Source: E-mail dt. 16.08.2012
Foreign Direct Investment in Indian Retail Sector – An Analysis
Associate Professor, Department of Commerce, Periyar University, Salem - 636 011
Mr. C. Sankar
Ph.D., Research Scholar, Department of Commerce, Periyar University, Salem - 636 011
FDI is a tool for economic growth through its strengthening of domestic capital, productivity and employment. FDI also plays a vital role in the up gradation of technology, skills and managerial capabilities in various sectors of the economy. The present paper attempts to analyze significance of the FDI Inflows in Indian retail sector since 1991 and relating the growth of retail sector FDI in generation of employment in terms of skilled and unskilled. Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption.
retail industry in
Retailing is the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. A retailer is one who stocks the producer’s goods and is involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.
Foreign Direct Investment (FDI) in Retail:
Given this backdrop, the recent clamour about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, with arguments to support both sides of the debate. It is widely acknowledged that FDI can have some positive results on the economy, triggering a series of reactions that in the long run can lead to greater efficiency and improvement of living standards, apart from greater integration into the global economy. Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. This in turn can lead to greater output and domestic consumption.
But 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. Till such time we are in a position to create jobs on a large scale in manufacturing, it would make eminent sense that any policy that results in the elimination of jobs in the unorganized retail sector should be kept on hold.
most of the high decibel arguments in favour of FDI in the retail sector are
not without some merit, it is not fully applicable to the retailing sector in
India, or at least, not yet. This is because the primary task of government in
if Wal-Mart, the world’s biggest retailer sets up operations in India at prime locations in the 35 large cities and towns
that house more than 1million people. The supermarket will typically sell
everything, from vegetables to the latest electronic gadgets, at extremely low
prices that will most likely undercut those in nearby local stores selling
similar goods. Wal- Mart would be more likely to source its raw materials from
abroad, and procure goods like vegetables and fruits directly from farmers at
preordained quantities and specifications. This means a foreign company will buy
Such re-orientation of sourcing of materials will completely disintegrate the already established supply chain. In time, the neighbouring traditional outlets are also likely to fold and perish, given the ‘predatory’ pricing power that a foreign player is able to exert. As Nick Robbins wrote in the context of the East India Company, “By controlling both ends of the chain, the company could buy cheap and sell dear”14. The producers and traders at the lowest level of operations will never find place in this sector, which would now have demand mostly only for fluent English-speaking helpers. Having been uprooted from their traditional form of business, these persons are unlikely to be suitable for other areas of work either.
is easy to visualize from the discussion above, how the entry of just one big
retailer is capable of destroying a whole local economy and send it hurtling
down a spiral. One must also not forget how countries like
Given their economies of scale and huge resources, a big domestic retailer or any new foreign player will be able to provide their merchandise at cheaper rates than a smaller retailer. But stopping an Indian retailer from growing bigger is something current public policy cannot do, whereas the State does have the prerogative in whether foreign entry in the retail sector should be stalled or not.
It is true that it is in the consumer’s best interest to obtain his goods and retails at the lowest possible price. But this is a privilege for the individual consumer and it cannot, in any circumstance, override the responsibility of any society to provide economic security for its population. Clearly collective well-being must take precedence over individual benefits.
Issues Concerning Retail Sector in
Retailing is the largest private
industry in India and second largest employer after agriculture. The sector
contributes to around 10 percent of GDP. With over 12 million retail outlets,
The Indian retail sector is very
different from that of the developed countries. In the developed countries,
products and retails 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. On the other hand, Indian retail industry 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. Unorganized
retailing is by far the prevalent form of trade in
Growth drivers in
The retail industry in India is
currently growing at a great pace and is expected to go up to US$ 833 billion
by the year 2013. It is further expected to reach US$ 1.3 trillion by the year 2018
at a CAGR of 10%. As the country has got a high growth rate, the consumer
spending has also gone up and is also expected to go up further in the future.
In the last four years, the consumer spending in
Challenges of Retailing in
In India the retailing industry has a long way to go and to become a truly flourishing industry, retailing needs to cross various hurdles. The first challenge facing the organized retail sector is the competition from unorganized sector. Needless to say, the Indian retail sector is overwhelmingly swarmed by the unorganized 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.
The tax structure in India favors
small retail business. Organized retail sector has to pay huge taxes, which is
negligible for small retail business. Thus, the cost of business operations is very
The status of the retail industry
will depend mostly on external factors like Government regulations and policies
and real estate prices, besides the activities of retailers and demands of the
customers also show impact on retail industry. Even though economy across the
globe is slowly emerging from recession, tough times lie ahead for the retail
industry as consumer spending still has not seen a consistent increase. In
fact, consumer spending could contract further as banks have been overcautious
in lending. Thus, retailers are witnessing an uphill task in terms of wooing
consumers, despite offering big discounts. Additionally, organized stores, especially in the food and grocery segment. In retail
sector, Automatic approval is not allowed for foreign investment. There are restrictions
on Foreign Direct Investment imposed in order to protect the interests of the country
and also in order to allow the domestic companies to make more profits with
less competition than that of in the presence of rival international firms. The
retail trading in
1. The retail sector in
2. A National Commission must be established to study the problems of the retail sector and to evolve policies that will enable it to cope with FDI – as and when it comes.
3. The proposed National Commission should evolve a clear set of conditionalities on giant foreign retailers on the procurement of farm produce, domestically manufactured merchandise and imported goods. These conditionalities must be aimed at encouraging the purchase of goods in the domestic market, state the minimum space, size and specify details like, construction and storage standards, the ratio of floor space to parking space etc. Giant shopping centres must not add to our existing urban snarl.
4. Entry of foreign players must be gradual and with social safeguards so that the effects of the labour dislocation can be analysed & policy finetuned. Initially allow them to set up supermarkets only in metros. Make the costs of entry high and according to specific norms and regulations so that the retailer cannot immediately indulge in ‘predatory’ pricing.
5. In order to address the dislocation
issue, it becomes imperative to develop and improve the manufacturing sector in
6. The government must actively encourage setting up of co-operative stores to procure and stock their consumer goods and commodities from small producers. This will address the dual problem of limited promotion and marketing ability, as well as market penetration for the retailer. The government can also facilitate the setting up of warehousing units and cold chains, thereby lowering the capital costs for the small retailers.
7. This is more than just a sizeable portion of the pie and what makes it even more significant is the fact that in this segment, returns are likely to be much higher for any retailer. Prices for perishable goods like vegetables, fruits, etc. are not fixed (as opposed to, say, branded textiles) and therefore, this is where economies of scale are likely to kick in and benefit the consumer in the form of lower prices. But due attention must be given to the producer too. Often the producer loses out, for example, when the goods are procured at Rs.2 and ultimately sold to the consumer at about Rs.15 as in the case of tomatoes now. The Government themselves can tap into the opportunities of this segment, rather than letting it be lost to foreign players. And by doing so, they can more directly ensure the welfare of producers and the interest of the consumers.
8. Set up an Agricultural Perishable Produce Commission (APPC), to ensure that procurement prices for perishable commodities are fair to farmers and that they are not distorted with relation to market prices.
Limitations of the Present Setup
has been a lack of investment in the logistics of the retail chain, leading to
an inefficient market mechanism. Though India is the second largest producer of
fruits and vegetables (about 180 million MT), it has a very limited integrated
cold-chain infrastructure, with only 5386 stand-alone cold storages, having a
total capacity of 23.6 million MT. ,80% of this is used only for potatoes. The
chain is highly fragmented and hence, perishable horticultural commodities find
it difficult to link to distant markets, including overseas markets, round the year.
Storage infrastructure is necessary for carrying over the agricultural produce
from production periods to the rest of the year and to prevent distress sales.
Lack of adequate storage facilities cause heavy losses to farmers in terms of
wastage in quality and quantity of produce in general, and of fruits and vegetables
in particular. Post-harvest losses of farm produce, especially of fruits, vegetables
and other perishables, have been estimated to be over Rs. 1 trillion per annum,
57 per cent of which is due to avoidable wastage and the rest due to avoidable
costs of storage and commissions''. As per some industry estimates, 25-30% of
fruits and vegetables and 5-7% of food grains in
Intermediaries dominate the value chain. They
often flout mandi norms and
their pricing lacks transparency. Wholesale regulated markets, governed by State
APMCActs, have developed a monopolistic and non-transparent character. According
to some reports, Indian farmers realize only 1/ 3rd of the total price paid by
the final consumer, as against 2/ 3rd by farmers in nations with a higher share
of organized retail!". A study commissioned by the World Bank attributes the
export non-competitiveness of
There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a 'farm-to-fork' retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
Opening up of FDI in multi-brand retail in India could potentially be a mixed blessing for domestic players. While initially the small indigenous retailers’ business would be impacted once modern retail enters the locality, this adverse impact is expected to be short-lived and to weaken over time. While this long awaited move is not expected to have an immediate impact on the Indian retail sector, it is expected to reap benefits in the medium to long-term as it will help improve the A) balance sheet and liquidity profile of cash-starved retailers with aggressive expansion plans B) supply chain and back-end infrastructure while reducing margins for middlemen through direct sourcing from farmers and C) arrest inflationary pressures through increased supplies facilitated by improved productivity of farmers and reduction of agri-waste. However, once 100% FDI is allowed in retail, that is when the landscape will become extremely competitive. Further, the move needs to be monitored in the wake of the current opposition by several political parties.
Reference and Notes