FORIEGN DIRECT INVESTMENT (FDI) IN RETAIL: ISSUES AND CONTRA-ISSUES

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1 FORIEGN DIRECT INVESTMENT (FDI) IN RETAIL: ISSUES AND CONTRA-ISSUES Dr. Rajib Roy Associate Professor and HOD Faculty of Management Studies, Dr. B. C. Roy Engineering College ABSTRACT Foreign Direct Investment (FDI) driven modern retail will not only contribute to the growth of Indian economy and generate employment but also will have some genuine impact on the end users. Considering the large number of people engaged in traditional retailing, which almost becomes a forced opportunity of self-employment for them, it is a big challenge to see that a few hundred new jobs created by FDI driven organised retail should not be at the cost of thousands of petty retailers in the unorganized sector. This research article is an attempt to outline the pros and cons of FDI driven organised retail. This also investigates into the various models adopted by different countries in allowing FDI and proposes some possible solutions for the policymakers as to how to go about the opening of the sector. Keywords: Foreign Direct Investment, employment opportunity, self-employment, job displacement, models Introduction Opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, with arguments supporting both sides of the debate. In the list of banned things for FDI in India, retail stands first (SIA, 2008). Proponents of FDI in retail believe that only foreign investment can accelerate the pace of organised retailing. Their case in point is China. In just ten years after China allowed FDI in the sector, the share of organised retail has grown from 10 per cent to 20 per cent. Those in favour of FDI argue that India has already provided `backdoor' entry to international retailers. Current norms allow foreign retailers to set up shop in India via the franchisee route, as has been done by the likes of Marks & Spencer and Mango. Foreign retailers are allowed to open outlets if they manufacture products in India (e.g. Benetton) or source their goods domestically. FDI is also permitted in cash-and-carry outlets, where goods are sold only to those who intend using them for commercial purposes (e.g. Metro, Shoprite). Foreign retailers therefore, have access to the Indian retail market, while India loses out on the investment. Some oppose it, citing the example of the policy taken by Wal-Mart in US for marginalising mom-andpop stores. Here it will not be out of context to mention that Sobel and Dean (2008) have argued that despite contrary belief, Wal-Mart has statistically insignificant impact on the local small business sector in the US and it is simply an evolution over other forms. Organised retailers feel they need to be given time to gain critical mass so that they can hold themselves strong against FDI. In China, the top four retailers are domestic retailers. The credit goes to China's policy of allowing domestic retailers to consolidate, merge and grow in size. Even those arguing for allowing FDI do with caution; that the entry should be gradual and with social safeguards (Guruswamy et al., 2005). The Government seemed to be considering a policy of allowing FDI in a phased manner by way of joint ventures with domestic players. It may also study the experience in other countries, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate. Prior to this, Government approval was required for FDI in wholesale cash and carry trading and FDI beyond 51% in export trading. To facilitate easier FDI inflow, instead of having to seek FIPB approval, FDI up to 100% has been allowed under the automatic route for cash and carry wholesale trading and export trading. The Cabinet has now allowed FDI up to 51% with prior Government approval for retail trade in Single Brand products with the objective of attracting investment, technology and global best practices and catering to the demand for such branded goods in India. The sector was loosened in 2006 when the Government of India opened FDI to single brand product retailing (Economic Survey, ). There were also some relaxations in e-commerce in B2B dealing with some conditions attached (SIA, 2003). With this backdrop the most common channels for entry of foreign retailers have so far been: 1. Strategic license Agreements i.e. foreign company partnering with Indian promoter owned companies or entering into a licensing agreement with a domestic retailer. Example: Mango, the Spanish apparel

2 brand has entered through this route via an agreement with Piramyd, a departmental store in Mumbai. SPAR has entered into a similar agreement with Radhakrishna Foodland s Pvt. Ltd. 2. Franchising, the most widely used entry route by international retailers. Example: Fast food retailers like Domino s have entered India through the master franchise route while Pizza Hut has entered India through a regional franchisee. 3. Cash-and-carry Wholesale Trading, a format of wholesale trading where 100% FDI is allowed and this involves building a large distribution infrastructure to assist local manufacturers. The business model is developed in a way so that the wholesaler deals with small retailers and not consumers. Example: Metro AG of Germany was one of the first significant global players to enter India through this route. People supporting FDI suggest that FDI in retail should be opened in a gradual/ phase-wise manner, such that it can promote competition and contribute to the growth of the Indian economy. The impact of the FDI would benefit the end user or the consumer to a great extent and will help to generate a decent amount of employment as more and more entrepreneurs would be coming forward to invest in retail marketing. The opening of FDI should be designed in such a way that many sectors - including agriculture, food processing, manufacturing, packaging and logistics would reap benefits. Table 1 below lists the pros and cons of allowing FDI into retail. Going ahead, the Government is expected to adopt a highly calibrated approach to allowing further FDI in the retail space. There is a possibility that the relaxation of FDI restrictions may take another 3-5 years. This may deter some international retailers from investing in a big way. However, regardless of the restrictions, international retailers are entering India in significant numbers. The returns on FDI in retailing in India are likely to be greater than those in China because large Indian retailers are much smaller than their Chinese counterparts. International retailers will find the competitive environment easier on the market share and the growth fronts. Thus it can be said that this investment boom could change the face of Indian retail by offering quality goods at lower prices to the consumers. In addition to this, the presence of global retailers will further enhance exports from India as they would also source Indian goods for their international outlets in a big way leading to a remarkable increase in Indian exports. With this background this research article is an attempt to outline the pros and cons of allowing FDI in the Indian retail sector and identify the ways how the issue can be approached by the policy makers with proper concern on the right focus areas. The benefits and drawbacks of allowing FDI have been discussed in the subsequent sections, its impact on retail sector and socio-economic perspective. As a part of discussion on survival of petty retailers, this study takes into consideration various models adopted in different international markets and discusses the relevance of such models in Indian context. Finally this study proposes some solutions backed by recent observations that will help the policymakers in approaching such an important issue. Table 1: Benefits and Drawbacks of FDI in Retail Benefits of FDI in Retail Drawbacks of FDI in Retail Inflow of investment and funds. Would give rise to cut-throat competition rather than promoting incremental business. Improvement in the quality of employment. Promoting cartels and creating monopoly. Generating more employment. Increase in the real estate prices. Increased local sourcing. Marginalise domestic entrepreneurs. Provide better value to end consumers. The financial strength of foreign players would displace the unorganised players. Investments and improvement in the supply chains and warehousing. Franchising opportunities for local entrepreneurs. Growth of infrastructure. Increased efficiency. Cost reduction. Absence of proper regulatory guidelines would induce unfair trade practices like Predatory pricing.

3 Implementation of IT in retail. Stimulate infant industries and other supporting industries. Foreign Direct Investment (FDI) and its impact on Retail Sector The advent of FDI in India was witnessed during the end of 1990 s when the Indian National Government announced a number of reforms which aimed at helping in the process of liberalization and deregulation of the Indian economy. Since its inception there has been a remarkable surge in the FDI inflows in the country. The total amount of FDI in India touched a figure of around US$ 42.3 billion in 2001, followed by US$ 54.1 billion in 2002, US$ 75.4 billion in 2003, and in 2004 this figure increased to US$ 113 billion. According to Department of Industrial Policy and Promotion (DIPP) data, the FDI inflow during (from April 2008 to March 2009) stood at approx. US$ 27.3 billion. It is interesting to note here, India achieved a substantial 85.1 per cent increase in FDI flows in calendar year the highest increase across all countries even as global flows declined by 14.5 per cent (UNCTAD, 2009). FDI inflows have proved to be very advantageous for the overall development of the Indian economy and have resulted in increased capital flow, improved technology, notable management expertise and favourable access to international markets. However considering the case in Indian retail sector, the picture does not seem to be that rosy despite the fact that FDI inflow in trading has increased over the years (see Table 2). Even though there is an apparent increase in FDI in trading, it is nowhere in comparison to the enormous potentiality that the sector holds and this dismal performance of the retail sector vis-à-vis some other sectors like service, computer software and hardware, telecommunication and construction undoubtedly stems from the absence of an FDI encouraging policy from the policymakers. Table 2: Cumulative FDI inflow in Trading (Amount in millions) Time Frame Amount of FDI inflows % to total FDI (in Rs.) (in US $) inflows Aug.,1991- Apr., , Apr., Apr., , Apr., Apr., Apr., Apr., , , Apr., Apr.,2010 1,02, , Source: Fact sheet on FDI (April, 2006 to April, 2010), Department of Industrial Policy & Promotion, Ministry of Commerce, Govt. of India Retail trading in India is one of those few sectors where FDI is not freely allowed. Although, FDI is fully admissible in cash and carry wholesale (back-end retail), it is admissible only up to 51 per cent in singlebrand front-end retail. Importantly, there is a complete ban on foreign investment in multi-brand, front-end retail. This has resulted in keeping all the giant corporate-backed retailers of the world like Wal-Mart (USA), Carrefour (France), Tesco (UK), and Metro (Germany), who are very keen to foray into India s retail sector, away from entering into the country. All of these retailers, therefore, to make their presence felt in the country, have either tied-up or trying to tie-up with local corporate houses, to offer their services for back-end operations like sourcing, logistics, inventory management, among others, for front-end, multi-brand retail operations of such companies. Two retailing giants Wal-Mart and Tesco already source goods worth billions of dollars from India and both are looking to establish a presence there in light of the great opportunities present (Elliott, 2006). Wal-Mart s tie-up with Bharti Group has come under criticism, even though the Government has given a goahead for the deal (Economic Times, 2007). The retail sector in India is of late often being hailed as one of the promising sectors in the economy. AT Kearney Report (2009) identified India as the most attractive retail destination in the world ahead of Russia and China from among thirty emergent markets. With a contribution of an overwhelming 14% to the National GDP and employing 8% of the total workforce (only agriculture employs more) in the country, the retail sector is definitely one of the pillars of the Indian economy. The Indian retail sector is very different from that of the developed countries. In the developed countries, products and services normally reach consumers from the manufacturer/producers through two different channels: (a) via independent retailers ( vertical separation ) and (b) directly from the producer ( vertical integration ). In the latter case, the producers establish their own chains of retail outlets, or develop franchises.

4 On the other hand, Indian retail sector is divided into organised and unorganised 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 supermarkets and retail chains, and also the privately owned giant retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of lowcost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc. Unorganised retailing is by far the prevalent form of trade in India constituting 96% of total trade, while organised trade accounts only for the remaining 4% and this is projected to increase to per cent by Clearly the Indian retail sector is overwhelmingly swarmed by the unorganised retailing with the dominance of small and medium enterprises in contradiction to the presence of few giant corporate retailing outlets. The trading sector is also highly fragmented, with a large number of intermediaries who operate at a strictly local level and there is no barrier to entry, given the structure and scale of these operations. Moreover, the retail sector also acts as an important employment absorber for the present social system. Thus, when a factory shuts down rendering workers jobless; or farmers get idle during part of the year or get evicted from their land; or the stagnant manufacturing sector fails to absorb the fresh entrants into the job market, the retail sector absorbs them all. According to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by It is expected that India will be among the top 5 retail markets then. The organised sector is expected to grow to $100 bn and account for 12-15% of retail sales by There is certainly a lucrative opportunity for foreign players to enter the Indian terrain. Growth rates of the industry both in the past and those expected for the next decade coupled with the changing consumer trends such as increased use of credit cards, brand consciousness, and favourable demographics are factors that encourage a foreign player to establish outlets in India. With the economy in the growth path since the last decade and real consumption estimated to grow from 17 trillion rupees to 70 trillion rupees by 2025 (Narayanswamy and Zainulbhai, 2007), it is no wonder that big international retailers want a share of this pie. However, the government policies towards FDI are the only hindering factors that do not make this an easy task for foreign players. Socio - Economic perspective of Retailing Employment Opportunities in Retailing Organised trade employs roughly 5 lakh people (Source : Monthly Abstract Statistics, Vol. 57, No. 7, July 2004, Central Statistical Organisation), whereas the unorganised retail trade employs nearly 3.95 crores (Source : Iyengar, Jayanthi, China, India Confront the Wal-Marts, Online Asia Times, January, 31,2004). According to a study conducted by Govt. of India, the number of workers in retail trade in 1998 was almost 175 lakhs. This indicates the massive expansion that has taken place in the retail sector recently, primarily because of the economic expansion as well as the jobless growth that have been witnessed in the past decade. It is also noticeable that even within the organised sector, the number of individually-owned retail outlets far outnumber the corporate-backed institutions. These numbers translate to approximately 8% of the workforce in the country (half the normal share in developed countries) [see Table 3]. Practically there are more retailers in India than other countries in absolute numbers, because of the demographic profile and the preponderance of youth that makes India s workforce proportionately much larger. That about 4% of India s population is in the retail trade goes to show how vital this business is to the socio-economic equilibrium in India. Table 3: Share of retailing in employment across different countries Country Employment (%) India 8 USA 16 Poland 12 Brazil 15 China 7 Source: Presentation to FICCI by Alan Rosling (Chairman, Jardine Matheson Group): International Experience on Policy Issues, 15 Nov., 2002, New Delhi Considering that organised retail is still in the early stages of its growth in the country, it is no exaggeration that bulk of the jobs are available in the unorganized sector, a significant portion of them being self-employment. This picture is in contradiction with what normally happens to the developed economies wherein organised trade contributes to over 70-80% of the trade and also compared to the other Asian developing economies like China, Thailand, South Korea and Philippines where organised retail covers up

5 around 20-25% of the overall retail market (Table 4). These figures also reveal the relative underdevelopment of the retail industry in India. Table 4: Percentage contributions of Retail Trade in India and South East Asia Countries Organised (%) Unorganised (%) India 4 96 China South Korea Indonesia Philippines Thailand Malaysia Source: CRISIL in Anil Sasi s article Indian Retail most Fragmented, The Hindu Business Line (18 Aug., 2004) Forced Employment Opportunity It is important to discuss how retailing works in our economy and the role it plays for our citizens from a social as well as an economic perspective. India still predominantly houses the traditional formats of retailing, that is, the local kirana shop, paan/beedi shop, hardware stores, weekly haats, convenience stores, and bazaars, which together form the bulk of the unorganised retail stores. One of the main reasons behind retail explosion and its fragmented nature is the fact that retailing is probably the primary form of disguised unemployment/underemployment in the country. Considering that agriculture sector is over-crowded and manufacturing sector almost stagnated and also considering the hard nature of job and relatively low wages in both the sectors, the only option left for many Indians is to look for the service sector out of shear compulsion. Thus opportunities being limited, it is almost a natural decision for an individual to set up a small shop or store for his/her living, depending on his/her means and capital. Thus, a retailer is born, more out of circumstances rather than choice. This is the reason why there are millions of kirana shops and small stores, most of them being scattered and fragmented. The explosion of retail outlets along the busy roads of Indian villages and towns is a visible testimony of this. The presence of more than one retailer for every hundred persons is an indicator of the lack of economic opportunities prevailing, which is actually forcing people into this form of self-employment even though much of it is marginal. Because of its fragmented nature, the Indian retail sector typically suffers from limited access to capital, labour and real estate options. The typical traditional retailer follows the low-cost-andsize format, functioning at a small-scale level, rarely eligible for tax and following a cheap model of operations. As it involves low capital and minimum infrastructural requirements, retailing happens to be the easiest option of earning for any individual and thus plays a pivotal role in the economy as a social security net for the unemployed. India, being a free and democratic country, provides its people with this cushion of being able to make a living for oneself through self-employment, as opposed to an economy like China, where employment is regulated. These so-called self-employed retailers are simply trying to make out a living, in the face of limited opportunities for employment. In this connotation one can brand this sector as one of forced employment, where the retailer is pushed into it, purely because of the dearth of opportunities in other sectors. Disturbing the Equilibrium Assuming 40 million adults in the retail sector and considering a 1:4 dependency ratio the total number of dependents amount to a figure of 160 million. Opening the retailing sector to FDI will pose a definite challenge to this huge mass and ultimately dislocate millions from their occupation pushing a lot of families under the poverty line. One must not forget that the western concept of efficiency is maximising output while minimising the number of workers involved, that is what Wal-Mart and other international retailers follow ensuring more outputs from less inputs (in terms of recruitments) which will only increase social tensions in a developing country like India, where millions of people are still seeking gainful employment. This dislocated and unemployed mass has to be accommodated somewhere else. But looking at the growth rates of labour in manufacturing and other industries one can imagine that those are not the right place. Agriculture sector is already spilling over employing nearly 60% of our total workforce. That leaves us with manufacturing as the only other alternative. With only 17% of our total workforce already employed in industry, which contributes altogether only 21.7% of our GDP, this sector can hardly absorb more without a major expansion (see Table 5). Table 5: Sectoral GDP, Employment and Growth Rates (%)

6 Sectors Share % in GDP (2004) Employment Cumulative average Growth Rate during Agriculture Industry Service Source: FICCI (2004) & NSS 55 th round Employment Survey ( ) So far Indian economy has been heavily geared towards the service sector (which also includes retail) that contributes 56% of our GDP. Having a high contribution from service sector is a characteristic feature of the developed economies. What is anomalous in the Indian case is the fact that in other fast developing economies, say China, manufacturing accounts for a significant share of GDP, whereas in India, manufacturing contributes a mere 23.1% of the GDP (see Table 6 and Table 7). So the debate over accommodating the dislocated mass into some other sector remains wide open and almost unanswered. Table 6: Indian Economy: Sectoral Sources of Growth (Percentage contributions to increase in GDP) Sectors to to Agriculture & allied sectors Manufacturing, construction & carrying Services Source: Bhanoji Rao Industry, Ugly Duckling, (Dec.1, 2004), the Economic Times Table 7: China: Sectoral Sources of Growth (Percentage contributions to increase in GDP) Sectors Agriculture Industry Services Source: Bhanoji Rao Industry, Ugly Duckling, (Dec.1, 2004), the Economic Times The policy decision behind opening up of FDI should aim at creation of economic activity and employment. The bottom line here is to generate incremental investment, economic activity and employment without disturbing the small players. Survival of Petty Retailers In India, retailing happens to be the easiest choice of self-employment to many for decades, since agriculture is overcrowded and manufacturing industry hardly provides any job opportunity. In such a scenario, it is a big challenge to see that a few hundred new jobs created by FDI in the organised retail should not be at the cost of thousands of petty retailers in the unorganised sector. A foreign retailer will buy big from India and abroad and be able to sell low severely undercutting the small retailers. Once a monopoly situation is created this will then turn into buying low and selling high. Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. With time, the neighbouring traditional outlets are also likely to fold and perish, given the predatory pricing power that a foreign player is able to impose. The issue has its roots to the Wal-Martization effect where more and more power (economic and otherwise) is controlled by fewer corporations (Ribeiro, 2005). There is growing evidence that Wal-Mart does not bear the full economic and social costs of its business practices (Irvin and Clark, 2006) and thus it is the community that has to do the balancing act and bear the brunt of having a Wal- Mart nearby. This may not be a good option for developing countries like India which may not be able to take additional social burden. Each worker in Wal-Mart replaces about 1.4 from the labour market (Neumark et al., 2007) and the practice followed by regarding payments of employees has not been great (Greenhouse, 2002). Studies have also shown that small towns lose about 47% of the retail trade after about 10 years of a Wal-Mart opening nearby (Stone, 1997). Here we must also remember how countries like China, Malaysia and Thailand, those who opened their retail sector to FDI in the recent past, have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets. Fortunately many of these countries have been successful in protecting the interest of the domestic retailers. As a matter of fact, even if foreign retailers enter India their success is not guaranteed. Taking an instance from German retail market, Wal-Mart was forced to increase its prices alongwith other retailers losing their competitive advantage thereby (Andrews, 2000). Its ignorance of the competitive

7 German market could be another reason for losing the edge (Knorr and Arndt, 2003). Tesco, even though successful in many other international destinations, had failed in France in , (Dunn et al., 2003). It is true that a consumer s interest is best protected when his/her goods and services are procured at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, overtake the responsibility of any society to provide economic security for its population. It is well understood that collective well-being must take precedence over individual benefits. The observation of Guruswamy et al. (2005) is quite pertinent here that the most important factor against FDI driven modern retailing is that it is labour displacing to the extent that it can only expand by destroying the traditional retail sector, even though it brings about lot of consumer benefits and greater integration into the global economy. They also suggest that any policy that results in the elimination/displacement of jobs in the unorganised retail sector should be kept on hold so long as we are not in a position to create jobs on a large scale in the manufacturing sector. Take for instance the case of the food retail industry that comprises of lots of small vendors. Considering that the share of the food retail outlets in total retail outlets is around 33% (see Table 8), the repercussion effects of a sudden displacement of food vendors by the giant chains will affect a huge number of people. When dislodged, they will be rendered jobless at one go. Therefore the displacement should at least be on a slow trajectory so that they can have a soft landing in other sectors. Table 8: Growth of Retail Outlets in India ( 000) Outlets Food Retailers Non-Food Retailers Total Retailers Source: P.G.Chengappa, Lalith Achoth, Arpita Mukherjee, B.M.Ramachandra Reddy and P.C.Ravi, Evolution of Food Retail Chains: The Indian Context, 5-6 th Nov. 2003, Guruswamy and Sharma (2006) outline four key areas that need to be analysed in detail before allowing FDI in retail: 1) Displacement of traditional retailers by large and efficient modern retailers leading to massive redundancies among the small family owned and mostly self employed retail trade. 2) Opening of a giant pipeline of cheaply sourced goods from China, Thailand, ASEAN, etc., leading to manufacturing job losses on a massive scale in India. 3) Using the tremendous clout of a monopolistic buyer to drive down procurement prices over time in manufactured and agricultural products. 4) Replacement of established national brands by the brands of the behemoth retail giants. However, all initiatives of large format players into retailing are not to be derided outright. The entry of big business in retail in the cash and carry format could deliver benefits to small retailers. Metro s cash and carry operation (mainly in Bangalore) has been selling items in bulk to small retailers for onward distribution. Similarly, Reliance Fresh is encouraging kirana shops and vegetable vendors to buy in bulk from them for eventual retailing. If this practice leads to the bypassing of the wholesale middleman in the fruit and vegetable mandis, it will indeed do the existing retail trade a great deal of good. Different models adopted in different countries A retail supermarket encompasses the entire chain of distribution channel and shrinks the intermediaries lowering costs and removing jobs. In a country with no social security net the replacement of thousands of retailers by a single large intermediary will shrink jobs by the millions in distribution industry. Many countries have taken different stands to combat with this situation by formulating different policies and regulations. Some of these models may throw different shades of light in discussing this issue. To start with the Thailand model where no large markets are permitted within 15 kilometre of the city centre all our metros should have a location limitation. Similarly, there should be ample parking space with a minimum requirement for 1000 cars and 200 sq. ft. for each car. Again one may consider the Chinese model of caution and hurrying slowly. In China, the top four retailers are domestic retailers, thanks to China's policy of allowing domestic retailers to merge and grow in size. China just allowed FDI in retail in 1992 and the cap was at 26%. 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 (source: Alok Ray, More Benefits than Costs, The Hindu Business line, 9 Nov., 2005). This strategy of slow and steady progress of organised retail in China may

8 be a learning experience for Indian policymakers which will allow ample time to the local retailers to grow and consolidate especially considering the vastness and fragmented nature of unorganised retail in India. Even in a liberal economy like Japan, large-scale retail location law of 2000 stringently regulates factors such as garbage removal, parking, noise and traffic. Recently Carrefour decided to exit Japan by selling off its eight struggling outlets after four years to the Japanese Aeon Co., as the extremely cumbersome Japanese regulations blatantly favour its own home grown retail firms ( source: The Hindu Business line, 11 Mar., 2005, report in; Attributed to Reuters). Malaysia s Bumiputra clause insists that 30% of equity is held by indigenous Malayans (source: Malaysia Today MT-news, Bumiputra equity plan upsets retailers ). Philippines insist that 30% of inventory by value be grown within the country (source: Section 5 of RA 8762, Hence putting up entry barriers leading to high entry cost, as it has been the case with some of these Asian markets, may be adopted in Indian context that will allow the small retailers some relief with respect to their survival. The experience in many US or European countries show that retail giants destroyed the livelihood of small shopkeepers, who later became employees of such giants for paltry salaries. On the contrary, Brazil is a different case in hand. This is a very good case-study of survival of small retail, where apprehensions were put to rest as the number of small traditional retail stores showed an increase of 27% whereas supermarket chains showed a decline of 5.7% between 1994 and Further small retailers received support from suppliers in the form of price discounts as the suppliers sought to reduce the share of the large chains to lower their bargaining power. Associativism was also a major area of success where small retailers centralised purchases along with a broad range of collective goods, such as, acceptance of credit cards, marketing campaigns, legal and accounting aid, brand name, automation, training of employees, centralisation of selection and administration of human resources, standardisation of store layouts and promotions as well as integration with a logistical operator for diminishing storage spaces and reducing costs of supply. This may be a good strategy to follow given the smallsize, low-cost and fragmented nature of unorganised retail in India. Keeping this in view, policy formulation with right kind of entry barriers alongwith proper emphasis on internal sourcing, Associativism, supply chain integration and creating a favourable atmosphere for exporting may allow some space to the traditional retailers to support their incompetency with respect to long-term survival. The retail scenario in India is in a phase characterised by Supply Chain Management, Operations, Technology and Processes (Ernst & Young in Sreejith and Raj, 2007). Recent Observations and some proposed solutions Organised retailers should be given time to gain critical mass so that they can hold themselves against further approval of FDI. The Big Bazaar owner, Mr. Kishore Biyani, has already gone public opposing any FDI in retail. He has got every reason to do so as he can understand the level of competition the foreign players can impose and why foreign players only, even Reliance is also a big threat for him. No matter whether it is a foreign player or a domestic retailer, in the upper layer i.e. in large-format organised retail (modern retail) it is more of survival of the fittest, but in the lower echelon i.e. in the unorganised retail it is almost like struggle for existence where it is always big vs. small. However there is ray of light visible when we see arguments backed by facts in favour of unorganised retail, or rather it is better to say, the existence of the petty retailers. At a conference of economic editors in New Delhi on 17th November, 2005, Kamal Nath, the then Minister for Commerce and Industry, expressed: the country's retail trade is expanding at a rate of 22 per cent each year with the addition of 25 million middle-class consumers. The expansion, according to him, was across all levels, both organised and unorganised, an evidence probing that the growth of unorganised sector is not slowed down in the face of challenge from the big players and also the surge in middle class consumption is a testimony of their survival, as organised retail is still far from meeting this need. According to NSSO s Employment and Unemployment Survey for , employment in the retail trade has been million, divided between rural (16.08 million) and urban (18.98 million) sectors. This constituted about 7.3% of the workforce in the country (459 million). Wholesale trade, on the other hand, contributed to an employment of 5.48 million, of which only 1.71 million was in the rural sector and 3.77 million in the urban sector. The NSSO data also included that retail employment was about million in with million in rural areas and much higher at million in the urban areas. This means that an additional employment of 4.44 million was generated in this sector during the five year period, , showing an annual employment growth of 2.7% per annum. However, it is important to note that the retail employment growth has been quite large in the rural sector there has been a massive rise in employment in rural retailing of 3.93 million during and the urban sector has also shown an employment growth, but only of 0.51 million during this period. The DRS-ICRIER Retail Survey, 2007, contained in the work of Joseph et al. (2008) reveals that only 40% unorganised retailers agreed with the negative impact of opening organised retail outlets in their vicinity. Region-wise the adverse impact of organised retail was admitted by as much as 59% in the West, followed by

9 48% both in the North and the East and in the South only 235 mentioned the adverse effect. Category-wise the impact has been perceived more by textiles and clothing shops at 46% and least by fruit and vegetable hawkers at 34%. Their study also includes that the growth of organised retail was reasonably fast till , at nearly 20% per annum and during this period unorganised retail also grew but at a slower pace of nearly 11% per annum. According to a recent study conducted by KSA Technopak on Top trends in retail sector (2007), modern and traditional retail will successfully co-exist in India. With overall Indian retail market (both organised and traditional) growing from US$ 336 billion in 2006 to US$ 590 billion in 2011, even if share of modern retail grows from current level of 4% to the estimated 16% by 2011, they say that the absolute market size of traditional retail will grow from around US$ 324 billion in 2006 to US$ 493 billion in 2011 (see Figure 1).This shows the growth of organised retail and entry of foreign players is not a threat for traditional retail channels such as kirana stores. Figure 1: Projection of growth of Modern and Traditional Retail Source: KSA Technopak quarterly Retail Outlook (2007) A company such as Wal-Mart with its large procurement from China could easily displace Indian producers and suppliers, as Chinese goods are more competent in terms of quality and price. This is a challenge to be met protecting the interest of our own producers and home markets. Clearly a lot of scope is there to think about import policy decision. A big importer with a big capacity distribution pipeline of its own has many advantages in terms of lowering prices due to bulk purchasing, and shorter and efficient supply and distribution chains. Quite clearly import in bulk is not desirable, particularly if it is at the cost of local production. When we consider this, it does not matter if the importer is Wal-Mart or Reliance or Future Group, the damage they will inflict on the economy will be about the same. Guruswamy, Sharma and Jos (2007) have rightly pointed out Wal-Mart s readily available distribution pipeline from China for sourcing standardized volumes of quality household products at a low price within strict time schedules. The expansion of organised retail business, with or without FDI, is inevitable. The question is how to go through this transition with the least pain. Two policy steps can mitigate that pain to a large extent. One is to prescribe minimum standards such as linking parking space to store size, public conveniences, airconditioning, warehousing, power supply etc. to make the entry costs high, and with a purpose to draw away pressure from city centers simultaneously not causing additional disturbance to the chaotic suburbs also. The other one deals with the problem of bulk imports. A possible solution is to insist that the organised retail sector or the big business retail be foreign exchange neutral till such a period the government determines that Indian producers can compete. This may require a series of reforms to take place to unfetter production and hence may be a long pending issue. Conclusion It is evident from the above discussion that one cannot resist the growth of modern retail or opening up the sector further with more FDI inflow in long term. There is no denying a fact that organised retail is going to do a lot of good to the Indian economy in the long run, only major problem with it is the issue of job-displacement of the small retailers and their survival. Though it follows from the above discussion that

10 the growth of unorganised retail has not stopped but surely it has slowed down. This issue needs to be handled properly before it slows down further resulting in more job-displacement. The policy decision for opening up of FDI must include creation of economic activity and employment opportunities. The objective should be to generate incremental investment, economic activity and employment without disturbing the small players. Policy formulation with right kind of entry barriers leading to high entry cost for the foreign retailers with parallel focus on internal sourcing, Associativism, supply chain integration and creating a favourable atmosphere for exporting will definitely allow Indian retailers to remain in the competition in one hand and ensure long-term co-existence of both traditional and organised retail on the other. John Menzer, CEO of Wal-Mart International, argues that kirana stores have unique advantages such as an understanding of local needs and superior service in the form of home delivery, which will help them retain their edge over the large supermarkets/ hypermarkets, foreign or Indian. In addition to this, the kirana stores have a unique advantage of convenience factor especially with regard to their locational positioning. Being small in size they can be put up anywhere near the locality or the street corner which is a key problem for the big houses for so many norms and regulations to comply with. Today there is definite format in organised retail called Convenience Stores. But no one can deny that the small kirana stores are the real convenience stores in every literary sense of it, whether in matter of close proximity or long-term familiar relationship with the client or home delivery or understanding the needs of the consumers in the locality. The trend is already there that big suppliers like HLL, Marico, Godrej & Tata Tea already helping kirana stores in store design, inventory management and computerization as well as in accounting systems thus helping them at the back-end with strong supply chain integration. Associativism is another trend that is expected to rise in India as smaller firms come together to compete with larger chains. Rajkot Small Retailers Association and All India Association of Pharmacists are current examples in India which have been formed to centralise purchasing efforts. All these are enough indications of peaceful co-existence of both modern and traditional retail in India in the long term. The policymakers need to remember these facts in order to formulate such policies that give encouragement to such practices which will ensure parallel existence of both formats of retail trade. This research article outlines the various aspects of FDI in the Indian retail sector with proper emphasis on its background and its impact on the retail sector including socio-economic perspective of retailing in Indian context. The study projects on the problem areas related to socio-economic imperative with special emphasis on the issue of survival of traditional retailers. The discussion included cases in other international markets with models/policies adopted in those countries followed by some observations based on facts and figures that give fair indication of coexistence of both modern and traditional retail in India in the recent past with similar projection for future. Keeping this in view and taking a cue from the different models adopted in different countries we provide some definite clues to the policy makers in order to approach the whole issue from a strategic perspective. References: AT Kearney Report (2009), Windows of hope for Global Retailers: The 2009 A.T. Kearney Global Retail Development Index. Andrews, E. L. (2000), Germany says Wal-Mart must raise prices, Sept , New York Times. Department of Commerce, Govt. of India, 23-Feb-2005, Press release on FDI in Organised Retail to generate Employment, but should not displace ongoing Retail activities, available at Release/pressrelease_detail.asp? Id=1673, [21-Jan-2009] Dunn, A., Mason, O., Scraff, D., and Towers, D. (2003), Market entry plan for Tesco in Switzerland, , available at business.html, [16-Jan- 2009] Economic Survey ( ), Ministry of Finance, Government of India, New Delhi, 2008 available at [21-Jan-2009] Economic Times (2007), No fault in Bharti-Wal-Mart deal: Govt., 15-Jan-2007, available at accessed on 06-Jan Elliott, J. (2006), Why there are no Indian Wal-Marts, May , Fortune, available at accessed on 24-Jan-2009 Greenhouse, S. (2002), Suits say Wal-Mart forces workers Toil off the Clock, 25-Jun-2002, The New York Times. Guruswamy, M., Sharma, K. Mohanty, J.P., and Korah, T.J. (2005), FDI in India s Retail Sector: More Bad than Good?, Economic and Pollitical Weekly, Vol. XL, No. 7, pp Guruswamy, M., Sharma, K. (2006), FDI in Retail II inviting more trouble?, Centre for Policy Alternatives (CPAS) report.

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