article csm december fdi in retail

8/3/2019 Article CSM December FDI in Retail

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To be or Not To be..

FDI in Retail

The Union cabinet on 24 November

2011 approved 51 per cent foreigndirect investment (FDI) in multi-

brand retail. The Cabinet also decided

to raise the cap on foreign investment

in single-brand retailing to 100 per

cent from 51 per cent. An estimated

Rs 30-lakh-crore retail sector was

thus opened to foreign investors by

clearing a bill that allows 51 per cent

investment in multi-brand retail.The

decision being perceived as game-

changer for the estimated USD 590

billion (Rs 29.50 lakh crore) retail

market was taken at the meeting of

the Cabinet presided over by Prime

Minister Manmohan Singh.

India currently allows 51 percent for-

eign investment in single-brand retail-

ers and 100 percent for wholesale op-

erations but no FDI in multi-brand

retail.

The major provisions for FDI invest-ment include that the minimum in-

vestment will have to be $100 mil-

lion. Retail stores will only be allowedin cities with more than one million

people. Also it will be mandatory for

retailers to source a minimum 30 per

cent of the value of manufactured

goods, barring food products, from

small and medium enterprises. Invest-

ment up to 50 per cent will have to

be in storage and back-end infrastruc-

ture. India being a signatory to World

Trade Organisations General Agree-

ment on Trade in Services, which in-

clude wholesale and retailing ser-

vices, had to open up the retail trade

sector to foreign investment. There

were initial reservations towards

opening up of retail sector arising

from fear of job losses, procurement

from international market, competi-

tion and loss of entrepreneurial op-

portunities. FDI in cash and carry or

wholesale trade, was allowed wayback in 1997 during the United Front

Government. Foreign investment of

up to 51 per cent in single brand re-tailing came to India in January 2006.

The Union government further as-

serted that 30 per cent sourcing un-

der FDI in multi-brand retail has been

made mandatory from Indian MSEs

only. The government highlighted

that the 30 per cent obligation before

the global players is limited to India.

The governments explanation came

amidst protests from the opposition

and the micro and small enterprises

(MSEs).According to governments

previous stand, the overseas players

have to do 30 per cent of their sourc-

ing from MSEs which, however, can

be done from anywhere in the world

and is not India-specific. The only

condition placed was that these

MSEs must not have more than $1

million [Rs.5 crore] investment in

plant and machinery.In 2004, The High Court of Delhi


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Indian retail sector to reach $496 bil-

lion by 2011-12 and ICRIER has also

come to conclusion that investment

of big money (large corporates and

FDI) in the retail sector would in the

long run not harm interests of small,traditional, retailers. In light of the

above, it can be safely concluded that

allowing healthy FDI in the retail sec-

tor would not only lead to a substan-

tial surge in the countrys GDP and

overall economic development, but

would inter alia also help in integrat-

ing the Indian retail market with that

of the global retail market in addi-

tion to providing not just employ-ment but a better paying employment,

which the unorganized sector (kirana

and other small time retailing shops)

have undoubtedly failed to provide

to the masses employed in them.

Concerns

It is feared that, it would lead to un-

fair competition and ultimately result

in large-scale exit of domestic retail-

ers, especially the small family man-

aged outlets, leading to large scale dis-

placement of persons employed in

the retail sector. Further, as the manu-

facturing sector has not been grow-

ing fast enough, the persons displaced

from the retail sector would not be

absorbed there. Another concern is

that the Indian retail sector, particu-

larly organized retail, is still under-

developed and in a nascent stage and

that, therefore, it is important that

the domestic retail sector is allowed

to grow and consolidate first, beforeopening this sector to foreign inves-

tors. Antagonists of FDI in retail sec-

tor oppose the same on various

grounds, like, that the entry of large

global retailers such as Wal-Mart

would kill local shops and millions of

jobs, since the unorganized retail sec-tor employs an enormous percentage

of Indian population after the agri-

culture sector; secondly that the glo-

bal retailers would conspire and ex-

ercise monopolistic power to raise

prices and monopolistic (big buying)

power to reduce the prices received

by the suppliers; thirdly, it would lead

to asymmetrical growth in cities,

causing discontent and social tensionelsewhere. Hence, both the consum-

ers and the suppliers would lose,

while the profit margins of such re-

tail chains would go up.

Argument that only foreign players

can create the supply chain for farm

produce is bogus. International retail

players have no role in building roads

or generating power. They are only

required to create storage facilities

and cold chains. This could be done

by governments in India. Move will

lead to large-scale job losses. Inter-

national experience shows supermar-

kets invariably displace small retail-

ers. Small retail has virtually been

wiped out in developed countries like

the US and in Europe. South East

Asian countries had to impose strin-

gent zoning and licensing regulations

to restrict growth of supermarketsafter small retailers were getting dis-

placed. Fragmented markets give

larger options to consumers. Consoli-

dated markets make the consumer

captive. Allowing foreign players with

deep pockets leads to consolidation.

International retail does not create

additional markets, it merely dis-

places existing markets. India has the

highest shopping density in the worldwith 11 shops per 1,000 people. It has

1.2 crore shops employing over 4

crore people; 95% of these are small

shops run by self-employed people.

Global retail giants will resort to

predatory pricing to create mo-

nopoly/ oligopoly. This can result inessentials, including food supplies,

being controlled by foreign organiza-

tions. Jobs in the manufacturing sec-

tor will be lost because structured

international retail makes purchases

internationally and not from domes-

tic sources. This has been the experi-

ence of most countries which have

allowed FDI in retail. Comparison

between India and China is mis-placed. China is predominantly a

manufacturing economy. It's the larg-

est supplier to Wal-Mart and other

international majors. It obviously can-

not say no to these chains opening

stores in China when it is a global

supplier to them. India in contrast will

lose both manufacturing and services

jobs.

Conclusion

Conclusively we can say that FDI in

retail has the both positive as well as

negative aspects of it ,but what we

should consider before jumping on

any conclusion that fears of small

shopkeepers getting displaced are

vastly exaggerated. When domestic

majors were allowed to invest in re-tail, both supermarket chains and

neighbourhood pop-and-mom stores

coexisted. If anything, the entry of

retail big boys is likely to hot up com-

petition, giving consumers a better

deal, both in prices and choices. Mega

retail chains need to keep price points

low and attractive - that's the USP

of their business. This is done by

smart procurement and inventory

management: Good practices from


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which Indian retail can also learn. The argument that farmers will suffer once global retail has developed a virtual

monopoly is also weak. To begin with, it's very unlikely that global retail will ever become monopolies. Stores like

Wal-Mart or Tesco are by definition few, on the outskirts of cities (to keep real estate costs low), and can't intrude

into the territory of local kiranas. So, they can not eat up their share of pie. Secondly, it can't be anyone's case that

farmers are getting a good deal right now. The fact is that farmers barely subsist while middlemen take the cream.

Let's not get dreamy about this unequal relationship.

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