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In this article we will discuss about the Foreign Direct Investment (FDI) in multi-brand retail trade in India:- 1. Introduction to FDI in Multi-Brand Retail Trade 2. Development and Background of FDI Retail Entry Sector 3. Conditions 4. Challenges 5. Observations.
Contents:
- Introduction to FDI in Multi-Brand Retail Trade
- Development and Background of FDI Retail Entry Sector
- Conditions on the FDI entry in Multi-brand Retail Trading
- Challenges of Retail Trade
- Observations of Retails in FDI
1. Introduction to FDI in Multi-Brand Retail Trade:
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On 20th September, 2012, the UPA Government at the Centre issued a notification for the entry of foreign direct investment (FDI) into multi-brand retail trade which raised a storm in the minds of cross section of people.
After a long debate in the Parliament, on 7th December, 2012, the Government won the approval of Parliament to its controversial decision of allowing FDI in multi-brand retail with a motion against it defeated convincingly in Rajya Sabha and thereby paved the path for the entry of FDI into the multi-brand retail trade.
On this issue, political parties of India are vertically divided on their own political lines. The ruling party congress and its allies in UPA supported the move. The opposition party BJP, although in 2004 promised before the elector to open up retail sector to foreign companies but now opposing the move on political compulsion.
Trade with a share of above 15 per cent in India’s GDP in the last seven years has been playing an important role in Indian, economy. In 2011-12, trade shares 16.6 per cent of India’s GDP and has grown to the level of Rs 8,10,585 crore. During the period 2004-05 to 2011-12, the compound annual growth rate (CAGR) of trade in India was 9.3 per cent.
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Among this volume of trade, retail trade contributes to the major portion involving a large number of people and thereby generate scope of self employment for millions of Indians. Thus retailing in a country like India, with its huge size of population, is one of the important pillars of its economy. It accounts for 14 to 15 per cent of its GDP.
The Indian retail market is roughly estimated to be $ 450 billion and it is considered one of the top five retail markets in the world by economic value. Moreover, India is one of the fastest growing retail market in the world with above 1.2 billion people.
2. Development and Background of FDI Retail Entry Sector:
FDI in retail is quite different from the foreign investment in corporate manufacturing or infrastructure sectors. Retail sales market may be single or multi-brand and may be described as a sale to the ultimate consumer at a margin of profit. In India, FDI in single brand retailing was allowed earlier and FDI in multi-brand retailed is now being allowed which has raised a spate of controversy.
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This new set up simply means a retail store or its chain started with foreign direct investment can sell multiple brands under one roof. Therefore, it can establish a link between the producer or manufacturer and the ultimate individual consumer.
In the mean time, India had to open up the retail trade sector to the foreign investor as the country is a signatory to the World Trade Organization’s (WTO) General Agreement on Trade and Services which includes both wholesale and retail services.
In India, the retail sector is highly fragmented with around 97 per cent of its business which are mostly being run by unorganized retailers. But organized retail set up is still at a nascent stage. As a result of the entry of FDI, the retail sector will become organized. Foreign investment in the food based retailing trade would ensure adequate and consistent flow of foreign capital into the country and also open up scope for its productive use.
In India, retailing business is essentially owner manned small shops. As a result of the transition in retailing sector, large format convenience stores and supermarkets have been established in large urban centres and in 2010, it accounted for 4 per cent of the industry.
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At present, the retail and logistics industry employs about 44 million persons in India (as per National Sample Survey estimates), Until 2011, the Government of India did not allow foreign direct investment (FDI) in the multi-brand retail sector, forbidding foreign groups to take up ownerships in supermarkets, convenience stores or any retail outlets.
However, FDI in single brand retail was allowed limited to 51 per cent ownership and subject to bureaucratic process. Again in November, 2011, the Government of India announced its retail reforms both for single brand retail stores and multi-brand retail stores.
These kind of reforms in the market opened the scope for retail innovation and competition with multi-brand retailers like Wal-Mart, Tesco, Carrefour as well as single brand retailers like Nike, Apple and IKEA. However, such announcement has resulted serious debate both in favour and against such proposed retail reforms.
As a result of the pressure from opposition, in December, 2011, the Government of India placed the proposal of retail reforms on hold till its reaches a consensus as a part of it coalition compulsion.
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In January 2012, the Government of India approved the entry of FDI into single brand retail only welcoming any retail player from the world to innovate in Indian retail market with 100 per cent ownership with a condition that the single brand retailer should source 30 per cent of its goods from India.
In June 2012, IKEA announced its decision to invest $ 1.9 billion in India and accordingly set up 25 retail stores. However, Fitch and other companies argued that 30 per cent requirement is likely to delay most single brand majors from Europe, USA and Japan from opening such retail stores and creating associated jobs in India.
On 14 September 2012, the Government of India finally announced the opening of FDI in multi-brand retail, subject to approval by individual states as retail market is state subject. This decision has raised opinion both favour and against the move from different corners and brought upheaval in the political coalition structure of the central government.
Again on 20th September, 2012, the Government of India formally notified the FDI reforms for both single and multi-brand retail and thereby made it effective under Indian law. On 7th December 2012, the Government of India finally allowed 51 per cent FDI in multi-brand retail in the Country.
As a result some state governments decided to allow foreign super markets like Wal-Mart, Tesco and Carrefour to open their retail outlets while some other states decided to oppose the move.
Recently on April 8, 2014, the retail giant Wal-Mart decided to focus on cash-and-carry segment in India and accordingly plans to open 50 wholesale stores in the next four to five years in order to expand its footprint in the country and also decided to extend the e-commerce platform to out cash-and-carry members with a virtual stepping opportunity.
Wal-Mart has also decided to invest in its supply chain infrastructure and supplier development related to its multi-brand retail segment in India.
If we look at the potential of India’s retail and logistics industry, then both organized and unorganized in combination, employs about 44 million Indians which constitute about 3.3 per cent of India’s total population. The typical Indian retail shops are very small in size. More than 14 million retail outlets are operating in the country and only 4 per cent of these outlets are larger than 500 sq. ft in size.
India has about 11 shop outlets for every 1000 people. In India, vast majority of unorganized retail shops normally employ family members and do not have the scale to procure or transport products at high volume wholesale level, maintain limited to no quality control or fake-versus-authentic product screening technology and have no training on safe and hygienic storage, packaging or logistics.
Most of the unorganized retail shops source their products from a chain of middlemen who mark up their product as it moves from farmer or producer to consumer. Such unorganized retail shops normally offers no after-sales support or service and most of its transactions are done with cash with all sales being taken as final.
In 1997, foreign direct investment (FDI) in Cash and carry wholesale was allowed in India with 51 per cent ownership and got the automatic permission in 2006. Between 2000 to 2010, Indian retail market attracted nearly about $ 1.8 billion in foreign direct investment which represented a very small 1.5 per cent of total investment flow into the country.
Out of the 96 proposals received during this period 57 were approved and implemented. This is a very small number considering the size of population and extent of the market as compared to China which allows 100 per-cent ownership by foreign countries both in single and multi- brand retail business.
Thus to face the challenges, the Government of India allowed 100 per cent ownership for foreign single brand retailer in January 2012 with a condition to source 30 per cent of its goods from India. The government also allowed 51 per cent FDI in multi-brand retail in the country on 7th December 2012 with certain conditions attached.
Indian retail sector has experienced very limited growth and its spoilage of food harvest is amongst the highest in the world. This is mainly due to very limited integrated cold Chain and other infrastructure. It is observed that India has developed 5386 stand-alone cold storages, having a total capacity of 23.6 million metric tonnes.
As 80 per cent of this storage is used only for storing potatoes thus the remaining capacity is less than 1 per cent of the total annual farm output in India. As this storage capacity is grossly inadequate during peak harvest seasons thus it leads to about 30 per cent losses in certain perishable farm output on an average every year. Although 100 per cent FDI in cold-chain infrastructure was allowed but it failed to attract investors into it due to the ban on multi-brand retail.
Until 2010, intermediaries and middlemen have dominated the value chain in India, flouting all norms. Small farmers in India realize only 1/3rd of total price paid by final Indian consumers as compared to 2/3rd of the price realized by farmers of those nation having higher share in organized retail.
India has also been facing a lot of debate and discussions on the risks and prudence of allowing innovation and competition within its retail industry. Large number of economists repeatedly recommended to the Government of India that legal restrictions on organized retail should be removed and the retail industry of the country must be opened to competition.
As for example, in an invited address to the Parliament of India in December 2010, Jagadish Bhagawati, Professor of Economies and Law, Columbia University analysed thoroughly the relationship between growth and poverty reduction and also urged the Indian Parliament to extend economic reforms by freeing up of the retail sector, further liberalization of trade in all sectors and also for introducing labour market reforms in order to accelerate economic growth and also improve the lot of India’s poor.
Noted journal ‘The Economist’ forecasts that Indian retail will nearly double in economic value, and are expected to expand by about $ 400 billion by 2020. The projected increase alone is just equivalent to the current retail market size of France.
In 2011, food component accounted for 70 per cent of Indian retail, but it was under—represented by organized retail. A.T. Kearney estimates show that India’s organized retail had a 31 per cent share in clothing and apparel, while the home supplies retail was growing between 20 to 30 per cent per year.
These data simply correspond to retail industry’s prospects us estimated prior to November 2012 announcement of the retail sector reform in India. Thus Indian market is offering endless possibilities for investors in retail market.
However, the situation has further improved after the announcement of 100 per cent FDI entry into single brand retail and 51 per cent entry of FDI into multi-brand retail in January 2012 and September 2012 respectively.
As per the A.T. Kearney, Global Retail Development Index 2012 Report, India ranked at 5th place in retail trade and remains a high potential market with accelerated retail market growth of 15 to 20 per cent expected over the next five years. While the overall retail market contributes 14 per cent of India’s GDP, organized retail penetrations remains low, indicating considerable room for growth.
3. Conditions on the FDI entry in Multi-Brand Retail Trading:
In India FDI in multi-brand retail has been permitted by the government subject to following specified conditions:
1. Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry fishery and meat products may be unbranded;
2. Minimum amount to be brought in as FDI by the foreign investor, would be US $ 100 million;
3. At least 50 per cent of total FDI brought in shall be invested in ‘backend infrastructure’ within three years of the first tranche of FDI.
4. At least 30 per cent of the value of procurement of manufactured/processed products purchased shall be sourced from Indian, ‘small industries’ (SMEs) which have a total investment in plant and machinery not exceeding US $ 1 million.
5. Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per census 2011 and may also cover an areas of 10 km around the municipal/urban agglomeration limits of such cities.
6. Government will have the first right to procurement of agricultural products.
7. The government allowed 51 per cent FDI in multi-brand retail trade as a strategy to boost trade.
8. States will have the right to decide on Retail trade in its various aspects like its number of entity to be permitted, market share, style, diversity etc. States can also bring regulation to control such trade.
9. As a result of entry of FDI into multi-brand retail, trans-national corporations (TNCs) in retail trade like Wal-Mart, Carrefour, Tesco, Target, Metro, Coop etc. will be able to start its own outlet in India and able to buy up to 51 per cent stake of the existing retail business.
The state governments and Union territories would be free to take their own decisions in respect of implementation of the policy as retail trade is a state subject. In the mean time, eleven states and union territories, viz. Andhra Pradesh, Assam, Delhi, Haryana, Jammu and Kashmir, Maharashtra, Manipur, Rajasthan, Uttarakhand, Daman and Diu, and Dadra and Nagar Haveli have agreed to permit establishment of retail outlets under this policy.
Constitution of a high level group under the Minister of Consumer Affairs has also been announced to look into various aspects relating to internal trade and to make recommendations on internal trade reforms to the government, whenever required.
Again on 1st August, 2013, the Union Government in its Cabinet meeting took decision to liberalise two conditions for investment in retail industry these are:
1. In pursuance to the earlier rules multi-national retail players were allowed to open retail outlet in those towns and cities which have population size 10 lakh or more. But the Union Cabinet now look a decision to permit opening of retail outlets in those cities and towns which have less than 10 lakh size of population if related state governments ready to agree with this proposal.
2. Regarding the rules of 30 per cent procurement of manufactured/processed goods by the retail players from the local small industries (SMEs), the Union Cabinet meeting has also decided to liberalise this rule to some extent. With the liberalisation of these rules it is now expected that investment in retail business from multinational players may now increase in near future.
4. Challenges of Retail Trade:
Indian retail market has its own diversities and complexities. Indian retail market has high diversities as it covers wide spectrum of goods produced by different sectors. Again it has high complexities in terms of a wide geographic spread and distinct consumer preferences usually varying by each region and thereby necessitating a need for localization even within the geographic zones.
India is now having the highest number of outlets per person (7 per thousand). Indian retail space per capita at 2 sq. ft. (0.19 m2)/person of 6 per cent is highest in the world. In India, 1.8 million households in India have an annual income of over Rs 45 lakh (US $ 81,900).
Thus India presents a large market opportunity given the number and increasing purchasing power of consumers. There are also significant challenges faced by the retail sector as over 90 per cent of trade is conducted through independent local stores.
Such 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.
A McKinsey study of Indian retail sector claims that retail productivity in India is very low as compared to international peer measures.
It is observed that the labour productivity in Indian retail was just 6 per cent of the labour productivity of United States in 2010. India’s labour productivity in food retailing is about 5 per cent in comparison to that of Brazil’s 14 per cent; while India’s labour productivity in non-food retailing is nearly 8 per cent in comparison to Poland’s 25 per cent.
Retail sector in India has also generated large number of employment. Total number of retail employment in India, both in organized and unorganized retail, account for about 6 per cent of Indian labour or work force currently, most of which are engaged in unorganized retail. This is about a third of levels engaged in United States and Europe; and about half of levels in other emerging economies.
A complete expansion and development of retail sector to levels and productivity similar to other emerging economics and those developed economics like United States would likely to generate 50 million jobs in India. Thus to attain such stage, arranging training and development of labour and management for such higher retail productivity is considered as a challenge.
In order to become a flourishing industry in right spirit, retail sector in India needs to cross or meet the following hurdles or challenges:
1. Automatic approval is not allowed for foreign investment in retail.
2. Regulations restricting real estate purchases and to withstand cumbersome local laws.
3. Taxation policy favouring small retail business.
4. Absence of developed supply chain and integrated IT management.
5. Low skill level for managing retail sector.
6. Lack of trained work force.
7. Lack of retailing courses and proper study options for the promotion of retail sector.
8. Intrinsic complexity of retailing in India—like rapid price changes, constant threat of product obsolescence and low margins.
Thus the challenges faced by the retail sector in India is quite serious and important.
5. Observations of Retails in FDI:
In spite of mixed responses, the FDI in retail trade has been working with success in different South East Asian Countries over and above other developed countries of the world. FDI in retail in China, Thailand, Singapore, Japan etc. have proved to be a boon. It brings technology and equity and thus created a good impact in those countries.
Various farmer associations in India have announced their support for the retail reforms. Shriram Gadhve of All India Vegetable Growers Association (AIVGA), which operates in nine major states of India, claims his organisation supports retail reform.
Bharat Krishak Samaj, (BKS), a farmer association with more than 75,000 members also supported retail reform. A.V. Jakhar, Chairman of BKS demanded that the government make it mandatory for organized retailers to buy 75 per cent of their produce directly from farmers, bypassing the middlemen monopoly and India’s ‘sabzi mandi auction system’.
Chengal Reddy, Secretary General of Consortium of Indian. Farmers’ Association (CIFA) announced its support for retail reforms. Shared Joshi, founder of Shetkari Sangathana (farmers association) also announced his support for retail reforms and claims that FDI in retail will help the farm sector to improve critical infrastructure and integrate farmer-consumer relationship.
Whatever may be the arguments advanced against retail reforms, one thing is very clear that farmer groups across India are seriously demanding retail reforms as the farmer is being exploited under the current retail system. They argue that Indian farmers usually get only one third of the price consumers pay for staple food and the rest is taken away by middlemen and shopkeepers.
In case of perishable horticulture produce, average price farmers receive is hardly 12 to 15 per cent of the final price consumer pays. Moreover, Indian potato and tomato farmers has to go for distress sale of their products by selling at Rs 2 to 3 and Rs 050 to 1 a kilogram respectively but the Indian consumer buys the same potato for Rs 10 to 20 a kilogram and tomato for Rs 10 to 15 a kilogram.
This is a sheer exploitation of Indian farmers by the present retailing system prevailing in our country.
Thus organized retail will offer the small Indian farmer more competing venue to sell his or her products and thereby can increase their income from less spoilage and waste. Unlike the current monopoly of middlemen buyer in India, retail reforms offer opportunities to Indian farmers to access to more buyers from organized retail setups, which will offer them better prices and support and also additional markets.
A study (H. Basavaraja et.al.) claims that not only do these losses reduce food security in India but also the poor farmers and others loose income because of waste and inefficiencies in the present retail system. Over US $ 50 billion of additional income can become available to Indian farmers by preventing post-harvest farm losses, improving transport, proper storage and retail outlets.
Organized retail is also expected to start infrastructure development creating million of jobs for rural and urban Indians.
The study claims that these post-harvest food staple losses in India could be eliminated with better infrastructure and retail network, enough food could be saved every year to feed 70 to 100 million over the year and thereby can raise food security.
Supporters of retail reform argue that it will increase competition and improve quality while reducing prices will help to contain India’s rampant inflation. It is also being argued that unorganized small shopkeepers will continue to exist alongside large organized supermarkets as these Kirana shops will remain the most accessible and most convenient place to shop for those common people.
Experience shows that Indian big retailers (viz., Spencer’s, Trends, Big Bazar, DLM, Sahara etc.) are doing business in many cities of India since last 10 years but small traders are still maintaining their business within their jurisdiction. Estimate reveals that even after the entry of FDI in retail, 84 per cent of retail trade will still remain in the hands of small traders.
Amartya Sen, the Indian born Nobel Prize wining economist, in an interview (NDTV, 18th December 2011) claimed that foreign direct investment in multi-brand retail can be good thing or bad thing depending on the nature of the investment. Prof. Sen claimed that quite often FDI is a good thing for India.
Thus while taking further decision on FDI in retail we should be very much careful. We should mobilise our opinion in a most rational manner and should not take decision blindly. Rather we should make continuous analysis of the situation arising out of it and put pressure on the government to rectify and regulate the policy on FDI in retail as per the changing situations.
However, at any cost, we have to protect the interest of common people, living both in rural and urban areas and safeguard the interest of the country.
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