FDI in Indian Retail Industry: Prospects and Problems

* V. Rana Pratap

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ABSTRACT

The Indian retail industry, valued at about $300 billion is India’s largest industry, accounting for
over 10 percent of the country’s GDP and around 8% of employment and is expected to reach
$637 billion in 2015. The organized retailing sector in India is only 3% and is expected to rise to
25- 30% by the year 2012. It has emerged as one of the most dynamic industries with several
players entering the market. But at the same time requirement of heavy investment, long
gestation period, lack of proper SCM systems are the problems facing the retail industry.
However, the future is promising; the market is growing, government policies are becoming
more favorable for growth. Further upsurge is anticipated in the retail sector as the Government
of India has opened up 51% FDI in single brand retail outlets. FDI can have some positive results
on the economy, triggering a series of reactions that in the long run can lead to greater efficiency
and improvement of living standards, apart from greater integration into the global economy. But
the most important factor against FDI driven “modern retailing” is that it is displacing labor to
the extent that it can only expand by destroying the traditional retail sector. In view of the above
factors, this paper tries to analyze the impact and future implications of FDI in Indian retailing
sector. It also tries to examine the advantages and disadvantages of allowing FDI in retail sector
with special reference to some foreign companies.

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* V. Rana Pratap, Lecturer, Department of Business Management, Lal Bahadur College P.G. Centre, Warangal. E-
mail: vrp_mba@yahoo.co.in

FDI in Indian Retail Industry: Prospects and Problems

Introduction

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The Indian retail market, which is the fifth largest retail destination globally, was ranked 2nd

after Vietnam as the most attractive emerging market destination for investment in the retail

sector, by AT Kearney's seventh annual Global Retail Development Index (GRDI), in 2008.

According to a study by ASSOCHAM, Indian retail will touch US$ 365 billion in 2008, against

US$ 300 billion in 2007. With a year-on-year growth of 30–35 per cent, the sector is likely to

touch US$ 440 billion by 2010. By 2015, the retail sector is projected to overtake the US$ 650

billion mark, and organized retail will cross the US$ 130 billion mark. The study also estimated

that the organized retail segment would see an investment of US$ 25 billion–28 billion in 2008,

which would touch US$ 70 billion by 2010. The organized segment will account for 25 per cent

of the total sales by 2011.

India has one of the largest numbers of retail outlets in the world. Of the 12 million retail outlets

present in the country, nearly five million sell food and related products. Thought the market has

been dominated by unorganized players, the entry of domestic and international organized

players is set to change the scenario. Mall space, from a meagre one million square feet in 2002,

is expected to touch an estimated 60 million square feet by end 2008, says Jones Lang LaSalle's

third annual Retailer Sentiment Survey-Asia. A report by Images Retail estimates the number of

operational malls to grow more than two-fold, to cross 412, with 205 million square feet by

2010, and a further 715 malls to be added by 2015, with major retail developments even in tier-II

and tier-III cities in India.

Modern/Organized retailing is growing at an aggressive pace in urban India, fuelled by

bourgeoning economic activity. Organized retail revenues are expected to increase from an

estimated US$ 12.9 billion per annum in 2005-06 to more than US$ 43 billion by 2009-10. The

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sector is predicted to grow by 400 per cent, in value terms, by 2007-08. A large number of

domestic and international players are setting up base and expanding their business with newer

organized retail formats and intense competition driving innovation in formats. Supermarkets,

hypermarkets and the entry of major players like Reliance Fresh (promoted by Reliance Retail

Ltd). This segment is poised to gain traction, with several new players planning their entry and

the existing players expanding their business in this segment at a rapid pace.

Objectives of the Study

The following are the specific objectives of this paper relevant to the current market.

 To study the future out look of the Indian retail industry.

 To examine the policies of Indian government towards FDI in retail industry

 To critically evaluate the challenges facing FDI in Indian retail industry.

 To assess the benefits associated with infusion of FDI in Indian retail market

Future Outlook of Indian Retail Industry

Retail sector revenues is pegged to reach US$ 460.6 billion by 2010-11, with the organized retail

sector projected to grow to US$ 43.8 billion in the said year. It is envisaged that modern retail

will adapt and absorb some of the traditional formats in the course of its expansion. Unorganized

retail formats are expected to converge and combine in formats such as mushrooming village

malls and rural retailing ventures. Against the backdrop of an accelerating modern retail

revolution, India offers to be an attractive destination for global corporations and leading

retailers seeking emerging markets overseas. India presents a significant market, with its young

population just beginning to embrace significant lifestyle changes.

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Policy and Regulatory Environment: The Government is progressively undertaking reforms

and liberalizing the retail sector; thereby attracting significant foreign investments. The

regulatory and supervisory policies are being reshaped and reoriented to meet the new challenges

and opportunities in this sector. To facilitate easier flow of Foreign Direct Investments (“FDI”)

inflow, instead of having to seek Foreign Investment Promotion Board (“FIPB”) approval, FDI

up to 100 per cent is allowed under the automatic route for cash and carry wholesale trading and

export trading. FDI up to 51 per cent is allowed, with prior Government approval for retail trade

in ‘Single Brand’ products with the objective of attracting investment, technology and global

best practices and catering to the demand for such branded goods in India. This implies that

foreign companies can now sell goods sold globally under a single brand, such as in the case of

Reebok, Nokia and Adidas. However, retailing of multiple brands, even if the goods are

produced by the same manufacturer, is presently not allowed. Relaxation of FDI restrictions are

being vigorously pursued by the business and trade coalitions and are expected to fall in place

over the next 3-5 years. The most common channels for entry of foreign retailers are the

strategic license agreements, franchising, distribution, manufacturing, joint ventures and cash

and carry wholesale trading.

Challenges Facing FDI in Indian Retail Industry

The challenges facing larger FDI in Indian retail industry are in spite of the fact that more than

100 of Fortune 500 companies are already investing in India. These FDIs are already generating

employment opportunities, income, technology transfer and economic stability. India is focusing

on maximizing political and social stability along with a regulatory environment. In spite of the

obvious advantages of FDIs, there are quite a few challenges facing larger FDIs in India, such as;

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Resource Challenge

India is known to have huge amounts of resources. There is manpower and significant

availability of fixed and working capital. At the same time, there are some underexploited or

unexploited resources. The resources are well available in the rural as well as the urban areas.

The focus is to increase infrastructure 10 years down the line, for which the requirement will be

an amount of about US$ 150 billion. This is the first step to overcome challenges facing larger

FDI.

Equity Challenge

India is definitely developing in a much faster pace now than before but in spite of that it can be

identified that developments have taken place unevenly. This means that while the more urban

areas have been tapped, the poorer sections are inadequately exploited. To get the complete

picture of growth, it is essential to make sure that the rural section has more or less the same

amount of development as the urbanized ones. Thus, fostering social equality and at the same

time, a balanced economic growth.

Political Challenge

The support of the political structure has to be there towards the investing countries abroad. This

can be worked out when foreign investors put forward their persuasion for increasing FDI capital

in various sectors like banking, and insurance. So, there has to be a common ground between the

Parliament and the foreign countries investing in India. This would increase the reforms in the

FDI area of the country.

Federal Challenge

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Very important among the major challenges facing FDI in retail, is the need to speed up the

implementation of policies, rules, and regulations. The vital part is to keep the implementation of

policies in all the states of India at par. Thus, asking for equal speed in policy implementation

among the states in India is important.

Benefits of FDI in Retail Sector

Proponents of FDI in retail believe that only foreign investment can hasten the pace of organized

retailing. Their case in point: China. In just ten years after China permitted FDI in the sector, the

share of organized retail has grown from 10 per cent to 20 per cent. The benefits of FDI can be

tangibly felt in the domains pertaining to technological advancements, generation of export,

production improvements, and hastening of manufacturing employment. Capital inflow into

India has increased and so have the exports from the country. Thanks to the economic boom

India is experiencing, some Indian companies are doing better. The benefits of FDI have been

briefly elaborated below:

Improved Human Capital

Indian industries are predominantly labor based but there is also a significant number of capital

based companies. A capital intensive set up is indeed an expensive proposition but with the

existing as well as potential labor intensive industries, India can look forward to more

professional and sophisticated number of workers and employees at every level. Human capital,

in terms of quantity was never a big problem in India, thanks to its huge population and quality

and efficiency in work has been ushered in by the MNCs.

Launching and Marketing of New Products and Brands in the Indian market

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New products are used by the multinational corporations and then demonstrated in the Indian

market. The processes followed by MNCs in India serve to have a demonstration effect on

Indian companies which in turn improves market competition and the standard of products. This

had started in the 1980s due to Japanese firms and as a result, Indian firms started inculcating

the practices of QC, JIT, and QA.

After farming, retailing is India's major occupation. It employs 40 million people. A sizeable

majority of owner/employees are in the business because of lack of other opportunities. The

decade of liberalization has so far been one of jobless growth. It is no wonder that retail has

become the refuge of these millions. Lopsided economic development is transforming India from

an agrarian economy directly to a service oriented post-industrial society. In the Indian

perspective, any policy that creates jobs is good policy. Any industry, Indian- or foreign-owned,

that generates employment is welcome. The question over foreign direct investment (FDI) in

retail is not as much about ownership as about jobs. The benefits from greater exports would be

particularly high in the farm sector. Right now, there is a tremendous amount of wastage and

value loss of agricultural products due to lack of storage, refrigeration, transportation and

processing facilities. As a result, farmers' price realization remains low while the consumers in

the cities end up paying a high price. To the extent the large retailers establish a direct linkage

with the farmers by cutting out many layers of middlemen, develop the processing facilities and

export the products to meet their global requirements, farmers would get better prices and bigger

markets while the consumers would benefit in terms of lower prices, better quality and greater

variety. The resultant rural prosperity may open up markets for other industrial goods and help a

more balanced regional development as

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Manufacturing Employment

Larger FDI definitely generate more and more employment opportunities. The opportunities are

highly experienced in the manufacturing area. This not only includes the quality human resource

but also provides for quick and efficient work and effective outcomes.

New Technology

Technological advancements take place as larger FDIs come in. In fact, three-fifths of the FDIs

result in new and advanced technologies. The local industry is benefiting from this to a large

extent. This as a result, would encourage more and more foreign firms for investment.

Social Impact

The social impact of FDI is dependent on India's policies and institutions. The flexibility of the

labor market would determine employment opportunities. The extents to which the lower income

groups can take advantage of the growth policies determine the growth-poverty relationship.

Foreign Direct Investments foster relations, co-operation, and harmony between India and

foreign countries. The social impact of larger FDI includes the product market as well because

many new products come into the market as a consequence of FDIs. As a result, the people of

India enjoy unprecedented exposure to branded and quality goods. In fact, various training

methods, personality grooming, and soft skills are given by multinational corporations which

impart value to human resources.

The increase in Foreign Direct Investments resulted in the Government of India making critical

reforms in 1991 and since then, the emphasis on Indian industry has been constantly on the rise.

The political impact of larger FDI is influencing the government to initialize and support

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concepts like liberalization. The political climate is focusing on liberalization of banking,

telecom, infrastructure, and insurance sectors. The political scenario is changing gradually, and is

accepting the concept of Foreign Direct Investment widely within the country. The government

is looking forward to working on the rural areas and bringing about equality in terms of

investment and wealth distribution with the urban areas.

Conclusion

Favorable demographics, combined with increasing disposable incomes, are progressively

changing the face of Indian consumerism. With the economy opening new vistas of employment

and with employers offering attractive compensation packages and perks, the pool of Indian

skilled professionals are boasting of higher disposable incomes. From frugal spending to frenzied

shopping, India’s swelling middle class is redefining lifestyle patterns with adoption of western

values and growing brand consciousness. The average household disposable income has doubled

since 1985, with analysts predicting a similar trend for the next two decades. The thriving

services sector growth has handed young India a bulging wallet and a penchant for luxury

products. The new found freedom to shop at plush malls and stores for expensive gadgets like

mobile phones and laptops has fuelled the growth of organized retail in India. The Indian

consumer is gradually moving from the local “kirana” shopping to “Mall Hopping”. With a

number of domestic and international brands available in stores in metros and smaller cities and

with a wide range of product offerings from food and grocery to furniture and fixtures, the Indian

consumer is fast embracing modern retail.

It must be well understood that MNCs are primarily coming for business and not to provide jobs.

And how much these quality-conscious MNCs will source from small entrepreneurs is open to

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question. This may, at best, partially activate the supply chains. The wide variety of cheap

products the shopping malls will sell, thanks to their economies of scale, may sound the death-

knell for of local producers. So the Government must exercise utmost caution in allowing FDI

into the unorganized sector, as the livelihood of millions of people may hang in the balance

References

http://www.blonnet.com/2005/11/09/stories/2005110900931000.htm

http://www.blonnet.com/catalyst/2005/08/04/stories/2005080400170100.htm

www.rediff.com/money/2005/jul/22spec1.htm

www.indianground.com/retail/retail-sector-in-india.aspx

www.indiaonestop.com/retailing.htm

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