Foreign Direct Investment in Retail: Myths and Realities


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Foreign Direct Investment in Retail: Myths and Realities

  1. 1. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR: MYTHS AND REALITIES Anurag Anand Research Scholar, Centre for Studies in Economics and Planning, School for Social Sciences, Central University of Gujarat, India. Email: ABSTRACTForeign Direct Investment (FDI) is a kind of an important factor in the process ofglobalization as it intensifies the interaction between states, regions and firms. To acceleratethe pace of economic progress, employment generation and consumer awareness in India,there is need for investment which can be fulfilled by FDI in retail. The long awaited schemeto allow FDI in retail sector has been approved by the Cabinet on September 2012 by someproposals that investment in multi-brand retailing has to be minimum investment of US$ 100of which 50 per cent to be spent on rural marketing and rural infrastructure. One of theimpacts of FDI in retail will hopefully be to improve the logistical infrastructure, so that itcan help the farmers and the households in food prices, easy market access for their products,reduction in the role of intermediaries. From the consumer’s welfare point of view, it is alsohelpful because of competition and market awareness. In long run, it will be helpful for thefarmers. This paper try to examine myths and realities of FDI in retail and how it is going toeffects retailer’s position and emerging urban facilities to rural India. It also tries to explorethe role of organised retail sector in India. This paper is mainly based on secondary data.Secondary data will be collected from various Reports of Ministry of Commerce, EconomicSurvey, RBI Bulletin, World Investment Reports, Books and Articles etc.Key Words: FDI, Retail, Rural Welfare, Investment, Consumer Awareness.
  2. 2. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012) INTRODUCTIONForeign Direct Investment (FDI) is a kind of an important factor in the process ofglobalization as it intensifies the interaction between states, regions and firms. It is a kind ofstrategic instrument of development policy. FDI is not simply a transfer of capital but thetransfer of package in which capital, management and new technology are combined. Itgenerates employment, influences income distribution and generates foreign exchange. So wecan say that FDI increases competition pressures to the local firms that result in animprovement in technical and allocate efficiency. India has consistently been classified asone of the most attractive investment destinations by reputed international ratingorganisations with a vast reservoir of skilled and cost. Developing countries like India needsubstantial foreign inflows to achieve the required investment to accelerate economic growthand development, it will fulfil by FDI in retail. It can act as a catalyst for domestic industrialdevelopment. Further, it helps in speeding up economic activity and brings with it otherscarce productive factors such as technical knowhow and managerial experience, which areequally essential for economic development. It will also help to increase consumption andproper volume growth.The retail industry in India is of late often being hailed as one of the sunrise sectors in theeconomy. AT Kearney, the well-known international management consultancy, recentlyidentified India as the ‘second most attractive retail destination’ globally from among thirtyemergent markets. It has made India the cause of a good deal of excitement and the cynosureof many foreign eyes. With a contribution of 14% to the national GDP and employing 7% ofthe total workforce (only agriculture employs more) in the country, the retail industry isdefinitely one of the pillars of the Indian economy. The recent decision of the Government ofIndia on permitting FDI up to 51% in the multi-brand retail has raised hopes for speedymodernisation of organised retail sector in the country. Expansion of organised retailingrequires supporting infrastructure such as storage facilities, assured electricity supply,transport and communication network which can be provided mainly through publicinvestment or through public-private partnership. REVIEW OF LITERATUREForeign Direct Investment (FDI) occupies a special place in the connection betweeneconomic development and globalization. FDI brings scarce capital and technology from rich
  3. 3. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)to poor countries. An additional factor that may prevent a country from reaping the fullbenefits of FDI is imperfect and underdeveloped financial markets (OECD 2002). E A SSarma (2005) said,the retail industry of India is largely in the hands of the unorganisedsector. Khor Chia Boon (2001) said in his study,“Foreign Direct Investment and EconomicGrowth” investigates the casual relationship between FDI and economic growth. So in thiscase FDI should not be restricted to certain branded product types or store formats. SwapnaS. Sinha (2007) in his thesis,” Comparative Analysis of FDI in China and India: CanLaggards Learn from Leaders?”andit is found that India has grown due to its human capital,size of market, rate of growth of the market. Ashoka, Mody. (2007) said in his book,“Foreign Direct Investment and the World Economy” FDI is thrice blessed. It brings scarcecapital where capital needed and productive. Nagaraj,R. (2011)observed that foreigninvestment is now seen as a source of scarce capital, technology and managerial skills thatwere considered necessary in an open, competitive world economy. Kumar, N. (2002) said,FDI as a widely perceived important resource for expediting the industrial development ofreceiving or host economy. Most developing countries, therefore, have a welcoming attitudetowards MNEs and FDI. OBJECTIVE OF THE STUDY  To study how FDI in Retail Affects Indian Farmers.  To Examine Rural Development through FDI in Multi-Brand Retail. METHODOLOGY OF THE STUDYThis study is mainly based on secondary data. Secondary data has been used from variousReports of Ministry of Commerce and Industry, Economic Survey, RBI Bulletin, WorldInvestment Reports, Books, Articles and online database of Indian Economy. FOREIGN DIRECT INVESTMENT IN INDIAForeign Direct Investment (FDI) is a predominant and vital factor for influencing thecontemporary process of global economic development. Foreign Investment in India isgoverned by the FDI policy announced by the government of India and the provision of theForeign Exchange Management Act (FEMA) 1999. FDI is generally defined as “A form oflong term international capital movement, made for the purpose of productive activity andaccompanied by the intention of managerial control or participation in the management of
  4. 4. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)foreign firms”. It is a kind of cross-border transfer of resources including process and producttechnology, managerial skills, marketing and distribution know-how and human capital. FDIgenerates employment, influences income distribution and generates foreign exchange.Indian retail needs FDI in retail because there is not enough capital being invested by theIndian companies. The reasons for this are obvious- quite a few Indian retailers havedisappointed all possible funding institutions, be it private equity, stock market, or the banks.Indian retailers have failed to satisfy any of them and thus the foreign capital inflow hasalmost dried up for the sector. UNDERSTANDING RETAIL SECTOR IN INDIAIndian retail sector is a kind of business enterprises of the economy. It is the 5th largest retaildestination and the second most attractive market after China for investment in the globe afterVietnam as reported by AT Kearney’s 7th annual Global Retail Development Index (GRDI),in 2011. The growing popularity of Indian retail has resulted in increasing awareness ofquality products and brands. As a whole we can say that Indian retail sector has made lifeconvenient, easy, quick and affordable. It is undergoing metamorphosis 1. Till 1990s retailcontinued in the form of kiranas that is unorganised retailing but after 1990s branded retailoutlets like Food World, Nilgiris and local retail outlets like Apna Bazar came into existence.Now big players like Reliance, Tata’s, Bharti, ITC and other reputed companies have enteredinto organised retail business (Gupta, 2012). The retail sector is mainly divided into twoparts- 1) Organised retail and 2) Unorganised retail. Organised retail refers to trade activitiesundertaken by licensed retailers that are those who are registered for sales tax, income tax,etc. These include the corporate-backed hypermarkets and retail chains, and also the privatelyowned large retail businesses. With over 12 million retail outlets, India has the highest retailoutlets density in the world. This sector witnessed significant development in the past 10years from small unorganized family owned retail formats to organized retailing.Unorganised retail refers to the traditional formats of low-cost retailing like the local kiranashops, owner manned general stores, paan-beedi shops, convenience stores and hand cart.The Indian retail sector is highly fragmented with 97% of its business being run by theunorganised retailers. The key factors that drive growth in retail sector are youngdemographic profile, increasing consumer aspirations, growing middle class incomes andimproving demand from rural markets. Also, rising incomes and improvements in1 When a metamorphosis occurs, a person or thing develops and changes into something completely different.
  5. 5. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)infrastructure are enlarging consumer markets and accelerating the convergence of consumertastes. FDI IN MULTI-BRAND RETAILING: FARMER’S WELFARE POINT OF VIEWIndia is the second largest producer of fruits and vegetables; it has a very limited cold-chaininfrastructure. Lack of adequate storage facilities causes heavy losses to farmers, in terms ofwastage in quality and quantity of produce in general, and of fruits and vegetables inparticular.According to the FDI policy norms, the minimum investment by a foreign retailer should be$100 billion, and 50% of this amount has to be channelled into the development of back-endinfrastructure in the first three years. This minimum investment can typically fund theestablishment of around one million sq. ft. of front-end store space, equivalent to 10-15hypermarkets or department stores. In a pan-Indian survey conducted over the weekend ofDecember 3, 2011, an overwhelming majority of consumers and formers in and around 10major cities across the country supported retail reforms. Over 90% of consumers said FDI inretail will bring down prices and offer a wider choice of goods. Nearly 78% of farmers saidthey will get better price for their produce from multi-brand stores. Various farmersassociations in India have also announced their support for retail reforms. These include AllIndia Vegetable Growers Association (AIVGA), Bharat Krishak Samaj, Consortium of IndianFarmers Associations (CIFA), and Sharad Joshi’s Shetkari Sanghatana. On December 4,2011, Deepak Parekh, Ashok Gulati and many other economic policy leaders in India haddescribed putting investment and innovation in retail on hold for the sake of vested interestsas unfair and detriment to the vast majority in India. They had urged farmers, consumers andcommon people to raise their voice against this false drama of apprehension against foreigninvestment and modernising trade in organised retailing. The recent decision of theGovernment of India on permitting FDI up to 51% in the multi-brand retail has raised hopesfor speedy modernisation of organised retail sector in the country through its technologicalup-gradation, resulting in improved competitiveness-necessary for sustaining high growth ofthe economy. On all account farmers, apart from other non-form enterprises and consumersin general, would benefit generally from the development of organised retail, especially inview of the policy requirement of substantial investment in back-end infrastructure much ofwhich would go into areas like rural warehousing and cold chains benefitting the Indianagriculture.
  6. 6. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)Benefit to farmers-  7-10% higher price to farmers than what they get from mandi.  3-4% incentive for the quality of produce farmers deliver to Bharti Wal-Mart based on customer requirement.  Expert’s advice on better crop planning and management. FDI IN MULTI-BRAND RETAIL AND RURAL DEVELOPMENT: MYTHS AND REALITIESFDI in retail will hopefully be to improve the logistical infrastructure, so that it can help thefarmers and the household in food prices. In longer run, it will be helpful for inflation, growthin economy and rural income. Recently the Government of India announced 51% FDI inmulti-brand retail; in this case there are some procedures/conditions for foreign investors- 1. FDI in multi-brand retail trading permitted in all products under Govt. Approval route. 2. Minimum FDI to be brought in by foreign investors US$ 100 million. 3. There should be 50% foreign investment to be invested in villages for infrastructure development. 4. At least 30% in value of procurement to be from small industries/villages and cottage industries, artisans and craftsman, whose total investment in plant and machinery not exceeding US$ 1 million. 5. Retail stores can be established in cities across the county, with a minimum population of 10 lakhs. 6. Smaller States have the right to make their decision for allow FDI in retail. 7. No retail trading by e-commerce by companies with FDI engaged in multi-brand retail trading. 8. Govt. has first right to procurement of agriculture products.Myth-The retail sector will be controlled by foreign stores.Reality- The FDI-backed stores can only operate in cities and every state has the freedom toallow or disallow FDI-backed retail investment.Myth-Farmers will be exploited and will lose their fields and crops to foreign investors.Reality-Farmers will not be exploited because farmers will receive better remuneration fortheir produce & will benefit from additional job opportunities resulting in overall
  7. 7. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)improvement in their quality of life. So that permitting FDI in retail is likely to open newopportunities for farmers, particularly for those dealing in fruits and vegetables. Some studiesshows that profit realisation by farmers can increase up to 60% when the produce is solddirectly to organised retailers, as compared with selling through Mandies.Myth- Kirana stores and small retailers will lose.Reality- Retailers will benefit from existing policy of sourcing their requirements fromwholesale cash & carry stores at a discount. Some countries such as China, Thailand,Indonesia, Brazil, Singapore, Argentina & Chile where there are no caps for FDI and wherethere are no conditions, small retail stores have flourished, leading to more employment.Myth- Another big myth is about potential job losses in the traditional retail sector thatemploys unskilled and unemployable people. But the reality is that, do we wish to securethese low-paid dead-end jobs, or should we try to create well-paying jobs with a certaingrowth path for individuals. DISCUSSION AND FINDINGSOver 80% of farmers now are small and marginal with increasing participation of women.Their awareness of the marketing problems in the new context as well as their bargainingpower while negotiating with more powerful buyers like organised wholesalers and retailersneed to be raised by organising them into sales cooperatives. In this case FDI in retail canbring in latest technology and supply chain management into the country and therefore thenation’s youth will benefit from numerous employment opportunities in this sector. Increasein Multi-brand retail stores will increase Growth in agro-processing industry. Transform ruralIndia through improved agro processing and cold chain and new manufacturing opportunitieswill open for the nation’s micro, small and medium enterprises. Those who are opposing FDIin retail on the grounds that lakhs of small traders will lose out are making big mistake. Theyare forgetting that the loss for these traders will be more than compensated by the gains tohundreds of millions of consumers and farmers who will benefit from cutting out thesemiddlemen. CONCLUSIONFDI would lead to a more comprehensive integration of India into worldwide market.Approval of 51% FDI in multi-brand retail is a kind of another revolutionary leap for Indianeconomy. Although consumers have largely benefited from retail chains, the expected
  8. 8. GLOBAL JOURNAL OF FINANCE & MANAGEMENT (GJFM) ISSN 0975-6477 Volume 4, Number 3 (2012)benefits have not reached farmers. This is mainly because domestic players have failed tocreate adequate back-end infrastructure to provide foe seamless flow of produce from farm tofork. Multi-brand retail chains are equipped with experience, skills and technology, and havebuilt good supply chains. In India there is need to build the capacity for aggressivelymarketing its products at the global level. As long as we can build the capacity ofaggressiveness and competitiveness, FDI is not a dangerous thing. REFERENCES 1. Mehta, S. Pradeep “FDI in retail will benefit all” (2012). Business Line news paper dated-August 8, 2012. 2. Gupta, Amisha. “Foreign Direct Investment in Retail Sector: Strategic Issues and Implications” (2010). IJMMR, Volume-1, Issue 1(December, 2010) ISSN-2229-6883. 3. Singhal, Arvind. (2009): “Indian Retail: The road ahead” Retail biz, available at, last visited 14th Oct.2010. 4. Mukherjee, Arpita and Patel, Nitisha. “FDI in retail sector: India”, Academic Foundation, New Delhi . (2005). 5. Singh, A.K. andAgarwal, P.K. “ Foreign Direct Investment: Big Bang in Indian Retail” VSRD-IJBMR, Vol. 2 (7), 2012, 327-337, (2012). Available online- accessed on 11-10-2012. 6. Kearney, A. T. “Retail Global Expansion: A Portfolio of Opportunities” (2011). Available online- 932c-50169e5aa2f3 accessed on 18-10-2012. 7. The Hindu “No easy ride for foreign retailers” by Jehani, B. Dated- October 22, 2012. Allahabad. 8. The Times of India “Govt. clears 51% FDI in retail, 49% in aviation” by Times view dated September 17, 2012. 9. 10. Ministry of Commerce and Industry, Govt. Of India.