Foreign direct investment in Retail in India.
Foreign direct
investment (FDI) is direct investment into production or business in a
country by a company in another country, either by buying a company in the
target country or by expanding operations of an existing business in that
country. . Foreign direct investment is in contrast to portfolio investment which
is a passive investment in the securities of another country such as stocks and bonds.
Definitions
FDI can be defined
as a cross border investment, where foreign assets are invested into the
organizations of the domestic market excluding the investment in stock. It
brings private funds from overseas into products or services. The domestic
company in which foreign currency is invested is usually being controlled by
the investing foreign company. Eg. An American company taking major stake in a
company in India. Their ROI is based on the performance of the project.
INVESTOPEDIA:
An investment made
by a company or entity based in one country, into a company or entity based in
another country. Foreign direct investments differ substantially from indirect
investments such as portfolio flows, wherein overseas institutions invest in
equities listed on a nation's stock exchange. Entities making direct
investments typically have a significant degree of influence and control over
the company into which the investment is made. Open economies with skilled
workforces and good growth prospects tend to attract larger amounts of foreign
direct investment than closed, highly regulated economies.
Economics Dictionary:
FDI stands
for Foreign Direct Investment, a component of a country's
national financial accounts. Foreign direct investment is
investment of foreign assets into domestic structures, equipment, and
organizations. It does not include foreign investment into the stock markets. FDI
is thought to be more useful to a country than investments in the equity of its
companies because equity investments are potentially "hot money"
which can leave at the first sign of trouble, whereas FDI is durable and
generally useful whether things go well or badly.
Foreign direct investment
and the developing world
In the past
decades, FDI was concerned only with highly industrialized countries. US was
the world’s largest recipient of FDI during 2006 with an investment of 184
million from OECD (Organization for Economic Co-operation and Development)
countries. France, Greece, Iceland, Poland, Slovak Republic, Switzerland and
Turkey also have a positive record in FDI investments. Now, during the course
of time, FDI has become a vital part in every country more particularly with
the developing countries.
This is
because of the following reasons:
§ Availability of cheap labor.
§ Uninterrupted availability of raw material.
§ Less production cost compared with other developed
countries.
§ Quick and easy market penetration.
The rapid
growth of world population since 1950 has occurred mostly in developing
countries. This growth has not been matched by similar increases in per-capita
income and access to the basics of modern life, like education, health care, or
- for too many - even sanitary water and waste disposal.FDI has proven when
skillfully applied to be one of the fastest means of, with the highest impact
on, development.
A recent meta-analysis of the effects of foreign direct investment on local
firms in developing and transition countries suggests that foreign investment
robustly increases local productivity growth. The Commitment to Development Index ranks the "development-friendliness" of
rich country investment policies.
Some development economists believe
that a sizeable part of Western Europe has now fallen behind the most dynamic amongst Asia’s emerging nations, notably because the latter adopted policies more
propitious to long-term investments: “Successful countries such as Singapore,
Indonesia and South Korea still remember the harsh adjustment mechanisms
imposed abruptly upon them by the IMF and World Bank during the 1997-1998
‘Asian Crisis’ . What they have achieved in the past 10 years is all the more
remarkable: they have quietly abandoned the “Washington consensus” [the
dominant Neoclassical perspective] by investing massively in infrastructure
projects, this pragmatic approach proved to be very successful.”
Foreign direct investment
GLOBALLY
The United Nations
Conference on Trade and Development said
that there was no significant growth of global FDI in 2010. In 2011 was $1,524
billion, in 2010 was $1,309 billion and in 2009 was $1,114 billion. The figure
was 25 percent below the pre-crisis average between 2005 and 2007
Foreign direct investment by Country
United States
Broadly
speaking, the U.S. has a fundamentally open economy and very small barriers to foreign direct investment.
The United States is the world’s largest recipient of FDI. U.S. FDI totaled
$194 billion in 2010. 84% of FDI in the U.S. in 2010 came from or through eight
countries: Switzerland, the United Kingdom, Japan, France, Germany, Luxembourg,
the Netherlands, and
China
FDI in China,
also known as RFDI (renminbi foreign direct investment), has increased considerably
in the last decade, reaching $59.1 billion in the first six months of 2012,
making China the largest recipient of foreign direct investment and topping the
United States which had $57.4 billion of FDI. During the global financial crisis FDI fell by over one-third in 2009 but rebounded in
2010.
India
Starting from
a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected
India as the second most important FDI destination (after China) for
transnational corporations during 2010–2012. As per the data, the sectors that
attracted higher inflows were services, telecommunication, construction
activities and computer software and hardware. Mauritius, Singapore, US and UK
were among the leading sources of FDI. Based on UNCTAD data FDI flows were
$10.4 billion, a drop of 43% from the first half of the last year. India
disallowed overseas corporate bodies (OCB) to invest in India
2012 FDI reforms in India
On 14
September 2012, Government of India allowed
FDI in aviation up to 49%, in the broadcast sector up to 74%, in multi-brand retail up
to 51% and in single-brand retail up
to 100%. The choice of allowing FDI in multi-brand retail up to 51% has
been left to each state.
In its supply
chain sector, the government of India had already approved 100% FDI for
developing cold chain. This allows non-Indians to now invest with full
ownership in India's burgeoning demand for efficient food supply systems. The
need to reduce waste in fresh food and to feed the aspiring demand of India's
fast developing population has made the cold supply chain a very exciting
investment proposition.
Foreign
investment was introduced by Prime Minister Manmohan Singh when he was finance
minister (1991) by the government of India as FEMA (Foreign Exchange Management
Act).
FDI in the Retail sector:
Retailing
refers to the transaction of goods from the fixed location, between the sellers
and end users (consumers). These transactions generally satisfy the needs
of the individuals or households for direct consumption, thus are small in
quantity. The kirana stores, departmental stores, shopping malls etc are
examples of retail outlets.
Retailing
is one of the world’s largest private industry. Liberalizations in FDI have
caused a massive restructuring in retail industry. The benefit of FDI in retail
industry superimposes its cost factors. Opening the retail industry to FDI will
bring forth benefits in terms of advance employment, organized retail stores, availability of quality products
at a better and cheaper price. It enables a country’s product or service to
enter into the global market.
Few facts about Indian Retail sector
· The Retail sector of India is vast, and has huge potential
for growth and development, as the majority of its constituents are
un-organized.
· The retail sector of India handles about
$250 billion every year, and is expected by veteran economists to reach to $660
billion by the year 2015.
· The business in the organized retail sector of India, is to
grow most and faster at the rate of 15-20% every year, and can reach the level
of $100 billion by the year 2015.
· India's growing economy with a rate of approximately 8% per
year makes its retail sector highly fertile and profitable to the foreign
investors of all sectors of commerce and economy, of all over the world.
· Retail trade is the second largest employer in India after
agriculture; it comprises food and non-food sectors.
· The food sector accounts for 70% of the total retail trade
in terms of value.
· 95% of the retail trade takes place in the unorganized sector.
· The retail sector has witnessed 15% growth rate with
indigenous capital. There is no policy or framework which focuses on retail
sector
· Retailing in India is one of the pillars of its
economy and accounts for 14 to 15 percent of its GDP.
· The Indian retail market is estimated to be US$ 450 billion and one
of the top five retail markets in the world by economic value.
· India is one of the fastest growing retail markets in the
world, with 1.2 billion people.
· India's retailing industry is essentially owner manned
small shops.
· In 2010, larger format convenience stores and supermarkets
accounted for about 4 percent of the industry, and these were present only in
large urban centers.
· 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 multi-brand
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 November
2011, India's central government announced retail reforms for both multi-brand
stores and single-brand stores. These market reforms paved the way for retail
innovation and competition with multi-brand retailers such as Walmart,
Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple.
AT Kearney (a
globally famous international management consultancy) recognized India as the
second most alluring and thriving retail destination of the world, among other
thirty growing and emerging markets. At present, other profitable retail
destinations of the world are China and Dubai of Asia.
The government
(led by Dr. Manmohan Singh, announced following prospective reforms in Indian
Retail Sector
· India will allow FDI of up to 51% in ―multi-brand‖ sector.
· Single brand retailers such as Apple and Ikea, can own 100%
of their Indian stores, up from previous cap of 51%.
· The retailers (both single and multi-brand) will have to
source at least 30% of their goods from small and medium sized Indian
suppliers.
· 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.
· 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.
· The opening of retail competition (policy) will be within
parameters of state laws and
regulations.
The recent
cabinet decision on FDI in retail has triggered protests by opposition and key
allies of the ruling United Progressive Alliance (UPA), who are demanding a
roll back of the policy. Opposition parties, led by BJP and the Left, stuck to
their stand and demanded rollback of the Cabinet decision to allow 51 per cent
FDI in multi-brand retail. In December 2011, under pressure from the
opposition, Indian government placed the retail reforms on hold till it reaches
a consensus.
Though at
present only 53 cities with population not less than 10 lakh in the country
have been identified for FDI As the fourth-largest economy in the world in PPP
terms, India is a preferred destination for FDI. During 2000รข€“10, the country
attracted $178 billion as FDI.
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 percent of its goods from
India. Indian government continues the hold on retail reforms for multi-brand
stores.
In June 2012, IKEA
announced it has applied for permission to invest $1.9 billion in India and set
up 25 retail stores. Fitch believes that the 30 percent requirement is likely
to significantly delay if not prevent most single brand majors from Europe, USA
and Japan from opening stores and creating associated jobs in India.
On 14
September 2012, the government of India announced the opening of FDI in
multi-brand retail, subject to approvals by individual states. This decision
has been welcomed by economists and the markets, however has caused protests
and an upheaval in India's central government's political coalition structure.
On 20 September 2012, the Government of India formally notified the FDI reforms
for single and multi brand retail, thereby making it effective under Indian
law.
Diverse foreign
direct investment in Indian retail is greatly cherished by most of the
major and leading retailers of USA and European countries, including Walmart
(USA), Tesco (UK), Metro (Germany), and Carrefour (France). Liberalization of
trade policy and loosening of barriers and restrictions to the foreign
investment in the retail sector of India, have collectively made the fdi
in retail sector quite easy and smooth
The present status of FDI in retail sector
· In September 2012, the UPA II has allowed 51% FDI in the
retail sector.
· Since 1997, 100 per cent FDI is permitted in cold chain
infrastructure and wholesale (cash and carry). The big giants like Wal-Mart and
Carrefour are presently operating in India in wholesale (cash and carry).
· From January 2012 100% FDI is permitted in single brand
retail. Prior to this from 2006, 51% FDI in single-brand retail is permitted.
It implies that foreign companies would be allowed to sell goods sold
internationally under a ‘single brand’, viz., Reebok, Nokia, and Adidas. In the
past five years in single-brand retail only $44.45 million (Rs 231 crore) came
to India, constituting barely 0.03% of total FDI inflows.
· FDI is not permitted in Multi Brand Retailing in India. FDI
in Multi Brand retail implies that a retail store with a foreign investment can
sell multiple brands under one roof
· On 7 December 2012, the Federal Government of India allowed
51% FDI in multi-brand retail in India. The Feds managed to get the approval of
multi-brand retail in the parliament despite heavy uproar from the opposition.
· Some states will allow foreign supermarkets like Walmart,
Tesco and Carrefour to open while other states will not.
Government has taken
this decision in
good faith. Few persons and lobbies
controlling the rates of food commodities in India, and bringing more competition in market will bring better prices
for buyers as well as sellers of commodities. Parties protesting against FDIs in
retail have choice to not allow FDIs in the states they are ruling.
ARGUMENTS IN
FAVOR OF FDI’s IN RETAIL.
§ Cheaper production facilities:
§ Availability of new and modern technology to the country.
§ Long term cash liquidity:
§ Lead driver for the country’s economic growth:
§ FDI opens new doors for Franchising:
§ FDIwould facilitate huge investments in the retail sector.
This would result in creation of gainful employment opportunities in agro-processing, sorting, marketing and
front-end retail business.
§ The protagonists of FDI also put forward the point that
opening up of multi-brand retail for foreign investors would have a beneficial
effect on food inflation by improving the supply chain and logistics
§ Improve rural infrastructure.
It would help build infrastructure and create a
competitive market.
§ Reduce wastage of agricultural
produce.
§ Those favoring FDI in multi brand retail are also of the
view that permission of FDI would lead to investments in the procurement
infrastructure and post harvest management. Post harvest wastage and lack
of procurement infrastructure like cold chain and warehouses results in damage
of substantial amount of farm products. Precisely, the marketing of perishable
agricultural produce needs a modern distribution system, FDI in multi brand
retailing could fill this gap.
§ Enable our farmers to get better
prices for their crops.
§ Consumers will get commodities of
daily use at reduced prices.
§ Biggest beneficiary of this would
be small farmers, who would be able to improve productivity and realize higher
remuneration by selling directly to large organized players and shorten the
chain from farm to consumers.
§ Permission of FDI in multi brand retail would enable a
procurement system, wherein the retail companies could directly procure from
the farmers and producers. This would result into disintermediation of the
agents and middlemen, thus producers can accrue the larger share in value
addition and profits.
§ Government too stands to gain by
this move through more transparent and accountable monitoring of goods and
supply chain management systems. It can expect to receive an additional US$
25-30 billion by way of taxes
§ Opening of retail can be seen as a
solution for food inflation, which has been confounding policy-makers. FDI in
retail would help in building much needed back end infrastructure.
Additionally, investments in cold storage chain infrastructure would reduce
loss of agricultural produce and provide more options to farmers.
FDI Success
story China:
China is the world’s
largest FDI recipient, and has used it deftly to increase its exports. It
started off with an FDI investment of $19 billion in 1990, and reached $300
billion in 1999. 40 retailers now have a secured approval in the Chinese
market. FDI has created an encouraging effect in both traditional as well as
modern formats of retail business in China.
Carrefour from
France, Tesco from England, Metro from Germany, and Wal-Mart from US have
entered the Chinese retail sector and has uplifted the country’s economy.
Initially during 1992, China allowed FDI only in a few selected cities and also
restricted the ownership by 26 percent. Later on as the exports of the country
progressively increased, by 2002, the Government increased the FDI cap to 49
percent. China continues to hit new records. More than 28 million people and
approximately 10 percent of Chinas total population are working in companies
funded with FDI.
With the
advent of FDI, retail sector is likely to make massive strides, and catalyze
the growth of the country’s economy. As far as developing nations are
concerned, it is the life blood of economy.
§ When our interest rates are high (14-16) how do we compete
with the economies which have lesser (4) interest rate.
§ The vehement opposition of FDI has come from the groups and
organization of the small traders and kirana stores. According to these groups
and organization the permission of FDI in multi brand retail would give a death
blow to the livelihood of small traders and especially the kirana stores. In
India more than 10 crore small shopkeepers and more than 40 crore
people depend on retail. The permission of FDI in retail is foreseen as a
threat to livelihood of these.
§ According to the critics FDI may prove beneficial only in
the short run, however in the long run small farmers and producers would be
forced to sell their produce at a lower rate. It is also held that permission
of FDI would reduce the negotiating power of the producers and end consumers as
the transactions would take place between asymmetrical actors, i.e. small
producers and individual consumer with big multinational giants like Wal-mart.
§ There is an apprehension that multinational retailers would
start selling food products sourced from abroad at a lower price and which
could be of better quality. There are many rich countries which provide huge
farm subsidies in their agriculture sector. It’s very natural that indigenous
farm products could not compete with products from those countries which are heavily
subsidized. This could demolish the farm sector in India which accounts for
dependence of more than 50% of population.
§ It is also held that permission of FDI on the account of
investment in procurement infrastructure is a vague argument. Although FDI in
wholesale trade was permitted in 1997, but no significant investment has
happened at the back-end of the supply chain.
§ The permission of FDI in multi brand retail could also
result into the monopoly of few big giants in this sector by crowding out the others
through systematic predatory pricing. Predatory pricing refers to a situation
where new players come with initially lower the prices for the consumers, with
the intention of creating a monopoly and raising prices later.
§ The domestic companies who have entered into modern trade
are in the nascent stage. Opening up of multi-brand retail to foreign players
could also prove detrimental for these domestic players.
§ It is also argued that there was no dearth of domestic
capital and materials in the Indian retail market because of the supply chain
established by unorganized players. Even in the absence of any policy framework
retail sector in India showing an annual growth of 1
§ Our infrastructure our trade
facilitations our labor laws, all these factors collectively don't make India
low cost. So do you want India to become a center where we allow foreign
companies to come in and set up these large chains which eventually instead of
selling domestic products out sourcing internationally the cheapest sources and
selling those products
§ Please remember domestic retail
normally sources domestically, international retail sources internationally
because they source from the cheapest sources.
§ Even if big retail companies help
the farmers in resurrecting their economy, what plan does the government has
for millions of middlemen who are part of the business process chain that
ensures manufactured products reach end users.
§ We engage millions of uneducated
and semi-educated people at various stages of retail business spread across
towns and cities but we are afraid that Tesco and Wal-Mart will only engage
smart and educated workforce in small strength, comparatively.
Conclusion
Sooner or later the permission of FDI in
various sectors would be a reality and multi brand retail is no exception. The
vehement opposition by various groups could only delay the process but cannot
prevent it. But since the issue is related with the livelihood of millions in
retail and farm sector, it must be dealt with utmost caution. Certain policy frame
work and arrangements are required so that a win-win situation is designed.
Thus the
arrangements should be such that the country not only accrue the financial and
economic benefits but could also align the foreign capital in such a manner
that it facilitates the socio-economic development. This can be done
by integrating into the rules and regulations for FDI in multi-brand retailing
certain inbuilt safety valves.
The following
are recommendations to deal with FDI in multi-brand:
· FDI in multi –brand retailing should be allowed in a manner
that the effect of possible loss of livelihood can be analyzed and policy fine
tuned accordingly. The alternative livelihood opportunities should be generated
or recognized for those who would be displaced.
· To ensure that the FDI make an authentic contribution to
the infrastructure development and supply chain efficiencies, it can be
predetermined that a certain fixed percentage of investment should go in the
back end infrastructure, logistics or agro processing units.
· Government should make a
strong regulatory body(like TRAI) for the commodity trade as we have for cellular services
to protect the interest of small retailers so that the retailing giants do not
resort to predatory pricing or acquire monopolistic tendencies through unfair
means. At the same time it should be ensured that the rights of consumers be
safeguarded
· Extension of institutional credit, at lower rates, by
financial institutions, to help improve efficiencies of small retailers;
undertaking of proactive program for supporting small retailers to improve
themselves
References:
§ FDI in retail sector of India –Pulkit Agarwal, Esha Tyagi.
§ FDI in Indian Retail Sector- - RUPALI GUPTA
§ Retail Sector in India and FDI-Digital Mantar
§ cci.gov.in
§ Wikipedia
- FDI in multi-brand retail- Jones Lang LaSall
- · www.globaljurix.com/
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