (2009 series), Department of Industrial Policy & Promotion, February 2009, page 3 – http://siadipp.nic.in/policy/changes/pn2_2009.pdf Rea L, Parker R, 'Designing & Conducting Survey Resaerch, Jossey-Bass Publishers, 1992 Sagarika Dutt, 'India in a Globalized World', Manchester University Press, 2006 Sapford, Roger, 'Survey Research', Sage Publishing, 2004, page 47 Sathyaraj (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized- retailing.html Saunders M, P Lewis & A Thornhill, “Research Methods for Business Students” Prentice Hall London, 2003 Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 – http://bimtech-retail.com/downloads/FDI_RetailDude.pdf Stewart D & Kamins M, “Secondary Research: Information sources and methods”, Sage, 2nd Edition, 1993, page 37 Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 2 Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 - http://www.retailing360.com/article/8/2009062420090624193427218739345f/Barring- foreign-players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html Mukherjee A & Patel, N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, quoted from foreword by A Virmani Naoum, Dr S G, “Dissertation Research & Writing for Consttruction Students”, Butterworth Heinemann, 2nd Edition, 2007 81
  • References Appendix Nayak, Amar K.J.R. 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008 Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized- retailing.html Whelan, Peter, 'India Economics', EDC Economics, May 2009, page 1 – http://www.edc.ca/english/docs/gindia_e.pdf http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.newrules.org/retail/news/walmart-charged-predatory-pricin http://www.allindiaretail.com/ http://www.isixsigma.com/library/content/c000709a.asp http://www.answers.com/topic/triangulation?cat=technology http://www-personal.umich.edu/~alandear/glossary/f.htm http://en.wikipedia.org/wiki/retailing http://en.wikipedia.org/wiki/List_of_countries_by_population http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm http://www.wto.org/english/tratop_e/dda_e/dda_e.htm http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm http://finance.indiamart.com/investment_in_india/fipb.html http://www.ril.com/html/business/business_retail.html http://www.investmentcommission.in/policies_and_laws.htm 82
  • Bibliography Appendix Indian Council for Social Science Research, 'Towards a New Era: Economic, Social & Political Reforms', Har-Anand Publications PVT Ltd, 2001 Denoon, David B H, 'The Economic and Strategic Rise of China and India; Asian Realignments after the 1997 Financial Crisis', Palgrave Macmillan, 2007 Ray, Pradeep Kanta, FDI and Industrial Organization in Developing Countries: The Challenge of Globalization in India, Ashgate Publishing Ltd, 2005 Advanti & Co et al, The New India, Opportunities & Strategies for Foreign Investment, Asia Law & Practice, 1999 Kolanad, Gitanjali Culture Shock! A Guide to Customs and Eqiquette, Kuperard (London) Ltd, 1994 Todaro, Michael P, Economics for a Developing World, An Introduction to principles, probems and policies for development, Third Edition, Longman Singapore Publishers Pte Ltd, 1992 http://www.iariw.org/papers/2009/8b%20Kolli.pdf http://www.ncaer.org/downloads/indianeconomy/services/q2aug07.pdf (NCAER economic stats) http://www.ncaer.org/downloads/indianeconomy/forecast/q2aug07.pdf http://labour.nic.in/ http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf http://dipp.nic.in/manual/FDI_Manual_text_Latest.pdf http://siadipp.nic.in/policy/icrier_report_27052008.pdf http://siadipp.nic.in/policy/changes/pn6_2009.pdf http://www.edc.ca/english/docs/gindia_e.pdf http://www.cds.edu/download_files/wp311.pdf http://indiafdiwatch.org/fileadmin/WARNstorage/indiwm.pdf http://indiafdiwatch.org/fileadmin/India_site/FDI_Broch_1_.pdf http://www.bijapurkar.com/printerfriendly.php?filename=ct_cons_india_better.htm http://www.bijapurkar.com/printerfriendly.php?filename=ct_cons_india_better.htm http://www.bijapurkar.com/indiamyland/indi_celebrating_diversity.php http://www.livemint.com/2009/06/08185249/Parliamentary-panel-recommends.html http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1 http://www.indianrealtynews.com/category/retail-market/ http://bimtech-retail.com/downloads/FDI_RetailDude.pdf http://bimtech-retail.com/downloads/Retail_Twist_RetailDude.pdf http://bimtech-retail.com/downloads/RetailDude_Interview_1.pdf http://indiafdiwatch.org/fileadmin/WARNstorage/indiwm.pdf 83