Advantages of FDI in Retail in India :

(1)       Growth in Economy : Due to foreign companies entering into retail sector, new infrastructure will be built thereby bolstering the jagging real estate sector. In turn, banking sector will also grow as the funds needed to build infrastructure will be provided by banks.

(2)     Job Opportunities : It has been estimated according to government, that approximately ten million jobs will be created mostly in retail and real estate sectors.

(3)     Benefits to Farmers : In the retailing business, the intermediaries have dominated the interface between the manufacturers or producers and the consumers. Hence the farmers and manufacturers lose their actual share of profit margin, as the lion’s share is eaten up by the middlemen.

This issue can be resolved by FD1, as farmers might get contract farming, where they will be able to supply an organised retailer based upon demand and will get paid handsomely for that and they need not run in search of buyers.

(4)     Benefits to consumers : Consumers will get variety of good quality products at low prices compared to market rates and will be able to choose from various international brands at one place.

(5)     Lack of Infrastructure : This has been one of the common issues in the retailing chain in India for years, which has led to the process of an incompetent market mechanism. To cite an example, inspite of India being one of the largest producers of fruits and vegetables, lack of proper cold storage facility significantly affects the selling of these perishable items and also in huge losses. Allowing FDI might help India have better logistics and storage technologies resulting in avoiding wastage. Due to FDI foreign companies will invest around $ 100 million in India. Thereby, infrastructure facilities, refrigeration technology, transportation sector will get a boost.

(6)     Cheaper Production facilities : FDI will assure operations in production cycle and distribution. Due to economies of operation, production facilities will be available at a cheaper rate and thus resulting in availability of variety products to the ultimate consumers at a reasonable and cheaper price.

(7)     Availability of new technology : FDI allows transfer of skills and technology from abroad and develops the infrastructure of the domestic country. Greater managerial talent will flow in from other countries. Domestic consumer will get the benefit of getting great variety and quality products at all price points.

(8)     Long term cash liquidity : FDI will render necessary capital for establishing organised retail chain stores. It is a long term investment because the physical capital in the domestic company is not easily liquidated.

            (9)     Conducive for the country’s economic growth : FDI will create a competition among the global investors, which will ultimately guarantee better and lower prices, thereby benefiting people in all sections of the society. The market growth and expansion will increase. It will step-up retail employment. It will ensure better managerial techniques and success. Higher wages will be paid by the international companies. Urban consumers will be exposed to international lifestyles.

(10)   FDI opens up a new avenue for Franchising : Restrictions on FDI are regarded as trade barriers as they traverse direct market access to foreign firms. Retail giants who are very keen in looking for entry into foreign markets look for other available alternatives. These restrictions on the global retailers regarding the inflow of FDI, leads them towards getting the market entry through franchises. Thus, countries which offer promising market potentialities for retail growth offer substantial growth in the franchising sector also.

(11)   According to the Indian Government’s condition, foreign companies have to source a minimum of 30% of their goods from Indian micro and small industries. This will encourage the domestic manufacturing by creating a big effect for employment and technology upgradation and income generation.

(12)   Countries like China, Indonesia and Thailand have 100% FD1 in retail. Reports show that these countries have experienced high growth in agro processing industry, refrigeration technology and infrastructure.

(13)   Foreign countries will also create a supply chain management in the Indian market. This will result in avoidance of food wastage and perishables.

Until 2011, foreign direct investment (FDI) was not allowed in multi-brand retail, forbidding foreign companies from any ownership in supermarkets, convenience stores or any retail outlets. Even single-brand retail was limited to 51 per cent ownership. In January 2012, India allowed 100 per cent FDI investment in single-brand stores, but imposed the requirement that the single brand retailer would have to source 30 percent of its goods from India. On 7 December 2012, India allowed 51 per cent FDI in multi-brand retail. Manmohan Singh, the then prime minister of India, felt that this would be beneficial for both consumers and farmers. Agricultural marketing was also expected to be benefited with the introduction of new technologies.

Manmohan Singh was credited with bringing about this policy change aimed at making India friendlier for businessmen. With this decision, international companies, especially the supermarkets, were able to increase their presence in the multi-brand retail sector of India. However, they were not allowed to own more than 51 per cent stakes in these establishments. This step was regarded as the most important one in the last two decades, especially with regard to reforms in India.

Political Controversies

There has been a fair share of controversy surrounding the then UPA government's decision to permit FDI in retail sector.

The decision to allow 51 percent FDI in the multi-brand retail sector came under attack from the opposition in the Rajya Sabha. The government had, on its part, aimed to justify the decision saying it was only in the best interests of India.

Reasons for promotion of FDI in Retail

The major benefit of FDI is that it is both supplementary and complimentary with regards to local investment. FDI lets a company gain better access to top class technology and supplementary funds. They are also exposed to management practices in vogue around the world and also get the chance to become a part of the global market system.

The Indian government had commissioned Indian Council for Research on International Economic Relations (ICRIER) to perform a study on the effect of organised retailing practices on its unorganised counterpart.

ICRIER submitted the report during 2008. The study hinted at the advantages that the growth of organised retail will have for various participants like the consumers, manufacturers, and farmers.

The government decided on the basis of the results in other countries and the ICRIER study that this decision would result in a greater influx of FDI in both back and front end infrastructure. It was expected that the agricultural sector would become more efficient and be in a better position to use technology.

It was also expected that this decision would result in more and better jobs being created and the best practices around the world will be introduced in India. Both farmers and consumers will see

more convenient prices and higher quality in future and this will help both the classes.

The government also put in an obligatory condition before foreign companies for procuring 30 percent supplies from local producers in order to provide a fillip to the manufacturing sector in India. Jobs are expected to be available in both rural and urban areas thanks to greater back and frontal operations resulting from more FDI.

Domestic retail entities and traders are expected to pull up their socks and increase their efficiency ever since this decision. Consequently, the consumers are expected to receive better services and the producers who provide the source products also get better payment.

Process of FDI in Retail

There is no such procedure for short listing the companies. International companies who are willing to invest in either single or multi-brand retail can put in their applications with the Department of Industrial Policy and Promotion.

Here the applications are reviewed in an effort to determine their suitability as per the stated guidelines. Subsequently, the Foreign Investment Promotion Board, Ministry of Finance will consider the applications before providing the final approval.

Advantages of FDI in retail

India's retail industry is one of the biggest around the world when it comes to the privately owned ones. The industry has seen some major restructuring thanks to the FDI structure becoming more liberal than before. The benefits of FDI in retail, as per experts, carry greater weightage than the cost related implications.

With FDI in retail, operations in distribution and production cycles are expected to become better. Owing to factors such as economic operations, the cost of production facilities will come down as well. This will mean a greater choice of products at lesser and justifiable prices for the customers.

As a result of FDI, companies will be able to bring in technology and skills from other countries and this will help in infrastructural development of India. This will also help in creating more value for money for the buyers.

After FDI in retail, it is possible to set up a properly organised chain of retail stores as the capital to do is readily available. The investment can be regarded as a long term one as the physical capital put into a domestic company is not liquidated easily. This is its main difference from equity capital.

ICRIER had also predicted that if FDI in retail was introduced in India during 2011-12, the Indian economy could have grown by 13 per cent, the unoganised sector could have seen a 10 per cent growth and the organised sector could have increased by 45 per cent.

Disadvantages of FDI in retail

Experts say that while analysing the positives and drawbacks of FDI in retail, both the government and the opposition did not refer to the Parliament Committee report where its effects had been studied in great detail. The committee had taken into cognizance many witnesses, NGOs, individuals, and trade associations to come up with the said report.

The Committee visited various corners of India and also went through reports and gathered knowledge about the experience of similar decisions in other countries. It also enquired from several government departments regarding the matter.

The Committee had surmised in its report that the number of people getting jobs will be lesser than the amount of people losing the same as a substantial amount of marginal and small farmers will be wiped out. Some other problems expected out of this were aggressive pricing and prevalence of monopoly.

As per the Committee's report almost 8 percent of India's workforce is employed in the unorganised retail sector. This comes up to roughly 40 million people. It has been stated that FDI in retail will generate 2 million jobs. However, the Committee had stated that it is not a proper indication as it does not take into account the number of people who already work in the retail sector.

ICRIER had executed a second study on the effects of FDI in retail during 2011 and in that it had stated that FDI will bring about a fantastic shopping experience for the consumers. It had actually interviewed 300 people from the middle and high income groups. Thus, in effect, the efforts of the Parliament Committee were overlooked for a private organisation.

Experts have questioned the logic of ICRIER to question 300 people in a country with a 1.2 billion population and more than 40 per cent who can be termed as poor.

The Parliamentary Committee report on FDI was never discussed in Parliament itself, and as per experts, it is not a good sign as far as the democratic system in India is concerned.

As per ICRIER, consumerism is positive for economic growth. In 2008 the first survey had dealt with 2020 small and unorganised retailers whereas the total count of such entities in India at that time was 6 million.

Leading economic experts from outside India have also posed the same question. They have also pointed at the labour practices of organisations such as Wal-Mart. Most of these are not exactly healthy for workers. This has also led them to ask if such processes were really required in India.

It is being said that the lobby favouring FDI in retail in India has invested at least Rs 52 crore and experts opine this could have had a major say in the way things turned out.

Challenges in introducing FDI in retail

Indian market has high complexities in terms of a wide geographic spread and distinct consumer preferences varying by each region necessitating a need for localisation even within the geographic zones. While India presents a large market opportunity given the number and increasing purchasing power of consumers, there are significant challenges as well given that over 90 per cent of trade is conducted through independent local stores. Challenges include: Geographically dispersed population, small ticket sizes, complex distribution network, little use of IT systems, limitations of mass media and existence of counterfeit goods.

Political opposition to FDI in retail

The then opposition party in India, Bharatiya Janata Party (BJP) was opposed to FDI in retail. As stated by the then Leader of Opposition in Lok Sabha and now Union Minster for External Affairs, Sushma Swaraj, the UPA never tried to create any consensus regarding the issue or talk with the opposition prior to their campaign in support of FDI in retail.

Swaraj also expressed her worries regarding the possible condition of small traders and farmers once FDI was introduced in retail. She stated that the big retailers were not coming to India because they wanted to be charitable but because they saw India as a major market.

Mulayam Singh Yadav, the head of Samajwadi Party, and an opponent of FDI in retail also questioned the logic of introducing the same only in the bigger cities with more than 10 lakh people. Yadav felt that this decision would only result in unemployment.

Trinamool Congress (TMC), a former ally of UPA, had left the coalition during September 2012 as a mark of protest against steps like FDI in retail.

Now that the BJP-led government is in power at the Centre, it is to be seen whether it goes ahead with the decision to allow 51 per cent foreign direct investment (FDI) in multi-brand retail by the UPA-II government. Though Nirmala Sitharaman, in charge of the commerce and industry portfolio as well as a minister of state for Finance and Corporate Affairs , has stated that the party is against FDI in multi-brand retail, reversing the decision of the previous government will not be easy, given the Narendra Modi government's keenness to woo investment, both domestic and foreign, to improve the Indian economy. - See more at: http://business.mapsofindia.com/fdi-india/retail.html#sthash.1tKFg6M5.dpuf

From the day the Government of India notified FDI in Retail allowing foreign companies to have 51% stake, there has been a flurry of opinions both for and against allowing Big Retailers like Walmart an entry into India. Though most of the opinions have been in support of the move there have been a few voices of caution against the entry of Big Box Retail. Most of the debate arguing why Kiranas won’t be hit or farmers will benefit, are sadly backed by very limited empirical evidence in terms of similar experiences in other countries. Let us look at some the biggest arguments in favor of FDI and examine why they might well turn out to be pipe dreams:

1. Walmart will provide better prices to Farmers

One of the biggest arguments in favor Big Box Retail has been that this will eliminate multiple layers of middlemen thereby giving better prices to the farmers. In theory this does sound very plausible, but in practice by eliminating layers of middleman Big Box retail manifests itself instead as the single biggest middleman leading to an Oligarchy – very few Big Box retailers providing limited choice for both the farmers and end consumers. Empirical evidence in developed countries tells us that in reality the farmers get squeezed by Big Retailers and get paid very poorly for their produce:– Farmers in Punjab have supposedly benefitted by indulging in Contract Farming for Bharti-Walmart, PepsiCo(Lays Chips) etc. But there have also been reports of big firms entering into contract farming agreements with the farmers and then going back on their commitment when the produce is available cheaper from other sources 1– Tesco in the UK has been beset with multiple allegations of harming farmers interests. It has been fined 10 million pounds for price fixing of dairy products 2– In a study of the Nicargaun agricultural market a Michigan State University found prices paid by Walmart are “significantly lower” than those paid by the traditional market9

2. Walmart will not threaten local Kirana stores as they will build stores far away from urban centers

The business model of Walmart in the US has been to build massive stores in the suburbs offering free parking to shoppers. Real Estate availability and low car ownership makes that model unviable in India. That doesn’t Walmart will employ same strategy in India. Look at Tesco in the UK, almost every street/area has a small Tesco store which resembles a local Kirana Shop. Why will not Big Box retail adopt that model in India? Lately Walmart in the US plans to open smaller shops called Mini-Express which resembles to take on local mom n pop stores3

3. Walmart will provide additional employment

One of the biggest arguments in favor of Walmart has been that it will provide additional employment. Entry of big retail is touted to create millions of additional jobs. This again is not supported by experiences in the west. Indian Retail largely dominated by family owned Kirana stores already employs more than 4 million people. In addition to these a significant number of people work in the supply chain and distribution areas. Government only talks about the jobs

Walmart is expected to created but does not consider the jobs that will be lost due to shutting down of thousands of Kirana stores. What this means is that in the near future an owner of Kirana store may end up becoming a minimum wage labourer in a Big Box Retail store!Net effect will only be job losses as various studies show:– University of California study suggests that for every new retail job created by Wal-Mart, 1.4 jobs are lost as existing businesses downsize or close4– Hunter College study on the impact of Walmart found a new store kills three local jobs for every two they create5– With their large entrenched supply chain in China, Big Box Retail will have a devastating effect on local manufacturing can be devastating. Studies indicate US has lost large number of manufacturing jobs to china ranging anywhere between 200,0006 to 1.2 millions7 jobs– Walmart worldwide employs about 2 million employees for an annual sale of $405 billion. That means a revenue generation of about $200,000 per employee. Indian Retail sector generates about $400 billion annually and employees close to 4 million people. Surely this means lesser number of people will be employed going by global standards

4. Walmart will provide better wages to workers

It is argued that Walmart will help get workers get better pay. This is far from the truth. Walmart is a cost competitor driving down costs of suppliers, farmers and employees to ensure low prices can be offered to consumers and large profits for the shareholders. Walmart is known to provide one of the lowest paying jobs. Empirical evidence and studies show this:– Wal-Mart’s average annual pay of $20,774 is below the US Federal Poverty Level for a family of four 5.– Wal-Mart employees earn 20 percent less than retail workers on average.– Walmart not only drives down wages of its own employees but also reduces wages in supporting industries. National Employment Law Project (NELP) study shows that Walmart’s outsourcing depresses wages In U.S. Warehouses

5. Walmart will bring in much needed FDI

Walmart is touted to bring in the much needed FDI into India by making it mandatory to invest $100 million into the country. This looks to be very good proposition but there are lot of ifs and buts:– Will this investment be made via Mauritius route to ensure no taxes can be levied on any future transactions?– Like it happened in the case of Dabhol and 2G scam tainted telecom companies, which were touted as FDI turned out to be a big NPA on Indian banks as the proposed FDI dollars were in reality rupee loans!– How much of this money will be used to invest in building fresh capacity versus buying out existing Indian loss making retailers? This will help the rich businessmen the most– Most importantly over the year how much of money from India will be taken away by Walmart as profits for its US Shareholders?

6. Walmart will provide technology

I find this particular argument hilarious. What is the propriety technology that Walmart will bring? Indian IT services firms are some of the biggest providers of technology services to the likes of Walmart. Why cant existing Indian Retailers get access to the same technology?

7. States have the freedom to prevent entry of Big Box Retailers

This is one of the biggest canards being spread by the government. India is a signatory to the Bilateral Investment Promotion & Protection Agreement (BIPAs) which makes it mandatory for the state governments to let the likes of Walmart operate. It simply means if Reliance Retail or Foodworld has shops in West Bengal, Mamata Banerjee cannot ban foreign retailers alone! In addition a Kerala HC judgment struck down the previous Left Front government decision to ban Indian Big Retail under the Shops & Establishments act

If Walmart truly provided all the benefits being claimed why does our government shy away from telling us that Walmart is banned in many big cities of the US like New York, San Francisco, San Diego and so on?

By eliminating middleman, distributors and small time retailers, Walmart has become the single biggest middleman gobbling away all the profits from the farm to the fork, thus helping the founder Sam Walton’s family earn a combined wealth in excess of $100 billion which is roughly equal to the wealth of the bottom 40% of Americans combined. Do we in India want emulate the US and help accelerate this wealth of the Waltons at the cost of our farmers, consumers and Kirana shop owners is the big question.