FDI in Retail - A Detailed Study

7/29/2019 FDI in Retail - A Detailed Study

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FDI in Retail: A detailed studyEconomics Project, II Semester2013

Submitted by:

Uday Uddanti (F-214)

Shrey Walia (F-207)

Vignesh Rajendran (F-227)

Divya Nihalani (F-169)


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Table of Contents

Background ............................................................................................................................................. 2

Literature Review .................................................................................................................................... 2

Current Scenario ................................................................................................................................. 2

FIIs versus FDIs .................................................................................................................................... 2

Effects of FDI in retail in India ................................................................................................................. 4

Positive impact .................................................................................................................................... 4

Negative Impact .................................................................................................................................. 5

Neutral Impact .................................................................................................................................... 8

Effect on GDP ...................................................................................................................................... 8

Analysis of Issues ................................................................................................................................ 8

Magnitude ............................................................................................................................................. 13

Critical Analysis ..................................................................................................................................... 13

SWOT Analysis of Open FDI Policy .................................................................................................... 13

Conclusion ......................................................................................................................................... 17

Bibliograpgy .......................................................................................................................................... 17


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Background

Literature Review

Foreign direct investment (FDI) refers to the net inflows of investment to acquire a lasting

management interest (10 per cent or more of voting stock) in an enterprise operating in an economy

other than that of the investor. It is the sum of equity capital, other long-term capital, and short-

term capital as shown in the balance of payments. It usually involves participation in

management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward

foreign direct investment and outward foreign direct investment, resulting in

a netFDI inflow(positive or negative), which is the cumulative number for a given period. Direct

investment excludes investment through purchase of shares.

One of the most striking developments during the last two decades is the spectacular growth of FDIin the global economic landscape. This unprecedented growth of global FDI in 1990 around the

world make FDI an important and vital component of development strategy in both developed and

developing nations and policies are designed in order to stimulate inward flows. In fact, FDI provides

a win win situation to the host and the home countries. Both countries are directly interested in

inviting FDI, because they benefit a lot from such type of investment. The home countries want to

take the advantage of the vast markets opened by industrial growth. On the other hand the host

countries want to acquire technological and managerial skills and supplement domestic savings and

foreign exchange. Moreover, the paucity of all types of resources viz. financial, capital,

entrepreneurship, technological know- how, skills and practices, access to markets- abroad- in their

economic development, developing nations accepted FDI as a sole visible panacea for all theirscarcities. Further, the integration of global financial markets paves ways to this explosive growth of

FDI around the globe

Current Scenario

In the past 2 decades, the world has seen drastic change in the capital flow patterns across its

geographies. Huge transnational corporations have begun to plan and coordinate their

manufacturing operations and supply chains across boundaries and are in a constant search for

newer markets to sell their products and services in. Such practices have increased the flow of cross-

country investments. This has led to a greater need for a strong FDI policy framework in any nation

that wants to be a part of this global paradigm shift.

FIIs versus FDIs

The issue of increased market volatility and crippling impact of global economic changes have been

largely attributed to FII inflows rather than FDI inflows. The FII inflows are by nature more unstable

than the FDI inflows as they tend to represent the investors interest in more liquid asset classes like

open-market equities. Due to this nature of FIIs, these capital flows are regularly considered to be

hot money. These inflows manifest themselves mainly in the secondary markets and offer very little

impact on the actual capital levels in businesses. Investing in liquid asset classes allow the FII

investors the freedom to easily pull out their investments in times of crises.


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The FDI investments require a long term commitment to the entity which is invested in. These

investments are made in assets with relatively less liquidity and operate predominantly in the

primary markets. This usually leads to the investor taking up active control in the day to day

functioning of the businesses they have invested in. In many cases, this leads to better corporate

governance, a higher emphasis on good record keeping and the access to better technologies and

trade partnerships which are crucial to the long term success of a business. Such practices tend to

create an overall improvement in the economy in which the investment is made, mainly through the

fringe benefits like investments in supply chain infrastructure.

Though this might be true, the FDI flows should in no way be considered to be stable. These capital

flows are also heavily influenced by global economic shocks and can suffocate the domestic credit

markets if conditions are not favourable. Figure 1 illustrates the variation in the FDI flows across the

world. The FDI inflows are clearly influenced by global financial changes, as can be seen from the dip

following the dot com bubble and the World Trade Centre attacks in early 2000s; the subsequent

boom in middle of the decade, fuelled by cheap interest rates in developed economies; and theultimate fall in the following the financial stress caused by the US mortgage crisis and the sovereign

debt crisis in the later part of the decade.

Risks Associated with Foreign Investments

Allowing foreign capital inflows creates a significant exposure to exchange rate risks. To boost the

confidence of international investors, governments in many capital-starved nations try to maintain

currency pegs, which fix the local currencys exchange rate to a more liquid currency, usually the US

dollar. Such measures are intended to signal to the global markets that the risk of the domestic

currencys devaluation is low. These signals can have strong influences on the abi lity of the

sovereigns to borrow as well. For example, the monetary consolidation under the euro allowed

many sovereign states in the Euro Zone to issue Euro-bonds which had significantly lower yields. But

with many financial policies, this is a double sided sword. To maintain a fixed exchange rate, the


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central banks have to be able to supply the reference foreign currency in exchange for any quantity

of their local currency if demand arises. This can put a severe strain on their foreign exchange

reserves, which can rapidly deplete if the investors decide to pull back on a large scale. Having a peg

on a highly liquid and largely traded currency also exposes the markets to speculative attacks. After

the contagion, former prime minister of Malaysia accused the Hungarian tycoon George Soros of

engaging in massive currency speculation with the Ringgits. The ultimate aim for any entity investing

in a foreign economy is to get monetary returns on the investment in the long run. This puts a strain

on the invested nations economy once the investments start making profits. These outflows can

severely offset the balance of payment levels in the country.

Another crippling requirement of nations trying to attract large foreign capital inflows is the need to

maintain high interest rates in their local markets. This is needed to avoid flight of capital to other

more secure economies which might offer similar returns on significantly safer investments. A of

standard comparison in this aspect are the US bonds. Actions such as the Federal Reserve increasing

its benchmark interest rates can trigger a massive flight to quality unless the domestic rates ofreturn are high enough. This reduces the domestic central banks ability to control their rates to

stimulate their domestic economies.

As mentioned, most nations try to induce as much FDI inflows as possible. This creates a huge

demand for these inflows and the entities which are willing to make these investments are highly

sought after. The FDI inflows also require the investors to lock their capital in long term investments

and incur large capital expenditures before they are able to draw returns. This puts an onus on them

to ensure long term safety on their investments and their returns. To ensure this, many entities

make significant policy changes requirements and government guarantees. This can lead to these

entities forming strong lobbying groups to help promote their interests, especially with the

governments which desperately seek out such inflows. At times, these interests do come in direct

conflict with the national interests in these countries. In the absence of a strong policy framework

and a regulatory body, this can lead to the national interests being compromised to induce these

capital inflows. Lobbying efforts by these investors can also lead to rampant corruption in the

related domestic agencies.

Effects of FDI in retail in India

Positive impact

Farming

Investment in back end infrastructure will help reduce wastage of farm produce, improve livelihood

of farmers, lower the prices of products and ease supply side inflation, food safety, hygiene and

quality. Direct farm initiatives shall also provide better remuneration to farmers. More investment is

likely in farming sector. Since each retailer is expected to bring $ 100 million, it will have notable

investment in back end and logistics and likely to push employment further. Farmers have chances

to gain greater market access, higher profits, better technology and linkages with consumers due to

direct back end linkages. Key farmer issues can be addressed which would help agricultural

productivity. Intermediaries often flout mandinorms and their pricing lacks transparency. Wholesale

regulated markets, governed by State APMC Acts, have developed a monopolistic and non-


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transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price

paid by final consumer, against 2/3rd by farmers in nations with a higher share of modern retail.

Real Estate

The decision to allow 51% in Multi brand retail is expected to prompt realtors to revive their plans to

build malls and shopping complexes, which were shelved down in the past few years due toeconomic slowdown. As per Jones Lang Lasalle India Consultant, Rs. 22,000 crores retail real estate

market shall grow at CAGR of 25 % a year for the next five years, growing at 50- 100 %. With this,

much needed capital too is expected to come into the country for retail which means more job

creation in future.

Consumers

The oft quoted term- consumer as a king and queen - is finally wearing a garb of reality. Entry of

global retailers is expected to have direct impact on consumers as well as common man. It is

expected to bring down commodity prices for the common man. Large scale and high volume

sourcing and technology edge of global retailers help in realizing greater operational efficiency and

wide assortment of goods at lower prices may be made available to consumers. Food safety, hygieneand quality are value additions. More than 60% of the wastage can be prevented if specialized cold

storage chains are built up on mass scales, which eventually shall help common man.

Long term cash liquidity:

FDI will provide necessary capital for setting up organized retail chain stores. It is a long term

investment because unlike equity capital, the physical capital invested in the domestic company is

not easily liquidated.

Lead driver for the countrys economic growth:

FDI in MBR would create a competition among the global investors, which would ultimately ensure

better and lower prices thus benefiting people in all sections of the society. There would be an

increase in the market growth and expansion. It will increase retail employment and suppress

untrained manpower and lack of experience. It will ensure better managerial techniques and

success. Higher wages will be paid by the international companies. Urban consumers will be exposed

to international lifestyles.

FDI opens new doors for Franchising:

Retail giants who are at their wings, seeking entry into foreign market look for other available

alternatives. These restrictions on the global retailers regarding the inflow of Foreign Direct

Investment, leads them towards acquiring the market entry through franchises. Thus, countries

which offer promising market potentialities for retail growth offers substantial growth in thefranchising sector as well.

Negative Impact

Growth in India has traditionally been powered by the high domestic savings and investments. India

did not openly embrace the FDI powered growth model that was adopted in many of the East Asian

economies. The government closed key sectors to FDI inflows and even in sectors which have been

opened up, government regulations and control in may crucial sectors act as active deterrents to

large foreign capital investments. When the capital flows to Asia slow down, many of the regions

economies take a bad hit while India remains relatively immune to changes in the global economy.

This structure went a long way in shielding its markets from the Asian Contagion to a large extend.


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Recent turbulence in the global economic environment has led to a massive stall in Indias economic

activities. The export demands are slacking and the growth has slowed down. The sovereign debt

crisis has given rise to massive flight to quality on a global scale with investors rallying on gold and

US treasuries. This has led to a massive depreciation of the rupee in comparison with the US dollar.

Imports are more expensive and the demand constraints are dampening the economys ability to

harness on its increased export competitiveness due to a weak Rupee. This has led to a large fiscal

deficit which is triggering more outflows. This spiraling loop has sent alarm bells ringing throughout

the system and the government has started to open up newer sectors to FDI, most notably the retail

sector.

Figure 1: Distribution of FDI inflow across states. Source: www.ft.com

One of the major arguments used to advocate this policy change is the creation of a better supply

chain infrastructure following the FDI in this sector. This infrastructure improvement is proposed to

reduce the wastage of goods like fruits, vegetables and grains in the country. This process might notpan out so efficiently. The scale of food wastage due to bad storage infrastructure is of astronomical


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levels in India. About 30-40% of the fruits and vegetables become unfit for consumption before

reaching the markets due to a gross shortfall in infrastructure. FDI backed retail outlets would not be

very effective in stemming this crisis because of two reasons. The volumes that they would be able

to sell are going to be far lesser given the percentage of the Indian population they can serve.

Secondly, most of the FDI backed retail outlets would be sourcing from premium producers. The

wastage of goods among these producers is actually very low. Moreover, the FDI policy itself is a

hurdle in the development of an efficient infrastructure. The clauses like the entry barrier on towns

with low population and the autonomy for states to allow or reject the FDI flows puts geographical

constraints which may not allow for the development of the most optimal system. Issues like the

uncertainty created by the states autonomy might discourage large infrastructure investments in

states where the opposing parties may have opposing views on this issue. This can also give rise to

the creation of lobbying groups which can lead to corrupt practices. In India, the supply chain

infrastructure is severely ignored by the government. It owns only a small portion of structures like

cold storages which are critical for improvement in the efficiency of the system. Depending on fringe

benefits from another sector to improve this shortfall should not be the way to handle this issue.Larger investments should be made by the government itself to ensure that the overall system

efficiency is improved.

Another line of thought adopted to defend the need for FDI is the comparative analysis with Chinas

rapid growth which was fuelled by such capital inflows. There are a few things that should be

considered in this argument as well. China has a much larger manufacturing base than India. Wal-

Mart, the quintessential global retailer sources more than 70% of its commodities from China. This

volume is so large that the Wal-Mart Chinas director of external affairs remarked If Wal-Mart were

an individual economy, it would rank as Chinas eighth-biggest trading partner, ahead of Russia,

Australia and Canada. This has actually forms a sizeable chunk of the US trade deficit to China. This

kind of a relationship is very different from what India can achieve, even with the minimum floor on

the domestic goods to be stocked in the retail outlets. This can also lead to massive dumping of

commodities from China into the local markets as a result. Another major characteristic of China is

its ability to pull off massive labor movements across geographies. When the Deng Xiaoping

established the special economic zones on Chinas eastern seaboard, they were able to achieve

massive growth rates in those enclosed environments which led to massive inflow of labor from the

rural districts of China. This is not an isolated behavior. Even in India, there is a huge geographical

disparity in the foreign investment pattern. Figure 2 shows this phenomenon. The investment Patten

shows very little correlation to the population distribution among these states. This might lead to a

large scale labor displacement in the country since these outlets are likely to follow similar

geographical distributions. This is a cause for concern, which needs to be looked into.

In the airlines sector, the opening up of FDI has led to apprehension among the local players as they

fear possible cartelization. The competitive influence of the FDI backed entities might be lethal to

domestic businesses as they have the financial backing to ride out any subsequent price wars. This is

especially potent in a country like India which has relatively high price elasticity. This can cause a

shift in the competitive dynamics that these sectors have today, possibly creating larger barriers for

new entrepreneurial firms which offer better growth in the fundamentals of the economy in the long

run.


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One of the main reasons which allowed the Asian Contagion evolved into a massive crisis was the

gross misappropriation of the capital inflows. Many of the countries which received large volumes of

capital inflows had deep structural flaws. Corruption was rampant in these economies and the lack

of a strong regulatory framework crippled efficient capital allocation. The benefits of these

investments did not trickle down to the entire economy and a large part of it was contained to

within a small group of individuals who grew massively wealthy. Many of these economies did not

see any growth in their manufacturing bases and opening up their markets led to dumping of certain

goods from global markets.

India too is plagued by these inefficiencies. Policies are driven by political motivation rather than

financial prudence. Corruption is another major issue in India. This has severely undermined the

investor confidence too. Under these circumstances, FDI is a path which should be handled with

utmost care. Yes, the capital inflows help boost the local credit markets which fosters growth, but a

deeper analysis should be done into how this system would behave under stress from global forces.

Neutral Impact

Effect on GDP

Analysis of Issues

Will it create jobs and provide a boost to employment?

Employment generation in the retail sector is a function of size and productivity within that sector.

Productivity norms differ between independent and corporatized retail. It is therefore important to

assess the respective shares of independent and corporatized retail and map these against the

respective productivity norms to determine the net impact of both independent and corporatized

retail on employment.

India is home to approx. 15 million points of sale, or shops, of which a majority are run as standalone

entities owned and operated by members of the same family. These independent retail shops thus

provide employment to family members and also paid employees. Almost all the paid employees in

these shops are part of an informal workforce and have no guaranteed social security cover,

minimum wage or fixed working hours. Employment in this segment averages ~1.5 employees per

shop.

@ 6% Real Growth @ 7% Real Growth @ 8% Real Growth

On the other hand, employment in corporatized retail comprises employees working on the shop

floor, clerks manning the billing counters, security guards and employees in central / corporatized

functions. The productivity norms for employment in corporatized retail are a function of sales per

square feet, or sq. ft., and employees per sq. ft.

The next step is to understand the shares of independent and corporatized retail within total

merchandise retail. In 2001, the share of corporatized retail in the retail sector was under 5% and


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the remaining 95% was constituted by independent retail. By 2011, the share of corporatized retail

grew to 7%; this is projected to grow further to 20% by 2021.

The analysis presented in above shows the effect of job creation by independent retail and by

corporatized retail. An important conclusion from this analysis is that employment in corporatized

retail has not grown at the cost of independent retail. In fact, independent retail has added 4 millionjobs in the last decade. In the next decade, while corporatized retail will add another 2.7 million jobs,

independent retail will create 9 million more jobs.

The argument that FDI in retail will lead to job losses in independent retail is therefore flawed.

Equally flawed is the argument that FDI in retail will create many new jobs in corporatized retail. The

truth is that employment generation in the retail sector is not a zero sum game. It is true that

opening up the retail sector will definitely create new jobs in corporatized retail but the extent of

this job creation will be limited by corporatized retails inability to grow its share in total

merchandise retail.

Will foreign retailers kill local industry?Corporatized retail will manage to grow its share of the retail pie from the current 7% to nearly 20%

in the next decade as stated earlier. By 2021, this will translate into USD 162 billion in revenue for

corporatized retail. Here it is worthwhile to understand the share of corporatized retail that will be

contributed by international retailers and the share that will be contributed by Indian retailers

2001 2012 2021

In 2011, the total revenue of all hypermarkets (largely international retailers) in China was USD 80

billion including the revenues of Walmart, Carrefour, Tesco and other regional players. This is after a

~15 year long journey for these retailers, in China. Optimistically, if it is assumed that retail sector

reforms in India will lead to the creation of a similar scale for these players then, in 2021, all the

international retailers in India can at best aspire for a USD 80 billion revenue share. This translates to

~50% of the total revenues of organized retail (USD 162 billion) in 2021, with Indian corporatized

retailers contributing the balance. This translates to around 10% of the total retail market each forinternational and Indian corporatized retailers by 2021.


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An analysis of the extent of globalization ofthe worlds leading retailers also brings out the fact that

retailing is essentially a local play. Table 5 elaborates on the total revenues of worlds top retailers in

2011. The analysis compares the share of sales of these retailers from their home market against

that from international markets. These are retailers who have pursued international expansion

beyond for quite a while. Despite this long globalization journey, six out of these eight retailers

generate no more than a third of their sales from international markets. The other two retailers are

still dependent on their home markets for nearly two-fifths of total revenues. The key inference here

is that expanding retailing beyond home markets is challenging. It is not easy to replicate an existing

model from abroad and plant it in a new country.

Every country presents unique challenges which retailers need to confront while chalking out a

growth strategy for that country. In the context of India, there are many such challenges, most of

which are unique. Resolving these requires sustained capital deployment and patience for returns

over a long time. This analysis therefore assumes international retailers share of the Indian retail

sector to be no more than 10% in the next 10 years, even in a best-case scenario. Even with this

being the case, 90% of the retail sector will still be attributable to independent retail or Indian

corporatized retail. Thus, the argument that international retailers will completely takeover local

retail does not hold water.

Will it reduce the cost of distributing goods to the consumer?

The supply chain for retail operations comprises product development, merchandising, vendor

development, logistics, warehousing, in-store selling etc. Inarguably, retailing requires scale,

precision and efficiency in the supply chain for retailers to be profitable. Retailers do this by

integrating the supply chain thus ensuring that quality merchandise is delivered faster without

damage or leakage of any kind. The efficient working of this supply chain reduces the costs incurred

in making goods reach the consumer. This demands capital deployment by retailers at every step of

the value chain involved in meeting this goal. In the Indian context, this capital deployment cannot

be undertaken by independent retail, due to the simple reason that this segment is fragmented and

undercapitalized. The quantum and scale of this capital deployment necessitates the large-scale

participation of the private sector. Like elsewhere in the world, this can only be done by

corporatized retail. However, corporatized retails inability to grow beyond a certain size will hamper

this desired capital creation. Ideally, retailing all merchandise through corporatized retail will

demand USD 200 billion of capital deployment.


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However, in this estimation, corporatized retail can at best aspire for a 20% share of total

merchandise sales by 2021. Therefore, the incremental capital creation by corporatized retail will

amount to USD 40 billion, of which USD 20 billion will be attributable to international retail (Table 6).

The lack of adequate capital deployment by corporatized retail will consequently inhibit the desired

creation of scale and efficiency in the retail sectors supply chain. This shortfall in performance of the

retail supply chain will therefore not have the desired effect of reducing either the time to market orthe cost of distributing merchandise.

Will it help in taming inflation?

It was argued in the previous point that corporatized retail does help in reducing the cost of

distributing merchandise by building scale and efficiency. This reduction in the distribution cost of

merchandise is passed on to the consumer through a lower retail price for that merchandise. Thus, it

contributes positively in reducing inflation. It is important to understand the various categories that

make up merchandise retail and the contribution of corporatized retail to each of these categories.

Food has the largest impact on consumer price inflation. This is validated by the fact that today 70%

of merchandise retailing comprises food & groceries (Table 7). Therefore, mapping the share of

corporatized retail in dispensing food merchandise will give an objective picture of corporatizedretails ability (present and future) to tame inflation.

For simplicity, merchandise retail is broadly classified into three categories - Food & Groceries,

Apparel, and Others (Jewellery & Watches, Electronics, Home Improvement, Pharmacy, Footwear

etc.) While 70% of total merchandise retail comprises Food & Groceries, only 3% of Food &

Groceries is retailed through corporatized retail. This scenario is not going to change much in the

coming decade. While, corporatized retails share will register an impressive growth in other

categories, Food & Groceries will prove to be a challenge. By 2021, the share of corporatized retail in

Food & Groceries retail will grow by a mere 2 percentage points, to around 5%. This is largely to do

with the market structure on the supply side of the Indian economy. This market structure will not

allow corporatized retailers to integrate their food & groceries supply chain. The lack of direct access

to farmers for sourcing, interstate movement of goods, tax structures, and inadequate capacities inthe food supply chain will act as the chief barriers to this integration. The inability of corporatized


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retail to grow its share in food & groceries retail will therefore curtail its firepower in achieving the

intended objective of taming inflation.

Is it detrimental to farmers?

This argument follows logically from the previous argument about corporatized retails role in

taming inflation. If we look into the evolution of retailing world over, corporatized retail does play aconstructive role in better price realization. It creates a transparency in the procurement process

and provides market-based options for farmers, among other benefits. However, in the Indian

context, it is too early for this debate to happen, given that corporatized retail will not be in a

position to create a large enough dent in food & groceries retailing.

The important but less talked about issues

Positive impact of corporatized retail on tax receipts

There is a positive relationship between the increase in tax receipts and the increasing share of

corporatized retail. Most retail transactions conducted in the ~15 million shops in India are in cash.

This provides a significant leeway for a parallel economy to thrive. There are tax (VAT) leakages viaunder-invoicing or non-reportage of sales. The structure of independent retail also provides enabling

conditions for the trade of spurious and counterfeit goods. With an increasing share of corporatized

retail, the probability of such leakages diminishes and the certainty of tax receipts increases. A case

to this effect is made in Table 8.

2001 2012 2021

In this analysis, the impact of an increasing share of corporatized retail on certainty in tax revenues is

assessed. This incremental increase in tax revenue goes directly into the coffers of all the Indian

states to the extent of their share in Indias retail pie.

In Table 9, a case is made for the incremental share of tax revenues from corporatized retail in 2012

and in 2021 for the top 5 Indian states by merchandise sale. The states share of Indias total GDP is

assumed as a proxy to the relative share of retail sales in these top 5 states. It is also assumed that

this relative share will not change in the coming decade.

The impact of E-commerce on Employment Generation

E-tailing in India is poised to grow manifold in the next decade, thanks to the convergence of

multiple factors that will enable the creation of an ecosystem for the take-off of e-tailing in India.

From the demand perspective, some of the enabling factors will include Internet access via


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broadband or high speed mobile networks, the availability and penetration of affordable

smartphones and tablets, and the creation of a sizeable consumption class that will be short of

time for shopping through brick-and-mortar formats. From the constraints perspective, the lack of

access to affordable real estate will be become the biggest enabler for the take-off of e-tailing in

India.

As per the estimates (Table 10), growth in e-tailing is capable of generating additional direct

employment for nearly 1 million people. A significant proportion of these jobs will be responsible for

delivering goods from the warehouse to the consumers location, which is also referred to as last

mile delivery.

Magnitude

Critical Analysis

SWOT Analysis of Open FDI Policy

In any strategic planning process, two factors namely internal and external Environmental factors

play an important role. A thorough scan of these factors is important for further planning. The

environmental factors, which are internal to the retail sector, can be classified as strengths and

weakness. The factors, which are external to the sector, can be classified as opportunities and

threats. The strategic analysis of environmental factors is referred as SWOT analysis. This analysis

provides the information that is helpful in understanding the retail sector resource mobilization and

capabilities to the competitive environment in which it operates. Finally, this will be an instrumental

in formulation of strategies for future growth and development of the sector.

Strengths

1. Boost up competition: Welcoming the FDI in retail industry can prove advantageous forIndia as it increase the competition in retail chain at domestic level. The competition always

demands the innovation and differentiation and the out result of these two is the quality

goods. As the competition increases, the competitor is compelled to serve quality of goods

at competitive at reasonable price.

2. Benefits to farmers: In most cases, in the retailing business, the intermediaries havedominated the interface between the manufacturers or producers and the consumers.

Hence the farmers and manufacturers lose their margins as the major share is eaten up by

the middle men. This issue can be resolved by FDI, 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.

3. Benefits to consumers: Consumer will get assortment of products at squat prices comparedto market rates, and will have more options to get international brands at one place.

because of competitive prices, and will improve the standard of living of the consumers.

4. Generate Employment opportunities: Bharti Walmart, a joint venture between BhartiEnterprises and Wal-Mart Stores, will open a training centre at Jalna in Maharashtra on a

public private partnership basis, according to a press note released on April 27, 2012. Bharti

Walmart currently runs three such training centres under the PPP model in Amritsar, Delhiand Bangalore, and three training centres at its modern wholesale stores in Zirakpur,


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Jalandhar and Ludhiana. The domestic retail sector is growing fast providing growth

opportunities. However, the industry lacks the talent pool with required skill sets to leverage

this huge potential. Bharti Walmart training centres aim to bridge this gap by imparting

training in various aspects of retailing to under-privileged youth making them employable in

the retail sector.

5. Efficient Banking Services: Efficient and customized services of banks today, is a result ofeffective competition which increases only after the foreign players were welcomed inarena.

6. Large scale investments: It has also contributed to large scale investments in the real estatesector with major national and global players investing in devolving the infrastructure and

construction of the retailing business.

7. Increased Purchasing power: Large domestic market with an increasing middle class andpotential customers with purchasing power.

8. Ranked second in Global Retail Development Index of 30 developing countries drawn up byAT Kearney and hence considered as a potential sector.

9. The annual growth of departmental stores is estimated at 24% which will add to substantialsurge in the countrys overall economic development.

Weaknesses

1. Lack of 'Industry' status, thereby creating financial issues for retailers: The retail sector inIndia does not enjoy the status of an "Industry, thereby making difficult for the retailers to

raise funds for the expansion projects as it is easier to access the flow of funds with that

status.

2. Lack of Infrastructure: Lack of infrastructure in the retailing chain has been one of the majorissues of concern which has 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.

FDI might help India overcome such issues by channelizing the resources in the rightmanner.

3. Catering to high end customers: This will mainly cater to high-end consumers placed inmetros and will not deliver mass consumption goods for customers in villages and small

towns.

4. Volume of sales is very low: The volume of sales in Indian retailing is low. India has largestpopulation in the world and a fast growing economy.

5. Rising retail real estate rentals: The rapid development of retail sector is the sharpimprovement in the availability of retail space. But the current surge in property prices,

retail real estate rentals have escalated significantly, which may render a few retailing

business houses unavailable. Retail companies have to pay high rentals which are block the

profits.6. Small size outlets: Small size outlets are also one of the major weaknesses in the Indianretailing. More than 96% of the outlets are lesser than 500 sq.ft and are also smaller than

those in the developed countries.

7. Inadequate merchandise mix: Retail chains are not settled down as on date with propermerchandise mix for the mall outlets. Retailing today is not about selling at the shop, but

also about researching and surveying the market, offering choice, competitive prices and

retailing consumers; hence there is a long road ahead.

Opportunities

1. Improvement in quality standards: The inflow of FDI in retail sector is bound to pull up thequality standards and cost-competitiveness of Indian producers in all the segments and

hence India will significantly flourish in terms of Consumer Expectations.


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2. Improving Distribution and Warehousing Technologies: The technical know-how fromglobal firms, such as warehousing technologies and distribution systems, will lend itself to

improving the supply chain in India, especially for agricultural produce.

3. Attractive Market: Global retail giants take India as key market .It is rated fifth mostattractive retail market. Indian retail industry has come forth as one of the most dynamic

and fast paced industry with several players entering the market. The organised retail sectoris expected to grow stronger than GDP growth in the next five years driven by changing

lifestyles, increase in income, purchasing power and favourable demographic outline. Food

and apparel retailing are key drivers of growth.

4. There will be more organization in the sector. There are numerous empirical evidencesacross globe relating to massive increase in the employment opportunities as the sector

grows after the reforms were initiated in countries like US and China. India is likely to

experience the same situation in this liberalised and open regime of FDI in retail sector in

India. It can become one of the largest industries in terms of numbers of employees and

establishments. Once the concept picks up, due to demonstration effect, there will be an

overall up-gradation of domestic retail trade.

5.

Rural retailing is still unexploited Indian market and could act as an opportunity for thegiants to venture into the retail market.

6. Promotes Healthy competition check on inflation: Retail giants such as Wal-Mart,Carrefour, Tesco, Target, Metro, Coop and 350 other global retail companies are already

having operations in many countries for over 30 years. Contrary to a view prevailing across

the globe that these MNCs will become a source of monopolies, rather they have managed

to keep a check on the food inflation through their healthy competitive practices and giving

variety and reasonably priced products to the customers.

7. More transparency compared to traditional Mandi systems: The intermediaries operatingin the Indian system are not adhering to transparency in the system relating to their price

strategies. According to some of the reports, an average Indian farmer realise only one-third

of the price, which a final consumer pays, but there will be more rationality andtransparency in the pricing policies of theses MNCs.

8. Eviction of Intermediaries and directly benefitting the farmers and producers at large: Theprices of the commodities will be automatically checked. For example, according to the

Business Standard, Walmart has introduced "Direct Farm Project" at Haider Nagar near

Malerkotla in Punjab, where 110 farmers have been connected with Bharti Walmart for

sourcing fresh vegetables directly. These strategies will benefit unswervingly the farmers

and producers at large in respect of realisation of true prices evicting the intermediaries.

9. Quality Control and control over leakage and wastage: There are number of issues relatingto malpractices and inefficiencies of the traditional system by which children are not able to

get the proper food (malnourished), there are losses, food gets rotten in the transit etc. To

correct this system and make available cheap product with good quality is an important stepin their (MNC) endeavour, which is possible by open FDI as Cost-cautious and highly

competitive retailers will try to avoid these wastage and looses and it will be their endeavour

to make the products available at lowest prices, hence making food available to the weakest

and poorest segment of Indian society which is the need of today.

10.Heavy flow of foreign capital will help in building up the infrastructure for the growingpopulation: India is a capital deficit country with big challenges of growing population,

developmental needs and with its present budgetary deficit cannot satisfy the growing

needs of the ever growing Indian Population. Hence foreign capital inflow will bridge this gap

and will enable to create a heavy and good capital base.

11.Sustainable development and regulated system: There will be sustainable development andmany other vital economic issues will be focused upon like child labour, overtime, not taking

of their welfare. These issues will not have any room in this transparent open system as


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contract between the employer and worker will evict corruption from grass root level and

will control black money.

Threats

1. Massive Job Losses: Indian economy is a developing economy and the level of developmentis not as desired. Due to paucity of infrastructure resources in Indian economy, there is adirect threat from big giants like Wal-Mart, which will compel current independent stores to

close which will directly lead to massive job losses, as their level is very high, fully automated

which need very few people to operate. This will lead to massive job losses; also since the

Sector is unable to employ retail staff on contract basis, this becomes a biggest threat for the

Indian economy.

2. Sustaining of loss strategy: Another challenge and threat Indian companies perceive is thesustaining of the loss by initially lowering the price to penetrate the market and this is a very

usual policy adopted by these big players. They can afford to lower the prices in initial stages

in order to knock-out the competition and become a monopoly and later on raise the prices

like was done by Pepsi and Coke.

3.

Inequitable Competition: It would lead to very inequitable competition and eventuallyresult in large-scale exit of domestic retailers, especially the small family managed outlets,

leading to large scale displacement of persons employed in the retail sector. Further, as the

manufacturing sector has not been growing fast enough, the persons displaced from the

retail sector would not be absorbed there.

4. Repatriation of profits outside India: India doesn't need foreign retailers, since home growncompanies and traditional markets may be able to do the job. Just like in BPO industry, work

will be done by Indians, profits will go to foreigners hence is not viable solution for Indians.

We cannot ever forget the example of East India Company. It entered India as a trader and

then took over politically.

5. Persistence of Political inconclusiveness of issues: There is still no consensus made bygovernment .In a politically and culturally diverse country like India, within no time everyeconomic issues turns out to become a political issue and there is a persistence of

inconclusiveness on the issue.

6. Offensive public opinion: There are strong apprehensive comments and action seen by theproliferation of these stores. A Wall Street Journal article reports that in Uttar Pradesh, Uma

Bharti, a senior leader of the opposition Bharatiya Janata Party (BJP), threatened to "set fire

to the first Wal-Mart store whenever it opens;" with her colleague Sushma Swaraj busy

tweeting up a storm of misinformation about how Wal-Mart allegedly ruined the U.S.

economy. With these offensive comments to develop a consensus is a most challenging job

by government of India.

7. Immature, undersize and nascent stage of India retail sector : Another concern ofGovernment of India is that the Indian retail sector, particularly organized retail, is stillimmature, undersized and is in a nascent stage and that, therefore, it is important that the

domestic retail sector is allowed to nurture and strengthen first, before fully opening this

sector to foreign investors.

8. Monopolistic tendencies and unnatural price trends: Another concern is that the globalretailers would conspire and exercise monopolistic power to raise prices and monopolistic

(big buying) power to reduce the prices received by the suppliers.

9. Asymmetric growth of cities: It would lead to asymmetrical growth in cities, causingdiscontent and social tension elsewhere. Hence, both the consumers and the suppliers

would lose, while the profit margins of such retail chains would go up.

10.Labour rules and regulation are also not followed in the organized retails.11.Lack of uniform tax system for organized retailing is also one of the obstacles.12. Inadequate infrastructure is likely to be an obstacle in the growth of organized retails.


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Conclusion

In view of the above discussion, if we try to balance the opportunities and prospects attached to the

given economic reforms, it could be advantageous for Indian economy once executed. With big

retail giants coming to India, it will surely improve our back-end storage and procurement process.

Once these multi-chain retailers establish themselves, they will create infrastructure facilities, which

will also propel the existing infrastructure. This has been evident on January 11 & 12, 2012, whenthe notification increasing FDI limit in single-brand retail from 51% to 100%, was announced. FDI in

multi-brand retail' should also be given a green signal as soon as possible. Keeping in view the above

benefits (or opportunities mentioned above), it is very reasonable to say that the period for which

we delay these reforms will be a loss for the Government only, since majority of the public is in

favour of this reform. The farmers will benefit from FDI as they will be able to get better prices for

their produce. The elimination of the intermediate channels in the procurement process will lead to

reduction of prices for consumers respectively.

The regulation in the FDI Bill that 30% of the total procurement has to come from small and medium

enterprises will benefit the domestic businesses. Of course a policy is needed to protect the small

and medium market channels from Chinese invasion. The whole economy will be benefittedincluding government and people at large with the reform process. Retailers venturing the Indian

market must ensure that they have considered the opportunities and the challenges to maximize

their returns. Retailers will need to bank on the local knowledge brought in by their partners,

employees, service providers to reduce the lead time required by them to establish operations and

get a firm place in the Indian market. There is a need for a symbiosis approach for the welfare of the

public at large.

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Documents

FDI in Retail - A Detailed Study