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FDI in Retail- The Retail conundrum

FDI in Retail - The Indian Retail Conundrum

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This presentation sums up the arguements and research that have been made in the contentious issue of FDI in Retail

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Page 1: FDI in Retail - The Indian Retail Conundrum

FDI in Retail- The Retail conundrum

Page 2: FDI in Retail - The Indian Retail Conundrum

Stakeholders involved

• Organized Retail Players• Farmers• Kirana Traders• Consumers• Governments

Page 3: FDI in Retail - The Indian Retail Conundrum

Role of Government

FDI in India are approved through two routes:

i. Approval by RBI

ii. Foreign Investment Promotion Board (FIPB).

Page 4: FDI in Retail - The Indian Retail Conundrum

Current Position

• Single brand retailing was permitted FDI in 2006, to the extent of 51%

• Total of 94 proposals were received till May 2010

• FDI inflow of $194.69 million was received between April 2006 and March 2010– Equal to 0.21% of the total FDI inflws during the

period.

Page 5: FDI in Retail - The Indian Retail Conundrum

Importance of FDI in Multi Brand

• India is the most attractive market – AT Kearney• Retail is the second largest employer after agriculture• Second largest producer of fruits and vegetables in

the world• Post harvest losses upto `1 trillion per annum

• Indian farmers realize only 1/ 3rd of the total price paid by the final consumer.

• Organized retail at present accounts for a mere 4% per cent of the total market (2008) as against 20% in China and 40 % in Thailand

Page 6: FDI in Retail - The Indian Retail Conundrum

• Growth Drivers– favourable demographics, – rising consumer incomes, – real estate developments, – availability of better sourcing options

• Behold the International brands– economic implications of the government, – increasing urbanization, – credit availability,

India Shining??

Page 7: FDI in Retail - The Indian Retail Conundrum

Benefits

• Generate huge employment

• Increased investment in technology

• The huge tax revenue generated.

• The consumer gains from the wide variety of choices and a more

diversified basket of prices available under one roof

• The indirect benefits like better roads, online marketing,

expansion of telecom sector etc. Will give a ‘big push’ to other

sectors like agriculture, small and medium size enterprises.

Page 8: FDI in Retail - The Indian Retail Conundrum

Concerns against FDI

• Employment by Retail – Organized & Unorganized

• retail trade employed 7.2% of total workers and provided job opportunities to 33.1 million persons

(%) (%)

Page 9: FDI in Retail - The Indian Retail Conundrum

• Unfair competition and ultimately result in large-scale exit of domestic retailers

• Large scale displacement of persons employed in the retail sector

• No other sector to absorb employment

Concerns against FDI

Year GDP Growth CPI2010 7.20% 4.90%2011 7.47% 5.22%2012 7.74% 5.55%2013 8.03% 5.91%

Page 10: FDI in Retail - The Indian Retail Conundrum

• Important that the domestic retail sector is allowed to grow and consolidate– Under-developed and in a nascent stage

• Rise in Real estate costs in Urban areas

Concerns against FDI

Page 11: FDI in Retail - The Indian Retail Conundrum

Organized Retail Currently Accounts for 5% of India’s Retail Market

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• With an anticipated $ 50 Billion in fresh investments over next 10 years, modern retail will show impressive CAGR > 25%

US$ Billion

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Page 12: FDI in Retail - The Indian Retail Conundrum

And Is Now Entering Expansion Phase

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IVIIIIIInitiation

Manufacturers opening their own outlets

Pure play Retailers, realizing the potential start to test waters,

Conceptualization Entry of large Indian corporates and Global Retailers

Large Investment Commitments by large Indian corporate

Expansion by leading Product Brands

Increasing Competition

Large Scale Consolidation

More than 25-30 retail businesses with Revenues in excess of US $ 1 Billion

More Aggression from International Players

Specialty Formats based on finer segmentation of the market

Private brands getting established

Movement to Smaller Cities and Rural Areas

I

Siz

e o

f In

du

str

y

Pre 1995 1995 to 2005

2005 to 2010

2010 Onwards

Entry of large global retailers

Consolidation and Expansion

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Page 13: FDI in Retail - The Indian Retail Conundrum

Organized Retailers

• The rate of closure of unorganized retail shops in gross terms was found to be 4.2 per cent per annum, which is much lower than the international rate of closure of small businesses.

• The rate of closure on account of competition from organized retail was found to still lower, at 1.7 per cent per annum.

Page 14: FDI in Retail - The Indian Retail Conundrum

The positive externalities

• Effective FDI indulges in enhancement of human capital of the country

– Subba Rao(2008) Research Paper

• The existing FDI rules are a constraint. There is need to open up the sector a bit more as it will facilitate fresh infusion of funds and also promote competition

– Real Estate Consultants CB Richard Ellis

Page 15: FDI in Retail - The Indian Retail Conundrum

Negative externalities

• Will FDI be necessary at all if there is enough domestic capital being injected in to the retail sector ?

• If FDI retailers were to acquire say 20% of retail trade, this would equate to Rs. 800 billion of turnover, which would lead to the employment of just 43,540 people, but would displace approximately 8 million people employed in the unorganised retail sector.

• Failure of farm and fork model???

Page 16: FDI in Retail - The Indian Retail Conundrum

Global scenario

• FDI permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation

• Malaysia has equity caps on FDI in the retail sector• FDI in retailing was permitted in China for the first time in

1992.

• The Asian crisis in 1997– Entry ban on foreign players was removed. – Within a short span of time, the foreign players expanded

their operations significantly and marginalised the local retailers

Page 17: FDI in Retail - The Indian Retail Conundrum

The story of Britain

• Britain was a nation of small shopkeepers• All of that has changed and this is because of

the supermarkets, led by Tesco. It is impossible for small shop keepers, who have so much to offer, to compete with the prices of the supermarkets

• “literally change the fabric of life in India" by endangering small shops.”– David Amess, Britain MP

Page 18: FDI in Retail - The Indian Retail Conundrum

Global Scenario

• Russian supermarket revolution has occurred only in the 2000s

• The two largest companies are Russian, but the origin of the capital, even of the Russian

• companies, is usually a mix of domestic and foreign.• The supermarket sector in Chile was launched in the

1990s, with the backing of domestic capital.• The three market leaders, all domestic, are expanding

rapidly into other Latin American countries in mergers and acquisitions, becoming regional multinationals.

Page 19: FDI in Retail - The Indian Retail Conundrum

FDI permitted in 1992. 40 foreign retailers have secured approval

Retail sales have [email protected]% CAGR since FDI was permitted

FDI initially restricted to 6 major cities (including Beijing, Shanghai and Guangzhou) and SEZs

Foreign ownership initially restricted to 49%

US$ 22 bn of FDI attracted, 3.6% of total FDI

In 2003, FDI in wholesale and retail was US$ 1.1 bn (Around 30% of our total FDI in 2003)

Current restrictions on FDI were phased out after China’s accession with WTO

Chinese retailing

Case study : Chinese retailing

Page 20: FDI in Retail - The Indian Retail Conundrum

What about Farmers?• Eighty per cent of 12 crore farm holdings own only 20 per cent of

the cultivated land.• Credit to agriculture sector has gone up by 200 per cent and

fertiliser subsidy by 300 per cent.• Agriculture productivity per hectare or acre is lower than in almost all

the countries cited by the DIPP document

• Minimum Support Price not supporting farmers• Change in cropping pattern from cereal or staple food-based

crops to high-value crops (in which retailers would be interested)

• Risk of further land consolidation in favor of rich and resourceful farmers

Page 21: FDI in Retail - The Indian Retail Conundrum

What next?

• Feedback on the the discussion paper was received.

• A committee, comprising officials from the ministry of consumer affairs and public distribution, commerce and industry ministry, financie ministry, food processing ministry etc. is looking into the proposals

• Ministry of consumer affairs is likely to prepare a cabinet note for the final decision

Page 22: FDI in Retail - The Indian Retail Conundrum

Recommendations• Entry of foreign players must be gradual with social

safeguards– Prevent diversion of agricultural land for building

malls– Preparation of a legal and regulatory framework and

enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means

– Stipulation that certain percentage of FDI should be spent in Logistics

• Better credit availability to unorganized retailers

Page 23: FDI in Retail - The Indian Retail Conundrum

RecommendationA Commission to ensure that

• procurement costs are fair for farmers of perishable commodities

– percentage of sourcing derives from the Indian market– a basic price support mechanism that ensures that costs are

covered– efficient extension services and information centres that

provide information about possible crops and best practices• Rules on repatriation of foreign profits should be revised, to

discourage ( and restrict) 100% of the profits from leaving India• Revoke Press Notes- 2009 permitting cascading sub-companies

Page 24: FDI in Retail - The Indian Retail Conundrum

References

• ISSUE OF DISCUSSION PAPER ON FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-BRAND RETAIL TRADING

• INDIA FOOD BRIEF – FDI in Retail – An Exhaustive Analysis

• FDI Watch – Centre for Policy Alternatives• Business Magazines in India