impact of fdi on retail in india

8/13/2019 Impact of Fdi on retail in india

1/17

THE IMPACT OF FDI IN RETAIL ON SME SECTOR

Prof . Nil esh YemdeAssistant Pr ofessor, Dr . S. Radhakrishn an Coll ege of Business M anagement, Nagpur

Email: [email protected] , [email protected]

M obile Number -09028097507

Abstract Indian Government has liberalized the trade policies during the last one and half decade whichhas motivated other countries to invest in India. Foreign direct investment (FDI) in India hasimportance in the context of the liberalization. Though India is the tenth most industrializedcountry in the world, it is well known that India is mainly agricultural based country, witharound 70% population engaged in the farm sector. However, in the initial stage ofliberalization, FDI was centered on the urban manufacturing sectors because of infrastructure,labour availability, flexible taxation mechanism, government policy and the projected demandsin the pertinent sectors. The success story of FDI in these sectors is known to us.

For a long time there were efforts for FDI in the retail sector so that the trader can reap thebenefit of FDI. Retail trade contributes around 10- 11% of Indias GDP and currently employsover 4 crores of people. Recently, a great debate has cropped up against the government plans

for FDI in the Indian retail sector. FDI in retail is fundamentally different from that inmanufacturing. However, there are many positive as well as negative factors that arecontributing toward the debate of FDI in Indian retail segment.

In this paper, the role of Foreign Direct I nvestment (FDI) in Indias growth dynamics isexamined. There are several examples of the benefits of FDI in India. FDI in the retail sectorcan expand markets by reducing transaction and transformation costs of business throughadoption of advanced supply chain and benefit consumers and suppliers (farmers). This also canresult in net gains in employment at the aggregate level.

This paper brings forth specific conceptual issues and analysis of qualitative information, dataanalysis of the facts & impact of FDI on Indian retail sector.

Keywords: I ndia Government, F oreign direct in vestment, Retail , Supply chain , Agr icul tur alSector.
mailto:[email protected]:[email protected]:[email protected]:[email protected]


2/17

INTRODUCTION

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a

foreign country through the acquisition of a local company or the establishment there of anoperation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflowsfrom abroad that is invested in or to enhance the production capacity of the economy.

Foreign direct investment (FDI) is direct investment into production or business in acountry by a company in another country, either by buying a company in the target countryor by expanding operations of an existing business in that country. Foreign directinvestment is done for many reasons including to take advantage of cheaper wages or forspecial investment privileges such as tax exemptions offered by the country as an incentiveto gain tariff-free access to the markets of the country or the region. Foreign directinvestment is in contrast to portfolio investment which is a passive investment in the

securities of another country such as stocks and bonds. Indian Government has liberalized the trade policies during the last one and half decadewhich has motivated other country to invest in India. Foreign direct investment (FDI) inIndia has importance in the context of this liberalization. Though India is the tenth mostindustrialized country in the world, it is well known that India is mainly agricultural basedcountry, with around 70% population engaged in the farm sector. However, in the initialstage of liberalization, FDI was centered on the urban manufacturing sectors because of itscivic infrastructure, labor availability, flexible taxation mechanism etc.

Indian retail sector is one of the growing sectors with ultimate growth potential. Accordingto the Investment Commission of India, the retail sector is expected to grow almost threetimes its current levels to $660 billion by 2015. However, in spite of the recentdevelopments in retailing and its immense contribution to the economy, retailing continuesto be the least evolved industries and the growth of organized retailing in India has beenmuch slower as compared to rest of the world. Undoubtedly, this miserable situation of theretail sector, despite the on-going wave of nonstop liberalization and globalization stemsfrom the absence of an FDI encouraging policy in the Indian retail sector. In this context,the present paper attempts to analyze the strategic issues concerning the influx of foreigndirect investment in the Indian retail industry. Moreover, with the latest move of thegovernment to allow FDI in the multiband retailing sector, the paper analyses the effects ofthese changes on entire retails sector. The findings of the study point out that FDI in retailwould undoubtedly enable India Inc. to integrate its economy with that of the globaleconomy. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just befreely allowed but should be significantly encouraged. The paper ends with a review of FDIpolicy of Government of India.
http://en.wikipedia.org/wiki/Tax_exemptionhttp://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Stockshttp://en.wikipedia.org/wiki/Stockshttp://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Bond_(finance)http://en.wikipedia.org/wiki/Stockshttp://en.wikipedia.org/wiki/Portfolio_investmenthttp://en.wikipedia.org/wiki/Tax_exemption


3/17

FDI Policy in India

Foreign Investment in India is governed by the FDI policy announced by the Government ofIndia and the provision of the Foreign Exchange Management Act (FEMA) 1999. TheReserve Bank of India (RBI) in this regard had issued a notification, which contains theForeign Exchange Management (Transfer or issue of security by a person resident outsideIndia) Regulations, 2000. This notification has been amended from time to time.

The Ministry of Commerce and Industry, Government of India is the nodal agency formotoring and reviewing the FDI policy on continued basis and changes in sectoral policy/sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat forIndustrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). Theforeign investors are free to invest in India, except few sectors/activities, where prior

approval from the RBI or Foreign Investment Promotion Board (FIPB) would be required.

FDI Policy with Regard to Retailing in India

It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidatedFDI Policy issued in October 2010 which provide the sector specific guidelines forFDI with regard to the conduct of trading activities.

FDI up to 100% for cash and carry wholesale trading and export trading allowedunder the automatic route.

FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of singleBrand products, subject to Press Note 3 (2006 Series)[12].

Prospected Changes in FDI Policy for Retail Sector in India

The government announced following prospective reforms in Indian Retail Sector

India will allow FDI of up to 51% in multi -brand sector. Single brand retailers such as Apple and Ikea, can own 100% of their Indian stores,

up from previous cap of 51%. The retailers (both single and multi-brand) will have to source at least 30% of their

goods from small and medium sized Indian suppliers.

All retail stores can open up their operations in population having over 1million.Outof approximately 7935 towns and cities in India, 55 suffice such criteria. Multi-brand retailers must bring minimum investment of US$ 100 million. Half of

this must be invested in back-end infrastructure facilities such as cold chains,refrigeration, transportation, packaging etc. to reduce post-harvest losses andprovide remunerative prices to farmers.

The opening of retail competition (policy) will be within parameters of state lawsand regulations.


4/17

OBJECTIVES

The objective of this paper is to make a focused analysis of conceptual issues in FDI.

To study the facts with special reference to net effects of allowing FDI into the retailsegment in India .

The objective of this paper is to prove that foreign direct investment (FDI) inretail improves Indias employment rate.

To analyze FDI as a powerful catalyst to spur competition in the retail industry.

RESEARCH METHODOLOGY

This study is totally based on primary as well as secondary data. A clear benefit of usingsecondary data is that much of the background work needed has already been carried out,for example, literature reviews, case studies might have been carried out, published textsand statistics could have been already used elsewhere, media promotion and personalcontacts have also been utilized.

Sample Size

In the present study, total 100 Enterprises have been selected for the study. 25entrepreneurs from each district were selected by using simple random technique.

Tools for data collection

Both primary as well as secondary data has been used in the present study. Questionnairetechnique is adopted to collect primary data and secondary data were collected frombooks, journals and other published reports

LITERATURE REVIEW

Determinants of FDI Policies in India


5/17

There are many studies which have identified technology; labour skills and infrastructureare the major determinants of foreign investment. These factors are very important toexplain the patterns and trends in the geographical structure of FDI at the world capitaincome, in relation to outbound as well as inbound FDI ( Hummels and Stern, 1994).

The incentives announced by the exchequer is also very important in formulating andanalyzing the corporate strategies of international location, also institutional, historical andcultural factors should be embedded in overall analyzing and framing of policies ,as thesefactors should not be ignored as they influence the investors location related decisions(Martin and Velazquez, 1997).

Research Studies Related to Changing Dynamics of Consumer Behaviour andFactors Affecting Retail Store Choice

There are many studies on Indian consumers, which reveal the shopping behaviour ofIndian consumers. Various parameters are included in their studies like level of income,education, and international exposure (Ramachander 1988), gender and age (Sinha, et al.2002) and distance from the store (Sinha 2003). As far as shopping behaviour of Indianconsumers across different retail outlets, traditional outlets are preferred mainly becausewe have a large chunk of middle class consumers who are very good bargainers whilemodern outlets are preferred because they link entertainment with shopping and now-adays its a customer delight to go out for shopping and entertainment togeth er (Sinha2003).There are number of studies which are done taking many parameters which affectthe choice of retail store these are product quality, goodwill ,lower prices, better shopping

experience, availability of product, play area ,parking facility, whereas on the other handproximity to residence, easy availability of credit, ,convenient timings, possibility ofbargain, etc are a few paybacks of traditional outlets as mentioned by a study done byJoseph and Soundararajan 2009. It is a complete myth that big retail outlets are highpriced; there is empirical evidence to this fact and they the level of savings depends on thetype of retail format it is more for discounters and supermarkets, and less forhypermarkets.

The main advantage of this transition of modernisation of retail stores is the consumer asthey get the best and wide choice, discounted prices and they are the focus point of

strategies formulated by the strategist as regard their retention plans. All the policies areformulated keeping many factors into considerations like their likes and dislikes dynamics,their buying behaviour psychology, what factor motivate them to buy. Domestic players areselectively growing in India postponing aggressive expansion plans, adding storesjudiciously and shifting gears to tier 2 and 3 cities.


6/17

Aditya Birla Group plans to open about 100 supermarkets and 10 hypermarkets by mid2011. Spencer's is expected to add up to 25 hypermarkets through 2012. Reliance Retail,India's organized retail leader, plans to open 150 Reliance Trends apparel and accessoriesstores in the next year.

Large Indian players like Reliance, Ambanis, K Rahejas, Bharti AirTel, ITC and many othersare making significant investments in this sector leading to emergence of big retailers whocan bargain with suppliers to reap economies of scale. Rise in retail modernize India andfacilitate rapid economic growth. This would help in efficient delivery of goods and valueadded services to the consumer making a higher contribution to the GDP.

DATA INTERPRETATION

The Survey confirms that almost 96% of the respondents from SME sector are aware of theGovernments earlier decision to allow 100% FDI in single brand retail and 51% FDI inmulti-brand retail and also of the latest notification in January this year.

96%

4%

Are aware of the Governments earlier decision to allow FDI

Yes No


7/17

The SME Industry, according to the survey, is in favour of the governments decision toallow 51% Foreign Direct Investment (FDI) in multi-brand retail and 100% in single brandretail. A majority of the SME companies, surveyed have supported the government sdecision and the notification allowing 100% FDI in single brand retail and about 52 percentof respondents also expect earlier and speedier implementation of 51% FDI in multi-brand

retail.

52%42%

6%

Are you in favour of government's decision to allow 51 %FDI in retail

Yes No Can't Say


8/17

On the question how the SME industry consider entry of MNC retailers as a threat oropportunity, majority of respondents (66.7%) see it as an opportunity for their sectorwhile around 21 % of respondents perceive it as a threat. About 12.5 percent ofrespondents are of the opinion that the decision would have little or no impact on theircompany.A considerably vast section of the SMEs are of the view that allowing 51% FDI in multi-brand retail and its earlier implementation on the part of the government would give amajor boost to the all round growth of organized retail in the country and will havesubstantial positive impact on the growth of SMEs with other allied positive developmentsin many sectors .

21%

67%

12%

How the SME industry consider entry of MNC retailers as a threat or opportunity ?

Threat Opportunity Neither ( dosent affect mycompany)


9/17

Majority of the respondents (98.6 percent) are of the opinion that the opening of the FDI inretail will result in substantial growth of sales of their products. Of them, around 21percent respondents foresee that the impact on the growth of sales of the product would bein the Excellent range of more than 20 percent, 31 percent of the respondents perceive theimpact on growth of sales to be in the high range of (10-20 percent) while 33 percentexpect it to be in moderate range (5-10 percent). 8 percent of the respondents perceive thegrowth to remain in a low range (0-5) category and 6 percent of the respondents feel thatthe decision would have a negative impact on the growth of sales of their products.

0

5

10

15

20

25

30

35

Excellent (>20%)

Higher(10

to20%)

Moderate(5-10%)

Low (1 to5%)

Negative(


10/17

On the aspect of the possible impact on the size of the industry, business and capacity

addition, majority of the respondents (98 percent) expect the size of their Industry /company to grow with the opening of 51 percent FDI in multi-brand retail along with 100percent FDI in single-brand retail. Around 22.9 percent of respondents perceived that theirindustry would grow by excellent rate of more than 20 percent). 25 percent of therespondents expect the impact on the size or capacity addition to be in the high range of10-20 percent while 33 percent expects the growth to be in the moderate range of 5-10percent and 22 percent perceive the growth to be in the low range (0-5 percent) category.A significantly negligible 2 percent of the respondents feel that the decision would have anegative impact on the growth of size of the industry and business.

0

5

10

15

20

25

30

Excellent (>20%)

Higher(10

to20%)

Moderate(5-10%)

Low (1 to5%)

Negative(


11/17

Majority of respondents are of the view that the decision of opening of the FDI in retailwould impact positively in the form of new orders/contracts generated. Around 31.2percent of respondents expect the new orders and contract to grow substantially withmore than excellent rate of 20 percent growth. 27 percent of the respondents expect theimpact on the new orders and contracts to be in the high range (10-20 percent) while 31.2percent expect the growth of orders / contracts in respect of their products to be in themoderate range (5-10 percent). Around 6 percent perceive the growth to be in a low range(0-5) category but 4 percent of the respondents feel that the decision would have anegative impact on the growth of size of the industry in terms of new orders.

0

5

10

15

20

25

30

35

Excellent (>20%)

Higher(10

to20%)

Moderate(5-10%)

Low (1 to5%)

Negative(


12/17

Over 56 percent of the respondents are also of the view that the governments decision ofmandatory sourcing of a minimum of 30% from Indian micro and small industry will helpin achieving qualitative improvements and branding of the products. This in turn willensure SMEs in receiving a sure source of market for their products while ensuring highervalue realization for their products/supplies. This will also provide for expansion of thescales of production facilitating domestic value addition in manufacturing, thereby creatinga multiplier effect on employment, technology up gradation and income generation,demand and further investment.

55%37%

8%

Improvements of Qualitative and branding

Yes No Can't Say


13/17

68.7 percent of the respondents are of the opinion that the opening up of the retail would

lead to improvements in the supply chain efficiencies in their sector which in turn willintegrate small and medium size enterprises into the modern trade process, resulting insubstantial amount of knowledge and skills transfer in the sector.

68%

17%

15%

Improvements in supply chain effeciencies

Yes No Can't Say


14/17

Around 48 percent of the respondents are of the opinion that the decision would have apositive impact on their employment whereas 35 percent expect no change in theemployment scenario. Around 16 percent expect the impact of FDI in retail on theemployment in the SME sector to be negative.

IMPACT OF FDI IN RETAIL ON SME SECTOR (MAJOR FINDINGS OF THE STUDY)

67%

16%

17%

Impact on Employment

Positive Negative No Change


15/17

The Survey conducted during the research on the impact of FDI in Retails on SMEs is basedon a large sample size of 100 companies covering different categories of SMEs fromdifferent regions of the country.

The Survey confirms that almost 96% of the respondents from SME sector are well aware

of the Governments earlier decision of allowing 100% FDI in single brand retail and 51%FDI in multi-brand retail and also of the latest notification in January this year.

The SME Industry, according to the survey, is in favour of the governm ents decision toallow 51% Foreign Direct Investment (FDI) in multi-brand retail and 100% in single brandretail. A majority of the SME companies, surveyed have supported the government sdecision and the notification allowing 100% FDI in single brand retail and about 52 percentof respondents hope for early implementation of 51% FDI in multi-brand retail.

On the question how the SME industry consider entry of MNC retailers as a threat oropportunity, majority of respondents (66.7%) see it as an opportunity for their sector

while around 21 % of respondents perceive it as a threat. About 12.5 percent ofrespondents are of the opinion that the decision would have little or no impact on theircompany.

The survey has also tried to find out and make an assessment of the impact of the openingof FDI in retail on SME in terms of different growth indicators / parameters like sales, sizeof the industry / capacity expansion, employment, branding and achieving otherefficiencies.


16/17

CONCLUSION

Foreign direct investment plays an important role in Indias growth dynamics. FDI inRetails expanded home and export markets, benefitted consumers, generated employment,and increased productivity to local firms. FDI in the retail sector, supported by effective

local institutions, can play similar role. The most important dimension of the possiblebenefits is generation of world class supply chain in India which will decrease transaction,information and production costs of business and expand markets significantly. As long asthe foreign players such as Wal-Mart do pricing based on long run average costs, thebenefits will accrue to consumers and farmers.

In political economy terms, the entry of foreign retailers affects different stakeholders onthe demand and supply side. Improvement in supply chain, especially for food items, acrossthe country benefits low income groups because their major part of the consumptionbasket is food.

Secondly, it will increase surplus to small and medium farmers. Low income consumers onthe demand side and small and medium scale farmers on supply side are less cohesivelyorganized in influencing government policies than wholesalers, middlemen, and Indianlarge retailers. Indian large retailers may block the entry of foreign players with short-termcalculations of their interests. However, they can benefit from externalities arising out ofthe entry of foreign players if the foreign players invest significant resources in developingthe supply chain and improve the know-how of large number of vendors.

Apart from this, as I observed in my field work, some of the wholesalers and small Kiranastores adopted innovative practices in procuring and selling goods in response tocompetition from the large retailers which will improve the overall organization of the

markets.

The main losers would be the middlemen rather than small traders. Small traders retainthe advantage of low overhead costs and take advantage of geographic distribution anddensity of consumers.

Any technological and organizational changes have disruptive effects - some losers in theshort run and larger number of gainers in the long run. As the presence of large retailersincreases, government tax revenues will increase which can be used to compensate thelosers.

The main role of government is to establish and implement effective and autonomousregulatory institutions- restraining anti-competitive conduct by firms, labor andenvironmental regulation. The government has to make credible commitments of itspolicies. 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 opposition. This behavior has asignificant 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-


17/17

impact of fdi on retail in india

Documents