In an ongoing debate on FDI in Retail sector that whether to increase the limit of FDI in Indian retail sector or not is a quite sensitive matter. Before coming to any conclusion first we must have to look upon all the facts related to it. We must have to make deep analysis of all the facts related to this topic of FDI in retail sector.
The recent clamor about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, the most important factor against FDI driven "modern retailing" is that it is labor displacing to the extent that it can only expand by destroying the traditional retail sector. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI (which have been the proposed figures till date) will have immediate and direct consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy; will render millions of small retailers jobless by closing the small slit of opportunity available to them. Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding process. If there aren't any goods being manufactured, then there will not be many goods to be retailed! This underlines the importance of manufacturing in a developing economy.
Global retailers have already been sourcing from India; the opening up of the retail sector to the FDI has been fraught with political challenges. With politicians arguing that the global retailers will put thousands of small local players and fledging domestic chains out of business. The only opening in the retail sector so far has been to allow 51% foreign stakes in single brand consumer stores, private labels, high tech items/ items requiring specialized after sales service, medical and diagnostic items and items sourced from Indian small sector (manufactured with technology provided by the foreign collaborations). Parties supporting the FDI suggest that the FDI in retail should be opened in a gradual/ phased manner, such that it can promote competition and contribute to the growth of the Indian economy. The impact of the FDI would benefit the end user of the consumer to a great extent and will help to generate a decent amount of employment as more and more entrepreneurs would be coming forward to invest and taste the new generation in retail marketing. The opening of FDI should be designed in such a way that many sectors - including agriculture, food processing, manufacturing, packaging and logistics would reap benefits.
Let us first know about all such terms i.e. Retail Business and FDI
What is Retail business?
As per the Delhi high court decision in 2004 the term 'retail' is defined as 'a sale for last consumption' and not for further sale in other words , sale to the end consumer. In general terms we can call it 'Business to Consumer' sales. Retail business is interface between the producer and the individual consumer buying for personal consumption. A retailer is the person who sells the goods to the individual consumer at a margin profit. Today the Retail contributes 15% of the economy and employs 8% of the total workforce.
The retail industry is mainly divided into:-
1) Organized Retailing
2) Unorganized Retailing
ORGANIZED 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 hypermarkets and retail chains, and also the privately owned large retail businesses.
UNORGANIZED RETAILING
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, 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.
What is FDI?
FDI is Foreign Direct Investment. It is an investment by a foreign company into other country than origin. This investment can be done through acquisition of local company or establishing a new business operation. That means it is the capital/funds inflow from foreign entities invested in allowed segments/sectors.
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India ('RBI') in this regard had issued a notification,[4] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board ('FIPB') would be required.
What does mean by FDI in Retail?
Currently:
1. FDI upto 51% in single brand retail store with prior govt approval.
2. FDI upto 100% for cash and carry wholesale trading and export under automatic route.
3. FDI is not allowed in multi brand retail sector retail segment.
As per the recent developments and reports: The cabinet of Government of India has approved 51% FDI in multi-brand retail. Also FDI ceiling for single brand retail is increased to 100% from current 51%.
Concerns for the Government for only Partially Allowing FDI in Retail Sector
1. A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Hon'ble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on 'Foreign and Domestic Investment in Retail Sector', laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:
2. It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
3. Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.
Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.
Rationale behind Allowing FDI in Retail Sector
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.
The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper's Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange's key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.[13]
The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner - foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow.
Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation.
Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.
So, from all the discussions so far we are able to know what is Retailing, FDI, supporting and opposing facts for the FDI in Retailing. Now, we are going to see Pros and Cons of FDI in retailing described below:
Pros of FDI in Retail:
1. It will cut the middleman and help farmers get more price and consumers less cost.
2. Prices will be brought down at retail level to tame inflation.
3. Big retail chains will invest in supply chains which will cut wastage, estimated at 40% in case of fruits and vegetables.
4. SMEs will have bigger market, along with better technology.
5. It will bring in much needed foreign technology with global best-practices.
6. It will create more employment than displacing people of small stores.
7. It will induce better competition in the market, benefiting both produces and consumers.
8. Franchising opportunities for local entrepreneurs.
Cons of FDI in Retail:
1. It will lead to closure of tens of thousands of small retail stores which may endanger livelihood of 4 crore people.
2. It may tame inflation initially but will fuel the inflation once MNC companies get a stronghold in retail.
3. Farmers may be given lucrative prices initially, but eventually they will be at the mercy of big retailers.
4. SMEs will become victims of predatory pricing policies of big retailers.
5. Create cultural and ecological problems by twisting the food production and availability as per the profit margin.
6. It will promote cartels and creating monopoly.
My Views:
As per the statistics 15% i.e. around $401 billion of the GDP today is generated by 40 million work force. This means that the wealth is distributed among the larger section. If we look at the Wal-Mart revenue is about $300 billion generated by just 2.1 million workforce.
If we allow big retailers to take over retail segment without proper regulations and fair competition then the larger amount of money will be concentrated with few business houses leading to poverty.
If the problem is rural infrastructure then we should not be dependent on outsiders for our development. We must be self-reliant in the infrastructure related activities.
Government must make sure that commodity pricing, procurement, rural infrastructure, supply chains are in place to promote competition.
Big Retailers have the tendency to get into 'contract farming' for their needs. This will push farmers to produce what they demand in bulk. Certainly, if retail giant asks for particular sort of produce in large quantity then to make more profits more area will be cultivated for that particular crop. Now due to this scenario if food grains production goes down then wouldn't there is a threat to our food security? And the farmer himself would be the buyer of the food grains.
Our strength lies in distributed and decentralized development, so in order to improve the life standard of last man of the strata it's imperative to take development to every individual by strengthening the small enterprises.
FDI should be allowed there is no need of blanket ban on it, but with appropriate safeguards for strengthening economy to avoid employment and farming crisis like Brazil, Argentina, and Thailand etc.
So, finally FDI should be allowed in Retail sector in order to achieve the various types of benefits being provided by the FDI in Retail sector but with the proper safeguards and functioning.
