B.c report


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B.c report

  1. 1. Purpose of Report “Report to highlight the implications of FDI in Indian retail on Indian economy onthe basis of secondary information” BackgroundGlobally, there has been significant change in the retail sector over the past twodecades. Much of the rapid growth in organised retail business in the developingcountries is due to the entry of global retailers. Indian retail industry is the largestindustry in the private sector employing around 7% of total labour force andcontributing to over 10% of the countrys GDP. It is six times bigger than Thailand and five times larger than South Korea andTaiwan. India is in the midst of a retail boom. Indian Retail at a Glance • Known as a Nation of Shop keepers with around 12million retail outlets • The share of unorganised sector is around 96% • The current worth of Indian retail is USD 300billion &expected to grow to USD 450- 600 billion by 2010 • Food & Grocery constitutes about71%of total retail sales • Growth rate since 2004 is 25% - 30 % • Contributes to GDP around 10% • Second largest employer after agriculture contributing to 7% of total labour force & expected to generate 2.5 million new jobs by 2010. • Government policy intiatives on FDI: a) Single brand retailing upto 51% subject to Govt. approval b) Cash & carry wholesale trade 100 %on automatic route • FDI inflows into the industry for the year 2008-09 amount to US$ 27.3 billionFDI in Indian RetailGiven this background, the report also would like to bring out the rosy side of Indianretail. India is being seen as a potential gold mine for retailing by investors all overthe world. The latest research has rated India as the top destination for an attractiveemerging retail market. (AT Kearney’s GRDI for 2008, India ranks second toVietnam. It topped the list in the year 2007.) Recent Ernst &Young study predictedMumbai and Bangalore to be the next promising global centres along with Shanghaifor retailing. India’s vast middle class and the country’s untapped retail industry arethe key attractions for global retail giants wanting to enter Indian markets. The WTOhas also been planning to withdraw tariff and trade privileges provided to India underthe new General Agreement on Tariffs and Trade if FDI is not allowed.The brands planning an India entry include The Pizza Company and Spicchio Pizza(both pizza chains from Thailand), Coffee Club from Australia, Lolita Fashion, a -1-
  2. 2. Japanese brand, Revive Juice Bars from the UK, Mrs Fields Cookies and Jamba Juicefrom the US, and Jules- French fashion brand. One can not ignore the WALMART‘sback door entry in wholesale operations in Indian retail.All the above factors and more importantly the major markets which are hit by retailslump attracted many national and international players to enter this sector in a bigway. Several brands are targeting grade B and C cities rather than expanding inmetros, as smaller cities are more brand hungry and retail is not yet hit these cities.With the presence of limited brands in Indian markets the country holds bigopportunity for these brands as this would also help them re-route inventories andorders to new markets and keep their sagging sales volume intactImportance of FDI in retailFDI in retail and the development of larger stores and supermarkets have thefollowing advantages from the point of view of consumers and other stake holders. • The larger supermarkets, which tend to become regional and national chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the benefit to consumers. • They can lay down better and tighter quality standards and ensure that manufacturers adhere to them. • Many consumer goods manufacturers will find that supermarkets account for an increasing share of their sales and will be afraid of losing this valuable and reliable customer to competition. • The fact that a well-known chain of supermarkets sources from a manufacturer becomes a stamp of quality. • With the availability of finance, the supermarkets can invest in much better infrastructure facilities like parking lots, coffee shops, ATM machines, etc. All this will make shopping a pleasant experience. • The supermarkets offer a wide range of products and services, so the consumer can enjoy single-point shopping. • The kirana shops in large parts of the country will enjoy built-in protection from supermarkets because the latter can only exist in large cities. • The ability of supermarkets to demand pricing and quality standards from manufacturers will benefit even kirana shops, who can even buy from the supermarkets to sell the same products in smaller towns and villages. • With FDI in retail trade, India will become more integrated with regional and global economies in terms of quality standards and consumer expectations.The benefits for India from a liberal FDI policy on investments in the retail sector arebeyond just benefiting the billion-strong Indian consumer population, or merelycreating incremental job opportunities. Allowing FDI in retail would contribute to a -2-
  3. 3. multiple impact not only in retail sector but also in many other activities such asmanufacturing, food processing, packaging and logistic services. The largest benefitin the medium term is a strong up-gradation of India’s agriculture and small andmedium manufacturing sectors. FDI will also facilitate Indian manufacturing to getintegrated with the global supply chain. Another positive rub-off of this improvedsupply chain will be a better product basket from India for exports. Tax compliancewould be greatly facilitated through a more organised retail network in India,generating more revenue for the central and state governments. Finally, it isacknowledged that retailing has a strong bearing on tourism. Singapore, Hong Kongand Dubai are the examples.Policy on FDI in Indian RetailEven 60years after Independence, policy-makers in India continue to be xenophobic.Fears of foreign imperialism have not yet receded and continue to be a barrier for theentry of foreign enterprises into retailing. India has opened almost the entiremanufacturing sector to FDI, including the most sensitive Defence equipmentmanufacturing. But, ironically, a less sensitive and significant contributor toeconomic growth, viz retail trade has been excluded from the liberalisation. Moreimportantly India is today the only major economy that still does not permit liberallyFDI in retail trade. 35 of the worlds top 70 retailers have already entered China andset up business. They have helped boost exports.At present, India allows 100 percent FDI in cash-and-carry wholesale trading andexport trade in the sector. In the year 2006 the government had decided to partiallyopen the retail sector by announcing 51 percent FDI in single brand retailing subjectto government’s approval .But at the moment, the entry of retail giants of multiplebrands like Wal-Mart is not allowed. Global luxury brands such as Fendi, LouisVuitton, Nike, Llardo, Rino Greggio, Damro, Etam, Zegna and Lee Cooper wereamong the first to get FDI permission under the single brand retail window.Implications of the current policy initiativesWith the new regulations in place, the debate is that what will happen to these smallstores? Will the entry of global retailers wipe out these local stores or will it make noimpact? If we take Chinas example, the FDI in retail has little or no impact on thelocal retailers and they still dominate the retail sector. Secondly, the decision may nottrigger the FDI flow as such as single brand retailers who wanted to be in India likeNike and Reebok are already here through franchise and may find it tough to findlocal partners willing to invest in business.However opening up of the retail sector to the FDI has been fraught with politicalchallenges and also opposition from small traders. Some of their arguments includethe following. • The global retailers will put thousands of small local players and fledging domestic chains out of business. • Would give rise to cut-throat competition rather than promoting incremental business. -3-
  4. 4. • Promoting cartels and creating monopoly. • Increase in the real estate prices. • Marginalize domestic entrepreneurs. • The financial strength of foreign players would displace the unorganized players. • Absence of proper regulatory guidelines would induce unfair trade practices like Predatory pricing.The arguments against FDI in Indian retail market are similar to the arguments usedduring the era of industrial licensing, which was meant to protect small-scaleindustries. . But eventually when licensing was abolished small-scale industries havenot died. Instead, they have learnt to co-exist as suppliers to large-scale industries.The political bosses have to see the reality and make others understand that the riskto the local grocer or kirana shop is the same from a Giant or a Big Bazaar, or StarIndia Bazaar, as it would be from a Tesco, or a Sainsbury. For example, ready-madegarments have displaced the family tailor (but not tailoring), horse buggies or Tongashave made way for the automobiles (but not reduced travel), and dharamshalas havebeen replaced by hotels (but not the cuisine). Practically in no developed ordeveloping country have ‘global’ retailers wiped out the local retail industry. Even ifFDI was allowed, it would take considerable time for any effects to surface, nothingwill change overnight. But it has to be understood that change will bring with it a lot of upheaval and"teething problems." The local retail players, large as well as small, need to be givensupport and time to adjust to a changed environment. Thus the arguments for and against FDI in retailing in the country are purely basedon perceptions of such parties and also the experiences of other countries in thisregard as there has not been sufficient data to support or oppose it. However variousstake holders of retailing industry would love to drag China and Thailand as case inpoint to support or oppose FDI in Indian retail. More academic and industrialresearch is needed to make any claims in this area. But by not allowing FDI in retailsector the Government would be cutting down an investment model.RecommendationsSome of the recommendations I would like to state that:  The Government and the RBI should evolve suitable lending policies to enable retailers in the organised and unorganised sectors to expand and improve efficiencies.  A national regulatory agency needs to be constituted to study the problems associated with FDI into the industry and to suggest measures to cope with FDI. -4-
  5. 5.  Entry of foreign players must be allowed with social safeguards in the sense that such a policy initiative must add to economic activity and social welfare. In fact FDI should be permitted only in joint venture format in such product categories where the threat perception is very high. Similarly FDI should not be permitted in those product categories where Indian players are already well established. For some product categories FDI should be permitted for sourcing only but not for selling in the Indian market.  India may follow Chinese model which took12 years to open the retail sector completely to FDI.  Efforts should be made to improve manufacturing sector so as to absorb the dislocated workers from the unorganised retail sector due to FDI.  Regulations restricting real estate purchases, and cumbersome local laws.  Absence of developed supply chain and integrated IT management.  Lack of trained work force.  Low skill level for retailing management.  Intrinsic complexity of retailing – rapid price changes, constant threat of product obsolescence and low marginsIn the end the logical conclusion is that any strategy in the direction of FDI shouldensure that domestic players are not unduly displaced and sufficient opportunities areavailable for the growth of domestic players. At the same time the governmentshould not let go a glorious opportunity offered by the largely untapped and highlypromising retail sector.References: 1. A.T. Kearney’s Report on Indian Retail, 2008. 2. Mukherjee Arprita/ Nitisha Patel “FDI in Retail Sector- India,pg 37-45 3. Nitin Malhotra “Indian Retail Sector—A PRIMER, ICFAI University press 4. Dr.R.KBalyan “FDI in Indian Retail- Beneficial or Detrimental-research paper 5. B.Congnizance.-.The IIT An E-Magazine, Google search 6. l.Damayanthi/S.Pradeekumar-FDI is it the Need of he Hour? Google search 7. Dipakumar Dey-Aspects of Indian Economy-Google search 8. Swapna Pradhan-‘Retailing Management- text & cases, Tata McGraw Hill 9. P.Vanita, G.Prakash Raj -FDI In Indian Retail-research paper www/ jeyabal.com -5-
  6. 6. 10. Mohan Guruswamy, Kamal Sharma, Maria Mini Jos –“FDI in Retail-111” www/India watch.org11. The Evolving Retail Market in India- www/icsc.org12. The Economic Times **************************************** -6-