Foreign Direct Investment and Indian Retail Sector and Its SWOT Analysis

Retail is the sale of goods to end users, not for resale, but for use and consumption by the purchaser. The retail transaction is at the end of the supply chain. Manufacturers sell large quantities of products to retailers, and retailers sell small quantities of those products to consumers. Thus, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. For Indian retailing, things started to change slowly in the 1980s, when India first began opening its economy. In India, textile sector (with companies like Bombay Dyeing, Raymond's, and Grasim etc.) was first to see the emergence of retail chains. Later on, Titan, the maker of premium watches, successfully created an organized retailing concept in India by establishing a series of showrooms. This retailing sector witnessed significant transformation in the past decade. Indian business houses and manufacturers are setting up retail formats, while the retail estate companies and venture capitalists are investing in retail infrastructure. Foreign Direct Investment, or FDI, is a measure of foreign ownership of domestic productive assets such as factories, land and organizations. FDI is cross border investment, where foreign assets are invested into the organizations of the domestic market excluding the investment in stock. Foreign investment is of two kinds- (1) Foreign Direct Investment (FDI) and (2) Foreign Portfolio Investment. FDI refers to capital inflow from abroad. FDI is a form of long-term international capital movement, that is made for the purpose of productive activity and may be accompanied by the intention of managerial control or participation in the management of foreign firm. It can also be defined as a category of cross border investment. Indian companies can receive FDI under two routes- 1) Automatic Route- It does not require any prior approval either of Reserve Bank of India(RBI) or of Government. 2) Government Route- It means that investment in the capital of resident entities by non-residents can be made only with the prior approval from Foreign Investment Promotion Board (FIPB) or Ministry of Finance or Department of Economic Affairs, as the case may be.

1) To study advantages and disadvantages of permitting FDI in retail sector. 2) To study various entry options available to global retailers in India. 3) To study whether or not FDI should be allowed in India. 4) To study the SWOT analysis with regard to FDI in Retail Sector.

The study is based on secondary sources of data. The main source of data are literature study, various Economic Surveys of India and Ministry of

1) Job Creation: With the entry of branded retailers, the market will increase, creating additional employment opportunities in retail and other tertiary sector. 2) Moving away from intermediary-only benefit: Intermediaries gains huge profits by buying products at low prices from suppliers and selling those products at marked up prices to customers. Besides the activities like hoarding and artificial shortages by the intermediaries push the prices of products to a high level. But retail sector, which enables on-site processing, scientific handling and quick transport through cold storage chains to final consumers, helps to curb the activities of intermediaries and it also ensures maximum efficiency and minimum wastage. 3) Improved Technology: Improved technology in the sphere of processing, grading, handling and packaging of goods and technical developments in the area like electronic weighing, billing, etc. could be a direct consequence of foreign companies opening retail shops in India. Further the advanced transportation facilities helps to bring down wastage of goods. 4) Impact on Real-Estate Development: Retail is closely related and dependent on real estate, as any retailer will require substantial space for setting up the business. Thus real estate can get a further uplift in India and can receive more investment with the opening up of FDI in retail sector. 5) Benefits to the Farmers: Though India is the second largest producer of fruits and vegetables, it has a very limited integrated cold-chain infrastructure. Lack of adequate storage facilities causes heavy losses to farmers, in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. With liberalization, there could be a complete overhaul of the currently fragmented supply chain infrastructure. Extensive backward integration by multinational retailers, coupled with their technical and operational expertise, can hopefully remedy such structural flaws. Thus it results in benefit to the farmer. 6) Lead Driver of Country's Economic Growth: Permitting FDI would create competition among the global investors, will be paid by the international companies and consumers are exposed to international lifestyle. All this helps to raise the standard of living of consumers and also leads to Economic Growth of country. Disadvantages of FDI in retail sector 1) Opponents of the FDI argue that allowing the FDI in retail sector will adversely affect the small retailers, farmers and consumers and give rise to monopolies of large corporate houses which can adversely affect the pricing and availability of goods. 2) They also argue that permitting FDI in retail sector can displace the small retailers, leading to loss of their livelihood. 3) The entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs. 4) The global retailers would collude and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up. 5) It would lead to lopsided growth in cities, causing discontent and social tension elsewhere. 6) It is argued that in the long run, consumers may have to face the risk of higher prices, substandard quality and limited options, once these big retailers settle down comfortably in Indian market.

1) Franchise agreement: In Franchise and commission agent services FDI is allowed with approval of RBI under FEMA. Players such as MacDonald, Pizza Hut, Nike, etc. have entered Indian market through this route. 2) Wholesale Cash and Carry Trade (B2B): 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. Metro A.G., Amway followed this route to enter into India. 3) Strategic licensing agreement: Some foreign brands had been given exclusive licenses and distribution rights to Indian sell foreign brand in their own stores. E.g. Mango, Adidas, etc. 4) Manufacturing and wholly owned subsidiaries: Multinationals having wholly owned subsidiaries in manufacturing in India are treated as Indian companies and are allowed to sell products to Indian customers .E.g. Sony, LG, Samsung, etc. 5) Test marketing: FIPB allows foreign companies to test market their products in India for two years period, by the end of which they are required to set up manufacturing unit in India. E.g. Amway. 6) Joint venture: Foreign retailers can enter into joint venture with Indian company and undertake business operations. E.g. Bharati- Walmart 7) Special cases: With special permission of RBI, some international retailers from Sri Lanka have independently entered Indian retail market. Such cases are treated as exclusive. E.g. Hammedia from Sri Lanka 8) Single Brand Retailing: FDI in single brand implies that a retail store with foreign investment can sell only one brand.

There are three arguments that are generally extended against permitting FDI in retail sector. First, this will prevent the growth of domestic retail industry. Second, it will result in the closure of small retail stores that will lead to loss of their livelihood. Third, it will disrupt social community and also will adversely affect the standard of living of general public. The first argument is passed simply because, with the entry of Reliance, Tata and other large players the domestic retail industry has surely suffered. But this argument does not have solid empirical basis. The liberalization of retail stores raises overall economic welfare and it does not result in loss of employment. For example, the entry of Haldiram has not led to the demise of Nathus and Agarwal mishthan bhandars. This infact will generate it‟s additional demand by reducing cost and lowering prices. This will also improve returns to the producers by eliminating unnecessary intermediaries. The third argument has greater substance. Malls could lead to greater urban anonymity. But this argument can also be proved wrong, as experience has shown that local communities can thrive if they are empowered and are involved in urban planning. So FDI in retail improves growth prospects, does not harm equity and discourages monopoly and therefore should be allowed. sector should be allowed in a phased manner so that it could serve the purpose of much-needed capital and bring boom in the sector, according to Confederation of Indian Industry (CII) Chairman Kishore Biyani. 1) FDI should be gradually allowed first in relatively less sensitive sectors like garments, lifestyle products, house ware and entertainment. 2) Alternative funding mechanisms and investment opportunities should be considered like FIIs and venture capital in the primary market, besides FDI. Hence they should be legalized and encouraged in the primary market. 3) Industry needs time for capital formation, which would take at least two-three years. The gradual inflow of FDI should not be a hindrance for the growth of the retail sector.

2) Young and dynamic manpower: A large young working population with median age of 25 years, nuclear families in urban areas, along with increasing working women population and emerging opportunities in the service sector are going to be the key growth drivers of the organized retail sector in India.

4) Efficient Banking Services: Efficient and customized services of bank‟s today, is a result of effective competition which

5) Large scale investments: It has also contributed to large scale investments in the real estate sector with major national and global players, investing in devolving the infrastructure and construction of the retailing business.

2) Catering to high end customers: This will mainly cater to high-end consumers placed in metros and will not deliver mass consumption goods for customers in villages and small towns.

4) Small size outlets: Small size outlets are also one of the major weaknesses in the Indian retailing. More than 96% of the outlets are lesser than 500 sq. ft and are also smaller than those in the developed countries.

inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments and hence India will significantly flourish in terms of Consumer Expectations. 2) Improvement in 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.

5) Attractive Market: Global retail giants take India as key market .It is rated fifth most attractive retail market. Indian retail industry is one of the most dynamic and fast paced industry with several players entering the market. The organized retail sector is expected to grow stronger than GDP growth in future, driven by changing lifestyles, increase in income, purchasing power and favourable demographic outline. Food and apparel retailing are key drivers of growth. 6) More transparency compared to traditional Mandi systems: The intermediaries operating in the Indian system are not adhering to transparency in the system relating to their price strategies. According to some of the reports, an average Indian farmer realize only one-third of the price, which a final consumer pays. But there will be more rationality and transparency in the pricing policies of these MNCs

1) 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, as their level is very high, fully automated which need very few people to operate. This will lead to massive job losses; also since the Sector is unable to employ retail staff on contract basis, this becomes a biggest threat for the Indian economy.

3) Repatriation of profits outside India: India doesn't need foreign retailers, since home grown companies and traditional markets may be able to do the job. Just like in BPO industry, work will be done by Indians, profits will go to foreigners, hence FDI is not viable solution for Indians. 4) 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. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there. 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 of such retail chains would go up. 7) Immature, undersize and infant stage of Indian retail sector: Another concern of Government of India is that the Indian retail sector, particularly organized retail, is still immature, undersized and is in a infant stage and that, therefore, it is important that the domestic retail sector is allowed to nurture and strengthen first, before fully opening this sector to foreign investors.

FDI in retail is very much debatable issue which needs to be resolved by taking into consideration the interest of the stakeholders. The decision to allow entry to foreign players in Indian retail sector may change the entire game. Big retail houses across the world shall come to India either independently or by partnering with Indian counterparts for a successful head start. FDI was allowed in Retail sector in order to make available the foreign brands to the domestic consumers. It shall benefit both the foreign retailer and the Indian partner – foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By completely opening this sector, the government has strongly conveyed its willingness in retail sector reforms. By allowing FDI in retail trade, India will significantly benefit in terms of quality standards, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost- competitiveness of Indian producers and marketers in all the segments. It will also help in integrating the modern Indian retail market with that of the global retail market. At the same time, Protection must be given to Indian small and medium retailers, as retailing is their source of livelihood. The Government must properly discuss the pros and cons of allowing FDI and have a law in place to control unfair competition. Then the FDI Bill will be given definitely a positive impact on the retail industry and the country by attracting more foreign investment. FDI in retail would help to control inflation by reducing wastage of farm output, as 30% to 40% of the produce does not reach the end-consumer. Part of inflation is due to the fact that produces do not reach the end-consumer. Permitting the FDI in Retail Sector also results in increasing the aggregate demand. It leads to creation of more employment and thus helps the general public in raising their standard of living by increasing the levels of their income. By permitting the FDI, it is also possible to get reach to the advanced technology and expertise. Thus, to conclude, FDI in Indian Retailing has both the pros and cons. But yet the disadvantages can be removed by designing suitable policies and rules and regulations to regulate the activities of foreign

formulating suitable policies). Thus it should be allowed keeping in view the benefits available to all stakeholders.

Economic Survey (2011-12), Ministry of Finance, Government of India, New Delhi, 2008 available at http://indiabudget.nic.in/es/ economy.html. ICRIER Report on Indian Retail, New Delhi, 2008. Joseph, Mathew and Soundararajan, Nirupama (2009), “Retail in India: A Critical Assessment”, Academic Foundation, NewDelhi.5 Mukherjee Arpita and Patel Nitisha (2005), “FDI in Retail Sector: India”, Academic Foundation, New Delhi. Pradhan Swapna, Retail Management, New Delhi, The McGraw Hill Companies, 2007. Pulkit Agarwal, Foreign Direct Investment in Indian Retail sector, [Online] Available: http://www.legalindia.in Internet Sources Websites: www.retailguru.com www.financialexpress.com www.legalindia.in/foreign-direct-investment-in-indian-retail-sector

Department of Commerce, M.D. University, Rohtak-124001 devender347@gmail.com