Fdi in india:An analysis on the impact of fdi in india’s retail sector

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Fdi in india:An analysis on the impact of fdi in india’s retail sector

  1. 1. FDI in India:An analysis on the impact of FDI in India’s Retail sector Submitted By: Subhajit RayDepartment of Humanities and Social Sciences IIT Kharagpur Kharagpur-721302 1
  2. 2. Introduction:Initially the Indian policy makers were quite apprehensive about the flow offoreign capital into the economy. This can be attributed to the colonial past whichsaw large investments being made by their colonial rulers in the form of majorinfrastructure instruments like railways but only to make huge gains forthemselves and sucking the host country of its resources. But currently the globaleconomy has been witnessing an incessant form of economic growthcharacterized by the flow of capital from the developed world to the developingcountries. During the 1990s Foreign Direct Investment (FDI) became the singlelargest source of external finance for the developing countries. When faced withan economic crisis during the same period the Indian policy makers had to openup the Indian market and accordingly India has been seeing a consistent increasein FDI inflows.Indian economy has been showing high growth rates in the post liberalizationera. In the last fiscal year according to the Planning commission’s data the Indianeconomy recorded a growth rate of 8.6% and 8% in the year before. This is reasonenough to call it a high performing economy. All Multi National Enterprises(MNEs) have been eyeing the Indian market ever since they have opened up. Thepolicy makers have been vigorously pursuing the reforms program as they believethat high growth has been the resultant of economic liberalization. FDI has beenseen as a dominant determinant to achieve high rate of economic growth becauseof the ease with which it can bring in scarce capital, triggers technology transferand enhances the efficiency by increasing the competitiveness of the market. AlsoFDI as a form of policy instrument to raise capital is usually preferred over otherforms of external finance because they are non-debt creating, non-volatile andtheir returns depend on the performance of the projects financed by theinvestors. FDI is successful in human capital formation, increases total factorproductivity and efficiency of resource use. But such benefits are highlydependent on the policies of the host government. It is furthermore described asa source of economic development, modernization, and employment generation.Several factors both political and apolitical have led to a greater acceptance ofFDI. The envisioned role of FDI has evolved from that of a tool to solve the crisisunder the license raj system to that of a modernizing force of the Indianeconomy. In support of their endeavor the policy makers have often cited theexample of the Chinese experience of achieving high growth rate through foreigndirect investment.India has opened up its economy and allowed MNEs in the core sectors such asPower and Fuels, Electrical Equipments, Transport, Chemicals, Food Processing, 2
  3. 3. Metallurgical, Drugs and Pharmaceuticals, Textiles, and Industrial Machinery asa part of reform process started in the beginning of 1990s. Currently FDI is alsopermissible in the Telecommunications, Banking, Insurance and IT sector.Currently there is huge debate going on about allowing FDI in retail. This paperaims to discuss the critical aspects of FDI in India, present a case study on thesuccess of reforms in the telecommunications sector, analyze both sides of thearguments currently going on regarding FDI in retail and conclude withsuggestive measures on the part of the government which can eliminate thenegative effects of allowing FDI in India’s retail sector. Assessing the impact of FDI on host economy- a review of various economic literatures:FDI inflow into the core sectors is assumed to play a vital role as a source ofcapital management and technology in countries of transition economies. Itimplies that FDI can have positive effects on a host economy’s development effort(Caves, 1974; Kokko, 1994; Markusen, 1995; Carves, 1996; Sahoo, Mathiyazhaganand Parida 2001). It has been argued that FDI can bring the technologicaldiffusion to the sectors through knowledge spillover and enhances a faster rate ofgrowth of output via increased labour productivity. There have been a lot ofempirical studies to assess the impact of FDI in developing economies and theresults to this date have been found to be mixed. Many reports have questionedthe positive effects of the FDI inflow in the host country. Some studies doneearlier had found that FDI has a negative impact on the growth of the developingcountries (Singer,1950; Griffin, 1970; Weisskof, 1972). Multinational Enterprises(MNEs) in the name of FDI may drive out the local firms because of theiroligopolistic power, and also, the repatriation of profit may drain out the capitalof the host country. The main argument in this regard was that the maincomponent of FDI in less developing countries was in the primary sector. Thenthese primary products were exported to the developed nations and processed forimport back to the developing nations and thus resulted in the host nationsreceiving a lesser value for their resources. Hanson (2001) argues that evidencethat FDI generates positive spillovers for host countries is weak. In a review ofmicro data on spillovers from foreign-owned to domestically owned firms Gorgand Greenwood (2002) conclude that the effects are mostly negative. Lipsey(2002) takes a more favorable view from reviewing the micro literature whichargues that there is evidence of positive effect. He also argues that there is needfor more consideration of the different circumstances that obstruct or promotepositive spillovers. Rodan (1961), Chenery and Strout (1966) in the early 1960sargued that foreign capital inflows have a favorable effect on the economicefficiency and growth towards the developing countries. It has been explainedthat FDI could have a favorable short-term effect on growth as it expands theeconomic activity. However, in the long run it reduces the growth rate due todependency, particularly due to “decapitalization” (Bornschier, 1980). This is dueto the reason that the foreign investors repatriate their investment by contractingthe economic activities in the long run. FDI is an important vehicle for the 3
  4. 4. transfer of technology and knowledge and it demonstrates that it can have a longrun effect on growth by generating increasing return in production via positiveexternalities and productive spillovers. Thus, FDI can lead to a higher growth byincorporating new inputs and techniques (Feenstra and Markusen, 1994). Aitken,et al. (1997) showed the external effect of FDI on export with example ofBangladesh, where the entry of a single Korean Multinational in garment exportsled to the establishment of a number of domestic export firms, creating thecountry’s largest export industry. Hu and Khan (1997) attribute the spectaculargrowth rate of Chinese economy during 1952 to 1994 to the productivity gainslargely due to market oriented reforms, especially the expansion of the non-statesector, as well as China’s “open-door” policy, which brought about a dramaticexpansion in foreign trade and FDI. A study by Xu (2000) found a strongevidence of technology diffusion from U.S. MNEs affiliated in developedcountries (DCs) but weak evidence of such diffusion in the less developedcountries (LDCs). It concluded that in order to benefit from the technologytransfer by the MNEs a country needs to achieve a basic minimum human capitalthreshold.A recent study by Banga (2005) demonstrates that FDI, trade and technologicalprogress have differential impact on wages and employment. While higher extentof FDI in an industry leads to higher wage rate in the industry, it has no impacton its employment. On the other hand, higher export intensity of an industryincreases employment in the industry but has no effect on its wage rate.Technological progress is found to be labor saving but does not influence thewage rate. Further, the results show that domestic innovation in terms ofresearch and development intensity has been labor utilizing in nature but importof technology has unfavorably affected employment in India. The study bySharma (2000) concluded that FDI does not have a statistically significant role inthe export promotion in Indian Economy. This result is also confirmed by thestudy of Pailwar (2001) and the study also argues that the foreign firms are moreinterested in the large Indian market rather than aiming for the global market.The study by Sahoo and Mathiyazhagan (2003) also support the view that FDI inIndia is not able to enhance the growth of the economy. Though there is acommon consensus among all the studies in the Indian context that FDI is notgrowth stimulant rather it is growth resultant. A study by Dr Maathai K.Mathiyazhagan(2005) demonstrate that the flow of FDI into the sectors hashelped to raise the output, labour productivity and export in some sectors but abetter role of FDI at the sectoral level is still expected. Results also reveal thatthere is no significant co-integrating relationship among the variables like FDI,Growth rate of output, Export and Labour Productivity in core sectors of theeconomy. This implies that when there is an increase in the output, export orlabour productivity of the sectors it is not due to the advent of FDI. Thus, it couldbe concluded that the advent of FDI has not helped to wield a positive impact onthe Indian economy at the sectoral level. Thus, in the eve of Indias plan forfurther opening up of the economy, it is advisable to open up the export orientedsectors so that a higher growth of the economy could be achieved through thegrowth of these sectors. 4
  5. 5. Foreign Direct Investment policy of India:Foreign direct investment policy of the government of India has been graduallyliberalized. As early as in the year 1948 and 1956 (two industrial policyresolutions) government policy clearly reflected the need to supplement foreigncapital and technology for rapid economic growth. The core objective of theforeign capital policy was that the control of industrial undertaking shouldremain in the Indian hands. However, the government had granted permission incertain cases for allowing establishment of exclusive foreign enterprises. Foreigncapital was preferred in specific areas which bring in new technology andestablish joint ventures with Indian partners. Government also granted taxconcessions to foreign enterprises and streamlined industrial licensingprocedures to accord early approvals for foreign collaborations. In the case of 100per cent export of output, foreigners were allowed to establish industrial units. Itneeds to be noted here that under the Foreign Exchange Regulation Act (FERA)1974 only upto 40 per cent of the equity holding of the foreign firms werepermitted. Foreign investment was permitted under designated industries alongwith restrictions in terms of local content clauses, export obligations, promotionof R&D and prohibition by law the use of foreign brands (Hybrid domesticbrands were promoted such as Ford Escort and Hero Honda). It needs to bepointed out here that the restrictions have been flouted frequently andrelaxations were also granted. This process has culminated into gradualliberalization of government policy towards foreign capital. It is reflected incontinuous increase in the number of approvals granted. During the period 1961-1971, the number of foreign collaborations approved was 2475 which wereincreased to 3041 during the period 1971-1980. There was dramatic increase inthe foreign collaboration approvals during the period 1981-1990 (7436collaborations were approved). This policy enabled to build domestictechnological capability in many branches of industry but generally consideredvery restrictive. It has been widely accepted that protection of domestic industryfor a longer period of time resulted into high cost production structure along withpoor quality. Foreign direct investment policy announced by the government ofIndia in July 1991 was regarded as a dramatic departure from the earlierrestrictive and discretionary policy towards foreign capital. The FDI policy of1991 proposed to achieve objective of efficient and competitive world class Indianindustry. Foreign investment was seen as a source of scarce resource, technologyand managerial and marketing skills. The major feature of policy regardingforeign investment up to 51 per cent of equity holding was permitted too.Automatic approvals were also allowed to foreign investment up to 51 per centequity in 34 industries as well as to foreign technology agreements in high 5
  6. 6. priority industries. The Foreign Investment Promotion Board (FIPB) was set upto speedily process applications for approvals of the cases which were not coveredunder the automatic route. Laws were amended to provide foreign firms theequivalent status as the domestic ones. Government of India, however, put inplace the regulatory mechanism to repatriate payments of dividends throughReserve Bank of India so that outflows are balanced through export earningsduring stipulated period of time. Further liberalization measures with regard toforeign investment were taken during 1992-93. The dividend balance conditionswere revoked except in the case of consumer goods industries. Non ResidentIndian (NRI) and Overseas Corporate Bodies (OCB) were permitted in highpriority industries to invest up to 100 per cent equity along with repatriation ofcapital and income. Apart from expansion of the area of operation for FDI inmany new economic activities, the existing companies were also allowed toincrease equity participation up to 51 per cent along with disinvestment of equity.Foreign direct investment policy has been changed frequently since 1991 to makeit more transparent and attractive to the foreign investors. FDI up to 100 per centis allowed under automatic route for all sectors/activities except activities thatattract industrial licensing, proposals where foreign investors had an existingjoint venture in same field, proposals for acquisition of shares in an existingIndian company in the financial sector and those activities where automatic routeis not available. The only sectors/activities where FDI is not permitted areagriculture and plantations excluding tea plantations, real estate business(excluding development of townships, housing, built up infrastructure andconstruction development projects-NRI/OCB investment is allowed for the realestate business), retail trade, lottery, security services and atomic energy.Government has simplified procedure, rules and regulations on a regular basissince 1991 to make Indian economic environment foreign investor friendly.Attempt has been made through FDI policy to make India the hub of globalforeign direct investment as well as in economic activities. Trend and Dimension of FDI inflow in India:The dimensions of the FDI flows into India could be explained in terms of itsgrowth and size, sources and sectoral compositions. The growth of FDI inflows inIndia was not significant until 1991 due to the regulatory policy framework. Itcould be observed that there has been a steady build up in the actual FDI inflowsin the post-liberalization period (Figures 1.1 and 1.2). Actual inflows have steadilyincreased from US $ 143.6 million in 1991 to US $ 37763 million in 2010. Thisresults in an annual average growth rate close to 6 per cent. However, the pace ofFDI inflows to India has definitely been slower than some of the smallerdeveloping countries like Indonesia, Thailand, Malaysia and Vietnam. In fact,India had registered a declining trend of FDI inflows and the FDI- GDP ratioespecially in 1998 and 2003 could be attributed to many factors, including the USsanctions imposed in the aftermath of the nuclear tests, the East Asian melt-down and the perceived Swadeshi image different political parties, which was 6
  7. 7. ruling government during this period in India. It is also important to note thatthe financial collaboration has out numbered the technical collaboration over theyears. But since 2006 India has seen a remarkably higher growth of FDI inaccordance with the general trends of the global economy with a slight dip in theyear 2009-2010. This can be attributed to the recessionary situation in the globaleconomy. In recent years, India’s share in the global FDI inflows has increasedsubstantially. Year wise FDI inflow in the post reforms era (1990-2001) 1999-2000 2439 1998-1999 1997-1998 1996-1997 FDI 1995-1996 1994-1995 1993-1994 1992-1993 0 1000 2000 3000 4000 US $ MILLIONS Figure 1.1Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00FDI 393 654 1374 2141 2770 3682 3083 2439 7
  8. 8. However, China receives a greater percent of global FDI inflows. India’s efforthave not yet realized in comparison to the changes which has been made in theFDI policy. Year wise revised FDI inflow since 2000-2001 with expended coverage to approach International Best Practices. 2009-2010 2008-2009 2007-2008 2006-2007 2005-2006 FDI 2004-2005 2003-2004 2002-2003 2001-2002 2000-2001 0 10000 20000 30000 40000 US $ MILLIONS Table 1.2Year 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009- 01 02 03 04 05 06 07 08 09 10FDI 4029 6130 5035 4322 6051 8961 22826 34835 37838 37763Capital goods sector has more or less been bypassed by FDI. This clearly pointsout the tendency of foreign investment to exploit the pent up domestic demand 8
  9. 9. for consumer durable goods. Further more, there is a gradual increase in themergers and acquisitions during the 1990s which show a tendency of FDI inflowsto acquire existing industrial assets and managerial control without actuallyengaging in new productive activities (Nagraj, 2006). India’s large size ofdomestic market seems to have been the major attraction for foreign firms. SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS Others 19 France 2 Germany 2 Cyprus 4 Japan 4 Country % Netherlands 4 U.K 5 U.S.A. 7 Singapore 9 Mauritius 42 0 10 20 30 40 50 %age to total Inflows (in terms of US $) The analyses of the origin of FDI inflows to India show that the new policy hasbroadened the source of FDI into India. There were 86 countries in 2000 whichincreased to 106 countries in 2003 as compared to 29 countries in 1991 whoseFDI was approved by the Indian Government. The country-wise analysis of theFDI inflows shows that Mauritius, which was not in the picture till 1992, is thehighest contributor of FDI to India. A major share of such investment isrepresented by the holding companies of Mauritius set up by the US firms. Itmeans that the investment flowing from the tax havens is mainly the investmentof the multinational corporations headquartered in other countries. Now an 9
  10. 10. important question arises as to why the US companies have routed theirinvestment through Mauritius. It is because, firstly, the US companies havepositioned their funds in Mauritius, which they like to invest elsewhere.Secondly, because the tax treaty between Mauritius and India stipulates adividend tax of five per cent, while the treaty between Indian and the USstipulated a dividend tax of 15 per cent (World Bank, 1999). Telecommunications Sector- A success story:Further narrowing of FDI in sub-sectors reveals the success story of thetelecommunications sector. Research into Telecommunications furthers thehaphazard nature of FDI investment and policy making. The current process forFDI in telecommunications can be attributed to two policies that wereundertaken by the government: National Telecom Policy of 1994 and NewTelecom Policy of 1999. Before the economic reforms ‘teledensity’ was low,infrastructure growth was slow, and the lack of reforms restricted investmentsand adoption of new technologies. The existing legislative and regulatoryenvironment needed major changes to facilitate growth in the sector. It was 1991when the programme was undertaken to expand and upgrade India’s vasttelecom network. The programme included: complete freedom of telecomequipment manufacturing, privatisation of services, liberal foreign investmentand new regulation in technology imports.Simultaneously, the government-managed Department of Telecommunications(DoT) was restructured to remove its monopoly status as the service provider.The government programme was formalised on a telecom policy statement calledNational Telecom Policy 1994 on 12 May 1994. However the 1994 policy was notsufficient to make the India’s telecommunications sector fully open andliberalised. The incumbent monopoly (DoT) was indifferent in implementing thenational telecom policy effectively due to its lack of commitment. This paved theway for designing a new policy framework for telecommunications which wascalled the New Telecom Policy 1999.The New Telecom Policy 1999 (NTP99) was developed after the reform processbegan in 1991. The interest of the government led to the new policy. As a result inaddition to the sectoral caps, the government policy played a major role in theliberalization of the telecom sector. As a result a large number of privateoperators started operating in the basic/mobile telephony and Internet domains.Teledensity has increased, mobile telephony has established a large base, thenumber of Internet users has seen a steep growth, and large bandwidth has beenmade available for software exports and IT-enabled services, and the tariffs forinternational and domestic links have seen significant reductions. Total FDI inTelecommunications sector is over US $ 15 billion. The takeover of Hutch byVodafone is one of the largest FDI deals for an amount of US $ 11 billion. Tariff 10
  11. 11. rates are the lowest in the whole world and there are more than 250 millionusers. The Retail sector in India:The retail industry in India is one of the fastest growing. Even without FDIdriving it, the corporate owned retail sector is expanding at a furious rate. ATKearney, the well-known international management consultancy, recentlyidentified India as the ‘second most attractive retail destination’ globally fromamong thirty emergent markets. It has made India the cause of a good deal ofexcitement and the cynosure of many foreign eyes. With a contribution of 14% tothe national GDP and employing 7% of the total workforce (only agricultureemploys more) in the country, the retail industry is definitely one of the pillars ofthe Indian economy..Trade or retailing is the single largest component of the services sector in termsof contribution to GDP. Its massive share of 14% is double the figure of the nextlargest broad economic activity in the sector. The retail industry is divided intoorganised and unorganised sectors. Organised retailing refers to trading activitiesundertaken by licensed retailers, that is, those who are registered for sales tax,income tax, etc. These include the corporate-backed hypermarkets and retailchains, and also the privately owned large retail businesses. Unorganisedretailing, on the other hand, refers to the traditional formats of low-cost retailing,for example, the local kirana shops, owner manned general stores, paan/beedishops, convenience stores, hand cart and pavement vendors, etc.A simple glance at the employment numbers is enough to paint a good picture ofthe relative sizes of these two forms of trade in India – organised trade employsroughly 5 lakh people whereas the unorganized retail trade employs nearly 3.95crores. Given the recent numbers indicated by other studies, this is onlyindicative of the magnitude of expansion the retail trade is experiencing, both dueto economic expansion as well as the ‘jobless growth’ that we have seen in thepast decade. It must be noted that even within the organised sector, the numberof individually-owned retail outlets far outnumber the corporate-backedinstitutions. Though these numbers translate to approximately 8% of theworkforce in the country (half the normal share in developed countries) there arefar more retailers in India than other countries in absolute numbers, because ofthe demographic profile and the preponderance of youth, India’s workforce isproportionately much larger. That about 4% of India’s population is in the retailtrade says a lot about how vital this business is to the socio-economic equilibriumin India. 11
  12. 12. Arguments against adoption of FDI in India’s Retail sector:FDI driven modern retailing is labour displacing to the extent that it can onlyexpand by destroying the traditional retail sector. Till such time we are in aposition to create jobs on a large scale in manufacturing, it would make eminentsense that any policy that results in the elimination of jobs in the unorganisedretail sector should be kept on hold. Studies suggest that about 5 crore jobs willbe lost and only 20 lakhs new jobs will be created.With their incredibly high capital FDI driven retailing units such as Wal-Martwill be able to sustain losses for many years till its immediate competition iswiped out. This is a normal predatory strategy used by large players to drive outsmall and dispersed competition. This entails job losses by the millions. Even theorganised retail sector may face serious problems and may eventually be wipedout.The FDI driven retail units will typically sell everything, from vegetables to thelatest electronic gadgets, at extremely low prices that will most likely undercutthose in nearby local stores selling similar goods. They would be more likely tosource their raw materials from abroad, and procure goods like vegetables andfruits directly from farmers at pre-ordained quantities and specifications. Thismeans a foreign company will buy big from India and abroad and be able to selllow – severely undercutting the small retailers. Once a monopoly situation iscreated this will then turn into buying low and selling high.Such re-orientation of sourcing of materials will completely disintegrate thealready established supply chain. In time, the neighbouring traditional outlets arealso likely to fold and perish, given the ‘predatory’ pricing power that a foreignplayer is able to exert. As Nick Robbins wrote in the context of the East IndiaCompany, “By controlling both ends of the chain, the company could buy cheapand sell dear”It is true that it is in the consumer’s best interest to obtain his goods and servicesat the lowest possible price. But this is a privilege for the individual consumerand it cannot, in any circumstance, override the responsibility of any society toprovide economic security for its population. Clearly collective well-being musttake precedence over individual benefits. The primary task of government inIndia is still to provide livelihoods and not create so called efficiencies of scale bycreating redundancies. 12
  13. 13. Arguments in favour of adoption of FDI in India’s Retail sector:The main driver for adoption of Retail in India seems to be the recognition thatthe Indian economy faces serious supply-side constraints, particularly in thefood-related retail chains. The government would like to improve back-endinfrastructure, and ultimately reduce post-harvest losses and other wastage.There is also a general concern, highlighted by the persistence of food inflation,that intermediaries obtain a disproportionate share of value in this chain andfarmers receive only 15% of the end consumer price. Now the farmers will be ableto get a better price for their products. With easy credit availability throughforeign direct investment the situation of farmer suicides in India will improve.With foreign capital flowing into the economy the current inflationary situationwill be tamed.One key point is that we must differentiate between the interests of consumers,who constitute our population of nearly 115 crore, from the interests of retailers,who may number near five crore. The larger supermarkets, which tend to becomeregional and national chains, can negotiate prices more aggressively withmanufacturers of consumer goods and pass on the benefit to consumers.Undoubtedly, lower prices psychologically propel buyers to spend more than theyotherwise would. The resulting growth in private consumption creates jobs. Thetax collection of the government will improve as it is impossible to tax theunorganised retail sector. The revenue collected by the government can be usedfor infrastructure development. Also India has had several retailers with deep pockets and access to skills. Thatthey have not been able to swamp the domestic small retailer says somethingabout consumer behaviour and small retail’s resilience. The argument that theadvent of FDI and supermarkets will displace a large number of kirana shops issimilar to the argument used during the era of industrial licensing, which wasmeant to protect small-scale industries. But eventually the inefficiencies andquality standards of the protected small-scale companies become apparent evento socialist politicians and licensing was abolished.Even a modest chain of 200 supermarkets, to be set up all over India in selectedtowns and cities in the next three years, will require an investment of about Rs2,000 crore (Rs 20 billion), at the rate of Rs 10 crore (Rs 100 million) persupermarket to cover the infrastructure and working capital. Each supermarketmay take 2 or 3 years before it becomes profitable. There is a risk that a few ofthem may even fail. No Indian entrepreneur will be willing and able to committhis level of investment and undertake the risks involved. That is where the 13
  14. 14. international experience and skills that may come with FDI would provide theconfidence and capital.Apart from this, by allowing FDI in retail trade, India will become moreintegrated with regional and global economies in terms of quality standards andconsumer expectations. Supermarkets could source several consumer goods fromIndia for wider international markets. India certainly has an advantage of beingable to produce several categories of consumer goods, viz. fruits and vegetables,beverages, textiles and garments, gems and jewellery, and leather goods. Theadvent of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all these segments. That will benefit notonly the Indian consumer but also open the door for Indian products to enter thewider global market.Suggestive measures to eliminate the negative effects of FDI in India’s Retail sector:FDI in the retail sector should be accompanied by policy formulations thatencourage the growth of manufacturing sector in India. A growing manufacturingsector can accommodate the people who will loose their jobs due to the adoptionof retail in India. FDI should be aggressively promoted in case of relatively lesssensitive sectors like entertainment, R&D etc. Moreover import duty should beimposed to protect domestic production units.Strict labour laws should be imposed to ensure that no management jobs areoutsourced. The government should also ensure the local population getscompetitive wages and the working environment is proper. Jobs should bereserved for the poor people. If the language of operation is English then it willact as a hindrance for job creation for the underprivileged people. Hence Hindiand local languages as a mode of operation should be encouraged.Cooperative societies should be formed for the farmers and other agriculturalsuppliers to take care of their rights and to ensure that they are getting a fair pricefrom the FDI driven big retail units.Strict corporate governance should be ensured to prevent the acquisition of localbusiness units by foreign firms and to promote investor friendly trade practices.The foreign retail units should be made to divest a certain percentage of theirequity in the Indian financial markets. Only strict governance can ensure that theforeign firms adhere to competitive trade practices.Social infrastructure like schools, colleges and hospitals should be developed topromote human capital formation as several studies suggest that such initiativescould enhance the spillover effects of FDI. Furthermore it will help in creating 14
  15. 15. jobs in the high technology sectors and will put India in the global technologyscenario. Social security should be ensured through different policy measures likepension plans, employment guarantee programmes and free health care. Strictenvironmental laws should be enforced to ensure that the foreign firms do notindulge in unsustainable trade practices. Conclusion:The growth rate of the Indian economy has been very high in the post reformsera. And hence India has become the cynosure of investment by foreignmultinational enterprises. The relationship between FDI and other macroeconomic variables like growth rate, export, employment and productivity hasbeen found to vary. It has been found that to gain a positive impact of technologyspillovers via FDI the host country should achieve a basic minimum humancapital threshold. Studies exist both in support and against the positive impact ofFDI in the Indian economy. It is self conclusive that the growth of FDI in India isgrowth resultant and not growth stimulant. The positive impact of FDI has beenfelt in the high technology sectors like telecommunication and IT. The successstory of the telecom sector is a real confidence booster in this regard. It is clearlyvisible that the MNEs are more interested in exploiting the Indian markets ratherthan investing in capital goods.The retail sector is one of the fastest growing sectors of India. It also employs ahuge proportion of the population. Hence any measure regarding this sector suchas approval of FDI in the Indian retail sector will have a gigantic impact onIndian economy. FDI in the Indian retail sector will work wonders in terms ofcontrolling inflation, creating new jobs and increasing the efficiency andproductivity of the Indian economy. But many believe that it may lead to widescale unemployment, drainage of capital from the Indian economy and socialinequity. Hence FDI in India’s retail sector should be accompanied by stringentpolicy measures on the part of the government so that the majority of thepopulation can benefit from the positive spillover effects of FDI. Governmentshould encourage FDI in the manufacturing sector along with the retail sector tocompensate for the loss of jobs that will be created due to the advent of FDI inretail. Government should also build social infrastructure to enhance the humancapital formation so that the positive spillover effects of FDI are greatly felt. 15
  16. 16. References• FDI in India’s Retail Sector More Bad than Good? By Mohan Guruswamy Kamal Sharma Jeevan Prakash Mohanty Thomas J. Korah• Rethinking the linkages between foreign direct investment and development: a third world perspective By: Shashank P. Kumar• India’s Economic Growth and the Role of Foreign Direct Investment: By Lakhwinder Singh 2006.• India’s FDI inflows Trends and Concepts By K.S. Chalapati Rao & Biswajit Dhar• Impact of liberalization on FDI structure in India. By Dr. Gulshan Kumar.• Impact of foreign direct investment on Indian economy: A sectoral level analysis. By Dr Maathai K. Mathiyazhagan.• Foreign Direct Investment in Post-Reform India:• Likely to Work Wonders for Regional Development? By Peter Nunnenkamp and Rudi Stracke.• FDI in India in the 1990s. Trends and issues. By R Nagaraj.• Economic Reforms, Foreign Direct Investment and its Economic Effects in India by Chandana Chakraborty Peter Nunnenkamp. March 2006.• China and India: Any difference in their FDI performances? By Wenhui Wei. June 2005• Fact sheet on FDI in India by the Planning Commission.• Data on GDP growth rate from the Planning Commisiion.• Wikipedia.com• Planningcommission.nic.in 16

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