FDI in Retail By ISBE-1 : Joshua Deepak ISBE-16: Saravanan. P ISBE-21: Balaji Murugan. U IIPM-8: Lillima James
Division of Retail Industry
The retail industry is mainly divided into:-
1) Organised ,and
2) Unorganised Retailing
Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc.
- the corporate-backed hypermarkets and retail chains,
- and also the privately owned large retail businesses.
Unorganised retailing, refers to the traditional formats of low-cost retailing.
For example :
- the local kirana shops,
- owner manned general stores,
- paan/beedi shops,
- convenience stores,
- hand cart and pavement vendors, etc.
Retailing In India
The Indian retail sector is highly fragmented with 93 per cent of its business being run by the unorganized retailers.
With over 12 million retail outlets of various sizes and formats.
The organized retail however is at a very nascent stage.
The unorganised retailers are the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP and 8% of employment
To become a truly flourishing industry, retailing in India needs to cross the following hurdles:
Automatic approval is not allowed for foreign investment in retail.
Regulations restricting real estate purchases, and cumbersome local laws.
Taxation, which favours small retail businesses.
Absence of developed supply chain and integrated IT management.
Lack of trained work force.
Low skill level for retailing management.
A Brief History
Beginning of FDI in Retail in India
In PV Narasimha Rao’s govt,the finance minister Manmohan Singh allowed limited FDI in retail as a result of which Dairy Farm, a multinational corporation made an entry in India.
In 5years, P Chidambaram, Commerce Minister of the same government who initiated trade reforms and changed Import & Export Policy, changed laws to go back to square one because by then he was finance minister of a communist-supported government.
BJP’s ego in politics
In 2002 FDI was shelved by the Vajpayee (BJP) govt.
Dr. Manmohan Singh had argued against FDI
In 2004 election manifesto, BJP assured of opening the retail sector.
Now backing from the stance.
On December 21, 2002, The finance minister gave an assurance that the government had no proposal to invite FDI in retail trade.
Entry of FDI
In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route.
In 2006, 51 percent investment in a single brand retail outlet was also permitted in 2006.
FDI in Multi-Brand retailing is prohibited in India.
51% FDI in Multi-brand outlets
100% FDI in single branded stores
Source third of their procurement through Indian SMEs.
Minimum investment of US$ 100 million in back end infrastructure
Suspending of FDI in Retail
7 th december,2011 the government has decided to hold back its decision to allow 51 per cent FDI in multi-brand retail.
Politics behind Opposing
Political parties are opposing these reforms, purely to pick up votes from select constituents by making inflammatory statements
Some opposition parties are opposing FDI reforms, merely to embarrass and corner the ruling Congress leadership
Arguments against FDI
Small retailers will get affected
Fear of monopoly/ oligopoly resulting in complete control to foreign investors
Consolidation creates consumers captive
Govt can build storage facility. FDI is not needed for this.
Comparison between India and China are misplaced.
Discussion points for FDI
Success stories – China, Thailand, Indonesia, etc.
In China, traditional retailers have grown 30% more with the modern retailers after opening up from 1996 to 2001.
100% FDI in cold storage, a dream
Wastage as per 2010, 25-30% in fruits and vegetables and 5-7% in food grains
Because there is absence of assured demand from unorganized retailers
FDI in Multi-brand retail will yield fruitful results in both the area of investment destinations
Support from the stakeholders
Congress led Govt
Strength of Big Retailers
Mobilization of surplus capital
Trained employees for customer satisfaction
Superior process of delivery
In 2006, Rs.60000 crore loan waiver was given
Because of low income as around 7% in the price of a product is going to the farmer, rest to the intermediaries.
Direct procurement will prevent this waivers as these were loss to the exchequer.
Employment – 4
Benefits to farmers – 4
Benefits to customer – 4
Supply chain efficiency-3
Check on inflation - 3
Multiplier effect – 3
Wastage control – 4
Total = 25
Monopoly – 3
Consumers get captivated – 2
Unorganized sector is at stake- 5
Profit to foreigners- 2
Middlemen affected – 4
Dumping Poor quality – 3
Total = 19
Allow FDI Conclusion: Allow FDI
Allow FDI TO THE EXTENT OF 51%
Strong legal framework in the form of competition commission to deal with anti-competitive practices
Positive results if implemented
Gainful employment opportunities
Farmers secure better prices. Farmers suicide can be prevented.
Supply chain efficiencies, improvement in back end infrastructure.
Will check the double digit food inflation.
Hampered progress if not implemented- better to implement
Segmentation of customers would suggest that local retailers have their own set of customers.
Intermediaries can’t be removed from the system wholly. They will be a part of the system.
Backward integration of retailers will fuel the competition in the products market also.