Impact Of Fdi In Indian Retail Sector Economics Essay

Retailing Sector in India has a short time ago development and a great avail to the country’s economy nevertheless retailing persists to be the meagre evolved industry sector. The augmentation of organised retailing sector in India has been much tedious as compared to the other countries of the world. It has always been in a small scale over a long period of time. One of the main reasons for this situation is that retailing in India is one of the very few sectors where FDI is not conceded. There has been turbulence throughout the country by trading associations and stake holders against approval of allowing the FDI in retailing. Between, the foreign investors get allured to the spreading market and India has been rendered as a ponderous investment depot for the global retailing chains.

Due to sporadic changes in globalisation, privatisation and liberalisation marketing there was a rapid change in retailing sector. Indian retail sector has been hailed as one of the sunrise sectors in the Indian economy. Some of the reasons for this are the global emergence, (why foreign retailers are interested to enter into the Indian retail market) and also for allowing 51% FDI in the single brand retail. And also, the impact of inward foreign direct investment on the domestic innovation, economic development and the benefits of technology transfer give us the relevant information to what extent FDI in retailing sector in India have changed the growth of the Indian economy.

CHAPTER – II

LITERATURE REVIEW:

The ratio of powerful sect-oral productivity and improved international responses in India are unremittingly drawing the attention of the global investors in India. In spite of the recession in the world economy, India is recognised as a third slot of global investment destinations. According to UNCTAD, “India will retain its slot in the next two years”. The major factors that are being characterized to the recommencement in foreign direct investment (FDI) require growing client assurance in the market.

Foreign Direct Investment in Indian retailing sector is constantly under the control of the government. According to Mr Kishore Biyani, “Retail is a long-haul game”. He says that “Both supply and demand will have to go hand in hand. Also investments into the sector will have a positive bearing on creating the infrastructure needed for conducting the retail business”. And also he stated that, “Government should have given access to foreign companies to enter into retail sectored of Indian market long back”. There is an added advantage to the Indian economy with the foreign investment because they can make use of the sources from India which gives rise to the Indian economy.

There was a strong belief among policy makers that single brand retail in India is doing well. In 2006, Indian government made a retail policy which allows up to 51% FDI through the single-brand retail. Since then, in a span of 2 years period the share of total FDI inflow in retail sector has increased from 0 – 0.2 per cent. In Feb 2010, the cumulative FDI in single brand retail stood at US $190 million. Now Indian government allows 51% of FDI in single brand retail and 100% in wholesale cash and carry trade.

Mr Rajan Bharti Mittal said that, “If the policy process is strategically done, it can create a synergic relationship between the small retailer and the larger retail chains. India can develop its own model based on its own realities towards modernisation of this sector in a calibrated manner”. India’s retail industry is mostly occupied by the unorganised retailers about 97% of the retailers are corner stores whereas organised retailing is increasing its pace in the recent days.

Because of India’s attractive GDP (Gross Domestic Product) growth rate and superior market performance are likely to attract growing organised retailers and FDI inflows. India is ranked as one of the world’s top 3-5 preferred investment destinations in recent global surveys. Despite the crisis, a number of leading global investors like Wal-Mart, LG, and a number of IT companies have announced large scale investments in various sector.

The literature survey says that, with the arrival of the foreign investors which have superior technology to that of the host country (domestically owned firms) causes damage to at least few domestic firms. So, one might look that the outcome increases if the foreign owned firms and domestically owned firms together makes profits. To consider the overall impact of inward FDI, both the existing firms and newly entering firms should be taken into consideration.

International retailers like Wal-Mart and Carrefour showing their keen interest to enter into Indian retail market and many more foreign retailers constantly showing their interest to invest and at the same time to generate profits. With the entry of international retailers there would be significant effect on the domestic innovation, investment and country’s economy.

CHAPTER – III

IMPACT OF FDI IN RETAIL SECTOR IN INDIA:

India has powerfully and most rapidly risen to become one of the leading global economies in the world. Currently it is being considered as the most attractive retail market in the world. According to A. T. Kearney’s Global Retail Index 2006, “India was ranked as the most attractive and the World’s No. 1country for inward FDI, for two consecutive years”. The boom for this sector had been recognised worldwide and the unexploited form in this sector is being considered by various retail giants from across the globe. This sector has been fragmented into 2 sub sectors: organised and unorganised. About 97 per cent (shown in Figure: 1 below) of the retailing sector was occupied by unorganised retailers leaving a small space to organised retailers. The organised retailing is at a growth stage and there were several attempts to increase its proportion to 10% by 2010 which can bring good response from global players. Employment in retailing sector stands at 2nd place that comes after agriculture and it contributes more than 10 per cent to Indian GDP.

Figure: 1

Source: Ernst & Young, The Great Indian Retail Story, 2006

The statistics show that retail sector in India is growing at a rate of 30% per annum and it is worth of $394 billion. ICRIER (Indian Council for Research on International Economic Relations) has found that retailing sector contributes about 10% to the Indian GDP and employs about 7%.

The government of India gave enough scope for foreign investment in retailing sector, with the intention of boosting rural employment and at the same time it strengthen the supply chain of organised retailing sector. For example the government diversion would help retailers to take big steps. The DIPP conducted a survey on opening up the retail sector to get the views from the stakeholders. Regarding this it submitted a 21-page document stating that by doing so, there is possibility of generating enough cash to fund investments for organised retailers.

DIPP has stated that, “There is a case for opening up of retail sectors to foreign investment. At the same time, there is a view that this may be more appropriately done in a calibrated manner”.

Different sections of retailers said investment improvement will play a key role in opening of the sector, which will provide employment and also help in constructing a strong supply chain network. Since 2007, FDI has showed steady rise in the single brand retailing sector. But during the period of recession across the world FDI has experienced instability.

Retail Consumption by Categories:

Source: Images Retail

Indian retail is mostly dominated by food & groceries sector which contributes more than 65 per cent of Rs. 9.3t retail market, almost 99 per cent of this is dominated by kirana (general) stores.

Life Cycle of Indian Retail market from Inception stage to Growth stage:

Source: Images Retail

With a growing middle class, rising consumption levels and low penetration of organized retailers, India offers immense opportunities.

Organised retail sector in India:

Source: KSA Technopak

As discussed earlier, the share of organised retail in total retail pie is set to increase from about 3 per cent to 8-10 per cent by 2010.

The organised retail sector in India has been considered as the difficult task when compared with the other countries of the world. Since long time this sector has been unexplored; one of the main reasons for this is due to the restrictions on inward FDI. There has been turbulence throughout the country by trading associations and stake holders against approval of allowing the FDI in retailing. Between, the foreign investors get allured to the spreading market and India has been rendered as a ponderous investment depot for the global retailing chains. Due to sporadic changes in globalisation, privatisation and liberalisation marketing there was a rapid change in retailing sector. The reasons for these rapid changes are global emergence, government relating policies and entry routes of Indian retailing sector are the key features.

REASONS:

Reasons which made global retailers to enter India, they are:

Suitable Geographical Conditions

Versatile Demographics

Vast Growing Economy

The Emerging Revolution

Opportunities Unexplored

SUITABLE GEOGRAPHICAL CONDITIONS:

India enjoys unique geographical advantage. Most of its trade is carried out through sea; about 90% of the international trade by volume and 77% by value are carried by sea. It is strategically situated at south of Asia from where it has the advantage of accessing to all leading markets across the world. It comprises of about 32, 87,590 Sq. Km in area, about 7000 Kilometre of coastline and it shares the border with six of the countries (like China, Pakistan, Bangladesh, Nepal Burma and Bhutan) so it is considered as a most promising destination for the Foreign Direct Investment.

VERSATILE DEMOGRAPHICS:

India occupies about 2.5% of the world’s land area and it is world’s second most populous country, with population of more than one billion which is about 1/6th of the world’s population. India is a land of all seasons with diverse culture. India comprises of many religions such as Hinduism, Buddhism, Sikhism, Jainism, Christianity and Islam. This shows India as a diverse culture. On the other hand, India has versatile population of metropolitan and rural living standards, which makes India a readymade source of market for international retailers.

VAST GROWING ECONOMY:

Due to the phenomenal economic growth in recent years, India is considered as one of the fastest growing economies in the world. India is the largest democratic country, which has an established government with robust programme of economic reforms. The economic growth of India is ranging over several years. By the year 2050, India will be the world’s 3rd largest economy in terms of the GDP (See Table – 1 in Appendix below). India has more than US $120 billion foreign exchange in reserve, Foreign Direct Investment of more than $9.9 billion (US), about 7.5% growth in GDP per annum and also rapidly growing investment in country’s infrastructure.

THE EMERGING REVOLUTION:

Retailing in India is the largest private sector and the employment in this sector stands at the second position that comes after agriculture. It contributes about 10% to the Gross Domestic Product (GDP) of India. Compared to the world retail market India has the highest retail stores, about 12 million stores. Due to this reason most of the prominent international retailers are showing their interest to enter into Indian retail market. From past 10 years there was a significant development from an unorganised family owned retail formats to organised retailing. Growth in GDP, rise in per capita income and increase in buying power has given enough scope for global investors to enter into Indian retail market with large business and business enterprise industrialist in investing in retail infrastructure.

Some of the facts which can used to judge the importance of retail sector in India are:

Retailing is the largest private sector and also big contributor to Indian GDP

This sector provides 15 per cent employment

Among other countries, India has world largest retail network

The entire market size of this sector in India is $180 billion (US Dollar)

The present share of organised retailing is about 5percent which is approximately $3.7 trillion

Growth of organised retail sector is about 28 per cent/annum

OPPORTUNITIES UNEXPLORED:

India has sometimes been called as “Nation of Shopkeepers”. Retail sector in India is highly fragmented, there are more than 12 million retail outlets and most of these are in unorganised sector. Compared to China the presence of international retailers in India is very less (See Table – 2 in Appendix below).

These reasons constitute the present facts to foreign retailers that there are vast industries with no large players; recently some Indian retailers have entered like Reliance, Trend. Shift towards FDI will provide multiple opportunities for companies and investors. To put in a nutshell, improved living standards, growth in economy, friendly business environment and the customer’s interest in quality and branded products attracts global retailers to enter into Indian market.

Before 24th Jan, 2006 FDI was not allowed in retailing in India. The policies and entry routes for foreign retailers to enter into the Indian market which provides the necessary information regarding how to perform their operations and the scope they have. Then later on Indian government made a retail policy which allows up to 51% FDI through the single-brand retail. This means that foreign retailers are allowed to sell goods sold international under a single brand for example: Sony, Adidas, and Nike etc.

Reasons for allowing FDI in single brand retail:

More access of goods to Indian consumers

Increased Investments

To ensure improved competitiveness of Indian firms

Augmented sourcing of Indian goods

Some of the important aspects of FDI in single brand products:

There should be approval from the Indian government prior to their investment in single brand retail

51% of foreign direct investment is allowed if and only if the product belongs to a single brand.

All products should be branded at the time of manufacturing

The company products should be approved by Secretariat for Industrial Assistance (SIA)

For all the new products require fresh approval

CHAPTER – IV

EFFECTS OF INWARD FDI ON DOMESTIC INNOVATION, ECONOMY AND INVESTMENT, TECHNOLOGY TRANSFER:

Inward FDI for an economy can be defined as “investing money in one country i.e., host country from a foreign direct investor residing in another country, to that economy which makes international dealings for their operations with the respective host country”. For example, Nike operates its business in India, for this they need some capital. This capital is inward FDI for India. There are different factors which encourage inward FDI; they are subsidies, loans, grants, tax breaks and the elimination of rules and regulations.

With the allowance of inward FDI there are many possible effects on the host country. Generally it is assumed that the technology used by the investing firms is superior to that of the host country. But there would be some other benefits to the host country like higher quality, lower prices in production of goods and service which in turn results in better consumer welfare.

The effect of inward foreign direct investment on the domestic innovation of the host country will have enormous changes like adaptation of R & D research, usage of modern technologies and improvements in the product quality and services. Improvements in the supply chain management of the retailing sector in organised as well as unorganised retailing.

ECONOMIC DEVELOPMENT:

Over the years, foreign direct investment has helped and showed its significant effect in the growth of a countries economy where the investment is being made but this is especially applicable for the economically developing countries.

For most of the countries in early 1990s, Foreign Direct Investment is considered as one of the major source of external finance which will help in the growth of the economic perspective and also it helps in the improvement of the infrastructural condition of a country as well as there is ample scope in the development of the technology. As a result of this foreign direct investment, the living standard of the general public of the host country will improve in a significant manner and also the health sector of the domestic country will experience its benefits. From this, we can say that foreign direct investment plays a crucial role in the overall economic and social development of a country.

Indian retail sector is one of the largest sectors and is being considered as the most profitable sector, which contributes about 10 per cent to the GDP and about 9 per cent of the employment. It has emerged as a dynamic and rapid growing sector as the global retailers showing their interest to enter into the market. With this significant effect the growth of the Indian economy has increased to a great extent, by this the format of retailing sector is now changing in terms of system and consumer purchasing behaviour.

According to A. T. Kearney, India was ranked as the most attractive destination for FDI. This is because the share of organised retailing is very low; it is just 4 per cent of the entire retail sector. The absence of this organised sector gave enough scope for the international retailers a golden opportunity to enter into the organised retail stores. A report by investment banker Goldman Sachs says that, India has the potential to deliver fastest growth with an average rate of more than 5% per year over the next 50 years. In the next five years, the growth of organized retailing sector will be more than the GDP growth. With this current growth rate this sector will be the 5th largest consumer market by 2025. The ASSOCHAM, has expressed its opinion in favour of further expansion of retail sector where foreign direct investment is allowed in a calibrated manner. According to estimation of industries, by 2015 both the organised and unorganised retail markets will grow to $637(USD) billion. This sector is experiencing very rapid growing around 40% a year, according to the data provided by the India Retail Report 2007. Thus, all these factors (despite all the hurdles) have encouraged the giant retailers from the worldwide to enter into the Indian retail market.

Most of the retailers from worldwide are showing their extreme interest to invest in Indian retail market; some of them are planning to enter in joint ventures in association with Indian marketers. The international retailer like Wal-Mart has showed their interest to invest in Indian retail sector. In the recent time, Wal-Mart the top retailer in the world has wished to establish its operations in India in joint venture with Bharti Enterprise and signed a 50-50 joint venture agreement for cash and carry business which has been waiting for government response with the name called as “Bharti Wal-Mart Private Limited”. In its initial attempt Wal-Mart has announced that, it is going to come up with its first store, which sells all the basic needs like fruits, vegetables, groceries and consumer appliances to retailers and small businesses. The world’s 2nd largest retailer Carrefour has also decided to reinvest in India in the joint venture with an Indian local retailer business. Walton Street Capital a US based property fund and Plaza Centres are interested to make investments in Indian retail sector.

One of the UK’s largest clothing retailer Marks and Spencer, is planning to make their mark in India as a joint venture with 51:49 ratio in intention to serve all kinds of food, clothing and home appliances. LVMH, one of the world’s largest luxury goods company based in France, Lladro Commercial of Spain the world’s leading retailer that produces many high quality porcelain figures, the French perfume and accessories’ company are also preparing to start their joint ventures in India.

TECHNOLOGY TRANSFER:

Foreign Direct Investment provides access to new technologies, and also transfers of technologies from one country to another. At times, FDI could be provided in the form of technology. This technology transfer provides access to new markets and marketing environment with products, manpower, and finance and management skills which provide a strong movement to the country’s economic development. All this is possible with the provision of capital inputs. The money that comes from a foreign country as foreign direct investment to the host country can be utilised to buy or import technologies. From this, we can say that foreign direct investment plays an important role in the context of economic development.

For any giant retail formats like India technology can be treated as lifeline in managing the basic functions of the store. It links between various operations performed by a retailing organisation in an integrated structure and it also helps in the information flow across the organisation. In today’s market various retail enterprise resource planning (ERP) systems are available which enables the retailers to perform their operations in a very convenient manner and at the same time to replace the in-house standalone systems for functions like point of sale, merchandising, and the management of supply chains and customer relations.

CHAPTER – V

FURTHER ADVANCEMENTS:

In recent times, Indian retailing sector is booming in a very extravagant manner. This sector has moved into second phase with the presence of existing players experimenting with different formats. The growth of organised retailing sector is playing a crucial role in the growth of Indian economy. The growth of this organised sector depends on “how and when” the large domestic business players enter in organised format, the change in rural marketing, the infrastructure development and allowing this sector fully to FDI. The other important growth factors are transfer and developments of technology and at the same time their adoption by the domestic players in order to improve their efficiencies so that they can meet the global standards like m-commerce, cash management systems and the type of technology used by both retailer’s back end and in the hands of the customer.

CONCLUSION:

I conclude with the FDI expansion in India has made a dramatic change to the country’s GDP and globally as well. Since for the country FDI results in the collaboration of technology, work culture, business strategies. It also enhance countries per capita income, increasing employment rate, most importantly strengthen the relationship between two countries by crossing the boundaries’, FDI not only results in the development on sector of the country but many other sectors as they are inter related and dependent on each other.

APPENDICES:

Foreign Direct Investment (FDI) plays a vital role in global business, which in turn gives rise to multinational corporations. FDI’s require a business relationship between two countries i.e., relationship between an owned company and its foreign subsidiary. It provides access to new technologies, new markets and marketing environment with products, manpower, and finance and management skills which provide a strong movement to economic development.

DEFINITION OF FDI:

In a simple way Foreign Direct Investment can be defined as “a company from one country making a physical investment into building a factory in another country”.

BASIC CRITERIA:

An investment to be regarded as an FDI, the investing firm i.e., the parent firm should hold at least 10% of the ordinary shares of its foreign subsidiary. It may also be treated as FDI if the parent firm itself holds the voting power in the home country even though it operates in foreign.

TYPES OF FDI:

Based on the types of restrictions imposed and the various prerequisites required for these investments, FDI are broadly classified into two types:

Outward-bound FDI

Inward-bound FDI

An outward FDI provide risk coverage and also subsidies to the domestic industries which is backed by the government against all types of associated risks. Inward FDI for an economy can be defined as “investing money in one country i.e., host country from a foreign direct investor residing in another country, to that economy which makes international dealings for their operations with the respective host country”. There are different factors which encourage inward FDI; they are subsidies, loans, grants, tax breaks and the elimination of rules and regulations.

USAGE:

The main usage of FDI is to strengthen the pre-existing market structure and to explore the opportunities of the new markets, which is called as the “market seeking FDIs”.

“Resource seeking FDIs” are mainly referred for production units i.e., factors of production. These factors of production are more efficient than the factors or resources that are available in the home country.

The other usage of FDI is “efficiency seeking FDI”, which is used to optimization of available opportunities and economies of scale.

TABLE – 1

Source: Mckinsey Quarterly Nov.04

TABLE – 2

Source: Mckinsey Quarterly Nov.04

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