Does India Need FDI in Multi-Brand Retai

8/15/2019 Does India Need FDI in Multi-Brand Retai

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Does India Need FDI in Multi-Brand Retailing?

SAGAR KUMAR JAISWAL*1

Email Id: [email protected]

Liberalization is good, for freedom is its language. However, freedom cannot be given to anyone

or body corporate in absolute, for it has a tendency to impeach the rights of the poor.

Liberalization of economy has become the norms of current political and economic set up,

developing and underdeveloped countries are in transition period in the direction of adopting the

same in full spirit. Of various tool of economic liberalisation, Foreign Direct Investment (FDI) in

multi-brand retails sector is one which has occupied a position of highly debatable issue in our

country in these days, even after the authorization by Indian legislature.

FDI is understood as capital inflows from abroad that is invested in or to enhance the production

capacity of the economy. It can be a subsidiary, joint venture or merger or acquisition and

includes Greenfield and Brownfield projects. So, Foreign Direct Investment is an investment

made by a foreign company or entity into a company or entity based in another country. Foreign

direct investments differ substantially from indirect investments such as portfolio flows, wherein

overseas institutions invest in equities listed on a nation's stock exchange. Such investments take

place for many reasons, including to take advantage of cheaper wages, special investment

privileges (e.g. tax exemptions) offered by the country. FDI in retail sector means investment of

such foreign exchange in the sector huge shopping complex purchasing of goods or services by

consumers wherein involves no intermediaries such as CNDF, Brokers, Wholesalers, etc.

Retailing is the last link that connects the individual consumer with the manufacturing and

distribution chain. FDI in multi brand retailing means such retailing in the marketing of a product

or services having multiple brand names. The big players in these sectors are Wal-Mart, Tesco,

Carrefour, etc. It is different from single brand retailing which involves retailing of product of

services bearing single brand names and not having any affiliation or association of product and

services provided under different brand names.

*Research Scholar, Law School, Banaras Hindu University, Varanasi.

mailto:[email protected]:[email protected]:[email protected]


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Since taking the decision by Indian legislatures for approval of FDI in multi retails sectors, nay,

too before after taking such decision, there has been unending debate on the theme whether such

an step by Indian government bring forth to us a common good. The debate is going on. And

why not if in the efforts to bring this institution into reality there is a space for policy interruption

which is part of governance and not of legislation. The government by making a rule can change

the ratio of local purchasing limit of multinationals in these sectors. Very recently, by taking

recourses of his power to change the rule, the government has eased the norms for inflow of FDI

by allowing multinational to have 51% stake in their hands. Furthermore, the country has

witnessed in fact under what background political conditions the legislation supporting FDI in

retail sectors has passed. The high-profile drama of political parties, the intention to deviate the

then attention of media and many more, before passing FDI Bill all have raised a doubt: “is

really FDI is the need of our country?” Arguments in favour of such kind of investment is being

posed by some economists taking stand that such FDI will generate employment opportunity,

will reduce the price of goods and services while having improved quality, will elevate the

economic condition of farmers, will be helpful in infrastructural development of country, and so

on. The present paper is merely a continuation of such debate taking stand against of such

investment. The reasons are manifolds.

Retailing contributes significantly to employment, especially self-employment. I the entry of

foreign players drive the domestic unorganised retailers out of business, it would lead to

widespread unemployment. They have cited examples of Malaysia and Thailand in support of

their claims. We have for instances, the case studies of Malasia, Thialand and South East Asia.

The study tells us that after of operation of FDI in multi brand retailing, the domestic retailers

were marginalised and this led to unemployment.

The argument that the entry of big foreign retailers will result in major employment opportunities

is misleading. Undeniably, multinational retailers will employ some people to manage stores but,

at the same time, they will be knocking off employment in large numbers in the overall

economy. It is the net numbers that should be the concern of the policy makers. The opening up

of the retail sector would have the adverse effect on the employment in unorganized sector which

is as large as 51% of overall employment in India. Again, there is no answer before us what

would remain for intermediaries after the opening of such FDI who has also been the part of


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sales and development in India. By reducing the number of intermediaries, organized retailing

will lead to some job displacement. Furthermore, there is no possibility that FDI would provide

employment opportunities to semi-literate people. Though they can provide employment

opportunities like drivers, watchman etc. but this argument gets more attention because in India

semi-illiterate people in quiet large in number. And, what about the social security in

employment? Given the lack of alternative employment opportunities available, it is highly

unlikely that the displaced unemployed (post foreign investment in the retail sector) will be

absorbed in agriculture or manufacturing sector.

There is no empirical evidence to prove that the entry of big multinational retailers will help

control inflation. The claim that they reduce consumer prices may be only applicable on “On

Sale” merchandise, which is a part of well-known “lossleader1” pricing strategy. What is

important is to look at retail mark-ups (the extent to which selling price is increased vis-à-vis

sourcing price). The mark-ups across four categories of products are shown in Graphic (page5).

The retail mark-ups in the West range from 2xmore than India to 3x more, and for some

categories of goods is as high as 9x. By rapid expansion and market concentration over time, the

retailers can easily increase their mark-ups and margin. Thus, it is in the interests of consumers

to have a fragmented retail environment where no one retailer can command excessive mark-ups

due to abuse of market power.

The arguments supportive of the entry of foreign investment in multi-brand retail in India are

highly overstated and backed by little evidence. On the contrary, real world experiences and

empirical studies show that the benefits of FDI in retail sector are much fewer in comparison

with the economic and social costs. In these circumstances, the opening up of multi-brand retail

sector to big foreign players may prove counterproductive and catastrophic.

Large international retailers can upset the import balance, by preferring to source majority of

their products locally rather than investing in local production. Global retailers might resort to

predatory pricing. Due to their financial clout, they often sell below cost in the new markets.

Once the domestic players are wiped out of the market, the foreign players have a monopoly

position which allows them to increase pricing, allow the multinational retailers to capture large

portion o the market in a short time span. . In less than 10 years, organised retailers have


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acquired 40 % of the market share in Thailand, close to 30 % in Poland and 19% in China. These

increases in the market share have been at the cost of domestic unorganized player who are

unable to fight the competition. The trading association of them has also pointed out that FDI in

retail trade would not attract large inflows of foreign investment since very little investment is

required to conduct retail business. Goods are bought on credit and sales are made on cash basis.

Hence, the working capital requirement is negligible. On the contrary, after making initial

investment on basic infrastructure, the multinational retailers may remit the profits earned in

India to their own country. Since Indian retailing is growing towards an organised format on its

own and the fixed capital requirement is small and can be financed by Indian business house,

there is no need to open up the sector for foreign investments. A question may justly arise, i.e.,

is not what is wrong in case of Foreign retailing , is also wrong in case of Indian Retailing? Of

course, that is, but it can be said that its effect is not so in comparison of multinationals, for

trading in case of domestic retailers is smaller level.

FDI provides mechanism to absorb the farmer’s product directly from the farms thereby killing

the intermediaries between the farmers and consumers who are responsible for food inflations.

Indeed, it cannot be denied that FDI in this sense is beneficial both for farmers and consumer.

However, the investment in the retail sector is also possible without recourses to investment in

India by foreign multinationals. Why should not we promote to Indian company to invest in this

sector and save the economic profit from being gone to foreign?

FDI in multi-brand retailing, as we have in many countries, is a gateway to contract farming. In

Indian famers are not in a position bargain. And they are bound to produce only that what would

be meant to foreign players in the veil of FDI. This would be the worst effect of FDI as it would

not only destruct the farming ecology of India, but also would lead to Indian famers towards a

position they could never come back. Their fate would be at the mercy of big farming players;

and from the operation of these farmers, the life of other class of the county would be affected in

demise.

Besides, there are many things which go in against of FDI in retails. Underneath are the

summary of them:-


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FDI in retail will drain out the country’s share of revenue to foreign countries, which may

cause negative impact on India’s economy.

FDI in retailing, like that in banking, can provide gateway to money laundering.

Fears that domestic organised retail sector might not be competitive enough to tackle

international players might not only resulting in loss of market share for them but in closure

of their units.

There is a possibility of small business owners and workers from other functional areas, as

lot of people are involved in unorganized retail business, may lose their jobs.

Though Government has stipulated that 30% procurement should be from Indian sources,

this may get diluted over the years. The remaining 70% procurement from cheaper countries

will make the people run towards that stuff and the 30% supply from Indian small industries

will have their own death, unable to compete with low price Chinese goods. Further, it is not

easy to trust on the commitment of government that the overall market would be under his

control. This is because in the age of economic liberalizations and India’s commitment under

WTO it is not possible for India to have control upon the expansion of these multilateral

corporations’ activities.

It is expected, therefore, People of India will understand the logic of FDI in mutli-brand retailing,

and will not allow such things to come into operation. Let be consistent with the resources we

have. That is enough to provide the need of ours and even to foreigners. Do not lose the feeling

of Indian being. The Rough in the country can be corrected by the enterprises of countrymen. Let

us belief to their enterprises, and do not be hasty.

Reference

Agosin, M. and R. Mayer (2000). “Foreign investment in Developing Countries: Does it

Crowd in Domestic

Blomström, M. and A. Kokko (2003). “The Economics of Foreign Direct Investment

Incentives”, Working, Paper No.9489, NBER.

Borensztein, E., J. De Gregorio and J. Lee (1995). “How does Foreign Direct Investment

Affect Growth”, Journal of International Economics, 45, pp.115-135.

Chari, A. and T. C. A. M. Raghavan (2012). Foreign Direct Investment in India’s DIPP (2010). Foreign Direct Investment (FDI) in Multi-Brand Retail Trading. Discussion

Dua, P. and A.I. Rasheed (1998). “Foreign Direct Investment and Economic Activity in

India”, Indian Economic Review, 33, pp.153-168.


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Does India Need FDI in Multi-Brand Retai