REPORT ON IMPACT OF FDI IN RETAIL ON INDIAN ECONOMY

By

VIKAS RAJ BHATT

IV SEMESTER MBA

11MB5204

UNDER THE GUIDANCE OF

T.V. BALAJI

Project Report submitted to the University of Mysore in partial fulfilment of the requirements IV Semester for MBA degree Examination-2013

Ramaiah Institute of Management Studies#15, New BEL Road, MSRIT Post, M S Ramaiah Nagar

Bangalore – 560054

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Ramaiah Institute of Management StudiesBangalore - 560054

CERTIFICATE

This is to certify that this Report on IMPACT OF FDI IN RETAIL ON INDIAN ECONOMY

is a bonafide study of VIKAS RAJ BHATT, carried out under my guidance and supervision.

Place: Bangalore

Date: [Signature of the Guide ]

2

Ramaiah Institute of Management Studies

Bangalore - 560054

CERTIFICATE

This is to certify that this Report on IMPACT OF FDI IN RETAIL ON INDIAN ECONOMY

is a bonafide study of VIKAS RAJ BHATT, carried out under guidance and supervision of the

College.

Place: Bangalore

Date: [Signature of Academic Head]

3

DECLARATION

I hereby declare that this Report on IMPACT OF FDI IN RETAIL ON INDIAN ECONOMY

submitted in partial fulfilment of the requirement for MBA Degree of University of Mysore

through Ramaiah Institute of Management Studies is my original work and not submitted to any

other university. This work has been done under the supervision of T.V.BALAJI in Ramaiah

Institute of Management Studies, Bangalore.

Place: Bangalore

Date: [Signatures]

[Reg.

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ACKNOWLEDGEMENT

Its human bound duty to acknowledge all those personalities who contribute immensely for

their effort and guide us in right direction.

We are very grateful to our faculty T.V. BALAJI, RAMAIAH INSTITUTE OF

MANAGEMENT STUDIES, for her constant encouragement and valuable guidance throughout

my project.

We proudly thank our parents for their constant support and priceless guidance in throughout this

endeavour.

Last but not the least we are also thankful to all our respondents, friends, family and classmates

for their kind co-operation throughout the project.

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TABLE OF CONTENTS

Chapter 1 Introduction .............................................6-151.1 Problem Definition................................................6-71.2 Research Objectives.............................................8-101.3 Research Methodology........................................10-121.4 Limitations Of Project Study...............................13-15

Chapter 2 Literature Review ........................16-20 2.1 Studies in Indian Context.......................16-18 2.2 Inter Country Studies..............................18-20 2.3 Model Building........................................20-21 2.4 Summary..................................................20-21

Chapter 3 Indian Retail Sector .......................16-28 3.1 Overview..................................................16-18 3.2 Structure of Indian Retail Sector..............19-21 3.3 Evolution and Growth of Retail Sector.......24-28 3.4 FDI policy in India....................................22-24 Chapter 4 Single and Multi-Brand Retailing ....29-37

4.1 FDI in Single-Brand Retail..........................29 4.2 FDI in Multi-Brand Retail...........................30 4.3 Challenges of Retailing in India..................31-33 4.4 Role of FIPB and FIIA.................................34-37

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Chapter 5 Impact of FDI in Retail various Stakeholders .38-45

5.1 Impact on Agriculture Community...38-39 5.2 Impact on Consumers.......................40-41 5.3 Impact on SME................................42-43 5.4 Impact on Employment....................44-45

Chapter 6 FDI in Retail Inflows to India ...................46-56

6.1 Trends and patterns of FDI in Retail Inflows to India..46-47 6.2 SWOT Analysis for Opening up FDI in Retail…60-63 6.3 FDI in Retail and Economic Growth...............51-53 6.4 Role of FDI in Retail on Economic growth...54-56

Chapter 7 Findings and Suggestions .................57-65

7.1 Findings....................................................57-58 7.2 Recommendations......................................58-59 7.3 Conclusion................................................60-61 7.4 Bibliography..............................................62-63

LIST OF TABLES

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Table No. Title Page No.

3.1 Share of Top Investing Countries FDI Equity Inflows 35

3.2 Sectors Specific Limits of Foreign Investment in India 38

5.1 Current Status of Warehousing Capacity in India 51

5.2 Definition of Micro, Small and Medium Enterprise (Mftg) 59

5.3 Definition of Micro, Small and Medium Enterprise (Service) 59

6.1 GDP & FDI Inflows in USD Millions 60

LIST OF CHARTS

Chart No. Title Page No.

3.1 Size of Indian Retail 313.2 Segment contribution to Retail sector 346.1 FDI inflows in Retail Trading (single brand) 61

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Chapter 1

INTRODUCTION

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1.1 Problem Definition :

Retailing in India is progressively inching its way toward becoming the next boom industry. It

has become the most dynamic and fast paced industry contributing over 10 per cent of country’s

GDP. Even though organized retail sector in India is at the infant stage, India today has become a

budding target for FDI. India today offers the most persuasive investment opportunities for mass

merchants and food retailers looking to expand overseas as Indian economy is growing at rapid

pace with consumer having high purchasing power.

With a robust economy experiencing unrelenting growth, India has exerted a pull and an

irresistible enticement to companies looking to expand their scope of operations.FDI is a source

of the intensification of retailing and will create enormous opportunities for innovation in retail

sector and create employment opportunities.

Domestic retailing industry is going to be severely hit by the entry of foreign retailers and they

will have very small market to serve. It is also argued that some new jobs will be created, but this

will be at the cost of thousands more jobs will be lost.

One of the most striking developments during the last two decades is the spectacular growth of

FDI in global economic landscape. This unprecedented growth of global FDI in 1990 around the

world make FDI an important and vital component of development strategy in both developed

and developing nations.FDI provides win-win situation to both home and host countries. The

home country wants to take the advantage of vast market opened by industrial growth. On the

other hand the host countries want to acquire technological and managerial skills and increase

foreign exchange.

FDI would enable India to integrate its economy with that of the global economy.FDI will

provide India with vital resources like Finance, Capital, Entrepreneurship, Technical Know-

How, Skills and efficient practices which will ramp up Indian production.

This paper aims to find out how FDI will benefit Indian economy. This paper will analyze the

effects of FDI on different stakeholders. The paper will end with appropriate findings and

conclusions whether FDI is desirable or not to Indian economy.

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The study attempts to analyze the important dimensions of FDI in India. The study works out the

trends and patterns, main determinants and investment flow to India.

1.2 Research Objectives :

This study is carried out to study FDI in India and analyse the its Impact on social and

economic performance measures of Indian Economy.

The main objectives of the research are:

To Study the Indian domestic retail market,

To assess the FDI inflow in Retail sector of the Economy,

To evaluate the Impact of FDI in Retail on Indian Economy,

To determine the various forms of FDI inflows in India.

To evaluate the Impact of FDI on Indian Consumers, Farmers, Traders and

Intermediaries.

To study the pros and cons of FDI in Retail Sector.

These are the objectives of the research that will be achieved on the completion of this paper.

The critical objective of this study is to determine how FDI can improve our domestic retail

sector which is facing numerous challenges.

1.3 Research Methodology:

The researcher has adopted Analytical, Descriptive and Comparative methodology for this

report. This study is based on secondary data. The required data has been collected from various

sources i.e. World Investment Reports, various Bulletins of Reserve Bank of India, Publications

from Ministry of Commerce, Government of India, etc .It is a time series data and the relevant

data have been collected for the period 1991-2012.

This report has collected data from books, Journals, newspapers and online databases. This study

has also collected the views of Experts on FDI in India and their views are recorded as part of the

study.

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1.4 Limitations Of The Study :

All the Economic and Scientific studies are faced with various limitations and this study is no exception to the phenomenon. The various limitations of the study are:

At various stages, the basic objective of the study has suffered due to inadequacy of the time series data from related agencies.

There has also been a problem of sufficient homogenous data from different sources. The research was also faced with problems various sources of Time and Money. There was very limited support from Experts while recording their views. There was limited access to qualified Experts.

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Chapter 2

LITERATURE REVIEW

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2.1 Studies in Indian Context:

The Comprehensive literature centered on economies pertaining to empirical findings and

theoretical rationale tends to demonstrate that FDI is necessary for growth of Indian economy in

the era of Globalization.

Planning Commission Deputy Chairman Montek Singh Ahluwalia, has justified opening up the

Indian retail sector to foreign direct investment saying it will create better quality jobs and lead

to GDP growth. [1]

The comprehensive literature studies have showed empirical findings that FDI is necessary for

sustained economic growth and development.Dr.R.K Balyan “FDI in Indian Retail – Beneficial

or Detrimental” 2009 [2] has concluded that government should encourage FDI in retail to boost

economic growth.

Mohan Guruswamy and Kamal Sharma in their paper “FDI in Retail-II inviting more

Trouble”2006 [3] recommended that government should create conditions that will slow down

FDI in retail and ensure that domestic and foreign players are on equal footing.

Dr.Gaurav Bisaria in his paper “FDI in Retail in India”2012[4] his findings showed that majority

of people in Lucknow supported FDI in retail and he also wants government to act swiftly.

Chandu. K.L in his paper “The New FDI Policy in Retail in India: Promises, Problems and

Perceptions”2008 [5] has neutral views on FDI in retail. His study concludes that FDI in retail

should not be seen as just another policy decision because it has a direct impact on agriculture

sector. Allowing FDI may not be as bad as some of us feel. But the policy must be well drafted

after considering the impact of FDI on various stakeholders.

Nayak D.N in his paper “Canadian Foreign Direct Investment in India: Some Observations”,

2004 [6] analyse the patterns and trends of Canadian FDI in India. He finds out that India does not

figure very much in the investment plans of Canadian Firms .The reasons for the same is the

indifferent attitude of Canadians towards India and lack of information of Investment

opportunities in India are the important contributing factor such an unhealthy trends in economic

relation between India and Canada. He suggested some measures such as publishing of regular

documents like newsletter that would highlight the opportunities in India and a detailed focus on

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India’s area of strength so that Canadian firms could come forward and discuss their areas of

expertise which would go in long way in enhancing Canadian FDI in India.

Balasubramanyam V.N in his paper “Does India need a lot more FDI” 2007 [7] compares the

levels of FDI inflows in India and China, and found that FDI in India is one tenth of that of

China. The paper also finds that India may not require increased FDI because of the structure and

composition of India’s manufacturing service sectors and her endowments of human capital. The

requirements of managerial and organizational skills of these industries are much lower than that

of labour intensive industries such as those in China. Also, India has a large pool of well-trained

engineers and scientists capable of adapting and restructuring imported know-how to suit local

factor and product market condition all of these factors promote effective spillovers of

technology and know-how from foreign firms to locally own firms.

Naga Raj in his paper “Foreign Direct Investment in India in the 1990s: Trends and Issues” 2003 [8] discusses the trends in FDI in India in the 1990s. The study raises some issues on the effect of

the recent investments in the domestic economy. Based on the analytical discussion and

comparative analysis, the study concludes by suggesting a realistic and effective foreign

investment policy.

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2.2 Inter Country Studies:

Bhagwati J. N in his study “Anatomy and Consequences of Exchange control Regimes”1978 [9]

analysed the impact of FDI on international trade. He concluded that countries actively pursuing

export led growth strategy can reap enormous benefits from FDI.

Gaziogolu.S and McCausland W.D in their study “An International Economic Analysis of FDI

and International Indebtness” 2000 [10] developed a micro foundations framework of analysis of

FDI and integrated it into a macro level analysis. They highlighted the importance of profit

repatriation in generating different effects FDI on net international debt, trade and real exchange

rate in developed economies.

Salisu.A Afees in his study “The Determinants and Impact of Foreign Direct Investment on

Economic Growth in Developing Countries: A Study of Nigeria” 2004 [11] examined the

determinants and impact of Foreign Direct Investment on economic growth in developing

countries using Nigeria as a case study. The study observed that Inflation, Debt Burden and

Exchange rate significantly influence FDI inflows into Nigeria. The study suggests the

government to pursue prudent fiscal and monetary policies that will be geared towards attracting

more FDI and enhancing overall domestic productivity, ensure improvements in infrastructural

facilities and to put a stop to the incessant social unrest in the country. The study concluded that

contribution of FDI to economic growth in Nigeria was very low even though it was perceived to

be significant factor influencing the level of economic growth in Nigeria.

Rhys Jenkins in his study “Globalization, FDI and Employment in Vietnam” 2000 [12] examines

the impact of FDI on employment in Vietnam, a country that received considerable inflow of

foreign capital in the 1990s as part of its increased integration with the global economy. The

study shows that the indirect employment effects have been minimal and possibly even negative

because of the limited linkages which foreign investors create and the possibility of crowding out

of the domestic investment. The study finds out that despite the significant share of foreign firms

in industrial output and exports, the direct employment generated has been limited because of the

higher labour productivity and low ratio of value added to output of much of this investment.

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Rydqvist Johan in his work “FDI and Currency Crisis: Currency Crisis and the Inflow of Foreign

Direct Investment” 2005 [13] analyses if there are any changes in the flow of FDI before, during

and after a currency crisis. The study found that no similarities in regions or year of occurrence

of the currency crisis. The depth, length and structure of each currency crisis together with using

the right definition of a currency crisis are two important factors relating to the outcomes of this

study.

2.3 Model Building:

To study the impact of the foreign direct investment in retail on economic growth, two model

can be framed and fitted. The foreign direct investment model shows the factor influencing

foreign direct investment in retail sector. The economic growth model shows the contribution of

foreign direct investment in retail to economic development.

1) FDI Model can be expressed as:

FDI = f (GDP,CONGDP,CONG,FEXGDP,NDGDP,AGRITECH)

Where,

FDI=Foreign Direct Investment in Retail.

GDP=Gross Domestic Product growth rate

CONGDP=Consumption as a percentage of GDP.

CONG=Growth rate in Consumption.

FEXGDP=Foreign Exchange Reserves as a percentage of GDP.

NDGDP=National Debt as a percentage of GDP

AGRITECH=Level of Agriculture Technology.

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Foreign direct investment in retail is influenced by the Gross domestic product of a country,

Consumption levels as a percentage of country GDP, Growth rate in Consumption, Foreign

Exchange Reserves held by the country as a percentage of GDP, National Debt of the country as

a percentage of GDP and Level of Agriculture Technology. These factors influence the FDI

inflows in retail in India.

2) Economic Growth Model can be Expressed as:

GDP= F (FDI)

Where,

GDP= Gross Domestic Product

FDI=Foreign Direct Investment

This model shows that economic growth (GDP) is expressed as a function of Foreign direct

investment in retail. It shows that economic growth is influenced by Foreign Direct Investment

in Retail.

2.4 SUMMARY:

The above review of literature helps in identifying the research issues and gaps for the present

study. The literature review highlights the following facts:

Institutional Infrastructure and development are the main determinants of FDI inflows in

an economy. Institutional environment plays a critical role in reducing the transaction

cost of both domestic and cross border business activity.

FDI plays an important role in generating employment in a country.

It is found that bigger diversity of types of FDI lead to more diverse types of spillovers

and skill transfers which proves more favourable for the host economy.

In industrial countries, where the labour cost is high encourage outflows and discourage

inflows of FDI.

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Studies which underlie the effects of FDI on the host countries economic growth shows

that FDI enhance economic growth in developing economies but not in developed

economies.

Studies on role of FDI in emerging economies shows that general institutional

framework, effectiveness of public sector administration and the availability of

infrastructural facilities enhance FDI inflows in these nations.

It is observed that countries pursuing export-led growth strategies reaps enormous

benefits from FDI.

The main determinants of FDI in developing countries are Inflation, Infrastructural

facilities, Debt burden, Exchange rate, FDI spillovers and stable Political environment.

FDI regulatory guidelines must be formulated in order to protect developing economies

from the consequences of FDI flows.

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Chapter 3

INDIAN RETAIL SECTOR

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3.1 Overview:

The retail industry in India is of late often being hailed as one of the sunrise sectors in the

economy. The Indian retail industry is the fifth largest in the world. AT Kearny, the

well-known international management consultancy, recently identified India as the most

attractive emerging market for investment in the retail sector by AT Kearney's eighth

annual Global Retail Development Index (GRDI), in 2009. India’s vast middle-class and

its almost untapped retail industry are key attractions for global retail giants wanting to

enter newer markets and India provides for the ideal locations.

It has made India the cause of a good deal of excitement and the cynosure of many

foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the

total work force in the country [14] ,the retail industry is definitely one of the pillars of the

Indian economy.

Trade or retailing is the single largest component of the services sector in terms of

contributions to GDP. Its massive share of 14% is double the figure of the next largest

broad economic activity sector.

India is one of the fastest growing retail market in the world with 1.2 billion people.

India’s retailing industry is essentially owner manned shops. In 2010,larger format

convenience stores and supermarkets accounted for about 4 % of the industry and these

were present only in large urban centres. India’s retail and logistics industry employs

about 40 million Indians (3.3% of Indian Population) [15] .

In November 2011, Indian Central Government announced retail reforms for both Single-

brand and Multi-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. The announcement sparked

intense activism, both in opposition and in support of the reforms. In December 2011,

under pressure from the opposition, Indian government placed retail reforms on hold till

it reaches a Consensus. [16]

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In January 2012, India approved reforms for Single brand stores welcoming anyone in the

world to innovate in the Indian retail market with 100 % ownership but imposed the

requirement that the single brand retailer should source 30 % of its goods from India.

Indian Government continues the hold on the retail reforms for Multi Brand stores. IKEA

announced in January that it is putting on hold its plan to open stores in India because of

the 30 % requirement [17].

3.2 Structure Of Indian Retail Sector:

Retailing can be defined as the interface between the producer and the individual consumer

buying for personal consumption. Retailing is the last link that connects the individual

consumer with the manufacturing and distribution Chain. Indian retail sector includes

Organized and Unorganized Retailing.

Organized 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

hypermarkets and retail chains, and also the privately owned large retail businesses.

Unorganized retailing refers to the traditional formats of low-cost retailing. It is

dominated by a large number of small retailers consisting of the local Kirana shops,

owner-manned General stores, Chemists, Footwear shops, Apparel shops, Paan shops,

Hand-cart hawkers, Pavement vendors etc.

3.2.1 Retail Formats:

1) Store Format By Location:

a) High Street Format

It is Located in busy shopping area.

Area is less than 2000 square feet.

No parking facility

Focused Merchandised Category

Example: M. G. Road in Bangalore

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b) Destination Format

Huge Parking space

Wide merchandise category

They are Independent retail store with alluring proposition for

the customer to visit the store with intention of shopping there

c) Convenience Store

Located in the catchment area of target customers

Extended hours of operation

Less than 5000 square feet

24X7 convenience stores situated close to homes to generate

high footprints

Snacks, grocery type items & confectionary Merchandise include: beverages, ready to eat

These stores carry a limited stock of daily use goods with a special focus on food

products eg. In & Out petrol pump outlets.

2) Store format by ownership

Franchise Format

Independent Store Format

3) Store format by Merchandise Category:

a) Specialty store

Specializing in a given type of merchandise.

Consortium of retailers that carry a certain category of products. They are

usually situated some distance from the city centre. Consumers have to

make a special visit to pick up the goods. Eg, Gold, Wedding Souk.

b) Department store:

Large retail store offering a variety of services and

merchandise organized in separate departments. Occupy

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prominent positions in the heart of town or as anchor stores in out-of-town malls

Eg. Shopper’s Stop.

c) Supermarket:

A store that sells a wide variety of goods including food, medicine

and household products; Often part of a chain that owns or

controls other supermarkets in the same or other towns; thus going

for economies of scale .The chains are often supplied from the distribution centres

of a larger business Eg. Food World.

d) Hypermarket (from the French term Hypermarche):

A store that combines a supermarket and a department store; A gigantic

retail facility that carries a big range of products under one roof,

including fresh groceries and apparel; When planned, constructed and

executed correctly, hyper mart caters to all routine weekly shopping needs in one trip Eg.

Big Bazaar, Giant, Hyderabad Size: 2000 Sq feet and above.

4) Other store formats:

a)Category killers:

Large format stores that specialize in a narrow line of merchandise Eg; Vivek, Vijay

Sales, Mega Mart; they use their buying power to negotiate low prices and excellent

terms and assured supply when items are scarce.

b) Seamless malls: Consortium of retailers without walls separating the individual stores.

One enormous shop, with hundreds of popular brands sharing space with each other. Eg.

Pantaloon’s Central Mall.

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c) Outlet mall: Shopping centre with national brand-name retailers selling discounted

merchandise. Eg. Huma Mall.

d) Lifestyle centres: Shopping centres or malls whose array of retail outlets are designed to

appeal to a particular segment of the population. Typically, lifestyle centres feature

upscale specialty stores, services, and restaurants. Eg. Centre stage Mall.

e) Anchor clients: The most important elements in a large format mall. An anchor is among

the first clients to enter a mall, and occupies at least 25-30% floor space. Eg. Big Bazaar

in Sahara Mall Gurgaon.

f) Draw tenant: A store that attracts a large number of potential customers to a shopping

centre, often an anchor store.

g) Food court: Separate area of a shopping centre containing fast-food outlets and a

common, seating area.

3.2.2(Organized Vs Unorganized) Vs Foreign Investors:

There have been huge controversies regarding the organized retail taking over the

unorganized sector and the following adverse impact on the lives of various local

retailers. The small retailers feel that they cannot fight the Big retailers like Reliance

fresh, Spencers, Food bazaar that are taking away their market share.

For the security of domestic retailers there was a extensive debate on foreign investment

in multi brand retailing that kept big foreign players like WalMart and Carrefour from

entering India. But now FDI of 100 % is permitted in India though only through single

branded retail outlets and not through multi brand outlets. Again they can only enter the

market through franchisees. This is how global players are entering India, like Wal-Mart

entering India in join hands with Bharati Enterprises. However domestic companies like

Reliance Industries, are confident that even if foreign players enter the Indian market the

domestic retail players will continue to have a competitive advantage over them.

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Competitive advantage will be achieved due to low labour and property costs. New

entrants to the organized retail sector will also face higher labour and property costs than

traditional firms and must bear the additional expense of back-up power supplies. Other

barriers will include expensive and often inadequate supply-chain infrastructure,

inflexible labor laws, complicated property codes, multiple licensing requirements and a

shortage of skilled managerial staff.

3.2.3 Key Points Of Indian Retail Industry:

India is the ‘second most attractive retail destination’ globally from among thirty

emergent markets.[18]

World Bank states, India to be world’s second largest economy after China by the year

2050.[18]

Stable and investor friendly Central Government at the helm of affairs.

High degree of professionalism and corporate ethics.

Excellent Investment opportunities in Indian retail sector and in allied sectors; sure and

high returns on investments.

Government to invest US $130 billion for the development of infrastructure, by year

2010.[18]

Hordes of foreign investors are thronging in to invest in Indian retail markets.

Highly educated English speaking young workforce.

Vibrant and multi cultured cities.

Huge opportunity exists, especially in semi-rural and rural areas.

Retail sector is the second largest employer after agriculture sector, for the huge semi-

skilled Indian population. 7% of the population is engaged in retailing [18]

Offers highest shop density in the whole world.

Having almost 1, 20,000 shops, across the length and breadth of the country.[18]

20 million Indians to join consuming age by 2010 [18]

55% of the Indian population will be under 20 years of age by 2015 [18]

32% rise in urbanization by 2008 [18]

10% annual growth in Retail market since 2000 [18]

A booming US$ 300 billion retail market in India [18]

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5.5 retail outlets per 1000 population, highest in the world [18]

3.3 Evolution and Growth Of Retail Sector:

Indian retail sector has caught the world’s imagination in the last few years, topping the list of

most attractive retail destination list for last decade. During 1970-90, India retail sector had

Kirana stores, Traditional village fairs and street hawkers. Most of the retail sales was happening

through small shops with cash payment. There were no departmental stores, no malls and no

showrooms.

But post LPG, Indian retail sector sector has seen many reforms and currently Indian Retail

Industry is the 5th largest retail destination. The growing popularity of Indian retail sector has

resulted in growing awareness of quality products and brands. As a whole Indian retail sector has

made life convenient, easy, quick and affordable. Indian retail sector specially organized retail is

growing rapidly, with customer spending increasing in unprecedented manner. Till 1980s retail

continued in the form of Kiranas stores that is unorganized retailing. Later in 1990s branded

retail outlet like Foodworld, Nilgiris and local retail outlets like Apna Bazaar came into

existence. Now big players like Reliance, Tata, Bharti, etc have entered organized retail business.

The reasons for growth of Indian retail sector are:

Increase in disposable Income.

Favourable Demographics.

Changing Lifestyles.

Growth of the middle class segments.

Untapped rural market.

Changing consumer preferences and shopping habits.

Spurt in urbanisation.

Easy credit availability.

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3.3.1 Major Retailers in India:

The Tata Group-Formats: Westside, Titan, Tanishq, Croma,, etc

Reliance Retail-Formats: Reliance mart, , Reliance fresh, Reliance Footprint, Reliance

Living, Reliance Digital, Reliance Jewellery, Reliance trends, etc

K Raheja Corp Group-Formats: Shoppers stop, Crossword, Hyper City, Inorbit mall.

Nilgiri’s-Formats: Nilgiris’ supermarket chain

Lifestyle International Formats:Lifestyle, Home Centre, Max and Fun City

Vivek Limited Retail Formats: Viveks, Jainsons, Viveks Service Centre,etc

Aditya Birla Group- Formats: More., Acquired Pantaloon from Future group, etc

Vishal Retail Group-Formats: Vishal Mega Mart

Gitanjali- Nakshatra, Gili, Asmi, D'damas, Gitanjali Jewels, Giantti, Gitanjali Gifts, etc

Chart-3.1 Size of Indian Retail (in USD $ bn)

(Source: Secretariat for Industrial Assistance, Ministry of commerce and industry.)

According to Ministry of commerce and industry, the size of Indian retail was $ 322 billion

which grew to $ 600 billion in 2011-12 and it is expected to grow to $ 1011 billion by 2016-17.

3.3.2 Phased Growth of Indian Retail Sector:

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2006-07 2011-12 2016-17(E)0

200

400

600

800

1000

1200

USD $ bn

USD $ bn

1995: Emerging: The Indian retail market was classified as Emerging Market.

2003-2004: Growth: Indian retail market enters the growth phase, characterized by

the entry of new domestic and international participants and expansion by existing

retailers in India.

2005-2006: Retail Boom: The beginning of the Indian retail boom, India is also

ranked as the #1 for global retailers to enter according to Global retail Development

Indices.

2006-2007: Maintaining its #1 position as the market with the most opportunity for

retail growth, Indian retail market grew by $ 330 billion.[19]

2008: The Indian retail boom is at its peak and this phase has been termed as the

‘high retail gold rush’.

2010-2012: Continued growth expected in retail market because of high disposable

income.

Chart 3.2

Segment contribution to Retail sector

36%

14%

1%

3%

17%

13%

3%1% 10%

2%

Clothing and TextileFood and Grocery Health and BeautyBooks and MusicWatch and JewelleryFootwear HomeEntertainment Durable Pharma

(Source: Secretariat for Industrial Assistance, Ministry of commerce and industry.)

In the Above Chart, We can see that Clothing and Textile sales contribute about 36% of

total retail in India. The other important contributors are Footwear (13%), Watch and

Jewellery (17%), Food and Grocery (14%), Durables (10%), etc.

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Indian Retail Industry has experienced high growth rate over the last decade with a

noticeable shift towards organised retailing formats. The industry is moving towards a

modern concept of retailing. The Indian retail sector is expected to grow at 7% over next

10 years, reaching a size of USD $ 850 billion by 2020 [20]. . With government bringing in

retail reforms like FDI will expand and make Indian retail industry more efficient.

3.4 FDI Policy in India:

FDI refers to capital inflows from foreign country that is invested in order to enhance the

production capacity of the economy. The proposals for foreign direct investment in India are

approved through two routes that are Reserve Bank of India and Foreign Investment Promotion

Board. Automatic approval is given by Reserve Bank of India to the proposal to the proposals for

foreign direct investment in India. The Reserve Bank of India gives approval for proposals

within two weeks. It gives approval to the proposals for foreign direct investment in India that

involve FDI up to 74% in nine categories that are included in List 4, FDI up to 50 % in the three

categories that are included in List 2 and FDI UP TO 51% in forty eight industries that are

included in List 3[21].

FDI approval in India is also done by the Foreign Investment Promotion Board (FIPB), which

processes cases of non-automatic approval. The time taken by Foreign Investment Promotion

Board for approving the proposals for foreign direct investment in India is between four-six

weeks. The approach of FIPB is liberal as a result of which it accepts most of the proposals and

rejects very few.

The policy on FDI in India has been the most liberal and transparent among all the other

developing countries, receiving FDI inflows for economic development. India receives up to

100% FDI under the automatic route in almost all the activities and industrial sectors except

those which require Government approval .

Investment proposals falling under the automatic route and matters related to FEMA are dealt with by RBI, while the Government handles investment through approval route and issues that relate to FDI policy per se through its three institutions, viz., the Foreign Investment Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA) and the Foreign Investment Implementation Authority (FIIA).[22]

30

FDI under the automatic route does not require any prior approval either by the Government or the Reserve Bank. The investors are only required to notify the concerned regional office of the RBI within 30 days of receipt of inward remittances and file the required documents with that office within 30 days of issuance of shares to foreign investors. Under the approval route, the proposals are considered in a time-bound and transparent manner by the FIPB. Approvals of composite proposals involving foreign investment/ foreign technical collaboration are also granted on the recommendations of the FIPB.

Table 3.1

Share of Top Investing Countries FDI Equity Inflows

Ranks Countries Cumulative

inflows (Amt

Rupees in

crores )

% of Total

Inflows

1 Mauritius 328729 38

2 Singapore 85841 10

3 U.K 77933 9

4 Japan 66465 7

5 USA 49943 6

6 Netherland 38265 4.5

7 Cyprus 31524 4

8 Germany 23403 3

9 France 15907 2

10 UAE 10962 1

Total FDI Inflows * 861231

*Includes Inflows under NRI schemes of RBI.

Source: Department of Industry Policy and Promotion, Ministry of Commerce and Industry.

31

From the above table, we get to know that Mauritius brings 38% of the total FDI inflows in

India. Other countries like Singapore, Japan, UK and USA also contribute fairly to FDI inflows

in the country.

Table 3.2

Sectors Specific Limits of Foreign Investment in India

Sector FDI

Cap/Equity

Entry Route Other

ConditionsA) Agriculture:

1)Floriculture,

Horticulture,

Animal Husbandry,

Pisciculture,Cultivation of

Vegetables, etc

100 % Automatic

2)Tea sector including

Plantation

100 % FIPB

B) Industry:

1)Mining covering

Exploration and mining of

diamonds, gold and silver

100 % Automatic

2)Coal , iron and steel and

cement production

100 % Automatic

C) Manufacturing:

1)Alcohol-Distillation and

Brewing

100 % Automatic

2)Coffee & rubber

processing & warehousing

100% Automatic

3)Defence Production 26% FIPB

32

4)Industrial explosives-

Manufacture-

100 Automatic

D) Services:

1)Asset Reconstruction

Companies

49% FIPB

2)Banking pvt sector 74%(FDI +FII) FII

not to exceed 49%

Automatic

3)NBFC 100 % Automatic Statutory

capitalisation norms

E) Commodity

Exchanges

49% FIPB

F) Insurance 26 % Automatic Clearance from

IRDA

G) Petroleum and

natural gas

Refining

49 %(Psu)

100%(Pvt)

FIPB (for Psu).

Automatic(Pvt)

H) Print Media 26 % FIPB

Source: Foreign Direct Investment flows to India, Reserve Bank of India.

3.4 Sectors Where FDI is not Allowed:

Atomic Energy

Business or Chit Fund

Gambling and Betting

Real Estate Business

Manufacturing of cigars, cigarettes or tobacco substitutes.

Lottery Business

The Ministry of Commerce and Industry, Government of India is the nodal agency for

monitoring and reviewing the FDI policy on continued basis and changes in sectrol policy/

sectoral equity cap.FDI policy is notified through press note by the Secretariat for Industrial

Assistance (SIA), Department of Industrial Policy and Promotion (DIPP) . FDI policy measures

33

by the Government can boost an Indian Economy and can increase the GDP. Foreign Investment

in India must meet the FDI policy regulations and statutory guidelines.

34

Chapter 4

Single and Multi-Brand Retailing

4.1 FDI in Single Brand Retail:

35

Single Brand retail implies that a retail store can only sell one Brand. For example, if Adidas

were to obtain permission to retail its flagship brand in India, their outlets can only sell products

under the Adidas brand and not under Reebok brand, for which separate permission is required.

The Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce and Industry,

increased the limit on FDI in single brand retail from 51% to 100 % on 10th January 2012,

subject to below conditions. [23]

a. Products to be sold should be of a 'Single Brand' only.b. Products should be sold under the same brand internationally i.e. products should be sold

under the same brand in one or more countries other than India.c. 'Single Brand' product-retail trading would cover only products which are branded during

manufacturing.d. The foreign investor should be the owner of the brand.e. In respect of proposals involving FDI beyond 51%, at least 30% of the value of products

sold would have to be mandatory sourced from Indian 'small industries/ village and cottage industries, artisans and craftsmen'.

For the purpose of this clause, 'Small industries' has been defined as industries which have a total investment in plant and machinery not exceeding USD 1,000,000.

The aforementioned valuation refers to the value at the time of installation, without providing for depreciation. Further, if at any point in time, the said valuation is exceeded, the industry will cease to qualify as a 'small industry' for the purpose of this clause. The compliance of this condition will be ensured through self-certification by the company, to be subsequently checked, by statutory auditors, from the duly certified accounts, which the company will be required to maintain.

f. An application seeking permission of the Government for FDI in retail trade of 'Single Brand' products would be made to the Secretariat for Industrial Assistance (SIA) in DIPP. The application would need to specifically indicate the product/ product categories which are proposed to be sold under a 'Single Brand'. Any addition to the product/ product categories to be sold under 'Single Brand' would require a fresh approval of the Government.

g. Applications would be processed by DIPP, to determine whether the products proposed to be sold satisfy the notified guidelines, before being considered by the Foreign Investment Promotion Board for Government approval.

The brands that are coming to a India due to 100 % FDI in Single Brand are [24]:

IKEA (Swedish Furniture brand)

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Brooks Brothers (America’s Clothing retailer) Pavers England (UK Footwear chain) Damiani (Italian Jewellery brand) GAP ( US Clothing brand) Prada (Italian Luxury brand)

The brands that already present through local partnership are:

Louis Vuitton (French Luxury brand) Christian Dior (French label) Jimmy Choo (UK Designer brand) Zara ( Spain Clothing brand) Marks & Spencer (UK Clothing retailer)

Government move to allow 100 % FDI in single brand will have a positive effect on the Economy. The condition relating to 30 % sourcing from SME’s, Village and Cottage industries will benefit Indian producers by integrating Indian producers with global market. Skill integration with craftsmen abroad is likely to help develop synergies with international brands and generate more employment. The consequential benefits, arising from the integration of global best practices in management, along with global standards in quality, design, packaging and production, would help build capacities of local producers, by making it worthwhile for them to scale-up their production, thereby creating a multiplier effect on employment and income generation. This would also lead to up-gradation of technology, which, in turn, would have a further multiplier effect on the economy.

4.2FDI in Multi Brand Retail:

37

Multi brand retail means shops that will sell items of various brands from goods to vegetables under one roof. They could be a mix of hypermarket, smaller supermarket or neighbourhood store. The Government of India on 20th September 2012, had decided to permit FDI up to 51 % under the government route subject to below specified conditions [25]:

a) Minimum amount to be brought in as FDI by the foreign investor would be USD $ 100 million.

b) At least 50% of total FDI brought in shall be invested in ‘Backend infrastructure’ within three years of the first tranche of FDI, where ‘Backend infrastructure will include capital expenditure on all activities.

c) At least 30% of the value of procurement of manufactured/processed products shall be sourced from Indian ‘small industries’ which have a total investment in plant and machinery not exceeding USD $ 1 million.

d) Self-certification by the company to ensure compliance of the conditions and shall maintain accounts duly certified by statutory auditors.

e) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 census.

f) Government will have the first right to procurement of agricultural products.g) The above policy is an enabling policy the State government/Union territories

would be free to take their own decisions in regard to implementation of the policy.

h) Retail trading in any form by means of E-commerce would not be permissible for companies with FDI, engaged in the activity of multi brand retailing.

i) Applications would be processed in the Department of Industrial policy & promotion, to determine whether the proposed investment satisfies the notified guidelines, before being considered by the FIPB for government approval.

Government decision to allow 51% FDI in multi brand retail led to nation-wide protest and many political parties including BJP were against the FDI in multi brand retail. So Government has left it to State Government to decide whether they would allow foreign retailers to open retail stores in their respective states.

So far only nine states and two union territories have agreed to allow FDI in multi brand retail. At least, 10 states including West Bengal, Uttar Pradesh, Tamil Nadu, Karnataka, Bihar, Gujarat, Madhya Pradesh, Odisha, Kerala, etc opposed FDI in multi brand retail [26].

Many foreign retailers like Wal-mart, Tesco, Carrefour, Target and Ahold want to open their stores in India. But due the political party’s opposition to FDI in multi brand retail are just happy to wait and watch the political scene in India.

The Indian government decision to allow up to 51% FDI in multi-brand retail in September 2012 can have a positive impact on the growth of retail industry. The objective of this policy is to boost the retail business through adoption of international standards and practices. The entry of international products, practices and technology is expected to enhance the efficiency of domestic retailers. The government has made it mandatory for foreign multi-brand retailers to

38

place at least 50% of their total investment in back-end infrastructure, thus giving a boost to facilities such as logistics and warehousing.

With multi-brand retailers exploring opportunities in India, demand for retail space is likely to rise significantly. This will induce developers to launch new malls and, as store size requirements are significantly higher for multinational retailers, will encourage them to build larger malls along with sufficient mall infrastructure. Quality will also receive a significant boost as the malls will be constructed to meet international standards and norms. The competitive environment is likely to enhance the productivity and efficiency of domestic retailers; with better and more transparent pricing, sales will improve significantly. Domestic retailers will also leverage their portfolios by adopting many of the new retail strategies followed by large international retailers.

4.2.1 Case Study: Case of Wal-Mart

I take the example of Wal-Mart’s model of retailing as the bench mark for the possible effects of allowing entry of large foreign retail firms into India. Wal- Mart is the largest retail corporation in the world with $ 400 million turnover and about two million employees [27]. Wal-Mart business model includes six strategies which are setting low prices, investing in technology, having specific human resources, establishing strategies for expansion, increasing product variety and developing Wal-Mart culture.

From the beginning Wal-Mart focused on increasing the volume of customers and enjoys economics of scale. By keeping the prices low, it increased sales so much more than just to compensate for the decreased in the markup. Wal-mart derived competitive advantage through adoption of highly efficient logistics and distribution system by leveraging new technologies. It adopted vertically integrated distribution system.

Wal-Mart procures goods directly from manufactures bypassing all intermediaries and always drives hard bargain from suppliers. It spends a significant amount of time meeting vendors and understanding their cost structure. Once satisfied, it establishes long term relationship with vendors. It is in constant touch with suppliers through computer network. The long term relationship of repeated interactions reduces transactions cost of exchange [28]. The ruthless pursuit of cost and price cutting strategies of Wal-Mart made it to grow into a gigantic corporation.

Wal-Mart entered China in 1996 and now operates 352 stores in 130 cities. Wal-Mart has been able to cater to the rapidly growing Chinese market. About 20,000 Chinese suppliers provide Wal-Mart with 70 % of its global sales. Thirty percent of Chinese FMCG exports are accounted by Wal-Mart. Just as China is providing Wal-Mart with the lifeblood of its commercial growth, Wal-Mart is helping the Chinese state to satisfy the escalating demands of its consumers [29].

39

Over the years as the incomes of Chinese consumers have been growing, there have been greater demands for clean food and environmentally friendly products. Wal-Mart started to adapt environment friendly products. Wal-Mart has had positive impact on Chinese economy. It has given employment to Chinese nationals, procured products from local suppliers and increased country’s exports. This has resulted in the growth of Chinese Economy.

In 2007, Wal-Mart announced an agreement with Bharti Enterprises to establish a joint venture. Bharti Walmart Private Limited is a wholesale cash and carry and back-end supply chain management operations in India. It sells wide range of Fruits, Vegetables, Groceries, Stationery, Footwear, Clothing, Consumer Durables and other general merchandise. They started operations in 2009 [30].

Wal-Mart has helped Chinese economy to consolidate their growth. Therefore, if the State Government can allow 51 % FDI in Multi brand retail it can do wonders for the Economy. It is beneficial for farmers, producers and of course consumers will benefit with improved quality of products and easy availability of wide range of goods. It will also improve distribution system and provide employment to large masses. In this way, Wal-Mart can also help Indian economy grow.

4.3 Challenges of Retailing in India:

In India the retailing industry has a long to go and to become a truly flourishing industry.

Retailing need to cross various hurdles in India. The first challenge facing the organized retail

sector is the competition from unorganized sector. Indian Retail sector has large number of small

and tiny units which are part of unorganised sector. The tax structure in India favours the small

retail business. Organised Retail sector has to pay huge taxes. Thus, the cost of business is very

high in India. The various challenges in retailing industry are:

Kirana continue: The very first challenge facing the organised retail industry in India is

competition from the unorganised sector. Kirana stores is a low cost structure, mostly

owner operated has negligible real estate and labour cost and no taxes to pay. Consumer

familiarity that runs from generation to generation is one big advantage for these Kirana

stores.

Retail not being Recognized as an Industry in India: Lack of recognition as an industry

hampers the availability of finance to the existing and new players. This affects the

growth and expansion plans.

40

The High Costs of Real Estate: Real estate prices in some cities in India are amongst the

highest in the world. The lease or rent of property is one of the major expenditure, which

influences their profitability.

Lack of Adequate Infrastructure: Poor roads and the lack of cold chain infrastructure

hamper the development of food and grocery retail in India. The existing supermarkets

and food retailers have to invest a huge amount of money in building a cold chain

network.

Multiple and Complex Taxation System: The sales tax rates vary from state to state,

while the organised players have to face a multiple point control and system there is

considerable sales tax evasion by small stores. Retailers have to also pay Value Added

Tax (VAT).

Price war between Retail Organizations: Each and every retailer provides goods at low

cost and various promotional schemes. There are no standards or uniformity in the

pricing policy followed by various retailers.

Poor Supply Chain Management: The distribution channels in India are traditional and

inefficient. They don’t use the technology and rely on manual methods.

Lack of Trained Work-force.

Poor Retail Technology

Rapid Price changes

Government Regulations and Policies

These are the challenges that are faced by the retailers in India. The rationale behind allowing

FDI in Indian retail sector is that it will act as a powerful catalyst to improve competition,

develop supply chain, bring in latest technology and increase productivity. In spite of these

challenges India is still a favoured nation for Retail business because of its demographics and

growth potential.

4.4 Role of FIPB and FIIA:

41

4.4.1Role of FIPB:

The Foreign Investment Promotion Board (FIPB) is a government body that offers a single

window clearance for proposals on Foreign Direct Investment in India that are not allowed

access through the automatic Route. The core group of FIPB consists of: [31]

a) Industry Secretary - Chairman, (Secretary Department of Industrial Policy and Promotion), Government of India.

b) Finance Secretary, Government of India.

c) Commerce Secretary, Government of India.

d) Secretary (Economic Relations), Ministry of External Affairs, Government of India.

The Board may include other Secretaries of the Government of India and top officials of Financial institutions, Banks and Professional experts of Industry and Commerce, as and when necessary.

4.4.2 The objective of the Board will be to promote the inflow of foreign direct investment (FDI) into India through:[31]

a) By undertaking investment promotion activities.

b) By facilitating investment in the country by international companies, non-resident Indians (NRIs) and other foreign investors in projects which are considered to be of benefit to the Indian economy but do not qualify for automatic approval by the Reserve Bank of India (RBI) and/or are outside the parameters of the existing policy for clearance of investment proposals. The Board shall consider all investment proposals with or without technical collaboration and/or industrial license.

4.4.3 The Functions of the board are:[31]

a) To ensure expeditious clearance of the proposals for foreign investment.

b) To review periodically the implementation of the proposals cleared by the Board.

c) To review, on a continuous basis, the general and sectoral policy regimes relating to FDI and in consultation with the Administrative Ministries and other concerned agencies, evolve a set of transparent guidelines for facilitating foreign investment in various sectors.

d) To undertake investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in the appropriate projects.

42

e) To interact with the Industry Association/Bodies and other concerned government and non-government agencies on relevant issues in order to facilitate increased inflow of FDI.

f) To identify sectors into which investment may be sought keeping in view the national priorities and also the specific regions of the world from which investment may be invited through special efforts.

g) To interact with the Foreign Investment Promotion Council (FIPC) being constituted separately in the Ministry of Industry; and

h) To undertake all other activities for promoting and facilitating foreign direct investment, as considered necessary from time to time. The Board will submit its recommendations to the Government for suitable action.

4.4.4 Procedures followed by FIPB:[31]

a) The FIPB should meet on a fixed day every week to ensure quick disposal of the cases and may have more frequent meetings whenever considered necessary.

b) Foreign investment proposals received by the Board's secretariat should be put up to the Board within 15 days of receipt and the Administrative Ministries must offer their comments either prior to and/or in the meeting of the FIPB.

c) It should be the endeavour of FIPB to ensure that, as far as possible the Government's decisions on FDI proposal is communicated to the applicant within six weeks.

d) The Board shall have the flexibility of purposeful negotiation with the investors and consider project - proposals in totality, free from parameters, in order to ensure maximum foreign direct investment into the country.

e) It would function as a transparent effective and investor-friendly single window providing clearance for foreign investment proposals.

f) The Board will lay down its own mode and working procedures keeping in view the requirements of each proposal considered by it.

4.4.5 Approval Levels of FIPB: [31]

a) The recommendations of FIPB in respect of the project-proposals each involving a total investment of Rs.600 crores or less would be considered and approved by the Industry Minister.

b) The recommendations in respect of the projects each with a total investment of above Rs 600 crores would be submitted to the Cabinet Committee on Foreign Investment (CCFI) for decision.

c) The CCFI would also consider the proposals which may be referred to it or which have been rejected by the Industry Minister.

43

d) The approval letters in all cases will be issued by the Secretariat of FIPB.

4.4.6 Role of FIIA:[31]

The Foreign Investment Implementation Authority (FIIA) was set up in 1999 by the Indian government. Foreign Investment Implementation Authority (FIIA) has been set up by the government of India in order to encourage the implementation of the proposals for FDI in the country. By doing this, Foreign Investment Implementation Authority (FIIA) has given a major boost to the Indian economy.

4.4.6.1 The Objectives FIIA are:[31]

a) To encourage fast translation of the approval of foreign direct investment and also its implementation.

b) To offer the foreign investors proactive services such as getting them approvals that are necessary.

c) To solve investors problems by meeting the various government agencies and also to solve various operational problems.

The Fast Track Committee (FTC) that has been set up in around 30 Departments of the Indian government helps Foreign Investment Implementation Authority (FIIA) in its tasks. The chairman of Foreign Investment Implementation Authority (FIIA) is the Secretariat for Industrial Assistance (SIA) of the Department of Industrial Promotion and Policy. 

4.4.6.2 Role of FIIA are:[31]

To understand and solve the problems of the investors To understand and solve thse problems of the approving authorities To refer the cases that have not been resolved at the level of FIA to the agencies at the

higher levels To start consultations with multiple agencies.

4.4.6.3 Meetings of FIIA:[31]

The meetings of FIIA are held with the investors from the foreign countries and also on the basis of regions. The high ranking officials from the state governments as well as Government of India, Ministers take part in the meetings of Foreign Investment Implementation Authority.

44

Chapter 5

Impact of FDI in Retail on various Stakeholders

45

5.1 Impact on Agriculture Community:

Agricultural retail market in India is in a very disadvantageous position suffering

from lack of avenues to reach out to the vast domestic as well as the world market.

This has largely been due to the inability of this sector to access latest technology

and improve its marketing efforts. Development of organised retailing market

induced by indigenous capital or by foreign capital is very crucial where small and

farmers can supply their produce directly to these big retailers (Indian or Foreign).

Due to lack of adequate infrastructure facilities and lack of proper storage facility

farmers are forced to sell their produce at a very low price which sometimes

cannot even cover their cost of production.

FDI in retail will ensure adequate flow of capital into rural economy in a manner

which will promote the welfare of farmers. It will bring about improvements in

farmer income and agricultural growth. It will improve quality standards and cost-

competitiveness of Indian farmers. It is estimated that 15% of crop produce is lost

between the farm gate and the consumer because of poor roads and inappropriate

storage facilities [32]. The entry of FDI in retail in India will undoubtedly bring an

intensive infrastructure for farmers.

5.1.1Current Scenario of Agriculture Infrastructure in the

Country:

The warehouses in our country have been built following traditional norms

and without proper specification. They lack in optimal size, adequate

design, ventilation facility, inventory management and storage system.

According to the latest estimates, the warehousing capacity available in

India, in public, cooperative and private sector is about 108.75 million MT

and another 35 million MT warehousing capacity is required during the

Twelfth Five Year Plan period for storage of all major crops. Thus there

exists a huge demand supply mismatch [32].

46

Though India is the second largest producer of fruits and vegetables, it has a

very limited cold-chain infrastructure. Lack of adequate storage facilities

causes heavy losses to farmers in terms of quality degradation and wastage

of produce.

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.

Indian farmers are currently employing traditional methods of farming

which leads to low productivity.

Table 5.1

Current Status of Warehousing Capacity in India

Name of Organisation/ Sector Storage Capacity in million MT

Food Corporation of India (FCI) 32.05

Central Warehousing Committee (CWC) 10.07

State Warehousing Committee (SWC) 21.29

State Civil Supplies 11.3

Cooperative Sector 15.07

Private Sector 18.97

Total 108.75

Source: ASSOCHAM

5.1.2 Role of FDI in Creating Infrastructure:

FDI in retail will bring in investment in the field of warehousing as modern

retail formats require large quantities to gain economics of scale.

If FDI in multi brand in retail up to 51% is allowed, the retail giants like

Wal-Mart and Tesco, will build linkages with farmers communities and

work towards creating supply chain directly with farmers.

47

Farmers in Punjab have got better price by selling their produce to Bharti-

Walmart. Therefore if FDI in retail will help farmers get better price for

their food grains and improve their earnings.

Bharti- Walmart has entered into farming contract with farmers in Punjab

and Haryana, where they provide Indian farmers with the modern methods

of farming and irrigation. They also bring in Agriculture consultant/expert

from US who work closely with Indian farmers to improve the quality of

their produce.

Big retailers will improve the storage facilities and will help in reduction of

agriculture wastage.

Companies like Walmart and Tesco can also export the agriculture produce

to their foreign centres, which will help in increasing foreign reserves in

India.

5.1.3 Support of FDI in Retail by Farmer Groups:

Shriram Gadhve of All India Vegetable Growers Association (AIVGA)

claims his organisation supports FDI in retail. He claimed that currently it is

the middlemen and commission agents are benefiting at the cost of farmers.

He says that FDI will bring in big retailers who will procure directly from

farmers and improve cold storage facilities [33].

Prakash Thakur, the chairman of the People for Environment Horticulture &

Livelihood of Himachal Pradesh, supported FDI in retail because it will

reduce number of middlemen and enhance returns to farmers [33].

Sharad Joshi, founder of Shetkari Sanathana (farmer’s association), has

announced his support for retail reforms. Joshi claims FDI in retail will help

the farm sector improve necessary infrastructure and integrate farmer-

consumer relationship [33].

Consortium of Indian Farmers Association (CIFA) announced its support for

FDI in retail. Chengal Reddy, secretary general of CIFA claimed that FDI

will help reduce farmer’s exploitation by providing them better prices for

their produce [33].

48

5.2 Impact on Consumers:

Most Indian shopping takes place in open markets or millions small, independent

grocery and retail shops. Shoppers typically stand outside the retail shop, ask for

what they want and cannot pick or examine a product from the shelf. Access to the

shelf or product storage area is limited. Once the shopper requests the food staple

or household product they are looking for, the shopkeeper goes to the container or

shelf, brings it out and offer for sale to the shopper. The product typically has no

price label in these small retail shops. The shopkeeper prices the food staple and

household products arbitrarily and two consumers may pay different prices for

same products. These stores do not provide any after sales service support.

The traditional practice of selling goods to the consumer is unorganized retail like Kirana store,

Mom and pop store. They have contact with local customer in relation seeming to be relatives.

Usually they are mingled with their customer as neighbour. But the time and economy has

changed, so has the consumer’s purchasing power and preference changed. Based on the taste &

preference, now the consumer is demanding for variety and standard products. Compared to

other industry, the retail industry is bigger booming potential industry. Each and every in need of

product approach the retail shop. This is the point where the every consumer approaches for the

product. Especially in India, the retail industry is mostly occupied by the unorganized industry.

The domestic organized players are very few in comparison with unorganized player. Compared

with the international organized player, the domestic players who are in the lack of capital are

not effective in healthy competition. So the industry is in need of capital infusion. That is where

FDI in retail will help the retail industry as well as the consumers.

India is now home to the largest number of moneyed consumers. FDI in retail

would allow Indian consumers get access to quality goods at low cost. It will help

Indian consumers to have the luxury of the world class opportunity of shopping to

meet their daily requirements. They will find a new world of enjoyment by picking

up consumer items that will satisfy their needs and wants. FDI in multi brand will

provide greater variety of products and increase consumer choice.

49

FDI in Multi-brand retail would help Indian consumers in following ways:

It would offer wide range of products and increase consumer choices.

It will help consumers to shop for all households goods at one shopping

point.

Companies like Walmart will offer quality and standardised products.

Products will be offered at lower prices because it will eliminate middlemen

costs.

FDI in retail will enable Indian customers to get access to International

brands which will help in reducing imports because those goods are

available in India.

It will also increase the bargaining power of Indian consumers.

FDI in retail will improve the standard of living of Indian consumers.

5.3 Impact on SME:

Micro, Small and Medium enterprises have been globally recognized as an engine of economic

growth and as key instrument for promoting equitable development. The major advantage of the

sector is its low capital cost. The small and medium enterprises play a pivotal role in the

economic and social development of the country, often acting as a nursery of entrepreneurship.

This sector plays a key role in the development of the economy with their effective, efficient,

flexible and innovative entrepreneurial spirit. SME contributes significantly to the country’s

manufacturing output, employment and exports.

Indian SMEs play a significant role for nation development through high contribution to

domestic production, significant export earnings, low investment requirements, operational

flexibility, low intensive imports, generate new entrepreneurs and support large industries.

In order to protect the Micro, Small and Medium enterprises, in respect to proposals involving

FDI beyond 51 %, sourcing of 30 % must be done from Micro, Small, Medium, Village and

Cottage industries, in all sectors where it is feasible. It is believed that the mandatory 30%

sourcing from Indian SMEs would help them to achieve higher growth in sales, size of the

industry, capacity addition, increased contracts/orders, qualitative improvements, product

50

branding, technology upgradation, etc. Thus the big retail giants like Walmart, Carrefour and

Tesco would need to take supplies from SMEs in order to cater the needs of Indian consumers.

Table 5.2

Definition of Micro, Small and Medium Enterprises(Manufacturing)

Manufacturing Enterprises

based

on Investment in Plant & Machinery

Description INRMicro enterprises Up to 25 lakhs

Small enterprises Above 25 lakhs & up to 5 crores

Medium enterprises Above 5 crores & up to 10 crores

Table 5.3

Definition of Micro, Small and Medium Enterprises (Service)

Service Enterprise based on Investment in Equipment

Description INR Micro enterprises Up to 10 lakhs

Small enterprises Above 10 lakhs & up to 2 crores

Medium enterprises Above 2 crores & up to 5 crores

Confederation of Indian Industries (CII), had done a survey on Impact of FDI in retail on SMEs

which was based on a sample of 250 SMEs. According to the Survey, the SME industry is in

favour of government decision to allow 51% FDI in multi-brand retail and 100% FDI in single

brand retail. The CII survey makes an assessment of the impact of opening FDI in retail on SME

in terms of different growth indicators / parameters like [34]:

51

Impact on Sales:

Majority of the respondents (98.6%) were of the opinion that the opening of the FDI in retail will

result in substantial growth of sales of their products.

Impact on Size of Industry, Business / Capacity Addition:

Majority of the respondent expect the size of their industry to grow with the opening of 51% FDI

in Multi-brand retail and 100% FDI in Single-brand retail.

Impact on New Orders / Contracts:

Majority of respondent were of the view that the decision of opening up of FDI in retail would

impact positively in form of new orders / contracts.

Impact on Qualitative Improvements and Branding of the products:

Over 56% of the respondents were of the view that the government decision of mandatory

sourcing of a minimum of 30% from Indian Micro and Small industry will help in achieving

qualitative improvements and branding of the products. This will ensure SMEs a sure source of

market for their products while ensuring higher value realization for their supplies.

Impact on Supply Chain Efficiencies:

68.7 % of the respondent was of the opinion that the opening up of the FDI in retail sector would

lead to improvements in the supply chain efficiencies in their sector which in turn would

integrate small and medium size enterprises into modern trade process, resulting in substantial

amount of knowledge and skills transfer in the sector.

Therefore, FDI in retail sector will have a positive impact on SME sector and will be lead to

sustainable growth of Small and Medium enterprises

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5.4 Impact on Employment:

The retail sector is the second largest source of employment and the job market is hugely

receptive to this, with more and more Business schools offering Retail management programs. In

addition to this, the experts are of the opinion that the foreign retailers will hire local retail

professionals to carry out their operations. The latest pool of retail professional are well trained

and industry ready. All they need is tweaking to adapt to company’s vision and requirements.

Apart from graduates from business schools who take the management posts, foreign players will

offer excellent job opportunities to youths with 10+2 pass category that boasts of lot more talent

than what BPO needs.

FDI in retail sector will have a multiplier effect generating jobs in construction, food processing,

furnishing, packing, management, data processing, transportation, etc because the super markets

have a huge potential for aiding development. A nationwide retail network will bring about an

economic revolution and can eradicate problem of poverty and unemployment.

Huge investments in the retail sector will see gainful employment opportunities in agro-

processing, sorting, marketing, logistics management and front end retail business. When the

aerated soft drink sector was opened to FDI, there were protest that it would have a negative

impact on domestic industries and employment but the sector has brought in significant

investment and provides direct and indirect employment to over 1,25,000 people [35]. In most

developing countries like Thailand and Brazil entry of foreign retailers has led to significant

employment generation in the food processing sector.

Effects of FDI on Employment in India:

FDI would lead to increase in productivity and efficiency.

It would lead to improvement in quality of employment in terms of salary and other

benefits.

More investment in training and skill development.

Work environment would improve.

Better quality employment opportunities for educated unemployed.

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Organised retailing would create more employment for educated youth but there may be loss of

employment among uneducated people employed in unorganised sector. Thus, there may be

employment opportunities for certain categories of people while others may face unemployment.

The government needs to create alternative employment opportunities for the class which is

more likely to be displaced with advent of organised retailing.

The overall impact on employment depends on the performance of the economy. If the economy

grows at a fast pace, employment in both organised and unorganised sector would grow.

With FDI in the retail, international MNCs are likely to enter India either directly or through

Indian companies and they in turn are going to recruit people for sales, customer service, back

end logistics and IT, which would mean substantial job creation.

According to Indian Staffing Federation (ISF), an apex body of the flexi staffing industry in

India, has stated that FDI in retail can create 3 million jobs in three years including both direct

and indirect jobs. In the next 10 years time the figure could touch as much as 10 million, wherein

4 million would be direct jobs and around 5-6 million indirect jobs including contractual

employees [35].

According to Randstad India President (Staffing) Aditya Narayan Mishra, The reforms push will

have a very good impact on the organised employment. If more retail happens then lot more jobs

are going to get created.

According to ISF, FDI in retail will have a much wider impact on organised employment than

what happened in IT, 12 years back as it shall open doors for less skilled and less educated

people as well.

Moreover with the recent reforms push, foreign investors are showing renewed interest in India,

which is likely to result in more investments and thus more number of jobs.

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Chapter 6

FDI in Retail Inflows to India

55

6.1 Trends and Patterns of FDI in Retail Inflows to India:

In the past few years, India has become one of the most attractive destinations for retailers across

the world. The retail space in the country has seen multifold growth backed by the entry of the

corporates into the sector, changing consumer behaviour and lifestyle and rising incomes. The

sector has witnessed exponential growth since 2001, with a clear distinction now visible between

organized retail and unorganized retail.

Western retail giants like Wal-mart and Tesco are also eyeing entry into developing markets like

India and China on the back of saturation in the developed western retail markets. There are

multiple new malls, supermarkets and departmental stores coming up in not only Tier I but also

Tier II and Tier III cities, to tap in the demand.

According to Economic Survey, 2011, during April 2006 to March 2010, India witnessed FDI

inflows valued at $194.69 million in the retail sector, accounting for 0.21 per cent of total FDI

inflows in the country during the period. A total of 94 proposals have been received till May,

2010, of which 57 were approved," the survey said [36].

Chart 6.1

FDI inflows in Retail Trading (single brand)

56

2006

2007

2008

2009

0 1000 2000 3000 4000 5000 6000 7000 8000

0

66.38

1008.29

7152.29

INDIA:YEAR WISE FDI INFLOWS IN RETAIL TRADING (SINGLE BRAND)

FDI IN-FOWS IN RETAIL TRADING(SINGLE BRA...

IN RUPEES (MILLIONS)

AAnalysis and interpretation:

In early 2006, the Government allowed FDI up to 51 per cent in single brand retailing,

with prior Government approval.

Currently, India allows:

100% FDI for Single brand retail.

100% FDI in Cash-and-carry wholesale trading.

51% Multi-brand retail.

From the above graph it is clear that FDI in single brand retail trading is showing a

growth pattern, where the investment has grown to7152.29 million in 2009 from 66.8

million in 2007.

6.1.1Modes of Entry of Foreign retailers before FDI in retail

was allowed:

Prior to government allowing 51% FDI in single brand retail in 2006 the foreign retailers

entered India through Franchise Agreements, Cash and carry wholesale trading and

Strategic licensing agreement.

Franchise agreements:

Franchising is the practice of using another firm's successful business model. For the

franchisor, the franchise is an alternative to building 'chain stores' to distribute goods

and avoid investment and liability over a chain.

The franchisor's success is the success of the franchisees. The franchisee is said to

have a greater incentive than a direct employee because he or she has a direct stake in

the business. For example, Fast food retailers like Domino’s and Pizza Hut have

entered India through franchise route.

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Cash and Carry wholesale trading:

100% FDI is allowed in wholesale trading which involves building of a large

distribution infrastructure to assist the local manufacturers.

The business model is built in a way so that the wholesaler deals only with small

retailers and not consumers.

Metro AG of Germany was one of the first significant global players to enter India

through this route. And now other large international retailers plan to follow a similar

route.

Strategic licensing agreements:

This route involves the foreign company entering into a licensing agreement with a

domestic retailer.

Mango, the Spanish apparel brand has entered India through this route with an

agreement with Pyramyd, a departmental store in Mumbai.

SPAR has entered into a similar agreement with Radhakrishna Foodland Private

Limited.

6.1.2 FDI Inflows in India Post Reform Era:

Indian has been attracting foreign direct investment for a long period. The sectors like

telecommunication, construction activities and computer software and hardware have been the

major sectors for FDI inflows in India.

The measures introduced by the government to liberalize provisions relating to FDI in 1991 lure

investors from every corner of the world. As a result FDI inflows during 1991-92 to March 2008

in India increased manifold as compared to during mid-1948 to March 1990. The below table

indicates that FDI inflows has increased from Rs 409 crores in 1991-92 to Rs 123025 crores in

2008-09.

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6.2 SWOT Analysis for Opening up FDI in Retail:

SWOT analysis is one of the primary analysis in strategic management. It contains

Strengths, weakness, Opportunities and Threats. The Strength and weakness of

FDI in Retail shows present scenario and Opportunities and Threats help to plan

for future.

Strengths:

A large young working population with median age of 24 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.

Customers will have access to greater variety of international quality branded goods.

Increase in disposable income and customer aspirations are important factors.

It will contribute 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.

Large domestic market with an increasing middle class and potential customers with

purchasing power.

Fast growing economy.

Young and dynamic retail professionals and experts.

Weakness

Will mainly cater to high-end consumers placed in metros and will not deliver mass

consumption goods for consumers in villages and small towns.

Small size outlets are also one of the weaknesses in the Indian retailing.

The rapid development of retail sector is the sharp improvement in the availability of

retail space. But the current rally in property prices, retail real estate rentals have

increased remarkably, which may render a few retailing business houses unavailable.

Retail companies have to pay high rentals which are blockage in the turn of profits.

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The volume of sales in Indian retailing is also very low.

Low capital investment in retail sector.

Highly unorganised.

Low productivity due to poor infrastructure.

Opportunities:

Increase in disposable income.

Quality improvements through better technology and efficiency.

Robust supply chain and reduce distribution bottlenecks.

It will enhance financial condition of farmers by buying their produce at fair prices.

Potential to increase export capacity.

Changing customer needs and aspiration.

High employment generation.

Threats:

One of the greatest barriers to the growth of modern retail formats are the supply chain

management issues.

The unorganized sector has dominance over the organized sector in India because of low investment needs.

Cut throat competition among large retailers.

Lack of uniform tax system for organized retailing is also one of the serious concerns.

Long Gestation period- foreign retailers will take a while to adapt to Indian market and

make profits.

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6.3 FDI in Retail and Economic Growth:

FDI in retail was introduced in 1996, where the Government allowed FDI in single

brand retail up to 51%. In order to understand the impact that FDI will have on

Indian economy we will have to see the impact that FDI has had on other countries

where FDI is permitted. We will analyse impact of FDI in retail in countries like

China, Thailand and Indonesia on their GDP, Employment and Exports.

China:

China opened up FDI in retail only in 1992 and that was limited to 26 per cent. Foreign retailers

were initially permitted to trade only in six provinces and Special Economic Zones. Ten years

later, in 2002, that cap was raised to 49 per cent. It was only in 2004 that 100 per cent FDI in

retail was allowed [37]. Some of the changes that have occurred in China following the

liberalization of its retail sector include:

Over 600 hypermarkets were opened between 1996-2001.[37]

The number of small outlets (equivalent to Kiranas) increased from 1.9 million to over

2.5 million from 1992-2000.[37]

The employment in the retail and wholesale sectors increased from 28 million to 54

million people from 1992-2000.[37]

China, in fact, is a really interesting example of how it transformed Walmart USA. As China

ramped up its own manufacturing sector, through subsidies, special economic zones and other

perks, as many as 15,000 Chinese suppliers were serving Walmart China in 2010; the company

had expanded its presence to 352 supermarkets in 130 cities across China. Exports to the US

amounted to $60 billion annually. Walmart China now claims that 95 per cent of its goods sold

in China are sourced locally. [37]

According to Chinese analyst, the changes in the efficiency and productivity were made possible

by the entry of foreign retail giants like Walmart and Carrefour who changed the way Chinese

managed their businesses. From farm procurement to logistics, supply chain management

techniques and technology spilled over the local firms. [37]

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20 years since then, it is the Chinese local retailers who still dominate the market in the retail

industry. The largest retailers are the Chinese companies like-Shanghai Bailian group, Suning,

Gome and Dashang, all have managed to capture a market share higher than Walmart in China.[37]

This easily demonstrates that FDI has certainly increased competition in China. We have got

ample learning opportunities from china. In the recent debate on Introduction of FDI in retail

sector in Indian retail industry, FDI may prove beneficial in the long run.

Thailand:

100% foreign equity in retailing with no limits on the number of outlets was introduced in 1997

in Thailand. Since then FDI has helped its agro processing industries grow at a tremendous pace.

Competition increased once large foreign-owned discount-store chains broke onto scene, their

presence forced local retailers to improve their management systems and marketing strategies.

However, the number of family- run shop and department stores had closed down due to entry of

foreign retailers. Since their entry in 1997, TESCO, Carrefour and Makro have been successful

in capturing more than 10% of the entire retail market. Foreign retailers followed Predatory

pricing strategy which led to price war and ultimately the small traditional retailers had to close

their shops. Around 60000 small retailers have been adversely impacted due to Predatory

pricing. [38]

Indonesia:

Indonesia is another emerging economy which has introduced liberalised policies and allows

100% FDI in its retail sector in 1990’s. Even after several years of emergence of supermarkets

90% of the fresh food and 70% of all food is still in hands of the traditional retailers. There has

been no complaint of abuse of dominance in the retail sector, the local retailer Mahatri is still

leader in the Retail industry. In Indonesia, 90% of retail business still remains in hands of small

retailers. [39]

In countries like China and Indonesia, has had positive impact of FDI in retail on their growth,

employment and exports. Therefore, the Chinese example indicates that foreign players may not

be as much of a threat to incumbents as is being parroted in the media.

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Economic Growth Model:

GDP= f (FDI)

Table 6.1

GDP & FDI Inflows in USD Millions

Year

GDP at current prises and current Exchange rates USD Millions FDI Inflows USD Millions

1991 287,233 73.541992 289708 276.511993 283231 550.371994 321553 973.271995 365020 2143.631996 376220 2426.061997 421042 3577.331998 424435 2634.651999 453659 2168.592000 476350 3584.222001 487779 5471.952002 510285 5626.042003 590968 4322.752004 715459 5771.132005 837298 7606.432006 947684 20335.952007 1205951 2548.652008 1283208 43406.282009 1353213 35595.862010 1597945 24159.182011 1676143 34247

Source: databank.worldbank.org

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Correlation was used to study the relationship between both the variables and

analysis is shown below;

Correlation (R) = 0.845

Coefficient of Determination (R square) = 0.715 (It suggests that FDI explains

71.5% of variance in GDP)

IN the Economic growth model, estimated correlation and coefficient on Foreign

Direct Investment has a positive relationship with Gross Domestic Product. It is

revealed from the above analysis that FDI is a significant factor influencing the

level of economic growth in India.

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6.4 Role of FDI in Retail on Economic growth:

FDI in retail is expected to bring the investment and expertise necessary to

modernize and develop the farm and manufacturing sector.

Foreign direct investment (FDI) in India's largely unorganised retail sector will help curb inflationary pressure by easing supply side constraints and revive economic growth, analysts said.[40]

"FDI in multi-brand retail is seen as a very important reform to revive the economy and it will ease supply side pressures and mitigate inflation and benefit, especially, the small and medium enterprises by way of greater market access and higher profit margins," said Sandip Somany, president, PHD Chamber of Commerce and Industry.[40]

Somany said overseas investments would boost business confidence in Indian economy.

In a major step forward to give a push to reform agenda, Prime Minister Manmohan Singh's government took a decision to allow up to 51 percent FDI in multi-brand retail.

"FDI infuses technological advancement, enhance production possibilities and induce capital flows, which help in maintaining general macroeconomic stability," said Somany.[40]

According to the latest Central Statistical Organisation (CSO) data, the Indian economy grew at a sluggish 5.5 percent in the April-June 2012 period as compared to 8 percent in the corresponding quarter of the previous year. The GDP growth had slumped to a nine-year low of 5.3 percent in the quarter ended March.[40]

The decision to push forward the reform process has come at a time when business sentiments have taken a beating, GDP growth is near decade low, inflation remained stubbornly high and the government was criticised for policy paralysis.

Sanjay Dutt, executive managing director, South Asia, Cushman and Wakefield, said allowing FDI in multi-brand retail was a much awaited and much needed initiative.In the next 12-24 months, International retailers will accelerate their entry strategy. As a result, the developers involved in shopping centre development, who were badly hit since 2008, will also get a tremendous boost and we will witness serious players expanding in this space," said Dutt.

"Over the medium- to long-term, the retail sector, real estate industry and the end-consumers will

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benefit from the move and the economy on the whole will gain momentum, depth and size," he added.[40]

A Sakthivel, chairman of the Apparel Exports Promotion Council (AEPC), said the move would create employment opportunities and boost economic growth. “It will give the much needed fillip to the entire textiles industry. Employment opportunity will be created in plenty. Manufacturing activities will get a boost” said Sakthivel. [40]

The AEPC chairman said overseas investors would help create better infrastructure in Indian retail sector that would benefit farmers as well as end users.

"Farmers will get better price of the produce as well as consumer will derive value for their money. It will lead to easing of inflation in the country. Gradually GDP will pick up and economic outlook will improve," Sakthivel said.

However, Ajay Jakhar, chairman, Bharat Krishak Samaj, said the government should have done more to address the concerns of farmers.

"We are not exactly thrilled as we would have hoped for more conditions to help farmers become a part of India's growth story," Jakhar said.[40]

Leading industry chambers also hailed the government's decision, saying overseas investments would help improve sentiments.

"The move to open up multi-brand retail is a major step in the right direction and this will not only end a long standing uncertainty in policy making but also boost investors' confidence besides promoting supply chains in the agriculture sector," Adi Godrej, president, Confederation of Indian Industry (CII). [40]

RV Kanoria, president, Federation of Indian Chambers of Commerce and Industry (FICCI) said the decision would usher in a retail revolution in the country.

"There are several benefits that would flow from this decision. We will see infusion of new technology across the agriculture value chain as well improvement in the back end infrastructure," said Kanoria.[40]

"There will be a multiplier effect in terms of employment generation and domestic manufacturers will benefit as they integrate with the supply chains of global retail majors. Consumers will have a wider choice and get better deals," Kanoria added.

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The arrival of foreign retail chains has twofold impact. First, those companies set up supply chains and logistical capabilities, spurring significant improvements in the infrastructure needed to source, ship, store and deliver products (covering all aspects of value chain and supply chain activities, including storage, warehousing, and information-intensive operations). Second, their entry and expansion induce domestic competitors to invest in infrastructure and logistics, as well as greatly speed up the emergence of product standards (especially in perishables and personal consumables), and begin the process of bypassing monopsony buyers and traders that dominate procurement in many product categories today.

For these reasons, foreign investment in retail has an impact that goes beyond its direct investment impact. It is a force multiplier that induces even more investment from competitors.

According to US investment banking giant Goldman Sachs, FDI in retail is necessary to push GDP growth and deal with high current account deficit, besides bringing in technological improvements into the sector [41]

"Every 1.7 dollar of foreign investment can generate one dollar of GDP growth, which is the lowest amount, simply because it has so many different linkages as opposed to putting in an additional dollar in banking," Goldman Sachs India Managing Director and Chief Economist Tushar Poddar said after announcing its India outlook for 2013.

He said that in the medium-term there are several benefits of FDI in retail to the economy. "There is very high current account deficit, so we need FDI, we need inflows”.

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