fdi in multibrand retail in india - an ipan report --an ebook by ipan
Post on 08-Feb-2017
224 Views
Preview:
TRANSCRIPT
nternational Policy Analysis Network (IPAN) is Asia's First Youth-Led Public Policy Think Tank, Idevoted to independent research and innovative
policy solutions. IPAN was founded by Kshitij Bansal in the year 2011 under the mentorship of Dr. S R S Bedi. The mission of IPAN is to involve youth in core policy analysis and make an impact upon national and global decision making. IPAN comes out with opinions,
research briefs, working papers and books. IPAN will soon publish the first edition of its flagship yearly journal 'The Policy Analyst'. It also purports to start university level outreach activities for reaching out to youth and creating an informed opinion.
“I take pride in the fact that our student Kshitij Bansal with his team has started this unique initiative IPAN which has already created its niche amongst young policy enthusiasts. RGNUL will be enriched with this annual working paper series. This report is a very informative, comprehensive and genuine analysis of FDI in Retail
policy. The Editorial Team led by Ms. Brindpreet Kaur has done a commendable work to present a neutral and broad perspective of the policy by placing long term
developmental goals at the centre stage…”
Prof. (Dr.) P S JaswalVice Chancellor
Rajiv Gandhi National University of Law, Punjab
International Policy Analysis Networkwww.ipanglobal.org
www.facebook.com/IPANglobal
An IPAN Working Paper Report
Brindpreet KaurEditor
Kshitij BansalAsst. Editor
RGNUL-IPAN Working Paper Series
2012
99
Brindpreet Kaur is an Assistant Professor of Economics and the
Deputy Coordinator of School of Agricultural Law and Economics
(SALE) at Rajiv Gandhi National University of Law, Punjab, India. She
is a very renowned and passionate academician in the field of
economics who has authored numerous text books for university
level students. She is a widely published researcher with numerous
paper presentations. She heads the university cultural committee
and has been holding various positions of responsibility at academic
and administrative levels. She is also the member of reputed
research institutions in the field of Economics.
Kshitij Bansal is a graduate from Rajiv Gandhi National University
of Law, Punjab, India specialised in International Laws and Global
Governance. He is the Founder President of International Policy
Analysis Network (IPAN), Asia's first youth-led public policy think
tank. A widely published author and a columnist, his
opinions/articles have been published in leading journals,
magazines, newspapers presented at reputed national/international
conferences. A university distinction holder, he was the Robert
Bosch Stiftung Scholar for the year 2012. Bansal represented India
as the Head of State at G20 Youth Summit 2012, Washington D.C.
and was also the UNESCO Youth Peace Ambassador 2012.
RGNUL-IPAN Working Paper Series 2012
FDI IN MULTI-BRAND RETAIL IN INDIA
An IPAN Working Paper Report
Series Editor: Brindpreet Kaur Deputy Coordinator, School of Agriculture Law and Economics (SALE) Rajiv Gandhi National University of Law, Punjab, India Series Assistant Editor: Kshitij Bansal President, International Policy Analysis Network (IPAN) Project Coordinator from IPAN: Sonali Dhanker MA (Economics) (Dept. of Economics, Panjab University, Chandigarh) Project Coordinator from RGNUL: Angshuman Hazarika Student of Law, RGNUL
Research Assistants: Aparajita Paul Student of Law, RGNUL
Nikhil Suresh Pareek Student of Law, RGNUL
Ankush Thakur Student of Law, RGNUL
INTERNATIONAL POLICY ANALYSIS NETWORK
www.ipanglobal.org; www.facebook.com/IPANglobal
Email: ipan.president@gmail.com, sale.rgnul@gmail.com
RAJIV GANDHI NATIONAL UNIVERSITY OF LAW, PUNJAB
www.rgnul.ac.in
Email: info@rgnul.ac.in
© International Policy Analysis Network 2013
All rights reserved. No part of this publication may be reproduced or transmitted in any form or
by any means, electronically or otherwise without prior permission in writing from International
Policy Analysis Network.
Enquiries concerning reproduction outside the scope of above should be sent to the President’s
Office, International Policy Analysis Network, at the address above.
Published in India in the year 2013 by The President, International Policy Analysis Network
(IPAN) on behalf of Rajiv Gandhi National University of Law, Punjab and International Policy
Analysis Network (IPAN). Cover page design by Goutam Jayasurya.
ISBN: 978-81-920809-4-9
Maximum Retail Price: 99
RESEARCH TEAM
This Working Paper Report 2012 on FDI in Multi-Brand Retail in India was prepared by a
team led by Kshitij Bansal under the guidance of Brindpreet Kaur. Sonali Dhanker and
Angshuman Hazarika were the Project Coordinators representing International Policy
Analysis Network and Rajiv Gandhi National University of Law respectively. The team
comprised of Aparajita Paul, Nikhil Suresh Pareek and Ankush Thakur as Research
Assistants. The Concept Note was primarily prepared by Research Assistants led by Project
Coordinators after a comprehensive research spread over a period of two months.
Contributions which have been published were peer reviewed and selected after they were
received in response to a competitive call for papers. The series was initiated by Kshitij
Bansal as the President of IPAN and carried out under the general supervision of Brindpreet
Kaur.
The editorial-production team was led by Gautam Jayasurya which provided graphical and
publishing assistance. RGNUL university staff and Vice Chancellor’s office staff provided
additional support. The cover page was designed by Gautam Jayasurya.
4
ACKNOWLEDGEMENTS
Preparation of this report drew from various other related research projects. Introductory
studies of the FDI in Retail Policy by Indian Government were done by Ankush Thakur.
Nikhil Suresh Pareek led the comparative studies of various other economies and analysed it
under the direction of Kshitij Bansal. Angshuman Hazarika, apart from coordinating the
research team, researched upon the human rights related aspects of this FDI policy. Aparajita
Paul comprehensively studied the complete analysis and finalised the positive and negative
implications of this policy under the direction of Sonali Dhanker. Sonali Dhanker coordinated
the project on economic theory perspectives and their long term policy implications.
Many individuals inside and outside Rajiv Gandhi National University of Law and
International Policy Analysis Network provided valuable contributions and comments
(Specific acknowledgements have been made in the bibliography mentioned at the end of this
report). Particular thanks are due to the following individuals who lent their continuous
support: Paramjit S Jaswal, G I S Sandhu, Brindpreet Kaur, Gautam Jayasurya, Hansraj,
Inderpreet Singh, Sukhwinder Virk, M L Bansal and Shashi Bansal.
The financial assistance of Rajiv Gandhi National University of Law at the initiative of
Paramjit S Jaswal, Vice Chancellor is gratefully acknowledged.
5
PREFACE
This report concludes the first edition of RGNUL – IPAN Working Paper Series which is
now an annual flagship policy research project. International Policy Analysis Network, Asia’s
first youth-led public policy think tank initiated this Annual Working Paper Series in
association with School of Agriculture Law and Economics (SALE), Rajiv Gandhi National
University of Law, India from the year 2012. The Research Theme for 2012 edition of this
series was “FDI in Multi-Brand Retail in India” for which students, academicians and Ph.D
scholars were invited to submit papers addressing some specific social, political, economic or
cultural aspect of this policy.
In this report, we have attempted to put together varied perspectives associated with this
policy. While the concept note introduces the whole policy to its readers; following papers
address specific issues in order to help the reader form an informed opinion about this
policy’s positive or negative implications.
The call for papers issued for this project received a huge response and some quality
submissions which were reviewed by the peer review committee. Papers were shortlisted
from the perspective of having diversity of opinion, innovation in recommendations and
practical applicability of research.
We sincerely believe that this report will contribute immensely to the ongoing policy
discussions in India and abroad. This comprehensive compilation of quality papers will assist
students, academicians and policy makers in their policy discourses.
Brindpreet Kaur and Kshitij Bansal
6
CONTENTS
1. Concept Note…………………………………….. 7
2. FDI in Multibrand Retail in India:
Issues, Opportunities and Challenges………. 72
Ananda Chakraverty and Sudipto Mitra
3. An Empirical Analysis of FDI in Retail
in India……………………………………………. 82
Dhaval Piyush Sampat, Mudita Manor,
Nitish Mathran, Dibyendu Sen (Project Guide)
4. FDI Policy from the Perspectives of
Portor’s Five Force Model and Social
Implications……………………………………… 95
Preet Singh Oberoi and Anuj Sabharwal
5. Arguments Against FDI in Retail in India…... 105
Soumya Singh Baghel and Manish Navlani
6. FDI in Multibrand Retail will hamper
Domestic Indian Market………………………... 114
Vimal Asthana and Saloni Arora
7. Bibliographic Note………………………………. 123
7
CONCEPT NOTE
PART 1: INTRODUCTION
Foreign Direct Investment in retail has a major significance in the present economic setup of Indian
economy. A major shift in the policy of Foreign Direct Investment (hereinafter referred to as FDI)
climate has provided an interesting future option to several international retailers' entry and expansion
plans for India. Foreign Direct Investment in multi-brand retail is an economic reform which would
allow global chains like Wal-Mart, Carrefour and Tesco etc. to own up to 51 percent of joint retail
ventures with Indian companies. The policy would let foreign retailers own up to 51 percent in
multibrand retailing and 100 percent of single brand retailing.1
According to Deardoff’s Glossary of International Economics, FDI is defined as “Acquisition or
construction of physical capital by a firm from one (source) country in another (host) country.”2 FDI is
also stated as “Investment that is made to acquire a lasting interest in an enterprise operating in an
economy other than that of the investor, the investor’s purpose being to have an effective voice in the
management of enterprise”.3
It is the stated intent and objective of the Government of India to attract and promote foreign direct
investment in order to supplement domestic capital, technology and skills, for accelerated economic
growth. “Foreign Direct Investment, as distinguished from portfolio investment, has the connotation of
establishing a lasting interest in an enterprise that is resident in an economy other than that of the
investor.”4
Latest Policy Move:
The policy cleared by Union Cabinet stipulates that FDI in multi brand retail will be allowed up to
51% foreign equity through the government approval route, subject to adequate safeguards for
1 Agencies, “What’s FDI in retail?” Hindustan Times, Nov. 29, 2012. Available at http://www.hindustantimes.com/India-
news/NewDelhi/What-s-FDI-in-retail/Article1-775543.aspx, Last accessed on 14 October, 2012. 2 Deardoff’s Glossary of International Economics. Available at http://www-
personal.umich.edu/~alandear/glossary/f.html#fdi2, Last accessed on 12 October, 2012. 3 International Monetary Fund, Balance of Payments Manual, Washington, DC, 1977, pp.408 4 Circular 1 of 2012, Chapter 1, P. 6, Intent and Objective, Dept. Of Industrial Policy and Promotion, Ministry Of Commerce
And Industry (Circular On Consolidated FDI Policy), Available At Http://Dipp.Nic.In/English/ Policies/FDI_Circular_01_2012.Pdf, Last accessed on 14October, 2012.
8
domestic stakeholders. The policy rollout will cover only cities with a population of more than 1
million5. It also specifies at least 30% of the procurement of manufactured/processed products must be
sourced from Indian “small industries”. 'Small industries' have been defined as industries which have a
total investment in plant & machinery not exceeding US $ 1.00 million.6
Organized retail penetration remains low, at 5 to 6 percent indicating room for growth.7 This provides
ample space for multi brand retailers to setup and explore the retail investment environment in India.
What is Single Brand Retailing and Multibrand Retailing?
Single brand retailing: its meaning says own label brands or they can be described as those which are
created and owned by businesses that operate in the distribution channel. Single brand implies that
foreign companies would be allowed to sell goods sold internationally under a ‘single brand’, viz.,
Reebok, Nokia and Adidas. FDI in ‘Single brand’ retail implies that a retail store with foreign
investment can only sell one brand. For example, if ‘Nike’ were to obtain permission to retail its
flagship brand in India, those retail outlets could only sell products under the ‘Nike’ brand and not the
‘Reebok’ brand, for which separate permission is required.
Foreign direct investment in multi brand retail means that foreign players can sell multiple brands of
his parent company in another country under one roof. Multi Brand Retail allows foreign companies to
sell goods of more than one brand under one roof viz. Wal-Mart, Tesco etc. For example, in India,
Pantaloons is a multibrand retail shop where if talked about garments, one can sell Reebok, Nike and
Adidas under one roof only.
It is only after Press release of Ministry of Commerce and Industry, that Foreign Direct Investment in
multi brand retail is allowed8. Opening up FDI in multi-brand retail will mean that global retailers will
5 Press Release Id 77725, Press Information Bureau, Government of India, Available at
http://pib.nic.in/newsite/erelease.aspx?relid=77725, Last accessed on 9 October, 2012. 6 Press Note No.4 (2012 Series), Ministry Of Commerce and Industry, Government of India. Available at
http://dipp.nic.in/English/acts_rules/ Press_Notes/pn4_2012.pdf, Last accessed on 08October, 2012. 7 News release, 2012 Global Retail Development Index, June 11, 2012, AT Kearney, Global management consultancy firm.
Available at http://www.atkearney.com/consumer-products-retail/global-retail-development-index/news-release/-/asset_publisher/56Fncka0K9JJ/content/brazil-tops-a-t-%C2%A0kearney-global-retail-development-index-for-the-second-year/10192., Last accessed on 14October, 2012.
8 Press Note No. 5 (2012 Series), Dept. Of Industrial Policy and Promotion, Ministry Of Commerce And Industry 14-09-2012. Available At http://Dipp.Nic.In/ English/Acts_Rules/Press_Notes/Pn4_2012.Pdf, Last accessed on 07 October, 2012.
9
offer a range of daily use items which are directly related to consumers in same way as other local ‘kirana’
shops sell.
History of FDI in Retail in India:
The advent of FDI in general in India was witnessed during the end of 1990’s when government announced
number of reforms which helped in the process of liberalisation and deregulation of the economy. Since its
inception there has been significant upsurge in the FDI flows in the country. But when we talk about FDI in
retail, it came quite late in 2006.
Prior to 2006, India prohibited FDI in both single brand and multi brand retail. In the second month of 2006,
government decided to open retail sector for FDI which was subject to certain conditions. At that time
government provided 51 percent FDI in single brand retail.9 There have been recommendations to further
liberalize the Indian government’s policy regarding FDI in retail trading, including to increase the permissible
level of FDI in single-brand retail operations and to open up the multi-brand retail sector to FDI.
In November 2011, the Union Cabinet of Ministers, decided to permit up to 100 percent FDI in single-brand
retail trading and up to 51 percent FDI in multi-brand retail trading. Unfortunately for foreign retailers, the
Cabinet’s November 2011 decision produced a considerable political backlash in India. The political backlash
was mainly focused on multi brand aspect of the FDI. Consequently, the Indian government reversed course
and indefinitely suspended plans to reform the retail sector. But later government of India on January 12, 2012
allowed 100 percent FDI in single brand retail10 and still there was no FDI in multi brand retail in the country.
Later amidst rising inflation, policy paralysis, risk of low grading by credit rating agencies and surging deficits,
Government of India decided to allow 51 percent FDI in multi brand retail.11
General Nature of Indian Retail Sector:
India is one of the most desirable retail destinations in the world due to a large middle class which has
a dispensable income. India’s economic growth and demographic profile set it apart from others
Developing Nations and set up a case for global retailers to enter the market. Retailing is a significant
9 Press Note 3 (2006 Series), Issued On February 10, 2006, Issued By Dipp. Ministry Of Commerce And Industry. Available
At http://Www.Ksidc.Org/FDI_Policy_2006.Pdf, Last accessed on 06 October, 2012. 10 Press Note 1 (2012 Series), Issued On January 10, 2012, Issued By Ministry Of Commerce and Industry. Available At
http://Dipp.Nic.In/English/ Acts_Rules/Press_Notes/Pn1_2012.Pdf, Last accessed on 07October, 2012. 11 Press Note 5 (2012 Series), Issued On January 10, 2012, Issued By Ministry Of Commerce And Industry. Available At
http://Rbidocs.Rbi.Org.In/ Rdocs/Content/Pdfs/PRES210912_5.Pdf, Last accessed on 07October, 2012.
10
sector of the economy, both in terms of GDP contribution and share in public employment. Although
there is no set definition for retail but to opt for a reliable authority, the definition of retail was given
by the Delhi High Court in the case of Association of Traders of Maharashtra V. Union of
India12 defined “retail as sale of final consumption or sale to ultimate consumer”. A manufacturer
selling his own brand is not retailing. Retailing is the bridge between the manufacturer and the final
consumer and falls last in the distribution chain having interface with the end customer.
There is no definition of retail trade under the FDI policy. In layman’s term it means selling of goods
to the consumer. So from local Kirana shops and mall based shopping formats, both form part of retail
sector. From street/cart retailers working on pavements/roadsides and small family run businesses to
international brands such as Rolex and Nike, the retail market in India is vibrant, colourful and highly
fragmented. In India, the retail industry is divided into organised and unorganized sectors. Organised
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.13 Unorganised retailing, on the other hand, is dominated by
large number of small retailers consisting of local kirana shops, owner manned general stores,
chemists, footwear shops, paan or beedi shops, pavement vendors etc. which together make up the so
called “unorganised retail” or traditional retail14.
At Kearney, a global management consulting firm, rates India as the most attractive nation for retail
investment. The study, presented in the Global Retail Development Index of 2012, is carried out
annually for 30 emerging markets, and has rated India fifth in all emerging markets. This report
expresses even more optimism, and estimates that suggests that India's retail market is expected to be
about US$535 billion by 2013, with around 10 per cent coming from organized retail.15.
Indian retail is mainly dominant with small and medium enterprises in contradiction to the presence of
few giant corporate retailing outlets. Coming up of FDI in retail may see a significant shift in Indian
retail industry.
12 Federation Of Association Of Traders v. Union Of India, 2005 (79) DRJ 426. 13 “Retailing, India In Business, Investment Technology Promotion Division, Ministry Of External Affairs, Govt. Of India”,
Available at http://www.indiainbusiness.nic.in/industry-infrastructure/service-sectors/retailing.htm, Last accessed on 09 October, 2012.
14 Ibid 15 “Global Retail Expansion: Keeps On Moving 2012’, Atkearny, Available at
http://www.atkearney.com/documents/10192/4799f4e6-b20b-4605-9aa8-3ef451098f8a, Last accessed on 14 October, 2012.
11
Key Features of this Policy:
Following are certain conditions which have been specified under the Press Note no. 5 of 201216 and
the foreign players have to comply with the same.
As per paragraph 6.1 of the press note FDI is prohibited in
(a) Lottery Business, including Government /private lottery, online lotteries, etc.
(b) Gambling and Betting, including casinos etc.
(c) Chit funds
(d) Nidhi company
(e) Trading in Transferable Development Rights (TDRs)
(f) Real Estate Business or Construction of Farm Houses
(g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco
Substitutes.
(h) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway
Transport (other than Mass Rapid Transport Systems).
Foreign Technology Collaboration in any form, including licensing for franchise, trade
mark, brand name, management contract, is also prohibited for lottery business and Gambling
and Betting activities.
The above policy is an enabling policy only and the State Governments and Union
Territories would be free to take their own decisions in regard to implementation of the
policy. Therefore, retail sales outlets may be set up in those States & union Territories which
have agreed, or agree in future, to allow FDI in MBRT under this policy. The list of States
&Union Territories which have conveyed their agreement is annexed. Such agreement, in
future, to permit establishment of retail outlets under this policy, would be conveyed to the
Government of India through the Department of Industrial Policy & Promotion and additions
would be made to the annexed list accordingly. The establishment of the retail sales outlets
will be in compliance of applicable State &Union Territory laws/ regulations, such as the
Shops and Establishments Act etc.
16 Press Note No. 5 of 2012, Govt. Of India, Available at http://Rbidocs.Rbi.Org.In/Rdocs/Content/Pdfs/PRES210912_5.Pdf,
Last accessed on 08October, 2012.
12
FDI in retail is left to the discretion of state governments which will decide whether to allow
foreign supermarket chains like Wal-Mart, Carrefour etc.to enter their territory or not.
Minimum amount to be brought in, as FDI, by foreigner investor, would be US $ 100
million. Minimum investment to be made by foreign investor through any multinational is at
least of $1 million. At least half of the total FDI shall consist of ‘back-end infrastructure’ such
as warehousing and cold storage facilities. This requirement has to be met within three years
of a retailer setting up shop.
At least 30% of the value of procurement of manufactured/ processed products
purchased shall be sourced from Indian 'small industries' which have a total investment in
plant & machinery not exceeding US $ 1.00 million. This valuation refers to the value at the
time of installation, without providing for depreciation. Further, if at any point in time, this
valuation is exceeded, the industry shall not qualify as a 'small industry' for this purpose. This
procurement requirement would have to be met, in the first instance, as an average of five
years' total value of the manufactured! Processed products purchased, beginning 1st April of
the year during which the first tranche of FDI is received. Thereafter, it would have to be met
on an annual basis. The multinational investing in the country will have to source almost one
third i.e. 30% of their manufactured and processed goods from industries with a total plant
and machinery investment of less than $1 million.
Retail sales outlets may be set up only in cities with a population of more than 10 lakh (1
million) as per 2011 Census and may also cover an area of 10 kms around the
municipal/urban agglomeration limits of such cities; retail locations will be restricted to
conforming areas as per the Master/Zonal Plans of the concerned cities and provision will be
made for requisite facilities such as transport connectivity and parking; In States/ Union
Territories not having cities with population of more than 10 lakh as per 2011 Census, retail
sales outlets may be set up in the cities of their choice, preferably the largest city and may also
cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The
locations of such outlets will be restricted to conforming areas, as per the Master/Zonal Plans
13
of the concerned cities and provision will be made for requisite facilities such as transport
connectivity and parking..
Retail trading, in any form, by means of e-commerce, would not be permissible, for
companies with FDI, engaged in the activity of multibrand retail trading. The Press Note
5 provides that retail trading, in any form, by means of e-commerce, would not be
permissible, for companies with FDI, engaged in the activity of multi-brand retail trading.
This would mean the web platforms carrying out enabling function shall not be impacted but
foreign firms that buy or sell any goods or services on online portals are prohibited under the
FDI policy17.
Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry,
fishery and meat products, may be unbranded.
Government will have the first right to procurement of agricultural products.
At least 50% of total FDI brought in shall be invested in 'backend infrastructure' within
three years of the first tranche of FDI, where 'back-end infrastructure' will include capital
expenditure on all activities, excluding that on front-end units; for instance, back-end
infrastructure will include investment made towards processing, manufacturing, distribution,
design improvement, quality control, packaging, logistics, storage, ware-house, agriculture
market produce infrastructure etc. Expenditure on land cost and rentals, if any, will not be
counted for purposes of back end infrastructure. At least half of the total FDI shall consist of
‘back-end infrastructure’ such as warehousing and cold storage facilities. This requirement
has to be met within three years of a retailer setting up shop.
Applications would be processed in the Department of Industrial Policy & Promotion, to
determine whether the proposed investment satisfies the notified guidelines, before being
considered by the FIPB for Government approval.
17 Nidhi Bothra, “FDI in Retail Business: The Key Issues of New Policy”, Moneylife, Sep. 26, 2012. Available at
http://www.moneylife.in/article/FDI-in-retail-business-the-key-issues-of-the-new-policy/28689.html, Last accessed on 07October, 2012.
14
There are few states and union territories which have agreed to allow FDI in multibrand retail.
States: Andhra Pradesh, Assam, Delhi, Haryana, Jammu & Kashmir, Maharashtra, Manipur,
Rajasthan, Uttarakhand; Union territories: Daman & Diu and Dadra and Nagar Haveli.
There has been a sort of mixed response by policy analysts and corporate masters. Corporate
professionals like Akash Gupta (retail expert at consultancy firm PricewaterhouseCoopers India
Ltd.), estimates that opening up the retail sector will lead to significant improvement of supply-chain
infrastructure, which will help reduce food waste by 30% to 40%. Adi Godrej, president of
the Confederation of Indian Industry, a leading trade body, said coming up of FDI in retail
announcements have “restarted the reform process”18.
18 WSJ Staff, “FDI in retail: The End of Policy Paralysis”, The Wall Street Journal. Available at
http://blogs.wsj.com/indiarealtime/2012/09/14/india-reacts-the-end-of-policy-paralysis/, Last accessed on 06October, 2012.
15
PART 2: INDIAN RETAIL: WHAT MAKES IT UNIQUE?
It is considered that unorganized Retail is the second step after agriculture for those seeking to
climb the ladder of affluence and in search of higher income.19 The traditional Indian retail sector
is highly fragmented,20 mainly consisting of small, independent and family managed stores/ventures.
The domestic organized retail industry is also at a nascent stage. The factors which affect the sector at
the macro level are the growth of nuclear family structure and the rise of consumerism among the
youth.21 Over the last few years a number of business houses in India22 have started invested in the
field of retail either through the acquisition of existing businesses or through fresh investment. These
business houses include The Aditya Birla Group, Reliance and the Bharti Group.23
Organised Retail in India by Domestic Players:
The advent of the domestic business houses in the retail scenario has led to a huge change in the
domestic retail business scenario due to their deep pockets.24 The focus of the new entrants to the field
of retailing is to capture the eyeball of the customer by providing maximum value coupled with
modern business principles. The new retailers aim to bring in maximum number of repeat customers
and build a stable base.
Although the primary differentiator between the different businesses is price of the products,
however the retailers aim to build their own identity through the following main ways 25:
(i) By improving sourcing and distribution efficiencies;
(ii) By expanding the product portfolio;
(iii) Providing personalised customer services
(iv) Creating a unique store ambience.
19 Kamaladevi Baskaran, “The FDI Permit for Multi Brand Retail Trading in India - Green Signal Or Red Signal”, Business
Intelligence Journal - January, 2012 Vol.5 No.1, p. 176-186. 20 Natika Jain, “Consumer Behaviour at Retail Outlet/ Shopping Mall”, Tirpude’s National Journal of Business Research,
Vol. 2 Issue 1, p. 1 21 Mathew Joseph, Nirupama Soundararajan, Manisha Gupta, Sanghamitra Sahu, “Working Paper No. 222 Impact of
organized Retailing on the Unorganized Sector”, Indian Council For Research on International Economic Relations, 2008 22 Manju Smita Dash, “Next-Generation Retailing In India: An Empirical Study Using Factor Analysis”, International
Review of Management and Marketing ,Vol. 1, No. 2, 2011, p. 29 23 Retail Insights, Available at http://www.dnb.co.in/IndianRetailIndustry/ insight.asp , Last accessed on 12October, 2012. 24 R.Y Naryanan, Temper Expectations from Retail Story, Available at http://www.thehindubusinessline.com/markets
/article3910762.ece , Last accessed on 11October, 2012. 25 Retail Advantage India, IBEF, November, 2010.
16
The Indian Retailers who have established stores till date have tried to build a strong sourcing and
distribution network across the country to ensure that they can ensure consistent and stable supplies of
their products. The retailers however had a few teething problems which also resulted in a few players
falling out of the market. However, a few players have emerged strong and look to take homegrown
organised retailing into the coming years.
The Indian home grown organised retailers have also tried to consistently tried to widen their product
portfolio to bring in more variety for the customers. A few players such as Big Bazaar have
consistently ventured into new areas such as electronics and furniture to provide greater variety to the
customers across different product segments.
The growth of organised retail in India has also prompted the players to bring about changes to ensure
customer retention and loyalty. To ensure a steady footfall the businesses have started loyalty
programs and also promotion schemes including branded credit cards and point redemption schemes.
The organised retail sector has also seen constant modifications in the store designing and maintenance
strategies to keep up with the changing consumer preferences. The stores have consistently tried to
innovate with new product presentation and display strategies with an eye to attract customers across
age groups and spending capacities.
Growth in the Domestic Indian Retail Sector
The last decade has seen a sea change in the field of Indian retail. India's retail sector is estimated to
touch US$ 833 billion by 2013 and US$ 1.3 trillion by 2018.26 At present the retail sector contributes
10% to our GDP and is the largest provider of employment after agriculture. The dynamics of
the Indian retail sector relating to political, social or economic environment has seen stark changes
over time which has been primarily led by the change in consumption patterns. The new millennium
has seen a clear bifurcation of the sector into organise and unorganised retail sectors.27 The fastest
growing segments have been the wholesale cash and carry stores (150 per cent) followed by
supermarkets (100 per cent) and hypermarkets (75-80 per cent). 28
26 Tazyn Rahman, “Organized Retail Industry In India – Opportunities And Challenges”, International Journal of Research
in Finance & Marketing, Volume 2, Issue 2 (February 2012) , p. 83 27 Sanjay Manocha and Anoop Pandey, “Organized Retailing in India : Challenges and Opportunities”, VSRD-IJBMR, Vol. 2
(3), 2012, 79 28 Ali Asgar Motiwala, Growth of Malls in India, US Commercial Service.
17
Pattern of Retail Growth In India
The growth of the retail sector in India has been highly skewed to the urban sector and primarily
metropolitan cities due to the high population density and large populations. On comparison between
the different states across the country, it is found that the south Indian states of Tamil Nadu, Kerala,
Karnataka, Andhra Pradesh, lead the way followed by the prosperous West Indian states of
Maharashtra and Gujarat. The new wave of retail in India has now spread it to the peripheries of the
National Capital region and the prosperous states of Punjab and Haryana. The trend of modern retail in
the late 1990s29 started in the southern region as South India has clusters of metro cities and tier-
1 towns. Further, the licensing process in states such as Andhra Pradesh, where the licensing process
is now online, has greatly reduced the time lag.30
Mode Of Entry Into Retail Route
In India, the main players of organised retail have entered into the market through the following
modes:
(a) the acquisition route which gives a jump-start to take advantage of the already
experienced manpower, infrastructure, front-end property of the acquired firm;
Ex: Spencers acquired by RPG.31
(b) the JV partnerships, a preferred route for firms seeking foreign collaboration for
technical know-how and assistance in the back-end operations as well as future export
opportunities. Ex: Bharti Wal-mart India32
(c) New venture route for market entry. Ex: More Stores33
(d) Mixture of Acquisition and JV routes for quick market access.
To take advantage of the second wave of business now, the firms have moved into the formation of
subsidiaries or specialised stores targeting a particular population group. The firms are normally
present in one or both of the segments: lifestyle and value retailing under multiple retail formats
except for a few exceptions which target only one of the sectors. The leaders in the Indian Retail
29 Rohit Bhasin and Bharti Ramola, Winning in India’s Retails Sector, PwC, Mumbai, Unknown. 30 Available at http://www.indianexpress.com/news/retailers-want-single-window-clearance-for-setting-up-outlets/205068/,
Last accessed on 11October, 2012. 31 Available at http://www.spencersretail.com/cms.php?page =milestones , Last accessed on 10 October, 2012. 32 Available at http://ibnlive.in.com/news/bhartiwalmart-will-be-a-5050-pc-partnership-rajan-mittal/296496-7.html , Last
accessed on 11October, 2012. 33 Available at http://www.morestore.com/abt_retail.html , Last accessed on 12 October, 2012.
18
sector are adopting a combination of formats including, mega (hyper and/or super), medium
(department and/or speciality), and small size (convenience and/or discount) for expansion. Rapid
expansion by the firms helps them to:
(i) Attain a large size increasing the bargaining power;
(ii) Economies of scope in sourcing by accruing costs across stores; and
(iii) Reach out to consumers at their doorsteps.
Understanding the way Indian Mega Retailers Run
Through this section we look into the important players of the organised retail market in India which
are run by the Indian business houses. The mega retailers follow an overall common strategy
irrespective of the type of product segment or market and a representative of each of the prevalent
models is taken for a case study. The main objective of these case studies is to understand how these
firms are planning to34:
(i) Penetrate markets and build market share;
(ii) Introduce multiple product and format categories;
(iii) Operate the chain from sourcing to marketing;
(iv) Create product identities through prices
(v) Capture customer footfalls.
In India, the main formats prevalent among the retail stores are studied below in relation to store sizes
and their business identities.
The formats prevalent in retail sector are35:-
34 Ibid 35 The IPAN SALE working group has taken these figures from (a) Working Paper No 222, Impact of Organized Retailing on
the Unorganised Sector, ICRIER, Indian Brand Equity Foundation, Retail, 2010. p. 8, (b) Rohit Bhasin and Bharti Ramola, Winning in India’s Retails Sector, PwC, Mumbai , (c) Ms. Vidushi Handa And Mr. Navneet Grover, “Retail Sector In India: Issues & Challenges”, Zenith International Journal of Multidisciplinary Research, Vol. 2, Issue 5, May 2012, p. 256, (d) Aditya P. Tripathi, “Emerging Trends in Modern Retail Formats & Customer Shopping Behavior in Indian Scenario: A Meta Analysis & Review”, Unknown, p. 10 (e) Tazyn Rahman, “Organized Retail Industry In India – Opportunities And Challenges”, International Journal of Research in Finance & Marketing, Volume 2, Issue 2 (February 2012) , p. 85 and (f) Sanjay Manocha and Anoop Pandey, “Organized Retailing in India : Challenges and Opportunities”, VSRD-IJBMR, Vol. 2 (3), 2012, p. 75 to design this table providing the division of different types of retail formats. In addition to the existing concepts provided in the mentioned papers, a few formats have been added by the research team itself.
19
Sr. No.
Type of Store
Store Size Description Examples
1. Restaurant Chains
As required The restaurant chains cater mainly to a particular cuisine and operate mainly in the high-end segment.
Sagar Ratna, Mainland China, O Calcutta
2. Hypermarket 50000- 100000 sq. Ft.
Offer alarge basket of products, ranging from grocery, fresh and processed food, beauty and household products, clothing and appliances, etc.
Spencer, Big Bazar, Easy Day Market
3. Cash and Carry (B2B format)
More than 75,000 sq. Ft
Focussed on bulk buying and selling of commodities. Have bulk buying requirements.
Metro Cash and Carry, Bharti- Walmart
4. Departmental Stores
10,000- 60,000 sq. Ft
Wide range of merchandise mix, usually in cohesive categories, such as fashion accessories, gifts and home Furnishings, but skewed towards garments. These stores are focused towards a wider Consumer audience catchment, with in-store services as a primary differentiator.
Westside, Reliance Trends.
5. Super Markets
3000-25000 sq. ft36
Offer household as well as food products. Aim to be one stop shop for daily needs.
Nilgiri’s, Food Bazar.
6. Shop-in-shop No fixed size. Normally smaller than supermarkets
Offer specialised products with a shop within a mall.
Spice Mobile Store, The Travel Shop
7. Speciality Stores
2000-5000 sq. ft
Speciality stores are single-category, focusing on individuals and group clusters of the same class, with high product loyalty. Typical
Archies, Ferns n Petals, Mom and Me
36 Available at http://www.igd.com/index.asp?id=1&fid=1&sid=7&tid=26&cid =94, Last accessed on 11October, 2012.
20
examples of such retail format are: Footwear stores, music stores, electronic and household stores, gift stores, food and Beverages retailers, and even focused apparel chain or brand stores.
8. Category Killers
Average size 8000 sq. ft
Category killers focus on a particular segment and are able to provide a wide range of choice to the consumer, usually at affordable prices due to the scale they achieve. They that offer less variety but deep assortment of merchandise.
Mochi, Krome- Republic of Fashion
9. Discount Stores
Average Size 1000 sq. Ft
Offers wide range of products, mostly branded at high rates of discount. Primarily provide discounts by selling in bulk.
The Loot, Koutons, Liverpool
10. Convenience Stores37
400-2000 sq.ft
Located near Residential areas in thickly populated areas. For easy access and daily purchase.
Safal, 6ten, Subhiksha, Mother Diary stores
11. Round the clock stores
No fixed Floor area
Focussed on providing necessities with availability throughout the day.
24 x 7, In and Out
We have taken a representative brand from the segments mentioned above and have tried to evaluate
the brand from the parameters we have stated before.
The flowing chart evaluates nahinclosely the strategies taken by the market leaders from all the above
mentioned segments for maintaining their growth and market share in India.
Brand Category
Brand Name Brand Information Market Strategies
Growth and Size in India
Restaurant Dominos Owner: Jubilant Foodworks Limited Focuses on a More
37 Ms. Vidushi Handa And Mr. Navneet Grover, “Retail Sector In India: Issues & Challenges”, Zenith International Journal
of Multidisciplinary Research, Vol. 2, Issue 5, May 2012, p. 256
21
Chains Business Model: Franchisee of Dominos Pizza International based in USA
product line covering all segments of the market from value for money to premium. Captured the delivery market with timely delivery guarantee.38 Have constantly focused on consumer-centric areas such as product innovation, taste, pricing and customer service.39 To increase share in dine in market Domino's is upgrading its dine-in stores, allocating larger spaces for them and foraying into new cities. 40
than 500 stores across more than 110 cities in India. Market leader in both organised Pizza market and Home Delivery Markets with 55% and 70 % share respectively.41 Income of Rs. 3145 million in 1st Quarter of FY 2013.42
Hyper Market Big Bazaar Owner: Pantaloon Retail India Limited Business Model: Wholly Owned Subsidiary
Coined the 3 C strategy: Confidence, Change and Consumption.43 Has succeeded largely due to its emphasis on consumer behaviour and understanding the
More than 164 stores in India in Big Bazaar Format.45 Total income of Rs. 7317 crores in
38 Ratna Bhushan, Domino's, Pizza Hut use delivery and dine-ins to whet the taste buds of demanding Indians, Available at
http://articles.economictimes. indiatimes.com/2012October, 10/news/34363627_1_dine-in-stores-yum-restaurants-pizza-hut, Last Accessed on 12October, 2012 at .
39 Drypen, Domino's Marketing Strategies – Says, Affordability is the key to survival in India market, http://drypen.in/branding/dominos-marketing-strategies-says-affordability-is-the-key-to-survival-in-india-market.html, Last accessed on 09October, 2012
40 Id at 22. 41 Press Release, Jubilant Foodworks Limited, August 30, 2012. 42 Earnings Presentation, Jubilant Foodworks Limited, Q1 FY 13, July 25, 2012 43 Priya Kumar, The Story of Big Bazaar, Available at http://www.chillibreeze. com/articles _various/the-story-of-Big-Bazaar-
611.asp, Last accessed on 11October, 2012. 45 Raghavendra Kamath, Makeover at Big Bazaar, Available at http://www.business-standard.com/india /news/ makeover-at-big-
bazaar/483456/, Last accessed on 14October, 2012.
22
diversity of Indian consumers. Further, it is products driven where the focus is on the front end to serve the consumers well. Additionally, the business model is based on low margin and high turnover. The shops offer products from numerous categories spread across multiple floors.44
2011-2012.46
Cash and Carry Best Price Modern Wholesale
Owner: Bharti Wal-Mart India Pvt. Ltd
Focussed on wholesale of more than 5000 products.47 Primary target are the retailers who sell the products to the end consumer.
More than 15 stores in India. Sales of Rs. 1876 crores with 143% increase in sales.48
Departmental Stores
Westside and Trent
Owner: Tata Group Retailing of clothes and lifestyle products under one roof.
More than 106 group stores. Total operating income exceeding Rs. 19000 lakh.49
Super Markets Food Bazar Owner: Sale of Food Sales
44 Ibid. 46 Kala Vijaya Raghavan & Sagar Malviya, Future Value to be merged with Pantaloon Retail to cut operating cost, Available at
http://articles.economictimes .indiatimes.com/2012-09-0/news/33737171_1_big-bazaar-pril-kb-s-fair-price, Last accessed on 14October, 2012.
47 Available at http://www.bharti-walmart.in/Ourstores-Overview.aspx, Last accessed on 12October, 2012. 48 Sagar Malviya, New stores, rising sales fail to boost Bharti Walmart's net worth, Available at
http://articles.economictimes.indiatimes.com/2012-05-22/news/31814426_1_bharti-walmart-multinational-retailers-first-cash-and-carry-store, Last accessed on 12October, 2012.
49 Audited Financial Results, Trent Limited, For the financial year ended 31st March, 2012.
23
Pantaloon Retail India Limited
Business Model:
Wholly Owned Subsidiary
Product and Groceries at affordable prices and sale of product through private brands to maximise profits.
revenue not separately available.
Speciality Stores
Archies India Archies India Limited. Sale of greeting cards and gifts through special stores.
Selected as Superbrand in 2009-10.50 Market leader in organised sector with 60% share.51 Sales revenue of Rs. 180 crore in 2010-2011.52
Through a comparison of the different players across the various segments mentioned in the chart
given above, a few common factors can be drawn which are enumerated as follows:
(a) Almost all of the above mentioned retailers have taken an aggressive expansion strategy with
a primary aim to build an economy of scale.
(b) The retailers are moving into smaller towns to capture a wider customer group and the
growing Indian middle class.
(c) Many of the players have a market share exceeding 60% in their sector which might show the
need for greater variety for customers and an opportunity for new players.
In addition to the formats of retail provided above, the Indian market has seen the emergence of a few
new and unique formats such as Quasi Mall by Shoppers Stop and Corner Shop by Globus.53 In
addition to the urban retail stores, the Indian players have also innovated by rural area specific
50 Available at http://www.archiesonline.com/gateway/archies_superbrand_article.php, Last accessed on 10October, 2012. 51 Available at http://www.archiesonline.com/gateway/hallmark/Archies-tie-up-Hallmark.php, Last accessed on 10October, 2012. 52 PTI, Archies eyes Rs 400 cr sales in 4 years, launches UNICEF cards, Available at
http://www.thehindu.com/business/companies/article2435761.ece, Last accessed on 10October, 2012. 53 Poonam Kamboj, "Indian Retail Industry: Its Growth, Opportunities And Challenges", IJRFM, Vol. 2, Issue 2 ,February 2012, p.
297
24
hypermarkets such as ITC’s E- Choupal and HLL's project Shakthi and Mahamaza. This shows a
continuous process of innovation and experimentation by the Indian retailers.
Nature of Indian Consumerism
The Indian retail sector is frequently referred to as a gold mine which is ready to be tapped by the most
efficient businesses.54 The primary target of the marketers is an untapped consumer group with
growing spending power and India provides them that opportunity. The commonly attributed reasons
for the growth of the retail market in India have been: Rapidly increasing income level, Change in
lifestyle, Favourable pattern of geography, Retail offering one roof shopping experience, Increase in
the number of nuclear families, Improved purchasing power of Indian middle class, Presence of
domestic and foreign player, Effect of Liberalization, Privatization, and Globalization.55
In one of the few empirical research studies undertaken on the topic, conducted by Swati Kewlani and
Sandeep Singh among a random group of 150 people in Indore, India has revealed that consumers go
to shopping malls for the variety they get there and because “they find shopping entertaining due
to good environment, and variety of products that they get there, reasonable price that are offered
along with the better quality of services rendered.” No doubt the big giants are giving tough
competition to small retail store, but consumers are still in favour of small retailers. 56 The study has
revealed that consumers prefer to buy consumer care and daily use products from shopping malls.
However, it has further revealed that they continue to buy from small retailers, and they spend equally
on buying from kiranas. The study listed a few benefits of local kiranas stated by the surveyed people
which are listed below:
(a) They are going to small retailers due to their long standing relations with them, the home
delivery services that the small retailers offer and because they find shopping less time
consuming while shopping with small retailers as compared to malls.
(b) When the respondents were asked whether they go to small retailers because of the
relationship they have developed over the period of time with them more than half (52%)
54 B.D. Singh & Sita Mishra, “Indian Retail Sector- HR Challenges & Measures for Improvement”, Indian Journal of
Industrial Relations, Volume 44 Issue 1, 2008. 55 Chandu. K. L , “The New FDI policy in Retail in India: Promises, Problems and Perceptions”, Asian Journal Of
Management Research, Volume 3 Issue 1, 2012 , p.100-106 56 Swati Kewlani and Sandeep Singh, “Small Retailers Or Big Shopping Malls: Will Big Fishes Eat The Small?” Journal of
Radix International Educational and Research Consortium, Volume 1, Issue 2, February 2012.
25
responded were with affirmation, thus clearly underlining the dictum that relationship
marketing hold the key to the survival of the minnows, which is emerging to be the U.S.P. of
these small retailers.
The authors also listed a few points why the kirana shop will be relevant even in the changed retail
landscape:
Firstly, the location of the shop at the neighbourhood allows for easy purchase of items at short
intervals without the need of detailed travel plans.
Secondly, there is a long friendly relationship with the neighbourhood kiranawalla based on mutual
trust.
Thirdly, the shopkeeper offers free home delivery under most circumstances.
Fourthly the small shopkeepers provide easy credit on the items of daily use and the amount is paid at
a fixed flexible interval by the customer enabling a lasting relationship.
Further, it is a commonly stated fact the Indian customer looks into the value for money aspect of a
product before a purchase decision which would make product differentiation on the basis of price a
key factor for any player coming into the market.
The main challenge before the Indian organised retail sector is to cope with the customer expectations
of the Indian customer who has till date been served at home by the Kirana shop. The kirana shop
provided convenient location, personalised location and easy credit. The Indian organised retailer will
have to come up with new and innovative platforms to tackle the kirana store challenge and some
factors such as instant credit will be a challenge for even the biggest players due to the varied Indian
conditions. Understanding the tastes and preferences to suit the local needs might also need some time
for the Indian organised retailer. A possible way to tackle the challenge might be to include
representatives of the local area in the business structure.
Challenges Faced By the Organised Retail Sector In India
The challenges faced by a new and emerging business sector are many and new hurdles seem to
emerge with the expansion of the business. However, for the purpose of the study we have tried to list
26
a few of the major hurdles faced by the organised retail sector till date in its relatively short journey in
India:
Political Opposition
The Indian political scenario is crowded with varying opinions about organised retail and its
possible impact on the Indian customer. A number of views have been put forward regarding
organised retail contributing to unemployment in the country and its possible impact on the
small Kirana shop owner. Different states around the country have varied policies on
organised retail and investment by business houses in certain states have even been met with
violent opposition As such a uniform policy across the country is absent presenting a huge
hurdle to the major players in the country.
Supply Chain
India is the seventh largest country in the world with varying climatic conditions and
consumer preferences across the country. The basic infrastructure of roads and availability of
storage facilities is not standard across the country which presents a huge challenge to the
investors. Infrastructure has been developed at priority in the last decade and it is hoped that a
planned expenditure of US$ 1 trillion in the 12th five year plan will help bridge the
infrastructure gap in the country. A strong supply chain is the immediate need of the hour and
any new player will have to build the supply chain to a large extent from the scratch.
Channel Conflicts
One of the primary modes by which the organised retails sector reduces costs worldwide is by
agreements with the producers and distributors of products. In India, however, the existing
supply model has been built with the small retailer in mind and a huge hurdle exists before the
organised retail sector to tackle the varied distribution system across the country.57 Further.
India also has varied taxation laws across the country with different rates of local taxes which
needs to be looked into by the retailers.
57 Indian Retail Market: Changing with the Changing Times, Deloitte, August, 2010.
27
Location and Rental
Rent forms a large portion of the total expenditure of any organised retail business in India.58
Indian property rentals are sometimes exorbitant in the prime areas thus putting a strong
pressure on viability.59 The challenge for a retailer would be to find the right location for their
stores and select properties which do not impact their bottom-line. Certain retailers have taken
to developing their own properties keeping an eye on the savings in the long run.60
Understanding the unique Indian Customer
The Indian consumer has varied tastes and is primarily value oriented and pricing is critical in
the country.61 Further, the tastes vary across the country. Thus, a particular product may be a
best seller in one area while might not sell in the other state. The organised retailer has to
identify the tastes of the different areas and cater to the varied demands62 which might
lead to lesser volumes and lesser bargaining power. Further, the Indian customer also has
a preference for fresh products and the retailers would have to modify their strategies to
suit such preferences.63
Regulatory measures
As mentioned before, the Indian tax structure varies to a large extent among the different
states and Goods and Service Tax which is likely to be implemented in 201364 will
replace a host of levies like excise, sales tax, value-added tax, entertainment tax and
luxury tax. Further, starting a new business venture in India requires a number of
licenses, which have to be obtained from different government departments leading to
considerable lead time in opening up of the stores.65
58 Malls and Hyper Markets: Perspectives of Contemporary Shopping, School of Management Studies, Punjabi University,
Patiala, p. 40 59 Nargundkar Rajendra, Services Marketing: Text and Cases, Tata McGraw Hill, New Delhi, 2010, p. 348 60 Ratna Bhushan & Rasul Bailay, Tata, Reliance join retail rush, plan to build shopping malls across the country, Available
at http://articles.economictimes.indiatimes.com/2012-07-11/news/32632952_1_malls-retail-space-retail-formats, Last accessed on 12 October, 2012.
61 Amisha Gupta, “Foreign Direct Investment In Indian Retail Sector: Strategic Issues And Implications”, IJMMR, Volume 1, Issue 1 (December, 2010) , pp. 56
62 Ramaswamy VS, S Nakamuri, Marketing Management, Macmillan Publishers India Limited, New Delhi, 2009 p. 272 63 Unknown, The Great Indian Bazaar, McKinsey and Company, Mumbai 2008, p.22 64 GST rollout likely in 2013-14: Modi, Available at http://www.financialexpress. com/news/gst-rollout-likely-in-201314-
modi/938756/, Last accessed on 11October, 2012. 65 Laxmikant S. Hurne, “Proposed FDI in Multi-Brand Retailing: Will it heat the Indian unorganized Retail Sector?”, Review
Of Research, Vol.1,Issue.VI, March, 2012, p.3
28
Slow acceptance of private labels
Private labels enable retailers to offer products at better prices due to the removal of the high
cost brand names. Further, it lets the retailer package their own products middlemen and
enhances bargaining power with supplier. In-house brands account for 12-15% of sales and
more than 20-25% of profits for most Indian retailers which is very low compared to the
global mark of earning 55-60% of revenues from private labels. 66 The concept of private
labels has however not captured the desired attention in the Indian market which in certain
sectors shows a high brand loyalty thus reducing the options for the retailers.
Absence of trained labour force
Indian retailing faces the challenge of lack of trained manpower67 and the new employees
which are employed by the companies have to be trained in the sector, thus increasing the cost
for the companies which employ the workers. Further, lack of past experience reduces
efficiency. Further, the sector sees high attrition levels due to shortage of quality manpower.
66 Sagar Malviya & Sarah Jacob, Private labels' euphoria subsides in retail, Available at
http://articles.economictimes.indiatimes.com/2011-06-13/news/ 29653341 _1_private -labels-spencer-s-kampani-ceo-thomas-varghese, Last accessed on 14 October, 2012.
67 Frost and Sullivan, Overview of The Indian Retail market, 2008 , p. 7
29
PART 3: EVOLUTION OF ORGANISED RETAIL WORLDWIDE
Retailing has come to be recognized as a discipline due to rapid growth in market coverage and
investments in this sector in India and the world. There are various factors responsible for retail
revolution across the globe, including in India. The demographic profile of the consumer has changed
and due to economic development and increased income level he has become affluent. Also it has been
observed that the powers have slowly started moving out of brands into retailer’s hands due to their
proximity with customers and improvements in customer service. The emergence of private labels will
substantiate this fact. All the mass produced products are being served to mass consumers through
retail platforms allowing the customer to choose from wider assortments. There has been revolution in
retail industry. The India Retail Industry is the largest among all the industries, accounting for over 10
per cent of the country’s GDP and around 8 per cent of the employment. The Retail Industry in India
has come forth as one of the most dynamic and fast paced industries with several players entering the
market.
The industrial revolution necessitated dramatic changes on the retail front. The increase in urbanization
meant that consumers were now clustered .in small geographic areas. These led to the emergence of
shops to serve the needs of locals.68 The number of consumers increased and mass transportation
became a way of life. Mass manufacturing, longer distribution channels and mass merchandisers
evolved. Retail evolved in many ways over the 20th century. Self service, a concept started in 1916
helped the retailer in reducing costs, as fewer workers were required to service the customers.69 The
emergence of the supermarkets during 1930s, discounted stores and hypermarket like Carrefour in
France in 1963 indicated retail boom. As the needs of consumers grew and changed, one saw the
emergence of commodity specialized mass merchandisers in 1970.70 The seventies also witnessed the
use of technology in the retail sector with the introduction of the barcode specialty chains developed in
the 80s as did large shopping malls. In 1995 the world of retail opened the doors to global market on
the web. With the growth of the World Wide Web, both the retailers and consumers can find suppliers
and products from anywhere in the world.71
68 Andrew Edgecliffe Johnson, “A Friendly Store from Arkansas”, Financial Times, 19 June 1999. 69 Wal-Mart Associate Handbook, Available at http://walmart.3cdn.net/ 594f2e1e559832379c_k3m6bh9d8.pdf, Last accessed
on 16 October 2012. 70 Annual Report, Wal-Mart Stores, Inc. (1971-2001), Available at http://stock.walmart.com/annual-reports, Last accessed on
16 October 2012. 71 Thomas L Friedman, The World Is Flat: The Globalized World in the Twenty-First Century, Penguin Books, 2007.
30
Factors which Assisted the Growth of Global Organised Retail
In western states, rise of organised retail globally has been attributed towards urbanization, and
positive change brought in by post world war situation and some of the growth factors of organized
retail can be listed as72:-
1. Increase in per capita income which in turn increases the household consumption
2. Demographical changes and improvements in the standard of living Change in patterns of
consumption and availability of low-cost consumer credit
3. Improvements in infrastructure and enhanced availability of retail space
4. Entry to various sources of financing
5. Advent of information technology
Lehman Brothers analysts have noted Wal-Mart’s “leading logistics and information competencies”.73
The Financial Times has called Wal-Mart “an operation whose efficiency is the envy of the world’s
storekeepers”. Wal-Mart and other such “big-box” retailer’s competitive edge is driven by a
combination of conventional cost-cutting and sensitivity to demand conditions and by superior
logistics and distribution systems. The chain’s most-cited advantages over small retailers are
economies of scale and access to capital markets, superior logistics, distribution, and inventory control.
These big retailer’s cost-savings extend to its employment practices; many have been accused of
requiring employees to work off the clock and using illegal-immigrant labor (through contractors).74
Such practices, if true, could reduce these retailers’ measured employment without reducing its actual
labor inputs. Big retailer’s low wages are also said to contribute to its measured productivity. While
Wal-Mart and such other companies’ wage data are not publicly available, several sources estimate the
current typical hourly wage of a Walmart “associate” to be $7-$8/hour.75 These wages are on par with
wages paid by other large discount chains (like K-Mart and Target), but are typically below union
rates.
72 J.R. Graham, “Marketing Strategies for Businesses that are more ‘Bricks’ than ‘Clicks’”, The American Salesman, Vol. 45
No. 9, 2000, pp. 19-25. 73 Emek Basker, “Selling a Cheaper Mousetrap: Entry and Competition in the Retail Sector”, Draft report University of
Missouri, January 2004. 74 Steven Greenhouse, “Suits Say Wal-Mart Forces Workers to Toil off the Clock”, New York Times, 25 June 2002. 75 Virginia Postrel, “Lessons in keeping Business Humming, Courtesy of Wal-Mart U”, New York Times, 28 Feb. 2002, At
C2.
31
To look into the explicit reasons behind the growth of organized retail, it would be convenient for us to
look into the growth of specific model, Wal-Mart is frequently referred as “King of Inventory
Management”, as the company keeps lesser inventory in comparison to it peers, reason attributed not
only to economy of scales that it has over other competitors but also scientifically advanced supply
chain management which gives corporation an edge over its competitors, forget small traders (mom &
pop store keepers). Many case studies have been conducted to decode the same, one of the most cited
one was published by Harvard Business Review, in which the whole supply chain management was
referred as Rocket Science.76 Specific departments in these corporations work to reduce per/piece cost
so as to contain the cost at such a low level which cannot be met by small retailers, thus eventually
driving them out of competition. In short, Business analysts explain Wal-Mart's success as a function
of four major factors: a big box format,77 everyday low pricing, efficiency in logistics,78 and
competitive intensity.79
Comparison of these Factors with the Indian Scenario
Most of the retail sector in India is unorganised, which are popularly referred as mom-pop stores. The
biggest advantage in this sector is the consumer familiarity that passes on from one generation to the
next. The transformation stage of the retail sector started in late 1990’s. The emergence of pure retailer
has started at this stage as it is been perceived as a beginner and the organised retailing is getting more
attractive. In India, the retail business contributes around 14 percent of GDP in 2011.80 Of this, the
organized retail sector accounts only for about five to six percent share, and the remaining share is
76 Marshall L Fischer, Ananth Raman and Anna Sheen Mcclelland, “Rocket Science Retailing Is Almost Here, Are You
Ready?”, Harvard Business Review, July-August, 2000. 77 The "Big Box Format" is the principle of how "Larger stores increase sales per square foot by encouraging customers to
buy additional goods, often on impulse. Big-Box Stores also let retailers spread fixed labor costs like store management and cleaning crews across more sales.".
78 One of Wal-Mart's greatest achievement is its use and development of it applications: It is widely regarded as the leader in the use of it in retail and pioneered a number of it applications including, for
example: Early adoption of computers to track inventory in distribution centers (1969),Use of computer terminals in stores to facilitate communication (1977),Scanning using UPC codes (1980),Ground-breaking use of electronic data interchange (1985), Satellite communications network (1987),Use of radio frequency (rf) guns (late 1980s), Expansion of the edi system to include an extranet, which became an early form of escm (beginning in 1991), Development of 'retail link,' a micro-merchandising and supply chain management tool (beginning in 1991), As with its managerial innovations, these innovative uses of it improved Wal-Mart's productivity (both capital and labor) and cost position. They also resulted in continued market share gain due to their contribution to lower prices, lower out of stocks, and more effective merchandising.
Mckinsey & Co., US Productivity Growth, 1995-2000 1, 2001, Available at http://www.mckinsey.com/mgi/reports/pdfs/productivity/retail.pdf, Last accessed on 07 October, 2012.
79 Ibid. 80 ‘Global Retail Expansion: Keeps On Moving 2012’, Atkearny, Available at
http://www.atkearney.com/documents/10192/4799f4e6-b20b-4605-9aa8-3ef451098f8a, Last accessed on 14 October, 2012.
32
contributed by the unorganised sector. The main challenge faced by the organised sector is the
competition from unorganized sector. An important aspect of the current economic scenario in India is
the emergence of organized retail. There has been considerable growth in organized retailing business
in recent years and it is poised for much faster growth in the future. Major industrial houses have
entered this area and have announced very ambitious future expansion plans.81 Transnational
corporations are also seeking to come to India and set up retail chains in collaboration with big Indian
companies. However, opinions are divided on the impact of the growth of organised retail in the
country. Factors responsible for the growth of organised sector do have applicability in Indian context
also, as the growth factors of organized retail are:-
Increase in per capita income which in turn increases the household consumption
Increasing per capita income is one of the reason that has enabled foreign and domestic investors to
invest in organised retail, as with the rise in income there is bound to be rise in living standard of
people, and India has witnessed unprecedented growth post liberalization thereby realization of
higher income by households.82
Demographical changes and improvements in the standard of living
With the impetus provided to industrial activity by measures initiated in 1991 budget, employment
opportunities increased on exponential fold in urban centers resulting in rural-urban migration, which
had a significant effect in bringing about demographic change in the country.83
Change in patterns of consumption and availability of low-cost consumer credit
With the objective of providing injections in the financial system, and to reduce leakages so as to
provide impetus to private investment in the country, interest rates were decontrolled in a specific
81 RIL, RPG, Videcon, Bharti-Airtel, Aditya Vikram Birla Group, etc., to name a few. 82 C. K. Prahalad, The Fortune at the Bottom of the Pyramid: Eradicating Poverty Through Profits, Pearson Prentice Hall,
2006. 83 National Council Of Applied Economic Research, Delhi (NCAER), report on ‘The India Market Demographic Report
2002’.
33
band, which resulted in easy access of credit to consumers, which in turn has led to spur growth in
the financial system.84
Improvements in infrastructure and enhanced availability of retail space
Infrastructure was government’s first priority, as in pre-liberalisation period there was dearth of
investment in the same, so various initiatives were taken such as providing tax exemptions on infra-
bonds, various models were developed like public private partnership (PPP Model), Build Operate
Transfer (BOT Model), etc., to involve private sector in developing infrastructure of the country.
Some of the prominent projects include Golden Quadrilateral (road sector), Ultra Mega Power Plant
(Electricity generation), etc., were taken on the same lines and has resulted in spurring investment by
retail players.
Entry to various sources of financing
Post liberalization there was huge influx of capital in the economy, so to regulate the same various
legislations were passed and amended like Securities Exchange Board of India (SEBI, 1992) came
into existence and since then there have been various financing models have been allowed like
mutual funds, fund of funds, relaxation in external commercial borrowings (ECBs), Indian
Depository Receipt (IDR), etc., to enable private individuals to raise money in a proper legal
framework. Various guidelines have been amended and have brought in transparency such as ICDR
2009 regulations, etc., which regulates the conduct of companies having securities listed in the
capital market.85
Advent of information technology
Post 1990s, globe has witnessed astonishing development in the field of information technology due
to heavy investment made in the sector during dot com bubble regime, resulting in advance
technology being available at cheaper prices which has further come to as an aid to retail sector. Big
84 Shivam Shirdhonkar, “Analysis of Rural Retail Market for Aadhar”, Available at
http://www.scribd.com/doc/50797888/20600169-godrej-Aadhar-Report, Last accessed on 14 October, 2012. . 85 M.Y. Khan, Indian Financial System, Tata Mcgraw-Hill Education, New Delhi, 2011.
34
corporations like Wal-Mart uses satellites, Radio Frequency Identification (RFID) system which has
further increase the efficiency of the corporations, there by resulting in minimising costs.86
Impact of Organised Retail Worldwide on Macro Economy
During recent decades, FDI has increased exponentially: the yearly global flows of FDI increased from
55 billion US $ in 1980 to 1,306 billion US $ in 2006. FDI inflows increased continuously during the
1980s and 1990s - with the sharpest growth in the late 1990s - to reach a peak in 2000. Between 2001
and 2003 the developed economies experienced a sharp decline in FDI inflows, associated with a
general global economic recession. Developing countries were affected only to a small extent. FDI
flows started to recover in 2004 and were back at their 2000 level in 2006.87
When a firm wants to invest in a foreign country, there are two possible entry modes, greenfield
investment or M&A (mergers and acquisitions). Greenfield FDI refers to the establishment of new
production facilities such as offices, buildings, plants, factories and the movement of intangible capital
(mainly services) to a foreign country, one of the preliminary conditions laid down in DIPP
notification. Greenfield FDI thus directly adds to production capacity in the host country and, other
things remaining the same, contributes to capital formation and employment generation in the host
country. Cross-border M&As involve the partial or full takeover or the merging of the capital and
assets of an existing enterprise in the host country by transnational companies from the home country.
M&As represent a change in ownership that does not necessarily involve any immediate additions to
investment or employment in the country.88 Greenfield investment is more important in developing
countries than in industrialised economies. The main idea underlying the FDI liberalisation policies of
many developing countries and the FDI promotion efforts of international donors such as the World
Bank and the IMF is the notion that FDI inflows foster economic growth.89 As FDI is a composite
bundle of capital stock, know-how and technology, its impact on economic growth is expected to be
manifold.90
86 Miguel Bustillo, “Wal-Mart Radio Tags to Track Clothing”, Wall Street Journal, 23 July 2010.
http://online.wsj.com/Article/Sb1000142405274870 4421 304575383213061198090.html, Last accessed on 16 Oct. 2012. 87 UNCTAD Report on ‘Trade and Development 2007’, Available at http://unctad.org/en/docs/tdr2007_en.pdf, Last accessed
on 12 October, 2012. 88 UNCTAD Report on ‘Trade and Development 2006’. Available at unctad.org/en/Docs/tdr2006_en.pdf, Last accessed on
10 October, 2012. 89 J.H. Dunning, “The Global Economy, Domestic Governance, Strategies Of Transnational Corporations: Interactions And
Policy Implications”, Transnational Corporations Journal, Vol. 1 No. 3, 1992, pp. 7-46. 90 L. De Mello, “Foreign Direct Investment in Developing Countries: A Selective Survey”, The Journal Of Development
Studies, Vol. 34 No. 1, 1997, pp. 1-34.
35
The traditional neo-classical approach to growth, this capital accumulation can affect growth only in
the short run.91 Long-run growth is only possible through a permanent increase in the level of
technology and is taken to be exogenous in neoclassical growth models.92 Yet, more recent models, i.e.
the endogenous growth model, consider technology as internal to the economic growth process, and
see a role for capital in the creation of technological advance.93 Capital allows for investment in the
development of new ideas and skills, and since knowledge is - to some extent at least - a public good, it
raises the level of technology not only within the firm but in the entire economy.94 These externalities
account for the permanent advance in the level of technology, which is needed to promote growth in
the long run. Thus, according to the new growth theories capital - including FDI - can permanently
affect output growth through increased investment in technology and know-how, thereby increasing
the overall level of knowledge and technology in the economy. FDI is described as a whole package of
resources: physical capital, modern technology and production techniques, managerial and marketing
knowledge, entrepreneurial abilities and business practices.95 Therefore FDI is said to contribute
directly - and more strongly than domestic investment - to accelerated levels of growth in an economy
because of the more advanced levels of technology, managerial capacity and knowhow, resulting in
higher levels of efficiency and productivity. MNCs are among the most technologically advanced firms
and account for a substantial part of the world's investment in research and development .96 When
starting up a foreign affiliate, MNCs are not likely to give the source of their competitive advantage
away for free. They will thus try to limit horizontal spillovers (intra-industry) of productivity and
market access advances to competing domestic firms that operate in the same market.97 Yet,
technology and knowledge are characterised by imperfect markets with important externalities, so
horizontal spillover of technology or trained labour to domestic competitors can never be completely
prevented. In contrast, vertical spillovers (inter-industry) through forward and backward linkages with
domestic companies are desirable for the MNC and it is thought that these spillovers to suppliers and
91 R.M. Solow, “A Contribution to the Theory of Economic Growth”, Quarterly Journal of Economics, Vol. 70, 1956, pp. 65-
94. 92 R.M. Solow, “Technical Change and the Aggregate Production Function”, Review of Economics and Statistics, Vol. 39,
1957, pp. 312-320. 93 P. Romer, “Endogenous Technological Change”, The Journal of Political Economy, Vol. 98 No. 5, 1990, pp. 71-102. 94 In later section China’s and Brazil’s home grown retailers have been discussed, how they survived competition from
foreign retailers and how they adopted practices followed by foreign retailers. 95 M.P. Todaro, The Economic Development in the Third World, Longman, New York, 1985. 96 R. Caves, “Multinational firms, Competition and Productivity in Host-Country Markets”, Economica, Vol. 41 No. 6, 1974,
pp. 176-793. 97 Liesbeth Colen, Miet Maertens and Jo Swinnen, “Foreign Direct Investment as an Engine for Economic Growth and
Human Development: A Review of the Arguments and Empirical Evidence”, Human Rights and International Legal Discourse, Vol. 180, 2009.
36
buyers can play a very important role. While MNCs tend to prevent the transfer of technologies to
home country competitors, they are likely to increase the efficiency of domestic suppliers or customers
voluntarily through vertical input-output linkages.98 MNCs provide incentives to local firms by
imposing high standards and help them to increase productivity and quality.99
Vertical spillover effects from FDI in the agri-food sectors of developing and transition countries
have recently received a lot of attention as FDI in the agri-food sector of developing countries is
thought to be particularly important because of the existence of vertical links with local farmers.
Such vertical links in the agri-food sector entail the potential for creating poverty-reducing effects in
the rural areas of developing countries, where poverty rates are often very high. Many studies
provide evidence of positive productivity spillover effects from FDI in the agri-food sector to
domestic farmers in low-income countries. Dairy farmers in Poland,100 have significantly higher
levels of output and productivity when they are vertically linked to modern FDI milk companies,
similar effects have been observed for the broiler, dairy and fruit and vegetable sectors in Thailand,
the Philippines and Australia.101 These studies indicate that such productivity spillover effects are
created because technology and know-how are transferred directly from FDI companies to supplying
farms through contract-farming schemes, including extensive farm assistance programmes.
Empirical evidence of export spillover effects is limited but there is evidence of positive export
spillover effects in the Venezuelan primary sector.102 The probability that a domestic firm engages in
export activities is positively correlated with proximity to multinational firms, while for domestic
exporting firms no export spillovers are found. MNCs' exports have a positive effect on domestic
firms' probability of being exporters but do not find evidence that such spillovers impact on the
export ratio of domestic firms.103
98 H. Gorg and D. Greenaway, “Much Ado about Nothing? Do Domestic Firms Really Benefit From Foreign Direct
Investment?”, The World Bank Research Observer, Vol.19 No. 2, 171-197. 99 H. Gow and J. Swinnen, “Up- And Downstream Restructuring, Foreign Direct Investment, And Hold-Up Problems in
Agricultural Transition”, European Review Of Agricultural Economics, Vol. 25 No. 3, 1998, pp. 331-350. 100 L. Dries and J. Swinnen , “Foreign Direct Investment, Vertical Integration And Local Suppliers: Evidence From The Polish
Dairy Sector”, World Development Review, Vol. 32, 2004, pp. 1525-1544. 101 P.S. Birthal, P.K. Joshi and A. Gulati, “Vertical Coordination In High-Value Food Commodities: Implications for
Smallholders”, Mtid Discussion Paper No. 85, 2005. 102 B. Aitken, G. Hanson and A. Harrison, “Spillovers, Foreign Investment and Export Behavior”, Journal of International
Economics, Vol. 43 No. 1-2, 1997, pp. 103-132. 103 D. Greenaway, N. Sousa and K. Wakelin, “Do Domestic Firms Learn To Export From Multinationals?”, European Journal
Of Political Economy, Vol. 20, 2004, pp. 1027-1043.
37
FDI can affect poverty is by contributing to the governments' tax revenue, which can be used for
redistributive measures benefiting the poor or spent on the development of social safety nets for the
poorest.104 In some developing countries, the importance of FDI in overall tax revenue is quite high,
creating opportunities for poverty-reducing policy measures.105
Indian scenario has been quite upbeat after the announcement of reforms as not only FIIs are on an
investment spree but there has been major announcement with regards to FDI, very recent Swedish
retailer IKEA, the world's largest furniture maker announced about € 1.5 Billion in India, over a
certain period after having correspondence with Indian Commerce Minister Anand Sharma.106 This
step comes after India allowed up to 100% FDI in single brand retail, albeit company had some
reservations as to the requirement of local sourcing. This investment does not look such a big step,
but considering the fact that total investment/FDI received by India during April 2006 and March
2010 in single brand retails totals to around $ 194.6 million,107 the period in which 51% FDI was
allowed certainly raises question as towards our FDI policy, if we are late entrant, further it also
leaves a joyful question mark in our hearts, if the single brand retail is capable of attracting such a
phenomenal investment then what would be the magnitude of investment by corporations dealing in
multi-brand retail ?
Impact of Organised Retail on Micro Economy: Global Outlook
Impact on Retail Workers: Labour Law issues
Merely bringing organised retail itself does not guarantee compliance of statutory laws, as one of the
arguments government has voiced is that labour laws are not abided by unorganised sector.
Experience of these large corporations tell us different story, as even in developed countries Wal-
Mart has exploited lacunas present in the enforcement agencies. Wal-Mart pushes down pay/salary
for retail employees even in the United States. When Wal-Mart builds a new store there, the jobs
that it displaces usually provided better pay, benefits and scheduling than Wal-Mart does.108
104 M. Klein, C. Aaron and B. Hadjimichael, “Foreign Direct Investment and Poverty Reduction”, World Bank Policy
Research Working Paper, No. 2613, 2001. 105 50% of Botswana's Government Budget Results from foreign Inflows in the primary sector,. 106 Available at, http://www.Business-Standard.com/Results/News/Ikea-To-Enter-India-Invest-15-Bln-Euros-In-
Stores/175906/, Last accessed on 15 Oct. 2012. 107 Issue of Discussion Paper on FDI In Multi Brand Retailing,( Department if Industrial Policy and Promotion). 108 Emek Basker , “Job Creation Or Destruction? Labor-Market Effects Of Wal-Mart Expansion”, J21University Of Missouri,
January 2004.
38
Workers are also less likely to have employer-sponsored health benefits, because they earn so little,
Wal-Mart workers in the US are more likely to rely on publicly provided health and welfare
programs compared to retail workers as a whole.109 In 2007, Wal-Mart was estimated to have
lowered average retail wages by 10% – by displacing higher-paying jobs and by putting pressure on
competitors to reduce wages –at an annual cost to US workers of $4.5 billion.110
Treatment to fairer sex by Wal-Mart has also been subjected to criticism, as in 2010, Wal-Mart
employed 798,881 women at non-supervisory positions,111 who earned an average wage of just
$8.81/hour,112 which is abysmally low in accordance to US standard of living wage for a single adult
working full-time with a child.113
A lawsuit was instituted against the company alleging gender discrimination in pay and promotions
which was tagged in a class action suit because of the extra ordinarily large number of people
instituting similar proceedings.114 The lawsuit brought by Wal-Mart employees, Dukes v. Wal-Mart,
became the largest class-action lawsuit in US history, with the plaintiffs representing around 1.5
million current and former female workers.115 As part of the proceedings, Wal-Mart was compelled
to disclose payroll and employment records. In his analysis of these records, economist Richard
Drogin found that in 2001, female employees at Wal-Mart at all levels earned less than their male
counterparts.116 On average, women earned $5,200 less per year than men. The Dukes case was
dismissed by the US Supreme Court in June 2011. The justices did not rule on the merits of the case;
instead, they essentially decided to disallow the lawsuit because the class was so large. 117
109 Affidavit of Kenneth Jacobs to the Competition Tribunal of South Africa, Ct Case No. 73/Lm/Nov10 110 Andrajit Dube, T. William Lester and Barry Eidlin, “Firm Entry and Wages: Impact Of Wal-Mart Growth on Earnings
throughout the Retail Sector,” Institute Of Industrial Relations Working Paper No. 126, 2004, p. 05. 111 Wal-Mart Global Responsibility Report on ‘Social – Associates 2011’. Available at,
http://walmartstores.com/Sites/Responsibilityreport/2011/Social_ Associates_Diversity.aspx, Last accessed on 16 Oct. 2012.
112 Gross, Courtney, “Is Wal-Mart Worse?”, Gotham Gazette, 14 Feb. 2011. Available at, http://www.gothamgazette.com/Article/Searchlight/20110214/ 203/3463, Last accessed on 14 Oct., 2012.
113 “Living Wage Calculator” Poverty in America, Available at http://www.Livingwage.Geog.Psu.Edu/States/08, Last accessed on 16 October, 2012
114 Jeffrey Toobin, “Betty Dukes V. Wal-Mart”, The New Yorker, 20 June 2011. Available at: http://www.newyorker.com/Online/ Blogs/Newsdesk/2011/06/Betty-Dukes-V-Walmart.Html,
115 Ibid. 116 ‘Walmart’s Global Track Record and the Implications for FDI in Multi-Brand Retail in India’, UNI Global Union,
Available at, http://www.uniglobalunion .org/ Apps/Unipub.Nsf/Vwlkpbyid/870affcdcffa1ee 7c12579c00054892d/$File/ FDI_Report.Pdf, Last accessed on 15 Oct. 2012.
117 Ibid.
39
Wal-Mart has broken the law multiple times in the past when it comes to minimum working
conditions even in US where minimum wage and other basic labour standards exist but lacks strong
enforcement.118 Wal-Mart recently in 2008, agreed to settle 63 pending wage lawsuits in 42 states.
The settlements totalled $640 million dollars in legal fees and payments to former and current
workers.119
Wal-Mart’s record in case of compliance with child labour legislation is also poor as when it comes
to workplace safety of the employed young persons. An internal company audit of 128 stores in the
U.S. found that in one week in July 2000 there were 1,371 instances of minors working too late,
during school hours, or for too many hours in a day. Wal-Mart paid $1,35,540 to settle a case with
the U.S. Department of Labour alleging that the company violated child labour laws in the states of
Arkansas, Connecticut and New Hampshire between 1998 and 2002 by requiring teenage employees
to use hazardous equipment such as chain saws, paper balers and forklifts.120 Washington State’s
Department of Labour and Industries in 2000, threatened to take over the management of Wal-
Mart’s workers’ compensation claims as the Department found that Wal-Mart repeatedly was not
allowing employees to file accident reports or workers’ compensation claims, and further failed to
respond to claims, made unreasonable delays in payments, prematurely terminated and
miscalculated compensation, had consistently poor record-keeping, and failed to recognise injured
workers’ rights to lost-time compensation.121
Effect on local existing retailers and intermediaries
Various studies have been conducted to study the impact of big corporations like Tesco and Wal-
Mart on the scope of job creation by way of opening these big stores, it has been concluded that such
stores in toto have negative impact, and one such studies explicit finding concludes that each Wal-
Mart worker takes the place of 1.4 retail worker.122
118 Kevin O’grady, “Five Decades After The Establishment of Wal-Mart”, Business Day (South Africa), 12 May 2011. 119 Steven Greenhouse and Stephanie Rosenbloom, “Wal-Mart Settles 63 Lawsuits Over Wages”, New York Times, 23 Dec
2008. 120 Steven Greenhouse, “In House Audit says Wal-Mart Violated Labor Laws”, New York Times, 13 January 2004. 121 Affidavit of Annette Bernhardt in the Competition Tribunal of South Africa, Cc Case No: 2010 Nov 5445. 122 Neumark, David, Junfu Zhang, and Stephen Ciccarella, “The Effects Of Wal-Mart On Local Labor Markets.” Iza
Discussion Paper, January 2007. Available at: http://www.Newrules.Org/Sites/Newrules.Org/Files/Images/ Neumarkstudy .pdf, Last accessed on 14 October, 2012.
40
When modern retail arrived in Chile in 1990s, large number of small shops went out of business in
the span of just a few years. It was reported in ICRIER’s May 2008 report, that between 1991 and
1995, “15,777 small shops went out of business, mainly in Santiago, a city of 4 million,
“representing 21-22% of small general food, meat and fish shops, 25% of deli/meat shops and dairy
shops, and 17% in produce shops.123 Chile’s food retail sector has continued the process of
consolidation to the point of negatively impacting free competition.
In December 2011, government competition authorities announced an investigation of Chile’s
highly concentrated grocery sector, where Wal-Mart is the largest player with 33.4% market
share,124 for possible price collusion of basic products including meats and detergents.125 Chile’s
experiences with modern retail is no different than Argentina where from 1984 to 1993, during the
most intense period of take-off of supermarkets, the number of small food shops declined from
209,000 to 145,000.126
Another example from Latin America can be that of Mexico where the effects of global retailers on
existing agricultural wholesalers is noteworthy, the role of regional wholesale markets diminished
significantly due to “the increasing reliance on direct procurement and distribution centres” as well
as “the emergence of large, powerful intermediaries closely linked with state government and export
markets.” Most notably, “this sharp decline in sales coincides with the increasing market share of
big retailers like Wal-Mart and national food retailers.”127
Comparative Assessment of Organised Retail in Various Countries
CHINA
China ushered into an era of economic reforms, has emerged as an export juggernaut, and has
experienced unprecedented urbanization which is backed up by the state’s unswerving commitment
to development which can be witnessed by high growth rate of GDP, have vaulted the Land of
123 Mahtew Joseph, Nirupama Soundararajan, Manisha Gupta and Sanghamitra Sahu, “Impact Of Organized Retailing On The
Unorganized Sector”, Indian Council For Research On International Economic Relations, May 2008 124 “Chile: Supermarket Sector Sending Out Sparks”, Estrategia, 26 September 2011. 125 “Investigan En Chile a Principales Cadenas Supermercados Por Posible Colusión”, Abc Digital, (2011) Available at,
http://www.Abc.Com.Py/Nota/ Investigan-En-Chile-A-Principales-Cadenas- Supermercados-Por-Posible-Colusion/, Last accessed on 11October, 2012.
126 Ibid. 127 James J. Biles and Et Al, “Globalization of Food Retailing and Transformation of Supply Networks: Consequences for
Small-Scale Agricultural Producers In Southeastern Mexico”, Journal Of Latin American Geography, Vol. 6 No. 2, 2007.
41
Dragon to a venerable position globally in terms of Purchasing Power Parity GDP, second only to
the United States (U.S.). Over the past two decades China’s Gross National Income (GNI) per capita
has expanded 13 times. And as incomes have grown, so has the capacity to spend.128 By 2015, per
capita consumption in China is set to increase to 17,000 renminbi ($2502) from 13,400 renminbi
($1975) in 2008. Total urban consumption in 2015 is likely to exceed 13.3 trillion renminbi ($1.96
trillion), making the country the third biggest consumer market after the U.S. and Japan according to
the 2009 Annual Chinese Consumer Study by McKinsey. These sweeping changes in China’s socio-
economic framework have also led to the emergence of a buoyant retail sector, which thrives on the
progressive Chinese consumer.129 With this, domestic retailers have come to benefit from the
mounting retail appetite, and global retail chains have made a beeline to grab a share in the booming
Chinese retail market.
As demand in the developed countries reaches maturity, the lure of the flourishing retail market in
China has attracted global retailers since the floodgates of the sector were thrown open to foreign
players.130 With consumption demand in most of the developed world still reeling under the
aftermath of the global slump, the bustling Chinese retail market provides greener pastures for
retailers looking for growth. Moreover, now that the Chinese government is consciously trying to
retool its development model more towards domestic consumption rather than export dependence,
retailing in the world’s fastest growing economy is poised for exuberant growth.131
China has experienced unparalleled levels of urbanization since the onset of economic reforms
begun in 1978. Compared to 1980, today China’s urban population has increased by over 200%.
According to a McKinsey research study, by 2025, two thirds of the Chinese will be living in urban
areas.132 By 2030, China’s urban centers will be inhabited by 350 million more people, this increase
itself beating the entire population of the U.S. today. Also by 2025, 221 Chinese cities will boast of
a population of over one million, with 23 cities registering over five million. In comparison, Europe
128 Available at, http://www.thomaswhite.Com/Explore-The-World/Bric-Spotlight/ China- Retail.Aspx, Last accessed on 15
Oct. 2012. 129 Ibid. 130 Murali Patibandla, "Working Paper No. 336 Foreign Direct Investment in India's Retail Sector : Some issues", Indian Institute
of Management, Bangalore, 2012. 131 “Bric Spotlight Report on Retail Sector in China: The Next Big Thing?, 2011”, Thomas White Global Investing, Available at
http://www.thomaswhite.com/pdf /bric-spotlight-report-china-retail-june-11.pdf, Last accessed on 12October, 2012. 132 Richard Dobbs, Sven Smit, Jaana Remes, James Manyika, Charles Roxburgh, Alejandra Restrepo, "Urban world: Mapping the
economic power of cities", 2011, Available at http://www.mckinsey.com /insights/mgi/research/urbanization /urban_world, Last accessed on 07October, 2012.
42
has just 35 cities with a population of over one million currently.133 The urban economy is expected
to generate 90% of China’s GDP by 2025, with its aggregate consumption and disposable incomes
twice those of Germany.
Opening up of retail sector: experience in China
China’s accession to the World Trade organization (WTO) in 2001 marked a new, liberalized era for
foreign investment in retail. Under the WTO’s Accession Protocol, the opening up of the retail sector
was phased over a period of five years to December 2006. The framework of rules however, left much
to be desired in terms of clarity and transparency. 134On the issue of equal ownership between the
domestic retailer and the foreign investor, the Commercial Sector Measures brought out in April 2004
by the Chinese government were in contradiction with the Accession Protocol as well as the 2007 FDI
Guidance Catalogue. While the Commercial Sector Measures restricted foreign investment to 49%
equity for foreign-invested retail chains with more than 30 outlets, the Accession Protocol as well as
the FDI Guidance Catalogue of 2007 allowed for equal ownership.
However, providing some clarity, the Chinese government’s Administrative Measures for Foreign
Enterprises or Individuals Establishing Partnership Enterprises, brought out in 2009, now permits
foreign investors or individuals to set up retail enterprises in partnership with domestic entities in
China.135 The Chinese Ministry of Commerce has also been gradually delegating the authority to
approve all foreign-invested retail businesses to provincial commerce branches, facilitating the
expansion of foreign retail players within the country. China’s retailing sector remains highly
fragmented, housing many small and medium-sized retailers unlike the U.S. where the big retailers
have a dominating presence. China was home to over 549,000 retail enterprises. Despite the fact that
the number of chain stores has grown in recent years, cross-provincial retailers remain less common
because of local market access barriers.
However, China does flaunt a wide array of retail formats, each at a different level of evolution and
development:
» Department stores: These stores were popular earlier on, but are facing intense competition
now and are battling to stay ahead.
133 Ibid. 134 Richard Self and B. K. Zutshi, “Movement Of Natural Person Under The GATS”, Joint WTO-World Bank Symposium. 135 Ibid.
43
» Hypermarkets: The development of hypermarkets has been led by international retailers, who
are now spreading their wings to tier 2 and 3 cities, as markets in tier 1 cities reach
saturation, retailers involved in the segment includes Wal-Mart, Carrefour, Vanguard,
Tesco, Metro, RT Mart Shanghai, Trust-Mart, etc.
» Supermarkets: This highly fragmented market dominated by domestic players, is witnessing
cutthroat competition, often leading to weeding out of the weaker players coupled with
strategic consolidation.
» Franchising: Constituting about 3% of China’s total retail market, franchising seems to have
tremendous potential for future growth, existing players in the segment include KFC,
McDonalds, 7-eleven and Pizza Hut.
» Specialty stores: Electronics/Appliances segment is dominated by domestic players, with
limited foreign investment.
» Direct selling: With direct selling rules introduced in 2005, providing the much needed legal
framework, the potential for further growth remains immense.
» Online retail: Online shoppers grew 68% between 2009 and 2010 to 185 million. Online retail
sales have been predominantly consumer-to-consumer transactions. Some of the
prominent retailers include Taobao, Alibaba and eBay.
Foreign companies were allowed to hold 51 per cent majority ownership (which India has now decided
to grant them) only 12 years after the sector was opened, first allowing 26 per cent foreign equity.
Initially, China also only allowed foreign retailers to open in select metropolises, such as Beijing,
Shanghai and Shenzhen, and, moreover, only in certain districts in those cities. In Beijing and
Shanghai, foreign retailers like Wal-Mart were only allowed to operate in districts where there were no
local competitors. Through these ‘invisible barriers', China succeeded in giving local retailers
protection, while, at the same time, they learnt from the ‘more efficient' business models of foreign
companies.136
Opening up of sector in a phased manner has benefitted local retailers in terms of logistics,
procurement and management, further benefits have also accrued to consumers as prices have fallen,
and efficiency has increased.
136 Ananth Krishnan, “Chinese Retailers Give Global Giants Run For Money”, The Hindu, Dec. 2, 2011, Available at,
http://www.Thehindu.Com/Business/ Economy/Article2681679.Ece?Service=Mobile, Last accessed on 15 Oct 2012.
44
BRAZIL
Situation in 1990s
South American markets as a whole were characterized by economic instability attributed to high
levels of public debt and hyperinflation was the hallmark of many Latin American economies.
Inflation in Brazil had touched extreme high of 5000% in 1994.137 This resulted in buyers being
forced to make stock as soon as they received salaries for fear of losing the real value of their
money; retailers on the other hand too had to revise their price lists at short intervals.
With Cardoso, coming to centre stage Brazil’s moved towards political and economic stability as
various economic decisions were taken, such as Real Plan that introduced a new Brazilian
currency which helped in reducing inflationary pressures over economy. The initiative unleashed
a generation of consumers who witnessed their real salary being increased on account of low and
confined inflation in the system. Again in 2003 there was a change in leadership and Lula Da
Silva becoming head of the state who continued the reforms initiated by his predecessor and
extended them to family welfare schemes, subsidized housing, an easier access to credit, and
generous pay hikes, among other initiatives.138
Consumer lending was boosted as banks were allowed to deduct interest charges on debt directly
from the workers’ payroll. According to a study by Brazil’s Getulio Vargas Foundation quoted in
the Financial Times, about 49 million low-income Brazilians rose to the ranks of the middle and
upper-middle classes since 2003.
Brazil’s retail market is estimated to be worth about $230 billion, driven mostly by domestic
demand. Besides the 40% growth in GDP per capita during the last eight years or so, population
distribution also plays a vital role in encouraging the growth of sectors such as retail.139 About
30% of the country’s population lives in the 10 principal metropolitan cities. Sao Paulo brims
over with a population of 18 million, while Rio de Janeiro has 10 million.140 As a PwC report
137 BRIC Spotlight Report on, ‘Retail Sector in Brazil: Riding The Wave Of Middle Class Growth And Consumer Credit
Boom 2012 ’. 138 Ibid. 139 Walter Molano, “Latin America, Its Emerging Markets And The Global Economy - An Overview”, The Journal Of
International Business & Law, Vol. 51, 2007. 140 Ibid.
45
points out, the lower income sections tend to spend more on essentials such as food and
beverages, while those in the upper income bracket splurge on leisure, durable goods, as well as
luxury items.141 The Brazilian market is also perhaps the most internationalized among the BRICs,
as the top 10 retailers corner almost 60% market share among themselves. Food retailers, apparel
retailers, consumer goods makers, appliance retailers, and consumer staples companies form the
backbone of the sector, supplemented by lesser savings rate existent in Brazil in comparison to its
peers Brazil became a hot destination for investors.142
Opening up of sector: experience
Although organized retail in Brazil could be traced back to 1948 when the current market leader Companhia
Brasileira de Distribuicao (CBD), better known as Pao de Acucar, started off as a small bakery. Among
foreign-owned entities, French retailer Carrefour S.A. was among the early birds to set up shop in Brazil,
coming in as early as 1975. Walmart Brazil, the third in the pecking order, was established in 1995 but
global biggies did not witness instant success rather homegrown retailers such as Hypermarcas and apparel
retailer Lojas Renner S.A. have grew at faster rates, helped by their knowledge of the local market.
Brazil has emerged as the world’s third-biggest grocery market, next only to America and China, thanks to
the aggressive growth strategy adopted by players operating in the market, both foreign and domestic.143
Global retailers such as Walmart and France’s Carrefour bank on the Brazilian market to make up for
sagging sales elsewhere. At the same time, domestic market leaders such as Pao de Acucar give them a run
for their money. Still, the new entrants find it tough to gain a foothold in the highly competitive market,
which offers great potential for growth.
Pao de Acucar is the biggest diversified retailer in Brazil, selling everything from groceries to home
appliances to clothing. The company has a market share of about 18% which is more than any of the foreign
retailer.
Carrefour S.A., French retailer, second only to Walmart worldwide, has been a significant market presence
in Brazil for more than 25 years with a market share of about 14.5%. Carrefour has got support from locals
141 PWC Report on ‘Demographics and Consumer Behaviour: Brazil’, Available at http://www.pwc.Com/En_Gx/Gx/Retail-
Consumer/Pdf/Brazil.Pdf, Last accessed on 15 Oct. 2012. 142 Available at http://www.egmontinstitute.Be/Paperegm/Ep31.Pdf, Last accessed on 16 Oct 2012. 143 Ibid..
46
as it became the first foreign retailer to source/procure Brazilian agriculture products to its store located
across the globe.144
Wal-Mart the world’s largest retailer though was a late entrant in Brazil retail space, its Brazilian unit is now
one among its best performing subsidiaries.145 Last year, Wal-Mart Brazil, which has a market share of
12%, created ripples in the market when it implemented its “Everyday Low Prices” strategy to take on its
rivals. Though Wal-Mart Brazil first entered the market through a joint venture with local player Lojas
Americanas, its growth has been driven by acquisitions of the local units of Netherlands’ Royal Ahold and
Portugal’s Sonae.146
Many analysts are alarmed over Brazil’s rapid credit growth, fearing that a U.S.-model credit bubble may be
brewing. However, as a Financial Times report pointed out, this concern may be unfounded as about 60% of
consumer loans are made against payrolls, property, or cars and are offered at fixed rates.
PHILIPPINES
Several factors contribute to a growing middle class and rising consumer demand in the Philippines
which was ranked 29th in 2012 Global Retail Development Index. Here salaries remain low, but
household income is bolstered by overseas remittances that help maintain positive economic growth.
Further new emerging sectors have also fueled the growth, like Business Processing Outsourcing in
which it recently surpassed India resulting in increase of aggregate investment in the Country.147 The
bulk of income goes towards retail spending. The domestic job market is improving as the outsourcing
industry grows, thus bringing more dual-income to middle class families and young professionals with
disposable income to urban areas. Most of Philippines’ retailers and shopping centers are in urban
areas, with about half of total retail sales concentrated in the Manila area. Organised retail accounts for
35% of the total trade.148
144 Ibid. 145 Alessandro Bonanno, Wal-Mart, “Oligopsony Power and Entry: An Analysis Of Local Labor Markets”, Aaea & Acci Joint
Annual Meeting In Milwaukee, Wi, July 26–28, 2009. 146 Ibid. 147 Goutam Das and Sunny Sen, “Born again India's BPO Industry Losing Voice, Finds Life Elsewhere”, Business Today, 1
Apr. 2012. 148 UNCTAD Report on ‘Trade and Development Report 2012’. Available at
unctad.org/en/PublicationsLibrary/tdr2012_en.pdf, Last accessed on 05 October, 2012
47
Opening of the Economy
Retail sector was opened to foreign investors in 2000 when Retail Trade Liberalization Act of 2000
(Retail Trade Act) was passed. This new act, which went into effect on March 26, 2000, essentially
opened the retail sector to foreign ownership. The Retail Trade Act declared that “the Philippine retail
industry is hereby liberalized to encourage Filipino and foreign investors to forge an efficient and
competitive retail sector in the interest of empowering the Filipino consumer through lower prices,
higher quality of goods, better services, and wider choices.”149 Under the Retail Trade Act, foreign
ownership in the Philippine retail sector is contingent on the level of total paid-up capital of an
enterprise, as specified under four categories. Category A consists of enterprises with less than US$2.5
million in paid-up capital, and is reserved exclusively for Filipinos and corporations wholly owned by
Filipinos.150 Category B consists of enterprises with minimum paid-up capital of at least US$2.5
million and may be wholly-owned by foreigners after March 26, 2000, two years after the Act went
into effect. During the first two years the Retail Trade Act was in effect, foreign ownership was
allowed up to only sixty percent.151 The third category, Category C, consists of enterprises with at least
US$7.5 million in paid-up capital, and could be wholly-owned by foreigners immediately upon the
Act's effective date." In addition, the Act requires that Category B and C enterprises with more than
eighty percent foreign ownership offer a minimum of thirty percent of its equity on any Philippine
stock exchange within eight years from the start of operations. The final category, Category D,
includes those enterprises specializing in so-called high-end or luxury products, with a paid-up capital
of at least US$250,000 per store. Category D enterprises can be wholly-owned by foreigners.152
Invisible Barriers
Under the Retail Trade Act, a foreign retailer must demonstrate that its parent corporation had153: 1) a
net worth of at least US$200 million for Category B and C enterprises, and US$50 million for
Category D enterprises; 2) five retail branches or franchises anywhere in the world, unless it has at
least one store with minimum capitalization of US$25 million; and 3) a five-year track record in
retailing. Additionally, only foreign retailers formed or incorporated in countries that allow Filipino
retailers are allowed to engage in retail trade in the Philippines. Finally, in order to promote locally-
manufactured products, the Retail Trade Act required that, for the ten-year period beginning on March
149 Retail Trade Act, 2000 (Phil.), Available at http://www.chanrobles.Com/ Republicactno8762.Htm. 150 Ibid. 151 Retail Trade Act § 3. 152 Ibid. 153 Van V. Mejia,”The Modern Foreign Investment Laws of the Philippines”, Temple Int'l & Comp. L.J., Vol. 17 No. 2, 2003.
48
26, 2000, Philippine-made products must make up thirty percent of the aggregate cost of a foreign
retailer's inventory.
Effect on Infrastructure
Economic indicators such as exports, imports, and employment in the country zoomed after
liberalizing economy, further FDI made significant contribution to the country’s development, its
impact on technology transfer, productivity, domestic linkages, and employment are limited. The
apparent lack of local suppliers and poor logistics and infrastructure had been the major impediments
to FDI, but with gradual increase in investment there was creation of spillover effect by local suppliers
on the rest of the economy.154 Moreover, poor logistics and infrastructure which limited FDI flows to
industries with weak linkages with the rest of the economy has also been addressed, with investment in
not limited to the retail sector, as with the development of the requisite infrastructure country also
started attracting investments in outsourcing attributed to the presence of cost effective manpower.
154 Rafaelita M. Aldaba and Fernando T. Aldaba, “Assessing the Spillover Effects of FDI to the Philippines”, Discussion
Paper Series No. 2010-27.
49
PART 4: POTENTIAL POSITIVE IMPACT OF INDIAN FDI IN RETAIL
Foreign direct investment plays an important role in India’s growth dynamics. The examples are software
and services industry, two-wheeler, automobile and auto-component industries, electronics and
telecommunications155. FDI in these industries expanded domestic and export markets, benefitted
consumers, generated employment, increased productivity and wages and generated externalities to local
firms.
FDI in the retail sector, supported by effective local institutions, might play similar role. The most important
dimension of the possible benefits is generation of world class supply chain in India which might decrease
transaction, information and production costs of business and expand markets significantly156.
Change is essential part of any dynamic society. The role of the government is generating effective
institutions that manage change which compensate the losers and make it work for the interests of larger
sections157. The main role of government is to establish and implement effective and autonomous regulatory
institutions - restraining anti-competitive conduct by firms, labour and environmental regulation158. The
government has to make credible commitments of its policies. Agents react differently if they believe that
the reform is only political window-dressing and most of it will be retracted in the face of opposition159. This
behaviour has a significant effect on the success of the reforms and the time it takes for the reform process.
If the government acts opportunistically in changing its policies, it sends signal of non-credible
commitments which discourages investments especially in durable assets (with high fixed and sunk
costs)160.
Huge investments in the retail sector will see gainful employment opportunities in agro-processing,
sorting, marketing, logistics, and front-end retail. At least 10 million jobs are likely to be created in the
next three years in the retail sector161. FDI in retail will help farmers to secure remunerative prices by
155 “Indian Retail Sector—An Outlook (2005-2010)”, Research and Consultancy Outsourcing Services, 2004. 156 M. Levy. and B. A. Weitz, Retailing Management, McGraw Hill Publishing Company Ltd, New York, 2003 157 S. Ganguly, ‘Retailing Industry in India’, 2004, Available at http://www
.researchandmarkets.com/reportinfo.asp?report_id=307524, Last accessed on 12October,2012 at 1420 hrs 158 ‘The final frontier for global retailing is beginning to open’, 2006, Available at http://www.indiaonestop.com/retailing.htm
, Last accessed on 11October,2012 at 1740 hrs. 159 "Coming to market", 2006, Available at http://www.economist.com /node/ 6795668?story_id=6795668, Last accessed on 04
October, 2012. 160 N.K. Malhotra, Marketing Research – An applied Orientation, Dorling Kindersely India, New Delhi, 2011. 161 ‘Innovation is key to sustain growth in FMCG sector’, 2005, Available at
http://www.indiainfoline.com/news/news.asp?dat=72291, Last accessed on 12October,2012 at 0910 hrs.
50
eliminating exploitative middlemen. Foreign retail majors will ensure supply chain efficiencies162. Policy
mandates a minimum investment of $100 million with at least half the amount to be invested in back-end
infrastructure, including cold chains, refrigeration, transportation, packing, sorting and processing. This is
expected to considerably reduce post-harvest losses. There has been impressive growth in retail and
wholesale trade after China approved 100% FDI in retail163. Thailand has experienced tremendous
growth in the agro-processing industry. In Indonesia, even after several years of emergence of
supermarkets, 90% of fresh food and 70% of all food is still controlled by traditional retailers164. In any
case, organized retail through Indian ownership is permissible. Experience of the last decade shows small
retailers have flourished in harmony with large outlets165.
Macro-economic impact
1. Presence of Strong FDI
A strong FDI presence in retail sector is expected to not only boost the retail scenario, but also act
as a driving force in attracting FDI in upstream activities as well166. This will be more prominent in
food processing and packaging industries because many large retail chains also promote their own
brands by way of backward integration/contract manufacturing167.
i. Generation of Employment
The outcome of FDI in retail is noteworthy in terms of the benefits to the customer, the
generation of employment and the ability of more people generation X marketing168.
162 ‘The Retail Industry’, 2007, Available at http://www.ibef.org/industry/retail .aspx , Last visted on 10October,2012 at 1120
hrs. 163 David Barstow, ‘Vast Mexico Bribery Case Hushed Up by Wal-Mart After Top Level Struggle’, The New York Times, 21
April, 2012. 164 E. Basker ‘Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion’, The Review of Economics and
Statistics, Vol. 87 Issue 1, 2005, p. 174-83. 165 Amitabh Mall, Kanika Sanghi, Abheek Singhi and Arvind Subramanian, The Tiger Roars: Capturing India’s Explosive
Growth in Consumer Spending, Boston Consulting, New Delhi, 2012. 166 H Brea-Solis, Ramon Casadesus-Masanell and Emili Grifell-Tatje, 2010,‘Business Model Evaluation: Quantifying
Walmart’s Sources of Advantage’, Available at http://www.webmeets.com /files/papers/SAEE/ 2010/461/Quantifying%20Walmart%20Sources%20of%20Advantage.pdf, Last accessed on 11October,2012
167 PM Chandran, Wal-Mart’s Supply Chain Management Practices, ICFAI ICMR Case Collection, 2003 168 Pankaj Ghemawat, Redefining Global Strategy, Harvard Business School Press, Cambridge, 2007.
51
ii. Indian Retail Sector
According to the market research report, “Indian Retail Sector- An Outlook” (2005-2010)
prepared by RNCOS it is found that if the government allowed 26% of FDI into retail, the sector
would grow at an AAGR of 28%-32% much more than current Rs 27,000cr169.
iii. Unreasonable apprehension
If one looks at the experience of countries like China & the US, one gets a feeling that the
apprehensions of the left parties as well as the local retailers are misplaced170.
iv. Situation in United States of America
In America, which is by far the most matured retail market in the world, 95% of retailers are
store operations. Now they may not be as small as our grocery shops, but are still small when
looked at from the US perspective171. Some of the world’s largest retailers, like Wal-Mart, JC
Penny, Target, etc. are American. Notwithstanding the dominance by these large players, the
smaller ‘mom n pop’ stores still co-exist with them, though one may not find them in the same
vicinity as the big retailers. And, even though their market share is getting eroded slowly, they
still account for just under 50% of the total American retail trade172.
v. Situation in China
Similarly in China, the top 10 retailers (both domestic & International), had only 9.6% share of
the $628-bn retail market in 2004. This was up from 2.9% in 2000173.
vi. The Kirana Store Position
The Kirana store owners in India face a threat from the domestic players, who have aggressive
expansion plans for the future. In addition, few of the country’s large corporate houses like
169 N. Lichtenstein, ‘Wal-Mart: Template for 21st Century Capitalism’, New Labor Forum, Volume. 14 Issue1, , 2005, p. 21-
30. 170 Murali Patibandla, ‘Pattern of Foreign Direct Investment in Developing Economies: A Comparative Analysis of China and
India’, International Journal of Management and Decision Making, Volume 8 Issue 2-4, 2007, p. 356-77. 171 Price Water Cooper (2011): ‘Winning in India’s Retail Sector: Factors for Success’, Available at
https://list2.pwc.fr/assets/files/lettre_retail-and-consumer/pwc_winning_in_india_retail _sector_1.pdf, Last accessed on 05 October, 2012.
172 P. Ghemawat and Ken A. Mark, ‘The Real Wal-Mart Effect’, Harvard Business School Working Knowledge, 2006. 173 A. Ray, B. Das, B. Baral, J. Rico and R.S. Pramanik, FDI in Multi-Brand Retail in India, Indian Institute of Management,
Bangalore, 2012.
52
Reliance, the Tatas and the Munjals, etc. too have mega plans for the retail sector174. In fact Reliance
has announced one. So, the grocery shopkeepers will feel the heat from these companies in any case,
which is a point the communists ally of the Government fail to appreciate175. Even in China, where
FDI in retail was allowed long time back, small vendors of vegetables and fruits coexist with the
hundreds of superstores, who are perceived to be the biggest threat to the Kirana shops176. Even in
India, where organized retailers have started mushrooming in big cities, the grocery shop owners
have not been wiped out177.
vii. Exposure to Global Supply Chain
Though one may argue that the supply chain efficiency can also be brought in by the local retailers
too, the moot point is that the global giants like Wal-Mart can substantially improve the fortunes of
India’s farm sector by directly linking it with global supply chain178. Remember, China’s agriculture
exports to the US nearly trebled from $3.86bn in 1999 to $9.96bn last year. India, on the other hand has
made only a marginal progress, with its farm exports to America rising from $3.19bn in 1999 to just
$4.28bn179.
viii. Draft ICRIER Report, 2004
A draft ICRIER report released in November 2004 called for 49% FDI in retail and opening up of the
sector in a phased manner over a period of five years. Fears about large-scale loss of jobs in the
unorganized retail sector due to inflow of FDI was unfounded, said the study. Job creation in the
organized sector would more than compensate for loss of jobs, and consolidation in the retail sector
would also push up economic growth. The report said that allowing foreign investment in retail would
lead to inflow of technical know-how, encourage large-scale production, increase employment and
investments and strengthen India’s position as a sourcing hub. Domestic companies would be able to
174 S. Robinson, ‘Food Fight’, 2007, Available at http://www.time.com/time/ magazine/article/0 9171,1626725,00.html, Last
accessed on 13October,2012 at 0950 hrs. 175 O Schell, ‘How Walmart Is Changing China’, 2011, Available at http://www.
theatlantic.com/magazine/archive/2011/12/how-walmart-is-changing-china/308709/#, Last accessed on 12October,2012 at 0520 hrs.
176 Narayan Basu, ‘Big Retailers not to effect mom ‘n’ pop store: ICREIR’, Financial Chronicle, May 27, 2008, Bangalore. 177 Murali Patibandla, Evolution of Markets and Institutions: A Study of an Emerging Economy, Routledge Taylor and Francis,
New York, 2006. 178 Arjun Swamp, "India's Retail Revolution", Blog Global Economy, March, 2007. 179 Singh Sukhpal, ‘Spencer’s Retail’, in M Harper, Inclusive Value Chains: A Pathway out of Poverty, World Scientific,
Singapore, 2010, 81-93.
53
compete on a stronger footing in the international market on the strength of the experience gained from
working and competing with multinationals180.
ix. Generation of Employment
The retail sector can generate huge employment opportunities, and can lead to job-led economic
growth. In most major economies, ‘services’ form the largest sector for creating employment181. US alone
have over 12% of its employable workforce engaged in the retail sector. The retail sector in India
employs nearly 21 million people, accounting for roughly 6.7% of the total employment. However,
employment in organized retailing is still very low, because of the small share of organized retail business
in the total Indian retail trade. A modern retail sector has the potential of creating over 2 million new jobs
within the next 6 years in the country (assuming only 8-10% share of organized retailing), according to
Arvind Singhal, CMD, KSA Technopak India Ltd182. A strong retail front-end can also provide the
necessary fillip to agriculture & food processing, handicrafts, and small and medium manufacturing
enterprises, creating millions of new jobs indirectly183. Through its strong linkages with sectors like
tourism and hospitality, retail has the potential of creating jobs in these sectors also184.
x. Planning Commission’s Views
Though the Planning Commission has identified retail as a prospective employment generator, in
order to strengthen the multiplier effect of the growth in organized retailing upon the overall employment
situation, a pro-active governmental support mechanism needs to evolve for nurturing the sector185. Issues
like FDI in retail, allocation of government-controlled land on more favourable terms, strong political and
bureaucratic leadership, etc., need to be addressed adequately186.
180 Bijoor Harish, ‘The Sin of Retail’, Business Line,, 2008, Available at
http://www.thehindubusinessline.in/catalyst/2008/06/12/stories/2008061250170400.htm, Last accessed on 14October,2012 at 1540 hrs.
181 V.Namakumari Ramaswamy. , Marketing Management Global Perspective Indian Context, Macmillan Publishers India, New Delhi, 2009.
182 Rosemary Varely and Mohammed Rafiq, Principles of Retail Management, Palgrave, London, 2003 183 Sandeep R.S.Roy, Opportunity in Indian Retail Macmillan, New Delhi . 184 Patibandla Murali ()‘Structure, Organizational Behavior and Technical Efficiency’, Journal of Economic Behavior and
Organization, Vol.34, Issue3),p. 431-42. 185 Department of Economics and Statistics, Statistical Outline of India2002-03, Tata Service Limited, New Delhi, 2004 186 Swapana Pradhan , Retailing Management: Text & Cases, Tata Mcgraw Hill Publishing Limted, New Delhi, 2009n.
54
xi. FICCI Views
Mr. Ravi Raheja, Chairman, FICCI Retailing Committee, while underlining the need for FDI in the
sector pointed out that foreign investment would generate competition and not adversely affect the
small retailers187. Ultimately, the consumers would stand to benefit in terms of a wide range of
products of world-class quality and lower prices.
xii. Inflation Control
Industry trends for retail sector indicate that organized retailing has major impact in controlling
inflation because large organized retailers are able to buy directly from producers at most competitive
prices188. World Bank attributes the opening of the retail sector to FDI to be beneficial for India in
terms of price and availability of products as it would give a boost to food products, textiles and
garments, leather products, etc., to benefit from large-scale procurement by international chains; in
turn, creating jobs opportunities at various levels.
Impact Upon Local Dealers In Unorganised Retail – Negligible Or Substantial?
i. Situation of Mom-and-Pop stores
At present, mom-and-pop stores cater to 95% of the total market. They have unique advantages,
like home-grown processes, skills in retaining customers, nearness, convenience and services.
However, global retailers investing in new markets have not hampered local retailers. The kirana shops
in large parts of the country will enjoy built-in protection from supermarkets because the latter can
only exist in large cities. The Kirana shops can get goods from the large outlets (which are present in
large towns and cities only) and sell it to their customers so that their profit margin would increase. For
instance, FDI in telecom did hit urban STD booth operators, but most of them have now been
converted to kiosks selling mobile connections and SIM cards.
187 S.R. Subba Rao, “Organised Retail Sector in India: Growth and Impact on the Economy”, The Journal Of Indian
Management and Strategy, Vol. II, No.2 April – June ,2006. 188 Julia Hanna, Ground floor opportunities for retail in India, 2004, Available at www.hbswk.hbs.edu, Last accessed on
14October,2012 at 1740 hrs.
55
ii. Reliability and Profitability of Markets
They promote the linkage of local suppliers, farmers and manufacturers, no doubt only those who
can meet the quality and safety standards, to global market and this will ensure a reliable and profitable
market to these local players189.
iii. Inflow of Real Competition in the Market
By allowing 51% foreign investments in the Indian market, it will teach the local retailers about
real competition and help in insuring that they give better service to Indian consumers. It is obviously
good for local competition. The kirana stores operate in a different environment catering to a certain
set of customers and they will continue to find new ways to retain them.
iv. Retention of domains by smaller traders
In the Indian policy debate, a contrasting view is that growth in organized retail is expected to
benefit producers, without (significantly) hurting smaller traders and that they may preserve their
smaller domains without being swallowed up by large retailers190.
Impact upon Agriculture
i. The vicious circle of poverty for farmers
As long as the foreign players such as Wal-Mart do pricing based on long run average costs, the
benefits will accrue to consumers and farmers. Small and medium farmers are trapped into a vicious
circle of poverty because of inefficient input and output markets especially distress sales at the time of
harvest owing to underdeveloped agricultural supply chain in India. Since the independence of India,
India’s government systematically failed in solving this vicious circle. As a matter of fact, it made it
worse by bad economic policies. A simple example is banning of cotton exports and causing suicides
of farmers because the mill sector is better organized than small farmers in capturing the government
189 Patibandla Murali and Bent Petersen, `Role of Transnational Corporations in the Evolution of a High-Tech Industry: the
Case of India’s Software Industry- A Reply’, World Development, Vol. 32 Issue 3, 2004, pp. 561-66. 190 Arpita Mukherjee & Nitisha Patel ,FDI in Retail Sector: India , Academic Foundation in association with ICRIER and
Ministry of Consumer Affairs, Food and Public Distribution(Govt. of India), New Delhi, 2005..
56
policies191. Another example is inter-state barriers of agricultural trade which depresses prices in the
regions which are productive which means punishing the farmers who are productive.
ii. Better infrastructure
Facilitating the Indian and foreign players to generate the supply chain infrastructure, farmers can be
made to be better off. The growth dynamics of generation of efficient supply chain are that it increases
farmers’ surplus and agricultural productivity which releases people from agriculture that have to be
absorbed by the manufacturing. The supply chain will also result in the growth of manufacturing (home and
export market expansion) which would absorb the people released from agriculture provided that the
agricultural workers are imparted with basic literacy skills.
iii. Elimination of middlemen
The main losers would be the middlemen rather than small traders. Small traders retain the advantage of
low overhead costs and take advantage of geographic distribution and density of consumers. Any
technological and organizational changes have disruptive effects - some losers in the short run and larger
number of gainers in the long run. As the presence of large retailers increases, government tax revenues will
increase which can be used to compensate the losers. It is unlikely that centuries old entrepreneurial
dynamism of India’s bazaars will be seriously dented by the advent of large retail firms in India192. The
farmers will benefit from FDI as they will be able to get better prices for their produce. The elimination of
the intermediate channels in the procurement process will lead to reduction of prices for consumers193.
iv. Backward linkages with agriculture sector
Those who are against FDI in retail are also missing an even bigger point. It concerns with the backward
linkages with the agriculture sector, efficiency in supply chain that foreign retailers can bring and the huge
opportunity in farm exports. India can attain huge savings by merely improving the supply chain. Some 20-
40% of all fruits & vegetables grown in the country go waste due to poor transportation, storage and
handling infrastructure. Also, for every rupee that an Indian consumer spends, the farmer gets only 20-22
191 “R-day reforms: Single brand retail opened to foreign funds”, Indian Express, January 25 2006. 192 Patibandla Murali and Trilochan Sastry ‘Capitalism and Cooperation: Cooperative Institutions in a Developing Economy’,
Economic and Political Weekly, Vol. XXXIX Issue27, 2004, pp. 2997-3004. 193 Arpita Mukherjee, "Working Paper No. 80, Distribution Services: India And The Gats 2000 Negotiations", Indian Council
For Research On International Economic Relations, 2002.
57
paise, as against 70-80 paise in developed markets. If large retailers, whether domestic or foreign, directly
source through farmers, consumers will have to pay less and the retailers will get higher margins.
Impact upon demand-supply gap:
i. Entry of foreign retailers
In political economy terms, the entry of foreign retailers affects different stakeholders on the demand
and supply side. Improvement in supply chain, especially for food items, across the country benefits low
income groups because their major part of the consumption basket is food.
ii. Increase of supply to small and medium farmers
Secondly, it will increase surplus to small and medium farmers. Low income consumers on the demand
side and small and medium scale farmers on supply side are less cohesively organized in influencing
government policies than wholesalers, middlemen, and Indian large retailers. Indian large retailers (such as
the newly entrenched interests like the Reliance fresh) may block the entry of foreign players with short-
term calculations of their interests. However, they can benefit from externalities arising out of the entry of
foreign players if the foreign players invest significant resources in developing the supply chain and improve
the know-how of large number of vendors. This took place in the case of the automobile sector. Apart from
this, some of the wholesalers and small Kirana stores adopted innovative practices in procuring and selling
goods in response to competition from the large retailers which will improve the overall organization of the
markets194.
Impact in terms of better availability to consumers
i. Availability of better technology
The global retailers have advanced management know how in merchandising and inventory
management and have adopted new technologies which can significantly improve productivity and
194 Patibandla Murali and Bent Petersen, ‘Role of Transnational Corporations in the Evolution of a High-Tech Industry: the
Case of India’s Software Industry’, World Development, Vol. 30 Issue 9, 2002, 1561-77.
58
efficiency in retailing195. Entry of large low-cost retailers and adoption of integrated supply chain
management by them is likely to lower down the prices196.
ii. Lowering of prices
Lowering of prices will not be a disadvantage, because if foreign players are present in India it
makes the availability of goods at cheaper prices. This arises because the foreign players will have
good technology, supply chain etc. that makes the product cost cheaper. So this can be availed by the
Kirana shops (i.e. buying the goods from the large retailers and selling it to their customers).
Moreover, as the price decreases, the purchasing power of the people will also increase. So the issue of
lowering prices will not be a disadvantage, it will always be an advantage197.
iii. Access to larger financial resources
FDI will provide access to larger financial resources for venture in the retail sector and that can lead to
several of the other advantages. The larger supermarkets, which tend to become regional and national
chains, can negotiate prices more aggressively with manufacturers of consumer goods and pass on the
benefit to consumers. They can lay down improved and tighter quality standards and ensure that
manufacturers adhere to them. The supermarkets offer a wide range of products and services, so the
consumer can enjoy single-point shopping. FDI in retailing can easily assure the quality of product, better
shopping experience and customer services.
Others
i. Development of supply chains
As multinational players are spreading their operation, regional players are also developing their supply
chain differentiating their strategies and improving their operations to counter the size of international
players. This all will encourage the investment and employment in supply chain management198.
195 M. Rehman, , ‘Impact of FDI in Retail in India’ 2006, Retrieved, from http://ezinearticles.com/?Impact-of-FDI-in-Retail-
in-India&id=380228, Last accessed on 04 Ocxtober, 2012. 196 Michel Chossudovsky, The Globalisation of Poverty: Impacts of IMF and World Bank Reforms, Zed Books Limited,
London, 1997. 197 Murali Patibandla, Deepak Kapur and Bent Petersen : ‘Import Substitution with Free Trade: The Case of India’s Software
Industry’, Economic and Political Weekly, 8 April, 2000, pp. 1263-70. 198 A. Mukherjee, & N. Patel, , FDI in Retail Sector: India, Academic Foundation in association with ICRIER and Ministry of
Consumer Affairs, Food and Public Distribution(Govt. of India), New Delhi, 2008
59
ii. Presence of joint ventures
Joint ventures would ease capital constraints of existing organized retailers. FDI would lead to
development of different retail formats and modernization of the sector199. FDI would lead to expansion of
opposite sell formats as good as modernization of a sector200.
iii. Potential of Retail Sector
As foreign investors exploring their potentials in the retail sector are keen on developing malls
in India, the size of organized retailing is expected to touch $30 billion by 2010 or approximately
10 per cent of the total. This has initiated market-entry announcement from some retailers and has
signalled to international retailers about India‘s seriousness in promoting the sector201.
iv. Suitability of India
India is already a key sourcing country for some global retailers. The entry of foreign retailers
is likely to further promote India‘s manufacturing and export sectors, leading to a double bonus
for the economy.
v. Social agenda
Allowing FDI in multi-brand retail can give a big push to the country‘s social agenda, too, and
has the potential to even positively impact and promote tourism, computerisation, systemisation,
government‘s ability to influence trade when required, address issues such as inflation (since data
available becomes more reliable/ accurate and trade gets increasingly organized), reduction of
black economy, control over food hygiene, better food quality assurance and accountability,
increased direct and indirect employment, push to real estate and availability of better managerial
talent, etc. Also, the retail revolution can change country‘s perception across the globe,
integrating it seamlessly into world trade and economy.
199 United Nations Economic and Social Commission for Asia and the Pacific (ESCAP), Transnational Corporations and
Primary Commodity Exports from Asia and the Pacific, Bangkok, 1981. 200 ‘Forms of Foreign Capital Flowing into India’, Available at http://business.mapsofindia.com/fipb/forms-foreign-capital-
flowing.html, Last accessed on 10 October, 2012 201 Global Economic Prospects and the Developing Countries, World Bank, New York, 1994, p. 41.
60
PART 5: POTENTIAL NEGATIVE IMPACT OF INDIAN RETAIL FDI
It is believed that this move will lead to large scale loss of self-employment because of intense
competition heat for unorganized retailers. International experience shows supermarkets invariably
displace small retailers. Small retail has virtually been wiped out in developed countries like the USA,
and in Europe. South East Asian Countries had to impose stringent zoning and licensing regulations to
restrict growth of supermarkets because small retailers were getting displaced.
India has the highest shopping density in the world with 11 shops per 1000 people. It has 1.2 crore
shops employing over 4 crore people; 95% of these are small shops run by self-employed people202.
Global retail giants will resort to predatory pricing to create monopoly/oligopoly. This can result in
essentials, including food supplies, being controlled by foreign players. Fragmented markets give
larger options to consumers203. Consolidated markets make the consumer captive. Permitting the
foreign players with deep pockets will lead to consolidation. International retail does not create
additional retail markets, it merely displaces existing markets. Jobs in the manufacturing sector will be
lost because structured international retail makes purchases internationally and not from domestic
sources.
Political control by pumping in enormous FDI into the country will lead to re-colonization that we had
during the pre-independence period. The indigenous trading community will be adversely affected.
This will be nothing but an enactment what this country had already experienced during the alien rule.
Control of manufacturing sector and biasing the production of goods will also enable pricing policy
that will be decided by the marketers.
There will be destruction of cottage industries as they will have no appreciable marketing strategies or
powerful retail outlets. A purchase phobia will be created in the minds of middle class people and
make them credit dependent and thus trying to push them in debt trap. Entry of foreign and enemy
agents inside India in the garbs of merchants will result in destabilizing the security of the country.
202 ICICI Property Services-Technopak, “India Retail Real Estate: The Read Ahead”, ICICI Property Services Technopak
White Paper, 2007-08. 203 Mandeep Singh, “Globalization in retailing; Causes, Impact and Trends in India", National Seminar On Foreign Direct
Investment in Retail Business, Feb. 18, 2006 in Guru Nanak Khalsa College, Karnal.
61
The hypermarket concept will further increase the gap between haves and have not. Thus the
formation of an egalitarian society will only be a dream. The aggression of the developed countries
against the underdeveloped or poor countries will be more pronounced. The developed countries
with a better economy will register for all patents and rights in the international market and make the
ill equipped and poor countries fully dependent on them. The wealth of the country is likely to be
siphoned off to alien countries without our knowledge or by circuitous means.
Macro Economic impact
i. Per capital income
India's per capita income is now $800204. This is per capita income through the Atlas method,
using official exchange rates for conversion. It is not per capita income using purchasing power
parity, which adjusts exchange rates for purchasing power of currencies205. From the World
Development Indicators database, we know India's PPP per capita income was $3,100 in 2004,
leading to a rank of 145th out of 208 countries ranked206.
ii. Purchasing Power Parity
Understandably, PPP blows up incomes of developing countries, in relative terms. If we find a
compromise in per capita income, we may assume it nearer to $1000207. However, about 30% of the
population in India is below poverty line and they cannot afford to have even one square meal a day.
The concepts of FDI or Hypermarkets are beyond their reach. Instead, this phenomenon will bring in
spiralling effect on prices of consumer goods due to which the population below poverty line may
increase208.
204 R. Banga, "Working Paper No. 154, Trade and Foreign Direct Investment in Services : A Review” Indian Council For
Research on International Economic Relations, 2005. Available at http:\\www.icrier.res.in/wp154.pdf, Last accessed on 14 October, 2012.
205 E. Basker, . "Working Paper No. 0215 Job Creation or Destruction? Labor-Market Effects of Wal-Mart Expansion”, Department of Economics, University of Missouri,2004.
206 B. Carver, , C. He and J. Hister, "India's Textile Industry : What will Happen When the Quotas are Lifted ?" Final project presented at GTTL Conference on June 2, 2004 at the University of Washington.
207 S. Daunfeldt, ., Niklas Rudholm and Fredrick Bergstrom . “Umea Economic Studies No. 599, Entry into Swedish Retail and Wholesale Trade Market”, Department of Economics, Umea University, 2002..
208 M. Bertrand, and Francies Kramarz, " IZA Discussion Paper No. 415, Does Entry Regulation Hinder Job Creation ? Evidence from the French Retail Industry", Institute for the Study of Labor.(IZA), 2002
62
Micro economic impact
i. Economies of Scale
The global players have economies of scale and are perfect in cost cutting and providing the
consumer the best at lowest price which still is a major challenge for Indian retail firms. The way
they perform their process itself builds an entry barrier for other new firms209.
ii. Brand name
They bring with them world class products which have high quality and a highly valued brand
name. The domestic brands don’t have that charm and attracting power as of global brands210.
iii. Technology
Global players are highly advanced in technology. The tools, equipments, kind of warehouses
they use, their way of performing processes are highly advanced and cannot be compared with those
used by Indian retail firms, which in turn provides better services and better quality products even in
categories like perishable food etc.
iv. Attract skilled employees
The work culture of global players is quite different from those of Indian players. They believe
in earning profits by cutting costs as much as possible and at the same time are conscious towards
career of their employees211. Their approach is more oriented towards achieving ends rather than
means. Attractive salary and high incentives can also attract skilled employees towards global
players which is also a threat for big Indian retail firms.
v. Better infrastructure
Better storage facilities, better transportation medium and high investment can pose another threat
to Indian retail firms which can hardly match the capabilities of giants on their own212.
209 P.S. Birthal, ., P.K. Joshi, and A. Gulati, Vertical coordination in high value commodities. In From plate to plough:
Agricultural diversification and its implications for the smallholders in India. Submitted to Ford Foundation, New Delhi, by International Food Policy Research Institute, Washington DC, 2006.
210 A. Desai, . The Price of Onions, Penguin Books, New Delhi,1999 211 Dabra Johnson, Book. Review of "Investment Analysis in Emerging Markets", Transnational Corporations, Vol. 14, No.
2, Aug. 2005. 212 D. Farrell, . "The Case for Globalisation : The Results of McKinsey's Latest Study of the Pros and Cons of Emerging
Market Foreign Investment," The International Economy, Winter Issue, 2004 Available at http:\\www.findarticles.com/p/articles/mi m2633/is 118 / ai 113564062, Last accessed on 04 October, 2012
63
vi. Joint ventures
Global players may not prefer to enter into joint ventures with Indian firms and may also close
down the existing ventures in wholesale and single brand which may adversely affect the Indian firms.
This is possible when 100% FDI is allowed in multi-brand retail.
1. Loss of jobs from unorganised retail
i. Unfair Competition
Opening up FDI may lead to unfair competition and ultimately result in large-scale exit of
incumbent domestic retailers, especially the small family-owned business. Given the large unorganized
component of the retail sector, this is a major concern213. Small shops in Mumbai are adversely
affected, in terms of falling sales, by the growing influence of shopping malls in the city. If
employment too is adversely affected, it is not clear how organized retail may absorb this displaced
labour214.
ii. Kirana Stores
The main fear is that the ingress of MNC Giants like Wa1mart, Tesco and Carrefour will throw the
hundreds of thousands of the neighbourhood Kirana store owners out of business, leading to millions
of job losses215.
iii. Unorganised retail sector
It may be estimated that about 5 crores of population are employed at present on unorganized retail
sector and this population will be hit badly if the mall system is introduced. This will again add
unemployment problem to the common labour market216.
213 A. Knorr, and A Arndt. "Why did Wal-Mart fail in Germany?" Paper presented at the Hawaji International Conference on
Business, June 18-21, 2003.A.Mukherjee, "ICRIER Working Paper No. 80, Distribution Services: India and the GATS 2000 Negotiations, ", 2002.
214 T. Reardon,, C.P. Timmer, C.B. Barrett and J.A. Berdegue "The Rise of Supermarkets in Africa, Asia and Latin America," American Journal of Agricultural Economics, Vol. 85, No. 5, pp. 1140-1146, December 2003.
215 W.G. Saab, W.G. and Luiz Carlos Perez Gimenez ,"Current Aspects of Food Retailing within Brazil and at International Level," The Brazilian Development Bank, 2000, Available at http://www.bndes.gov.br/ english/studies/studies02.pdf, Last accessed on 6 October, 2012.
216 Vedpuriswar, A.V., (2001). "The Globalisation of the Retailing Industry," Chapter from the Book - The Global CEO, ICFAI Website: http://www.vedpuriswar.org/book/bookoverview.
64
iv. Agricultural aspect
The agricultural employees are part timers in the system of rural marketing and their case will
become worse and they will go jobless for about 6 months period in a year during which they practice
marketing their agricultural products217.
v. Negative impact of loss of intermediaries
Also, by reducing the number of intermediaries, organized retailing will lead to some job
displacement218.
vi. Literacy
It is said that FDI would provide employment opportunities. But, the fact is that they cannot
provide employment opportunities to semi-illiterate people219. Though they can provide employment
opportunities like drivers, watchman etc. but this argument gets more attention because in India semi-
illiterate people in quiet large in number220.
Predatory pricing leading to losses to SMEs and Small Scale Industry
i. Domestic players
Another concern is with regard to the pricing power of the global retail giants which the
communists say will squeeze out the suppliers and hurt farmers. The left are also worried that the
foreign retail majors will hurt domestic players with the practice of predatory pricing and become
monopolies.
ii. Monopoly position
Due to financial clout of the global retailers, they often sell below cost in the new markets. Once
the domestic players are wiped out of the market foreign players enjoy a monopoly position which
allows them to increase prices and earn profits221.
217 N. Wrigley, and A. Currah "Globalizing Retail and the E-conomy: The Organizational Challenge of E-Commerce for the
Retail TNCs, "International Review of Retail and Distribution Management, 2003 218 Philip Kotler and Kevis Lan Kelles, "Managing Retailing, Wholesaling and Logistics" Marketing Management, Pearson
Prentic Hall, Delhi, 2006. 219 D. Dutt,, ‘An outlook for Retailing in India, Vision2005’ (Form a presentation by KSA Technopak at MDI Gurgaon in
January and February, 2004). 220 Philip Kotler, Marketing Management,., Prentice Hall of India Pvt Ltd, New Delhi, 2000 221 P. Powers,. "Distribution in China: The End of the Beginning, "The China Business Review, July-August 2001.
65
iii. Hyper marketing and super marketing
There are about one crore small time traders whose investments are within the range of a few
thousands to one crore. These traders are having a base in urban, semi urban and in rural areas. The
hyper marketing and super marketing concepts will kill them, as they cannot afford to compete with
the giants as far as their marketing presentation, product delivery and pricing domination. Once such
an unequal war is fought against the parties, the destruction of the small traders is certain222.
iv. Pepsi – Cola – Parle Case
The best example is the war that was fought between the indigenous soft drinks manufacturers and
the international giants Pepsi and Coke. Both the erstwhile Janatha Government drove out the
companies Pepsi and Coca Cola in 1977-78 that re-entered in India during 1989-90. During the re-
entry stage, the giants found that comfortable market was enjoyed by the indigenous manufacturers
such as Parle etc. The Pepsi and Coke found that the pricing strategy will give a blow to the Indian
software marketers and they started to sell 250/300 ml bottles at the price of Rs.5/- whereas the Indian
marketers were selling 200 ml at the cost of Rs.6/-. This aggravated their markets and the hot and
chirpy taste of the foreign giants made a trick in the psyche of the consumers. The tingly taste was
liked along with a lowered price for the commodity and that was the death bell for the local
manufacturers. The Pepsi and Coke amalgamated or purchased all the Indian manufacturing companies
along with their bottling units and converted them as its own marketing and manufacturing points.
v. Higher lending rates
Indian retailers have argued that since lending rates are much higher in India, Indian retailers,
especially small retailers, are at a disadvantageous position compared to foreign retailers who have
access to international funds at lower interest rates. High cost of borrowing forces the domestic players
to charge higher prices for the products223.
222 Madona Devasahayam, , ‘Big Deal’, Praxis Quarterly Journal on Management, August, Vol.2, No.2., 1998 223 R. Rastogi,. “India : Country Report on E-Commerce Initiatives”, Department of Information Technology, Ministry of
Communication and Information Technology, India, 2002 Available at http://www.unescap.org/tid/ publication/part three2261_ind.pdf, Last accessed on 01 October, 2012
66
Cooperative Movement v. Foreign Funded Organised Retail
i. Retailers’ Cooperatives There is a need for setting up of Retailers Cooperatives which functions as distribution centres
and warehouses. It will help the retailers to buy the products they want directly from original
manufacturers in bulk quantity.
ii. Definition of Cooperative Stores
Cooperative stores in India are the result of the cooperative movement that can be traced to the
Pre-independence period. They emerged as a reaction to the feudal system & attempted to place the
fruit of labour in the hands of the producer himself to make himself relevant. A consumer
cooperative is a retail institution owned by member customers. A consumer cooperative is generally
formed either because of dissatisfied consumers who's needs are not fulfilled by the existing retailers
or on account of initiative by enlightened consumer.
iii. Mother Dairy Case
Mother Dairy was established in 1974 with a view of making liquid milk available to city
consumers. It is set up by National Dairy Development Board under first phase of operation flood
programme224. Mother Dairy also markets dairy products such as ice cream, dahi, lassi, butter
cheese dairy whitener, Dhara range of edible oils and Safal of fresh fruit and vegetables frozen
vegetables and fruit juices225.
Mother Dairy Model : Mother Dairy follows cooperative models. This model directs the
formation of federation, by the help of village level societies and district level unions, whose
prime responsibilities is the marketing of milk and milk products.
Pricing Strategy : Mother dairy ensures that farmers get market price by offering quality produce
and also provide the produce to the consumers at reasonable prices through minimizing costs.
224 Panle Jia, “What Happens When Wal-Mart Comes to Town: An Empirical Analysis of the Discount Retailing Industry,”
Econometrica, Vol. 76, No. 6, 2008, pp. 1263–1316. 225 Anuradha Kalhan, “Impact of Malls on Small Shops and Hawkers,” Economic and Political Weekly, Vol.42, No.22, 2007,
pp.2063-66.
67
Challenges Faced: Company is facing competition from other organised retailers and increased
imports. The quality of milk, low yields, falling cattle health are some major challenges faced by
company.
iv. Advantage to small farmers
The organizational form of rural producers as they interact with Big Retail is still not being
done. Small farmers can undertake contract farming, but they have no bargaining power and will
be at the mercy of their buyers. Small producers need to be organized into farmer companies or
producer cooperatives that can deal with Big Retail from a much stronger position so that their
interests are not lost226.
Others
i. Premature Indian retailers
Indian retailers have yet to consolidate their position227. The existing retailing scenario is
characterized by the presence of a large number of fragmented family owned businesses, who
would not be able to survive the competition from global players.
ii. Upsetting import balance
The examples of south-east Asian countries show that after allowing FDI, the domestic
retailers were marginalized and this led to unemployment228. FDI in retailing can upset the import
balance, as large international retailers may prefer to source majority of their products globally
rather than investing in local products229.
iii. Margin of unorganised players
Some fear that, if FDI is allowed in retailing then it would result in lowering of prices because
FDI will result in good technology, supply chain, etc230. If prices were lowered then it would lower
the margin of unorganized players231. As a result the unorganized market will be affected232.
226 Jerry A Hausman,. and Ephraim Leibtag, . “Consumer Benefits from Increased Competition in Shopping Outlets: Measuring
the effect of Wal-Mart”, Journal of Applied Econometrics, Vol. 22, No. 7, 2007, pp. 1157–1177. 227 Anuradha Kalhan, and Martin Franz, “Regulation of Retail: Comparative Experience,” Economic and Political Weekly,
Vol.44, No.32, 2009, pp.56-64. 228 David Neumark, Junfu Zhang, and Stephen Ciccarella,. “The Effects of Wal-Mart on Local Labor Markets,” Journal of Urban
Economics, Vol. 63, No. 2, 2008, pp. 405-430. 229 Gupta, R., ‘Pharma retailing gains momentum in India’, www.galtglobal reveiw.com 230 E.A.S Sarma, , “Need for Caution in Retail FDI,” Economic and Political Weekly, Vol.40, No.46, 2005, pp.4795-98.
68
iv. Loss of foreign investment
FDI in retail trade would not attract large inflows of foreign investment since very little
investment is required to conduct retail business. Goods are bought on credit and sales are made on
cash basis233. Hence, the working capital requirement is negligible. On the contrary; after making
initial investment on basic infrastructure, the multinational retailers may remit the higher amount of
profits earned in India to their own country234.
v. Loss of culture
Loss of cultural and ethical values happens due to more influence of the other cultures235.
vi. Infant industry argument
A concern raised by domestic incumbent firms in the organized retail sector is an infant industry
argument: that this sector is under-developed and in a nascent stage. In this view, it is important that
the domestic retail sector grow and consolidate first, before being exposed to foreign investors236.
Domestic firms in this sector oppose liberalizing retail to FDI as they view multinational companies
as direct competitors237.
vii. Findings of UK Competition Commission 2000
The UK Competition Commission found in a 2000 study of major retail chains including Marks
& Spencer, Sainsbury and Tesco that “the burden of cost increases in the supply chain has fallen
disproportionately heavily on small suppliers such as farmers.”238 Apart from prices, the report states
that smaller farmers came under severe pressure from supermarkets due to the latter’s requirement
231 R.J. Volpe, R. J. and N. Lavoie, . “The Effect of Wal-Mart Supercenters on Grocery Prices in New England,” Applied
Economic Perspectives and Policies, Vol. 30, No. 1, 2008, pp. 4 - 26. 232 Department of Industrial Policy and Promotion, 2010. “Foreign Direct Investment (FDI) in Multi-Brand Retail Trading,”
Discussion paper. Available at http://www.dipp.nic.in, Last accessed on 06 October, 2012 233 Arindrajit Dube, , Lester, T. William and Eidlin, Barry,. “Firm Entry and Wages: Impact of Wal- Mart Growth on Earnings
Throughout the Retail Sector.”, 2007 Available at http://ssrn.com/abstract=841684, Last accessed on 05 October, 2012. 234 Emek Basker,. “Job Creation or Destruction? Labor Market Effects of Wal-Mart Expansion,” Review of Economic Statistics,
Vol. 87, No. 1, 2005, pp. 174-183. 235 K. Gupta,D. Roy, and H. Vivek, Do small farmers gain from participation in producers’ organizations? The case of
Milkfed Dairy Cooperative in Indian Punjab. In From plate to plough: Agricultural diversification and its implications for the smallholders in India, 2006 Submitted to Ford Foundation, New Delhi, by International Food Policy Research Institute, Washington DC.
236 Emek Basker, 2005. “Selling a Cheaper Mousetrap: Wal-Mart's Effect on Retail Prices,” Journal of Urban Economics, Vol. 58, No. 2, 2005 pp. 203-229.
237 Mohan Guruswamy, , Kamal Sharma, Jeevan Prakash Mohanty, Thomas J Korah, “FDI in India’s Retail Sector: More Bad than Good?” Economic and Political Weekly, Vol.40 No.7, 2005, pp.619-23.
238 L.,J.Foster, Haltiwagner and C.J. Krizan ,The Link between Aggregate and Micro Productivity Growth Evidence from Retail Trade, Centre for Economic Studies, 2002
69
for large volumes of each product, pushing farmers to grow single crops rather than the multiple
produce they would usually grow to minimise risk239.
viii. Incumbent retailers
Observed supermarket practices too may work against the interests of incumbent retailers, even
organized ones. Supermarket chains routinely sell some products at lower than market prices, which
appears to benefit consumers, but this puts pressure on small local stores and has an adverse impact
on low-income and elderly consumers who rely on local shops240. Supermarkets also tend to alter
prices in different branches adjusting to local rivals, “price-flexing” as the UK Competition
Commission termed it, again working to the disadvantage of local mom-and-pop stores241.
239 Emek Basker, . “The Causes and Consequences of Wal-Mart's Growth.” Journal of Economic Perspectives, Vol. 21, No.3,
2007, pp. 177-198. 240 Jerry A Hausman,. and Ephraim Leibtag,. “NBER Working Paper No. w10712CPI Bias from Supercenters: Does the BLS
Know that Wal-Mart Exists?”, 2004. 241 Keith Head, Ran Jing, and Deborah L. Swenson, 2010. “NBER Working Paper No. 16288 From Beijing to Bentonville: Do
Multinational Retailers Link Markets?”.
70
PART 6: PRELIMINARY CONCLUSION
This concept note has been prepared to initiate this Working Paper on FDI in Multi-Brand Retail. This
concept note is for prospective contributors to know the basic ideas and features of this policy.
RGNUL-IPAN Research Team has done this preliminary research to take forward this debate. We
have dealt comprehensively with all the associated factors which might impact or get affected by this
retail sector policy.
After this preliminary insight into the issue, few generalised conclusions which can be inferred are
as follows:
Retail sector of any economy is one such area which is primarily governed by the local
factors, preferences and conditions for growth. Thus, foreign investment in this sector largely
has to adapt to the local conditions unlike other core areas like steel, mining, power,
manufacturing etc where large foreign players have been able to modify the local economic
environment according to their needs and suitability.
Retail Sector essentially goes according to the consumer psychology and not by the economic
prowess of any industry player.
India is a highly complex and unique consumer market which is not at all comparable to any
other economy in terms of its consumer preferences, consumer-retailer relationship and
retailer margin patterns.
Most importantly, this policy in question at this stage of initial proposal cannot be stated to be
highly beneficial or highly detrimental to the Indian economy. It will have a long gestation
period before any such conclusion can be made out. The claims of govt. as well as the
opposition are highly ill-founded and exaggerated.
These preliminary conclusions are purely on the basis of an initial study. We had received highly
critical contributions which either establish these notions or completely negate these general inferences. The most comprehensive contributions have been selected to be published here after. Specific case studies/questionnaires/interviews/impact evaluation reports have been included in
the papers further compiled below.
71
______________________________________________________
Disclaimer: Contributions published hereafter are a compilation of selected papers submitted by various authors. The views expressed here are of the individual contributors and do not reflect those of International Policy Analysis Network (IPAN) or RGNUL.
The publishers and editors will not be responsible for any loss arising out of the information provided in this report. Readers are advised to exercise personal discretion and verification.
_______________________________________________________
72
FDI IN MULTI BRAND RETAIL IN INDIA: ISSUES, OPPRTUNITIES
AND CHALLENGES
Ananda Chakraverty1
Sudipto Mitra2
ABSTRACT
Recently, there has been a huge uproar at the national front on the Indian Government's decision to
allow 51% FDI in Multi-Brand Retail in India. Thereby, turning into a hot goblet of national issue
widely debated for a significant amount of time. This paper deals with the contemporary issues,
opportunities and challenges of such policy decision. The paper starts by analyzing the reform
scenario which accelerated the opening up of the retail sector to foreign investment. Thereafter,
arguments in favour of and against FDI in retail have been propounded and analyzed. The benefits,
scope and imminent challenges of FDI in Multi-Brand Retail forms the crux of the paper. It concludes
with the authors’ discerning views on the issue analysing this crucified matter from the standpoint of
both a retailer and a consumer.
Key Words: FDI, Multi-brand Retail, India.
1 Student of the second year pursuing B.A. LL.B (Hons.) from Hidayatullah National Law University, Raipur, Chhattisgarh. 2 Student of the second year pursuing B.A. LL.B (Hons.) from Hidayatullah National Law University, Raipur, Chhattisgarh.
73
1. FDI in Retail: Arguments For and Against
The global retailers have advanced management dexterity in merchandise and stock management and they
have an added pro for innovative technology which not only improves productivity but also efficiency in
retailing. FDI in retailing also underscores entry of large low-cost retailers and adoption of integrated supply
chain management by them is likely to lower down the prices.3 There is a conspicuous establishment of
quality benchmark ensuring a good shopping experience. As multinational units branch out in their
operations, regional competitors tend to expand their horizons in terms of quality and competency to counter
the growth of international players. This all will encourage the investment and employment in supply chain
management and this will ensure a reliable and profitable market to these local players.4 Joint ventures
would ease capital constraints of existing organized retailers5 leading to expansion of opposite sell formats
as good as modernization of a sector.6 Industry tendencies for retail sector designate that organized retailing
has foremost impact in controlling inflation because large organized retailers are capable of buying
unswervingly from producers at competitive most prices.
As foreign investors exploring their potentials in the retail sector are keen on developing malls in India, the
size of organized retailing is expected to touch $30 billion by 2010 or approximately 10 per cent of the total.
This has initiated market-entry announcement from some retailers and has signaled to international retailers
about India‘s seriousness in promoting the sector.7 India is already a key sourcing country for some global
retailers. The entry of foreign retailers is likely to further promote India‘s manufacturing and export sectors,
leading to a double bonus for the economy.8 Allowing FDI in multi-brand retail can give a big push to the
country‘s social agenda, too, and has the potential to even positively impact and promote tourism,
computerization, systemization, government‘s ability to influence trade when required, address issues such
as inflation (since data available becomes more reliable/ accurate and trade gets increasingly organized),
reduction of black economy, control over food hygiene, better food quality assurance and accountability,
increased direct and indirect employment, push to real estate and availability of better managerial talent,
3 Sarthak Sarin, ‘Foreign Direct Investment in Retail Sector,’ at http://www.legalindia.in/foreign-direct-investment-in- retail-sector-
others-surmountingindia-napping (Last accessed 23 September , 2012) 4 Dipankar Dey, ‘Aspects of India’s Economy - FDI in India’s Retail Trade: Some Additional Issues,’ No. 43 Research Unit for
Political Economy (R U P E) Publications, Colaba, Mumbai, India, July 2007. 5 Hemant Batra, ‘FDI in Retailing Sector in India, – Pros & Cons,’ at http://www.legallyindia.com/1468-FDI-inretailing-sector-in-
india-pros-cons-by-hemant-batra (Last accessed 30 September , 2012). 6 Nabael Mancheri, ‘India’s FDI policies: Paradigm shift,’ at http cies-paradigm-shift (Last accessed 1 October , 2012). 7 Pulkit Agarwal & Esha Tyagi, ‘Foreign Direct Investment in Indian Retail Sector – An Analysis,’ at http://www.legalindia.in/
foreign- direct-investment-in-indian-retail-sector-an-analysis ( Last accessed 30 September, 2012). 8 Writankar Mukhar Jee & Chaitali Chakavarti, “Retailers Stumped as Govt. Shifts FDI Stance,” The Economic Times, 5 December,
2011.
74
etc.9 Also, the retail revolution can change country‘s perception across the globe, integrating it seamlessly
into world trade and economy.10
Indian retailers have yet to consolidate their position. The existing retailing scenario is characterized by the
presence of a large number of fragmented family owned businesses, who would not be able to survive the
competition from global players. The examples of south east Asian countries show that after allowing FDI,
the domestic retailers were marginalized and this led to unemployment.11 FDI in retailing can upset the
import balance, as large international retailers may prefer to source majority of their products globally rather
than investing in local products. Global retailers might resort to predatory pricing. Due to their financial
clout, they often sell below cost in the new markets. Once the domestic players are wiped out of the market
foreign players enjoy a monopoly position which allows them to increase prices and earn profits.12. High
cost of borrowing forces the domestic players to charge higher prices for the products. The opening up of the
retail sector would affect the sales in the unorganized sector. Some fear that, if FDI is allowed in retailing
then it would result in lowering of prices because FDI will result in good technology, supply chain, etc. If
prices were lowered then it would lower the margin of unorganized players. As a result the unorganized
market will be affected.13 Goods are bought on credit and sales are made on cash basis. Hence, the working
capital requirement is negligible. On the contrary; after making initial investment on basic infrastructure, the
multinational retailers may remit the higher amount of profits earned in India to their own country. Small
producers need to be organized into farmer companies or producer cooperatives that can deal with Big
Retail from a much stronger position. So that their interests are not lost.14 Department of Industrial Policy
and Promotion, Ministry of Commerce through the Press Note No. 5 dated 20 September, 2012 allowed 51
% foreign direct investment in multi brand retail through government approval route subject to the following
conditions15:
Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and
meat products, may be unbranded. Minimum amount to be brought in, as FDI, by the foreign investor,
9 Zubin Kabraji, Regional Director, Indo-German Chamber of Commerce, at http://www.businessstandard.com ( Last accessed 3
October 3, 2013). 10 Id. 11 Arvind Singhal, “Missing the Wood for the Trees”, The Economic Times, New Delhi December 13, 2011 12 P.G. Chengappa, Lalith Achoth, Arpita Mukherjee, B.M. Ramachandra Reddy & P.C. Ravi, “Evolution of Food Retail Chains:
The Indian Context” (Nov 5-6, 2003) www.ficci.com (accessed October 5,2012). 13 Saby Ganguly, Retailing Industry in India www.indiaonestop.com (accessed October 6, 2012). 14 David Neumark, Junfu Zhang & Stephen Ciccarella, “The Effects of Wal-Mart on Local Labor Markets” Journal of Urban
Economics 63, no. 2 (2008): 405-430. 15 “September Archives,” pib.nic.in/archieve/others/2012/sep/d2012092002.pdf (accessed October 6, 2012).
75
would be US $ 100 million.16 At least 50% of total FDI brought in shall be invested in 'backend
infrastructure' within three years of the first tranche of FDI, where 'back-end infrastructure' will include
capital expenditure on all activities, excluding that on front-end units; for instance, back-end infrastructure
will include investment made towards processing, manufacturing, distribution, design improvement, quality
control, packaging, logistics, storage, ware-house, agriculture market produce infrastructure etc. Expenditure
on land cost and rentals, if any, will not be counted for purposes of back end infrastructure.17 At least 30%
of the value of procurement of manufactured/processed products purchased shall be sourced from Indian
'small industries' which have a total investment in plant and machinery not exceeding US $ .1.00 million.
This procurement requirement would have to be met, in the first instance, as an average of five years' total
value of the manufactured/ processed products purchased, beginning 1st April of the year during which the
first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.18 Self-certification
by the company, to ensure compliance of the above conditions, which could be crosschecked, as and when
required. Accordingly, the investors shall maintain accounts, duly certified by statutory auditors.19 The
above policy is an enabling policy only and the State Governments/Union Territories would be free to take
their own decisions in regard to implementation of the policy. Therefore, retail sales outlets may be set up in
those States/Union Territories which have agreed, or agree in future, to allow FDI in MBRT under this
policy.20 Retail trading, in any form, by means of e-commerce, would not be permissible, for companies
with FDI, engaged in the activity of multi-brand retail trading.21
2. FDI in Multi-Brand Retail in India: Bouquets and Brickbats
Single brand retailing involves selling of products under one umbrella name only. For instance, French
Connection, Gucci, Puma etc. are examples of aforementioned kind. Multi brand retailing on the other hand
can be epitomized by the concept of super markets, shopping malls and hyper markets.
Soaring inflation is one of the lashing motives encapsulating this bent towards Multi Brand retailing.
Moreover, industry experts endure that allowing FDI will incise squandering, as big players will build
16 Id. 17 Id. 18 Id. 19 Id. 20 Id. 21 Id.
76
backend infrastructure, would help narrow the current account deficits, and move away from an industry
focus on intermediaries and job creation.22
Several constituencies are positively impacted by modern trade23 Farmers/producers Consumers Government Unorganized trade Inefficiencies in India’s food supply chain
Modern trade improves the quality of life
Increased tax inflows for the government
Kiranas as a major part of India’s retail sector
Several layers of intermediaries
Greater choice Organized and unorganized trade that is different in structure, size and in terms of taxes paid to the exchequer
India’s large retail sector that accommodates both organized and unorganized trade
High wastage levels (24-40%)
More competitive prices
The challenge of revenue collection from the unorganized retail sector
Lower than fair market value paid to farmers
Better quality of food products for modern trade players to transfer best practices to local farmers
Tax-compliant modern trade players who are large taxpayers
High final prices for consumers
“Lifestyle parity” where Indian products are similar to those available overseas
Agents controlling prices
Farmers benefit from modern trade
Consumers benefit from modern trade
The government from modern trade
Unorganized trade benefit from modern trade
Wastage is reduced In a democracy, fundamental tenet of progressive policy changes is that the main beneficiary
State VAT revenues increase as modern trade grows and develops.
Kiranas can source food and non-food items, essential for operations, from cash-and carry providers, benefitting from bulk discounts.
22 “Survey Report on India’s Retail Sector,” http://www.cci.in/pdf/surveys_ reports/ indias_retail_sector.pdf (Last accessed 4
October, 2012). 23 Id.
77
must be the consumer.
Income flow for farmers is stabilized
As economies evolve, governments should provide for inclusive growth and minimal displacement
Modern trade helps develop related sectors (supply chain, logistics, cold chain, etc.). Companies in these sectors contribute to the exchequer in terms of indirect taxes.
Kiranas can become franchise partners for modern trade players’ neighbourhood format.
The quality of fruits, produce, dairy, poultry, etc. is improved.
Farmers are integrated into modern trade
While we say, India can enjoy a fine integer of benefits by allocating FDI in Indian multi-brand retail,
it is imperative to note the fact that there are few threats too that eclipse the benefits.
Switzerland-based UNI Global Union’s paper 'Wal-Mart's Global Track Record and the implication for
FDI in multi-brand retail' dwells on the business practices of Wal-Mart concludes that lacking passable
safeguards put in place, FDI in multi-brand retail would result to displacement and maltreatment of
Indian workers in retail, logistics, agriculture and manufacturing. The US-based world's largest retailer
Wal-Mart has already established its presence in the Indian market through wholesale cash and carry
stores.24 It is said that dearth of production of processed agricultural products enhances inflation and
FDI in multi-brand retail will eliminate the 40% wastage of food grain that currently occurs. Secondly
it is preconceived that only foreign investors can facilitate good warehousing without realizing that,
currently, the Indian corporate sector is more or less free to undertake (notified) contractual agreements
with farmers for supply of output.25 Lack of investment therefore, is more due to the controlled nature
of agricultural production than lack of foreign investors.26 The problem is that all the benefits, if they
24 “FDI in multi brand retail to harm Indian workers,” The Times of India, 3 October, 2012, Available at
http://timesofindia.indiatimes.com/business/india-business/FDI-in-multi-brand-retail-to-harm-Indian-workers-Globalreport/ articleshow/15601774.cms?.
25 “Multi Brand FDI farmers,” Indiatimes, 30 September, 2012, Available at http://articles.economictimes.indiatimes.com/2012-08-10/news/33137589_1_multi-brand-FDI-farmers.
26 Id.
78
coming about through FDI, can well be created by these very same “global players” through the 100%
FDI in Cash-and-Carry route, which is already allowed.27
The reason why these problems are yet unsolved is not even remotely concerned with monetary
subjections (foreign or domestic), but with governance. At the very outset, the government needs to
build proper channels to link villages to the consumption centres (which are largely urban). Secondly,
make electricity available (on a 24-hour basis) for cold chain infrastructure viably. Scrap the
Agricultural Produce Marketing Commodity (APMC) Act so that farmers can sell their produce to
whomever they choose, at the best possible price. Amendments in the Warehousing Act, the Essential
Commodities Act, the various food laws, and yes provide tax incentives for creation of supply chain
infrastructure. Bringing about increase in irrigation and protecting agricultural land (by declaring it as
no-development zones) for food security.28 International retailers ensue on the principle of “buy cheap
and sell costlier” hence, it is a myth that middlemen are eliminated and the benefits go to producers or
farmers directly. Therefore, the benefits derived out of elimination of the middlemen goes to the
retailer and not even substantially to farmers or producers. The basic principles of trade negotiations
have been ignored while making concessions to the US and EU by agreeing to their proposal on big
retail without any corresponding quid pro quo.29
That an option has been given to the states to implement FDI is a myth being spread to mislead people.
FDI is a central subject and not a state subject. International treaties on investment, to which India is a
party, require a “national treatment”. The deception is a trap for future litigation which may force all
states to accept FDI in retail.30
3. FDI in Multi–Brand in India: Challenges and Opportunities
Accelerated urbanization in India has ushered in drastic changes in the consumption pattern.
Emergence of new social classes and expansion of middle and upper middle classes, substantial
rise in the income of the people and growth of the nuclear family system have brought in a
great deal of change in the attitude of consumers. India’s population predominantly consists of
27 McKinsey & Company Report, The Great Indian Bazaar: Organised Retail Comes of Age in India (2008). 28 J.P. Mohanty, Kamal Sharma, Moahn Guruswamy, Thomas J. Korah, FDI in India's Retail Sector – More Bad Than Good,
Center for Policy Alternatives (CPAS), New Delhi. 29 S.D. Roye, ‘No to FDI in Retail, No to Wal-Mart,’ at http://indiafdiwatch.org/ fileadmin/WARNstorage/NoFDI.pdf (Last
accessed 9 October, 2012). 30 ‘10 Reasons why FDI in retail will Hurt,’ at http://www.firstpost.com/ politics/bjp-gives-10-reasons-why-FDI-in-retail-
will-hurt-471236.htm (Last accessed 3 October, 2012).
79
youth who are more brand-conscious and are ready to pay a premium for quality, environment
and brands. People, now a days, are keen to spend on lifestyle. Today, the typical Indian
consumer expects everything to be available under a single roof. All this makes India a very
attractive destination for foreign investment in retail sector.31
It may be imagined that, if the entry of trans-nationals in retail trade leads to harmful consequences,
the government can restrict and regulate their activities, or even remove them altogether. However,
TNCs in services are striving to bring in changes in the General Agreement on Trade in Services
(GATS) to ensure that their entry is irreversible and ever-expanding.32
To elicit the opinions of stakeholders of the economy, with respect to allowing FDI in Multi Brand
Retail Sector in India, the Department of Industrial Policy and Promotion floated a discussion
paper. Some of the voices heard after that is such that the MNCs would bring in advanced technologies
and methods that would bring in huge advantages for a techno-hungry country like India. It is opined
that FDI in Multi-Brand Retail Sector can be considered appreciable as it may bring the latest
cutting-edge technologies to India that would benefit a host of the sectors of the economy such as,
the retail traders, farming, cooperative, service sector in non corporate enterprises and end
consumers.33 The face of the Indian Retail Industry will change with the entry of Global Retail Majors
who are known for their quality, service, and technology of highest standards. Infrastructural facilities
and assured markets for the farm produce are the prerequisites for the growth of the rural agricultural
sector. Most farmers tend to prefer wheat and traditional crops if they don’t find adequate market for
cash crops. FDI in Multi-Brand Retail can create market for cash crops and may move the farmers
to grow commercial products like fruits, vegetables depending on the suitability to the soil and
climatic conditions of that area. Bharti-Wal-Mart, a joint venture between India’s Bharti Enterprises
and US-based Wal-Mart Stores, has plans to buy farm produce directly from over 35,000 small and
medium farmers in India by 2015.34 Wal-Mart is confident that this initiative will result in an increase
of 20 per cent in the income of farmers and will have a multiplier effect benefiting one million farmers
31 Mathew Joseph & Soundararajan, Nirupama, ‘Retail In India: A Critical Assessment,’ 2009 (unpublished). 32 S. Parekh & Kaustabh Prakash, ‘Retailing in India: Recent Trends and Upcoming Challenges- Aspects of Indian
Economy,’ 2011 (unpublished) . 33 Dr. Sameena Khan & Fayaz Ahamed, “Foreign Direct Investment in India: Challenges and Opportunities in Multi-
brand Retail Sector,” International Journal Of Research In Commerce And Management, Vol. 2, No. 1, 2011, pp. 97-98. 34 D. Raghunandan, ‘FDI in Organised Retail: A Lose-Lose Game,’ India Current Affairs, Economy, July 7, 2010.
80
and agricultural labor.35 Investment in infrastructure will help in reducing the intermediaries and thus
will reduce the gap between prices paid by the consumers and prices received by the farmers.
Development of back-end infrastructure can cut the wastage of farm output, time and can
improve quality. Improved facilities will enable farmers increase their income. FDI in multi-brand
retail will intensify the competition paving path to improvement in the standard of quality of the
merchandise and widening the consumer choice.36 For a mammoth-size economy like India this might
not be the case as there is room for accommodating both big as well as small retail outlets to
grow.37 Another point worth-noting is that when large modern domestic Multi Brand Retail outlets
start operating in the economy, some consumers from small retail outlets may shift to the big modern
outlets. 38
Undeniably, Mom and Pop shops will continue to enjoy the advantage and may remain unaffected by
the FDI in Multi Brand Retail because of the convenience factor. In view of the availability of
disposable incomes for Indians, there is an increased thinking to pay for quality and ease and access to
a “one-stop buying” which will have a wide range of different products.39
Micro, Small and Medium Enterprises are expected to be benefited since the foreign companies
will approach them for the know-how local tastes and merchandise preferences. Investments in
back-end infrastructure will lead to more efficient retail trade and thus it can be felt that FDI in Multi-
Brand Retailing will definitely aid in developing world-class supply chain for the retail sector in
India. 40
The move to allow FDI in India may augment the likelihood of achieving a double digit
economic intensification as it can attract global retail stalwarts such as Walmart, Tesco, Home Depot,
Carrefour etc. to partake in retailing in India. Experts opine that India's agrarian infrastructure
would massively develop as the foreign companies must invest in infrastructural facilities such
35 Economic Times, ‘Foreign Direct Investment,’ Economic Times, http://articles.economictimes.indiatimes.com/ (Last
accessed 4 October, 2012). 36 V. Handa & N. Grover, ‘Retail Sector in India: Issues & Challenges,’ International Journal of Multidisciplinary Research,
Vol. 2, No.5, 2012. 37 ‘FDI in Multi-Brand Retailing: Economic Compulsions or Political Gains?,’ Amic – Infoseries – 8, Agricultural Market
Intelligence Centre, Department of Agricultural Economics, Kerala Agricultural University,Thrissur (2012). 38 ‘FDI in Retail – An idea whose time has come,’ Images Retail, 2011, pp. 62-63. 39 Laxmikant S. Hurne, ‘Proposed FDI in Multi-Brand Retailing: Will it heat the Indian unorganized Retail Sector? ,’ Review
of Research, Vol.1, No. 6, 2012, pp. 1-4. 40 Id. at 1.
81
as cold storage and logistics to support their operations. At present around 35 percent of the
post-harvest produce is going waste in India while about half of the people are malnourished.
Consumers will be entitled to experience variety, high- quality merchandise, and superior customer
service at reasonable price.41
4. Conclusion
Amidst today’s time of fierce competition and a quest to achieve and enhance a substantial level of
economic and social development, nations are trying to liberalize its economic policies in order to
attract investments from not only, domestic players, but also from magnates all across the globe.
Consequently, people with generous coffers of funds, all around the globe, are expanding their wings
and seeking opportunities of investing in different spheres of this lucrative market. India too is not
oblivious to the rapid developments taking place in the global market and has emerged as one of the
prime destinations for the investment of funds from an impressive number of foreign investors.
As India capitalizes on the benefits of FDI, there will be more competition in the market at large and
the rural sector of the country will be in the process of reformation, thus bringing about a socio-
economic stability. However, the path of liberalizing the Indian retail sector should be treaded
cautiously in the wake of the fact that international experience has shown that except for the huge
profits raked in by the supermarket chains, organized retail has been a lose-lose scenario for farmers,
small traders and wholesalers, consumers and the environment and therefore society as a whole. As of
now, there is no proper definition of retailing or retail formats in India. International players are
exploiting the situation and are often entering the market and expanding their businesses through
multiple routes and are operating in the country with more than one format of retailing. The regulatory
regime should address these issues. The entry norms should clearly state the approval requirements,
conditions / restrictions if any imposed, etc. The government should also strictly enforce the quality
standards for local production and imports.
FDI in Retail trading should be opened up to substantially improve productivity and distribution
system through modern format retailing. The government should come out with a policy statement
laying down the roadmap for modern retail and allowing foreign investment in retail. These flows,
especially FDI, need to be encouraged through an appropriate policy regime. Thus, as a matter of fact
FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be
significantly encouraged.
41 Id. at 2.
AN EMPIRICAL ANALYSIS OF POSSIBLE EFFECTS OF FDI IN MULTI
BRAND RETAIL IN INDIA
Dhaval Piyush Sampat1
Mudita Manot2
Nitish Mathran3
Dibyendu Sen (Project Guide)4
ABSTRACT
In a country like India where unorganized retail counts for approximately 90% of the total retail, the
big question is whether the local industries will be able to survive and if the new FDI policy will
actually provide the much needed stimulus to the economy.
In this context, the first part of the paper shows the status of organized retailing in India with SWOT
analysis, the impact of organized retail on the unorganized retail sector as well as the farmers and
addresses their issues towards multi-brand retailing. The results expected from the survey that was
conducted among 3 major stakeholders – the industrialists, consumers and the unorganized retail shop
owners who face the risk of being wiped out, helped us delve more into this, with focus on some
specific cases. Our present work makes an attempt to study the consumer perception and the various
myths and realities surrounding the entry of the various global giants to India. It also looks into the
issues of the farmers and the impact on the traditional supply chain as well as the agricultural back
end system.
The findings from the paper reveal that the unorganized sector will have the highest negative impact of
the FDI policy and the survey results also show that it is the retailers in the unorganized sector who
are not keen on supporting the government's decision to bring in FDI in multi brand retail as
compared to corporates and consumers who favour the policy.The paper concludes with
recommendations and how the concerned parties can co-exist towards helping India improve the
health of the economy as well.
1 Dhaval Piyush Sampat is a student of the Dept of Business Administration of St. Xavier`s College, Kolkata. 2 Mudita Manot is a student of the Dept of Business Administration of St. Xavier`s College, Kolkata. 3 Nitish Mathran is a student of the Dept of Business Administration of St. Xavier`s College, Kolkata. 4 Dibyendu Sen is an Assistant Professor at St. Xavier`s College, Kolkata.
83
1. Introduction - Present situation of unorganized and organized retail in India
The Indian retail market is estimated to be US$ 450 billion and one of the top five retail markets in the
world. India’s retailing industry is essentially owner manned small shops that account for more than
90%.5 Currently, the share of modern retail is a mere five per cent in the total retail trade sector. From
all estimates, this is expected to, at best, quadruple over the next 20 years. That would still leave a
healthy 80 per cent of total retail trade to the self-organized sector.
The Indian retail sector accounts for 22 percent of the country's gross domestic product (GDP) and
contributes to 8 per cent of the total employment. India continues to be among the most attractive
investment propositions for global retailers. The Government recently passed a cabinet note permitting
FDI up to 51% in multi brand retailing with prior Government approval and 100% in single brand
retailing thus further liberalizing the sector. This policy initiative is expected to provide further fillip to
the growth of the sector.
Cumulative foreign direct investment (FDI) inflows in single-brand retail trading, during April 2000 to
June 2011, stood at US$ 69.26 million. India's retail market is expected to grow at 7% over the next 10
years, reaching a size of more than US$ 850 billion by 2020. Traditional retail is expected to grow at
5% and reach a size of US$ 650 billion (76%), while organized retail is expected to grow at 25% and
reach a size of US$ 200 billion by 2020.6
With this growth in retail, not only front end but the entire network of activities leading to a
culmination of a successful retail transaction has undergone a significant development. India has been
topping the AT Kearney's annual Global Retail Development Index (GRDI) for three consecutive
years, thus presenting itself as an attractive market for retail investment.
Table 1 – Growth of Retail in India
Year 1999 2002 2005 2009 2010 2013 (expected)
Total Retail (billion
INR)
7000 8250 10000 18450 19500 24000
Organised Retail 50 150 350 920 1350 2400
5 ASA & Associates, “A brief report on Retail Sector in India” 6 FDI leading to growth in various sectors, Available at https://www.ficci.com/sector/33/Project_docs/Sector-prof.pdf , Last
accessed on 24 December 2012.
84
(billion INR)
Share of Organized
Retail (%)
0.70% 1.80% 3.50% 5.00% 7.00% 10.00%
2. Myths and Realities surrounding the entry of global giants to India:
2.1 Creation of Jobs- People are thinking that their arrival will create a lot of jobs in the economy and
will give it the much needed boost. But it can lead to robbing of livelihoods many more times than the
number of jobs they are going to create. For potentially creating 2 million jobs they are going to
destruct 40 million livelihoods in retail sector.
2.2 Organized Retail stores sell fresh products- The people tend to have the notion that organized
corporate retail outlets sell fresh products and maintain proper hygiene. This might not be always true
because long distance supply chain and refrigeration can sometimes lead to stale fruits and vegetables.
2.3 Consumers will get better prices as middle men are being removed- The threat lies in the fact that
it might lead to a monopolistic situation where there will be no option for the buyers but to go and buy
from them only. In other countries there have been situations where the prices of the products were
kept very low and once the small outlets and all were wiped out and there was no competition they
resorted to normal pricing.
2.4 Local manufacturers will benefit- FDI in retail will help local manufacturers scale up to global
level. This is a myth that foreign retailers are peddling–that they will source locally for their global
operations and this will benefit Indian manufacturers to scale up. If this was true then how come
Walmart, a US-based company, has not helped American manufacturers scale up? One of the biggest
criticisms against foreign retailers is that they destroy small and medium sized companies. Foreign
retailers, source bulk of their produce from China and have contributed to the destruction of SME
manufacturers across the world. This is one of the biggest reasons why many countries don’t allow
foreign retail to come in. Japan has continuously and consciously kept foreign retailers out and is very
strict even about single-brand retail.
Source: www.nielsen.com
85
3. SWOT Analysis of FDI in Retail:
Strengths:
The emerging retail formats like malls, supermarkets and specialty stores, provide all range of
products and services under one roof.
The organized retail stores tend to buy in bulk and hence they will procure directly from
manufacturer or farmer which will lead to better prices and margins, both for the consumer
and the farmers.
Potential generation of thousand plus jobs in the sector.
Indian consumers have high disposable incomes, which translates into high consumption
levels and the presence of a growing strength of earning young population.
Weakness:
The presence of a significant number of strong and well-established players in the sector
limits the entry for a new potential player.
High real-estate and distribution cost in some parts of the country are the obstacles for growth
of retail in India.
Not everyone will have access to these stores and malls which ultimately result in a major
chunk of the population making purchases from the conveniently located store nearby.
Low conversion ratio when we compare the footfall to the actual number of people who make
purchases from these malls.
Relatively small domestic market, as not many will have access to these, which thereby limits
the growth opportunities.
Opportunities:
Increasing awareness of consumers about products and services through various forms of
media compared to what it was a few years back.
The urban area has been the focus of Organized Retail which has led to increased
competition. Rural India is home to 72 Crores consumers across 6 lakh villages. 17% of these
villages account for 50 % of the rural population as well as 60 % of rural wealth. Hariyali
Kisan Bazaars (DCM) and Aadhars (Pantaloon-Godrej JV), Choupal Sagar (ITC), Kisan
86
Sansars (Tata), Reliance Fresh, and others such as the Naya Yug Bazaar have already
ventured into their market.7
Threats:
Rigid government policies and regulations make this very unpredictable.
Indifferent attitude towards the malls and stores that are coming up in India.
The unorganized retail sector in India which tends to provide personal customized service
(like credit facility) to their existing consumers.
4. Case Study:
A micro-based case study approach has been used to get an insight on the existence of Organized
Retail outlets, being run by corporates, the unorganized retail markets and the local general stores in
the same locality.
Location:
Camac Street, Kolkata.
Enterprises:
Food Bazaar Retail Store, Vardaan Market and Hari Om General Stores.
History:
The above mentioned 3 stores are located in a radius of 1 km and had a lot of common customers.
Vardaan Market and Hari Om General Stores have been in the locality for more than 5 years. It was
after the construction of the first ever Pantaloons outlet in Kolkata which also led to Food bazaar
occupying the top floor of that outlet.
Impact:
On analyzing the data received from the retail shop owners in Vardaan Market and owners of Hari Om
General Stores it was found out that the conversion ratio had reduced in these two places after the
Food Bazaar Retail Outlet had come up near these existing small retail markets and there was a
decline in sales in the first two years after the new retail outlet had been setup. Hari Om General Stores
was forced to down shutters owing to the decline in number of customers; major reason being that the
7 NSDC- National Skill Development Corporation, Available at http://www.nsdcindia.org/pdf/organised-retail.pdf, Last
accessed on 15 January 2012.
87
organized retail outlet set up in the locality was offering all kinds of products and various brands under
one roof, drawing consumers away from the limited variety general store.
Challenges:
The organized retail outlets offer a wide range of products under one roof which solves the purpose of
the consumers as everything can be purchased from one place. These organized retail outlets like Food
Bazaar have a pan India presence and lure the consumer towards them through various discount
schemes like Sabse Sasta Din – where all the products are offered at the lowest possible price on that
particular day and various other mass media promotions which the small sized retail outlets can`t
afford. Also, the range of products and the availability of exclusive brands, keeps them in good stead
and ahead of the shops in the existing unorganized retail markets.
5. Impact on back end Infrastructure and farmer issues:
As per the government guidelines, within three years of the induction of the FDI at least 50% of total
investment shall be invested in back-end infrastructure by the foreign retailer in the country. This
would include investment in processing, manufacturing, distribution, quality control, packaging,
logistics, storage, warehouse etc. Highly fragmented supply chains coupled with infrastructure issues
and the vast geographical spread of the Indian market pose huge challenges to the retailers. Foreign
retailers have to enhance their supply chains to succeed in the cost conscious market. 30-35% of
India’s total production of fruits and vegetables is wasted every year due to inadequate cold storage
and transport facilities8. Almost half of this wastage can be prevented if fruit and vegetable retailers
have access to specialized cold storage facilities and refrigerated trucks. The organized retail will bring
in efficient practices that will help farmers in the procurement process, reduce wastage with finally
efficient storage and will finally cut the losses. The giant retailers will help India to have strong storage
system with highly developed transportation. The arrival of foreign retailers will definitely bring in
synergies in distribution management practices.
The farmers across India’s 6, 00,000 villages stand to gain with higher profits and better market access.
The original producers will get a higher price since the profit will flow to them directly, leaving behind
8 Ramesh Chand, “FDI in retail must be measured by benefits for consumer & economy, not just for farmers,” The Economic
Times, 4 October 2012, Available at http://articles.economictimes.indiatimes.com/2012-10-04/news/34260288_1_farmers-farm-sector-multi-brand-retail-trade, Last accessed on25 January 2012.
Abhineet Kumar, “FDI in retail to benefit farmers, consumers and artisans,” Business Standard, 20 September 2012, Available at http://business-standard.com/india/news/FDI-in-retail-to-benefit-farmers-consumersartisans/187584/on, Last accessed on 20 January 2012.
88
the middle men. However it is also believed that FDI in retail might have adverse effect on farmers.
There are chances of farmers getting exploited by MNCs. It is argued that giants like Wal-Mart will
use their monopolistic power to keep farm prices low and disrupt long and time-tested channels of
trade.
6. Research Methodology:
Sample Size: 300.
Sampling Technique: Stratified Sampling.
Population: Finite.
Data Collection Instrument: Questionnaire
Demographic: 60% were males & 40% were females and individuals from various groups who stand to
be affected, were taken in equal proportions. For the consumers, equal number of people from the 3
income brackets – less than 1 lakh, 1 lakh to 5 lakh, 5 lakh and above, and individuals who have a say
in the purchase decision of the family were accepted as respondent in survey.
Geographic Location: Kolkata, India
Findings:
Figure 1: Supporting 51% FDI in Multibrand Retail.
89
Figure 2: On which sector will this have the highest negative impact?
The above graphs show the representation of the data collected from 3 core groups who are affected by
this – the Consumers, Corporates in Retail Sector and the businesses in the unorganized sector. The
overall survey also revealed that the unorganized sector will have the highest negative impact of this
FDI policy and stand to be impacted most by its negative consequences.The table shows the consumer
response when they were asked to choose the factors for which they would decide between the local
kirana store or the retail outlets.
Table 2 – Role of various factors in deciding purchase location.
Factor Local kirana Store Organized Retail Outlet
Price 60% 40%
Product Display and Range 22% 78%
Hygiene and Visual Appeal 26% 74%
Credit facility and other benefits 83% 17%
Exclusive Brand Availability 10% 90%
In order to get the overall perception of the people about the local grocery shop and and the various
attributes which were considered before making the decision have been represented in the percptual
90
map below.The horizontal axes represent Service and Offerings while the vertical axes measures the
display and visual appeal. The perceptual map reveals that the kirana stores have an upper hand
because of the credit facility they provide but they lose out when it comes to exclusive brand
availability, the display of products and visual delight that a big retail store offers.
Figure 3 – Perceptual Map.
7. Challenges to be faced by the Foreign Investors:
As much as the unorganized sector faces challenges from the foreign investors in terms of capital
structure, predatory pricing, wide range of brand availability and product display, the foreign investors
are equally vulnerable to various other potential threats and challenges. A few of them have been
discussed below.
(i) Competition from Unorganised Sector - Traditional retailing has been established in India for
many centuries, and is characterized by small, family-owned operations. Because of this, such
businesses are usually very low-margin, are owner-operated, and have mostly negligible real estate
and labour costs. Such small shops develop strong networks with local neighbourhoods. The
informal system of credit adds to their attractiveness. Moreover, low labour costs also allow shops
to employ delivery boys, such that consumers may order their grocery list directly on the phone. In
contrast, players in the organized sector have to cover big fixed costs, and yet have to keep prices
low enough to be able to compete with the traditional sector.9
9 Anusha Chari and T.C.A. Madhav Raghavan, “Foreign Direct Investment in India’s Retail Bazaar: Opportunities and
Challenges”, The World Economy, Vol. 35, Issue 1, 2012, pp. 79-90.
91
(ii) Location Costs - In urban settings, real estate rents are also very high. Thus the opportunities in
this sector are limited to those retailers with deep pockets, and puts pressure on their margins.
Conversely, for retailers looking to set up large stores at a distance from residential
neighbourhoods may struggle to attract consumers away from their traditional sources of groceries
and other products.
(iii) Red Tapism - Before investment approval is given, the application of foreign investors has to pass
through various transfer channels which are dominated by the Bureaucrat. This is referred to as
Red Tapism. This results into delay in decision making regarding investment beginning. Delay in
approvals leads to disinterested corporate giants.
(iv) Procedural Delays - India has requirement for the number of permits and significantly longer
median number of days to start a firm than almost all countries, which are included in the Global
Competitiveness Report’s Database. According to the report by World Bank, starting a business in
India requires 11 procedures and median time is 71 days as compared to china, which has 14
procedures with a median time of 48 days.
8. A Comparison of India with China-
Two decades ago, China was a different story. It had very little organized retail and virtually no malls
and with the average Chinese not exposed to foreign brands. China allowed FDI in the year 1992.
Today, China's retail industry is worth upwards of $700 billion with more than 14 global mega retailers
setting up shop in the last ten years. In the first phase, China allowed FDI in retailing with some
restrictions:
(i) It was restricted to six major cities namely (including Beijing, Shanghai and Guangzhou,
Tianjin, Dalian, Qungdao) and Special Economic Zones.
(ii) Foreign ownership initially restricted to 49% of joint ventures.
(iii) Foreign retailers that operate large retailers will be limited to 50 units.
It took over 12 years to liberalize its FDI regime and in stages with reversals as well. As soon as retail
was opened to FDI, global retailers like Tesco, Wal-Mart, Metro and Carrefour were quick to enter.
After 10 years the cap was raised to 49% when local chains had sufficiently entrenched themselves.
100% FDI in retail was permitted only in 2004, after the infant retailing industry had acquired some
muscle. It even revoked some previously granted approvals, to reduce the foreign retailers’ footprint.
92
Given this timeline, the Chinese retail environment is 20 years ahead of India. Looking at their market
today can give us a rough idea of how FDI in MBRT in India might pan out in the medium term.
Initially, China also allowed foreign retailers to open only in select metropolises, such as Beijing,
Shanghai and Shenzhen, and moreover, only in certain districts in those cities. In Beijing and
Shanghai, foreign retailers like Wal-Mart were only allowed to operate in districts where there were no
local competitors. Through these ‘invisible barriers’, China succeeded in giving local retailers
protection, while at the same time, they learnt from the more efficient business models of foreign
companies.
China opened up its retail sector completely in December 2004. Under the new regulations, overseas
entities are now allowed to set up a Foreign Invested Commercial Enterprise (FICE), which may act as
a commission agent, wholesaler and retailer or engage in franchising activities on a wholly owned
basis in China.
8.1 Effect Of Opening Up Of The Sector10
(i) 40 foreign retailers have secured approval since 1992
(ii) $22 billion of FDI attracted 3.6% of total FDI.
(iii) Employment in retailing has grown at 6% p.a. since 1992 to 53 million
(iv) Retail sales have grown@13.5% CAGR since FDI was permitted.
(v) In 2003, FDI in wholesale and retail was US$ 1.1 Billion (Around 30% of our total FDI in
2003).
(vi) Some well-known foreign retail corporations include Nike, Wal-Mart, Carrefour, 7-Eleven,
and Giordano. These retailers, amongst others, account for some of the 10 percent of total
merchandise.
(vii) Since 1992 FDI has improved the quality of experience, choice and prices for the Chinese
shoppers.
(viii) There was also considerable increase in traditional stores, hypermarkets, super markets,
convenience.
10 Kaanan Gupta, “FDI in Multi-brand Retailing: Lessons from China 2012”, Available at
http://www.studymode.com/essays/Foreign-Direct-Investment-1336191.html, Last visited on 12 May, 2013.
93
While the experience of China has been cited by many as an argument for opening India’s sector, there
are, however, key differences in the organization of China’s retail and in its opening process that are
markedly different from the Indian context. Therefore, it cannot be ascertained that FDI will prove to
be equally beneficial for India given the political and economic setup here.
Chinese experience, indicates a mixed result of the coming of foreign retailers on farmers’ client base.
In some cases the client base has increased while in other cases farmers have been rendered out of
work due to market consolidation. However, it cannot be anyone's case that farmers are getting a good
deal right now. They remain underprivileged in terms of accessing technology, inputs, and above all,
credits and subsidies from the government in India.
Foreign retailers have played an instrumental role in providing impetus to organized retail in China as
well as modernizing the sector through best practices and state-of-the-art technology with modern
management techniques and brand recognition becoming the mainstays of the Chinese retail sector. It
is also because big players’ strengths in their home countries are based on factors that are totally absent
in India, like incredible logistics and supply chains; physical infrastructure like roads and ports.
All China’s biggest retail firms are Chinese companies despite the fact the big-box retailer set up shop
nearly 15 years ago in the country, which was enabled by the government controlling the speed of the
‘gradual’ opening up process, which gave local retailers enough time to adapt. It is still obscure if India
can pose the barriers that challenged foreign retailers in China as the unorganized retail sector is also
far larger in India, with organized retail accounting for less than 7%, compared with 20% in China.
Consolidation of the retail sector in China, as a result of the government-supported rise of local retail
giants like Bailian, did put many small retailers who could not cope with the surge in number of
competitors and lower prices, out of work reflecting the Darwinian philosophy of survival of the fittest.
In India, given the political and economic background, the number of small retailers losing out on their
jobs could be far more.
In China, unorganized retail, represented by street vendors and neighbourhood ‘community retailers’,
has continued to thrive, offering cheaper prices than supermarkets and retail chains. Similar is the
scene expected in India as poor are not able to negotiate prices with modern but traditional retailers.
Further, the products which are offered at a lower price by modern retail are less relevant for the poor
who buy them loose in small quantities.
94
Looking from a wholistic view, it is important that, like China, India should first encourage and focus
on strengthening the domestic organized retail chains’ foothold and presence in the multi brand retail
sector prior to completely opening Multi Brand Retail Trade to foreign investment.
9. Recommendations and Conclusion:
The survey results reveal that in a place like India where more than 90% of the total retail involves the
unorganized sector, there still lurks the fear of not being able to survive once the multinational giants
enter. Since the Indian retail sector is highly fragmented and domestic retailers are in the process of
consolidating their position, the opening up of FDI regime should be in a phased manner over 5 to 10
years time frame so as to give the domestic retailers enough time to adjust to the changes.
Stringent rules should be formed against collusion and predatory pricing and a code of conduct should
be drafted for the organized retail sector for dealing with their suppliers so that the suppliers (for
example farmers) are equally benefitted and are not exploited.
The back-end infrastructure requirement should be carefully planned and devised so as to ensure that
the supply chain and storage system of the country adequately benefit from it and the consumers do not
have to bear the burden of rising costs due to inefficiencies currently prevalent in the logistics and
supply chain system.
Quality regulation, certification & price administration bodies can be created at district and lower
levels for upgrading the technical and human interface in the rural to urban supply chain.
The number of cities in which the investment will be allowed should be reduced, not increased, and
stores can be located away from inner cities in order to reduce the impact on small retailers. The
process should move forward with care and due concern for the various stakeholders, in a carefully
phased manner.
FDI POLICY FROM THE PERSPECTIVES OF PORTOR’S FIVE FORCE
MODEL AND SOCIAL IMPLICATIONS
Preet Singh Oberoi1
Anuj Sabharwal2
ABSTRACT
FDI may be defined as “Acquisition or construction of physical capital by a firm from one (source)
country in another (host) country”3In simple terms FDI may understood as the inflow of Capital from
one country to another i.e. source country to the host country. The Union Cabinet of India, via their
policy, allows that FDI in multi brand retail may be permitted up to 51% foreign equity through the
government approval route, subject to adequate safeguards for domestic stakeholders. The policy
rollout will cover only cities with a population of more than 1 million.4 It also stipulates that at least
30% of the procurement of manufactured/processed products must be sourced from Indian small
industries (SME). Small industries, for the purposes of this policy, have been referred to as industries
which have a total investment in plant & machinery not exceeding US $ 1.00 million.5
The new age phenomena social welfare versus economic necessity plays its way into this debate very
ably. Given the state of affairs of the Indian economy and the socio-political situations of the recent
past, India is in dire needs of funds to avoid a foreseeable deterioration. However, a society ours,
which still suffers from the social evils like poverty, employment, malnutrition, illiteracy and also a
substantial dependence on agriculture, cannot at any cost afford to forget and ignore the welfare
aspect of our policy. Hence, we must instigate equilibrium with respect to welfare as well as
economics.
In this paper we wish to suggest that there should be a floor limit for indigenous population which
shall ensure them guaranteed employment. There should be amendments in the competitive laws like
more effective laws for predatory pricing; comprehensive remedial and punitive measures in case of
anti-competitive practices like dumping , abuse of dominance , anti-competitive practices or autonomy
to CCI.
1 IVth Year Amity Law School, Delhi (GGSIPU),Contact Number- 09999987440 2 IVth Year Amity Law School, Delhi (GGSIPU),Contact Number- 09953986233 3 Deardoff‟s Glossary of International Economics. Available at http://www.
personal.umich.edu/~alandear/glossary/f.html#fdi2, (Last accessed on 12 October, 2012) 4 Press Release Id 77725, Press Information Bureau, Government of India, Available at
http://pib.nic.in/newsite/erelease.aspx?relid=77725, (Last accessed on 9 October, 2012) 5 Press Note No.4 (2012 Series), Ministry Of Commerce and Industry, Government of India. Available at
http://dipp.nic.in/English/acts_ rules/Press_Notes/ pn4_2012.pdf, Last accessed on 08October, 2012.
96
1. Socio- Economic Implications Of The FDI Policy
Foreign direct investment in multi brand retail is one of the most debated topics of present day polity.
There are certain genuine concerns with respect to this policy however the notified policy does not seem
to be bereft of any cause or prospects. This policy like a coin has two sides to it. Whilst certain opposition
or reservations to this policy may be pertinent yet the policy does not prima facie seem to be ill founded.
Major reservations relate to its socio- economic impact.
Employment
The most contentious of all the arguments for or against FDI in multi brand retail happens to be the
employment argument. Whilst the supporters contend or rather assure 10 million new employment
opportunities in the retail sector without impacting the existing employment unorganized sector.6 Out of
the said promise 50 to 60 percent is estimated to be generated from logistics and infrastructure providing
services to organized retail trade.7 Yet there is a big question mark over the pragmatic fulfillment of the
said problem. Despite, the obvious implication of creation of new jobs however the displacement of the
pre- existing ones seems inevitable. Though organized retail might create jobs yet the creation of new
jobs seem improbable without the displacement of jobs so created by the mom & pop stores.
Infrastructure
In order to overcome the infrastructural deficiency in India a huge injection of capital becomes a
necessity. India, in effect, is an unexploited economy with limited surplus capital. Furthermore, the Indian
government is one which is running on budget deficit. So the generation of capital from within our
economic system becomes impragmatic. Furthermore it is not just the capital that the Indian retail
industry lacks, it is the structure, knowledge and the global integration which can possibly be attracted
through foreign direct investment.
6 Available at: http://timesofindia.indiatimes.com/india/FDI-in-retail-will-create-10-million-jobs-in-3-years-Anand-
Sharma/articleshow/10867757.cms /, Last visited on 27 January 2013. 7 Bob Evans (2011), Available at: http://www.forbes.com/sites/sap/ 2011/12/02/how-india-and-wal-mart-will-create-10-
millionjobs /, Last visited on 27 January 2013.
97
Food Wastage
As according to the estimates, the warehousing capacity available in India including both public
and private sector is around 108.75 million MT and an additional of 35 million MT will be
required in twelfth year plan for the storage of agricultural crops. The warehouses in our country
are not efficient and they are put up on traditional norms and without any apt design. The Indian
warehouses lack optimal size, ventilation facilities, proper storage system etc. India being the
second largest producer of fruit & vegetable (200 million MT) but still has a limited integrated
cold–chain infrastructure, with only 5,386 stand-alone cold storages having an overall capacity of
only 23.6 million MT because of this lack of storage facilities only the farmers have to suffer
heavy losses in relation to quality and degradation and which further leads to wastage of the
produce particularly in case of perishable harvest. The post –harvest losses of farm produce,
especially in case of fruits and vegetables and other perishable produce the loss has been
projected to be over 1 trillion Indian rupees per annum which include those 57 % which is caused
due to avoidable cost of storages.8 As per the industry estimates the wastage of fruits, vegetables
constitutes 35 to 40 percent and food grains constitutes 10 percent. This is the unfortunate fate of
India where 40 % of food is lost due to wastage by ignorant state and lack of any machinery to
protect it, whereas on the darker side 50 million children suffer from the disgrace and curse of
malnourishment. Furthermore, the market size of warehousing is also expected to grow to 35,100
crore in the financial year 2016-17 with a Compound Annual Growth rate (CAGR) OF 9%. 9 The
Cold Storage Units, which will evolve out of this FDI Policy, would further the endeavour to
facilitate the cause of structural improvement with respect to food storage capacity in India.
Consumerism
Consumerism primarily refers to an induced psychological base by the controllers of the market of
wider and cheaper options in goods for the objective of creating consumer attractions towards the
market which is far-fetched from the primary requirement of retail goods as commodities of need.
Thus, consumerism is a psychological impediment that exploits the basic human affinity towards
the frills of the modern multi quantitative and qualitative global retail sector.
8 Associated Chambers of Commerce and Industry of India- FDI in Retail Advantage Farmers, Available at
http://www.assocham.org/arb/general/ Background-FDI-Retail.pdf, Last visited on 12 May, 2013. 9 Ibid
98
2. PORTOR’S FIVE FORCE MODEL
THREAT OF NEW ENTRANT:
The coming of a new entrant into the retail industry will be a threat for the existing unorganized
sector which constitutes 90 to 95 percent of the retail market in India as the organized sector’s
vertical structure and centralized buying gives these chain stores better competitive advantage
over the independent stores. Now after the new FDI policy has come the Indian government has
further moved by dropping its protectionist policies. Allowing foreign retailers will also bring in
the more foreign investors i.e. more capital which will help our country reducing its deficits.
Therefore, threat from the new entrants in the retail industry is too high.
POWER OF SUPPLIERS :
This point can be explained by an example wherein in 1970’s a company Sears which started
dominating the home appliances market set very high standards of quality and those suppliers
which failed to meet those standards were dropped from their list of suppliers. This could also be
seen in case of Wal-Mart which also has set high standards for its suppliers so the say of suppliers
is less i.e. the suppliers in the retail industry has a very little power.
POWER OF BUYER :
The power of consumers to bargain in an organized retail stores is jettisoned. But where a
consumer has a whole ask for or demand high quality goods at a bargained price then it supports
in keeping the retailer honest. Now taking this from Porter’s side the consumers has relatively
high bargaining power in unorganized sector as compared to the organized sector as the customer
will be more conscious about the quality of the products when demanding it from a from the
organized sector.
AVAILABILTY OF SUBTITUTES :
The trend of the retail sector basically is not just to specialize in a particular goods or services but
to deal in a wide range of products where one does not need to go in different stores for buying
different products everything is available under one roof. This means what one store offers is
likely to be offered by other stores also therefore a threat from substitutes is very high.
99
COMPETITIVE RIVALRY :
There has always been a cut throat competition in the retail industry and the retailers must also
fight with the unorganized sector. This can be seen and is evident from the aggressive marketing
strategies and policies to attract more and more consumers by offering them additional services
etc. which will finally benefit the consumer only.
The growth rate of GDP has slowed down from 8.4% in 2010-11 to 6.5% in 2011-12. In Q1 of
2012-13, the GDP growth rate further slipped to 5.5%. Manufacturing growth has suffered a
major setback with the growth rate plummeting to -3.2% in June 2012, compared to 11.1% in June
2011. A major factor driving this slowdown has been a slowdown in investment demand in the
economy, where the investment-GDP ratio has come down from 33.9% in 2011-12Q1 to 32.8% in
2012-13Q1. This fall in investment demand has been the main driver of the slowdown in growth
in the economy.
The main reason cited by the Prime Minister as well as his neo-liberal followers is that there has
been a decline in the investor confidence in the economy. This decline in investor confidence is
mainly because of two factors, one is the adverse economic condition existent in the world
economy as such and the other is the so called ‘policy paralysis’ which the government was
entangled in, which sent negative vibes to the investors to invest in India, in the absence of any
big ticket reform agenda. Therefore, the PM thought it prudent on his part to break away of this
‘policy paralysis’ and announced the measures of FDI in retail and other sectors and an increase
in diesel prices to ensure a ‘revival in investor confidence domestically and globally’.10
ORGANISATION :
The protagonists of the organized retail sectors proposes that these firms can offer wider products
and at lower prices to consumers as compared to unorganized retail industry. But another
10 Prime Minister’s speech to the nation on 21st September 2012, Available at: http://pmindia.nic.in/speech-
details.php?nodeid=1226 , Last visited on 30 November, 2012.
100
important benefits of organized retail sector is that they offer safe products to the consumers as
quality control is one of the basic aspects of the organized retail. Since, in India, the food borne
diseases and contamination in the food products is an upright issue, the present policy would help
in bringing more quality products to consumers. The organized retailing corporations have the
ability to extricate the suppliers at the lowest cost from around the scape of the world. Moreover,
it will reduce wastage as it will also invest in cold storage facilities where there is 25 to 30
percent of wastage of fruits and vegetables produced in our country. Millions of tons of wheat and
rice are stored under tarpaulin or left out to rot in monsoon.11
3. Experience Of FDI In Retail Of Other Countries
Various studies have been conducted in different countries which show as to what were the effects of
the FDI in retail industry in those countries.
CHILE:
Modern retail in Chile entered in 1990’s, as a result of which large number of shops went out of
business in just few years between 1991 and 1995, almost ―15,777 small shops went out of business,
largely in Santiago, which represented 21-22% of small general food, meat and fish shops, 25% of
daily meat shops and dairy and other similar shops, and 17% in produce shops.12 In December 2011,
the competition authorities of the state ordered for an investigation of Chile‘s greatly intense grocery
sector, which was dominated by Wal-Mart which had the largest share that of 33.4% market share.13
11 Basu (2010) observes that India needs a redesign of the mechanisms by which the country acquires and releases food to the
market. 12 Mahtew Joseph, Nirupama Soundararajan, Manisha Gupta and Sanghamitra Sahu, “Impact Of Organized Retailing On The
Unorganized Sector” , Indian Council For Research On International Economic Relations, May 2008 13 Chile: Supermarket Sector Sending Out Sparks‖, Estrategia, 26 September 2011.
101
MEXICO:
Mexico where the effects of global retailers on existing agricultural wholesalers is noteworthy, the role
of regional wholesale markets shrank significantly due to their increasing reliance on direct
procurement and distribution centers as well as the emergence of large, powerful intermediaries closely
linked with state government and export markets. Most notably, this sharp decline in sales coincides
with the increasing market share of big retailers like Wal-Mart and national food retailers.14
CHINA:
China allowed FDI in the year 1992 and at that time only 49% was allowed. But today China’s retail
industry is of 700$ billion. In the first phase, China allowed FDI in retailing with some restrictions:15
I. It was restricted to six major cities namely (including Beijing, Shanghai and Guangzhou,
Tianjin, Dalian, Qungdao) and Special Economic Zones.
II. Foreign ownership initially restricted to 49% of joint ventures.
III. Foreign retailers that operate large retailers will be limited to 50 units.
But in 2004 China opened its economy for FDI in retail industry completely with less restrictions.
Since then China attracted 22$ billion of FDI. Even the employment in retailing has also increased at 6
% per annum since 1992 to around 53 million. In 2003, FDI in wholesale and retail was US$ 1.1
Billion (Around 30% of our total FDI in 2003).16
14 James J. Biles and Et Al, “Globalization of Food Retailing and Transformation of Supply Networks: Consequences for
Small-Scale Agricultural Producers In Southeastern Mexico”, Journal Of Latin American Geography, Vol. 6 No. 2, 2007. 15 L. Dhamayanthi, S. Pradeep Kumar, School of Management , Sri Krishna College of Engineering and Technology,
Coimbatore, Apr 2006 16 Ibid
102
Though the experience of other countries are to be taken into due consideration, however, it is to be
made certain that such an account shall not eclipse the present liberalized policy. We see peculiar
market conditions for different economies. Such a comparison can be pertinent so far as to get a better
understanding of the behaviour of such changes and their direct effect to their economy. Now, we see
that most FDI in retail models in the world have seen failure, we must endeavour to ensure that the
policy which is formed asserts a certain amount of stealth so that history doesn’t repeats itself. In the
instant case barring China, we see an over dependence upon such chains. We must ensure through
stronger anti-trust laws and more effective machinery that global integration, which is the aim of the
policy in India does not get translated into over dependence.
4. Conclusion
Foreign Direct Investment, like any other policy, has its supporters as well as detractors. It must be
pertinent to note here that a policy such has this one has the baggage of history as various substantial
technicalities.
The world we live in today is one which is scarred by recession, deficits and scarcity of funds. The
emerging trends of monopolies do not help the cause either. Specifically, in India, the foreign investor
has been become reluctant to invest in India given the political and legal kiosk created by ever so
maligned Uninor and Vodafone cases. So we see that there arises a need to resurrect India’s reputation
in the Global Market as well boost our economy with an injection of capital.
Furthermore it has been observed by the Planning Commission, in its The 12th Plan’s draft approach
paper that-
“Thus the average investment rate needed during the Twelfth Plan period is estimated to be 38.5 per
cent of GDP for the 9.0 per cent growth scenario with 4.5–5.0 average inflation. It would have to rise
as much as 41.4 per cent of GDP for the 9.5 per cent growth scenario with 5.0–5.5 rate of inflation”
103
and in terms of investment in infrastructure the same document suggests that “The total investment in
infrastructure would have to be over Rs.45 lakh crore or $ 1 trillion during the 12th Plan period.
Financing this level of investment will require larger outlays from the public sector, but this has to be
coupled with a more than proportional rise in private investment”.
There are two issues that may arise whilst determining a manner in which to achieve the aim as so
engrafted by the Planning Commission-
Which area of the Market is to be exploited?
How that area is to be exploited?
With respect to the first issue, Retail seems to be relatively better option than other areas of the Market
owing to the nature of Indian retail sector being a highly unexploited one. In the year 2012 the Indian
retail sector was proposed to be of Rs. 18673 billion and it accounts for 15% of GDP and 8% of the
total employment. India being the home to largest middle-class in the world which constitutes 160
million in 2011, has become the most attractive and the most unexploited appropriate retail markets in
the world as the middle-class provides for a viable market place and cultural universe for global capital
to operate and flourish in India. India is the seventh largest retail market in the world which is expected
to grow at 7% over the next 10 years. Furthermore the organized retail only accounts for 5-7% of the
total retail in our country. Hence the retail sector becomes an obvious choice.
Coming to the manner of exploitation, here is where the jury seems split. Whether to exploit the
market-
(a) Domestically or;
(b) By way of foreign investment.
Since India is functioning on huge fiscal deficits which is Rs. 4.07 trillion of the full budgeted fiscal
year of 2012-13 which is 5.1 percent of our GDP17, so there is an urgent need for inflow of capital
investment. Beyond capital there is an essential requirement of technology and knowledge which will
help in global integration. The global integration in the retail industry will help farmers as they will be
able link up with global export markets in the world. For example Wal-Mart exports some 1 billion $
every year since it entered the Indian wholesale market.
17 Available at http://in.reuters.com/article/2013/01/31/india-economy-deficit-idINDEE90U08120130131, Last accessed on
12 May, 2013.
104
The new age phenomena social welfare versus economic necessity plays its way into this debate very
ably. Given the state of affairs of the Indian economy and the socio-political situations of the recent
past, India is in dire needs of funds to avoid a foreseeable deterioration. However, a society ours,
which still suffers from the social evils like poverty, employment, malnutrition, illiteracy and also a
substantial dependence on agriculture, cannot at any cost afford to forget and ignore the welfare aspect
of our policy. Hence, we must instigate equilibrium with respect to welfare as well as economics.
Our Recommendations and Suggestions:
With the advent of global integration we must ensure that the benefits of such reforms reach the
domestic entrepreneurs. The promotion of retail trade within the domestic market must also be
promoted. A few policies which aim at facilitating retail trade to Indian citizens must be passed such as
subsidies, easy loans to establish retail practices among others.
There must be a floor limit for minimum number of workers that should be mandated under the present
regime. This shall ensure that the benefit of the employment is fully availed to the indigenous
population.
More effective competition laws must be ensured by the government, there must be amendments in the
competition laws, comprehensive remedial and punitive measures in case of anti-competitive practices
like dumping, abuse of dominance, anti-competitive practices or autonomy to CCI.
ARGUMENTS AGAINST FDI IN RETAIL IN INDIA
Soumya Singh Baghel1
Manisha Navlani2
ABSTRACT
There were many debates over the entry of foreign mega retailers in India. The proposal had a great
opposition from the parties from left, CPI (M), Economists and small retailers. The paper explores the
impediments which will emerge from the FDI. The organised retail in India is developing fast. There is
a need for next five to ten years for its scaling up to have a visible impact on the backend operations of
Retailers. Government and business need to work together so that this opportunity is not lost but used
in a manner that benefits most to our country.
Further the paper explores the impact of organised retailing on unorganised sector. It will also study
the impact of retailing on neighbouring countries. And inefficiencies of the implementation of
competition laws in India.
1 II nd Year, BA. LLB., Institute of Law, Nirma University 2 II nd Year, BA. LLB., Institute of Law, Nirma University
106
1. Impact Of FDI In Retail On Unorganised Sector
The road side shops selling grocery, a stationary cart without roof selling fresh vegetables and fruits
and hawkers paddling at signals constitute 98 percent of the total retail business of India as estimated
by A. T Kearney3. Retail and wholesale is largest of the service sector contributing 14 percent of the
GDP4. It gives employment to 7 percent of total workforce as surveyed by FICCI5. The economic
liberalisation started in India started in 1991 but could not open it for FDI in retail because of
opposition from the left and UPA government. The department of consumer affair commissioned
Indian Council of research and international economic relation (ICRIER) for the study of impact of
FDI in Retail in India. There are neither many empirical studies on the plight of these tiny traders and
nor has any government department considered it necessary to commission such a study6. India-
organized trade employs roughly 5 lakh people, whereas the unorganized retail trade employs nearly
3.95 crore .According to a Government of India (GoI) study, the number of workers in retail trade in
1998 was almost 175 lakh or 1.75 crore7. The reason behind the large scale of workforce working in
unorganized sector can be the low number of jobs available by organized sector. From year 1992- 2002
there were 413.88 lakh job-seekers registered in employment exchange in which only 30,000 jobs
added to the organized sector8. Resulting, job-seekers are forced to generate self employment and in
which retail trade in best option because it’s low capital and infrastructural need. India has approx 1.5
lakh small retail outlet in which more than 4 percent require not more than 500 sq. ft in size. According
to the A.T. Kearney’s projection of economy in 1999 shows that average India retailer turnover is
3,33,00 and according to FICCI estimate in 2003 its 11,00,000. Employing 93.5 million persons, out of
that only 4 percent is from organized retailing.
Retail in itself does not require large investments. One should not therefore expect this sector to attract
large investments. Even the expectation of employment generation is somewhere vague. The big retail
will think about their profit rather than employment generation in the country. Walmartization leads to
monopolization of retail trade and procurement as pointed out by the report which was made by the
CPI (M) which was the ground of their opposition. This was evident in the case of our neighbouring
country Thailand.
3 It is a global management consulting firm, focusing on strategic and operational CEO-agenda issues for the world's leading
organizations across all major industries and sectors. Available at http://www.atkearney.com/shared_res /pdf/FDICIOct_2004_S.pdf, Last accessed on 12 May, 2013
4 Presentation by FICCI conducted for ‘Strategy for financing service sector’, Sept’2004. 5 Federation of Indian Chamber of Commerce is a body 6 E.A.S Sharma, “Need for caution in retail FDI”, Economic and Political Weekly, (2005) Available at
http://www.jstor.org/stable/4417383, Last accessed on 12 May, 2013 7 Economic Survey, Ministry of statistics and Program implementation (MSPI), GoI, 1998. 8 “Monthly Abstract of Statistics”, Volume 57, No 7, July 2004, Central Statistical Organization, GoI.
107
2. Competition Law: Improper Implementation
Laws are of great significance in the retail sector where corporate retail uses a combination of
predatory pricing,
high advertising and
promotional expenses
are used as standard competitive strategy against smaller players. The law defines predatory
pricing comprehensively as "any agreement to sell goods at such prices as would have the
effect of eliminating competition or a competitor".
By 1990, the definition of predatory pricing had evolved to include an "understanding by even a single
seller to fix prices below appropriate measure of cost for the purpose of eliminating competition in the
short run or reducing competition in the long run". The sub-section of the law was also used to deal
with cheap imports in the 1990s. The availability of evidence of actual cost and the intention to
eliminate competition thus became critical to prove predatory pricing as required under the new law.
It is difficult to prove of selling below cost and malafide intention which requires inspection of internal
documents and cost auditing which is difficult in case of firms located abroad. Even the disagreement
arises regarding which cost should be taken into account- the marginal, average total or average
variable cost.
"The spurt in food prices, particularly in retail prices which are proportionately surging ahead of
wholesale prices (cereals, pulses, vegetables and fruits) over the last two years is being attributed
among other factors to hoarding and the emerging dominance of multinationals in agribusiness, and
corporate retailing" (The Hindu 2002, Frontline 2008). It is hard to determine the distinction between
low prices which result from legitimate competitive behaviour and predatory behaviour is very thin
and difficult to determine.
As the multinational corporations entering into the Indian market are not dominant as they practice
predatory pricing. They also use location as the main tools of entry9.
9 Anuradha Kalhan, Martin Franz, “Regulation of retail: comparative experience”, Economic and Political weekly Vol. 44,
No. 32 (AUGUST 8-14, 2009), pp. 56-64. Available at http://www.jstor.org/stable/25663423, Last accessed on 12 May, 2013
108
The policies to safeguard healthy degree of competition should be made. The best way of achieving
this is through ‘relevant market’ which can be done through the host economy’s openness to
international trade. Modern competition policy should focuses on efficiency and protection of
consumers.
The most important concerns are the impact of these retail chains on local competition; elimination of
small and medium-size retail and their environmentally wasteful use of resources particularly open
spaces in densely populated urban centres. The modern retail outlets, particularly the transnational,
large format chains have spread rapidly in the heavily populated urban region. Therefore we should
have laws to restrict development of large stores in inner city areas. If the competition law is meant to
protect, promote and sustain competition and protect the interest of consumers in markets, by
implication it needs to protect the small and medium size range of competitors in every geographical
zone. The workers in corporate retail are better off than their counterparts in small shops due to large
number of workers less than one roof makes it easier to unionise. They have comparatively higher
wages, written contracts and benefits like employee state insurance and provident fund entitlements.
But the prospects for continued-on-the-job training and upward mobility are limited.
This may also be a deliberate ploy to attract foreign investments. In this entire transition phase of
policy, large format multi product corporate retailers and their different size formats are in the process
of acquiring real estate and dominant positions in geo graphical areas within and around dense
metropolitan zones and smaller cities, elbowing out small and medium size shops10. Events on the
ground are racing ahead of regulatory adaptation, so much so that competition from the small and
medium type retailer in the sector may be whittled away before regulation strengthens and recognises
the fact. If the new competition law is meant to protect, promote and sustain competition and protect
the interest of consumers in markets, by implication it needs to protect the small and medium size
range of competitors in every geographical zone. Although the existing supply chain in India for many
goods is inefficient. But the promised efficiency improvement in supply change will have a huge
bearing not only the livelihoods of the estimated 70 million or more small shopkeepers, 'kirana' stores,
and street vendors but also on small and marginal farmers.
10 Kalhan, "Impact of Malls on Small Shop keepers and Hawkers," Economic & Political Weekly, Vol XLII, No 22, (2007),
pp 2063-66.
109
Kirana store would face disadvantages relative to the organised player is higher procurement costs. As
kirana store will not have access to the access to the back-end supply chain. But this disadvantage can
be largely eliminated through government action. The government can make a law similar to the
robinson-patman act of the U.S.A. which addresses the same issue. The robinson-patman act or anti-
price discrimination act, also known as the chain stores act which that prohibits price discrimination by
chain stores or suppliers, stores. The objective was to ensure that businessmen at the same functional
level would stand on equal competitive footing as far as price is concerned. The incorporation of
robinson-patman act can replace the monopolies and Restrictive Trade Practices Act, 1969. The act
also prohibits certain vertical agreements which could take place in the retail industry if left
unchecked. Examples include: tie-in arrangement, exclusive supply arrangement, exclusive distribution
arrangement, refusal to deal, resale price maintenance, etc. The Act also prevents any abuse of
dominance through "predatory pricing", where a larger player charges low prices over a long enough
period of time so as to drive a competitor out of the market or deters others from entering the market
and then raises prices to recoup its losses. The Act also regulates combinations (mergers, joint
ventures, takeovers), which cause or are likely to cause an appreciable adverse effect on competition.
To summarise, there is a void in the Competition Act, which can be filled by framing a new law on the
lines of the Robinson-Patman Act. This should go a long way in placing the kirana stores on the same
competitive footing as the organised retailers.
2. Studies Of Wal-Mart
In two separate studies designed to examine the potential impact of Wal-Mart, the icon of modern big-
box retailing on poverty, and on levels of social capital in the US, it was found that a presence of a
Wal-Mart store in a community is associated with statistically Significant higher poverty levels as well
as a statistically significant degradation of community's stock of social capital. The poverty study
controls for a wide set of confounding factors that have been found by other researchers to account for
differences in poverty rates across communities. These include factors such as access to employment
and levels of education or human capital within the population. Most importantly, we carefully control
for the possibility of reverse causation, namely that Wal-Mart may deliberately seek out poor
communities, so that its location represents a reaction to, rather than a cause of, poverty. After
110
controlling all of these factors, it was found that Wal-Mart is associated with higher poverty rates. It
was also found that, ceteris paribus, Wal-Mart tends to avoid communities with higher poverty rates11.
The effect of wal-mart on public welfare programme was tested. The presence of big-box chain is
associated with higher poverty rates. Most direct effect is the decline of existing small, family
operations that is caused by arrival of wal-mart or any other big-box retailer in a community poverty
rates will rise if displaced retail workers seek employment at the big-box store at lower wages because
they have no viable alter-natives. In India, it is at least theoretically possible that some of the workers
displaced from the informal sector may well be better off through higher paying jobs at the stores that
displaced them12.
Further question arises is what happens to the profit earned with a significant investment? Are they
reinvested locally or repatriated to the home country? It was found that all cash earned is send to its
headquarters on the same day, so that capital is not available for use in local community. Social capital,
or civic capacity, is an essential ingredient for economic growth to occur, according to Robert Putnam
and, more recently, Skinner and Staiger, who show that his variable is even more important than
certain economic factors in explaining why some regions lag behind others13.
To examine this theory, a follow-up study was conducted examining the effect of Wal-Mart on social
capital in US com-munities14. In particular, it was examined the effects of Wal-Mart stores that existed
at the beginning of the 1990s and the effects of new stores that were built during the 1990s on the level
of social capital stocks at the end of the 1990s decade. In both cases, the effect on social capital was
statistically significant and negative after controlling for other variables known to affect social capital
stocks in a community15.
11 Hema Swaminathan and Stephan J. Goetz, “The Retail Revolution': Do We Know Enough”? Economic and Political
Weekly, Vol. 42, No. 14, (April. 7-13, 2007), pp. 1246-1247,Available at http://www.jstor.org/stable/4419438, Last accessed on 12 May, 2013
12 Ibid. 13 Skinner, J and D Staiger (2005): “Technology Adoption from Hybrid Corn to Beta Blockers”, National Bureau of
Economic Research, Working Paper No 11251. Available at http:/ www.nber.org/papers/W1 1251i, Last accessed on 12 May, 2013
14 Goetz, Stephan J and Anil Rupasingha (2006): “Wal-Mart and Social Capital”, American Journal of Agricultural Economics, 88, 5, December, 1304-10.
15 Supra20
111
2. Retail: Is It More Good than Bad?
The net benefits from FDI do not accrue automatically and their magnitude differs according to host
country and context. The payment of little or no tax by the unorganised kirana store owners who serve
96 per cent of the retail market by value in the country. To be sure, many of these kirana stores do not
earn much above the exempted income limits but tax compliance even by the bigger kirana stores
would have meant some tax income for the country. Overall, the economy will witness a culture of
better tax compliance as a result of the shift from the unorganised to organised sector.
Regardless of protecting the interests of the workforce employed in the unorganized and informal
sectors falls within purview of the exit policy or not, there is compelling need to formulate policies that
will take into account the requirements of the weakest section of the employee strata. FDI-induced
economic change may produce some adverse distributional and employment effects in the host country
.Both categories of problems should be temporary, but they can be prolonged and aggravated in the
absence of appropriate policy responses16.
Confederation of Indian Industry (CII) believes that while imposing a high minimum capitalization
requirement of USD 100 million would facilitate large investments, at the same time it would also
result in limiting foreign participation in the sector and making FDI in the retail sector restricted to
select large players only, which would not be conducive to either promoting FDI or in generating
healthy competition in the sector. Further, CII believes that there should also be a distinction in the
approach for food and non-food sectors given the nature, configuration and sensitivities of the food and
non-food retail segments in the Indian retail industry17.
FDI often contributes to creating a more transparent environment. There are cases of foreign corporate
presences encouraging more open government practices, raising corporate transparency and assisting
in the fight against corruption. More generally, by inducing MNEs to observe commonly agreed
standards such as the OECD Convention on Combating Bribery of Foreign Public Officials, the
Declaration on International Investment and the Guidelines for Multinational Enterprises, home-
16 Foreign Direct Investment for development maximizing benefits, minimising costs OECD Publications 2002, 2, rue
André-Pascal, 75775 PARIS CEDEX 16 Printed in France (00 2002 34 1 P) No. 81839 2002. 17 CII Perspective on Introducing FDI in Multi Brand Retail Trading Business for livelihood, Available at www.cii.in, Last
accessed on 12 May, 2013
112
country authorities can contribute to raising standards for corporate Social responsibility in host
countries18.
To maximise benefits from foreign corporate a healthy enabling environment for business is
paramount, which encourages domestic as well as foreign investment, provides incentives for
innovation and improvements of skills and contributes to a competitive corporate climate.
4. Conclusion And Suggestions
The kirana stores can also take their own initiatives to cope with the new competitive situation. They
can form buying co- operatives, which will increase their bargaining power in dealing with suppliers.
If the buying cooperatives are large enough, they can even procure directly from farmers or processors.
The government should facilitate the formation of such cooperatives. The kirana stores can also tie up
with organised retailers and food processing companies. As mentioned earlier, Unilever and Reliance
have already started such initiatives19.
Big retail stores should be strictly for bided to open on Sundays and holidays. This may help the small
retailers. There should be regional planning regulation to control the development of the retail sector.
Due to FDI there will be increase in the retail marts outside of cities. Sometimes at highways which
can be obstacles to complete the development of the affected cities.
The drastic changes induced in these host countries due to the internationalisation of retail and the
inevitable protest by traditional retailers and intermediaries has led to the issue coming up before the
regulatory authorities. Hence we know regulatory authority.
There should be “private code of conduct” governing the relationship of organised retailers with
suppliers including manufacturers, wholesalers and farmers. Competition commission of India can
enforce rules against collusion and predatory pricing.
18 Foreign direct investment for development maximising benefits, minimising costs, “OECD Publications Service”, 2, rue
André-Pascal, 75775 Paris Cedex 16, France, p-22 19 Vijay Kumar, Yogesh Patwari and H. N. Ayush, “Organised Food Retailing: A Blessing or a Curse”? Economic and
Political Weekly, Vol. 43, No. 20 (May 17 - 23, 2008), ), pp. 67-75.
113
The government should also assist traders and commission agents in reorienting their business models. It
should seriously consider giving them credit and providing other benefits like tax holidays, etc, so that
they can choose to become wholesalers if they so wish. This would be in line with the recommendation
of creating a more vibrant wholesale market, which would also mean better prices for kirana stores and
pushcart vendors.
Alternately, they could supplement their own competencies with manufacturing competencies to start
processing operations to supply private label goods to the retail segment. In summary, the recommended
actions are as follows:
(1) Assist farmers, especially the small ones, to form sales cooperatives;
(2) facilitate the entry of organised retailers - domestic or foreign - willing to enter the market;
(3) modify the Competition Act to include provisions similar to the Robinson-Patman Act;
(4) Actively assist the kirana stores to form buying cooperatives;
(5) Provide kirana stores access to the private labels of organised players;
(6) Eliminate corruption that hinders the business of pushcart vendors; and
(7) Assist traders and commission agents in reorienting their businesses to wholesale, processing
or other formats.
The productivity level in retailing will increase dramatically, leading to better quality jobs and higher
incomes. While organised retail would employ fewer people per unit of sales, overall employment
would increase if the economy continues to grow at the recent rates. Indeed, the onset of organised
retailing may be timely as the country is projected to face tighter labour markets in the not too distant
future. Most notably, given the shift in the food basket to higher value items, farm productivity in
terms of land as well as labour would increase.
FDI IN RETAIL WILL HAMPER DOMESTIC INDIAN MARKET
Vimal Asthana1
Saloni Arora2
ABSTRACT
The current debate on FDI in multi-brand retail is primarily focusing on the effects on various socio-
economic segments in India in the short-run. Prima facie, benefits clearly overshadow the negative
impacts. But, in the long run these multi nationals entering the country are likely to create a monopoly
and exercise their discretion.
The paper first discusses the overall aspect of allowing FDI in multi-brand retail sector and then
discusses its negative impacts like the outflow of profit generated, disguised employment, unsolved
problems of farmers, adverse impact on the manufacturing industry along with the case study of
Thailand when it liberalized its policies relating to FDI in the retail market.
The paper also throws light on how the national interest can be safeguarded in presence of FDI and
the potential reforms in the polity and law of the Indian economy. The economy requires more
transparency and efficiency so that both foreign and Indian parties shall reap benefits out of it.
1 3rd Year Student, BBA LLB, Symbiosis Law School, Noida 2 3rd Year Student, Economic (Hons), Shri Ram College of Commerce, Delhi University.
115
1. False Claim Of Employment
The most favouring point in multi-brand retailing is that it will produce employment for 1 crore people
by 2020. But, such an argument is without any basis for its correctness. Rather, taking the example of
America, there is no competent of Wal-Mart in retail and that its annual turnover is approximately 30
lakhs crore although only 21 lakhs people are involved. The irony lies in the fact that India’s total retail
industry is worth 20 lakhs crore and is employed with 4.40 crore of people across the country. This
perspective makes it clear that India’s retail sector is a much promising employment provider3.
The reform is deemed fatal, for currently only 5% out of 450 billion retail market in India are
‘organized retail’ (i.e. retailer with a license)4 . As a consequence, it is not hard to imagine why
millions of small businesses would fall into the panic of being wiped out facing enormous magnitude
of multi-national companies.
In fact, according to a study by ICRIER, one Wal-Mart supermarket can displace over 1300 Indian
small retail stores and thereby render around 3900 persons jobless. The employment created against
this in that supermarket will be 214 (or maximum 225, which is the average in the US). Clearly, there
will be severe job losses if giant MNC supermarkets are allowed entry into the Indian market5.
Also, the prospective employment opportunities are not there for the very-high-in-number 'semi-
illiterate' population of India. In such a scenario, the claims of creating employment opportunities do
not hold true at all6.
2. Monopoly Threat
Global retail corporation will establish a monopolistic or/an oligopolistic market, capturing the
essentials commodities (food product, etc) market whose supply and pricing decisions will be
controlled by the MNC’s and the organised retailers, also causing job losses. There is an expected
3 Kirtan Pandya, “Negative Impact of FDI in Retail”, Available at http://www.slideshare.net/KirtanPandya/FDI-in-retail-
negative-impacts, Last accessed on 12 May, 2013 4 Ruo Shangguan , “FDI reform of retail in India”, The Times of India, 31 October 2012.
5 Sample survey of unorganised retailers done by the ICRIER in 2008 -'Impact of Organised Retailing on the Unorganised Sector', ICRIER, May 2008.
6 D. Dutt, “An outlook for Retailing in India, Vision2005” (From a presentation by KSA Technopak at MDI Gurgaon in January and February, 2004).
116
displacement of a large number of unorganised retailers and small kirana shop owners. Also, the
oligopolistic condition shall spread in the manufacturing sector as well. Currently, manufacturing
sector accounts to 16% of contribution to GDP which in absence of an FDI is expected to touch a 25%
mark in a decade7, but shall reduce due to the segmentation of the market available to the
manufacturers, once FDI comes in.
Such an establishment is likely to drive the then existing small retailers out of business. These
monopolies created such as Wal-Mart or Carrefour work on economies of scale and thus, have
considerably lower average production costs, thus, having an edge above the existing small retailers in
the organized as well as unorganized sector. In the long run, it is likely that the established monopolies
then increase their prices and also, exploit Indian labour at lower wages.
The best example is the war that was fought between the indigenous soft-drinks manufacturers and the
international giants Pepsi and Coke. Both the erstwhile Janatha Government drove out the companies
Pepsi and Coca Cola in 1977-78 that re-entered in India during 1989-90. During the re-entry stage, the
giants found that comfortable market was enjoyed by the indigenous manufacturers such as Parle etc.
The Pepsi and Coke found that the pricing strategy will give a blow to the Indian software marketers
and they started to sell 250/300 ml bottles at the price of Rs.5/- whereas the Indian marketers were
selling 200 ml at the cost of Rs.6/-. This aggravated their markets and the hot and chirpy taste of the
foreign giants made a trick in the psyche of the consumers. The tingly taste was liked along with a
lowered price for the commodity and that was the death bell for the local manufacturers. The Pepsi and
Coke amalgamated or purchased all the Indian manufacturing companies along with their bottling units
and converted them into its own marketing and manufacturing units.
3. FDI In Retail: Experience Of Thailand
In this context, the experience of Thailand, which opened up its retail sector for FDI in the 1980s,
could be an eye opener for us. The Thai government liberalized their trading sector before the GATS
negotiation process was started. European retail giants Tesco, Royal Ahold, Carrefour had set up their
operations in Thailand. As expected, many of the traditional retailers had to down their shutters, unable
7 Retail Sector Growth in India’ Available at http://www.scribd.com/doc/ 83459653/23717847-Retail-Sector, Last accessed
on 30 January,2013.
117
to compete with global firms in an unequal fight. For example, traditional traders controlled 74% of the
retail market in 1997 but by 2002, their share came down to 60%. Faced with severe criticism from
local retailers, the government announced that they would put control on large retail establishments by
imposing the zoning policy regulation. In 2002, the ‘Retail Business Act' was enacted to control the
expansion of foreign retailers. However, the Thai government changed their decision on zoning
regulation allegedly under pressure from European Commission (EC) who had requested Thailand to
open up their retail sector through GATS negotiations. As WTO lists zoning laws as “trade barriers”, it
is feared that the Thai government would lose the most effective tool to control the expansion of giant
retail chains if they further open their retail sector through commitments under the GATS negotiation
process8.
4. Impact On The Manufacturing Sector
The contribution of agriculture in India to the GDP has come down to about 16 percent. About 60
percent Indians are employed in the agriculture sector. Thus, there is huge underemployment in the
agriculture sector. In the normal course, as the Indian economy grows, it leads to large job shift from
agriculture to manufacturing. Bulk of the jobs is created in the manufacturing sector. India needs to
transfer a large part of its working population from agriculture to manufacturing. For this, India needs
a robust broad-based manufacturing which grows at a much faster rate. For manufacturing to grow,
India has to transform ourselves in to a low-cost economy, where cheaper and good quality products
are available. Nobody consciously buy costly goods. This is precisely the reason, why the pendulum
has swung in favour of low-cost manufacturing economies. India needs manufacturing sector reforms,
cheaper loans, low cost utilities and power availability, proper infrastructure and trade facilitation.
India needs to have a taxation regime, which is globally comparable. It is only then that India can
compete with the low-cost manufacturing economies. The first adverse impact of allowing FDI in
multi-brand retail will be loss in manufacturing jobs. India’s manufacturing growth has to shoot up to a
12 -14 percent growth rate as was witnessed in China. Without taking adequate manufacturing sector
reforms, allowing FDI in retail will hit India’s manufacturing sector. In USA, when structured retail
replaced unorganized retail, more than 40 percent jobs in manufacturing sector were lost in the past 30
years. In 1979, the US employed 19.5 million Americans in manufacturing. Despite being the most
8 Dipankar Day, “FDI in India’s Retail Trade: Few Missing Issues in the Current Debate”, PhD Faculty ICFAI Business
School, Social Science Research Network, January, 2009.
118
powerful economy in 2009, this figure has come down to 11.8 million – loss of 7.7 million jobs. Stores
such as Wal-Mart, Carrefour and Tesco which have shown interest in entering India would source most
of their products from outside India. Once, our manufacturing sector suffers, the writing on the wall
would be two-fold. Firstly, we will have retail stores owned by the Europeans and Americans selling
Chinese products. India would be a nation of sales boys and sales girls. Secondly, with India’s
manufacturing suffering, the danger of India being a nation of traders would stare us in the face9. Thus,
this will be a huge blow to the manufacturing industry.
5. Effect On Farmers
The pro activist supporter of FDI claims that the coming of FDI in the retail sector will help in
increasing farmer’s prosperity in general. They claim that the giant multinational will procure
commodities directly from the farmers, resulting in increase in the income of the farmers as the
intermediaries are wiped away.
But when we take the Indian Scenario, the picture changes a bit. Majority of the farmers work in their
farms during the harvesting season, while for the rest of the 6 months, the same farmers act as
intermediaries to market their own harvest. Bringing of FDI in retail sector will render these people
jobless for the remaining period.
Also, they shall face stiff competition from the increased produce imported from other countries.
Example; apple imports in Himachal have increased from 35,832 tonne in 2006-07 to 1.15 lakh tonne
in 2010-11 to 2 lakhs tonne in 2012 10, which is directly affecting the interest of domestic producers.
An argument that holds relevant here is that the small scale farmers may benefit from the provision of
a direct market and the removal of a middleman but the monopoly position of the giants will actually
leave the petty farmers at the mercy of these big retail traders who will employ them at lower wages.
The case for FDI in retail is often made on the basis of the need to develop modern supply chains in
India, in terms of the development of storage and warehousing, transportation and logistics and support
services, especially in order to meet the requirements of agriculture and food processing industries.
While the infrastructure and technology needs are undeniable, the belief that the entry of the
9 Arun Jaitley in his speech “opposing FDI in multi-brand retail”, in Rajya Sabha, May 2012. 10 A. Bodh, “Farmers fear adverse impact of FDI on apple farming Himachal”, The Times of India, 14 September, 2012.
119
multinational food retailers is the only way to build such infrastructure or upgrade technology is
unfounded. That can also be achieved by increasing public investment and government intervention.
Moreover, the pitfalls of relying upon an agrarian development strategy driven by food retail chains
and giant agribusinesses have already become clear through the experiences of several developing
countries like Malaysia, Thailand and Vietnam. Small horticultural farmers find it almost impossible to
meet the private quality and safety standards set by the food retailers, which are generally much higher
than the national standards. Even the big farmers have to bear high risks while supplying their produce
to the food retailers and many get eliminated under the ‘preferred supplier’ system11.
The assistance claimed, in training credit equipment and other needs are not likely to be generalised.
Over time, the poor, small farmers will face increasing challenges to survive in the market as it
modernizes.
When farmers enter super market channels, they tend to earn 20-50% more in net terms. But to stay in
the supply chain would require farmers to make more up-front investments and meet greater demands
for quality consistency, and volume compared with marketing to traditional markets.
In a pan-Indian survey, over 75% of the traders claimed their marketing resources will continue to be
needed to push sales through multiple channels, but they may have to accept lower margins for greater
volumes.12
6. Cultural And Sociological Impact
Not only shall this create a long term impact and short term chaos in the Indian economy but is also
expected to create a chaotic position for the polity and society of India. The various trade unions have
already started expressing their disapproval and it is highly probable that for the states allowing FDI in
their region shall witness high instability in the politics of the region. And for any country, unstable
state governments can pose problems at the central management as well.
Also, India is known for its cultural and ethical values. These will definitely be influenced by foreign
intervention.
11 A. Sharma 'Defend Indian Livelihoods' Available at http://www.firstpost.com/ tag/FDI-Policy, Last accessed on January
6,2013. 12 Rupali Gupta, “FDI in Indian Retail Sector: Analysis of Competition in Agri-Food Sector”, Internship project for
Competition Commission of India, Dec 2011, p.6
120
Another problem of concern here is that India is still in its developing stages, or, in other words, is not
among the developed countries as yet. Dynamic scale economics, like external economies at a time,
potentially justify protectionism. Suppose that a country could have low enough costs to produce a
good for export if it had more production experience, the good cannot be produced competitively. Such
a country might increase its long-term welfare either by encouraging the production of the good by a
subsidy or by protecting it from foreign competition until the industry could stand on its own feet. This
is also known as the Infant Industry Argument. It is simple economics which in such a scenario,
suggests that the industries in its nascent stage be protected. These are the industries which over-time
reduce their average cost of production but require protection from competition in its initial stages. In
presence of a fierce foreign competition, it is likely that the self-sufficiency of India be disturbed.
Thus, for short term benefits, it is not a just move to dig a pit for self in the long run13.
7. Protecting National Interest
The key to protect national interest is not whether allow FDI or not, but how to calibrate laws in order
to create a transparent and stable commercial environment in which both locals and foreigners can
benefit. In Ruo Shannguan’s opinion, at least three points are worth emphasis in the new
regulations.14First of all, to improve manufacturing export and mitigate unemployment, local
procurement and employment should be guaranteed. Moreover, regulations need to spur a healthy
competition that cultivate local brands on one hand and prevent foreign invasion on the other. Finally,
foreign companies should be encouraged to bring capital and expertise into construction of
infrastructures and logistics that facilitate direct sales of agricultural products. As agriculture provides
livelihood of over 58.4% of population15, enhancement in agricultural efficiency plays critical role in
increasing national welfare.
In conclusion, law reform brings both difficulty and opportunity. FDI comes in with destructive effects
as it initially appears, but yes under appropriate legal framework, it is more an exciting chance for
India to embrace modernization and globalization.
13 Paul R.Krugman, “Infant Industry Argument” 14 V.Mallet, “Indians voice anger at reform plans”, Financial Times, Available at http://www.ft.com/cms/s/0/4138b80c-02cc-
11e2-8cf8-00144feabdc0.html#axzz2A0ZrbQBY, September 2012. 15 Ruo Shangguan, “FDI reform of retail in India”, The Times of India, 31 October 2012.
121
8. Stiglitz View On FDI In Retail
Nobel Prize-winning economist Joseph Stiglitz of Columbia University has black-flagged the FDI.
Delivering a lecture on 'Redefining Capitalism', in Patna on January 15th, 2013, Stiglitz spoke of the
'monopsony power'16 of a retailer (evidently referring to US retail giant Wal-Mart) waiting to enter
India, which would bring little to the table. "This particular retailer can use its immense clout to
displace Indian goods in the market to the detriment of small manufacturers and retailers," he said.
"This retailer is also known for bribery in Mexico. But then Indians have their own expertise in this
matter," the Nobel laureate said. Stiglitz also argued there was no such thing as an ideal capitalism
model. "Capitalism has to be continually redefined. Each country has to decide what kind of market
economy is ideal for it by way of benefiting the largest number of its citizens. The state's role is critical
in making a success of the model adopted," he said. The former World Bank chief economist warned
that countries copying the US model of capitalism ran the risk of ending up in a soup as inequality,
especially of opportunity, remained a serious problem in the country.17
9. Conclusion
We must remember that FDI will only help in establishing new stores only in the urban settlement.
Now, as per the census of 2011, these urban settlement have a population of 14,06,87,573, which is
merely 11.5% of the Indian population of 120 crore.
It is further argued that FDI would bring in much of the needed finance in the Indian retail sector. But,
when we come to Indian business houses such as Reliance, Tatas, Bharti, Aditya Birla, we note that
they have already jumped into the retail sector and by no stretch of imagination, they seem to be in
short supply of funds. As such I don’t agree with the idea that the funds to fuel the retail boom into our
economy needs to be imported from outside.
We must understand that there is a chalk and cheese difference between the composition of the Indian
and Western economy. For an economy like India which is labour surplus, such standalone retails like
‘Kirana Stores’, hawkers, etc perhaps provide the most convenient source of self employment.
16 Monopsony is a state in which demand comes from one source. If there is only one customer for a certain good, that
customer has a monopsony in the market for that good. Analogous to monopoly, but on the demand side not the supply side.
17 J. Stiglitz, “FDI in Retail”, The Hindu, 15 January, 2013, Available at http://www.thehindu.com/business/Economy/tread-FDI-path-cautiously-stiglitz-tells-india/article4307798.ece, Last accessed on 22 April,2013.
122
Therefore, while we speak about the employment opportunities such organised retail would bring, we
must not forget the fact that it seeks to convert a large chunk of our population into salaried class, in
the process crushing the entrepreneurial spirit of our country and further widening the already rising
inequality.
Many are of the view that FDI will lead to increased prosperity of farmers by positive backward
linkage effect. However, the minimum requirement for sourcing such goods from domestic market is
only 30%. This is merely a token requirement as compared to the market we are throwing open to such
retailers and will inevitably lead to dumping of foreign manufactured goods. Moreover, it will sooner
or later, result in creation of market where a few buyers will dominate the scene, especially, in urban
nearing areas, thereby adversely affecting the interest of the farmers for whom it is now considered to
be a boom.
Lastly, the fact must be acknowledged that the Indian consumers have markedly different
characteristics against western countries. ‘One shop purchase’ preference of a buyer generates a need
for such a retail structure. In a country like India where the majority of the population still dwells in the
rural areas such a move is not the need of the hour. There was a recent fall of retailers like ‘Subhiksha’
and fall in sale of Pantaloons. All such factors hints that India is still at a premature age for such
organised retail to rush in and FDI will cause further harm in consolidation of this sector.
Thus, to conclude it can be said that while FDI in multi brand retail seems to be a bed of roses, in
reality it is a mixed blessing where perhaps, the disadvantages far outweigh the advantages as things
stand today in our economy. We need to open up those areas to foreign investors where there is
shortage of funds or domestic investors are apprehensive about investing such as infrastructure, power,
etc. The need of the hour is to expand our economy and not just to increase the competitive
environment without any real growth as with such FDI in retail the consumption side is not likely to
rise and the sellers are merely replaced. We need to make our vision clear before we embark on such
reforms which will not bring any real growth to our economy.
BIBLIOGRAPHIC NOTE
This report has drawn on a wide range of materials including background studies,
internationally sponsored economic researches, empirical surveys carried out by researchers
and many others. Citations in the footnotes refer to the specific sources used. The list of
principle sources and specific contributions to different papers is mentioned below.
Paper 1: FDI In Multibrand Retail – Issues, Opportunities and Challenges
Abhineet Kumar, “FDI in retail to benefit farmers, consumers and artisans”, Business Standard, 20 September 2012
ASA & Associates, “A brief report on Retail Sector in India”
AT Kearney, “Retail Global Expansion: A Portfolio of Opportunities”
Bertrand, et all "Does Entry Regulation Hinder Job Creation? Evidence from the French Retail Industry", IZA
Discussion Paper No. 415
Deloitte, “Global Powers of Retailing 2011”
DIPP, “Discussion paper on Foreign Direct Investment (FDI) in Multi-brand Retail Trading”
Kaanan Gupta, “FDI in Multi-brand Retailing: Lessons from China 2012.”
McKinsey & Company, "Winning the Indian Consumer."
Mohan Guruswamy, et all. “FDI in India`s Retail Sector: More Bad than Good?”, Economic and Political Weekly,
Vol.40 No.7, 2005, pp.619-23.
Ramanuj Majumdar, Marketing Research – Text, Application and Case Studies, New Age International, 2007.
Ramesh Chand, “FDI in retail must be measured by benefits for consumer & economy, not just for farmers”, The
Economic Times, 4 October 2012.
Paper 2: An Empirical Analysis of Possible Effects of FDI in Multibrand Retail in India
Deardoff's Glossary of International Economics. Available at
http://www.personal.umich.edu/~alandear/glossary/f.html#fdi2
124
Press Release Id 77725, Press Information Bureau, Government of India, Available at
http://pib.nic.in/newsite/erelease.aspx?relid=77725
Press Note No.4 (2012 Series), Ministry Of Commerce and Industry, Government of India. Available at
http://dipp.nic.in/English /acts_ rules/Press_ Notes/pn4_2012.pdf,
Federation Of Association Of Traders v. Union Of India, 2005 (79) DRJ 426
Boston Consulting Group : The Tiger Roars: Capturing India’s Explosive Growth in Consumer Spending (2012)
Ready for the transition, ERNST & YOUNG Attractive Survey 2012, India
The Indian Middle Class Emerging Cultures of Politics and Economic, Surinder S. Jodhka / Aseem Prakash.
Dinodia Capital Advisors- FDI in multi brand retail trade – the journey
Sector profile provided by FICCI
Trading Densities of Organised Retail Formats.– Study Series. 2010 (www.asipac.com)
Srivastava, R.K. "Changing retail scene in India”, International Journal of Retail & Distribution Management, Vol. 36
(9), pp.714 – 721. 2008
A T Kearney (2010) Global Retail Development Index (GRDI) 2010
Paragraph 6.1, Press Note No.5 (2012 Series), Government of India Ministry of Commerce & Industry
Department of Industrial Policy & Promotion (FC-I Section), Press Note No.5 (2012 Series), Government of
IndiaMinistry of Commerce & Industry Department of Industrial Policy & Promotion (FC-I Section)
Bob Evans (2011), available at:
http://www.forbes.com/sites/sap/2011/12/02/how-india-and-wal-mart-will-create-10-millionjobs/
Associated Chambers of Commerce and Industry of India- FDI in Retail Advantage Farmers.
Prime Minister’s speech to the nation on 21st September 2012, available at: http://pmindia.nic.in/speech-
details.php?nodeid=1226
Mahtew Joseph, Nirupama Soundararajan, Manisha Gupta and Sanghamitra Sahu, ―Impact Of Organized Retailing
On The Unorganized Sector‖, Indian Council For Research On International Economic Relations, May 2008
Chile: Supermarket Sector Sending Out Sparks‖, Estrategia, 26 September 2011.
James J. Biles and Et Al, ―Globalization of Food Retailing and Transformation of Supply Networks: Consequences
for Small-Scale Agricultural Producers In Southeastern Mexico‖, Journal Of Latin American Geography, Vol. 6 No. 2,
2007.
125
L. Dhamayanthi, S. Pradeep Kumar, School of Management , Sri Krishna College of Engineering and Technology,
Coimbatore, Apr 2006
Paper 3: FDI Policy From the Perspectives of Portor’s Five Force Model and Social Implications
Piya Mahtaney, ‘India, china and globalization-The emerging superpowers and the future of economic development’ (Palgrave Macmillan, 2007). Mathew Joseph, Nirupama Soundararajan, ‘Retail in India-A critical assessment’, (Academic Foundation, New Delhi,2009)
Hema Swaminathan and Stephan J. Goetz, “The 'Retail Revolution”: Do We Know Enough? (Economic and Political Weekly, 2007). Vijay Kumar, Yogesh Patwari, Ayush H N, ‘Organised Food Retailing: A Blessing or a Curse’, (Economic and Political Weekly, 2008). Anurahha Kalhan and Martin Franz, ‘Regulation of Retail: Comparative Experience’, (Economic and Political weekly, 2003).
Paper 4: Arguments Against FDI in Retail in India
Rupali Gupta, “FDI in Indian Retail Sector: Analysis of Competition in Agri-Food Sector”
Dipankae Dey, “FDI in India’s Retail Trade”, published at SSRN on January 9, 2009.
Kirtan Pandey, “Negative Impact of FDI in Retail”
D. Dutta, “An outlook for Retailing in India, Vision” published on February, 2004.
FDI in India’s Retail Trade: Few Missing Issues in the Current scenario.
Paul R.Krugman, “Infant Industry Argument”.
Sample survey of unorganised retailers done by the ICRIER in 2008 -'Impact of Organised Retailing on the
Unorganised Sector', ICRIER, May 2008.
Arun Jaitley; in his speech opposing FDI in multi-brand retail in Rajya Sabha.
‘Monopoly Threat’ Published in Hindu, Dated-October 25,2011
The Times of India. Farmers fear adverse impact of FDI on Apple farming Himachal. Anand Bodh, TNN. September
23, 2012
Indians voice anger at reform plans. Published in the Financial Times on 29/1/2009.
126
Paper 5: FDI in Retail will Hamper Domestic Indian Market
Planning Commission of India.2002. Report of the Steering Group on Foreign Direct Investment: Foreign Investment
India. [Government report]. P 11. New Delhi: Planning Commission, Government of India. Available at
http://planningcommission.nic.in/aboutus/committee/strgrp/stgp_FDI.pdf.
Blonigen, Bruce A. and Wang, Miao. “Inappropriate Pooling of Wealthy and Poor Countries in Empirical FDI
Studies,” in Theodore H. Moran, Edward D. Graham, and Magnus Blamestorm, eds., Does Foreign Direct Investment
Promote Development? Washington, DC: Institute for International Economics, 2005, pp. 221-44.
Contessi, Silvio. “What Happens When Wal-Mart Comes to Your Country? Multinational Firm’ Entry, Productivity,
and Inefficiency.” Unpublished manuscript, 2009b.
Borensztein, Eduardo; De Gregorio, Jose and Lee, Jong-Wha. “How Does Foreign Direct Investment Affect Economic
Growth?” Journal of International Economics, June 1998, 45(1), pp. 115-35.
Kulwindar Singh, Foreign Direct Investment in India:A Critical Analysis of FDI from 1991-2005, Centre for Civil
Society, New DelhiResearch Internship Programme, 2005 (2005 (79) DRJ 426).
Arun Kr. Singh and P.K. Agarwal, Foreign Direct Investment :The Big Bang in Indian Retail, VSRD International
Journal of Business and Management Research, Vol. 2 (7), 2012, pp. 327-337.
top related