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December 19, 2016

How will FDI Affect the Retail Sector in India ?

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Foreign Direct Investment (FDI)

Overview
  • What does FDI mean ? 
  • FDI inflows after 1991 liberation reforms
  • FDI investments in Indian market
  • Division of Indian retail industry
  • FDI boosts the economic growth
  • Challenges faced by the FDI
  • Government's role in safeguarding domestic industry from the ill-effects of the FDI.
"For Indians, FDI is First Develop India and for foreigners, it is an opportunity". 
Prime Minister Narendra Modi 

According to International Monetary Fund (IMF), Foreign Direct Investment refers to an investment made to acquire lasting interest in enterprises operating outside the economy of the investor. In
simple words, FDI is the capital inflow from abroad in order to enhance the production capacity of an economy. It involves the transfer of new technology, integration with the global markets, inflow of capital, job creation and better supply chain management. 

FDI is considered as one of the most stable forms of non-debt creating capital inflows, with significant positive effects on the economy. The FDI involves Greenfield and Brownfield investments. The Greenfield FDI involves building a completely new factory or business whereas a Brownfield FDI involves buying an existing business and working on its growth. Google, Microsoft, and Amazon etc have Greenfield investments in India whereas when Vodafone bought Hutch and took over all its operations, it was a Brownfield investment.

Post 1991 liberalisation reforms, the Indian economy was opened to the Foreign Direct Investments (FDI), and Foreign Institutional Investments (FII), under the Foreign Exchange Management Act (FEMA). FDI allows a foreign entity to make an active presence felt in the markets whereas FII is a form of passive investment made through the stock markets. As per the World Investment Report 2016 by the United Nations Conference on Trade and Development (UNCTAD), India continues to be among the top ten countries in terms of the FDI inflows globally and the fourth in developing Asia. The FDI in retail made an entry into the Indian economy in 1995 under the WTO's General Agreement on Trade and Services (GATS). Until 2011, FDI was not allowed in the multi brand retail. This had forbidden the foreign players from ownership in the supermarkets, convenience stores or any retail outlet. Later, the government allowed


100 per cent FDI in the single-brand stores with a condition to source 30 per cent goods from India. Later, the government allowed 51 per cent FDI in India multi brand retail in 2012 which was subjected to approval by the respective states. But in March, 2016, BJP-led government allowed 100% overseas capital in processed food retailing. Walmart and Tesco are likely to take the advantage of the government's policy. The MNCs welcome the decision of the government. They believe this decision by the government to allow up to 100% Foreign Direct Investment (FDI) through FIPB in marketing of (processed) food products produced and manufactured in India is very progressive and will help in reducing wastages, helping farm diversification and encourage industry to produce locally.

The India retail market is estimated to be US $ 600 billion and one of the top five retail markets in the world by economic value. India is one of the fastest growing retail markets in the world. The Indian retail industry can be divided into organised and unorganised retailing. The organised retailing involves the activities taken up by the licensed retailers such as corporate backed hypermarkets, retail chains, and privately owned large retail businesses.

However, FDI in retail has been a debatable topic ever since. The proponents of the FDI advocate the improved technology, increased capital inflows and the creation of jobs as its major advantages. The global giants are expected to rope in the world class technology and infrastructure in the country. The farmers of our country will be acquainted with the new technology in agriculture. This will improve their knowledge and subsequently better results could be achieved in terms of agricultural output. The back-end infrastructure which involves warehouse and cold storage chains will witness a significant development. A large amount of agricultural produce including fruit and vegetables are wasted due to lack of storage facilities.

Contractual farming and farm gate will guarantee assured monetary returns to the farmers. An inflow of FDI will boost the economic growth of the country. With the entry of foreign players, a mass employment will be generated with the creation of jobs. These jobs will provide employment opportunities to both the skilled and unskilled workers. With 51% FDI limit in multi-brand retailers, nearly half of any profits will remain in India. There are many modern retail format and mall management companies in India. Some important Indian retail groups are, Pantaloon Retail, Shoppers Stop, Spencers Retail, Westside Retail, Reliance Retail, Bharti Retail, Lifestyle Retail etc. 

FDI in retailing will lead to higher customer satisfaction. The overall shopping experience of the customer will be enhanced with one-stop shops, ▪ huge space for product display, international brands. The global giants use cncti economies of scale to reduce the prices of their offerings. This will provide customers a variety of goods and services at competitive prices. Also, it will 10▪ keep a check on the inflation and promote healthy competition in the domestic markets as well. It challenges the monopoly of the companies and 4.9"Nb the ultimate beneficiary is the customer. Besides the supply chain and logistics will witness a significant improvement. The markets will witness new technology in terms of processing, grading, labelling, packaging, designing and transportation.

However, there are many who consider the FDI in single or multi-brand as one of the biggest threats to the Indian domestic retail industry, especially the unorganised sectors. The benefits offered by FDI are considered illusions. It is feared that FDI will alter the cropping pattern in the country. The farmers will have to limit themselves to a single crop and may use artificial means of farming. As the farmers will be growing a single crop, they will have to compromise with the price offered to them. Eventually, they will have to bear the burden of reduced MRPs of the final product. Already, the brick and mortar shops are facing stiff competition from the booming e-commerce sector.

The intentional 'low pricing' as a part of the predatory pricing by the global giants, can distort India's retail industry. Besides, the supermarket culture will modify the consumption patterns of the population leading to unhealthy consumption practices. The economists who support retail reforms claim that it will increase competition and quality while reducing prices helping to reduce India's rampant inflation. They also claim that unorganised small shopkeepers will continue to exist alongside large organised supermarkets, because for many Indians these small shops will remain the most accessible and the most convenient place to shop.

However, the domestic industry can be protected from the ill- effects of the FDI by certain safeguard measures from the government's end. The government can fix the ceiling in terms of investment to be made in the infrastructure and the number of jobs. The agricultural, produce can be procured by the government, if required for the Public Distribution System (PDS). The concept of hypermarkets and malls can be restricted to the metropolitan cities with a population above 1 million. The FDI in retail falls in line with the 'Make in India' campaign of Prime Minster Narendra Modi and would lead to a more comprehensive integration of India with the global markets.

Difficult Words with Meanings
  1. Enhance to increase or further improve the good quality, value or status of something/somebody
  2. Integration the act or process of combining two or more things, so that they work together
  3. Hypermarket a very large shop, located outside a town, that sells a wide range of goods
  4. Retail business the selling of goods to the public, usually through stores
  5. Warehouse a building where large quantities of goods are stored
  6. Logistics the business of transporting and delivering goods
  7. Predatory using weaker people for financial advantage
  8. Safeguard to protect something/somebody from loss, harm or damage
  9. Ceiling the highest limit of amount of something.
shared by Nisheeta Mirchandani
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