FDI IN RETAIL: A Perspective

Globalization and liberalization the two pillars of new economic world order has lead to
revolutionary change and overhauling in the approaches and business practices worldwide in
order to address the opportunities and challenges presented by the Multi Polar World.
INTRODUCTION:
After nearly a decade of anticipation, Prime Minister Manmohan Singh and his cabinet recently
took bold action to revive Indias economic reform agenda. Despite stiff opposition, Singh
announced on September 14 that multi-brand retail and other key sectors of the Indian economy
would be open to foreign direct investment (FDI) on a state-by-state basis. To-date, a handful of
Indias 28 statesmostly Congress-ledhave agreed to move forward on the new FDI limits.
SECTOR
Single Brand Retail
Multi Brand Retail

FDI Percentage
100%
51%

BENEFITS:
FDI in retail is expected to bring the investment and expertise necessary to modernize and
develop the farm and manufacturing sector. Analysts estimate that the retail market in India,
currently worth $500 billion, will grow to $1.3 trillion by 2020. Organized retail is expected to
reach 20-25% of total retail by 2020 (from a current 5-6%). The prospect of higher growth in the
food and grocery category is particularly attractive because over fifty percent of Indias
workforce is employed in the farm sector. Therefore, advocates see a significant role for FDI for
the economic development of the country as a whole. Such investment would create new offfarm jobs for 50- 60 million low-skilled workers, enough to absorb new entrants to the work
force as well as those potentially displaced by the market efficiencies introduced by FDI. New
investment would result in other positive externalities such as better seeds and stricter standards
that would increase quality and productivity while lowering costs. FDI in retail should also be
cross-cutting and modernize not only retail and agriculture, but also manufacturing.
DISADVANTAGES:
Domestic companies fear that they may lose their ownership to overseas company

 Small enterprises fear that they may not be able to compete with world class large companies
and may ultimately is edged out of business;
Large giants of the world try to monopolize and take over the highly profitable sectors;
Such foreign companies invest more in machinery and intellectual property than in wages of
the local people;
Government has less control over the functioning of such companies as they usually work as
wholly owned subsidiary of an overseas company.
Despite the regulatory provisions to ensure domestic competition and protect the domestic retail
industry and farmers, the policy has received stiff opposition. Concerns include the possibility of
monopoly power of foreign entrants over farmers and consumers both, predatory pricing
strategies of the entrants, manipulation of prices for the entrants own benefit and a fall in
income, employment and the eventual destruction of the unorganized indigenous retail sector
dominated by small family-run outlets.
OTHER ECONOMIES EXPERIENCES:
It is important to remember that other countries like Argentina, Brazil, Chile, China, Indonesia,
Malaysia, Russia, Singapore, and Thailand have allowed 100% FDI in multi-brand retail since
the 1990s and many of them have had encouraging experiences. China, for one, permitted FDI in
retail as early as 1992. It has since attracted huge investments in the retail sector without
affecting either small retailers or domestic retail chains. Since 2004, the number of small outlets
rose from 1.9 million to over 2.5 million in China. Employment in the retail and wholesale
sectors increased from 28 million to 54 million from 1992 to 2001.
What will be the role of New FDI policy in Multi-Brand Retailing?
FDI in multi brand retail is expected to bring retail Know how and best practice, shopping
experience, foreign capital, generate huge employment, investment in supply chain and backend
operation mainly in food and grocery segment. The new FDI policy has been designed to attract
the large Food and Grocery and Hypermarket retailers like Wal-Mart, Carrefour and Tesco who
already have presence in India in various ways and are furthering their expansion plan through
their Indian retail partners.

The opening will allow the existing organized retailers to have joint ventures with many global
players to bring different retail formats to the market similar to what has happened in the Middle
Eastern countries. It is the local corporate who have brought foreign players rather than the other
way round using licensing, franchise or joint venture route.
CONCLUSION
As retailing still is very local industry (over 90%), the FDI in multibrand retailing will only
benefit existing organized players in terms of attracting foreign capital and will not change
significantly the retail landscape in terms of formats proliferations benefiting customers,
generating huge employment or investment in supply chain or back end investment as has been
envisaged in the policy. This opening will attract very few global retailers particularly in food
and grocery segment. Out of top 250 retailers, the 36 retailers who are successful in China are
most likely to enter into India as 17 retailers out of this have already entered India, hence scope
for many global players to enter is very limited. At best, the global players already present in
India will expand faster due to opening up. Favorable experiences of other emerging markets
suggest that the appropriate implementation of FDI in multi-brand food retailing, with effective
checks designed to protect indigenous small and medium-size enterprises, will eventually
alleviate the supply-side impediments to agricultural production. It will transform the way
perishable agricultural produce is acquired, stored, preserved, and marketed and thus help
control Indias persistent food inflation.
Recommendations
1. The Government and RBI need to evolve suitable lending policies that will enable
retailers in the organized and unorganised sectors to expand and improve efficiencies.
2. A National Commission must be established to study the problems of the retail sector and
to evolve policies that will enable it to cope with FDI as and when it comes.
3. The proposed National Commission should evolve a clear set of conditionalities on giant
foreign retailers on the procurement of farm produce, domestically manufactured
merchandise and imported goods. These conditionality must be aimed at encouraging the
purchase of goods in the domestic market, state the minimum space, size and specify
details like, construction and storage standards, the ratio of floor space to parking space
etc. Giant shopping centres must not add to our existing urban snarl.

4. Entry of foreign players must be gradual and with social safeguards so that the effects of
the labour dislocation can be analysed & policy fine- tuned. Initially allow them to set up
supermarkets only in metros. Make the costs of entry high and according to specific
norms and regulations so that the retailer cannot immediately indulge in predatory
pricing.
5. In order to address the dislocation issue, it becomes imperative to develop and
improve the

manufacturing sector in India. There has been a substantial fall in

employment by the manufacturing sector, to the extent of 4.06 lakhs over the period 1998
to 2001, while its contribution to the GDP has grown at an average rate of only 3.7%. If
this sector is given due attention, and allowed to take wings, then it could be a source of
great compensation to the displaced workforce from the retail industry.
6. The government must actively encourage setting up of co-operative stores to procure and
stock their consumer goods and commodities from small producers. This will address the
dual problem of limited promotion and marketing ability, as well as market penetration
for the retailer. The government can also facilitate the setting up of warehousing units and
cold chains, thereby lowering the capital costs for the small retailers.
7. According to IndiaInfoline.com, agro products and food processing sector in India is
responsible for $69.4 billion out of the total $180 billion retail sector (these are 2001
figures). This is more than just a sizeable portion of the pie and what makes it even more
significant is the fact that in this segment, returns are likely to be much higher for any
retailer. Prices for perishable goods like vegetables, fruits, etc. are not fixed (as opposed
to, say, branded textiles) and therefore, this is where economies of scale are likely to kick
in and benefit the consumer in the form of lower prices. But due attention must be given
to the producer too. Often the producer loses out, for example, when the goods are
procured at Rs.2 and ultimately sold to the consumer at about Rs.15 as in the case of
tomatoes now. The Government themselves can tap into the opportunities of this
segment, rather than letting it be lost to foreign players. And by doing so, they can more
directly ensure the welfare of producers and the interest of the consumers.
8. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that
procurement prices for perishable commodities are fair to farmers and that they are not
distorted with relation to market prices.

GROUP MEMBERS:
RAKESH NAGAR
SAURABH JAGOREE
SHUBHAM SHARMA
RAHUL CHAUDHARY
MRIDUL C.P