Rosary College of Commerce & Arts

STUDENTs Seminar
Is the recent hike in FDI rate to 51% beneficial to the Indian retail sector?

Done By:- Group 2 R-10-03 Naganand Badgeri R-10-10 Collins DCosta R-10-20 Hureshwar Gaude R-10-25 Asiel Lobo R-10-27 Sanita Menezes R-10-29 Meliva Pereira

Sunday, 06 May 2012 TABLE OF CONTENTS

SR NO. TITLE PG NO.

1 2 3 4 5 6 7 8 9 10 11 12

INTRODUCTION DIFFERENCE BETWEEN FDI AND FII FDI IN INDIA RECENT DEVELOPMENTS HIGHLIGHTS OF FDI IN MULTI BRAND RETAIL KEY IMPACTS ADVANTAGES OF FDI IN RETAIL SECTOR IN INDIA DISADVANTAGES OF FDI IN RETAIL SECTOR IN INDIA WHY KIRANA STORES WILL NOT BE AFFECTED OUR SUGGESTIONS AND RECOMMENDATIONS CONCLUSION BIBLIOGRAPHY

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Introduction Foreign direct investment refers to the investment made by an entity (generally a company) in an enterprise located in a different country. By virtue of making this investment, the investing entity gains a certain degree of influence or control over the management of the enterprise. To qualify as FDI, the investor should be in possession of at least 10% of the shares of the company and have access to voting power in the company. FDI can be both outward and inward. In the case of inward FDI, the investor can enter the country by incorporating a company, either by getting into a joint venture with an Indian company or setting up a wholly owned subsidiary. Alternatively, he could retain the status of a foreign company and simply set up a liaison, project or branch office in India. However, it is generally expected that FDI signals long-term commitment on the part of the investor as there is a lot of physical investment included. FDI comes with benefits for both the investor and the economy where the investment in made. For the investor, this could be a chance to tap markets where he could make profits. The investors are wooed with techniques such as tax breaks, easier regulations, and low interest rate on loans and so on. For the economy, FDI has provided a much needed push in terms of injecting liquidity apart from bringing in better technology, creating more job opportunities and so on. FDI limits for other sectors are as follows:

Banking - 74% Non-banking financial companies (stock broking, credit cards, financial consulting, etc.) - 100% Insurance - 26% Telecommunications - 74% Private petrol refining - 100% Construction development - 100% Coal & lignite - 74% Trading - 51% Electricity - 100% Pharmaceuticals - 100% Transportation infrastructure - 100 % Tourism - 100% Mining - 74% Advertising - 100%

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Airports - 74% Films - 100% Domestic airlines - 49% Mass transit - 100% Pollution control - 100% Print media - 26% for newspapers and current events, 100 % for scientific and technical periodicals

Difference between FDI and FII The most visible difference would be that while FDI includes investment directly into a particular company, Foreign Institutional Investors (FIIs) are known to invest either in the primary or secondary markets, in stocks, mutual funds or via instruments such as participatory notes, dated government securities, commercial papers etcetera. There is also a greater perception of stability that is associated with FDI. In periods of market instability, FIIs are known to quickly sell their investments leaving the market in a lurch. FDI in India India enjoys a strong position as a global investment hub with the country registering high economic growth figures even during the peak of financial meltdown. As a result, overseas investors rested their confidence in the economy which eventually pushed foreign direct investments (FDI) in India. A research by Morgan Stanley anticipates that India could attract FDI worth as much as US$ 80 billion in next 1-2 years. Around US$ 48 billion of FDI has been pumped in the Indian economy in the last two years. KPMG officials believe that FDI in 2011-12 may cross US$ 35 billion mark.

Key Statistics

FDI inflow rose by 50 per cent to US$ 20.76 billion during January-August 2011, while the cumulative amount of FDI equity inflows from April 2000 to August 2011 stood at US$ 219.14 billion, according to the latest data released by the Department of Industrial Policy and Promotion (DIPP). Mauritius, Singapore, the US, the UK, the Netherlands, Japan, Germany and the UAE, among others, are the major investors in India. India's foreign exchange (Forex) reserves have increased by US$ 858 million to US$ 318.4 billion for the as of October 21, 2011, according to the weekly statistical bulletin released by the Reserve Bank of India (RBI). Foreign

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currency assets went up by US$ 861 million to US$ 282.5 billion, while the gold reserves stood at US$ 28.7 billion. Indian companies announced 177 merger and acquisitions deals worth US$ 26.8 billion in the first nine months of 2011.

Recent Developments The Union Cabinet passed a bill to increase foreign direct investment (FDI) to 51 per cent in multi-brand retail (like Wal-Mart or Carrefour) and 100 per cent in single brand (like Starbucks or Zara) on 24th November 2011. The government says its big step towards progress and bringing inflation down while the opposition says it will ruin poor and middle class men. In simple words FDI in retail refers to opening of retail sector to foreign investors. Now foreign companies will be able to set up and invest into retail market of India, and if the bill is passed one would be soon seeing international retail giants like Wal-Mart and Tesco investing heavily in Indian retail and bringing with them their cutting-edge global expertise. This would also mean that single-brand retailers such as IKEA could set up shops in India, opening up an altogether new sector in this market. Retail trade contributes around 10-11% of Indias GDP and currently employs over 4 crores of people.

Highlights of FDI in Multi-brand Retail

1. Prior approval of the Indian Foreign Investment Promotion Board (FIPB). 2. At least 30 percent of the products sold would have to be sourced from small

producers and industries, which have a total investment in plant and machinery not exceeding US$1 million. 3. Minimum FDI investment of US$100 million would be required with at least 50 percent of such foreign investment in back-end infrastructure (for example, investments made towards processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, agriculture market produce infrastructure, etc.; expenditure on land cost and rentals, if any, will not be counted for purposes of back-end infrastructure). 4. Stores could be only located in cities with a population of at least 1 million (based on 2011 consensus, India has 53 cities with a population of over 1 million).

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5. The Indian government would have the first right of procurement for farm produce.

Note that fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, could be unbranded under this new policy. The Committee of Secretaries, CoS, had given their nod to 51% FDI in multi-brand retail. It means Rs. 450 crores in multi-brand retail, but with stringent conditions like mandatory investment of at least 50% in the back-end infrastructure, minimum sales of 30% to come from small traders, and 30% mandatory sourcing from small and medium enterprises. Going by the 10 lakh population threshold to open supermarkets, 53 cities that accounts for over 42% of total urban population will be eligible to have internationally renowned retail outlets. Now first go with 50% investment in back-end infrastructure, it will not only improve our countrys infrastructure but also generate the employment to the country. Second, minimum sales of 30% to come from small traders, it will create a very good opportunity for small traders and they will become quite competitive. Third, 30% mandatory sourcing from small and medium enterprises, it will give an opportunity to small and medium enterprises to be competitive and improve their quality because multi brand retail stores coming to India will be very quality conscious. Lastly, the cent per cent opening up of single-brand retail segment will foster growth in Indias infrastructure for luxury retail markets such as jewellery, fine dining, luxurious real-estate, global branded apparels, yachts, and swanky hotels amongst other niche segment offerings.

Key Impacts The opening of the retail sector to foreign investors will have three key impacts beginning with wide scale mergers and acquisition activity, gush of investments in logistics, realty and manpower training besides job creation in the organized sector of the economy. The retail market is expected to double from its current size of $490 Billion to $1 Trillion over the next 20 years. The current share of organised retail (including foreign ones) is expected to quadruple from 4% to 16%. That means, the market size for the kirana type stores will go up from the current $470 Billion to $840 Billion over the next two decades. More than 30 Crore people are expected to migrate to urban locations
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from the hinterland over the next two decades. The kirana stores are unlikely to be able to meet the extra demand or employ a significant percentage of the influx. To maintain Indias GDP growth rate at 9%, 1.2 Crore additional jobs will need to be created every year for the next 15 years. Such a large number of jobs are unlikely to be created by manufacturing units (which rely more and more on automation) or IT services (which are reaching growth limits).

Foremost, for foreign investors like Wal-Mart has a similar JV with Bharti Group of Mittals and so has TPG-Shriram for Vishal Mega Mart. With the proposed relaxation in norms, these foreign investors would pick 51 per cent stake in the front end business too and by some measure it is likely in existing ventures the separate backend and front end firms are merged while retaining the 51 per cent overall foreign investment limit. Moreover, once the new rule comes into force, even single brand retailers will be able to fully own its stores in India. Up till now foreign investment in such firms that sell one brand is capped at 51 per cent. This limited their growth as their ability to expand stores network was dependent on the local partner bringing in more money to maintain the equity holding as mandated by law. A Citi report says $15-20 billion in FDI could flow into the country over the next 10 years as a result of FDI in multi-brand retail. The report also says the move would help enhance the share of organised players in the overall retail sector. Multi-brand retail in India is largely in the unorganised sector dominated by neighbourhood kirana stores and there is a concern among political parties and traders that these stores would be affected by the entry of global retailers. Despite presence of large format retail stores like Spencers, Big Bazaar, Reliance Fresh, Trends - kirana stores havent gone out of business. Both small and big format stores are co-existing. The real differentiator in retail business is not at the front-end, the actual stores where we go to buy goods. It is the back-end operations involving logistics, supply chain management and sophisticated computer systems. These require knowledge, experience and large investments

Advantages of FDI in retail sector in India:

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 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.

Job opportunities: Estimates shows that this will create about 80Lakh jobs. These career opportunities will be created mostly in retail, real estate and logistics sectors. But it will create positive impact on others sectors as well. 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 lions 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. The farmers would get more options to sell their produce to and a much bigger market to sell it in. That would consequently mean bigger orders and better prices. The employment sector would be a direct beneficiary too.

Benefits to farmers: In most cases, in the retailing business, the intermediaries have

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. The opening up of retail sector would bring in more, better competition. Not only will the global retailers bring better products to India, they will compel their Indian counterparts to innovate and evolve. Overall, that should raise the quality of products offered to the Indian customers. Furthermore, greater competition would mean more choices. The Indian customers would have far more options than ever before, and for less. Increased competition would eventually mean lesser prices and consequently decreased inflation.
Lack of infrastructure in the retailing chain has been one of the common issues in

India for years 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 right manner. In the last years, the Public distribution system is proved to be significantly ineffective. In spite of the fact that the government arranged for subsidies, the food inflation has caused its negative impact continuously and it can be handled by FDI.

Disadvantages of FDI in retail sector in India:

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* According to the non-government cult, FDI will drain out the countrys share of revenue to foreign countries which may cause negative impact on Indias overall economy. * The domestic organized retail sector might not be competitive enough to tackle international players and might lose its market share. * Many of the small business owners and workers from other functional areas may lose their jobs, as lot of people are into unorganized retail business such as small shops.

Why KIRANA Stores will not be affected 1. The super stores that will come up will not come up in nooks and small gallis of our cities. These are super stores which require 30000-40000 sq ft. space even for their smallest stores. They are going to be destination stores. Since you would not be taking your car for a 5 km drive in our traffic (also with the cost of gas) to buy eggs and bread for breakfast, kirana stores will co-exist. Their assortment may change over time but they will profitably co-exist.

2. There will be a transformation of the existing retail space. The Kirana stores will morph into more organized retail stores. The new infrastructure into supply chain will assist this transformation. These stores will be more retail efficient and more profitable. 3. The entrepreneurs who run these kirana stores have always been astute entrepreneurs. They have an amazing ability to acclimate to the business environment. That is why that sector has been operating successfully for ages. 4. Small retailers in India already operate with such low overhead costs (by relying on informal labor and making minimal investment in any technology, even refrigeration) that its hard for Wal-Mart to compete with them. (Indias traders have, however, invested in their relationships with state and local politicians, who count on their support around election time.) Elsewhere, Wal-Mart may have pioneered the use of low-cost retail labor; in India, the cost of labor in retail is already about as low as it can get.

Our Suggestions and Recommendations Though the move to hike the FDI rate to 51% in multi brand retail is an extremely important and vital move for India, the government needs to ensure certain conditions are implemented and followed:
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1. Rapid introduction of the goods and services tax (GST) as well as ease of interand intra-state movement of food grain, agro products and fresh produce, This would help in controlling prices as well as reducing storage and transit losses. 2. Brands by big FDI retailers need to be carried across borders ensuring that the quality of those brands needs to be same across borders, too. As of now we see that with these manufacturers and retailers there is one lower quality for sale in India and 3. The investments in retail by the FDI route, when they come, should come only through a short-list of recognized tax adherence countries. The misused option of FDI coming in through known or suspect tax havens needs to be blocked firmly. Likewise, full disclosures of the strictest sort need to be made on who the investors are. 4. The payment processing and cash management as well as tax adherence part of this industry, both in terms of procurement and sale, need to be through the Indian banking system. And by fully transparent methods, so that float as well as control remains in India at all times, as is the case in developed countries. 5. Since such huge benefits are being provided to these FDI retailers by India, it must be imperative that these large retailers subscribe and adhere to the RTI Act of India 2005 from day one, along with their first application. 6. Provide educational support to the local small and medium business owners to compete internationally. 7. Subsidize small and medium business owners, initially for 3 years, seeking in importing or developing high end technology and mandatory participation in giving back to educational institutions. 8. Revise and incorporate employment insurance policies, social assistance and continuing educational support. 9. Raise the standards of the vocational institutions and mandatory internship for the vocational students. 10. The Baccalaureates and higher graduates entering into work force need to be licensed.
11. Develop a policy of taxation in such a way that they can deduct charities and

other up liftment programs.

In conclusion the hike in FDI will bring the end of the great Indian middle man. There are so many layers of supply chain before the produce reaches the retail floor and so many commissions that are exchanged in between that the actual producer (farmer) is happy to get his costs back and some of his produce for his consumption. For a country that is being counted as the next global economic leader we have miserable
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infrastructure in the name of supply chain. We have tons of grain lost every year because of mishandling. We lost a lot of perishable goods before it reached the retail floor. An organisation with a profit motive will ensure the supply chain is efficient and productive. this in turn will create new jobs, new businesses, new entrepreneurs. that is how economies grow. Its a right move and it must be applauded. Its a shame to see other political partiesb opposing this decision. For the governments part, its the right way to go. Having said that, they havent done anywhere near enough and the pace is unacceptably slow. They need to do a lot more and fast. They must continue to privatise and liberalise more sectors, open more sectors to FDI, and reduce its regulatory hold on our industries. We as citizens of India must continue to put pressure on the government to open our markets. We will almost certainly see rapid economic growth in the next 5 years on the back of the retail sector. Lets that not make us complacent. Lets always remember that we have a long way to go and our time is running out. It means FDI in Retail Sector is a very good sign for consumers because they will get lots of varieties in a reasonable price, employment generation for 2nd largest populated country, and competition increase.

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