Foreign Direct Investment (FDI)Challenges and Opportunities in Multi-Brand Retail
TEAM MEMBERS PARTH SARTHI GAIROLA RAJAT SAXENA PRABHUTI BHASIN RUCHIKA PRITI PRIYA NITIN YADAV 2
Road Map for Presentation Background What is FDI & FII Reasons for FDI in retail in India Opportunities and Challenges Sector wise analysis of FDI Conclusion 3
Background: India Transformed !! …Yesterday Slow rate of growth Bureaucratic Controls Protected and slow Small consumer markets Weak infrastructure …Today Strong macro economic fundamentals Encouraging foreign investment Outsourcing destination Growing consumerism Impetus on infrastructure development India -- the largest Democracy - one of the fastest growing economies in the World! 4
ADVANTAGES INDIA HAS TO OFFER• Stable democratic environment over 60 years of independence• Large and growing market• World class scientific, technical and managerial manpower• Cost-effective and skilled labour• Abundance of natural resources• Large English speaking population• Well-established legal system with independent judiciary• Developed banking system and vibrant capital market• Well developed accountancy, legal, actuarial and consultancy profession 5
What is FDI & FIIForeign Institutional Investment (FII):FII denotes all those investors or investment companiesthat are not located within the territory of the country inwhich they are investing. 6
What Exactly is FDI ?Foreign direct investment (FDI) in its classic form isdefined as a company from one country making aphysical investment into building a factory in anothercountry. Include investments made to acquire lasting interest inenterprises operating outside of the economy of theinvestor. 7
Distinction between FDI and FII FDI FII 1. It is long-term investment 1. It is generally short-term investment 2. Investment in physical assets 2. Investment in financial assets 3. Aim is to increase enterprise capacity or 3. Aim is to increase capital availability productivity or change management control 4. Leads to technology transfer, access to 4. FII results in only capital inflows markets and management inputs 5. FDI flows into the primary market 5. FII flows into the secondary market 6. Entry and exit is relatively difficult 6. Entry and exist is relatively easy 7. FDI is eligible for profits of the company 7. FII is eligible for capital gain 8. Does not tend be speculative 8. Tends to be speculative 9. Direct impact on employment of labour 9. No direct impact on employment of labour and wages and wages 10.Abiding interest in mgt. 10.Fleeting interest in mgt. 8
Why FDI is NEEDED ?1. Gain a foothold in a new geographic market.2. Increase a firm’s global competitiveness and positioning.3. Fill gaps in a company’s product lines in a global industry.4. Reduce costs in areas such as R&D, production, and distribution.5. Advantages of advanced technology, management practices andassured markets.6. Contribution to GDP and foreign exchange earnings. 9
Retail• In 2004, The High Court of Delhi defined the term „retail‟ as a sale for final consumption.• Unorganized Retail- refers to the traditional formats of low-cost retailing.• e.g.. the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.• Organized Retail- refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc.• In India 94% is unorganized retail & 5-6% is organized retail.• India tops in the list of emerging market for global retailer .• Retailing in India is one of the pillars of its economy and accounts for 14 to 15% of its GDP.• According to study conducted by ICRIER, total retail business in India will grow at 13% US $590 billion in 2011-12 and further US $1 trillion by 2016-17.
• The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the world by economic value.• Indias retail and logistics industry employs about 40 million Indians (3.3% of Indian population).
Entry Options For Foreign Playersprior to FDI Policy• Franchise Agreements .• Eg -: Pizza Hut, Lacoste & Spencer.• Cash And Carry Wholesale Trading.• 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers.• Eg -: Metro AG of Germany• Strategic Licensing Agreements.• Some foreign brands give exclusive licenses and distribution rights to Indian companies.• Eg -:Mango, the Spanish apparel brand has an agreement with Piramyd, Mumbai.• Manufacturing and Wholly Owned Subsidiaries.• Eg -: Nike, Reebok & Adidas.
FDI in Retail in India• Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail.• Even single-brand retail was limited to 51% ownership.• In November 2011, Indias central government announced retail reforms for both multi-brand stores and single-brand stores.• In December 2011, under pressure from the opposition, Indian government placed the retail reforms on hold.• In January 2012, India approved reforms for single-brand stores with 100% ownership.• Imposed the requirement that the single brand retailer source 30% of its goods from India.• IKEA announced in January that it is putting on hold its plan to open stores in India because of the 30% requirement.
FDI Policy with Regard toRetailing in India• FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.• FDI up to 100 % with prior Government approval for retail trade of Single Brand products.• FDI up to 51% is permitted in Multi Brand Retailing in India.• All retail stores can open up their operations in population having over 1million.• Multi-brand retailers must bring minimum investment of US$ 100 million.• Half of this must be invested in back-end infrastructure facilities such as cold chains, refrigeration, transportation, packaging etc.• The opening of retail competition (policy) will be within parameters of state laws and regulations.
Current scenario twomajor problems :• Political Instability• Public Agony
SWOT Analysis of Retail Sector. • Major contribution to GDP. • Lack of Competitors. • High Growth Rate. • Highly Unorganized. • Low Productivity. • High Potential. • Shortage of Talented Professionals. • High Employment Generator. • No Industry‘ status, hence creating financial issues for retailers S W • There will be more organization in • Current Independent Stores will be the sector. compelled to close. • Healthy Competition. (check on • Big players can knock-out inflation.) competition. • Create transparency in the system. • India does not need foreign • Intermediaries will be evicted. retailers. • Quality Control and Control • Remember East India Company it Wastage. entered India as trader and then • Heavy flow of capital. took over politically. O T
Top FDI Sectors and inflow in india Cumulative Sector- wise FDI equity inflows (from April 2000 to January 2012) - Annex-„B‟.
Top Investing Countries Of FDI In India i) *Includes inflows under NRI Schemes of RBI. (ii) Cumulative country-wise FDI equity inflows (from April 2000 to January 2012) – Annex-„A‟.
Year-wise FDI Inflows in India 40000 35000Amounts in US$ million 30000 25000 20000 15000 10000 5000 0 Financial years Fact Sheet On Foreign Direct Investment (FDI) 2010-2011 http://dipp.nic.in/English/Publications/FDI_Statistics/2011/india_FDI_ March2011.pdf
FDI Equity Inflows from 2000-2012 %age growth over previous year S. Nos Financial Year (April – March) Amount of FDI Inflows (in terms of US $) FINANCIAL YEARS 2000-2012 In ` crores In US$ million 1 2000-01 10733 2463 - 2 2001-02 18654 4065 ( + ) 52% 3 2002-03 12871 2705 ( - ) 18 % 4 2003-04 10064 2188 ( - ) 14 % 5 2004-05 14653 3219 ( + ) 40 % 6 2005-06 24584 5540 ( + ) 48 % 7 2006-07 56390 12492 (+ )146 % 8 2007-08 98642 24575 ( + ) 53 % 9 2008-09 ‘*’ 142829 31396 ( + ) 20% 10 2009-10 # 123120 25834 ( - ) 10 % 11 2010-11 # 88520 19427 ( - ) 13 % 12 2011-12 # (April - January 2012) 122307 26192 - CUMULATIVE TOTAL (from April 2000 to January 2012) 723367 160096 - Sourc(i) RBI‟s Bulletin March 2012 dt. 13.03.2012 (Table No. 44 – FOREIGN INVESTMENT INFLOWS). Monthly data on components of FDI as per expended coverage are not available. These data, therefore, are not comparable with FDI data for previous years. Figures updated by RBI up to January, 2012
FDI Equity Inflows in Urban Regions of India: Year 2010-2011 Fact Sheet On Foreign Direct Investment (FDI) 2010-2011 http://dipp.nic.in/English/Publications/FDI_Statistics/2011/india_FDI_ March2011.pdf
Global Retail‟s Big 10 and Shopping Future Walmart • Home base- US • Present in 16 countries • Total revenue- $418.9bn Carrefour • Home base- France • Present in 33 countries • Total revenue- $119bn Tesco • Home base- UK • Present in 13 countries • Total revenue- $92bn
Metro• Home base- Germany• Present in 33 countries• Total revenue- $88.bn Kroger• Home base- US• Present in 1 country• Total revenue- $82bn Schwarz• Home base- Germany• Present in 26 countries• Total revenue- $79bn
Costco• Home base-US ; Present in 9 countries.• Total revenue- $76.2bn The Home Depot• Home Base- US ; Present in 5 countries.• Total revenue- $67.9bn Walgreen Co• Home base- US ; Present in 2 countries.• Total revenue- $67.4bn Aldi• Home base- Germany ; Present in 18 countries.• Total revenue- $67bn
China and India are World‟s TopTwo FDI Destinations: UN Survey • A recent survey of transnational corporations found that companies see China and India as the world’s first and second most important destinations for foreign direct investment over the 2010 to 2012 period, respectively
• China and India together account for about 37.5% of world population and 6.4% of the value of world output and income at current prices and exchange rates If China opened up in 1978, India did so in 1991 i.e 14 yrs after China therefore any comparison of India of today should be made with china as it was more than a decade ago as emerging global powers now … Since the two countries have similar labor endowments and development lags due to government controls and protected nature of their economies , they can be expressed to follow similar growth paths on opening up…
China – Economic Fact SheetGDP – real growth rate:9.8% (2008) country comparison to the world:13% (2007)11.6% (2006)GDP-Per capita (PPP-Purchasing power parity):$6,000 (2008)country comparison to the world:$5,500 (2007)$4,900 (2006)note: data are in 2008 US dollarsGDP – composition by sector:agriculture: 10.6%industry: 49.2%services: 40.2% (2008)
India – Economic Fact Sheet• GDP- real growth rate:• 6.6% (2008)• 9% (2007)• 9.6% (2006)• GDP – per capita (PPP – Purchasing power parity)• $2,800 (2008)• $2,700 (2007)• $2,500 (2006)• note: data are in 2008 US dollars• GDP – Composition by sector:• agriculture: 17.2%• industry: 29.1%• services: 53.7% (2008)
Comparing India and China’s Growth Stories Indicators India China Political System Multi-party Democracy One-party authoritarian rule Speed of Growth Economic reforms Economic reforms started in 1991. started in 1978. Average 6% growth Average 9.5% growth rate in past two rate in past two decades. decades. Areas of Rising power in Dominant in mass Specialization software, design, manufacturing, services, and precision electronics and heavy industry. industrial plants
Comparing India and China’s Growth Stories Indicators India China Gini index 47.0 (up 10 points (standard measure 36.8 from 15 yrs ago) of inequality) Foreign Direct 6.8% (up from 0.3% 17.8% Investment in 2004) Future Areas of R&D, bio-technology, IT business, services growth high-value IT enabled and continued services (legal, medical, manufacturing engineering architecture), manufacturing, agro- based industry
Comparision India lags behind china in infrastructure. China has a weak banking and legal system. India has the advantage of the English language which has made it easier to participate in the global economy. What holds India back are bureaucratic red tape, corruption and its inability to build infrastructure fast enough. According to Peter Drucker, India has managed rural to urban transition in a relatively smooth and peaceful manner, which China is still struggling to do.
GROSS DOMESTIC SAVINGSCHINA & INDIA 70 China India 60 50 40 30 20 10 0 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008
Port and shipping Indian exports $13.94 billion in august 2009 where as china is $ 95.41 billion. Indian imports amounted to $130.36 billion where as china is 424.59 billion Installed port capacity in China is 5.6 btpa vis-à-vis India‟s capacity of ~0.75 btpa Container terminal capacity in China is ~100 m teus vis-à-vis India‟s capacity of 8.6 m teus. The largest container vessel calling at Chinese Port is more than 13,000 teus where as at Indian container terminal (JNPT) is 6,000 teus. The draft at Shanghai is 19+ m where as at JNPT it is 11.5m and at Mundra it is 17.5 m. The berth length at Shanghai is 13,800 m and that at hong kong is 4,426 m whereas total container berth length at JNPT is 2000 m and at 1280 m at Mundra
Structural change China: “classic” pattern, moving from primary to manufacturing sector, which has doubled its share of workforce and tripled its share of output. India: Move has been mainly from agriculture to services in share of output, with no substantial increase in manufacturing, and the structure of employment has not changed much. Share of the primary sector in GDP fell from 60 per cent to 25 per cent in four decades, but share in employment still more than 60 per cent.
Poverty reduction China: Officially 4 per cent of the population now lives under the poverty line, unofficially around 12 per cent. (Reflects earlier asset redistribution and basic need provision in China under communism, plus larger mass market and role of agricultural prices.) India: poverty ratio much higher and persistent, between 26 per cent and 34 per cent depending upon how one interprets the NSS data.
• 2009 China FDI USD 95 billion 2009 Indian FDI USD 36.6 billion• 2010 China Jan – Jul FDI USD 58.35 billion 2010 India Jan – Jun FDI USD 10.78 billion
Comparison of FDI inflow inIndia and china 1999- 2002 2003 2004 2000(annual avg) India 30104 52743 60630 72406 China 1705 5627 5474 6598 Developing 134670 163583 275032 334285 economies World 495391 617732 710755 916277
Small retailers will not be crowded out, but would strengthen market positions by turning innovative/contemporary. Growing economy and increasing purchasing power would more than compensate for the loss of market share of the unorganized sector retailers. There will be initial and desirable displacement of middlemen involved in the supply chain of farm produce, but they are likely to be absorbed by increase in the food processing sector induced by organized retailing. Innovative government measures could further mitigate adverse effects on small retailers and traders. Farmers will get another window of direct marketing and hence get better remuneration, but this would require affirmative action and creation of adequate safety nets. Consumers would certainly gain from enhanced competition, better quality, assured weights and cash memos. The government revenues will rise on account of larger business as well as recorded sales. 50
"If there is one place on theface of this Earth where allthe dreams of living men havefound a home when manbegan the dream of existence,it is India". Romain Rolland, French philosopher 51