Sai Om Journal of Commerce & Management A Peer Reviewed National Journal FOREIGN DIRECT INVESTMENT: MYTH OR REALITY

Transcription

1 Volume 1, Issue 3 (March, 2014) Online ISSN Published by: Sai Om Publications FOREIGN DIRECT INVESTMENT: MYTH OR REALITY Pushkar Dubey Lecturer, Padmashree Krutartha Acharya College of Engineering (PKACE), Bargarh, India pushkardubey@rediffmail.com ABSTRACT Retail sector occupies a prominent position in the economic development of the country. It contributes 14% of the total GDP of India. It comprises of both organised and unorganised sector. An organised sector comprises the retailers who are licensed and are registered for sales tax, income tax etc, whereas unorganised sector constitutes the traditional low volume retailers like kirana and betel shops. Unorganised retiling is predominant in India accounting for 92% of the retail sector. This creates ample of gap for the organised sector to set them in competition. Foreign direct investment (FDI) in Indian market is relatively old concept. It was introduced in Indian market in 1991 by allowing foreign investors to trade in the home country. On September 20 th, 2012, a set of new regulations on FDI was introduced by Government of India. According to this rule FDI was approved for 51% in Multiband retailing and 100% FDI on Single brand retailing. In the view of this economic reform many of the political parties and states expressed their protest. States opposing the FDI rule includes Gujarat, UP, West Bengal, Bihar, Tamil Nadu, Kerala, Chhattisgarh and Odisha. Many critics point out that it was a positive move by the government in the time of economic recession, while others opposed it, as its long term consequences are still unknown. Although FDI in retail has advantages like abolition of middlemen concept, bringing in best of the management practices, provision of quality and variety in goods and services with least possible prices etc. It can also significantly contribute towards GDP of the nation, which will bring economic development and will create infrastructural reforms in the country. At the same time it has certain drawbacks like unorganised retailers will lose their livelihood, large scale unemployment can be seen in the future time, it will create disequilibrium in the Indian labour market, essential resources will get depleted, local and national brand of product will get exhausted. The biggest threat of Retail FDI is, their long term effects during the time of economic crises are still unknown. There is a popular saying that Man proposes and God Disposes. Allowing the foreign players to trade in Indian market through FDI reforms is how far positive move is a critical point of debate which will be solved in the future course of time. Keywords: Foreign Direct Investment (FDI); Retail Sector; Gross Domestic Product (GDP); Economic Development INTRODUCTION Foreign direct Investment is the hottest point of discussion of late. Although this concept is old for the Indian market, but with the new FDI rules of organised retail sector, it is finding as a topic of interest to a common man. Although India has attended self sufficiency in production of food but the country is yet to achieve financial stability. The country still finds it difficult to manage key areas like inflation, employment, power and Infrastructure. In the above scenario the decision to allow foreign players to do business in the Indian market is how far a positive move is very difficult to analyse. However critics point out this agreement as a long term venture, the effect of which can be felt with the passage of time. The global crises in the past decade have also affected the Indian economy. Rise Available online on 1

2 in crude oil prices in the world market has burdened the common man to pay additional price, moreover rise in fiscal deficit has augmented more unemployment in the country. Corruption and government monopoly adds more power to the existing scenario. Retail Sector in India The current estimated value of the Indian retail sector is about 500 billion USD and is estimated to reach 1.3 trillion USD by The sector has witnessed a growth of 10.6% between the years 2010 to It comprises of both the organised and unorganised sector. While organised retail constitutes 8% of the total retail business, majority i.e. 92% is under the unorganised sector. This suggests that majority of Indian retail segment comprises of the traditional businessmen s and small entrepreneurs. The unorganised retail Industry is expected to grow at 5%, while the progress estimates for the organised sector is about 25%. The overall retail market in India contributes 14% to the Gross domestic product (GDP), the contribution from the organised player remains low at 5-6% of the overall GDP. Thus, organised retailing in India has high potential for growth and has big role to play in satisfying the requirements of the Indian consumers. Indian retail market in total comprises of variety items. Items like food and grocery accounts for 60% of consumption followed by apparels (8%), Mobile and telecom (6%), Food services (5%), Jewellery (4%), Consumer electronics (3%), Pharmacy (3%) and others accounting 11% of the total market share. India remains a potential market for the investors. According to survey of Global retail development Index (2012) India ranks 5 th in terms of market attractiveness all over the world. The overall retail market in India is expected to grow at the rate of 15-20% in the next five years which will contribute approximately 6-7% rise in GDP. The major organised retail players in India constitutes Pantaloon, Shoppers stop, Spencer, Lifestyle, Bharti, Reliance, Aditya Birla and Tata Trent. With the new regulations in FDI retails companies like Wal-mart, Carrefour, Tesco Plc, Metro Ag, Ikea are expected as potential investors in the Indian market. OBJECTIVES OF STUDY The current paper aims to present a picture of foreign direct investment in Retail sector in India. It highlights the significance and drawbacks of the FDI in the country. The author tries to focus on the present need of economic reforms in the form of FDI and future challenges to be faced by the country. What is FDI? In general sense, Foreign Direct Investment (FDI) is the investments made in various business sectors by the foreign players or entrepreneurs in a home country, with an aim to generate profit. According to Wikipedia FDI is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Investments made by the foreign players into a domestic market may be due to due to the following reasons: To invest the excessive capital, with an aim to generate income and profit. To use the potential resources of the home country, which is wasted or remains unutilized. To utilize the competition gap which exist in the domestic market. To bring in new technology which is capable of producing better products and services, than the home country. To prove to be cost effective in production, sales and distribution. To transfer the best practices of corporate culture, skills, methods of working etc. to the home country, which can serve as benchmarks. To acquire the scope of competitive advantage and core competence in home country. To diversify the business across the globe. VOL. 1, ISSUE 3 (March 2014) 2

3 History of FDI in India With the view of bringing economic reforms, FDI was introduced in India in 1991 under Foreign Exchange Management Act (FEMA). By then, the leadership was under the control of finance minister Dr. Manmohan Singh and Prime Minister Sri. P.V. Narshima Rao. According to survey report of UNCTAD (2012) at present time, India is the second most favourite choice for the investors to invest after China. The attractive sector for the investors includes retail, services, telecommunication, construction activities and computer software and hardware. The total inflow of capital from FDI in 2012 worth $10.4 billion from major players like Mauritius, Singapore, US and UK. Prime Minister while addressing the country on September 21 st 2012 spoke about the economic reforms of the country. He said in order to meet the fiscal deficit of the country in the form of government expenditure on rising crude oil prices in International market, there is a need of reformation and since money does not grows in trees ; something is to be done to check the rise in prices. The option is to allow the foreign players to trade in the Indian market. Benefits of Retail FDI in India Every plan has certain benefits and limitations. Following points enumerates the beneficial impacts of FDI in India: 1. It reduces the level in channel of distribution of goods and services: FDI opens the door of direct marketing in Indian economy. Products produced by various sectors including agriculture can be sold directly to the manufacturer. This will eliminate the role of channel intermediary, and the margin of profit directly goes into the hands of the seller. The household can directly purchase the finished goods from the manufacturer. Thus abolishes the concept of middlemen to create a common platform for both seller and the buyer. 2. Provides benchmarks in Management practices: FDI will bring in best of management practices across the globe. This will act as a benchmark in setting the standards with respect to organisational culture, productivity, planning and organizing practices, developmental framework etc. High benchmarks in the organisation can easily eliminate its domestic competitors. 3. Quality goods and services at less price: FDI can provides quality goods and services to the people at large. Since the foreign players enjoy competitive advantage in the area of production, the selling price of the product is kept low. 4. Variety products: FDI can act as a satisfier to the variety seeking consumers. Consumers can find more variety in the product mix, and will lead to more satisfaction. 5. Knowledge to domestic Retailers: FDI in retail can act as a source of knowledge to the domestic retailers with respect to product development and practice of modern method of management. 6. Contribute to GDP: FDI can act as a major contributor to Gross domestic product in India. Rise in GDP can lead to growth and development of the economy. 7. Creates new employment opportunities: Large malls and shopping centers can absorb the manpower of the country. FDI creates both skilled and unskilled job opportunities for the people of the home country. 8. Resource utilization: with the creation of FDI market in retail sector, resources will be less wasted and will find effective utilization. 9. Promotes agricultural development: FDI retail market demands the essential inputs from the agricultural sector for the production of crucial goods, this in turn will boost the farmers of the country to produce more. VOL. 1, ISSUE 3 (March 2014) 3

4 10. Increase in liquidity ratio (Foreign exchange reserves): FDI will generate more government revenue by fiscal duties which will increase the foreign exchange reserve. It will generate supplementary liquidity ratio, thereby banks and financial institutions can borrow additional funds from the central bank, leading to credit expansion in the domestic market. 11. Infrastructural development: warehouses, malls, shopping center etc. created in the course of business expansion by Foreign Investors will contribute to the Infrastructural development of the country. Drawbacks of Retail FDI in India FDI in retail sector is not free from limitations. Following worse consequences it can bring during its operation: 1. Threats to existing domestic Retailers and Entrepreneurs: Middleman like Retailers and entrepreneurs who are engaged in retail business, both in organized and unorganized sector will be under intimidation of competition. 2. Loss of Employment: Although FDI market provides both skilled and unskilled job employment, but it also results in creation of large scale unemployment in the country. Retail enterprises are most common form of business practiced in India. With the foreign investor play in the market, they will lose their business and means of livelihood. 3. Creates disequilibrium in the labour market: Paying high wages to the labors by the FDI market may decrease the supply of it. As this is a condition of exception to law of supply. According to this law if wages in the form of price raises excessively it will lead to decrease in supply of labour rather than increasing it. This will create a mismatch between demand and supply, resulting in disequilibrium in the labour market. 4. Threat to National and Local Brands: FDI in retail sector will act as a threat for the products of national and local repute. Variety in product mix offered by the foreign retailers, will throw Indian players out of the market. 5. Overuse of Limited Resources: FDI are projected to use excess of local and national resources for the production of goods, thereby the country s resources will soon get depleted. 6. Control over internal affairs of the Country: Although Foreign players are meant to do business and they have their own strategical limitations or boundaries, but it is predicted that in a long run they might show interest over the internal affairs of the country. CONCLUSION Retail sector in India has ample of gap which has attracted foreign investors. With the new regulations in FDI, it has opened the door for the outside players to establish themselves. Although the country will be benefited by this move but its long term effect might be drastic. Therefore it is essential to have a close look on the companies who are willing to carry out their future trade. Proactive steps in this regards must be taken by the government, so as to minimise its drastic consequences. REFERENCES 1. Kaushik. K. R. and Bansal K.K. (2012). Foreign Direct Investment in Indian Retail Sector Pros and Cons International Journal of Emerging Research in Management and Technology (accessed on 30/01/2014) (accessed on date: 30/01/2014) (accessed on date: 30/01/2014). 5. "Retailing in India Unshackling the chain stores". The Economist. 29 May VOL. 1, ISSUE 3 (March 2014) 4

5 6. Agarwal, Vibhuti; Bahree, Megha (7 December 2011). "India puts retails reforms on hold". The Wall Street Journal. 7. Global Powers of Retailing 2011". Deloitte "Indian retail kings around the world". Rediff, 6 December VOL. 1, ISSUE 3 (March 2014) 5