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1. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
FDI in Indian Retail Sector - Highlights &
Analysis
The FDI or Foreign Direct Investment in retail sector of India has remained a very hot topic in the year 2011
and it still remains also. What makes this topic so important for a common-man and why it is so talked about?
Let's find out.
FDI in India
Present Retail Sector in India
Like every other economy, the retail sector is also one of the most crucial and extremely potential sector of
the Indian Economy. As of now, the retail sector in India accounts for approximately 33-35% of the GDP
with 46% growth rate in past three years. The Indian retail market is one of the top 5 retail markets in the
world and employs 7% of the total Indian work-force.
The retail sector in India is divided into two main heads, viz., organised and unorganised sector. Organised
Sector Retailers means to include the licensed retailers i.e. those, who have registered themselves for sales
tax/VAT, income tax, etc. These are generally privately owned large businesses, like Westside, Tanishq,
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2. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
Croma, Shoppers Stop, Lifestyle, Pantaloons, Reliance World, Max and many more.
On the other hand, unorganised retailing refers to the traditional kirana shops, general/departmental stores,
paan/beedi shops, etc.
If we talk about the statistics, the market share of unorganised retail sector is 97% of the total retail sector, as
compared to organised retail sector, which accounts for only 2-3%. This data is even after the presence of
big corporate giants like Tata, Reliance, K Raheja Corp Group.
There are three different forms through which retail trade is carried out in India, namely:
Mono/Exclusive/Single Brand
Multi-branded Retail Shops Convergence Retail Outlets
Retail Shops
Exclusive Showrooms either
In these kinds of stores, almost all
owned or franchised out by the
brands are available for a single These kinds of products have
manufacturer. A complete range
product type. The customer has a almost all kinds of products,
of all the products manufactured
very wide choice for the kind of required by a consumer, in them.
by the said manufacturer under
product he is willing to buy.
one brand name.
The focus is on the nature of The focus is on the diverse
The focus is on the brand name.
product. consumer needs.
e.g.: Exclusive showroom / e.g.: Big Bazaar, In & Out,
e.g.: Max, Shoppers Stop,
franchise outlets of Nike, Liberty, Subhiksha, Grand India Bazaar,
Croma, etc.
Samsung, Nokia, etc. etc.
Current FDI Policy in respect of Retail Sector in India
Keeping in mind the 'welfare' motive, India has kept the retail sector closed for the foreign investors in order
to protect the interest of the 15 million small retail store-owners. Currently, the foreign investor can make
investments as per following guidelines:
1. FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic
route.
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3. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
2. FDI up to 51% with prior Government approval for retail trade of ‘Single Brand’ products. (now 100%
allowed vide notification dated 11/Jan/2012).
3. FDI is not permitted in Multi Brand Retailing in India.
Present entrance routes for the Foreign Investors
In view of the restrictive entrance policies for the foreign investors in the retail sector, they followed one or
more of the following routes to expand their business in India:
D.Manufacturing
A.Franchise B.Cash and Carry C.StrategicLicensing
and Wholly-owned
Agreement Wholesale Agreement Agreement
Subsidiary
<>o<>o
<>o<>o
In this kind of
arrangement,
foreign brands give e.g.:
exclusive licences
and distribution <>o<>o <>o<>o
rights to Indian e.g.: Metro AG of Germany
e.g.: Domino’s, Nike, was the first significant global e.g.: Levi’s, Reebok,
companies. Through
Lacoste, have entered player to enter India through Woodland, have
these rights, Indian
the Indian market this route. subsidiaries in India
companies can who manufacture the
through this route
either sell it through products with these
their own stores, or brand-name.
enter into shop-in-
shop arrangements
or distribute the
brands to
franchisees.
PROSPECTED changes in FDI Policy for Retail Sector in India
The government (led by Dr.Manmohan Singh), announced the following prospective reforms in the retail
sector in India:
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4. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
1. India will allow foreign direct investment of up to 51 per cent in "multi-brand" sector;
2. single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores, up from the
previous cap of 51 percent. This has been allowed lately on 11/Jan/2012.
The bill has following important drivers:
1. The retailers (both single-brand and multi-brand) will have to source at least 30% of their goods from small
and medium sized Indian suppliers.
2. All retail stores can open up their operations in having population over 1 million. Out of approximately
7935 cities and towns in India, 55 cities satisfy such criteria.
3.Multi-brand retailers must bring a minimum investment of US$ 100 millions. Out of this, half of the amount
must be invested in back-end infrastructure fac3ilities such as cold chains, refrigeration, transportation,
packing, sorting and processing, in order to reduce the post harvest losses and to bring the remunerative
prices to farmers.
4. The opening of retail competition (policy) will be within the parameters of state laws and regulations.
ISSUES / CONTROVERSIES
Oppositions' reaction against retail sector reforms
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5. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
A lot of objections have been raised by the opposition parties and public at large, as a result of which the said
bill has been kept on hold.
Those who are criticising these reforms took support of the following points: [Threats]
1. Current Independent stores will be compelled to close, leading to massive job losses. The operations in big
stores like Walmart are highly automated and employ very less work-force.
2. Big players 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. This kind of phenomenon was evident earlier in the case of
soft-drinks. Eviction of CampaCola by Pepsi and Coke is one such example.
3. India doesn't need foreign retailers, since homegrown companies and traditional markets may be able to do
the job.
4. Just like in BPO industry, work will be done by Indians, profits will go to foreigners.
5. Remember East India Company. It entered India as a trader and then took over politically.
6. The government hasn't built consensus.
In a politically and culturally diverse country like India, every ECONOMIC issues turns out to become an
POLITICAL issue. On December 1, 2011, there was a nation-wide "Bandh" (close all business in protest)
was called up by various political parties opposing the retail sector reforms. Many nation-wide newspapers
such as the Times of India and the Hindu, claimed that there was a mixed response to that protest. Many
stores ignored the shutdown call and remained open also during the whole "bandh" day, whereas many other
opened during the second half of the day. This was because of the fact that many of the opposition parties
privately supported and encouraged these reforms. As a result of this, these reforms have been kept on hold.
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.
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6. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
According to Bloomberg, on 3 December 2011, the Chief Minister of the Indian state of West Bengal,
Mamata Banerjee, who is against the policy and whose Trinamool Congress brings 19 votes to the ruling
Congress party-led coalition, claimed that India’s government may put the FDI retail reforms on hold until it
reaches consensus within the ruling coalition. Reuters reports that this risked a possible dilution of the policy
rather than a change of heart.
India Today claimed that the resistance to Indian retail reforms is primarily because it has been badly sold,
even though it can help fix the exploitation of Indian farmers by the decades-old "arhtiya" and "mandi"
monopoly system. India Today claims the policy is good for the small Indian farmer and the Indian consumer.
Pratap Mehta, president of the Centre for Policy Research, claimed any U-turn or postponement of retail
reforms will cause an immense loss of face to the Congress-led central government of Manmohan Singh. The
mom-and-pop farmers of India support these reforms. The consumers of India want the reforms. The
government has already annoyed those who oppose change and innovation in retail. By putting retail reforms
on hold, the government will additionally alienate much larger segment of India's population supporting FDI.
So they will now have the worst of both worlds, claims Mehta.
Apart from these, many of the economic leaders like Deepak Parekh and Ashok Ganguly are in support of
such reforms. They urged farmers, consumers and the common people to raise their voice against this false
drama of apprehension against investment and modernising trade in organised retailing. They called upon
Indians to come out and strongly support progressive measures and reforms with the same spirit and gusto
with which we take the liberties to criticize policies or issues we do not appreciate.
SWOT ANALYSIS
In order to conclude this issue let us draw a SWOT analysis of the situation.
CURRENT
Strengths
1. Major contributor to the GDP: The retail sector in India is hovering 33-35% of the GDP, as compared
to around 20% in USA.
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7. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
2. High growth rate: The retail sector in India enjoys an extremely high growth rate of approximately 46%.
3. High potential: Since the organised portion of retail sector in India is only 2-3%, thereby creating a lot of
potential for the future players.
4. High employment generator: The retail sector employs 7% of the total work-force in India, which is rite
now limited to unorganised sector only. Once the reforms get implemented this percentage is likely to increase
substantially.
Weaknesses (limitations):
1. Lack of Competition: AT Kearney's study on global retailing trends found that India is least competitive
as well as least saturated markets of the world.
2. Highly unorganised: The unorganised portion of total retails sector is 97% as compared to US, which is
only 20%.
3. Low productivity: A McKinsey study claims retail productivity in India is very low as compared to its
international peers.
4. Shortage of talented professionals: The retail trade business in India is not considered as a reputed
profession and it is mostly carried-out by the family members (self-employment/captive business). Such
people are generally not academically and professionally qualified.
5. No 'Industry' status, hence creating financial issues for retailers: The retail sector in India do not
enjoy the "Industry" status, thereby making difficult for the retailers to raise funds for the expansion projects.
PROSPECTS
Opportunities (benefits):
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8. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
1. There will be more organization in the sector. Organized retail will need workers. This is quite evident
in Unites States of America, where the 80% of the retail sector is organised and it employs 13-16% of the
work-force of that country. Moreover, according to the findings of KPMG, one of the world's largest audit
companies, in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about
7% in 2001, post reforms and innovative competition in the retail sector in that country.
2. Healthy competition will be boosted and their will be an check on the prices (inflation). Retail
giants such as Walmart, Carrefour, Tesco, Target, Metro, Coop and 350 other global retail companies are
already have operations in many countries for over 30 years. Until now, they have not at all become
monopolies, rather they have managed to keep a check on the food inflation through their healthy competitive
practices.
3. Create transparency in the system. The intermediaries operating as per mandi norms do not have
transparency in their pricing. According to some of the reports, an average Indian farmer realise only one-
third of the price, which a final consumer pays.
4. Intermediaries and 'mandi system' will be envicted, hence directly benefiting the farmers and
producers. The prices of the commodities will 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.
5. Quality Control and control over leakage and wastage. Due to organisation of the sector, 40% of the
production does not reach the ultimate consumer. According to a news in the Times of India, 42% of the
children below the age group of 5 are malnourished and the Prime Minister Dr.Manmohan Singh has referred
to it as "a national shame". Food often gets rot in farm, in-transit and in antiquated state-run warehouses.
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.
6. Heavy flow of foreign capital will help in building up the infrastructure for the growing
population. India is already operating in the budgetary deficit. Neither the Government of India nor the
Indian domestic investor are capable to satisfy the growing needs (schools, hospitals, transport, infrastructure)
of the ever growing Indian Population. Hence foreign capital inflow will enable us to create a heavy capital
base.
7. There will be sustainable development and many other economic issues will be focused upon.
Many Indian small shop owners employs many workers, who are not under any contract and make them
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9. 7/12/12 CAclubindia News : FDI in Indian Retail Sector - Highlights & Analysis
work for long hours. Many of such employs under-aged workers, thus giving rise to child-labour. Not only
this, lack of contract between worker and employer and no registration of such shops boosts corruption at
grass-root level and generates black money.
Threats (drawbacks):
Emergence of foreign players in Indian retail sector can give rise to a number of threats also, which are
discussed above. Out of the above mentioned drawbacks, most of them are politically created.
CONCLUSION
In view of the above discussion, if we try to balance the opportunities and prospects attached to the given
economic reforms, it will definitely cause good to Indian economy and consequently to the public at large, if
once implemented. This has been evident on January 11 & 12, 2012, when the notification increasing FDI
limit in single-brand retail from 51% to 100%, was announced. According to the news in the Economic Times
website, the stock prices of existing retailers rose substantially. As per the news, shares of Pantaloon Retail
gained 4%; Shoppers Stop rose 4.9% and Koutons Retail surged almost 10%. I believe that, the reform of
'51% FDI in multi-brand retail' should also be given a green signal as soon as possible, subject to the above
mentioned bill driver / riders (conditions). 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 favor of this reform. Needless to mention, the above list of
opportunities or benefits is illustrative. There could be many more benefits of such a reform. If this policy is
implemented then it will be of benefit for the Indian corporates, since 49% of the profit share will remain with
the Indian companies only. Thus, both the Government, corporates and public in large will be benefited with
this reform. I personally believe that instead poking the political game in the economic reform issues like
these, all the political parties (ruling party and all other opposition parties also) of India, should work in
symbiosis, not only for their selfish benefits, but for the welfare of the public at large. Needless to say India is
a WELFARE State... !!!!
Source : http://moneypedia-india.blogspot.com/ -
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