Indian retail industry is one of
the sunrise sectors with huge growth potential.
According to the Investment
Commission of India, the retail sector is expected to
grow almost three times its current levels to $660
billion by 2015.
FDI in cash and carry (wholesale)
with 100% ownership was
allowed under the Government
approval route. It was brought under the automatic
route in 2006. 51% investment in
a single brand retail outlet was also permitted in
2006
As such, these retail giants will
try to gain from some quick wins while reaching out
to the Indian consumer. For one,
they will effectively harness their expertise with
cold storage technologies to lure
customers with fresh and exotic vegetables, fruits
and organic produce. Secondly,
they will also emphasise on the access that they can
create for a range of
inspirational global foods and household brands. Thirdly, by
supporting domestic farmers will
try ensuring supplies of essential raw materials to
them
is one of the pillars of its
economy and accounts for 14 to
15% of its GDP.
India's retail and
logistics industry employs about
40 million Indians (3.3% of Indian population).
Until 2011, Indian central
government denied foreign direct investment (FDI) in multibrand
retail, forbidding foreign groups
from any ownership in supermarkets,
convenience stores or any retail
outlets. Even single-brand retail was limited to 51%
ownership and a bureaucratic process
In January 2012, India approved
reforms for single-brand stores welcoming anyone
in the world to innovate in
Indian retail market with 100% ownership, but imposed the
requirement that the single brand retailer source
30% of its goods from India
100% FDI is allowed in wholesale
trading which involves building of a large
distribution infrastructure to
assist local manufacturers.The wholesaler deals only
with smaller retailers and not
Consumers. Metro AG of Germany was the first
significant global player to enter India through
this route.
a) FDI up to 100% for cash and
carry wholesale trading and export trading
allowed under the automatic
route.
b) FDI up to 51 % with prior
Government approval (i.e. FIPB) for retail trade of
‗Single Brand‘ products, subject
to Press Note 3 (2006 Series)[12].
c) FDI is not permitted in Multi Brand Retailing in
India
Changed
1. India will allow FDI of up to
51% in ―multi-brand‖ sector.
2. Single brand retailers such as
Apple and Ikea, can own 100% of their Indian
stores, up from previous cap of
51%.
3. The retailers (both single and
multi-brand) will have to source at least 30% of
their goods from small and medium
sized Indian suppliers.
4. All retail stores can open up
their operations in population having over
1million.Out of approximately
7935 towns and cities in India, 55 suffice such
criteria.
5. Multi-brand retailers must
bring minimum investment of US$ 100 million. Half
of this must be invested in
back-end infrastructure facilities such as cold
chains, refrigeration,
transportation, packaging etc. to reduce post-harvest
losses and provide remunerative
prices to farmers.
6. The opening of retail
competition (policy) will be within parameters of state
laws and regulations.
The first challenge facing the
organized retail sector is the competition from
unorganized sector
no ‗barrier to entry
Organized retail sector has to pay
huge taxes, which is
negligible for small retail business.
Developed supply chain and
integrated IT management is absent in retail
Sector
Also,
the intrinsic complexity of
retailing- rapid price changes, threat of product
obsolescence, low margins, high
cost of real estate and dissimilarity in consumer
groups are the other challenges that the retail
sector in India is facing
Another apprehension is that FDI
in retailing can upset the import balance, as large
international retailers may
prefer to source majority of their products globally rather
than investing in local products.
The global retailers might resort to predatory pricing.
Due to their financial clout,
they often sell below cost in the new markets. Once the
domestic players are wiped out of
the market foreign players enjoy a monopoly
position which allows them to increase prices and
earn profits.
On the contrary; after making
initial investment on basic
infrastructure, the multinational retailers may remit the
higher amount of profits earned in India to their
own country.
India needs trillions of dollars
to build its infrastructure, hospitals, housing and
schools for its growing
population. Indian economy is small, with limited
surplus capital. Indian
government is already operating on budget deficits. It is
simply not possible for Indian
investors or Indian government to fund this
expansion, job creation and
growth at the rate India needs. Global investment
capital through FDI is necessary.
Beyond capital, Indian retail industry needs
knowledge and global integration.
Global retail leaders, some of which are
partly owned by people of Indian
origin, [28]
can
bring this knowledge. Global
integration can potentially open
export markets for Indian farmers and
producers. Walmart, for example,
expects to source and export some $1
billion worth of goods from India
every year, since it came into Indian
wholesale retail market
India has 600 million
farmers, 1,200 million consumers and 5 million
traders
\ Indian farmers get only one
third of the price consumers pay for food staples,
the rest is taken as commissions
and mark-ups by middlemen and
shopkeepers.
Partial FDI in retail was
introduced in 1992 in China.
Subsequently, in December 2004,
the Chinese retail market was fully opened up to
utilise the enormous manpower and
wide customer base available that has led to a
rapid growth of the sector.
Today, its retail sector is the second largest (in value) in
the world with global retailers
such as Walmart, 7-Eleven and Carrefour comprising
10% of the total merchandise
FDI in multi-brand retail would
in no way endanger the jobs of people
employed in the unorganised
retail sector. On the contrary, it would lead to
the creation of millions of jobs
as massive infrastructure capabilities would be
needed to cater to the changing
lifestyle needs of the urban Indian who is
keen on allocating the disposable
income towards organised retailing in
addition to the local kirana stores.
These stores would be able to retain their
importance owing to their unique
characteristics of convenience, proximity
and skills in retaining
customers. Also, these would be more prominent in the
Tier-II and Tier-III cities where
the organised supermarkets would find it
harder to establish themselves
In contrast, players in the
organized sector have to cover
big fixed costs, and yet have to keep prices low
enough to be able to compete with
the traditional sector. Getting customers to
switch their purchasing away from
small neighbourhood shops and towards largescale
retailers may be a major challenge
Growing economy and increasing
purchasing power would more than
compensate for the loss of market share of the
unorganised sector retailers
IMPACT OF FDI
- Infrastructure
·
investment in the logistics
· infrastructure
cold-chain
- Intermediaries
dominate the value chain
- Improper
Public Distribution System (“PDS”)
- quality
standards and consumer expectations
- employment
CHALLENGES
-
kill
local shops and millions of jobs
-
monopolistic
power
-
asymmetrical
growth in cities
-
Change
in balance of payments
-
interest
rates
-
Thousands
may be created but millions may be lost
-
Work
will be done by Indians, profits will go to foreigners.
-
free
and fair retail competition is needed
-
inefficiencies
and wastage in distribution and storage
-
decrease
of child labour in unorganized retail formart
-
impact
on suppliers
-
decrease
in middlemen commission agents
-
credit
system cant be implemented as in case of local neighborhood shops
pros
-
needed
investment
-
can
learn from domestic players and compete them
-
decrease
in supply chain cost
-
Technology
-
Farmers
get better prices
-
More
choice for consumers
-
Govt
gets about usd25-30 billionas taxes
-
Reduce
its trade defecit
-
Availability
of foreign goods
Cons
-
Rupee
depreciation
-
Small
retailers
-
Lowers
the growth of the economy
-
Monopoly
-
poor unskilled labor
-
unorganized retailing
-
educated unemployment in india
-
predatory
pricing by foreign retailers
-
widen
the rural -urban divide in
FDI IN RETAILING SECTOR IN INDIA – PROS &CONS - by
Hemant Batra
Hemant Batra, Lead Partner, Kaden Boriss
Legal LLP, India
Most
Countries of the World which embarked on the road to economic development had
to depend on foreign capital to some extent. But until the early 1990s India’s
approach towards foreign capital as an instrument of growth and development in
an overall sense was rigid, restrictive and selective. Things, however, changed
with the Industrial Policy 1991.Coming on the heels of the macro –economic and
balance of payment crisis of late 1980s, it ushered in a paradigm shift in the
Indian economy and over bent to cajole foreign capital to come to India. The
beginning made by the Industrial Policy 1991 in the direction of inviting
foreign capital has increasingly been gaining momentum with new sectors being
made eligible, with almost each subsequent year, for foreign capital.
The
most important channel through which foreign capital flows into the country is Foreign Direct Investment (FDI). FDI as defined in Dictionary of Economics (Graham Bannock
et.al) is “investment in a foreign country through the acquisition of a local
company or the establishment there of an operation on a new (Greenfield) site.
International Monetary Organization (IMF) and Organization for Economic
Cooperation and Development (OECD) define FDI as a category of cross
border investment made by a resident in one economy (the direct investor) with
the objective of establishing a ‘lasting interest’ in an enterprise (the direct
investment enterprise) that is resident in an economy other than that of the
direct investor. The motive of the direct investor is a strategic long term
relationship with the direct investment enterprise to ensure significant degree
of influence in the management of the direct investment enterprise .Besides,
International Bank for Reconstruction and Development (IBRD) and United Nations
Conference on Trade and Development (UNCTAD) also provide definition of Foreign
Direct Investment. To put in simple words, FDI refers to capital inflows from
abroad that is invested in or to enhance the production capacity of the
economy. It is preferred over other source of foreign capital because it is
non-volatile, non-debt creating and results in economic development,
modernization and employment generation in the economy.
Foreign
Direct Investment under the Industrial Policy 1991 and thereafter under
different Foreign Trade Policies is being allowed in different sectors of the
economy in different proportion under either the Government route or Automatic
Route. In Retailing, presently 51 per cent FDI is allowed in single brand
retail through the Government
Approval route while 100 per cent FDI is allowed
in the cash-and-carry (wholesale) formats under the Automatic route. Under the Government Approval route, proposal for FDI in
‘Single Brand Product Retailing’ are received in the Department of Industrial
Policy and Promotion, Ministry of Commerce & Industry. Automatic route
dispenses with the need of multiple approvals from Government and/or regulatory
agencies (Government of India or the RBI). Investors are required only to
notify the concerned Regional offices of RBI within 30 days of receipt of
inward remittances and file required documents with that office within 30 days
of the issue of shares to foreign investors
The
legal
regimes that controls FDI in India and to
that extent FDI in retailing includes Press Notes by Department of Industrial
Policy and Promotion, Foreign Exchange Management Act 1999, Guidelines of
Reserve Bank of India(RBI) and Security and Exchange Board of India, besides,
of course, the Constitution of India.
India’s
large and ever growing population coupled with a paucity of profitable economic
opportunities make “labor intensive” activities like Agriculture and Retailing
a major source of subsistence for the teeming millions especially the poor
unskilled labor, superfluous labor and the educated unemployed. Therefore, any
change that tend to disturb the existing configuration of these two sectors
have a bearing on the lives of millions of these people and raises sharp public
outcry and to that extent FDI in Agriculture and Retailing has always been a
contentious issue. Of late, the Government of India has expressed its desire to
bring the Multi-Brand retailing within the ambit of FDI, and in the process has
put in train a debate on its possible outcome. This short paper proposes to
examine the conflicting view points of this debate so as to arrive at a
balanced conclusion.
Retailing
in India as also elsewhere in the world is divided into organized and unorganized retailing. Organized retailing refers to trade activities undertaken
by the licensed retailers i,e, those who are registered for sales tax,
income tax etc. These include the corporate backed hypermarket, retail chains
and also the privately owned large retail business. Unorganized retailing, on the
other hand, refers to traditional format of low cost retailing, for example the
corner store (kirana i.e. grocery shops),owner manned general stores, Cigarette
shops, convenience store, hand cart, pavement vendor etc. Unorganized retailing is the most
prolific and visible form of
retailing in India while the organized retailing constitutes only a very small
percentage (3-4%). The reasons as to why Indian retailing is so fragmented or
unorganized in nature lies in her entrenched poverty and the fact that a large
number of educated unemployed and superfluous labor takes refuge in retailing
in the face of joblessness and glaring poverty. Retailing in unorganized sector
is thus not a profit oriented vocation but a mere source of livelihood.
Naturally, the capital investment is very low and the infrastructure is
rudimentary. It is estimated that less than 4% of Indian retailers have shops
larger than 500 square feet. Given this rickety state of Indian unorganized
retailing, there are serious apprehensions that the flow of organized foreign
capital with its associated baggage of humungous infrastructure, bulging
financial power professional managerial staffs etc, would sound the death knell for the Indian retailing
industry. As against most Indian retailers’
less than 500 square feet premises, the average size of a store of Wall-mart
(American Retailing Giant) is 85000 square feet and has an average
annual turnover of $51 million as opposed to an average Indian retailer’s
paltry turnover of Rs.186, 000. Further, it is feared that the international
retailing giants will resort to predatory pricing
to acquire monopolies. These retailing giants with their sprawling business
cutting across different continents and deep pockets will be able to sustain
loss till their competitors are wiped out.
As
has been mentioned earlier retailing “disguises” the
abysmal nature of unemployment in the country. Indian agriculture has long been
a source of livelihood for the teeming millions of the country (provides
employment to more than 50% of India’s labor force) so much so that
it is massively over-crowded now. Besides, during the lean season even the
productive farmer find themselves unemployed. Although the manufacturing is a
labor absorbing sector, its true potential has not been harnessed as yet and it
has been stagnating since the tenth five year plan. Retailing helps in
absorbing these shocks providing safety-net and opportunities to the
superfluous labor to eke out a living where all other sectors have not been
able to. Critics fear that the inflow of FDI in retailing will restrict the
labor absorbing capacity of the retailing sector since the international
retailing giants employ labor saving machinery and knowhow both to add value to
their service as well as to enhance their profit. And given the fact that the
manufacturing is not in a vibrating state to absorb those who are displaced
from the retailing by the advent of FDI, the poor and the unemployed will find
the going very difficult for them. There will be a hike in the rate of both
unemployment and underemployment.
It
has also been said that the domestic
organized retailing is underdeveloped
and in a nascent stage. Therefore, it is important that the domestic retailing
sector is allowed to grow and consolidate first before the sector is opened to
FDI. FDI in retailing may also widen the rural -urban divide in the sense that most of the retailing centers would be set
up in the cities where both the density of population and level of income of
the people are high. These retail centers would also attract cheap
labor from the rural areas and thereby deplete the hinterland of its workforce.
In addition, organized retailing with FDI would result in bevy of buildings and
multiplexes. Unless their constructions are regulated, they will also add to
the chaotic muddle of urbanscape.
After
having expatiated on the possible pitfalls of allowing FDI in retailing, it is
also necessary to understand the distinction between appearance and reality. Much of the prognostication of gloom is based on a
theoretical understanding of the situation. In reality, the research conducted
by the Indian Council for Research on International Economic Relations (ICRIER)
has revealed that there is no evidence of overall decline in the employment of
the Unorganized retailing sector as a result of the advent of FDI in organized
retailing and that the rate of closure of small shops for the same reason is
very minimal.
One
needs to be holistic in his assessment of the outcome of introducing FDI in
Retailing. One of the reasons as to why a vast swath of India’s population is
suffering poverty and depravation is that Agricultural sector of the country
has not developed appropriately, and the main stumbling block in this regard
has been that of inadequate logistics and direct access for farmers to vast
markets. FDI in retailing can to a large extent ameliorate these deficiencies.
If FDI in front end retailing is allowed, the international retailing giants
will be motivated to invest capital, bring in knowhow and global capacity
on a colossal scale and as a result a world class back end infrastructure would be built the like of which may take the government
years to make (Though FDI is permitted in backend infrastructure to the extent
of 100% through the automatic route, in the absence of FDI in retailing,
investment in backend infrastructure has not been so forthcoming) . The
foremost beneficiary of such a development would be the farmers, especially
those engaged in Horticulture. Though India is the second largest producer of
fruits and vegetables, lack of storage facilities cause heavy losses to
farmers. Availability of adequate post harvest and cold chain infrastructure
would enable the farmers to avoid wastage and distress sales. The retailers
would engage the farmers directly through the contract farming programmes as
also resort to direct buying from the farmers which will dilute the role of
profit siphoning intermediaries, enhance the income of the farmers and give
them direct access to markets. The resultant rural prosperity may open up
market for other industrial goods and help bring about a more balanced regional
development.
The
Medium and
Small Enterprise that plays a critical role in
country’s overall manufacturing scenario has lagged and suffered due to lack of
branding and avenues to reach out to the vast world market. The international
retailers can buy from them not only for the domestic market but for their
stores outside the country also and in the process provide the small and medium
enterprises of the country a brand name and a window to the international
market. In fact, it is estimated that FDI in retailing can significantly increase export from the country. If the domestic organized retailers are
allowed to grow to the exclusion of FDI, it may bring about other above
mentioned developments but not increase the exports.FDI can, in fact, spur
competition among the organized retailers. The ultimate beneficiary of these
competitions would be the consumers. An example of how the consumer benefit
from the competition is the automobile industry in India. The intense
competition among the automobile industries has resulted in a situation where
the consumer has been able to purchase cars for as low a price as rupees one
lakh. CRIER in its research has found that all income groups save through
organized retail purchase, but the lower income groups save more. Thus,
organized retail is relatively more beneficial to the less well-off consumers.
A
growing and mushrooming retail sector means that its contribution to GDP would
grow. It would thus help in expanding
the economy, generate employment and result in more tax income.
In
the light of all that have been discussed above it can be said without any
dispute that the time for allowing FDI in Multi –Brand Retailing has come and
as Victor Hugo has said “Nothing can stop an idea whose time has come”. FDI in
Retailing started with FDI in cash and carry wholesale trading first permitted
in 1997 to the extent of 100% under the Government approval route and
thereafter in 2006 brought under the automatic route. In 2006 again FDI in
Single Brand Retailing was permitted to the extent of 51%. From here it is but
natural and logical that FDI would now proliferate to multi-brand retailing.
But the progression to FDI in multi-brand retailing cannot take place at the
cost of vital concerns raised in connection with this possible change by
different groups; viz, the question of adaptability of the retailers in the
unorganized sector, the question as to how the FDI in retailing can be harnessed
for the benefits of Indian agriculture and Medium and Small Enterprise and
above all how to impart into the economy a degree of resilience to withstand
the changes that would be ushered in the wake of introduction of FDI in
retailing. All these concerns have to be addressed not because the Left wing
political parties and the media through their campaign have necessitated such
attention but because we are constitutionally bound to do so .The Preamble of the Constitution resolves to constitute India into a Sovereign, Socialist,
Secular, Democratic, Republic and to secure to all its citizens JUSTICE,
social, economic and political …..EQUALITY of status and opportunity.
Directive
Principles of State Policy similarly exhorts the state to establish just, equitable
and fair order. Article 39(c) states that the state should ensure that the
operation of the economic system does not result in the concentration of wealth
and means of production to the common detriment. Though both these features are
not enforceable, the Executive and the Apex Court in particular have time and
again reiterated the sacrosanct nature of these features [ Kesavananda Bharti v.State
of Kerala AIR 1973 SC1461,1973(4) SCC225; Minerva Mills v. Union of
India 1980 AIR 1789,1981 SCR(1) 2061]
Unlike
FDI in single brand retailing which pertains to brand loyal and a relatively
small high income clientele, FDI in multi-brand retailing would have direct
impact on a vast spectrum of population and thus a sensitive issue. Left alone
foreign capital will seek ways through which it can only multiply itself, and
unthinking application of capital for profit, given our peculiar socio-economic
conditions, may spell doom and deepen the hiatus between the rich and the poor.
Thus the proliferation of foreign capital into multi-brand retailing needs to
be anchored in such a way that it results in a win-win situation for India.
This can be done by integrating into the rules and regulations for FDI in
multi-brand retailing certain inbuilt safety valves. For example FDI in multi
–brand retailing can be allowed in a calibrated manner with social safeguards
so that the effect of possible labor dislocation can be analyzed and policy
fine tuned accordingly. To ensure that the foreign investors make a genuine
contribution to the development of infrastructure and logistics, it can be
stipulated that a percentage of FDI should be spent towards building up of back
end infrastructure, logistics or agro processing units. One of the
justifications for introducing FDI in multi-brand retailing is to transform the
poverty stricken and stagnating rural sphere into a forward moving and
prosperous rural sphere. To actualize this goal it can be stipulated that at
least 50% of the jobs in the retail outlet should be reserved for rural youth
and that a certain amount of farm produce be procured from the poor farmers.
Similarly to develop our small and medium enterprise, it can also be stipulated
that a minimum percentage of manufactured products be sourced from the SME
sector in India. Public Distribution System is still in many ways the life line
of the people living below the poverty line. To ensure that the system is not
weakened the government may reserve the right to procure a certain amount of
food grains for replenishing the buffer. The government may also put in place
an exclusive regulatory framework to protect the interest of small retailers.
It will ensure that the retailing giants do resort to predatory pricing or
acquire monopolistic tendencies. Besides, the government and RBI need to evolve
suitable policies to enable the retailers in the unorganized sector to expand
and improve their efficiencies
The
Industrial policy 1991 had crafted a trajectory of change whereby every sectors
of Indian economy at one point of time or the other would be embraced by
liberalization, privatization and globalization.FDI in multi-brand retailing is
in that sense a steady progression of that trajectory. But the government has
by far cushioned the adverse impact of the change that has ensued in the wake
of the implementation of Industrial Policy 1991 through safety nets and social
safeguards. But the change that the movement of retailing sector into the FDI
regime would bring about will require more involved and informed support from
the government. One hopes that the government would stand up to its
responsibility, because what is at stake is the stability of the vital pillars
of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of
the entire country.
By Hemant Batra, Lead
Partner, Kaden Boriss Legal LLP, India; Vice President, SAARCLAW; Chairperson,
IICLAM, Singapore; Advisory Board Member, OIC, USA
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