FDI in Multi Brand Retailing in India Research Paper

Foreign Direct Investment In Multi Brand Retailing In India

By: Apurva Thakur & Biswadeep ChakravartyIV BSL LLB ILS Law College

ABSTRACT

The topic of FDI in retail branding and business has been a contentious issue for some time now. The Government recently announced FDI in retail; namely 51% in Multi Brand Retail and 100% in Single Brand; but fortunately or unfortunately had to roll back the same due to political opposition both within and outside the coalition.The advent of the New Economic Policy in 1991, under the leadership of current Prime Minister and then Financial Minister Mr. Manmohan Singh; saw a sudden and enormous surge of foreign investment in various sectors and especially the retail sector.Foreign investment has always been constantly growing in the retail Sector. This is primarily due to the reason that foreign investors have always viewed the Indian Market as a potentially profitable market in addition to housing the second largest population in the world.

The opening of the retail sector offers tremendous opportunities to the foreign Investors and gives them access to effectively more than a billion customers.

Many international retailers including Wal-Mart, GAP, JC Penney etc. have already begun and are well under way in procuring goods from India..

Aim/Objective of the Research Paper:

The aim of the present research paper is to provide a clear, empirical and an analytical overview of the present situation regarding Foreign Direct Investment in Multi Brand Retailing in India, as well as the legal aspects thereto. In addition this paper will also aim to provide an outlook into the future prospects of any changes in the market structure; along with taking into consideration the gradual change in the sector regarding the same.

Method of research:

Careful legal analysis of current and past market trends regarding Foreign Direct Investment regarding retail sector, with particular emphasis on the multi brand format of the same, along with the application of empirical data.

Contents

1 Introduction2 Definitions3 Difference between Retail and other forms of Business Transactions or sales.4 The changing face of Indian retail market.

Current and Past Market Trends Regarding the Retail Sector5 Opening up of FDI routes and the consequences thereto6 E-Commerce and Multi Brand Retailing7 FDI in Multi Brand Retail - Pros and Cons.

1. Introduction

The Times of India, 25 November 2011, reported, “NEW DELHI: Commerce Minister Anand Sharma Friday formally announced the decision taken by India's federal cabinet the previous evening to allow up to 51 percent foreign equity in multi-brand retailing and 100 percent in single-brand format..”1

With the advent of the New Economic policy reforms in 1991, there has been a tremendous increase in the input of the FDI in the country in various sectors. One contentious sector in this regard is the Retail Sector, particularly the Multi Brand segment. Trade is an important segment in India’s Gross Domestic Product (GDP). As per the National Accounts, released by the Central Statistical Organisation (CSO), GDP from trade (inclusive of wholesale and retail in organised and unorganised sector), at current prices, increased from Rs 4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual rate of 16.2 per cent. The share of trade in GDP, however, remained fairly stable at little over 15 per cent in last four years1. The share of the private organised sector intotal GDP from trade was 23.2 per cent in 2008-09 and it grew at 15.0% during the year. The share of the retail trade in GDP remained stable at 8.1 per cent during this period.

Foreign Direct Investment has been a major reason for the gradual increment in the Gross Domestic Product of the country. And an increase in the same has strongly been advocated throughout the decades.

2. Definitions

● Foreign Direct Investment:

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is the investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site.

1. The Times of India, 25 November 2011http://expressbuzz.com/finance/india-formally-announces-fdi-in-retail/336987.html

In other words it refers to the acquisition of stake in any sector by any foreign entity. Foreign Investment may further be divided into two kinds, namely; Foreign Direct Investment (FDI) and Foreign Institutional Investors.The primary difference between the aforementioned kinds of foreign investment is with regards to the persons making the investments. While the former may include individuals, companies, etc while the latter comprises of financial institutions primarily. Examples of FIIs are Mutual Funds, Banks, etc.Foreign Direct Investment is regulated in India by the Reserve Bank of India. The RBI regulates the inflow of FDI in the economy by putting caps on the various sectors.One of the major reasons for regulating FDI in the Indian economy is that the Indian Economy is one, which in many aspects ,is still developing. The primary fear or reservation with regards to the opening up of the sectors is the fear of job losses.

Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India in this regard had issued a notification2 which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000, which are amended intermittently.

The Ministry of Commerce and Industry, Government of India is the nodal agency for monitoring and reviewing the FDI policy changes by providing for a sectoral equity cap on a continued basis. The FDI policy is notified to the public through Press Notes released by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). The Reserve Bank Of India in furtherance of regulating the FDI policy in India, issues a Consolidated FDI Policy published biannually.

● Foreign Direct Investment in Retail Sector:

India’s retail industry is divided into organized and unorganized sectors. Post-liberalization, organized retail has grown exponentially and is a testament of the Indianmiddle class’s burgeoning purchasing power. However, Foreign Direct Investment is a relatively new phenomenon in the Indian economy in relation to the other sectors; one which has come up only in the last ten years.The first foreign players to enter the Indian market were Naaz Foods Ltd. and Spencer Ltd. Currently FDI is permitted upto 51% in Single Brand Retail. However, FDI in Multi Brand Retail is not yet permitted. Furthermore, the DIPP too issues a consolidated policy every financial year.FDI in the Indian market especially in the retail sector is still in a nascent stage.

The current state in the FDI in the Retail Sector has been stated by the DIPP as the following3:a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.

2. Notification No. FEMA 20/2000-RB dated May 3, 2000

3. Press Note 4 of 2006

b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single Brand products, subject to Press Note 3 (2006 Series)4.

c) FDI is not permitted in Multi Brand Retailing in India.

● Retailing:

According to Blacks Law Dictionary (Eighth Edition), “Brand: (Trademarks) a name or symbol used by a seller or manufacturer to identify goods and services and to distinguish them from competitors’ goods or services;The term used colloquially to refer to a corporate or product name. Retailer: A person or entity engaged in the business of selling personal property to the public or to consumers, as opposed to selling to those who intend to resell the items. Wholesaler: One who buys large quantities of goods and resells them in smaller quantities to retailers or other merchants, who in turn sell to the ultimate consumer.”

Retailing is a form of a business transaction wherein the goods are transferred from the retailer to the consumer. The Delhi High Court in defining the concept of retailing stated that retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale).5

It is also often referred to as the final leg in the transfer of goods from the producer and the final consumer. also known as the supply chain. Retailing can be further be classified into two forms, namely Organised and Unorganised.

● Multi Brand Retail At present, there is no comprehensive definition given to the concept of Multi Brand Retailing, it thus becomes pertinent to note the definition of the terms “Brand”, “Retailing”, according to different sources. Department of Commerce, confirmed the definition adopted by the World Trade Organisation (WTO), according to which: “Wholesaling consists of the sale of goods/ merchandise to retailers, to industrial, commercial, institutional, or other professional business users or to other wholesalers and related subordinated services." “Retailing services consists of the sale of goods/ merchandise for personal or household consumption either from a fixed location (e.g. Store, kiosk, etc.) or away from a fixed location and related subordinated services."6

4http://siadipp.nic.in/policy/changes/pn3_2006.pdf

5. Association of Traders of Maharashtra v. Union of India [2005 (79) DRJ 426]

6. Ibid

As can be clearly seen from the above, it is not the quantity of sales that is the determinant of whether a business is wholesale or retailing, but it is the type of customer to whom such goods are sold.

Now, according to the Consolidated Policy on FDI released by the RBI on April 10, 2012, FDI is prohibited in Retail Trading (Except Single Brand Retailing).7

According to the same policy, FDI in Single Brand Retail is allowed upto 100% under the Government Route. Government Route referred to here is to be read as prior approval of the FIPB.8

Thus, the pre- requisites of a Multi Brand Retailing Format are:

1 The trade activity contemplated must be that of a retailing format, wherein the goods are sold to final end-customers, who would use the same for purpose of personal consumption.2 The products sold must be not be of a Single Brand only, but be of various brands, which may be manufactured by different persons.

● Retailing in India :

The retailing market in India is one which is still in a nascent stage, however as of 2008 it accounts for over 13% of the country’s GDP (Gross Domestic Product). Foreign Direct Investment in Retail Sector, as aforementioned, is permitted only in the Single Brand variant of the same. FDI in Multi Brand Retailing is not permitted as yet. As of August 1991 to April 2011, FDI in Retail Sector is pegged at Rs. 3067.12 (Crore)/ $9. The Indian Retail Sector is currently growing at a Three year compunded annual rate of 46.64 per cent.10

The two kinds of retailing in India are namely, Organised and Unorganised:

● Unorganised :

This form of retailing has been present in the Indian market through the ages. This comprises of the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.The retail trade sector, according to the latest NSSO 64th Round, in 2007-08 retail trade employed 7.2 per cent11 of total workers and provided job opportunities to 33.1 million.12

This sector is however is one which is highly segmented and in being so,cannot achieve

7. FDI Circular 01 of 2012, RBI

8 . Ibid

9 . Fact Sheet on FDI Inflow from August 1991 - April 2011.

10. India’s Retail sector (June, 2011) http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf

11. NSSO, Report No 531, Employment and Unemployment Situation in India, 2007-08

12. Ibid.

economies of scale. 97 per cent of the Indian retail market is fragmented and consists of Unorganised retailing.One of the major reasons why the Unorganised form of retail is an integral part of the Indian economy, is that besides its reach in the rural areas, it also provides employment to a portion of the Indian population, only second to agriculture which is the primary source of bread and butter of the nation.

● Organised :

The Organised form of retailing refers to the business model undertaken by licensed retailers which means and includes the business entities who are registered for sales tax, income tax, etc. A major ingredient of the same are the corporate-backed hypermarkets and retail chains, along with the privately owned large retail businesses.One of the fastest growing sectors is without doubt the Organised Retail Sector. This is a sector which 10-15 years prior was a fraction of what it is now and the pace at which it is growing.It is interesting to note here that the Retail sector in India has been growing 30-35 per cent as compared to 20 per cent in the US. Of which the organised sector shares about 2-3 per cent.13 Examples of organised retailing are Reliance Trends, Reliance Digital, Pantaloons, etc.

4. The changing face of Indian retail market.

Current and Past Market Trends Regarding the Retail Sector

Under the prevailing system there are three major kinds of Organised Retailing in India:

1 Mono exclusive Branded Retail Shops2 Multi Branded Retail Shops3 Convergence retail Outlets

Table 1. 14

Form of Retail Primary Focus Consumer BenefitsMono exclusive branded retail outlet

Exclusive showrooms either owned or franchised out by a manufacturer

Complete Range available for a given brand; certified quality

Multi Brand Rertail Shops

Focus on particular product categories and carry most of the brands available.

Customers get to have more choices as many brands on display

13. India’s Retail Sector (June, 2011) http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf

14. “IT Retailing: Are You In The Loop?” July 16, 2006

Convergence retail Outlet

Usually have a display most of the convergence as well as consumer/electronic products including communication and IT goods

One stop shop for many consumer, many product lines of different brands on display.

The Indian retail sector is one which is constantly changing in an attempt to adapting itself to the dynamic market segment it is a part of. The Indian organised sector typically comprises of a large number of retailers, greater enforcement of taxation mechanisms and better labour law monitoring system. The modern retail are encouraging development of well established and efficient supply chains in each segment ensuring efficient movement of goods from farms to kitchens, which will result in huge savings for the farmers as well as for the nation. The Government also stands to gain through more efficient collection of tax revenues. Along with the aforementioned format, the non store retailing channels are also witnessing action with HLL initiating Sangam Direct, a direct to home service. Gas stations are seeing action in the form of convenience stores, ATMs, food courts and pharmacies appearing in many outlets.15

Current and Past Market Trends Regarding the Retail Sector

At present there are 50 hypermarkets (form of organised retail) operated by four to five large retailers spread across 67 cities.16

The ever changing market of the Indian Retail Sector necessitates the existing retail players to continuously try and experiment and try expand their businesses. A brief outlook at the current and prospective market trends regarding the same are listed below:

Table 2. 17

Retailer Current Format New Formats, Experimenting WithShoppers Stop Department Store Quasi-mallEbony Department Store Quasi-mall, smaller outlets, adding food retailCrossword Large Book Store Corner ShopsPyramid Department Store Quasi-mall, food retailPantaloon Own Brand Store HypermarketSubiksha Supermarket Considering move to self serviceVitan Supermarket Suburban Discount StoreFood World Food Supermarket Hypermarket, Food World ExpressGlobus Department Store Small Fashion StoresBombay Bazaar Aggregation of KiranasE – Foodmart Aggregation of Kiranas


16. Ibid.


Metro Cash and CarryS Kumar Discount Stores

Mergers and Acquisitions: One tool which has proven effective in helping expand business is the process of merger and acquisition. With a view to consolidation retail business in a fragmented market like India, mergers and acquisitions are only but necessary.

Table 3 18

Year Acquired/JV Company/Target

Acquirer Nature of Business

Stake (%)

Consideration (US $ Million)

2005 Liberty Shoes Future Group

Retail (Footwear)

51 3

2005 Indus – League Clothing

Future Group

Retail Clothing

68 5

2005 Odyssey India Deccan Chronicle Holdings

Lesiure Retail Chain (books, music, toys)

100 14

2005 Landmark Tata Trent Books, Music, Accessories

74 24

2006 Bistro Hospitality

TGI Friday’s (a subsidiary of Carison Restaurant Worldwide)

Restaurant (Food Retail)

25 N/A

2006 Indus – League Clothing (Future Group Company)

Etam Group, France

Lingerie and women’s wear retailing

50 (JV)

8

Difference Between Retail and other forms of Business Transactions:

18. Ibid, PriceWaterhouseCoppers, Asia-Pacific M&A Bulletin

The Reserve Bank of India defines and distinguishes Retail form of Trade from Wholesale as “...Cash & Carry Wholesale trading/Wholesale trading, would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would, accordingly, be sales for the purpose of trade, business and profession, as opposed to sales for the purpose of personal consumption. The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales. Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce” 19. Whereas retail has been defined by the Delhi High Court as a “sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale)”.20

Due to the restrictions placed by the Government on the entry of FDI in the retail sector, MNCs have over the years developed and implemented the following business models:

i. Franchise Agreement:

This is the most widely used model used the foreign companies to enter the domestic market. Franchising refers to, in simple terms, the practice of using another firm’s business model. Franchise agreements are more often than not used as an alternative to opening of chains stores and thereby avoiding the liabilities and risks involved in the same. As stated earlier, franchising is one of the most widely used business models worldwide. In the absence of any specific law or provision thereto, franchising is referred to as distribution system, whose laws apply, with the trademark covered by specific covenants.Although it is the most widely used business model, with the exception of America and China, there are no specific legal provisions regulating the same. As far as India is concerned, the only laws covering Franchising agreements are the Indian Contract Act, 1872 and the Specific Relief Act, 1963; which set down provisions for the enforcement of agreements and recovery of damages in breach thereof.FDI (unless otherwise prohibited) in franchising business model is permitted, with the prior approval of the Reserve Bank of India.One of the most successful franchises in the country is McDonald’s, which has a large presence throughout the major cities of the country. Fast food majors, Domino’s and Pizza Hut have also successfully implemented this business model, through a master and regional franchising agreements.21 Other franchises include apparel and footwear majors like Nike, Lacoste, Mango and Marks & Spencers.

ii. Cash and Carry Wholesale Trading:

19. Reserve Bank of India; Foreign Direct Investment Circular 02 of 2011

20. Association of Traders of Maharashtra v. Union of India [2005 (79) DRJ 426]


The Reserve Bank of India defines and distinguishes Retail form of Trade from Wholesale as “...Cash & Carry Wholesale trading/Wholesale trading, would mean sale of goods/merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. Wholesale trading would include resale, processing and thereafter sale, bulk imports with ex-port/ex-bonded warehouse business sales and B2B e-Commerce”22 Furthermore the wholesale form of business may be distinguished from the retail form of business as the latter being the form of model whereby sale is made to the final consumer. The yardstick to determine whether the sale is wholesale or not would be the type of customers to whom the sale is made and not the size and volume of sales. 23

iii. Strategic Licensing Agreements:

In its most general sense, licensing is a key mode of entry for firms considering international expansion. A licensing agreement gives a foreign company the rights to produce and/or sell another firm's goods in their country. The agreement also may include production and sales in more than one country. The licensee takes the risks and makes the investment in facilities for handling the manufacturing of the goods, as well as managing other supply chain linkages to deliver and even sell the goods to the final consumer. The licensor is normally paid a royalty on each unit produced and sold. Because there is little investment for the licensor, this method is seen as an easier way to become an international or global company.It is a fairly common business model adopted by foreign players to enter the domestic market. The Spanish apparel brand Mango entered India through this route with an agreement with Pyramid, Mumbai; SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd.

5. Opening up of Foreign Direct Investment in Retail

The India market has seen an upsurge of foreign investment in the area of retail over the past decade and a half.Although however the Government of India has kept the retail sector largely closed to outsiders to safeguard the livelihood of nearly 15 million small store owners and only allows 51 per cent foreign investment in single-brand retail with prior Government permission. FDI is also allowed in the wholesale business. Single-brand retailers such as Louis Vuitton, Fendi, LLadro, Nike and Toyota can operate now on their own. Metro is already operating through the cash-and-carry wholesale mode.The policy makers continue to explore areas where FDI can be invited without hurting the interest of local retail community. Government is considering opening up of the retail trading for select sectors such as electronic goods, stationery, sports goods, and building equipment.Foreign direct investment (FDI) in retail space, specialized goods retailing like sports goods, electronics and stationery is also being contemplated. The Government has to walk a

22. Reserve Bank of India; Foreign Direct Investment Circular 02 of 2011

23. Ibid.

tightrope to ensure a `level playing field' for everyone.The policy of permitting 51 per cent FDI in single-brand product retailing has led to the entry of only a few global brands such as Nike (footwear), Louis Vuitton (shoes, travel accessories, watches, ties, textiles ready-to wear), Lladro (porcelain goods), Fendi (luxury products), Damro (knock-down furniture), Argenterie Greggio (silverware, cutlery, traditional home accessories and gift items) and Toyota (retail trading of cars), into retail trading. A 12-billion euro French luxury industry is also eyeing the domestic luxury segment to make a presence through retailing directly.24

In recent developments, the Australian retail giant Woolworth Ltd made in innovative entry in India’s retail space, with India’s Tata group. The Tata group has floated Infiniti Retail Ltd, in venture with which will sell consumer goods and electronics across the country. Infiniti Retail will be a 100 per cent subsidiary of Tata Sons and will receive an initial equity infusion of Rs 4 billion. This Tata retail venture joined hands with Australian retail giant Woolworths Ltd, which currently operates more than 2,000 stores in 12 different formats. While Infiniti will own and run retail operations in India, Woolworths, which has attained notable success in selling electronics and consumer goods through its Dick Smith Electronics chain, will provide technical support and strategic sourcing facilities from its global network.25

6. E-COMMERCE AND MULTI BRAND RETAILING

Now with the advent of E-Commerce (as defined above), much of the retailing business has gone online. One of the largest E-commerce Retailing companies is Amazon.com, which recently entered the Indian E-commerce market through Junglee.com. What is important to note here is that Junglee.com is not a E-tailing company vis-à-vis Flipkart or Myntra. It is merely a portal where different prices of products of different brands is listed, thereby saving much of the Consumers’ time and energy in having to browse from one website of a company to another. “On the Internet, a price comparison service (also known as comparison shopping, shopping comparison, or price engine) allows individuals to see different lists of prices for specific products. Most price comparison services do not sell products themselves, but source prices from retailers from whom users can buy.” One of the prime reasons why a company like Flipkart or Myntra would not be called a Price Comparison Service is that in case of the former, upon selecting a product the consumer would be directed to the manufacturer’s website while the same is not true in case of a company website like Flipkart.The products are not merely on “Display” as is the case of a Price Comparison Service, but can be purchased from the same shop. This is the main point of distinction that makes a company like Flipkart a multi-brand retail e-store, quite like its offline counterparts namely; Westside or Shoppers Stop.However since FDI in Multi Brand Retail is prohibited in India following the rollback of the proposed opening of the same to 51%; it is interesting to note as to how India E-commerce Giants are able to attract foreign Investment.“For example, Flipkart, which does multi-brand retailing of everything from books to


25. Ibid.

mobiles, received $150 million from Accel and Tiger Global Management over three years. Companies such as Snapdeal and Myntra have also received foreign investment.”26

The same can be answered by looking closely at the operations of a company engaged in E-Commerce;“Since the nature of the back-end was not clearly defined, many of these companies attracted funding by creating a wholesale logistics or warehousing arm where 100 per cent FDI could be used. These logistics / warehousing companies would not have a website and they technically became the sourcing arm for the e-commerce business. But that too is a violation of the law because the e-commerce business is sourcing 100 per cent of the products from its trading arm, where only 25 per cent sourcing is allowed”.27

7. FDI IN MULTI BRAND RETAIL - ADVANTAGES

Following opposition, including by its own ally Trinamool Congress, the government had to suspend its decision to open the multi-brand retail sector to foreign investments.The paper said, "Given the international experience, it is argued that FDI in retail would help in reaping benefits of organised supply chains and reduction in wastage in terms of better prices to both farmers and consumers."FDI inflows to India remained sluggish, when global FDI flows to EMEs recovered in 2010-11, despite sound domestic economic performance. Gross equity FDI flows moderated to $20.3 billion in 2010-11 from $27.1 billion a year ago. The study further said as the India integrates more with the global economy and the domestic economic and political conditions permit, there may be a need to re-look at the sectoral caps, especially in the insurance sector. "The demands for raising the present FDI limits of 26 per cent in the insurance sector may be reviewed...," it said.A Bill to raise the FDI cap in insurance sector is pending in Parliament. The RBI paper also said another "important sector" that"may merit a revisit" is the generation, transmission and distribution of electricity produced in atomic power, where FDI is not permitted at present. The recent trends show that the moderation in gross equity FDI flows during 2010-11 has been mainly driven by sectors such as construction, real estate and mining and services such as business and financial services, it said.28

Another major problem with the current Business Model is that there is a large presence of Middlemen in the equation between the farmer and the End retail customer.This tends to lead to impoverishing of the farmers who are actually producing the food product.

26. “Endgame For E-Tail?” Business World Issue Dated 30-04-2012

27. Ibid.

28. Posted on Apr 12, 2012 at 02:16am IST (http://ibnlive.in.com/news/rbi-study-favours-fdi-in-multibrand-retail-atomic-power/247898-3.html)

The introduction of retain the Food Product business will, lead to minimisation of the the middlemen and will lead to alleviation of poverty to a great extent. The current scenario need to drastically change as the rate at which the suicides committed by farmers is growing at an alarming rate and has finally shocked the national conscience.

The Multi Brand Retail Sector is one which is constantly growing. India remains one of the few unsaturated and untapped markets with regard to Retail, especially Multi Brand Retail. The Indian market, of which one of the greatest advantages is its sheer volume of the customer base it has an access to.

A good talent pool, unlimited opportunities, huge markets and availability of quality raw materials at cheaper costs is expected to make India overtake the world's best retail economies by 2042, according to industry players. The retail industry in India, according to experts, will be a major employment generator in the future. Currently, the market share of organised modern retail is just over 4 percent of the total retail industry, thereby leaving a huge untapped opportunity.29

The Potential of the Indian Retail Sector30

The high growth projected in domestic retail demand will be fuelled by:

● The migration of population to higher income segments with increasing per capita incomes● An increase in urbanisation● Changing consumer attitudes especially the increasing use of credit cards● The growth of the population in the 20 to 49 years age band.

There is retail opportunity in most product categories and for all types of formats● Food and Grocery : The largest category; largely unorganised today● Home Improvement and Consumer Durables: Over 20 per cent p.a. CAGR (Compounded

Annual Growth Rate)estimated in the next 10 years● Apparel and Eating Out : 13 per cent p.a. CAGR projected over 10 years ● Opportunities for investment in supply chain infrastructure : Cold chain and logistics India

also has significant potential to emerge as a sourcing base for a wide variety of goods for international retail companies.

Employment:

India has the fastest growing number of young trained professions int the World. Unemployment, unfortunately too is on the rise. This poses a major to the Indian economy . This problem is a difficult one to solve as the Indian Market is saturated one.

The retail industry in India, according to experts, will be a major employment generator in the future. Currently, the market share of organised modern retail is just over 4 percent of the total retail industry, thereby leaving a huge untapped opportunity. The sector is expected to


30. Ibid.

see an investment of over $30 billion within the next 4-5 years,catapulting modern retail in the country to $175-200 billion by 2016, according to Technopak estimates.31

FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.32

Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of ‘big’ money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers.33

Thus, from a clear reading of the above mentioned aspects of FDI in Multi Brand Retail, there does clearly exist a strong case for the introduction of FDI on Multi Brand Retail.

FDI IN MULTI BRAND RETAIL - DISADVANTAGES?

However, FDI agnostics and antagonists alike have brought out and voiced their concern over the “devastating” effects the allowing of 51% FDI in Multi Brand Retail can have over the Indian markets.

The Hon’ble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on ‘Foreign and Domestic Investment in Retail Sector’, laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:● It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. ● Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.

31. Ibid.

32. Nabael Mancheri, India’s FDI policies: Paradigm shift, http://www.eastasiaforum.org/2010/12/24/indias-fdi-policies-paradigm-shift/-

33. Foreign Direct Investment in Retail Sector (Sarthak Sarin, (Nov 23, 2010))

http://www.legalindia.in/foreign-direct-investment-in-retail-sector-others-surmounting-india-napping

● Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.

The same view has also been echoed by the Researchers and Market Analysts, the same may be summarised as follows:● The entry of retail behemoths like Wal-Mart, would decimate the Local Retailers and put millions out of job. This would have a devastating effect on the already mentioned ever growing Unemployment rates, as, the Unorganised Sector provides the maximum amount of employment after the Agriculture Sector. Furthermore, as stated earlier, the unemployed will have nowhere to go as the Manufacturing Sector of India is not at a stage yet that it may absorb such vast volumes of unemployed.● The second fear that is harboured among the Researchers is that the entry of such huge Retail entities will turn the Retail Market into a monopolistic market. It will further enable the retail Giants to conspire and to raise prices and reduce the prices received by the suppliers; which in turn would defeat the basic purpose of FDI in Multi Brand Retail, i.e., prevention of exploitation of the Indian farmers.● Lastly, such a move, would lead to a imbalance of growth in already increasing disparities between the Cities and the Rural areas.Thus, as can be seen, both the Consumers and Suppliers would lose, while the gains procured by the retail chain giants, would continue to sky-rocket.Another point brought up by antagonists of FDI in Multi Brand Retail, has been the fact that the Indian retail sector, particularly organised retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.

FDI in Multi Brand Retailing in India Research Paper

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