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Pros & Cons of FDI in India Retail – Benefits of Foreign Direct Investment

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FDI in Retail- A boon or a bane

Before starting with the Indian Retail Industry and the FDI policy in Retail Industry let us first answer one very simple question

What is Retail Industry

Retail Industry as the word describes deals with the Retail sector which includes the sales of goods and merchandise from a location which includes departmental store, malls, boutique etc. In a layman’s word, retail includes retailer, who are individuals or group of individuals, who purchased goods from the manufacturers, wholesalers or imports them and sells them in smaller quantities to the end user. Shops or stores are commonly used terms for retails establishment. So we can say retailers are the person who makes the goods available to end users and are thus at the end of the supply chain.

Moving on to Indian Retail Industry, we see that Indian Retail Industry is one of the pillars of Indian economy as it accounts for a large portion, to an extent of 13%, of the GDP.  The Industry is divided broadly in two sectors classified as Organized and Unorganized as shown in the figure:

Indian Retail Industry

Organized retail sector:

This consists of the retailers who are registered for the taxes viz. Income Tax, Sales Tax, etc. This basically includes the corporate promoted retail chains and hypermarket, or individually promoted big businesses or privately owned large retail businesses.

Unorganized retail sector:

This involves the traditional low cost retailing which includes the Kirana Shops, or the proprietor managed general stores, roadside/pavement vendors or the ones having movable shops on carts.

Indian Retail Industry is currently at its point of flexion, waiting for the real boom to take place. The retail industry in India gathered a new dimension with the setting up of the different outlets of internationally acclaimed brands, Hypermarkets or Supermarkets, western style shopping malls and departmental stores. The ever expanding scope of retailing has attracted big International players like Wal-Mart, eBay, etc. into India, thus leaving behind our old traditional kirana shops. The other participants in the Indian Retail sector which are given due importance includes Bata, Big Bazaar, Pantaloons, Archie’s, Cafe Coffee Day, Landmark, Khadims, Crossword, Oxford, Barista, McDonalds etc. Indian Retail sector is experiencing a rapid change, and with a growth rate of 46% compounded annually for three years, it is currently the fastest growing sector in the Indian economy.

Factors affecting the growth of the Retail sector in India:

  • Large Working Population with a median age of 24 years
  • Nuclear families in urban and semi urban areas
  • Increasing population of working women and
  • Emerging opportunities in the services sector.

Trends driving the growth of the retail sector in India:

  • Low share of organized retailing
  • The fall in the real estate prices
  • Increase in disposable income of the consumers
  • Increase in expenditure for luxurious items by the end users.

Retailing format in India

The retailing format in India can be accounted to the following though it is not limited to the same:

  • Malls
  • Discount Stores
  • Department Stores
  • Hypermarket/ Supermarkets
  • Convenience Stores.

Challenges of the Indian Retail Industry:

The Indian Retail Industry, no doubt, has the potential to flourish to a great extent and reach newer heights. According to a McKinsey & Company report titled ‘The Great Indian Bazaar: Organized Retail Comes of Age in India’, organized retail in India is expected to reach US$ 450 billion by 2015. With this immense potential in it, there are few challenges faced by industry which are acting as hurdles to its target. Following are the key challenges the Indian Retail Industry is facing currently:

  • With the increased pressure to supply the quality of products as demanded by the consumers, the retail players are under serious pressure to make their supply chain efficient which would lead to an increase the costs by 15%.
  • Lack of proper infrastructure and the underdeveloped infrastructure in terms of roads, rails, electricity etc has led to impediment of pan-India of suppliers. Also this has led to increase cost in case the retailers have to resort to different vendors and suppliers.
  • Even now the choice of retail as a career is not opted by majority of the educated people. Educated people are automatically directed towards the IT/ITES, BPO industries etc which results in the lack of sharp minds in the retail sector, thus no backing support for the sector is available till date.
  • Despite the measures being taken by the union government to make the value added tax system in different  states uniform, some states are practicing their own state laws and have their own local legislative bodies to formulate the Tax system for the state which has resulted in increased costs and complexities in establishing a uniform distribution system.
  • The existing labor laws which defines the number of hours to be worked and the minimum wages to be paid has created an ineffective and non flexible environment for the operations and employment of the part time employees.
  • Several stages of clearance required to be completed before opening a new outlet for the same company is also a major problem which creates the problem of increased cost incurred.
  • The non-industry status of the retail sector makes it difficult for the retailers to raise finance from the banks and financial institutions which results in the delay of the project and ultimately a slower growth.
  • Non availability of government lands and also the zonal restrictions on the real estate has created a major problem in availing a land of proper size and location for the expansion or new opening. Also the rigorous land reform which includes the high stamp duty and also the lease documentation are a hurdle in the land acquisition for the project to start.

Advantages of Foreign Direct Investment

With the implementation of  Foreign Direct Investment in Retail, Government sees a prospective growth for the economy. It is argued that:

  • Huge investments in the retail sector will see gainful employment opportunities in fields like agro-processing, sorting, marketing, logistics management and front-end retail as well, which would improve the employment which would create at least 10 million jobs in the next three years in the retail sector.
  • FDI in retail will help the poor farmers the most as they can secure remunerative prices by eliminating exploitative middlemen.
  • Supply chain efficiencies will be ensured by the big players and foreign retail majors.
  • As the policy mandates a minimum investment of $100 million with at least half the amount to be invested in back-end infrastructure including the development of cold chains, refrigeration, transportation, packing etc. It is expected that the post-harvest losses will be reduced and proper storage facility will be implemented.
  • Also the food and grains, which perishes due to inadequate infrastructure, will not be wasted which in turn would have a salutary impact on food inflation from efficiencies in supply chain.

At last it is argued that there has been impressive growth in retail and wholesale trade after the approval of 100% FDI in retail by China. Similarly tremendous growth in the agro-processing industry was seen in Thailand. At last it is said that organized retail through Indian Corporates is also permissible and history shows that small retailers have flourished in harmony with large outlets.

Disadvantages of Foreign Direct Investment

Looking at the other side of the coin it is seen that FDI policy might have equal disadvantages. Some of them are enlisted below:

  • Allowing of FDI in retail will lead to large-scale job losses. Supermarkets invariably displace small retailers as it can be seen that small retail has virtually been wiped out in developed countries like the US and in Europe.
  • We know India has the highest shopping density in the world with around 11 shops per 1,000 people. Also it has the huge density of 1.2 Crore shops which employs over 4 Crore people among which 95% of these are small shops run by self-employed people thus the implementation of FDI will affect the daily bread earning of the people belonging to lower and upper middle class families.
  • Global retail giants will have competitive and attractive pricing with an objective aimed at creating monopoly which can result in essentials, including food supplies, being controlled by foreign organizations thus disrupting the agriculture sector in India as well.
  • It is believed that fragmented markets give larger options to consumers where as the consolidated markets make the consumer captive. Allowing foreign players to come in would merely lead to consolidation of the market as International retail does not create additional markets rather it merely displaces existing markets.
  • Jobs in the manufacturing sector will be reduced as because the structured international retail (due to the implementation of sophisticated SCM technology) makes purchases internationally and not from domestic sources. Many countries which have allowed FDI in retail has already experienced the same.
  • Comparison between India and China on the FDI in retail front is not valid as because the former is predominantly a services economy and latter is a manufacturing economy. Also China being the largest supplier to Wal-Mart and other international majors can never really say “NO” to these chains opening stores in China as it would affect its export whereas India in contrast will lose both manufacturing and services jobs by allowing FDI in retail.

Mega retail chains need to keep price points low and attractive – that’s the USP of their business. This is done by smart procurement and inventory management: Good practices from which Indian retail can also learn.

SWOT Analysis of FDI in Retail

Strengths

  • Immense cash inflow from foreign players
  • Financing of current a/c deficit
  • Due to stiff competition the goods available has to be of good quality at cheaper prices
  • More employment opportunities due to bulk hiring by Big Retail chains
Weakness
  • Extremely volatile market
Opportunity
  • Increasing disposable income/ nuclear family/ working professionals etc would be attracted more
  • Huge customer base due to Urbanization will be attracted
  • One roof store which is cheaper than retail outlets and kirana store
Threat
  • Unorganized sector would be killed
  • The lower middle class people who depend on their shops for the bread earning would be deprived
  • Might give rise to increase in poverty, unemployment in lower middle class people of the class of worker
Conclusion

Despite seeing the pros and cons of FDI in retail and various other arguments from the government, opposition, business leaders, aristocrats, etc I strongly feel until the implementation of FDI in retail causes a severe problem to the economy and the industry it should be allowed. Looking at the arguments stating that the jobs will be killed, we can clearly see that the multi brand and big retail outlets which are having a chain of stores across the country works on the model of supply chain management and needs man power equally, thus loads of job opportunities will be created. Also we can see that when the big retail players were allowed in India, then also the mom and pop stores, kirana stores were their which were not affected so not much of a problem can be seen with the advent of FDI in Retail rather it would help the most potential bearing industry grow at a immense pace.

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Author: Niraj Satnalika. Read more about the author in the About section.

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Sneha Shah

I am Sneha, the Editor-in-chief for the Blog. We would be glad to receive suggestions, inputs & comments on GWI from you guys to keep it going! You can contact me for consultancy/trade inquires by writing an email to greensneha@yahoo.in or call me on +913340606492.

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2 Responses so far | Have Your Say!

  1. Anandh Sundar

    “Also it has the huge density of 1.2 Crore shops which employs over 4 Crore people among which 95%”-this number seems a bit too high, any reference for this? It seems to imply that 3% Indians directly work in the retail sector, and 1 shop for every 100 people..

  2. Abhishek Shah

    thanks anandh for your valuable inputs

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