Foreign Direct Investment in Retail Sector in India

 “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.

The mere existence of resources in a country is no guarantee they will contribute to output. Multinational enterprises (MNEs) may enable ideal resources to be used. Oil production for instance, requires not only the presence of underground deposits but also the knowledge of how to find them and the capital equipment to bring the oil to the surface. Production is useless without markets and transportation facilities, which an international investor may be able to supply. Access to foreign markets, particularly the investor's home market, may be particularly important to developing countries that lack the knowledge and resources necessary to sell there. Additionally, another less tangible aspect of Foreign Direct Investment is greater resource utilization. Through exposure to new consumer products, the local labor force may develop new wants, which could encourage them to work longer and harder to acquire the additional goods and services

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:

1. Growth in economy: Due to coming of foreign companies‟ new infrastructure will be build, thus real estate sector will grow consequently banking sector, as money need to be required to build infrastructure would be provided by banks. Inflow of Foreign Direct Investment will improve the balance of payment of India. India‟s Economic growth currently estimated at 9 percent GDP for 2007-2008(up from earlier estimate of 8%) continues to support retail industry. The industry is of view that opening of Foreign Direct Investment in retail would lead the rapid growth of this sector. According to the experts Policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This is expected to considerably reduce post-harvest losses. 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

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 make investment not only in from of the capital but also in from of technology. The inflow of technology is said to be a natural migration along with the global retail giants. Technology like RFID would become known to Indian retailers too and can transform the way in which business is being conducted right now.

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. 

If you have doubts please let me know

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