ABSTRACT

Foreign direct investment (FDI) plays an important role in India

’s growth
dynamics.There are several examples of the benefits of FDI in India. FDI in the
retail sector canexpand markets by reducing transaction and transformation costs
of business throughadoption of advanced supply chain and benefit consumers
and suppliers (farmers). India being second most-
populous country has immense scope for retail expansion asalong with time
urbanization and consumerism has also been increasing. Initially Indiawas
conservative regarding FDI; it imposed restriction on foreign companies to
limittheir share in equity capital of their Indian subsidiaries but over the time
Government of India gradually liberalized foreign investment in various
sectors. Recently in
2011 India permitted 100% FDI in single brand retail and in 2012, 51% FDI perm
itted in multibrand. In this paper we are analyzing the impact of such decision on
various sectors
like food retail sector, farmers, traditional & employment and food inflation. In thi
s contextthe present work makes an attempt to study the likely impact of FDI on
Indian
retail sector whether good or bad, opportunities & challenges. It analyses the reas
ons why foreign retailers are interested in India and their prospects in India and
also find out the suggestions for the future growth of the retail industry.
INTRODUCTION
FDI (Foreign Direct Investment) is a process which enables the residents of one
countryto directly invest their funds in another country and acquire ownership of
assets andexercise control over the investment in terms of production,
management, distribution,effective decision making, employment etc.
“FDI is an international financial flow with
foreign country.”
India is now the latest major frontline for globalized retail market. In the last
twenty years since the economic liberalization of India in 1991, India‘s middle
class has significantly expanded, and so has its expanding purchasing power.
However, over the years, unlike other major emerging economies, India has been
slow to open its retail sector to foreign investment. Foreign Direct Investment
(FDI) is defined by the Reserve Bank of India (RBI) as when a foreign company
wants to establish any business operation in India which may include company
under the company Act, 1956 (joint venture or wholly owned subsidiary) or set up
a Liaison office or project office or a branch office of the foreign company which
can undertake activities permitted under the Foreign Exchange Management
Regulation, 2000. At present, almost all the developing countries liberalizing there
FDIs and India is not different. Since liberalization India‘s Gross Domestic Product
(GDP) has been increasing and India‘s middle class has expanded as well. India
has been slow in opening economy for FDI in retail sector, but recent policy
changes suggest that perspective of government is changing. In 2006, the
government first time relaxed retail policy and since then, there has been gradual
increase in FDI in the retail sector. It may bring in investment in completely
backward area like infrastructure required for Food transfer from farmers to
consumer that will improve efficiency in food sector, we can expect that retail
sector will become organized and will save farmers from middlemen exploitation
or it may also result in job loss in unorganized sector, it may become tough to
procure food for Public Distribution System (PDS). In this paper we will study few
aspect of FDI liberalization into retail sector; mainly we will study effect of FDI in
food retail sector, farmers, traditional & employment and food inflation.
Retail sector is one of the biggest supports of the Indian economy and accounts for
15 percent of its GDP. The Indian retail market is estimated to be US$ 450 billion
and one ofthe top ten retail markets in the world by terms of economic value. India
is one of thefastest emerging retail markets in the world, with 1.2 billion people. In
simple wordsretailing is making the final product directly available to the final
consumers of the product or a sale to the ultimate consumer.The Indian retail
industry is the fifth largest in the world which is comprised of organizedand
unorganized sectors. The Retail industry is of late often being hailed as one of
thefastest growing industries in India. With growing market demand, the industry
isexpected to grow at a pace of 25-30% annually. The Indian retail industry is
expected togrow from Rs. 35,000crores in 2004-05 to Rs. 109,000crores by the
year 2010. ATKearney, the well known international management consultancy
recently identified Indiaas the second most attractive retail destination globally
from among thirty emergentmarkets. In 2007, the retail trade in India had a share
of 8- 10% in the GDP (GrossDomestic Product) of the country. In 2009, it rose to
12%. It is also expected to reach
22% by 2010(Kearney, A.T). The organized sector is expected to grow to $100 bn
andaccount for 12-15% of retail sales by 2015(Singhal 1999). The latest moves
taken byIndian government suggest that this may be about to change and global
supermarketchain stores such as Wal-Mart (United States), Carrefour (France),
Marks & Spencer andTesco (United Kingdom), and Shoprite (South Africa) may
finally be allowed to set upshop in India. In January 2012, India approved reforms
for single-brand stores welcominganyone in the world to innovate in Indian retail
market with 100% ownership, butimposed the requirement that the single brand
retailer source 30 percent of its goods fromIndia. Indian government continues the
hold on retail reforms for multi-brand stores.The impact of entry by large retail
chains on employment and incumbent mom-and-popstores is mixed. There can be
substantial benefits to consumers in the form of
lower prices and lowered food price inflation. Moreover, by employing improved d
istributionand warehousing technologies, large retail chains are in a position to
provide better pricesignals to farmers and to serve as a platform for
enhanced exports.This paper discusses about the likely impact of FDI on Indian
retail sector whether goodor bad, opportunities & challenges and also the
contribution of FDI in retail in economicgrowth of the country. It also explains
about the trends in FDI inflows in variousemerging market economies.

Research Objective a) To discuss the policies undertaken by Government of India

(GOI) for FDI issue in retail marketing, b) To study FDI root and scenario in Retail
market in India, c) To analyze the impacts of FDI into retail market on Farmers,
Employment and Food Inflation. 3. Data Analysis/ Findings 3.1. Policy Adopted
Indian foreign policy regarding investment can be study on four phases i.e. First
phase consist of the Period 1948-66 in which India welcome foreign investment
cautiously. In late sixties crises emerged as a result of which India adopted relative
and restrictive policy from 1967 till the second oil crisis in 1979. In order to attract
resources from oil exporting, developing countries, foreign investment policy has
been revised in October 1980 and in 1982-83. It has been further liberalized.
Fourth phase started in 1991 with liberalization and open door policy as the main
aim of these reform was to encourage investment and accelerate economic growth.
The retail sector in India is organized into three categories. According to the
Department of Industrial Policy and Promotion (DIPP) of the Government of India,
the single-brand retail comprises those retailers selling products ―of a ‗single
brand‘ only, such that products should be sold under the same brand
internationally; and single-brand product retailing covers only products which are
branded during manufacturing. ―In this category, FDI is allowed to the extent of
51 per cent. From 2006 to March 2010, around 94 foreign firms applied to invest
through the single-brand route of which 57 were approved. Consequently, the
percentage increase in FDI flows in the retail sector between 2008 and 2010 was
even higher than that in sectors such as the services sector, trading and
telecommunications, which have a much higher share in the country's overall FDI‖
(DIPP, 2010). The second category is that, in contrast to the first category, no FDI
is allowed in the multi-brand retail category. This includes all firms in organized
retail that seek to stock and sell multiple brands, such as large international
retailers like Wal-Mart and Carrefour. This is the sector that is most under dispute.
The third segment, called ‗cash and carry‘, refers to the retailing at wholesale
level. The government defines this segment as the ―sale of goods and
merchandise to retailers, industrial, commercial, institutional or other professional
business users or to other wholesalers and related subordinated service providers‖.
In India, FDI of 100 per cent is permitted in this category. The FDI policy has been
revised on a continuing basis and several measures has been taken over time for
liberalization. Over the last decade several such steps has been taken starting from
2000 when 100% foreign equality allowed in infrastructure projects. In 2002,
limited FDI in print media was also allowed. FDI further liberalized in Airlines
sector in 2004. In 2005-06, FDI cap has been increased from 49% to 74% in basic
and cellular telecom services (Economic survey 2005-06). Likewise many steps
has been taken regarding FDI liberalization in pharmaceutical industry, Banking
sector, Insurance sector, Oil corporation power etc.. Specifically considering retail
sector in 1995 World Trade Organization‘s (WTO) general agreement on Trade and
services, which included both wholesales and retailing services, came into effect.
FDI in cash and carry wholesales with 100% rights allowed under government
approval route further in 2006, FDI in cash and carry (wholesales) brought under
the automatic route, up to 1% investment in a single brand retail permitted. Subject
to press Note 3 (2006 series).Then in 2011, 100% FDI in single brand retail
permitted and in 2012, 51% FDI in multi brand retail permitted. 3.2. FDI In Retail
Sector ‗The Indian retail sector is very different from that of the developed
countries. In the developed countries, products and services normally reach
consumers from the manufacturer/ producers through two different channels: (a)
via independent retailers (‗vertical separation‘) and (b) directly from the producer
(‗vertical integration‘).‘ In the latter case, the producers found their own chains of
retail outlets, or develop franchises. On the other hand, Indian retail industry is
divided into organised and unorganised sectors. The Organised retailing market is
referring to the trading activities carry out by the licensed retailers; and that is also,
those who are registered for sales tax, income tax, etc. The organized retailers
include the corporate-funded supermarkets and retail chains, and also the privately
owned gigantic retail businesses. On the other hand, the unorganised retailing
refers to the traditional players 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 unorganized retailing is the prevalent form of
trade in India, even in present scenario – constituting almost 98% of total trade in
retail market, while organised trade accounts only for the remaining 2%. However,
this is projected to increase to 15-20 per cent by 2010 (Singhal 2009). 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%) (Gupta, 2012). For achieving such high growth of
retail sector there will be need for capital, proper infrastructure, latest technology,
skilled worker etc. FDI can play an important role in fulfilling these need that‘s
why India has liberalized its norms regarding FDI in retail sector. FDI in retail
sector will lead to competition and efficiency. Through FDI in retail, Major global
Players are expected to be beneficial for consumers, Farmers as well as well as
economy as a whole.
Conditions For FDI Route In Retail Sector The conditions for 51% FDI in MBRT
include a minimum investment of $100 million by each player, 50% of it in back-
end infrastructure, 30% procurement from micro, small and medium enterprises
(MSMEs), and the government‘s right to procure the farm produce first. Further,
the permission for MBRT has been granted for cities with a population of one
million or more, which brings in 53 cities. Some of entrance routes used by them
have been discussed in sum as below: a) Franchise Agreement Franchise
agreement is written contract between the franchisor and franchisee. It is the
easiest mode to enter Indian market. One can enter through this route with RBI
approval under the Foreign Exchange Management Act. Many of the players like
Spencer, Lacoste, Mango, Nike etc. entered through this route only. b) Cash And
Carry Wholesale Trading Cash & Carry wholesale trading would mean sale of
goods/merchandise to retailers, industrial, commercial, institutional or other
professional business users or to other wholesalers and related subordinated service
providers. 100% FDI is allowed to wholesale trading which include building local
infrastructure for manufacturers that will improve distribution. First Global Player
entered through this route was Metro AG. c) Strategic Licensing Agreements
Through strategic licensing developer of intellectual property, technology or a
product give exclusive license and distribution rights to Indian companies. It is
beneficial for both the companies. Using these Indian companies can sell it through
their own shops or distribute the brand to franchises. Mango, the Spanish apparel
brand has entered India through this with an agreement with Piramyd, Mumbai,
SPAR entered into a similar agreement with Radhakrishna Foodland Pvt. Ltd. d)
Manufacturing And Wholly Owned Subsidiaries In a wholly owned subsidiary, the
parent company owns all the Shares of the company and there are no minority
shareholders. The subsidiary operates with the permission of the parent company.
Foreign brands have their subsidiaries in India and these companies have the
authority to sell products to Indian consumers by franchising, internal distributors,
existent Indian retailers, own outlets etc. Some examples are Nike, Reebok,
Adidas, etc. that have wholly-owned subsidiaries.

Implications Of FDI In Food Retail Sector

a) Impact On Farmers
Indian supply chain is very complicated and moreover it has remained same since
long time. With the growth of economy as well development of agriculture sector,
the supply chain requires some changes. The Indian Farmers receive only 30%
share of most of the food grains while in developed country this share ranges from
50% to 70% for most of the commodities. The main cause behind this difference is
large number of intermediaries involved in the chain. All the intermediaries take
some margin at various level as well as they also result in delay of supply of
product to final consumer. The margin increases the final price at which the retailer
sells the product to consumer. Entry of organized retailer through FDI in Indian
market would result in efficiency and effectiveness of food supply chain as it will
eliminate the unnecessary intermediaries from chain as a result the farmers will get
decent prices as well as goods will be available to consumer at cheaper price. FDI
will bring investment that is needed to modernize the farm sector. The Indian
agricultural sector is dominated by small farms (83% of total farms). Large
corporations of farms are unlikely to stomach the transaction costs involved in
dealing with the millions of small suppliers. Furthermore, small farmers are less
likely to have access to technology in order to meet the quality standards required
by these corporations. Without such business relationships, many small farmers
may not realize their desirable higher incomes, or worse, be put out of business by
the economically competitive larger farms. b) Impact On Traditional Retail And
Employment ―The key factors that drive growth in retail industry are young
demographic profile, increasing consumer aspirations, growing middle class
incomes and improving demand from rural markets.‖ Also, the increasing incomes
and improvements in infrastructure are broadening consumer markets and hurrying
the convergence of consumer tastes. Economic liberalization of the Indian
economy, increased in spending per capita income, even for the common citizen.
Moreover, the coming up of dual income families in urban area also help in the
growth of retail sector, even in small towns. In addition to that, ―the consumer
preferences for shopping in new vicinities, availability of quality real estate and
mall management practices and a shift in consumer demand to foreign brands like
McDonalds, Sony, Panasonic, etc. also contributes to the spiral of growth in this
sector.‖ ‗The Government of India recommends that retail firms source a
percentage of manufactured products from the small and medium domestic
enterprises‘ (DIPP Report, 2010). With a restriction of this, the opening up of the
retail sector to FDI could therefore provide a boost to small-and-medium
enterprises. Moreover, the expansion in the retail market could also create
substantial employment potential, especially among the rural youth and semi-
urban youth.

Supermarket expansion leads to a phenomenon of ―retail Darwinism‖ in which

only the fittest survive (Bijoor 2011) that means as compared to unorganized
sector like street vendor traditional retailer & shop vender the organized sector like
supermarkets would need few people to handle same volume of produce. Retail
sector is in India has been the largest source of employment after agriculture.
Nearly 40 million people employed in retail sector which accounts for 8% of the
total employment and 4% of the entire population (Rao, 2013) but large proportion
of Indian retail sector is unorganized, that means supermarket expansion is going
to affect employment negatively. According to a report by UNI Global Union
(2012) without adequate safeguards put in place, FDI in multi-brand retail will
lead to widespread displacement and poor treatment of Indian workers in retail,
logistics, agriculture and manufacturing. For example Metro‘s cash carry
employed 1.2 workers per ton of tomatoes sold in Vietnam compared with the 2.9
persons employed by traditional wholesale channel for the same quantity sold. In
India traditional sector has been a major employer which employs large number of
people. It is also important here to include the potential loss of employment in the
traditional retail sector when calculating the employment benefits from modern
retailing and the net employment effect should be considered in policy decisions.
Whereas, the urban educated middle class people can get more employment from
opening up the multi-brand retail market, but much more uneducated or less
educated poor people from rural India may lose their job in a sudden. Further, as
supermarkets use modern technology, not many jobs may be forthcoming from
their operations even with 50% investment in back-end operations. c) Impact On
Food Inflation It is evident, from the United States that FDI in organized retail
market could help to tackle the growing level inflation, particularly with wholesale
prices of food items. Inflation is a politically sensitive subject, particularly for
incumbent governments in a democratic country such as India, in particular
because rising food prices tend to be regressive in their impact. Food logistic
system in India has many problems like lack of transport facility, storage facility
etc. Most of the food items are perishable and because of improper transport and
storage facility most of the produce got wasted. The major reason behind this
problem is dominant part of the food industry consists of unorganized players and
they fall short of funds as well as they lack behind in management. This problem
can be solved through allowing FDI in this sector. FDI may fuel the funding
requirement in logistics. Apart from this they generally operate at large scale and
get benefit of economies of scale. Some of the big players in this industry are ITC
and Bharti Wal-Mart. Past record reveals that they directly purchase products from
farmers, pay them decent prices as well as they have good arrangement of
transportation and storage facility which result in minimum loss and this reap them
huge benefit. This system is beneficial for farmers as well as consumers because
these companies work at very small margin and as result products are available at
cheap prices. One of the reason for this is Scale at which they operate is very large
because of which their cost of production is cheap. We can say that FDI will
decrease inflation in food market. 4. Conclusion India being one of the major
economies in the world has been enjoying huge and regular FDI from Investor of
all around the world. Majority of this FDI in India has been made in the sectors of
telecommunication, construction, computer software and hardware etc. At the time
of independence India welcomed FDI cautiously but as it developed FDI has been
liberalized gradually. FDI in retail sector has been permitted to enter in 2006 and
gradually it liberalized and recently in 2011, 100% FDI in single brand retail
permitted and in 2012, 51% FDI in multi brand retail permitted. This has led to
debate regarding implication of this policy; in this paper we have analyzed
implication of these policies on farmers, traditional retail & employment and on
food inflation. FDI has positive impact on some sectors while negative on others.
In our analysis we have seen that FDI will bring investment for modernizing farm
as well as retail sector and will also improve supply chain. As a result of these
factors food inflation will come down and it will benefit consumers as well. On the
employment side it can have negative impact as major part of retail sector is
unorganized and as a result of FDI many global players will enter in this sector,
this may displace the small players. In this paper, it is argued that the potential
benefits from allowing large retailers to enter the Indian retail market may
outweigh the costs. Evidence from developed countries like, the United States
suggests that FDI in organized retail could help to curb the increasing trend of
inflation, particularly with wholesale prices. One can also expect that technical
knowledge from foreign firms, such as warehousing technologies and distribution
systems, for example, will also help to improve the supply chain in India,
especially for the perishable goods, like agricultural produce. It can also create
better linkages between demand and supply; and this way it create the potentiality
to improve the price signals that farmers receive. Thus, it eliminates both wastage
of food items and middlemen. And it also increases the division of the final sales
prices that is paid to farmers. An added benefit of improved distribution and
warehousing channels may also come from enhanced exports. However, much of
the Indian retail trade (particularly grocery) still has traditional features: small
family-run shops and street hawkers dominate the situation in most of the country.
However, the retail trade in India is now undergoing an intensive structural
change. And that could cause irretrievable damage to commodity supply chains at
local level and competition of competitive markets. To, protect from these ill-
effects, an economy needs a proper system of regulations. However, the existing
regulations are not adequate to fulfill the new requirements in the changing
scenario of Indian retail market in recent time. At the time of this juncture, India
can learn from the experiences of south-east Asian countries which are improving
regulatory frameworks and handling the multi-brand retail issues efficiently. Some
advanced economies like Germany which are already considered more successful
regulators in this sector. Opening up the economy for the multi-brand retail sector
to FDI will help to develop the farm sector and it would modernize the farm sector
in India and it may generate higher level incomes for the certain section of
farmers. However, the story is not very straight and bright. Large corporations,
such as Wal-Mart and Carrefour are less interested and likely to work with the
millions of small farmers in India that comprise over 83% of the sector. Therefore,
in order for small farmers to truly realize the benefits that FDI can provide to the
multi-brand retail markets, they must adapt and pursue one of two routes. One is
that the small farmers can either come together to form producer companies that
would work directly with the corporations thereby enjoying higher revenues.
Otherwise, the small farmers must willingly abandon small-scale farming
altogether and move into the new jobs directly or indirectly created by FDI—in
sectors such as retail, food processing and supporting industries. The structural
change in job markets, especially in Indian farm sector is unavoidable. The
government should play, in this respect, a leading role with legal provisions and
institutional mechanisms for helping the cooperatives of the farmers, producer
companies and producer groups in a smooth functioning of the retail market
linkage and to avoid its ill-effects.

REVIEW OFLITERATURE
M. Joseph and N. Soundararajan, (2009),
The Indian Council for Research onInternational Economic Relations (ICRIER)
study has shown that hardly 1.7 per cent ofsmall shops have closed down due to
competition from organized retail. They havecompeted successfully against
organized retail through adoption of better
business practices and technology. FDI has positive spillover effects on the econom
y as itsownership advantages get disseminated to locally owned enterprises,
enhancing
their productivity. All these benefits of foreign direct investment have been well pr
oven inIndia in sectors such as automobiles, telecom and consumer electronics.
Mukherjee and Patel (2005),
found that foreign retailers are working with smallmanufacturers for in-house
labels and are providing them technologies like packagingtechnologies and bar
coding. Sourcing from India has increased with the advent offoreign retailers and
they also bring in an efficient supply-chain management system.Joint ventures with
foreign retailers are helping the Indian industry to get access tofinance and global
best practices. Besides, retailing being a non-tradable service there isno possibility
of improved efficiency through import competition and foreign investmentis the
way forward. The aspects of foreign direct investment i.e. political scenario
andtrends are analyzed by most of the studies and they are, Alvin and Wint(1992)
Reviewsthe liberalization of FDI regulation in ten developing countries and
concludes that therecan be a disconnect between formal liberalization and the
actual implementation of thescreening process.
Dornbusch and Park(1995)
observe that foreign investors pursue a positive feedbackstrategy, which makes
stocks to overreact to change in fundamentals.
Bor enszt i n et al ( 1998)
examine absorptive capacity of recipient country, which ismeasured by stock of
human capital required for technological progress; it takes place
through 'capital is deepening’ associated with new capital
goods brought into an economy by FDI.
Ta n a y K u m a r N a n d i a n d R i t a n k a r S a h e r ( 2 0 0 7 )
in their work made an attempt to studythe Foreign Direct Investment in India with
a special focus on Retail Trade, This paperstresses the need of FDI in India in retail
sector and uses the augment that FDI is allowedin multiple sectors and The study
also suggests that FDI in retail sector must be allowed.Jaya Gupta (2007) in a
paper made an attempt to review the change in sectoral trends inIndia due to FDI
inflows since liberalization. This paper also examines the changed policy
implications on sectoral growth and economic development of India as a whole.
J o h n A n d r e a s 3 2 ( 2 0 0 4 ) in his work “The Effects of FDI Inflows on
Host CountryEconomic Growth” discusses the potenti
al of FDI inflows to affect host countryeconomic growth. The paper argues that
FDI should have a positive effect on economicgrowth as a result of technology
spillovers and physical capital inflows. Economicgrowth increases the size of the
host country market and strengthens the incentives for
market seeking FDI. This could result in a situation where FDI and economic
growth aremutually supporting. However, for the ease of most of the developing
economies growthis unlikely to result in market
–
seeking FDI due to the low income levels. Therefore,causality is primarily
expected to run from FDI inflows to economic growth for theseeconomies.
OBJECTIVES OFTHE STUDY
1. To analyze the Impact of FDI on Retail Sector2. To know the trends of FDI
inflows in various Emerging Market Economies3. To discuss about the
Opportunities & Challenges faced by the Retail Sector4. To discuss about the
suggestions for the growth of Indian retail industry.
GROWTH OFINDIAN RETAIL
1. According to the 8th Annual Global Retail Development Index (GRDI) of
ATKearney, India retail industry is the most promising emerging market for
investment. In2007, the retail trade in India had a share of 8-10% in the GDP
(Gross Domestic Product)of the country. In 2009, it rose to 12%, 22% in 2010 and
is expected to reach 35% by2011-12.2. In 2011-12 over 1,000 hypermarkets and
3,000 supermarkets are projected to come up.India will need additional retail space
of 700,000,000 sq ft (65,000,000 m2) as comparedto today. Current projections on
construction point to a supply of just 200,000,000 sq ft(19,000,000 m2), leaving a
gap of 500,000,000 sq ft (46,000,000 m2) that needs to befilled, at a cost of US$15
–
18 billion3. According to the ICRIER report, the retail business in India is
estimated to grow at13% from $322 billion in 2006-07 to $590 billion in 2011-12.
The unorganized retailsector is expected to grow at about 10% per annum with
sales expected to rise from $ 309 billion in 2006-07 to $ 496 billion in 2011-12.
TRENDS OFFDI INFLOWS IN EMERGING MARKET ECONOMIES
The liberalization of trade, capital markets, breaking of business barriers,
technologicaladvancements, and the growing internationalization of goods,
services, or ideas over
the past two decades makes the world economies the globalised one. Consequently,
withlarge domestic market, low labour costs, cheap and skilled labour, high returns
toinvestment, developing countries now have a significant impact on the global
economy, particularly in the economics of the industrialized states. Trends in Worl
d FDI flowsdepict that developing countries makes their presence felt by receiving
a considerablechunk of FDI inflows.
CURRENT PICTURE OFFDI IN RETAILSECTOR
According to the announcement, FDI up to 51 per cent in retail trade would be
subject tothe following conditions1. Products to be sold should be of a single brand
only2. Products should be sold under the same brand internationally3. Single brand
product retailing would cover only products which are branded
duringmanufacturing.4. FDI would be allowed only with prior approval of the
Government, conforming to prescribed norms and conditions5. Processing will be
done by the dept. Of industrial policy and promotion forgovernment Approval.The
guidelines would, however, ensure that the food and grocery segment of
Indianretailing would not face competition from capital because this sector in India
tended to bemulti-stock keeper units and multi-brands.
MAJOR CHALLENGES FOR RETAILDEVELOPMENT IN INDIA
Organized retail in India is little over a decade old. It is largely an urban
phenomenon andthe pace of growth is still slow. Some of the reasons for this slow
growth are: -The Existence of Traditional KIRANA stores - The first and foremost
challengefacing by the organized retail industry in India is competition from
theunorganized sector. Retailing is not new concept for India; it has been
establishedhere since centuries. It is a low cost structure, mostly owner operated,
hasnegligible real estate and labor costs and little or no taxes to pay. Consumer
familiarity that runs from generation to generation is one big advantage for
thetraditional retailing sector. On the other hand, organized sector have big
expensesto meet and yet have to keep prices low enough to compete with the
traditionalsector.Lack of Recognition as an Industry
–
Lack of recognition as an industry hampersthe availability of finance to the
existing and new players. This affects growth andexpansion plans.High Cost of
Real Estate
–
Real estate prices in some cities in India are amongstthe highest in the world.
Lease rent of the property is so high that it reduces the profitability of the
project.High Cost of Stamp Duties
–
Stamp duties on transfer of property are also veryhigh which varies from state to
state e.g, 12.5% in Gujarat and 8% in Delhi.
The problem is compounded by problems of clear titles to ownership, while at thes
ame time land use conversion is time consuming and complex as is the
legal process for settling of property disputes.Lack of Infrastructural Facilities-
Poor roads and transport facility hampers thedevelopment of food and grocery
retail in India. The existing supermarkets andfoods retailers have to invest a
substantial amount of money and time in buildinga cold chain network.Multiple
and Complex Taxation System
–
The sales tax rates vary from state tostate and organized retail players have to face
a multiple point octroi with theintroduction of value added tax (VAT) which causes
disruption in supply chainmanagement.Price War-There is price war between
different retail organizations. Each andevery one is saying to provide goods at low
cost and offers various promotional
schemes. In such a case it is difficult to keep one’s customers with onesel
f.
OPPORTUNITIES FOR RETAILDEVELOPMENT IN INDIA
Retail marketing gets various opportunities to grow up in the Indian market. Not
onlyretailing but Manufacturers as well as suppliers, and buyers have various
opportunities,some of which are mentioned below-
Provides visibility to Brands- Organized retail provides needed visibility to
brandsand a platform for customer interaction. It also helps in launching of new
productor product variant and in market penetration. It has wider product range and
morefrequent, speedier deliveries.Urbanization
–
As large percentage of population has now been shifted to urbanareas due to more
job opportunities and more facilities for their children andfamily, they know the
importance of brands and moreover they want everythingunder one roof, thus a
single retail can catch more customers. Nuclear Family- As the time passed away
joint families came in a new form i.e.nuclear family. Again the income level
of these nuclear families increases because both members
started earning. This results into increased power of purchase andlack of time.
Now they want everything under one roof. This brought the conceptof organized
retailing.Plastic Revolution
–
Increased use of credit cards is in favor of retail marketing. Itcreates requirement
even when it is not necessary.Indian Consumers
–
Organized retail stores put stress on proper infrastructure likewell maintained
building, air conditioning, trained employees, electronic machine, parking facilities
and proper display of goods category wise. The customers feelgood to see
everything displayed in front of them which make purchase easier forthem. They
need not to wait for anybody to show them the products. Self-selection saves time
and gives more opportunities and satisfaction. Fix costremoves the threat of
misleading. They avail various discounts and promotionalschemes presented by the
manufacturers. They also get product of differentvarieties and of proper
quality.High Availability of Jobs - There will be huge job opportunities in the
country (incrores) as there will be opening of malls and store houses. The entry of
modernretailers will expand the market creating large amount of additional jobs in
retail.Opportunities will vary from ordinary workers to specialized officers.
Theemployment opportunities will be in retail sales, retail floor manager, cold
chains,warehousing and logistics. The jobs will be for urban as well as rural youth.
There will be huge scope of MBA’s as they will cherish working with world class

chainof retailers.Indian Farmers: The main benefits of FDI in retail would be to

farmers who will be able to get good returns of their harvest by supplying
to organized retailers bytying up long term contracts with them which they are not
able to sell in the localmandi. The payments will be directly credited into bank
accounts and will be freefrom commission agents. The large retailers will also save
10-15% in comissions by purchasing fruits and vegetables directly.Reduces Supply
Chain Management - The big players of retail marketing and theManufacturing
companies directly come in contact thus reducing manyintermediary chains.
Manufacturers also give many promotional schemes for their product that is
beneficial for consumers.Proper tax system: Tax revenue will increase like VAT
and service tax. Theorganized sales with computerized billing system will also
yield more revenuethrough commodity taxes like VAT and service tax to the
government. Thus tax buoyancy of the economy would increase.Inflation control:
Inflation will be curbed.
CONCLUSION
The concept of FDI is now a part of India’s economic future but the term remains
vague
to many, despite the profound effects on the economy. FDI means Foreign
DirectInvestment in which foreign investors c
an make investment in India. FDI in India’s retail
sector has both advantages as well as disadvantages. It is advantageous to the
governmentas the tax revenue collected can be used for infrastructure
development, not only this itwill be beneficial to the farmers and consumers also to
a large extent. It will also
provide job opportunity which is a crucial factor for developing countries. On the o
ther hand itwill cause cut throat competition specially in the organized retail sector
promotingcartels, creation of monopolies, increase real estate prices etc. Increased
competition will be beneficial as everyone will try to make its product better from
others to increase their profits which will ultimately result in quality products at
reasonable prices. Opponents ofFDI in retail argue that it will bring major job
losses but frankly it will cause only
redistribution of jobs with some drying up (like middlemen) and new ones
sprouting up.The argument that farmers will suffer due to creation of monopolies is
weak. Stores likeWal-Mart and Tesco are very few, on the outskirts of cities (to
keep real estate costs low)
and can’t intrude in the local territory of local kiranas.
FDI is advantageous and disadvantageous both but it depends only on the way
weimplement it in our country so that FDI does not have a bad impact on India's
Business.Government must make some rules so that it is beneficial for Indian
market, retailers andthe customers get the required benefit from this. May be by
this Indian economy may risewhich is helpful in the employment field. The
experience of successful ASEAN countriesamply demonstrates how FDI can play a
leading role in bringing about rapid, export-ledgrowth. In the retail sector changes
are very frequent therefore survival in retail willdepend upon the ability to adapt to
change. The Indian retailers need to develop propersystems and processes keeping
the unique nature of the country in mind. FDI would leadto a more comprehensive
integration of India into the worldwide market and as such, it isimperative for the
government to promote this sector for the overall economicdevelopment and social
welfare of the country. So FDI should be implemented in alimited way so that it
releases a good impact on India market. If done in the right manner,it can prove to
be a boon and not a curse.The performance of foreign direct investment till date is
round about the satisfactorylevel baring the certain issues and challenges. Today
we have more than $303.48 billionas a foreign exchange reserves and above
foreign debts are around about $297.5 billionwhich we can further improves
through export promotions, liberal opportunities ofinvestment for foreign
investors.The future of foreign retail players is also uncertain like that of Indian
retail players. Nodoubt the opening of the investment opportunities for the foreign
investor will make theIndian industries more competitive and some of them may
have to struggle for thesurvivals such as small retailers and shop keepers. It has
been observed from the aboveanalysis that FDI approval given by the government
will benefit almost all the sectors ofthe economy. There are some people who are
trying to mislead people for their own
benefit and are opposing the entry of foreign retailers into India. FDI in
retail sector notonly benefit the society but also helps in the economic growth of
the country. The IndiaRetail Industry is gradually inching its way towards
becoming the next boom industry.

FDI IN RETAIL TO TAKE INDIA’S CONSUMERISM TO A NEW

GROWTH TRAJECTORY:
Any process of change is a dialectic process. Change is the only truth which
prevails at the end if it brings well being to the masses. We believe sooner or later
opposition to the FDI in retail will end and new era will begin.

FDI IN RETAIL PRESENT STATUS:

51% FDI in multi brand Retail and 100% in single brand is put hold till the time
consensus is reached between the political parties. There is stiff opposition being
seen within the UPA allies in context of FDI in retail. Also opposition party is
seeing this as an opportunity to get the political mileage.

FINE POINTS OF PROPOSED FDI IN RETAIL:

Govt allowed 51% FDI in multi brand retail and increased FDI limit in single
brand retail from 49% to 100%. This is right now put on the back burner due to
opposition from the political parties. Following are some of the points are the fine
points of the FDI in retail.
FDI is not likely under the automatic route implying that FIPB approval on case by
case basis.
Minimum Investment to be done is $100 million.
50% of the investment should be done in improving the back end infrastructure.
30% of all raw materials have to be procured from the small and medium
enterprises.
Permission to set retail stores only in cities with a minimum population of 10
lakhs.
Govt has the first right to procure material from the farmers.

OPPOSITION PARTY STANDS ON THE FDI IN RETAIL:

Following are the concern regarding the FDI in Retail.

Govt does not have any clear stands on the FDI in Retail. They have not done any
survey and cost benefit analysis of this issue.
As claimed by the Govt that it will create Jobs, opposition does not buy it. They
claim million of retailers have to shut their shops.
As claimed by Govt that it will bring down price, opposition thinks otherwise.

GOVT STAND ON FDI IN RETAIL:

Following are the facts that Govt is giving to support FDI in Retail.
FDI in retail will create 80 lakhs jobs.
It will bring growth and prosperity.
Prices of products will come down. This will tame inflationary pressure in the
economy.

GLOBAL RETAILING SCENARIO:

Retail has played a major role in improving the productivity of the whole economy
at large. The positive impact of organized retailing could be seen in USA, UK, and
Mexico and also in China. Retail is the second largest industry in US. It is also one
of the largest employment generators.
It is also important to understand that Argentina, China, Brazil, Chile, Indonesia,
Malaysia, Russia, Singapore and Thailand have allowed 100% FDI in multi brand
retail. These countries benefited immensely from it. Also small retailers co-exist.
The quality of the services has increased.
China permitted FDI in retail in 1992 and has seen huge investment flowing into
the sector. It has not affected the small or domestic retail chains on the contrary
small retailers have increased since 2004 from 1.9 million to over 2.5 million.
Take for example Indonesia where still 90% of the business still remains in the
hand of small traders.

HOW FARMERS TO GET BENEFITED:

Farmers in India get only 10%-12% of the price the consumer pays for the agri-
products. Coming of organized retailing will benefit farmers in big way. Big
retailers sell their product at very competitive prices. So, they source it directly
from the farmers. Middle man does not have any place in this format of retailing.
This will not only benefit farmers but also help in checking the food inflation.
Also India has very inadequate facilities to store the food grains and vegetables. As
the investment will flow into back end infrastructure, supply chain will get
strengthened. Storage is a major problem area and 20%-25% of the agri products
get wasted due to improper storage.

PRODUCT WASTAGE
TOMATOES 35%
MANGOES 30%
POTATOES 25%
Another area which is also the cause of concern is movement of vegetable and
other perishable agri item from one place to another. Lack of proper transportation
forces the farmer to sell their produce in local market. This results in the lower
realization on the produce.

IMMENSE GROWTH OPPORTUNITY FOR RETAILERS

India is Asia’s third largest retail market after China and Japan. Organized retailing
is very virgin space in India. It provides immense growth opportunity. Only 5% of
the total sales are being done by organized retailer. Currently Indian Retail sector
have sales of around $500 billion. Retail sector is expected to have sales of $900
billion by 2014. It still far behind China, whose retail sales by 2014 is expected to
cross $4500 billion mark.

Purchasing power of Indian urban consumer is growing and branded merchandise

in categories like Apparels, Cosmetics, Shoes, Watches, Beverages, Food and even
Jewellery, are slowly becoming lifestyle products that are widely accepted by the
urban Indian consumer.

The Indian retail sector can be broadly classified into:

Food Retailers
Health and beauty Products
Clothing and Footwear
Home Furniture & Household goods
Durable goods
Leisure & Personal Goods

Of these above segment Food and beverage and clothing segment is expected to
grow exponentially.
GROWTH DRIVERS OF INDIAN RETAIL SECTOR:
Rising Income and increase in convergence of consumer taste and preferences.
Dual family Income.
Knowledge about different product through different medium like Internet,
Television etc. Also knowledge about the latest trend and fashion.
47% of the India’s population is under the age of 30. This category is driving the
consumption story.
Emergence of new retailing format.
Availability of Credit Facilities.

FDI COULD BENEFIT STRESSED COMPANIES:

FDI in multi brand will stimulate investment in the sector. There are companies in
the retail sector that are reeling under debt. These companies could get fresh lease
of life.

Company Debt (Rs Crore) Market Cap

Pantaloon 4,200 3, 867
Vishal Retail 700 42
Provogue 400 275

Beneficiary of FDI in Multi – Brand Retail:

Multi Brand Retail Stores: 51% in multi brand retail.
Pantaloon Retail
Vishal Retail
Shoppers Stop
Koutons
Trent
Single Brand Retail: 100% FDI in Single Brand Retail.
Archies
Cantabil
VIP Ind
Titan
IFB Industries

Real Estate: Especially mall developers. Retailers like Wal-Mart, Tesco operates
in large area of 50,000 – 60,000 sqft. They generally pay to the builders certain
percentage of the total revenue. Real Estate companies into retailing space to be
benefitted.
Unitech
DLF
Sobha Developers

FMCG Companies: Big retailers generally sources from the producers, FMCG
companies are going to be benefited.
HUL
GSK
Godrej Consumer
Dabur
Marico

SIDE EFFECTS OF THE FDI AND SOLUTION:

Nevertheless much said about good things that FDI in retail will bring but
argument will not be justified if we do not take into account the grey areas. Some
of the grey areas are:
Predatory pricing could strangulate the domestic retailers.
It has been seen MNCs retailers uses there big size to kill competitors.
In order to bring goods at lowest possible price for customers they squeeze the
margins of their suppliers. So as claimed by thousand that suppliers will benefit, it
still doubted.
In order to correct these anomalies, India need to have strong regulator for the
sector. And at the same time strengthen the Competition Commission of India
before these Big Retailers prowls into the Indian Territory.

SUGGESTIONS FORTHE GROWTH OFRETAILINDUSTRY

FDI since 1991 has proved to be game changer for wide segments of Indian
industry. FDIhas changed quality, productivity, and production in areas where it
has been allowed.1. India needs to invest in infrastructure development because
India is lacking only in thiswhich will affect our Retail Industry majorly.2. India
should increase the investment absorption capacity.3. India should make FDI
policies little bit more liberal so that it can face competitionwith other emerging
economies.4. Bureaucratic delays and various governmental approvals and
clearances involvingdifferent ministries need to be fastened.5. Restrictions on
sector caps and entry route to sectors other than those of nationalimportance need
to be liberalized further and constant reviewing of policies must bedone.6.
Government must ensure consistency of policy so as to improve the business
andinvestor confidence

he recent decision of the government to allow FDI in multi-brand retail trade has
attracted heated debate and emotive reactions. Though the main consideration for
allowing FDI in retail is not its benefit for farm sector, the debate has
predominantly focused on threats and benefits to the country's farmers and the
farm sector. Interestingly, the main stakeholders, i.e., farmers, have not reacted
much to the policy decision and response of various states has been purely on party
lines.

A few farmers' organisations have come openly in support of this move. The
majority view, as appearing in media, is that FDI in retail will have adverse effect
on farmers. Instances of exploitation of farmers by MNCs in some countries are
quoted to prove the point that entry of MNCs will be harmful for our farmers,
particularly small ones. It is argued that giants like Wal-Mart will use their
monopsonistic power to keep farm prices low and disrupt long and time-tested
channels of trade.
The main mechanism adopted by organised retail for sourcing supply of farm
goods is direct procurement of produce from farmers with or without contract
farming. Past experience in India, though confined to select pockets, shows that
this has helped some farmers in getting higher net income for their produce.
Studies by reputed researchers have found that (a) in some cases, private firms
favour large-sized farms rather than small farms, (b) in some cases, the firm leaves
the field after a few years, and (c) sometimes, terms and conditions are not
honoured by either party. None of these indicate harm done to farmers; in fact,
benefits denied to farmers are quoted as adverse effect.

It is apparent from the debate that both benefits and threats are being exaggerated
and the real context for assessing impact on farmers is missed. Farming and
farmers today are suffering much more from marketing imperfections and
inefficiencies than anything else. Marketing legislation, regulatory framework and
infrastructure have not kept pace with the changing requirements and environment.
Marketing of agricultural produce, being a state subject, is governed by APMC
Acts of respective states that has become very restrictive. The Act require that
"all agricultural produce brought into or processed within a market area shall pass
through the principal yard or sub-yard and shall not be bought or sold at any other
place in the market area or no such person shall carry on business and trade in
agriculture produce into market area except one who holds the licence issued by
the market committee".
These provisions do not allow direct marketing from producer to buyer (including
the consumer) and necessitates the produce pass through a chain of intermediaries.
There are further restrictions imposed by the Essential Commodities Act relating to
volume of business and pan-India movement of produce.
Even after a decade of model APMC Act developed by the central government for
bringing changes in the Act, no state has brought significant change in APMC Act
to permit alternative models of marketing due to strong opposition from trading
communities and middlemen in each state. This so-called 'unorganised' class is
quite organised to thwart any attempt to bring reforms to market.

No political party in any state takes the risk of annoying them. The net result of
this is that price spread in farm commodities is getting larger without any real
value addition and middlemen are cornering substantial share of increase in prices
paid by consumers.

A move like FDI in organised trade, superimposed from above, has the potential to
create a lot of pressure for market reforms by demonstrating benefit of vertical
integration of retail with farm and through direct purchase of farm produce from
the field. This indirect contribution of FDI in organised retail will be a great service
to India's farmers.
Some farmers will definitely benefit from FDI in retail and some are already
benefiting from organised trade. The experience of other developing countries,
where organised retail and FDI are present for long and have reached peak levels,
shows that their benefit reaches a maximum of 10-15% farmers. Therefore, it will
be wrong to expect FDI and organised retail as a panacea for overcoming
deficiencies of agricultural marketing.

The potential of FDI in retail to benefit some farmers should not deflect our
attention from various measures that are urgently needed to integrate supply chain,
remove disconnect between retail and farm prices, and impart benefit of scale to
agricultural marketing.

Given the vastness and diversity of Indian agriculture, the country needs multiple
approaches including APMC mechanism, new models and upscaling of successful
experiences such as cooperative milk marketing, along with organised retail, to
impart efficiency, competitiveness and modernisation to agricultural marketing.

All states, in particular, need to promote producers' association, producers'

companies and cooperative marketing societies to improve bargaining power of
producers in marketing and to raise the share of producers in value addition in
marketing, which is getting bigger and bigger.

Finally, it is concluded, that growth in organised retail with or without FDI will
directly benefit a small percentage of Indian farmers and the apprehension of harm
on farm sector is unfounded.

At worst, it could be benign for the sector. As the effect of FDI in organised retail
on farm sector is not a significant factor for deciding desirability of FDI in
organised retail, this decision should be guided by other factors such as effect on
consumers and the overall economy.