FDI: FOREIGN DIRECT INVESTMENT Definition: Foreign Direct Investment, or FDI, is a type of investment that involves the injection

of foreign funds into an enterprise that operates in a different country of origin from the investor. Concept: FDI has three components: - equity capital; - reinvested earnings, the investor's share of earning not distributed as dividends by affiliates, in proportion to its share in the equity (say for instance 50% in a certain joint venture); - intra-company loans, when the investor borrows funds to the affiliate, usually without the intention of asking the money back. To better understand their defining characteristics, you should consider that FDI are flows of capital that share the following features: - they are long-term (in contrast to portfolio investment in bonds and in short-term speculation in shares); - they give rise to a property right on the asset built or bought (in contrast to foreign aid).

However, FDI is quite heterogeneous and one should distinguish several kinds, e.g. by looking at the following factors: whether the activity in the host country is just an intermediate phase in a longer production chain or it gives rise to a finished good; . the production phase performed in the host country (design, manufacture, distribution); where the outcome of the process in the host coutry will be sold (there or abroad). The "classical" FDI is a manufacture plant using foreign technology and management techniques to exploit lowcost local resources, with sales made to the present clients of the investor (thus, usually involving exports). However, market-oriented FDI as well as FDI in other sectors (e.g. tourism resorts, banks, transport) are important phenomena as well.

Role of FDI: The role of Foreign Direct Investment in an economy goes beyond simply easing financial constraints. FDI inflows are associated with multiple benefits such as technology transfer, market access and organisational skills. Consequently, there is an increasing and intense competition between countries to maximize the quantity of FDI inflows. Any successful policy for attracting FDI has to keep this competitive scenario in mind.

The benefits of FDI inflows can bebroadly identified as: Bridging the financial gap between the quantum of funds needed to sustain a level of growth and the domestic availability of funds. Technology transfer coupled with knowledge diffusion that leads to improvement in productivity. It can, thus, fasten the rate of technological progress through a contagion effect that permeates domestic firms. The transfer of better organisational and management practices through the linkages between the investing foreign company and local suppliers and customers. The key industries in Orissa are primarily basic metals (including iron & steel, aluminium) and chemicals & chemical products. Between 1991-2004, Orissa attracted 0.9 per cent of Indias investment, aggregating to nearly US$ 370 million. Currently, investment worth US$ 20 billion are in the pipeline in Orissa and a sectorwise break-up of these projects indicates that a majority of the investment are in electricity generation and mineral-based industries including aluminium and steel. Orissa can emerge as a hub for metals business in India and has the potential to attract investment up to US$ 3040 billion over the next five years if it focuses on utilising the opportunity presented by the current global

metals cycle. With its locational advantage, and the current up trend in global market, the State can become the metals, mining, and manufacturing hub of the country. Though Orissa accounted for only 6.3 per cent of projects under implementation as on January 2005, its share of Indias aggregate outstanding projects announced has risen to 17 per cent. Its share in manufacturing sector projects announced in India is higher at 38 per cent and the investment value of projects announced in Orissa has shot up over four times to US$ 24 billion as on January 2005 from US$ 5.5 billion in January 2004 (Centre for Monitoring Indian Economy). During 1991 to 2003, Orissa approved over US$ 2.3 billion of foreign direct investment. The key sectors attracting FDI in Orissa are electricity, metals and metallurgical products, chemical and chemical products. It now seems that there has been a turning point in the last few years and the economy of Orissa has witnessed acceleration in terms of the gross state domestic product (GSDP). Orissas real GSDP has grown by an average annual rate of 4.8% on a long term basis during 1980-81 to 2006-07 compared to 6% for the same period for the nation as a whole. The index number of GSDP (with 1980-81 = 100.0) nearly doubled over the 20 years period 1980-2000 and has

further increased by another 60 per cent since then. In particular, there has been a sharp rise in the index after 2002-03. The average GSDP growth rate of 8.6 per cent per annum during the period 2002-03 to 2006-07 compares very well with the national level. The per capita income of Orissa was about Rs.7700 at 19992000 prices in the year 1980-81. It nearly doubled to Rs.15100 in 2006-07 . 2). Per capita income at the national level has grown by 160 per cent from about Rs.8600 to Rs.22700 during the same period. Orissa thus continues to remain behind the national average considerably. There have been attempts to bridge the gap and the growth rates noticed in recent years is the first major indicator of a move in that direction. Like other developing economy, the economy of Orissa has been going through structural changes away from agriculture in favour of industry and services. Primary sector accounted for most of income generated in the State in 1980-81. It has reduced to 32% in 2006-07. It might be noted that mining and quarrying sector plays a more important role in Orissa and income generated in this sector forms about 8% of total income. About 24% of State income is produced agriculture and allied sectors. Share of secondary sector has increased from

17% to 23% and that of services from 30% to 44%. Compared to the all-India level, primary sectors share is about 12% more in Orissa and service sectors share is about 10% less. Share of the secondary sector in Orissa is nearly similar to that for all states taken together. Conclusion about Odisha: Indias rising growth trajectory requires rapidly expanding infrastructure facilities to support it. The Government recognises the fact that domestic resources alone may not be adequate to sustain the required expansion in infrastructure. Thus, it has followed a strategy to create incentives for Foreign Direct Investment. India, today, has an extremely liberal regime for FDI in terms of entry norms. As Odisha is a hub of mineral resources the Government has taken systematic initiatives to address these problems largely through comprehensive reforms in sectors like power, iron and steel. The combination of domestic private foreign investment and multilateral investments is likely to propel Odishas economic growth momentum in future.

Definition of Retail In 2004, The High Court of Delhi defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale).A sale to the ultimate consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customersRetailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit. Division of Retail Industry Organised and Unorganised Retailing The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include

the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of Indias GDP FDI Policy with Regard to Retailing in India It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities. a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.

b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products, subject to Press Note 3 (2006 Series). c) FDI is not permitted in Multi Brand Retailing in India. Foreign Investors Concern Regarding FDI Policy in India For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away. For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector corporates such as Tata

through its brand Westside, RPG Group through Foodworld, Pantaloon of the Raheja Group and Shoppers Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing? An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partners share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the same field without the first partners consent if the joint venture agreement does not provide for a conflict of interest clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in

India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently. Concerns for the Government for only Partially Allowing FDI in Retail Sector A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Honble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on Foreign and Domestic Investment in Retail Sector, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included: It would lead to unfair competition and ultimately result 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. Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and

consolidate first, before opening this sector to foreign investors. Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up The Cabinet has approved 51 per cent FDI in multibrand retail, a decision that will allow global mega chains like Wal-Mart, Tesco and Carrefour to open outlets in India. The Cabinet also increased the foreign investment (FDI) ceiling to 100 per cent from the present 51 per cent in single-brand retail. The following are the main issues raised by those in

favour of foreign equity in multi-brand retailingand those opposed to it: Those against: - It will lead to closure of tens of thousands of momand-pop shops across the country and endanger livelihood of 40 million people - It may bring down prices initially, but fuel inflation once multinational companies get a stronghold in the retail market - Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers - Small and medium enterprises will become victims of predatory pricing policies of multinational retailers - It will disintegrate established supply chains by encouraging monopolies of global retailers Those in favour: - It will cut intermediaries between farmers and the retailers, thereby helping them get more money for their produce - It will help in bringing down prices at retail level and calm inflation - Big retail chains will invest in supply chains which will reduce wastage, estimated at 40 percent in the case of fruits and vegetables

- Small and medium enterprises will have a bigger market, along with better technology and branding - It will bring much-needed foreign investment into the country, along with technology and global bestpractices - It will actually create employment than displace people engaged in small stores - It will induce better competition in the market, thus benefiting both producers and consumers (With IANS inputs)