"FDI, Participation in Retail Sector"


By

K.K. Pandey
Lecturer
Department of Business Studies
BBDNITM
Lucknow
 


INTRODUCTON

After globalization our economy have moved from social sector to capital sector and there is a great need of foreign capital or investment in our country. As our economy is growing and targeting 10%development rate, there is a great need of concentration on underdeveloped and potentially viable sector i.e. retail sector agriculture etc.

Retailing in India is the largest private sector and second to agriculture in employment. India has highest retail outlet density –Around 1.5 retail crore retail outlet. The retail sector contributes about 10-11%to Indian GDP and it is valued at an estimated Rs.93000 crore out of which organized retailing industry around Rs.35000 crore.

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 deriving the retail growth in India and contributes significantly to the growth of economy. According to the study done by the  "Associate Chambers of Commerce and Industry" it is expected that annual retail sales will reach $17billionby the year 2010, the retail sector in India has the potential to reach $270-280 billion dollar.

For this the government will have to bring about the required liberalization in the retail sector if India is to ever become a developed economy. Recently organized multi outlet retail concept has gained acceptance and since then accelerated.

All major players such as Wal-Mart, Tesco, Sainbury and others are keen to enter the retail market. "A.K.Kearney" ranked India 5th out of 30 most attractive retail markets in terms of investment. Recently government has taken certain action to liberalize the retail market in India.

PRESENT SCENARIO IN RETAIL MARKET

In Indian retail sector there is a paradigm shift from unorganized to organized sector and Indian retail sector has suddenly become active. Some major retail players are trying to move in retail market.

Reliance Industries has launched its retail operations branded "Reliance retail" in the country by opening outlets in Hydra bad that sells fruits vegetables and grocery.

Aditya Birla group is also going to spend Rs.15000 crore to set up 6000 outlets in 3 years. Aditya Birla group is expected to open it first store by the middle of next year.

Bharti Enterprises is planning to tie up for his field fresh foods pvt. Ltd. With the U.K based Tesco to set up chain stores in India.

Wal-Mart has initiated talks with Indian companies for franchised or cash and carry transaction. Wal mart is also planning to tie up with Bharti Enterprises.

Large FMCG players like HLL, ITC, Dabour and Marico are putting in place systems to service Reliance as the off take of consumer goods from HLL is expected to be large.

World second largest retail chain the 74.5 billion Carrefour is also set to enter India along with Dubai based Landmark group which operates the lifestyle chain of stores in India. According to Carrefour's plans include opening 200 hypermarkets throughout India in the next 10 Years.

A recent study by "Real estate services provider Frank Knight India" revealed that the Indian retail sector is worth $210 billion and is expected to grow at between 5 to 7% per year.

INDIA AS AN EMERGING HUB OR DESTINATION FOR FDI

India today represents the most compelling investment opportunity for mass merchant and food retailers looking to expand overseas. According to A.T. Kearney's annual global retail development index for 2005, India retail market totaling $300 billion is vastly undeserved and has grown at an average rate of 10% in the last five years.

Present Government policy on FDI allows to have a presence of international brands through different routes i.e. Franchise, Joint venture, Manufacturing, Distribution, Cash and carry.

For Indian Consumers the gradual and phase wise entry of foreign companies in retail involves three pivotal changes (1) Modern Technology (2) better Transparency in dealing (3) sharing best practice.

FDI in Retail can be leveraged for incremental results in the sector with an India specific approach upgrade existing infrastructure and stimulate further development are the key initiatives that the government and industry need to take together to ensure that the opening of this sector to foreign players is a win win for all.

BENEFITS AND IMPACT ON THE COUNTRY

Inflow of funds and investments
Growth of Infrastructure
Knowledge Base-Technical Know How
Reduced cost and Increased Efficiency
Franchising Opportunity for local Entrepreneurs
Investment in Supply Chain, cold Chain and warehousing
Implementation of IT in Retail
Increase number and Improve Quality of Employment
Provide better value to end Customer

Hence it will lead to overall economic growth and create Benchmark.

Concerns Regarding Foreign Investments

Foreign Players would displace the unorganized retailers because of their superior financial strengths
Induce Unfair trade practices like predatory pricing ,in the absence of proper regulatory guidelines.
Create monopoly and promote cartels
Give rise to cut throat competition rather than promoting incremental  business.
Increase in real estate prices and marginalize domestic entrepreneurs.
Hence checks are to be injected to ensure the overall growth of small and big retailers and to create a level playing field for all.

DEFINING THE WAY FORWARD

FDI would serve the purpose of much needed capital and bring a boom in the retail sector. Since objective of FDI is to increase investment, there is also a need to explore alternative funding routes in addition to FDI foreign institutional investors and venture capital funds should be liberalized and encouraged for investment in the primary market.

FDI should be gradually allowed first in relatively less sensitive sectors, garments, lifestyle products, house ware, entertainment etc.

Ultimate objective of FDI should be enhancement of infrastructure so FDI should be allowed in Tier-2 and lower class cities to facilitate infrastructure building.

FDI should be opened in a Gradual phased manner allowing a lead time for the Indian retailers to create a level playing field for all. Hence promote competition and contribute to the growth of Indian Economy.

Licensing Approach might be a good way forward. License should be divided into three different categories Local, Regional and National. Big players like Wal mart Tesco and Sanbury should be asked to bid for licensing. This will help government to generate additional revenue and control on the actions of big players.

CONCLUSION

Participation of big players will ensure the higher quality of service and produce being sold to the consumers. There are others benefits in terms of choice and pricing that will be passed along to the consumers as the big retailers will compete with each other for greater share of market. Farmers and Suppliers will be able to sell their produce directly to major retailers and hence make more profit on their produce.

Apart from this required capital will be available and level of technology will be enhanced and improved. Infrastructure facilities will be improved and functioning will be more transparent and fair.
 


K.K. Pandey
Lecturer
Department of Business Studies
BBDNITM
Lucknow
 

Source: E-mail December 27, 2007

          

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