9 Satendra Bhardwaj 443 Research Letter Oct 2011

7/28/2019 9 Satendra Bhardwaj 443 Research Letter Oct 2011

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VSRD-IJBMR, Vol. 1 (8), 2011, 570-577

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1Assistant Professor, MBA Department, Lovely Professional University, Phagwara, Punjab, INDIA.2,4Lecturer, 3Senior Lecturer, 2,3,4MBA Department, Mangalayatan University, Aligarh, Uttar Pradesh, INDIA.*Correspondence : [email protected]

R R R EEE SSS EEE AAA R R R CCC HHH LLL EEE TTT TTT EEE R R R

FDI in Retail Business – A Boon or Bane1Satendra Bhardwaj*,

2Rajeev Sharma,

3Ambrish Sharma and

4Priyanka Garg

ABSTRACT

With Government very well putting the cap on Privatization & Disinvestments, foreign direct investment in

trade has developed into the fresh theatre of war flanked by the pro-reform and anti-reform lobbies. Foreign

investors are tremendously enthusiastic on charisma in India's retail sector. AT Kearney's 2005 Global Retail

Development Index has termed India “The most compelling opportunity for retailers.” There's sufficient reasons

cited for this: the country is becoming richer, close to a quarter of the population is in the 20-34 age group in

demand by marketers, and punter expenditure is anticipated to pick up in a major way. Both sides have been

taking extreme positions. Those rooting for FDI assure overall opulence if it is permitted. Undeniably, FDI in

retail is emerging as a sort of litmus trial to the government's pledge to liberalization, with Prime Minister also

supporting advancement on this front. On the other hand, those divergent on the pitch claim it will mop away

corner shops in every locality, chuck inhabitants out of jobs & bring unthinkable melancholy.

This article develop an insight as to what are the trends in Indian Retail Industry, benefits and drawbacks of FDI

in Retail, whether it will be beneficial for economy and finally the challenges in Indian Retailing.

Keywords : Privatization, FDI and Retail.

1. INTRODUCTION

Foreign direct investment (FDI) plays an extraordinary and growing role in global business. It can provide a

firm with new markets and marketing channels, cheaper production facilities, and access to new technology,

products, skills and financing. For a host country or the foreign firm which receives the investment, it can

provide a source of new technologies, capital, processes, products, organizational technologies and management

skills, and as such can provide a strong impetus to economic development. Foreign direct investment, in its

classic definition, is defined as a company from one country making a physical investment into building a

factory in another country. As such, it may take many forms, such as a direct acquisition of a foreign firm,



Satendra Bhardwaj et. al / VSRD International Journal of Business & Management Research Vol. 1 (8), 2011

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construction of a facility, or investment in a joint venture or strategic alliance with a local firm with attendant

input of technology, licensing of intellectual property.

Foreign direct investment (FDI) is considered to be the lifeblood for economic development as far as the

developing nations are concerned

Foreign direct investment (FDI) has the potential to generate employment, raise productivity, transfer skills and

technology, enhance exports and contribute to the long-term economic development of the world’s developing

countries. More than ever, countries at all levels of development seek to leverage FDI for development.

Foreign affiliates of some 64,000 transnational corporations (TNCs) generate 53 million jobs.

FDI is the largest source of external finance for developing countries.

Developing countries´ inward stock of FDI amounted to about one third of their GDP, compared to just 10

per cent in 1980.

Foreign direct investment (FDI) has become a key component of national development strategies for all most all

the countries over the Globe. FDI is considered to be an essential tool for jump-starting economic growth

through its bolstering of domestic capital, productivity and employment.

FDI to developing countries in the 1990s was the leading source of external financing. The rise in FDI volume

was accompanied by a marked change in its composition. That is investment taking the form of acquisition of

existing assets (mergers and acquisitions) grew much more rapidly than investment in new assets particularly in

countries undertaking extensive privatization of public enterprises.

2. FDI IN RETAIL BUSINESS

India is tipped as the second largest retail market after China. Retailing is the largest private sector in India and

second to agriculture in employment. India today has perhaps the highest retail outlet density – with

approximately 15 million retail outlets. The entire retail trade contributes about 10-11% to India’s GDP and is

valued at an estimated Rs 9, 30,000 crores. Out of this, organized retailing industry is around Rs 35,000 crores.

Organized retailing is primarily urban centric, its share as represented in urban scenario is projected to be 12 to

20%. Growing at more than 30%, the organized sector is driving the retail growth in India and contributes

significantly to the growth of the economy. This economic growth comes primarily from increased consumer

spending.

The Government approved sweeping reforms in FDI with a first step towards partially opening retail markets to

foreign investors. It will now allow 51 per cent FDI in single brand products in the retail sector. Besides retail,

other sectors are being opened:

100 per cent allowed in new sectors such as power trading, processing and warehousing of coffee and

rubber.

FDI limit raised to 100 percent under automatic route in mining of diamonds and precious stones,




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development of new airports, cash and carry wholesale trading and export trading, laying of natural gas

pipelines, petroleum infrastructure, captive mining of coal and lignite.

Subject to other regulations, 100 percent FDI is allowed in distillation and brewing of potable alcohol,

industrial explosives and hazardous chemicals.

Indian investor allowed to transfer shares in an existing company to foreign investors.

Limit for telecoms services firms raised to 74 per cent from 49 per cent.

3. FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR IN INDIA

Retailing is the largest private sector in India and second to agriculture in employment. India today has perhaps

the highest retail outlet density – with approximately 15 million retail outlets. The entire retail trade contributes

about 10-11% to India’s GDP and is valued at an estimated Rs 9, 30,000 crores. Out of this, organized retailing

industry is around Rs 35,000 crores. Organized retailing is primarily urban centric, its share as represented in

urban scenario is projected to be 12 to 20%. Growing at more than 30%, the organized sector is driving the retail

growth in India and contributes significantly to the growth of the economy. This economic growth comes

primarily from increased consumer spending.

The government, according to official sources, is examining what could be the possible cap on foreign

investment, if and when it will open the sector - 26 per cent, 49 per cent or 51 per cent. India today represents

the most compelling investment opportunity for mass merchants and food retailers looking to expand overseas.

According to AT Kearney’s Annual Global Retail Development Index for 2005 – an annual study of retail

investment attractiveness among 30 emerging markets – India displaced Russia to move from the second place

to the first. India’s retail market, totaling $300 billion, is vastly underserved and has grown at an average rate of

10% in the last five years. This increased spending and consumer confidence is a positive indication for the

growth of the Indian economy.

4. WHAT IS THE SCOPE FOR THE RETAILING INDUSTRY IN INDIA?

The present size of the retail industry in India is around USD 180 billion. This is expected to touch USD 450-

500 billion by 2010. Within the retail sector, grocery constitutes the biggest component with about 50 per cent

share. Apparel is another high growth area in the retail sector.

4.1. FDI in Retail – Benefits & Concerns

Benefits and Impact on the country:

–Inflow of investment and funds

–Growth of Infrastructure

–Knowledge Base / Technical know-how

–Reduced Cost and Increased Efficiency

–Franchising opportunity for local entrepreneurs




Page 573 of 577

–Investment in supply chain, cold chains and warehousing

–Implementation of IT in retail

–Stimulate Infant industries and other supporting industries

–Increased Local sourcing

–Increase number and improve quality of Employment- Provide better value to end customers

Hence, it will lead to overall economic growth and create benchmarks.

FDI would serve the purpose of much needed capital and bring a boom in the Retail sector. As, some of the

global retailers are already coming in through other channels there is no justification to keep FDI in Retail on

hold. Retail is a sunshine sector with tremendous growth potential – allowing them to invest in retail companies

in the primary market will enable many of these emerging companies to increase operations, improve

infrastructure, set up the latest systems, achieve critical mass and enhance employment opportunities.

Another objective of FDI is to enhance infrastructure. While there is no dearth of potential investors in metro

cities, the Tier-2 and lesser cities are getting sidelined. FDI should be initially allowed in Tier–2 and lower cities

to facilitate infrastructure building. The more such investment, the more incentives to operate in Metro cities.

Models similar to airline operators and telecom operators need to be explored. With this the focus would be on

incremental business and create a level playing field for all and not on cutthroat competition. The Government is

already considering a host of conditions for bringing in FDI. One of them is to impose a minimum limit of

10,000 sq ft on the floor space of foreign retail chains and limit the number of stores to one per million once FDI

in retail is allowed. This also serves to create level playing fields for all players. Also, inclusion of a clause for

reserving at least 500-600 sq ft (out of 10,000 sq ft) of retail space for foods & processed foods alone will

further help to protect the interests of certain sectors like agriculture and integrate them with the organized retail

supply chain. These measures are to be applicable for a short while only, as the Department of Industrial Policy

and Promotion (DIPP) is considering easing some of these restrictions with time. Hence, with an objective of

enhancing Indian economy by increasing consumption, a recommended CII policy for introducing FDI in retail

is as follows:

The big Indian retail players looking to expand their operations include Shopper's Stop, Pantaloon, Lifestyle,

Subhiksha, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Café Coffee Day, Wills Lifestyle, Raymond,

Titan, and Bata

Well-established business houses such as Wadia, Godrej, Tata, Hero, Malhotras, etc., are drawing up plans to

enter the fast-growing organized retail market in India.

The international players currently in India include McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas,

TGIF, Benetton, Swarovski, Sony, Sharp, Kodak, and the Medicine Shoppe. Global players are entering India

indirectly, via the licensee/franchisee route, since Foreign Direct Investment (FDI) is not allowed in the sector.

Retail business s growing at 5-6 per cent per annum. The size of organized retailing was estimated around Rs

26,000 crore in 2004, about three per cent of the total. However, it is now set to grow at 25-30 per cent per




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annum. In developed countries, organized retailing makes for over 70 per cent of the total business. In China

this segment accounts for 20 per cent of the overall business.

Recently, the Government announced its intention to open up the retail sector to foreign investment. It is still,

however, debating whether to allow 26 per cent or 49 per cent FDI in the sector. It is indeed unfortunate that this

issue is hanging fire for nearly four years now, even as the government has allowed foreign investment in a

number of sectors including banking, telecom and insurance.

The fears expressed in certain quarters that FDI in retail sector will short-change the local kirana stores and

smaller players and that there will be job losses are exaggerated. Even though organized retailing is set to grow

at 25-30 per cent per annum over the next decade, it is unlikely to increase its share beyond 20 per cent. Since

the total size of the retail trade is expected to grow at a robust pace in the coming years and the consumer

segments patronizing the big malls are going to be different, the traditional outlets are unlikely to be affected.

As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited access to capital,

labor and suitable real estate options. In contrast, China, which allowed 49 per cent FDI in the retail sector since

1992, benefited immensely with foreign players bringing capital and new technologies and growing export

market for domestic products. At present, around 40 foreign retail players account for almost 20 per cent of the

organized retailing in that country. And the total size of the Indian retail industry is expected to touch the $300

billion mark in the next five years from the current $200 billion.

Now one may ask where the grocer's shop in every colony figures in the scheme of things. If one looks at the

domestic retail business, it can be broadly divided into two segments: food and apparel. Of this, grocery is the

largest segment, accounting for over 70 per cent of the retail trade. And therein lies part of the fears of the

trader's lobby. Instead, it is one of deciding on transparently opening up the FDI in retail trading, allowing

foreign companies to operate freely instead of having to resort to back-door entry tactics. One of the

fundamental facts is that the circle of economic activity cannot be completed until what is produced reaches the

consumer. Hence, efficient distribution and retailing are very important.

Presently, retail trade in India is highly unorganized and inefficient. The entry of the organized sector in retail

trade is capable of mitigating the huge waste involved in the current system. It would simultaneously lead to

better prices for the producers and lower prices for the consumers.

The efficiency of organized sector in retailing is manifested in some of the newer supermarkets in

urban/metropolitan India- the produce is cleaner, fresher, well packed, and often cheaper than the local

shopkeeper.

There are other benefits too of transforming retail sector into an organized sector. Firstly, a number of new jobs

will be created, far better paid than the underage labor working in the local shops. Secondly, circulation of black

money and tax evasion will be curbed, as big employers, as distinct from owner-managed chains, will have to

keep proper records. Thirdly, the benefits to the producer and consumer through better prices, and through

lesser wastage throwing up exportable surpluses, will also benefit the economy as a whole.

Thus one can see that allowing foreign direct investment in retailing is beneficial to all the stakeholders




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involved.

5. FOREIGN DIRECT INVESTMENT - IMPACT AND ANALYSIS BRIEF REPORT

The local Indian retail market will go through a metamorphosis of a change when you have the big players with

long term planning and with FDI. The local stores may be the thing of the past or restricted to last minute

unplanned buying.

The impact of FDI in retail is far fetched and too a great extent benefiting to the end user or the consumer and at

the same time will generate a decent amount of employment and more and more entrepreneurs will be coming

forward to invest and taste the new generation retail marketing.

Market liberalization, a growing middle-class, and increasingly assertive consumers are sowing the seeds for a

retail transformation that will bring more Indian and multinational players on the scene.

Well-established business houses such as Wadia, Godrej, Tata, Hero, Malhotras, etc., are drawing up plans to

enter the fast-growing organised retail market in India.

Similarly, Welspun, a leading manufacturer of terry towels, has entered the domestic retail business with a home

textile brand, Spaces, which will offer a range of bed, bath, kitchen and table linen, specifically for the Indian

market. The company currently exports to 32 countries.

Recently, the Government announced its intention to open up the retail sector to foreign investment. It is still,

however, debating whether to allow 26 per cent or 49 per cent FDI in the sector. This is expected to

tremendously boost the organized retail sector by enabling it to create better and modern infrastructure. Also,

the extension of confessional duty scheme for import of capital goods by retailers with minimum area of 1,000

square metres and implementation of VAT will significantly help organized retailing. Even though organized

retailing is set to grow at 25-30 per cent per annum over the next decade, it is unlikely to increase its share

beyond 20 per cent.

On the contrary, the opening up of the sector to FDI will lead new economic opportunities and there will be

more employment generation. .

Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality

standards and marketing.

As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited access to capital,

labor and suitable real estate options. In contrast, China, which allowed 49 per cent FDI in the retail sector since

1992, benefited immensely with foreign players bringing capital and new technologies and growing export

market for domestic products. At present, around 40 foreign retail players account for almost 20 per cent of the

organized retailing in that country.

The size of organized retailing is expected to touch $30 billion by 2010 or approximately 10 per cent of the

total. Various retailers from across the word have been visiting India over the past few months with a view to

establishing their presence in a market that is expected to witness exiting developments.




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6. FDI IN SERVICES SECTOR

A growing body of evidence suggests that the close availability of diverse business services is important for

economic growth. Producer services such as managerial and engineering consulting can provide specialized

knowledge to help domestic firms develop at lower unit cost. But these intermediate services are often

nontraded, or costly to trade, which may be one reason that cities and industrial complexes form and economic

performance differs across regions. Because services are costly to trade, foreign services are best transferred

through foreign direct investment. This has important implications for public policy. Policies that affect foreign

direct investment differ considerably from those that affect trade in goods. The authors develop a model of

services, results from which show that:

1. Liberalizing restraints on inward foreign direct investment has a powerful positive impact on the income and

welfare of the importing country. The impact is much stronger than in traditional competitive models of trade in

goods.

2. Policies to protect domestic skilled labor against competition from imported services can have the perverse

effect of lowering returns to domestic skilled labor-because while imported services economize on the use of

domestic skilled labor (compared with domestic service industries), the positive effects on scale and

productivity in the downstream industry can be powerful enough that the real wages of domestic skilled labor

rise after the liberalization of foreign direct investment in service industries. In other words, domestic skilled

labor and foreign direct investment are partial-equilibrium substitutes in the model but are typically general-

equilibrium complements.

3. The increase in the variety of imported services leads to increased total factor productivity in downstreamindustries, but the relative impact on downstream industries depends on how intensively they use intermediate

services. The differential in effects on productivity in the production of final goods can be strong enough that

permitting foreign direct investment can actually affect whether a good is exported rather than being imported.

7. CONCLUSION

Many developing countries have made dramatic progress in promoting private sector participation in their

infrastructure sectors, especially with the help of foreign investors. However, this has not been the case in

Southern and Eastern Africa, which has been perceived as relatively unattractive locations for investment. This

paper describes the state of infrastructure in the region, takes stock of actual and potential projects in the various

sectors, and analyzes the main impediments to private investment in the region's infrastructure services.

Legal frameworks tended to address traditional public-sector responsibilities and not investor concerns.

Regulatory environments either did not exist or did not provide investors enough guarantees that their future

operating environment would be sufficiently reliable. Although each country has unique policy problems, FIAS

has encountered common features in key areas that pose stumbling blocks for private infrastructure investments.

This study synthesizes this experience and derives lessons for facilitating and encouraging foreign direct

investment in infrastructure.




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8. REFERENCES[1] Business Line, 2008, ‘Kamal Nath defends retail FDI policy’, Feb-09-2008, available at

http://www.thehindubusinessline.com/2008/02/09/stories/2008020952401000.htm, [21-Jan-2009]

[2] Department of Commerce, Government of India, 23-Feb-2005, Press Release on ‘FDI in Organised Retail

to generate Employment, but should not displace ongoing Retail activities’, available at

http://commerce.nic.in/PressRelease/pressrelease_detail.asp?id=1673, [21-Jan-2009]

[3] Economic Survey (2007-08), Ministry of Finance, Government of India, New Delhi, 2008 available at

http://indiabudget.nic.in/es2007-08/seconomy.htm [21-Jan-2009].

[4] Economic Times, 2007, ‘No fault in Bharti-Wal-Mart deal: Govt’, 15-Jan-2007, available at

http://economictimes.indiatimes.com/articleshow/1202454.cms, accessed 06-Jan-2009

[5] Guruswamy, M. et al, (2005), “FDI in India’s Retail Sector: More Bad than Good”, , Economic and

Political Weekly, Volume XL No 7, Feb 12-18,2005, pages 619 to 623.

[6] Gupta, D., 2006, ‘Retailing in India and the Role of the Marketing Mix’, European Retail Digest, 2006,

Oxford Institute of Retail Management

[7] FDI –by Marin Alexander (EDT) Marinoy-354 pages

[8] European Union and the race for foreign-by Lars Oxelheim, Pervez N.ghauri-256 pages

[9] U.S trade, FDI-by Rolf Hackmann

[10] Foreign investors eyeing booming realty sector-Hindu

[11] Govt may further ease FDI in retail-Rediff-17 Nov 2006

[12] Website:

a. www.cpasind.com

b. http://www.going-global.com/

c. http://www.oecd.org

d. www.financialexpress.com/

e. http://www.iie.com

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9 Satendra Bhardwaj 443 Research Letter Oct 2011