FDI in Retail - More Good than Bad


Shiji Shukla
MBA, B.COM (Taxation)
Asst. Professor
Vishisht School of Management

Indian industry's euphoria over the government's decision to throw open the country's retail trade to foreign companies gave way to despair after Finance Minister Pranab Mukherjee announced suspension of the plans owing to political pressure from both within the ruling coalition and outside.

The issue of allowing FDI in the multi-brand retail is of immense importance because as much as 7.8% of India's total workforce is engaged in retail trade (NSSO 66th Round), which are mostly the small groceries, handlooms-textiles-garment shops, family stores etc. Now with FDI in this sector, multinational giants with multi-billion dollar enterprise like Wal-Mart, Carrefour, Tesco etc. who sell from grocery-items to garments, furniture to fitness-equipments, are allowed to set up their stores in India. Notwithstanding the government's claim of 'revolutionizing' the retail sector in India, it needs to be asked that what will be its impact on the unorganized retail which consists of 95% of total retail sector in India while organized trade accounts only for the remaining 5%. Out of this organized and unorganized retail almost 60% of the household expense consists of food and grocery expense.

A study reveals that the average size of a shop in India is 217sq.ft. Almost 95% of the shops have less than 500 square feet area. The average business per store per year is $30,000. And a typical Indian retail shop employs 3-4 persons. On the other hand, an average size of a Wal-mart store is a mind boggling 1, 13,142sq.ft, it runs an annual business of $48 million and each store on an average employs 238 persons.

India is one of the most leading economies with a strong economic backing and is posing threat to the other developed economies. The Indian economy has reached in the orbit of high economic growth rate. It is being widely acclaimed and considered as an emerging global economic power. Presently, the economy of India  is the ninth largest in the world by nominal GDP and the  fourth largest by purchasing power parity (PPP). The country is a part of the G-20 major economies and the BRICS, in addition to being partners of the ASEAN. India has a per capita GDP (PPP) of $1,477 (WBG ) as per 2010 figures, making it a low-middle income country. India enjoys a strong position as a global investment hub with the country registering high economic growth figures even during the peak of financial meltdown. As a result, overseas investors rested their confidence in the economy which eventually pushed foreign direct investments.

These multinational retail agencies thus have immense storage capacity, and capability of running business thousand times bigger than an average Indian retail shop. In India, where consumer expenditure is not constrained by supply-chain bottlenecks (rather it is restricted by low income and purchasing power of the poor). Such big retail agencies would displace millions of unorganized retailers destroying their only source of livelihood. Moreover, if a newly introduced Wal-mart store performs its usual average business, it can displace around 1600 average Indian stores rendering more than 5000 people jobless. Against this, it can create employment for only 238 people, on an average.

However, as a coin has two sides, so does FDI has its positive impact on the Indian economy. The criticism is not justified. There is a fear in the market that the FDI in retail would upset the import balance by preferring to global sources than investing in local production. But, the matter of fact is that India is known to have cheaper labor and easy availability of raw materials. Also giants like Arrow, GAP, Levis, JC Penny, McDonalds and Metro Cash and Carry are already sourcing their products from India.

Another criticism put forward was that of predatory pricing policy fear in India. Studies, however has shown that a non-competitive nature of current Indian retail industry is resulting in steeper prices for consumers and higher prices for the retailers. The sudden move may not have a pervasive effect on the producers and consumers, but they stand to substantially gain from the FDI proposal to allow FDI in retail sector. Few of them are:-
  • Benefits for the consumers
  • o Allowing FDI will increase competition in the market which can force domestic consumers to improve their efficiency and productivity and thus lowering prices.

    o A very evident fact is that the modernization of different sectors has evinced a lot of interest of the foreign investors and has attracted massive FDI inflows in the near past.

    o This in turn has generated lot of employment opportunities in the economy.

    o Consumers now have a wide variety of brands and product categories to choose from which has made shopping experiences of international quality.

    o It will also help focus n the service quality like consistency, standardization, pricing, pre-sales activity, after sales services etc.

  • Benefit for producers:-
  • o A significant market shift to the organized sector will help to reduce the producer's problem of counterfeit products.

    o Consumer financing schemes provided by the retailers help the producer's too.

    o Congregation of large number of customers under one roof will boost low cost marketing campaigns and thus minimizing advertising costs.

    o This will enhance the channel feedback to the manufacturers thus helping to formulate better business strategies.

    o By establishing a real time network with the retailers, the producers can crash their supply chain and minimize the inventory holding cost, response time to market demands resulting in economic benefits which have a final benefit for the producers as well as consumers.

    o  Indian producers will get an opportunity of showcasing their produce in the international markets and foreign retailers.

  • Benefits for the Economy:-
  • o In the era of M&As happening globally, restructuring is a sine qua non for prosperity and survival in the midst of global competitiveness.

    o Postponing FDI in this sector will only help the unorganized sector to flourish pulling in almost Rs. 110,000 crore from the money market.

    o The risk element can be hedged and easily arbitraged, if the FDI is allowed.

Therefore, the proposed FDI norms will open up strategic investment opportunity for global retailers, who have been waiting to invest in India. This may have a significant impact on the current arrangement of foreign players. With the global economy still recovering, investment in India is lucrative to a retailer attributable to strong consumerism, rising disposable income, growing middle class population, favorable macro and micro economic indicators supplemented by a stable government. Retailers entering the Indian market need to ensure that they have considered the opportunity along with the challenges to maximize their returns. Retailers will need to bank on the local knowledge brought in by their partners/employees/ service providers to be able to reduce the lead time required by them to set-up operations and get a foothold in the Indian market.

Shiji Shukla
MBA, B.COM (Taxation)
Asst. Professor
Vishisht School of Management

Source: E-mail February 6, 2012


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