INTERNATIONAL JOURNAL OF RESEARCH AND ANALYSIS VOLUME 2 ISSUE 3

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1 FOREIGN DIRECT INVESTMENT IN MULTI BRAND RETAIL: BOON OR BANE **** Aditya Khandelwal & Arpit Dwivedi 1. INTRODUCTION Foreign direct Investment (FDI) is an investment in a foreign country through the acquisition of a local company or the establishment, thereby an operation on a new site 1. In simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy. Large number of countries acquires advantage & interest to invite FDI by opening its market economy at large phase with global economy by encouraging industrial growth. On the other hand, the host countries are eager to acquire better technology, expert s skills, capital investment, etc. in order to encourage their domestic savings. As per the report of Planning Commission of India in the year 2002, FDI are usually preferred over other forms of external finance because they are nondebt creating, non-volatile and their returns depend on the performance of the projects financed by the investors. FDI also facilitates international trade and transfer of knowledge, skills and technology. 2 In 1991, Indian Government introduced its new economic policy which attracts foreign investors in Indian economic market to allow higher level of foreign participation in various sectors. FDI in Indian context means, investment by an entity/person that is non-resident, resident outside India in the capital of Indian Company governed by Schedule I of Foreign Exchange Management (Transfer or Issue of Security by a person resident outside India) Regulations, The Government of India has its intent and object for the promotion and 1 Foreign Direct Investment. Dictionary of Economics - Oxford Reference Online Dictionary (2 April ). 2 REPORT OF THE STEERING GROUP ON FOREIGN DIRECT INVESTMENT: FOREIGN INVESTMENT INDIA, PLANNING COMMISSION, GOVERNMENT OF INDIA, Report No. 4, at 18 (2002). 3 ANNUAL REPORT , DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, MINISTRY OF COMMERCE AND INDUSTRY, GOVERNMENT OF INDIA, Report No. 1, at 80 (2013). 9

2 encouragement of FDI to increase its domestic capital, technology & expert skills and to accelerate its economic growth. FDI policy is reviewed on an ongoing basis and measures for its further liberalization are taken. Change in sectoral policy/sectoral equity cap is notified from time to time through Press Notes by the Department of Industrial Policy & Promotion (DIPP). Policy announcement by DIPP are subsequently notified by Reserve Bank of India (RBI) under Foreign Exchange Management Act (FEMA). The total FDI inflow in India in financial year is US$ 28,807 million and from April, 2000 to January, is US$ 318,885 million. 4 The DIPP under Ministry of Commerce & Industry, Government of India, stipulates the policy framework on FDI in their Circular on Consolidated FDI Policy, which may be updated from year to year, which is crystal clear, easily understandable and predictable FDI IN RETAIL SECTOR: INDIA CURRENT SECENRIO OF FDI IN RETAIL IN INDIA Several restrictions were imposed by the government of India on FDI in retail sector in 1997, although in 2006 these restrictions were opened. Presently government allows 100% FDI in wholesale cash & carry and single brand retailing, but allows 51% FDI in multi-brand retailing. In 2004, Delhi High Court in a case 6 went on to define the term Retail as a sale for final consumption in contrast to a sale for further sale or processing. Retailing involves a direct interface with the customer and the coordination of business activities from end to end- right 4 Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India, Fact Sheet on Foreign Direct Investment (FDI) from April, 2000 to January,, DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION, (last visited April 5, ). [herein after Fact Sheet ] 5 Department of Industrial Policy & Promotion, Ministry of Commerce and Industry, Government of India, Consolidated FDI Policy (Effective from April 5, 2013), DEPARTMENT OF INDUSTRIAL POLICY & PROMOTION (April 5, 2013), (last visited April 5, ). 6 Association of Traders of Maharashtra v. Union of India, 2005 (79) DRJ

3 from the concept or design stage of a product or offering, to its delivery and post-delivery service to the customer. The Indian retail industry is generally divided into two major segments organized retailing and unorganized retailing. (i) Organized Retailing This kind of trading activities conducted through licensing of retailing business, of those who are registered with the department of sales tax, income tax, etc. It includes the corporate-backed hypermarkets, retail chain stores and various private owned retail business stores. For example, Reliance store, Hypermarket, Big Bazaar, etc. (ii) Unorganized Retailing This type of retail business is followed from traditional period in all over the country which is also known as low-cost retailing stores, for example, the local kirana shops, owner manned general stores, etc. Mauritius is at top of the list of countries investing through FDI Equity inflows with US $77, million from April, 2000 to January,. Taking into account the investment through retail trading in single brand in FDI constitute US $98.66 million which is about 0.05 percent of the total investment in FDI from April 2000 to January, 7. The industry has long way to go as there is a huge opportunity in streamlining the sector. Indian retail sector is gradually inching its way towards becoming the next boom industry 8. According to the Investment Commission of India, the retail sector is expected to grow almost three times its current level to $660 billion by As per the estimation of Associated Chamber of Commerce and Industry (ASSOCHAM) presented in one of its recent retail report, the contribution of both organized and unorganized retail stood at 22 % of GDP. This would mean that Indian retail sector size should measure closer to Rs trillion in and going by this logic the retail sector will reach a size Rs. 34 trillion by Fact Sheet, supra note 4, at 5. 8 Rajesh Thambala, Indian Retail Industry, RESEARCH (Feb. 13, 2013), 9 Dr. Rajkumar B. Salgar, FDI in Retail Sector in India: A Critical Review, 2 Zenith International Journal of Business Economics & Management Research 6, 144 (2012). 10 Money Control, An overview of Indian retail realty sector, (last visited April 15, ). 11

4 3. FOREIGN DIRECT INVESTMENT AND NATIONAL INTEREST: DEBATE India being a signatory to World Trade Organization s General Agreement on Trade in Services, which include wholesale and retailing services, was bound to open its economy in retail trade sector to the world investors. Though during the initial stage, India was in real dilemma towards opening up of the retail sector as it may result in job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the Government of India in a series of moves has opened the retail sector slowly and gradually and cautiously to Foreign Direct Investment 11.However, on 7 th December, 2012 a long -standing vote by Indian government to allow 51 % FDI in multi-brand was passed, but it was highly criticized by several economists and public at large. Mr. Vivek Dehejia, Associate Professor of Economics at Carleton University and author of Indianomix, calls it for bolder reforms: FDI is important, but FDI cannot be a magic bullet that fixes what is ailing the economy. We need major, and politically difficult reforms like labour law reform and elimination of all non-transparent ways of things like land allocation by overhauling the regulatory infrastructure to bring in more transparency and tackle corruption 12. FDI in multi-brand retail sector was passed through several multi-dimensional debates which were majorly concerned about the growth and stability of small retailers and Indian retail industries. Further, this policy decision was also questioned by several development agencies & non-governmental organizations and the same was challenged before the Supreme Court of India. Wherein, the Supreme Court of India after taken into consideration several developmental aspects in relation to Indian economy decided in favour of Indian government and declared this policy decision as legible one. 11 Bairwa K.C., Prasad Dasharath, Prasad Heerendra, Foreign Direct Investment (FDI) retailing in India and its impact on Indian economy, 3 Journal of Progressive Agriculture 2, 1 (2012). 12 The London School of Economics and Political Science, Top 10 Challenges for India in 2013, BLOGS.LSE.AC.UK, blogs.lse.ac.uk/indiaatlse/2012/12/19/top-10-challenges-for-india-1n-2013/ (last visited April 11, ). 12

5 GOVERNMENT CONCERNS FOR PARTIAL ALLOWING FDI SECTOR IN INDIA Number of issues has been identified by Government with the partial opening of FDI in multi brand retailing. The Department of Parliamentary Standing Committee on Commerce, in its 90 th Report on Foreign and Domestic Investment in Retail Sector, laid down before the Lok Sabha and the Rajya Sabha on 8 June, 2009 identified numerous of issues related to FDI in the retail sector: (i) This would lead to unfair competition in market which results into exit of large number of domestic retailers, basically small retailers with low income source, further lead to unemployment. The manufacturing sector is also not much developed to absorb the persons displaced from the retail sector. (ii) The organized Indian retail sector is itself at developing stage which is still underdeveloped. So, it is important to give more opportunities to the domestic retailers to grow and develop first, instead of inviting foreign players. (iii)the opponents of FDI in retail sector oppose it on various grounds that large global retailers such like Wal-Mart would harm local shops and millions of jobs, since large number of Indian population are engaged in unorganized retail sector. Further the global retailers would use their monopolistic power to cub the competition from market. (iv) It would also lead to irregular growth in various cities which leads to social tension. Other related issues also came before the Indian government, due to which they faced lots of criticism from several stakeholders. This policy issue is still debatable, which is engraved by several political parties in their election manifestos in order to protect or develop the Indian economic market. For example, the Bharatiya Janata Party manifesto of parliamentary election of clearly opposes the FDI in multi-brand retailing. 13

6 POSITIVE IMPLICATION OF FDI POLICY ON DIFFERENT STAKEHOLDERS The positive implications of FDI can be as follows: (i) Benefits to the farmers - The growth of organized retail sector helps in reducing the role of middle man, which will increase the profit earning of the farmers in a country like India where agriculture contributes the major percentage of GDP. Increase in investment through foreign contribution will help in provide better quality of food-grains and efficient distribution system by using better technology in agricultural activities, storing and packaging of products. (ii) Growth of small manufacturing enterprises - The policy framework of FDI provides that at least 30% of the procurement by foreign players investing in retail sector through FDI shall be sourced from small enterprises which have a total investment in plant and machinery not exceeding US$ 1 million. (iii)infrastructure development - With the production of about 200 million ton every year, India stands at the second largest producer of fruits and vegetables, but it has very limited integrated cold storage infrastructure with a total capacity of 23.6 million ton out of which 80% is used for potatoes only, due to lack of integrated cold storage infrastructure facilities, the farmers have to bear heavy losses in terms of quality and quantity of product 13. So, allowance of FDI in retail sector would increase the storage facility which helps in realizing more prices to farmers. (iv) Employment opportunities - Some of the industry estimated suggests that FDI in retail sector would create about 1.5 million jobs in next five years in the front-end alone and for backend jobs 10% extra people would be required which will create direct employment in the retail sector estimated about 1.7 million jobs 14. (v) Development of banking sector - The foreign companies will require money to invest in infrastructure for FDI, which creates an opportunity for banking institutions to provide financial assistance to foreign companies lead to development of banking industries. 13 Department of Commerce, Government of India Ministry of Commerce & Industry, FDI Policy in Multi Brand Retail, DEPARTMENT OF COMMERCE, commerce.nic.in/pressrelease_detail.asp?id=2864, (last visited April 12, ). 14 Id at 9. 14

7 NEGATIVE IMPLICATIONS OF FDI IN INDIA The potential menaces of FDI can be as follows 15 : (i) Control of organized retailers - FDI will strengthen the organized retail in India and further such organized will have dominance of status over the entire consumer market. It may lead to unfair competition or unfair market strategies ruling the entries of other players or exiting the small retailers, family owned stores etc mainly. (ii) Threat of unemployment - A change in the structure will replace the local person from that of a foreign retailer having large chunk of money and will directly be dealing with the supplier and removing the middle men from the market thereby throwing out a large number of people from their jobs 16. (iii)slaughter of self competitive strength - There may be a situation creating that the Indian companies will not be able to compete with such big global players in the market and even if they collaborate with such giant players they may end up losing their own self competitive strength. (iv) Increase in real estate cost - In order to Open malls and stores, foreign retailer will search for places in core areas of the city which will certainly develop over all infrastructure of India, but such a move will indirectly increase the real estate cost and which indirectly will affect medium and small class of people who wish to own a house in the limits of the city. (v) Distortion of culture - FDI may indirectly or directly lead to enhancement of tourism, hospitality, infrastructure but such may distort or changes the culture of India, which may easily, influenced the behavior of youth by such negative foreign culture. (vi) Reliance on foreign investor - Liberalizing or encouraging greater foreign participation will lead India to a situation where the economy may be too much depended on foreign inflows from other countries. The capital giant may dominate the industry exceeding the domestic player. The revenue would outflow abroad affecting Forex reserve. 15 Rajib Bhattacharyya, The Opportunities and Challenges of FDI in Retail in India, 5 IOSR Journal Of Humanities And Social Science (JHSS) 5, , (2012). 16 FOREIGN AND DOMESTIC INVESTMENT IN RETAIL SECTOR, DEPARTMENT RELATED PARLIAMENTARY STANDING COMMITTEE ON COMMERCE, GOVERNMENT OF INDIA, Report No. 90, at 13 (2010). 15

8 5. JUDICIAL PRONOUNCEMENT ON FDI IN INDIA The Supreme Court of India in recent years in catena of cases expressed its views on the competency and effect of Foreign Direct Investment in India. (i) Manohar Lal Sharma V. Union of India & Anr. 17 This is the most pertinent case in which Supreme Court took a stand for the adoption of FDI in retail sector. Mr. Manohar Lal Sharma, appellant filed a writ petition against the Press Note Nos. 4,5,6,7 and 8 of (2012 Series) dated 20th September, 2012, as being unconstitutional which allowed FDI in Single-Brand Product Retail Trading, Multi-Brand Retail Trading, Air Transport Services, Broadcasting Carriage Services and Power Exchanges. The said Press Note allowed the FDI upto 100% in single brand retail and 51% multi brand retail. The Supreme Court dismissed the said writ petition by stating that Press Note No. 4,5,6,7 & 8 (2012 Series) dated 20th September, 2012 have no force of law, which does not require to scrutinize and also emphasized on following groundsa) The Court laid down emphasis on the Counter Affidavit filed by the Union of India, which enumerates several benefits of FDI in retail sector such as benefits to consumers by enlarging number of choices at affordable prices, reducing the role of middlemen between producers and retailers, generation of employment, improvised infrastructure and provide better quality of products. b) The said affidavit also contained a report of research conducted by the World Bank, that there is an increment of revenue for farmers of about 60% when they directly sell the products to organized retailers instead of selling them in Mandi. The same was also supported by the Government of India on the subject of "Impact of Organized Retailing on the Unorganized Sector" through the Indian Council for research on International Economic Relations (ICRIER) submitted in May, The ICRIER 17 Manohar Lal Sharma v. Union of India & Anr., (2013) 6 SCC 616. [herein after Manohar Lal ] 16

9 report also prescribed that unorganized and organized retail sector will grow after the adoption of FDI in retail sector. c) The court also emphasized on the other features of FDI policy on multi brand retail, which mandates that minimum 30% of the value of procurement of manufactured/processed products shall be purchased from Indian small industries having total investment in plant & machinery not exceeding US $ 1.00 million. For setting up of the retail sales outlets in cities, there must be a presence of more than 10s lakh of population as per 2011 Census and which may also cover an area of 10 kms around the municipal/urban agglomeration limits of such cities. The Supreme Court also held that the said policy is only an directory policy, the State Governments or Union Territories have an option with them either to implement the policy or not, by considering the local factors. (ii) Ramniklal N. Bhutta and Another V. State of Maharashtra and Others 18 The Supreme Court of India while deciding over the matter of land acquisition of Appellant for public purpose expressed the importance of FDI for the growth and development of the Indian economy. The court expressed that for the overall development of country s economy the government is very eager to attract the FDI to the maximum extent to compete with countries like China. For the development of infrastructure in India it is necessary to gain extreme speed similar to other Asian countries like South Korea, Taiwan and Singapore. So, these kinds of models are very pertinent for the growth of Indian economy. The above two judgments of Supreme Court held in the favour of FDI in India in several sectors, which would contributes to the immense growth of Indian economy. The Court also embarks that the purpose behind allowing FDI in India is to strengthen the Indian economy in the various fields in which India is lagging behind. 18 Ramniklal N. Bhutta and Another V. State of Maharashtra and Others, AIR 1997 SC

10 6. CONCLUSION & SUGGESTIONS From 1991, when India was forced to take a big decision of opening of its economy to the world by adopting LPG policy, many named and giant foreign players have entered into the Indian Market through the possible roots of franchise and exporting but the opening of gates of FDI would strengthen their operations and activities in India on a large scale and with maximum utilization of available resources also. The government needs to further strengthen its move by adopting suitable judicious and proper measure for the better function of the Indian retail trade. Some of the possible suggestions that can be drawn out of debates, discussions are: (i) As FDI in India is still in its infant stage, it should only be allowed in those areas which are less sensitive or prone to danger and not in core areas where the government or the locals should only function. (ii) The expansion of FDI in India should be done in a planned and phased manner as adopted by China. (iii)the foreign investors should be allowed to enter into the market gradually with all social safeguards to minimize dislocation of labours or small industries in India. (iv) Attention should be made to uplift and promote local participation in the same field so that a balance is maintained between the foreigner players and local retailers. (v) A minimum standard must be made which has to be adhered by all the foreign players investing in India without fail dealing with staff recruitment, investment in warehouse, cold storage, infrastructure, competition and construction so that it not only improves infrastructure or the economy but a win-win situation is established for both the government and the foreign investor. (vi) During the initial year of FDI, a commission should be set up to study in detail the impact of FDI on economy, on local market and problems associated with the retail sector. In the light and advancement of these debate, the positive conclusion that can be drawn is that FDI has led to growth and development of economy over the years without damaging or hampering countries small or medium scale retailers and it cannot be said that allowing of such policy in India would be against national interest or a large section of society will lose their jobs or livelihood. 18

11 The assertion made by many against allowing of FDI that the same is against the principles laid down in the Constitution of India is also invalid and has receive subsequent backing with the decision of Supreme Court in the case of Manohar Lal case 19. On the other hand, what it would lead to is creating a healthy and competitive environment beneficial for all i.e. the foreign investor, local retailers and to the economy of India. It will help in integrating the Indian retail sector with that of global market and in turn increasing the GDP of the country. It can prove to be a blessing in disguise for the Indian economy which at the present time is facing serious problems. The allegation that it may lead to displacement of small and local retailers is nothing but a mere exaggerated claim as even the domestic players will also be allowed to invest in retail. Allowing FDI will bring with it new technologies, global method of trading and investment, healthy competition (as it is not that only one foreign investor would be allowed in the sector but multiple of them competing against each other and also with well established network of small and local retailers who enjoy direct contact with the consumers), generating employment and reducing tax evasion. The expectation behind allowing FDI in multi-brand is gigantic. Though it would be too early to predict or decide on the future of the government decision to allow FDI in multi-brand retail but the Government of India need to cautiously draft laws, policies, rules and procedure to safeguards the need of small and local retail and to built an environment where both the foreign companies as well as local retails can grow and co-exist harmoniously and further the positive of FDI mitigating and overriding the possible negative of such a decision. 19 Manohar Lal, supra note