“India has been termed as a nation with the most compelling opportunity for retailers”, according to AT Kearney's 2005 Global Retail Development Index. There are sufficient reasons for saying to this, because the disposable income of the middle class people is increasing day by day, close to a quarter of the population is in the 20-34 age group in demand by marketers, and punter expenditure is anticipated to pick up in a major way. Secondly India is rated as economically and politically more stable than the other developing countries. These reasons are attracting the investors to make direct investment in retail sectors.
According to
A T Kearney‟s Global Retail Development Index (GRDI) 2012, India is the 5th
most favorable destination for international retailers). Of the total Indian
retail market, 8% constitutes the organised retail segment which is estimated
to grow at a rate of almost 30% by 2015, and hence at a much faster pace than
the overall retail market which is forecast to grow by 16% in the same period.
Clothing & Apparel make up almost a third of the organized retail segment,
followed by Food & Grocery and Consumer Electronics. India currently has a
small penetration within the organized retail segment as compared to other
emerging markets such as China, which has a penetration of more than 20% within
organised retail according to the Global Retail Index report by the World
Retail Conference.
What is
Foreign Direct Investment?:-
Instead of
investing in local businesses, putting money in a company functioning or
incorporated in another country is foreign direct investment. For the country
which is attracting the investment, the investor is a considered “a foreign
direct investor". The foreign direct investor can have influence on the
management of the companies invested in. Many companies prefer FDI to exporting
to gain access to new or larger markets, gain cost advantages in the host
country and in response to trade barriers.
The foreign
direct investors may have a varying amount of stake in the invested company -
stakes can be as low as 10% or may also cross 49% of the shares or stock
ownership. Some countries may have caps on the amount of equity a foreign
direct investor may hold. The foreign direct investor seeks to have a
controlling stake in the entity invested. This distinguishes it from an
ordinary foreign investment.
For example
a company in the United States might purchase the production facility that is
used to manufacture automobiles in China. By owning the production facility,
the company from the United States is able to control the production process to
ensure the quality of the vehicles, as well as the process that is used to turn
raw materials into the final product.
In foreign
direct investment, an individual or company is purchasing assets that given
them direct control. Rather than just investing money in the hopefully that the
investment will grow in value, the company or individual making the foreign
direct investment controls the asset. This means that direct input is possible
over the processes that occur in relation to the assets that are owned.
FDI Policy with Regard to Retailing in India:-
India
permits Foreign Direct Investment up to 51 present in the Single Brand retail
and 100 present in cash and carry wholesale trading. There is ban on Foreign
Direct Investment in big multi brand retails stores but the companies can
access the foreign equity market through the American and global receipts. In
the year 2006 the Government of India, opened-up Foreign Direct Investment in single
brand retailing for boosting the organized retailing in India. Foreign Direct
Investment can invest up to 51 % of capital in Indian Companies which engaged
in retailing trade of Single Brand. Before investing in retail sector Foreign
Direct Investment must follow the approval process prescribed by the Government
of India. FDI should sell the inter-alia products of a Single Brand, which are
sold under the same brand internationally and these products have to be so
branded during manufacturing.
India‟s
total Foreign Direct Investment (FDI) inflows rose over 10 times to $166.7
billion in 2000-12 from $16.6 billion in 1991-00. FDI in industry kept pace
with the total FDI inflows and increased 10 times to $81 billion from 8.1
billion over the period. FDI in India is subject to certain rules and
regulations and is subject to predefined limits in various sectors, ranging
from 20% to 100%. The UPA government approved the recommendations given by a
committee to increase FDI limits in 12 out of the proposed 20 sectors,
including crucial ones such as defense, Retail and telecom to boost inflow of
foreign money in a bid to revive the economy and control current account
deficit. Though the current size of the India retail market is USD $500 billion
and is poised to reach USD $1.3 trillion by 2020, India has lost its sheen as
an attractive destination for retail business. This year India slipped from the
5th to the 14th position on the Global Retail Development Index for 2013.
Considering multiple factors like the current political situation, economic
volatility and widespread corruption, India has been rated as a medium risk
market.
Foreign
Direct Investment
The
Government of India put a ceiling on Foreign Direct Investment in retail
sector, like many other sectors, has been essentially a personification of the
dilemna that confronts policy – makers about whether opening-up Foreign Direct
Investment in retail would be good or bad for the sectors and stakeholders
involved in it. There has been a school of thought which has strongly favored
further liberalization of Foreign Direct Investment in retail and has counted
on their several advantages. On the other hand, there has been another very
contrasting school of thought which opposed this idea strongly, listing the
fall-outs of doing so. While giving the opinion people always see the one side
of matter, and not considered the other side.
Advantages of FDI in retail sector:
In any case, organized retail through Indian corporate is permissible.
Experience of the last decade shows small retailers have flourished in harmony
with large outlets.
2. Job opportunities: Estimates shows that Foreign Direct Investment in retail sector will create at least 10 million jobs in the next three years in the retail sector. These career opportunities will be created mostly in retail, real estate. But it will create positive impact on others sectors as well. According to the ICRIER there is fear of large scale loss of jobs in the unorganized retail sector due to inflow of Foreign Direct Investment was mere only figment of the imagination. It said that the job creation in the organized retail sector would be more than compensate the loss of jobs. The retail sector can generate huge employment opportunities in retails and other related sectors
In the
proposed policy Sourcing of a minimum of 30% from Indian micro and small
industry is mandatory. This will provide the scales to encourage domestic value
addition and manufacturing, thereby creating a multiplier effect for
employment, technology up gradation and income generation.
3. Infrastructural Growth: Infrastructural limitations have been found as one of the main important reasons for the slow moving growth of retail sector. Lack of infrastructure in the retailing chain has been one of the common issues in India for years which have led the process to an incompetent market mechanism. For example, in spite of India being one of the largest producers of vegetables and fruits, lack of proper count of cold storages has significantly affected the selling of these perishable items. Foreign Direct Investment might help India to overcome from such issues by channelizing the resources in the right manner. Past few years the Government & private players are taking efforts for the infrastructural growth in retail sector.
4. Benefits to farmers: In most cases, in the retailing business, the intermediaries have dominated the interface between the manufacturers or producers and the consumers. Hence the farmers and manufacturers lose their actual share of profit margin as the lion‟s share is eaten up by the middle men. This issue can be resolved by Foreign Direct Investment , as farmers might get contract farming where they will supply to a retailer based upon demand and will get good cash for that, they need not to search for buyers
There is
opinion of the experts that a stronger Foreign Direct Investment presence would
mean a much need backward integration, in terms of more efficient supply of
chain and better returns to the farmers. Currently unavailability of proper
transportation, storage and handling facilities have made the supply chain
inefficient. It is estimated that a larger percentage of perishable items are
wasted due to a poor supply chain. Foreign Direct Investment is expected to
push up this issue and restructure the supply chain, making it smoother and
efficient. Foreign Direct Investment will also open the door of export for the
farmers, which improve the profit margin of the farmers. Farmers will benefit
from opening of Multi brand retails like Wal-mart in India as they will be
earning 30-40% more because they can sell their products directly to these
retail chains, cutting the profit made by middle men in between.
5. Inflow of
Technical Know-How: Increased
Foreign Direct Investment would certainly bring in the best of global players
on to the Indian retail scence. The Foreign Direct Investment
6. Benefits to consumers: Consumer will get variety of products at low prices compared to market rates, and will have more choice to get international brands at one place. A strong Foreign Direct Investment in retail would be fuel competition even more. As competition is increasing in retail sector, one natural effect has been the price war. Every retailer will try to attract the consumer by reducing price of products and offering additional services to them. Ultimately, consumer would stand to benefit in terms of wide range of products & services at lower prices. Retailers have been ensured that quality of products cannot go down with the prices science there is lot of market transparency. It is already observed that in single brand retail trade where Government has allowed 51% of Foreign Direct Investment. The entry of global brand in readymade wear, lifestyle products as seen the prices of almost every well known brand in India come down. It means the common customers can buy the branded readymade wear easily.
7. Proper tax system: The organized sales with computerized billing system will also yield more revenue through commodity taxes like VAT and service tax to the government. Thus tax buoyancy of the economy would increase.
8. Partnership opportunity: The
foreign direct investment in the retail sector is a partnership opportunity to
retailers that
involves a
lot of learning that could take them to higher profitability. The central
government is planning to have 51% foreign investment; this means the foreign
retailers need partners for the rest investment to gain market.