Foreign Direct Investment: The Big Bang in Indian Retail


By
Arun Kr. Singh
Research Scholar
Department of Management
Mewar University
Chittorgarh

P.K. Agarwal
Director
Deewan Institute of Management Studies
Meerut

Varsha Dadhich
Student - MBA 3rd Semester
Department of Management Studies
Vaish College of Engineering
Rohtak
 


ABSTRACT

The Government of India was initially very apprehensive of the introduction of the Foreign Direct Investment in the Retail Sector in India. But the winds of globalization sweeping across has taken the Indian economic environment in its fold and the proposals for further integration has gained momentum, The transformation has also changed the Indian consumer from a state of conserving resources, he's now ready to accept the shopping culture. The government encouraged by the outcome of economic policy of 1991 in India, has proposed retail reforms mainly as 100% FDI in the retail sector in India.

India's retail industry is divided into organized and unorganized sectors. The unorganized retail sector as has been mentioned earlier occupies 95% of the retail sector and the rest 5% is contributed by the organized sector.

The current regulations on retail allow 100% FDI in wholesale cash-and-carry trading. In single-brand retailing, 100% FDI is permitted while it is 51% in multi-brand retailing. The question arises whether opening up of FDI in multi-brand retail will create problems or provide opportunities. There is no clear answer and ample views have been expressed by that in favour and against FDI.

This paper is an attempt to get an insight as to what are the trends in Indian retail industry, advantages & disadvantage of 100% FDI in retail.

Keywords: Retail; Organized Retail; Unorganized Retail; FDI.

INTRODUCTION

For Indian retailing, things started to change slowly in the 1980s, when India first began opening its economy. Textiles sector (which companies like Bombay Dyeing, Raymond's, S Kumar's and Grasim) was the first to see the emergence of retail chains. Later on, Titan, maker of premium watches, successfully created an organized retailing concept in India by establishing a series of elegant showrooms. For long, these remained the only organized retailers, but the latter half of the 1990s saw a fresh wave of entrants in the retailing business. This time around it was not the manufacturer looking for an alternative sales channel. These were pure retailers with no serious plans of getting into manufacturing. These entrants were, like - FoodWorld, Subhiksha and Nilgiris in food and FMCG. Now India is in the midst of a retail boom. The sector witnessed significant transformation in the past decade from small-unorganized family-owned retail formats to organized retailing. Indian business houses and manufacturers are setting up retail formats while real estate companies and venture capitalist are investing in retail infrastructure. Many international brands have entered the market. With the growth in organized retailing, unorganized retailers are fast changing their business models.

We begin with an overview of year 2006 findings:


India being a signatory to World Trade Organization's General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment (FDI). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. Now, 100 percent investment in single brand retail and 51 percentages in multi brand retail outlet is also permitted in September 2012.

Definition of Retail: In 2004, The High Court of Delhi defined the term 'retail' as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer.

Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.

Division of Retail Industry: The retail industry is mainly divided into:-

1) Organized and
2) Unorganized Retailing.

Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hyper markets and retail chains, and also the privately owned large retail businesses.

Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India's GDP.

Table 1: Share of retailing in employment across different countries

Country

Employment (%)

India

         8

USA

        16

Poland

        12

Brazil

        15

China

          7

Source: Presentation to FICCI by Alan Rosling (Chairman, Jardine Matheson Group):
"International Experience on Policy Issues."


Indian Retailing Trends

The retail industry in India is of late often being hailed as one of the sunrise sectors in the economy. AT Kearney, the well-known international management consultancy, recently identified India as the second most attractive retail destination globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.

* Modern retail formats - The growth of western-style malls is changing the way urban consumers shop. We're seeing many bigger box, value based formats setting up shop. The size of these stores is about 50,000 square feet, a departure from the smaller mom & pop-type store that dominates the local retail landscape.

* Shoppers' Stop - department store format.

* Westside - emulated the Marks & Spencer model of 100 per cent private label, very good value for money merchandise for the entire family.

* Giant and Big Bazaar - hypermarket/cash & carry store.

* Food World and Nilgiris – supermarket format.

* Pantaloons and The Home Store - specialty retailing.

* Tanishq has very successfully pioneered a very high quality organized retail business in fine jewellery.

* A new entrant in the retail environment is the 'discounter' format. It is also is known as cash and- carry or

* Hypermarket. These formats usually work on bulk buying and bulk selling. Shopping experience in terms of

* Ambience or the service is not the mainstay here.

Rapid Transformation Anticipated [2]

Current Size & Future Projections for Indian Retail Market


Source: Technopak Analysis

Growth of Indian retail


Source: Technopak Analysis

Indian Retail expected to grow by over 7% p.a. in the next 5 years [2]


Source: Technopak Analysis

FDI stands for foreign direct investment i.e. investment made by the foreign companies or foreign government in India. It is mainly dealing with monetary matters. FDI is a popular mode of entering in another country's economy. It is made by foreign countries in order to established wholly owned companies or to manage them or to purchase shares of companies in  another country. It can be of two type-

1) Horizontal –when foreign company invest in same type of industry in other country.

2) Vertical - when foreign company makes a financial collaboration with marketing unit or suppliers of input in that country.

India's retail industry is estimated to be worth approximately US$411.28 billion and is still growing, expected to reach US$804.06 billion in 2015. As part of the economic liberalization process set in place by the Industrial Policy of 1991, the Indian government has opened the retail sector to FDI slowly through a series of steps:


FDI in single brand Retail

While the precise meaning of single-brand retail has not been clearly defined in any Indian government circular or notification, single-brand retail generally refers to the selling of goods under a single brand name. Up to 100 percent FDI is permissible in single-brand retail

FDI in single-brand retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand. For Adidas to sell products under the Reebok brand, which it owns, separate government permission is required and (if permission is granted) Reebok products must then be sold in separate retail outlets.

FDI in Multi brand Retail

While the government of India has also not clearly defined the term "multi-brand retail," FDI in multi-brand retail generally refers to selling multiple brands under one roof.

In July 2010, the Department of Industrial Policy and Promotion (DIPP) and the Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The Committee of Secretaries, led by Cabinet Secretary Ajit Seth, recommended opening the retail sector for FDI with a 51 percent cap on FDI, minimum investment of US$100 million and a mandatory 50 percent capital reinvestment into backend operations. Notably, the decision on multi brand retailing has been taken in 2012 when government announced 51% foreign participation in multi brand retailing.

FOREIGN DIRECT INVESTMENT - IMPACT AND ANALYSIS

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. The big Indian retail players looking to expand their operations include Shopper's Stop, Pantaloon, Reliance, Lifestyle, Food World, Vivek's, Nilgiris, Ebony, Crosswords, Globus, Barista, Café Coffee Day, Wills Lifestyle, Raymond, Titan, Bata and Westside. Well-established business houses such as Wadia, Godrej, Tata, Hero, etc., are drawing up plans to enter the fast-growing organized retail market in India. Global players are entering India indirectly, via the licensee/franchisee route, since Foreign Direct Investment (FDI) is not allowed in the sector. The international players currently in India include McDonald's, Pizza Hut, Dominos, Levis, Lee, Nike, Adidas and the Medicine Shoppe.


Sources;http://www.fibre2fashion.com/industry-article/7/604/fdi-in-retailing1.asp

Despite all these developments, the organized retail business still comprises a small proportion of the total size of the Rs 9, 00, 00-crore ($200 billion) retail sector. Retail business is 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 annum. In developed countries, organized retailing makes for over 70 per cent of the total business.

Recently, the Government has announced its new foreign investment policy regarding the retail sector. It is now, 100 per cent in single brand or 51per cent in multi brand retailing. Initially, the idea was to begin with 26 per cent and then gradually liberalize it further. However, since China moved from 49 per cent to 100 per cent FDI in this sector last year, the Commerce Ministry and the Prime Minister's Office (PMO) appear to be inclined to go for 49 per cent FDI at one go, despite opposition from Left parties.

Even as the government is debating the level FDI in of retail, a number of foreign players, including the world's largest corporation, the $288- billion Wal-Mart Stores, Inc., have announced their intention to enter India in a big way. According to industry analysts, as many as 20 big Indian companies are working on plans to enter the sector in partnership with foreign investors.

Despite all these favorable developments, the Government appears to be still dithering in giving a green signal to FDI in this sector in view of the opposition from Left parties. 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.

As of now, the Indian retail sector, largely due to its fragmented structure, suffers from limited access to capital, labour and suitable real estate options. India is tipped as the second largest retail market after China, 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.

On the contrary, the opening up of the sector to FDI will lead new economic opportunities and there will be more employment generation. According to a policy paper prepared by the Department of Industrial Policy and Promotion (DIPP), FDI in retail must result in backward linkages of production and manufacturing and spur domestic retailing as well as exports.

The opening up of retail to FDI should be designed in a such as way that many sectors - including agriculture, food processing, manufacturing, packaging and logistics -reap benefits. It is understood that the multinationals that invest in retail business in India would also source Indian goods for their international outlets in a big way and thus provide a boost to Indian exports. Indian retail chains would get integrated with global supply chains since FDI will bring in technology, quality standards and marketing.

According to the World Bank, opening the retail sector to FDI would be beneficial for India in terms of price and availability of products. Experience everywhere has shown that organized retailing tends to have a major controlling effect on inflation because large organized retailers are able to buy directly from producers at most competitive prices. The scale of operation and technology help organized retailers score over the unorganized players, giving the consumers both cost and service advantages.
 


Arun Kr. Singh
Research Scholar
Department of Management
Mewar University
Chittorgarh

P.K. Agarwal
Director
Deewan Institute of Management Studies
Meerut

Varsha Dadhich
Student - MBA 3rd Semester
Department of Management Studies
Vaish College of Engineering
Rohtak
 

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Source: E-mail December 4, 2012

 

           

 

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