FDI in India’s Retail Sector

FDI IN INDIA’S RETAIL SECTOR

By Gaikhamdim Marangmei

FDI is a process of investment in which a foreign investor, invest his money in other country by establishing his own business and also run it with its own existence. For instance Adidas, KFC, Reebok etc.

FDI in India can be granted through automatic route and govt. approval, in the automatic route FDI can be done through the permission of RBI, as RBI has been delegated the authority to do the same. While on the other hand FDI though govt. approval is done with the acceptance of govt.  and while giving such type of acceptance govt. will act according to the recommendation of the FIPB ( Foreign investment promotion board)

The present discussion regarding FDI is about purposing of 51% FDI in retail multi brand sector. As there is already FDI in single brand sector.

FDI limit in various sector till date

Retailing is defined as an interface between the manufacturer and the individual consumer who are basically individual users. Retailers stock the producer’s goods, after purchasing it directly from them, and then sell it to the individual consumers keeping a profit margin for themselves. The retailing sector in India had grown with coveted success, terming it as one of the sunrise sector in the economy.  A.T. Kearney the well known international management consultancy, considered India as the second most lucrative destination of the world for retail business.

In India retail sector is divided into two classes – Organized and Unorganized sectors.

Organized retailing is the one, trading conducted by licensed retailers. Those who are registered for various kinds of taxes. On the other hand unorganized retailing refers to the traditional format of low cost retailing like local store, small road side stores, door to door selling of various goods etc.

Unorganized form of retailing is the most prevalent form of trade in India, constituting almost 98% of the total trade, while organized sector account only for the remaining 2%

The recent cabinet decision to allowed 51% FDI in the multi brand sector has triggered a series of debates on both positive and negative notes, and has become a political issue.

Some of the merit and demerit of FDI in retail sector:

Merit

It is widely acknowledge that FDI can have a positive result on the economy triggering a series of reaction that in the long run can lead to greater efficiency and improvement of living standard apart from greater integration into the global economy.

With the coming of the foreign companies, new infrastructure will be build, thus real estate sector will grow consequently banking sector, as money need to be required to build such infrastructure would be provided by banks.

CII (Confederation of Indian industry) said FDI in multi brand retailing will boost to the organized sector, which positively impact several stake holders, including producers, workers, employees, consumers and government, thus the overall economy. Opening up of FDI can increased organized retail market size to $260 billion by 2020.

This would also result to generation of job and also government can be expected to received an additional income of $25-30 billion by the way of a variety of taxes.

For Producers

Increasing price realization for the farmer by 10-20%, through sourcing directly to the farm.

Upgrading the framer’s capabilities by providing know-how and capital.

Improving farmer output and yield through better extension services and user friendly processes.

For Consumers

A wider choice for the consumers with better option.

Assurance of quality with greater transparency and easier monitoring of adulteration, counterfeit product and traceability.

For low income family organized retails has the ability to lower the cost of the monthly consumption basket as much as by 5-10%.

Lack of infrastructure in the retail sector has been a major issue in India, which has led to an incompetent market mechanism.  FDI might help India overcome such issues by channelizing the resources  in the right manner.

Demerit

Many of the small business owner and workers may lose their job as lot of people is into unorganized retail business such as local shops. If the retails giant like Wal-Mart sets up operation in India, their supermarket will sell everything from vegetable to the latest electronic gadgets at a very low price, which will most likely undercut those selling similar goods. Foreign retail giant may buy big from India and abroad and sell it low price, severely under cutting the small retailers. Once a monopoly situation is created this might turn into buying low and selling high.

Nick Robbins wrote in the context of the East India Company that by controlling both ends of the chain the company could buy cheap and sell dear. The producers and the traders at the local level of the operation will never find place in this sector. Having been uprooted from their traditional form of business, they are unlikely to be suitable for other areas of work either. In time the local outlet are also likely to fold and perish by the pricing power that a foreign players is bale to exert.

Dr Murukadas, Chairman Foundation for sustainable development, while describing  about the demerit of FDI in retail sector also point out that majority of the consumers who buy essentials goods from their neighborhood stores on credit and pay bill on  a monthly basis, will also suffer with the disruption of the traditional system of neighborhood retail stores.

From the above discussion it give a clear picture of the merit and demerit of FDI in retail sector. Many non-governmental organizations have recommended various method to the govt. regarding the method to improved retail industry without FDI, citing the example of developing countries where FDI was allowed in retail sector. China Malaysia and Thailand who opened their retail sector to FDI in the recent years have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets.

Posted: 2012-02-04

[box]This article was sent to KanglaOnline by Gaikhamdim Marangmei, adim2b AT gmail.com [/box]