FDI in Indian Retail Industry

In this article, the Author Focuses on various aspects of FDI in Retail Industry. 

Contributor :- PM Anudeep Kumar, PGPB6. 

FDI in Indian Retail Industry

Abstract:- 

India is one of the largest emerging markets, with a population of over one billion. India is one of the largest economies in the world in terms of purchasing power and has a strong middle class base of 300 million. Around 70 per cent of the total households in India (188 million) reside in the rural areas, where mostly traditional retail outlets, commonly called kirana stores exist. These are unorganized, operated by single person and runs on the basis of consumer familiarity with the owner. However, recently organized retailing has become more popular in big cities in India and most of the metropolitan cities and modern organized retail stores flood other big cities. Many semirural areas also witnesses entry of such organized retail outlets. Till now, entry of foreign retailers was restricted in Indian retail market because of the ban on Foreign Direct Investment in Indian Retail Sector. But recently, as government has changed its policy and the cabinet has allowed 51 per cent FDI in single-brand retail, the prospects of foreign players entering India became high
 

FDI in Indian Retail Sector

Retailing in India is at a nascent stage of its evolution, but within a small period of time certain trends are clearly emerging which are in line with the global experiences. The indian economy was liberalized in the 1990’s, which triggered a total metamorphosis in the indian economy and gave a new lease of life to organized retailing (Yadav & Siraj, 2014). Organized retailing is witnessing a wave of players entering the industry. These players are experimenting with various retail formats. Yet, Indian retailing has still not been able to come up with many successful formats that can be scaled up and applied across India. The first challenge facing the organized retail industry in India is: competition from the unorganized sector. Traditional retailing has established in India for some centuries. It is a low cost structure, mostly owner-operated, has negligible real estate and labor costs and little or no taxes to pay. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector. In contrast, players in the organized sector have big expenses to meet, and yet have to keep prices low enough to be able to compete with the traditional sector. High costs for the organized sector arises from: higher labor costs, social security to employees, high quality real estate, much bigger premises, comfort facilities such as air-conditioning, back-up power supply, taxes etc.

Organized retailing also has to cope with the middle class psychology that the bigger and brighter a sales outlet is, the more expensive it will be. The past 2-3 years have seen a number of developments in the retailing business in India. The entry of corporate houses like RPG, Tatas and Piramals has increased the capital availability in the market. Bigger players like Shoppers Stop are in a position to take advantage of their sizes in dealing with the manufacturers. Despite a slowdown in the economy, customer queues at the stores are not decreasing. Network Magazine, an Indian business publication, observes that retailing is India's largest industry, accounting for over 10% of the country's gross domestic product and around 8% of employment. "The Indian retail industry is valued at about $300 billion and is expected to grow to $427 billion in 2010 and $637 billion in 2015," says the magazine. 

Only 2% to 3% of that is "organized." That is, actual stores instead of open-air markets, roadside stands and other beneficiaries of India's relaxed attitude toward urban planning. Retail has always been an alluring business proposition. But foreign retailers could not hang their shingles in India because of the restriction on Foreign Direct Investment. However, as the cabinet allowed 51 per cent FDI in single-brand retail, the prospects of foreign players entering India became high. Wal-Mart, which largely functions as an American company, is now planning to open its retail store in India as a joint venture with Bharti. Similarly, numbers of other big players are planning to enter the Indian market once the restriction on FDI is uplifted. India's own Reliance Group is expanding its chain of supermarkets in India, though they are far more limited in scope than Wal-Mart's big-box business model.

There's no question that Wal-Mart's fabled "efficiencies of scale" and modern distribution methods would be a breath of fresh air in India, because no one can compare any of the Indian Retailers with a huge giant like Walmart. And, here the concern is not of the credibility of Walmart But to decide whether it’s a right time to open the Indian retail market for foreign players or not. The prospect of international retail chains like Walmart, Carrefour and Ahold entering the country has enthused many suppliers. And also consumers, who are looking for a wider choice and finer prices product. However there remains some
opposition to allowing FDI in retail. Before opening a sector, many feels we should first look into the possible impact of transnational supermarkets on livelihood security of those engaged in small-scale operations. A few analysts report that allowing major global retail chains in India would entail the loss of several thousands of jobs as traditional mom-and-pop businesses would close down —as has happened in the West. There are 12 million people working in retail in India, ranging from operators of boutiques to the fellows who sell "cold water" on the streets of Delhi. I think the water guy and the kid selling fresh coconut juice in Mumbai don't have much to worry about (avoid the water, but try the coconut juice, by the way). 

What troubles me are the "organized retail" shops, which are often run by the same family for generations. What happens to their businesses and what happens to the markets--or bazaars as what we usually call it in India? In India, "Main Street" is not a street, but a bazaar. Delhi alone has dozens, ranging from Old Delhi's Chandni Chowk--a real bazaar in the Middle Eastern sense of the word--to roadside hovels to upscale markets like in South Extension and Greater Kailash. In Central Market at Lajpat Nagar, a sprawling shopping district in South Delhi, you can get a ready-made suit or a suit piece, order world- class opticals, buy Sandals and shoes, or buy pretty much anything else you could
want at an affordable price. The merchants are competitive with each other, usually, and Delhi shoppers will go from shop to shop, bargaining for a better deal. The question is what will happen to these bazaars and owners of these small shops? Many people argue that thousands of people will be unemployed with the Walmarts entry. And this is true also because if the customer will get quality product at low cost then they will definitely go for that. But there is also a powerful counter-argument: each sector that has been opened to private investment, such as insurance, banking, civil aviation etc. has grown. And the consumer  has benefited every time. 

A study by Luis Guasch (2002), Clive Harris (2003), and the McKinsey Global Institute (2003) have shown that in almost all cases FDI had a largely positive impact on productivity (the key criterion for assessing long-term economic performance) and on the coverage of services. But ill-designed privatization processes, contracts, and regulations have often led to poor returns on investments or, in some cases, to excessive returns. The financial and infrastructure sectors are tricky to regulate as quasinatural monopolies, but FDI is not to blame for government shortcomings. In sectors where competition is stronger, FDI has had a much more obvious positive impact. A study of India by the McKinsey Global Institute (2001) showed that the removal of FDI restrictions in the automotive sector unleashed competition and investments, resulting in a threefold increase in productivity that translated into a threefold increase in output due to falling prices. Employment also rose. So, once adjusted for the one time events and government shortcomings, the fundamental picture of FDI is quite positive. Change is the name of game. Those who want to survive in the competitive market they need to change there products and the practices that they are following in past.

India is no longer in a position to protect its domestic manufacturer from international players in this fast emerging fiercely competitive globalized world. Whatever arguments people give against the entry of foreign retailers, but few advantages are for sure going to happen such as it will Bring down price of all goods, Provide opportunities for more people willing to work/do business with retail giants, increase scope of taxation, thereby reducing the tax burden on salaried people and Provide platform for next generation to grow and become competitive.