A Study on Critical Review of Foreign Direct Investment in Indian Retail Sector

Transcription

1 37 A Study on Critical Review of Foreign Direct Investment in Indian Retail Sector Preeti, Assistant Professor, Government P.G. College, Bhiwani ABSTRACT: Retail is one of the largest sectors of Indian economy, the unorganized retail sector in India occupies 97% of the retail business and the rest 3% is contributed by the organized sector. The unorganized retail sector contributes about 13% to the GDP and absorbs 6% of our labour force. Widespread liberalization and deregulation of financial markets, cross border mergers and acquisition, increased role of investors willing to invest abroad, rapid advances in modern technology and internet have all resulted in remarkable increase of international capital flows in India. Foreign direct investment acts as a major medium in the development of a country through up-gradation of technical know how, managerial skills and financial resources. Rise in purchasing power, growing consumption and brand flare-up has led to transformation in retail sector. Initially India was conservative regarding FDI; it imposed restriction on foreign companies to limit their share in equity capital of their Indian subsidiaries but over the time Government of India gradually liberalized foreign investment in various sectors. In 2012 the Government of India has approved 51% FDI in Multiband retail and 100% in Single Brand retail sector, there is divided opinion on the impact of FDI in the retail sector in India, Some say that FDI in the retail sector in India will lead to economic growth and creation of new jobs along with rural infrastructure development But the other view point is that mass scale job loss will happen particularly in manufacturing sector with the entry of the big MNCs like Wal-Mart and Carrafuer, Metro PLC and IKEA etc. The present paper focuses on the Indian retail sector in context of opportunities of expansion of FDI in Indian retail sector and the challenges come forward that retail sector faces. Keywords: Foreign Direct Investment (FDI), Organized Retail, Unorganized Retail, Single Brand Retail, Multi-brand Retail. INTRODUCTION Foreign direct investment is the process whereby residents of one country acquire the ownership of assets for the purpose of controlling the production, distribution and other activities of a firm in another country. According to IMF, foreign direct investment is the category of international investment that reflects the objective of obtaining a lasting interest by a resident entity in one economy in an enterprise resident in one economy. Foreign direct investment is growing rapidly in India. Foreign direct investment is an essential part of an international economic system. India is now the latest major frontline for globalized retail market. In the last twenty years, since the economic liberalization of India in 1991, India s middle class has significantly expanded, and so has its expanding purchasing power. However, over the years, unlike other major emerging economies, India has been slow to open its retail sector to foreign investment. During nineties Mr. P V Narsimha Rao lead Govt. allowed limited FDI in retail and as a result Dairy Farm a MNC made entry in India. In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in NDA Government was willing to introduce FDI in retail sector in May, 2002 but it could not materialize due to unknown reasons than 51% Foreign Direct investment in single brand retail was also permitted in 2006 In % FDI was allowed in Single Brand retail withholding the FDI in Multi Brand Retail due to various political reasons. 100 % FDI in Single Brand (with revised guidelines) and 51% in Multi-Brand retailing with some conditions have now been allowed in India in 2012 OBJECTIVES OF THE STUDY The objectives of this study are: To have an overview of Indian Retail Sector. To explain the current FDI policy in single brand retailing and multi brand retailing. To discuss the challenges and opportunities of FDI in retailing sector RESEARCH METHODOLOGY The present study is descriptive in nature. The data used for the study is secondary in nature and has been collected from various websites of Government, reputed journals, books and magazines related to FDI flows, reports and publications of various associations connected with business and industry, agencies and Government.

2 38 OVERVIEW OF INDIAN RETAIL SETOR In 2004, The High Court of Delhi defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale) - a sale to the ultimate consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit. The retail industry is mainly divided into: - 1) Organised and 2) Unorganised Retailing 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 corporatebacked hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. pavement vendors, owner managed general stores etc. PRESENT FDI POLICY FOR RETAIL SECTOR IN INDIA The Ministry of Commerce and Industry, Government of India is the nodal agency for monitoring and reviewing the FDI policy on continued basis. The FDI policy is notified through Press Notes/ Policy Circulars by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP) Ministry of Commerce & Industry. FDI is allowed under Direct Route and Government route. FDI policy w.e.f. April 17, 2004 is: A) FDI POLICY IN SINGLE BRAND PRODUCT RETAIL TRADING (effective from April 17, 2014) In Single Brand product retail trading (Automatic up to 49% and Government route beyond 49% ) (1)Foreign Investment in Single Brand product retail trading is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. (2) FDI in Single Brand product retail trading would be subject to the following conditions: (a) Products to be sold should be of a Single Brand only. (b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India. (c) Single Brand product-retail trading would cover only products which are branded during manufacturing. (d) A non-resident entity or entities, whether owner of the brand or otherwise, shall be permitted to undertake single brand product retail trading in the country for the specific brand, directly or through a legally tenable agreement with the brand owner for undertaking single brand product retail trading. The onus for ensuring compliance with this condition will rest with the Indian entity carrying out single-brand product retail trading in India. The investing entity shall provide evidence to this effect at the time of seeking approval, including a copy of the licensing/franchise/sub-license agreement, specifically indicating compliance with the above condition. The requisite evidence should be filed with the RBI for the automatic route and SIA/FIPB for cases involving approval (e) In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of goods purchased will be done from India, preferably from MSMEs, village and cottage industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will be self-certified by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts which the company will be required to maintain. This procurement requirement would have to be met, in the first instance, as an average of five years total value of the goods 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. For the purpose of ascertaining the sourcing requirement, the relevant entity would be the company, incorporated in India, which is the recipient of FDI for the purpose of carrying out single-brand product retail trading. (f) Retail trading, in any form, by means of e- commerce, would not be permissible, for companies with FDI, engaged in the activity of single-brand retail trading. (3) Application seeking permission of the Government for FDI exceeding 49% in a company which proposes to undertake single brand retail trading in India would be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion. The applications would specifically indicate the product/product categories which are proposed to be sold

3 39 under a Single Brand. Any addition to the product/product categories to be sold under Single Brand would require a fresh approval of the Government. In case of FDI up to 49%, the list of products/product categories proposed to be sold except food products would be provided to the RBI. (4) 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 B) FDI POLICY IN MULTI BRAND RETAIL TRADING (1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following conditions: (i) Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh poultry, fishery and meat products, may be unbranded. (ii) Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million. (iii) At least 50% of total FDI brought in the first tranche of US $ 100 million, shall be invested in 'back-end infrastructure' within three years, 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 backend infrastructure. Subsequent investment in backend infrastructure would be made by the MBRT retailer as needed, depending upon its business requirements (iv) At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian micro, small and medium industries, which have a total investment in plant & machinery not exceeding US $ 2.00 million. This valuation refers to the value at the time of installation, without providing for depreciation. The small industry status would be reckoned only at the time of first engagement with the retailer, and such industry shall continue to qualify as a small industry for this purpose, even if it outgrows the said investment of US $ 2.00 million during the course of its relationship with the said retailer. Sourcing from agricultural co-operatives and farmers co-operatives would also be considered in this category. The 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 (v) Self-certification by the company, to ensure compliance of the conditions at serial nos. (ii), (iii) and (iv) above, which could be cross-checked, as and when required. Accordingly, the investors shall maintain accounts, duly certified by statutory auditors. (vi) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census or any other cities as per the decision of the respective State Governments, 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. (vii) Government will have the first right to procurement of agricultural products. (viii) 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. States/Union Territories which have conveyed their agreement are Andhra Pradesh, Assam,Delhi,Haryana, Himachal Pradesh, Jammu & Kashmir, Karnataka,Maharashtra, Manipur, Rajasthan,Uttarakhand, Daman & Diu and Dadra and Nagar Haveli. 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 it. 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. (ix) 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 (x) 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 OPPORTUNITIES AND CHALLENGES OF FDI IN INDIAN RETAIL SECTOR: Opportunities always lie in challenges.. Every act has two dimensions, same in case with FDI, on the one side it brings opportunities. for a country on the other side it

4 40 brings challenges. The major opportunities and challenges perceived to face by Indian retail industry because of FDI are: Opportunities: 1. Raises the quality standard: The flow of FDI in retail sector is bound to pull up the quality standards and cost competitiveness of Indian producers in all the segments 2. Bridges the gap between capital required and raised. FDI is the major source of investment which would provide an opportunity for cash lacking retailers to a developing country like India and investment from multinational companies will improve the India s growth rate.. 3. Boost Healthy Competition and check inflation: Supporters of FDI argue that entry of the many multi-national corporations will obviously promise intensive competition between the different companies offering their brands in a particular product market and this will result in availability of many varieties, reduced prices, and convenient distribution of the marketing offers. 4. Higher Customer Satisfaction: Consumers in the organized retail will have the opportunity to choose between a numbers of internationally famous brands with pleasant shopping environment, huge space for product display, maintenance of hygiene and better customer care which leads to customer satisfaction. 5. Improved technology and logistics: Improved technology in the sphere of processing, grading, handling and packaging of goods and further technical developments in areas like electronic weighing, billing, barcode scanning etc. could be a direct consequence of foreign companies opening retail shops in India,. Further, transportation facilities can get a boost, in the form of increased number of refrigerated vans and pre-cooling chambers which can help bring down wastage of goods. 6. Benefits for the Farmers: With FDI in multi-brand retail trading, the farmers will get better remunerations for their produce. The farmers will also get better prices from the heavy reduction in post-harvest losses. It will also result in the strengthening of the backend infrastructure and lead to direct purchase by the retailers. 7. Creation of More and Better Employment Opportunities: The entry of foreign companies into Indian Retailing will not only create many employment opportunities but, will also ensure quality in them. This helps the Indian human resource to find better quality jobs and to improve their standard of living and life styles on par with that of the citizens of developed nations. 8. Improving Distribution and Warehousing Technologies: The technical know-how from global firms, such as warehousing technologies and distribution systems, will lend itself to improving the supply chain in India, especially for agricultural produce. Challenges: FDI is not an unmixed blessing. Governments in developing countries have to be very careful while deciding the magnitude, pattern and conditions of private investment. Possible adverse implications of FDI are: 1. Inequitable Competition: It would lead to very inequitable competition and eventually result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. 2. Massive Job Losses: Indian economy is a developing economy and the level of development is not as desired. Due to paucity of infrastructure resources in Indian economy, there is a direct threat from big giants like Wal-Mart, which will compel current independent stores to close which will directly lead to massive job losses, 3. Repatriation of profits outside India: FDI in retail will drain out the country s share of revenue to foreign countries, which may cause negative impact on India s economy 4. Persistence of Political inconclusiveness of issues: There is still no consensus made by government in a politically and culturally diverse country like India, within no time every economic issues turns out to become a political issue and there is a persistence of inconclusiveness on the issue. 5. Monopolistic tendencies and unnatural price trends: Another concern is that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers. 6. Asymmetric growth of cities: It would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. CONCLUSION This article gives an overview of retail trade in India. It discusses various potential benefits and threats of FDI in the retail sector entry for foreign retailers into India. Due to increase in the FDI cap in retail sector many foreign brands have entered India either through JVs with leading Indian retailers or through exclusive franchisees to set up shop in India. Louis Vuitton, Marks & Spencer Plc, GAS, Armani are some such operators who have entered India through JVs. McDonald s, KFC, Domino s are the retailers who have taken the franchise route. The opening up of the retail sector to FDI could therefore provide a

5 41 boost to small and medium enterprises. Expansion in retail sector could also generate significant employment potential especially among rural and semi urban peoples. So it is very difficult to predict the future of Indian retail sector. But Indian government must be caution about the apprehension raised by the critics and adequate safeguards must be taken so that the positive effects may balance the negative ones and the traditional retailers coexist even after big foreign retailers enter the market Opportunities always lie in challenges. It can be simply defined that opportunities and challenges are related with each others. Every act has two dimensions on the one side brings challenges for a country on the other side it brings opportunities. Each country has to make balance in both the situations. Every challenge led the country to the development because when a country face challenges then the country go to implement the new amendments to change. The major opportunities and challenges perceived to face by Indian retail industry are because of FDI. REFERENCES [1] Ali, M.A., Ahmad, M. (2012). Foreign Direct Investment in Indian Retail Sector: Strategic Issues and Implication, Radix International Journal of Research in Marketing [2] Babu, S. H. (2012). SWOT Analysis for Opening of FDI in Indian Retailing, European Journal of Business and Management. [3] Press notes of Department of Industrial Policy and Promotion (DIPP) ( ). [4] P.K. Rajesh An Exploratory Study on Opportunities and Threats of FDI in Multi-brand Retailing in India Global Journal of Commerce and Management Perspective, Vol.3(4): (July-August, 2014) [5] Rao, N. M (2013) FDI in Multi-brand Retailing - Challenges and Opportunities, International Business Management, pp [6] Parmar,D.M & Bhesaniya,K.V.(2012) FDI Policy with regard to Retailing in India, International Journal of Scientific Research, Volume: 1, pp [7] Shaha, N.V. and Shinde, M.A. (2013) FDI in Indian Retail Sector: A Critical Analysis, Tactful Management Research Journal, Vol. 1, Issue. 5, pp [8] Singh Satbir, Sharma Mamta(2013) Critical Review of FDI and Indian Retail Sector, International journal of management and social science research, Volume 2, No. 8, August Websites: Consolidated FDI Policy issued in April 2014