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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
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.
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.
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.
ACKNOWLEDGEMENT
Its human bound duty to acknowledge all those personalities who contribute their effort and guide us in right direction.
immensely for
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.
TABLE OF CONTENTS
Chapter 1 Introduction.............................................6-15 1.1 Problem Definition................................................6-7 1.2 Research Objectives.............................................8-10 1.3 Research Methodology........................................10-12 1.4 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 4.2 4.3 4.4 FDI in Single-Brand Retail..........................29 FDI in Multi-Brand Retail...........................30 Challenges of Retailing in India..................31-33 Role of FIPB and FIIA.................................34-37
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Chapter 5 Impact of FDI in Retail various Stakeholders.38-45 5.1 5.2 5.3 5.4 Impact Impact Impact Impact on on on on Agriculture Community...38-39 Consumers.......................40-41 SME................................42-43 Employment....................44 -45
Chapter 6 FDI in Retail Inflows to India...................46-56 6.1 6.2 6.3 6.4 Trends and patterns of FDI in Retail Inflows to India..46-47 SWOT Analysis for Opening up FDI in Retail60 -63 FDI in Retail and Economic Growth...............51-53 Role of FDI in Retail on Economic growth...54 -56
Chapter 7 Findings and Suggestions.................57-65 7.1 7.2 7.3 7.4 Findings....................................................57 -58 Recommendations......................................58 -59 Conclusion................................................60 -61 Bibliography........................................ ......62-63
LIST OF TABLES Table No. 3.1 3.2 5.1 5.2 Title Page No. 35 38 51
Share of Top Investing Countries FDI Equity Inflows Sectors Specific Limits of Foreign Investment in India Current Status of Warehousing Capacity in India
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. 3.1 3.2 6.1 Title Page No.
Size of Indian Retail 31 Segment contribution to Retail sector 34 FDI inflows in Retail Trading (single brand) 61
Chapter 1
INTRODUCTION
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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
13
Chapter 2
LITERATURE REVIEW
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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 India2012[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 Perceptions2008
[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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Indias 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 Indias 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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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]
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.
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.
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
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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. Indias 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. Indias 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. Indias 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 Singlebrand 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].
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.
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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.
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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.
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. Pantaloons Central Mall.
c) Outlet mall: Shopping centre with national brand-name retailers selling discounted merchandise. Eg. Huma Mall.
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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.
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.
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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. Nilgiris-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
USD $ bn
1200 1000 800 600 400 200 0 2006-07 2011-12 2016-17(E)
USD $ bn
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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. 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.
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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] 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 )
1 2 3 Mauritius Singapore U.K Japan USA Netherland Cyprus Germany France UAE Total FDI Inflows * *Includes Inflows under NRI schemes of RBI.
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% of Total Inflows
328729 85841 77933 66465 49943 38265 31524 23403 15907 10962 861231
38 10 9 7 6 4.5 4 3 2 1
4
5 6 7 8 9 10
Source: Department of Industry Policy and Promotion, Ministry of Commerce and Industry. 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
A) Agriculture: 1)Floriculture, Horticulture, Animal Husbandry, Pisciculture,Cultivation of Vegetables, etc 2)Tea sector including Plantation B) Industry: 1)Mining covering Exploration and mining of diamonds, gold and silver 2)Coal , iron and steel and cement production C) Manufacturing: 1)Alcohol-Distillation and Brewing 2)Coffee & rubber 100% Automatic 100 % Automatic 100 % Automatic 100 % Automatic 100 % FIPB 100 % Automatic
Entry Route
Other Conditions
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processing & warehousing 3)Defence Production 4)Industrial explosivesManufactureD) Services: 1)Asset Reconstruction Companies 2)Banking pvt sector 74%(FDI +FII) FII not to exceed 49% 3)NBFC 100 % Automatic Statutory capitalisation norms E) Commodity Exchanges F) Insurance 26 % Automatic Clearance from IRDA G) Petroleum and natural gas Refining H) Print Media 26 % FIPB 49 %(Psu) 100%(Pvt) FIPB (for Psu). Automatic(Pvt) 49% FIPB Automatic 49% FIPB 26% 100 FIPB Automatic
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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 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.
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Chapter 4
36
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The brands that are coming to a India due to 100 % FDI in Single Brand are [24]: IKEA Brooks Brothers Pavers England Damiani GAP Prada (Swedish Furniture brand) (Americas Clothing retailer) (UK Footwear chain) (Italian Jewellery brand) ( US Clothing brand) (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 SMEs, 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.
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domestic retailers. The government has made it mandatory for foreign multi-brand retailers to 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.
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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 countrys 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.
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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 dont 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.
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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.
d) To undertake investment promotion activities including establishment of contact with and inviting selected international companies to invest in India in the appropriate projects. e) To interact with the Industry Association/Bodies and other concerned government and nongovernment 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.
c) The CCFI would also consider the proposals which may be referred to it or which have been rejected by the Industry Minister. d) The approval letters in all cases will be issued by the Secretariat of FIPB.
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Twelfth Five Year Plan period for storage of all major crops. Thus there exists a huge demand supply mismatch
[ 3 2]
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.
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.
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
[ 3 3]
Sharad Joshi, founder of Shetkari Sanathana (farmers 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 Ass ociation (CIFA) announced its support for FDI in retail. Chengal Reddy, secretary general of CIFA claimed that FDI will help reduce farmers exploitation by providing them better prices for their produce
[ 3 3]
.
49
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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 b ecause those goods are available in India. It will also increase the bargaining power of Indian consumer s. FDI in retail will improve the standard of living of Indian consumers .
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
Micro enterprises Small enterprises Medium enterprises
INR
Up to 25 lakhs Above 25 lakhs & up to 5 crores Above 5 crores & up to 10 crores
Table 5.3 Definition of Micro, Small and Medium Enterprises (Service) Service Enterprise based on Description
Micro enterprises Small enterprises Medium enterprises
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]:
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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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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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Analysis 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.
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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.
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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. The volume of sales in Indian retailing is also very low.
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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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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 1990s. 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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Year 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011
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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"Over the medium- to long-term, the retail sector, real estate industry and the end-consumers will 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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1) Nag, Ashoke. Montek Singh Ahluwalia backs FDI in Retail. Economic Times 09 June.2012 : 7 . Print 2) Balyan , Dr R.K. FDI in Indian Retail Beneficial or Detrimental. 2009 3) Guruswamy, Mohan and Sharma, Kamal. FDI in Retail-II inviting more trouble.2006 4) Bisaria,Dr Gaurav, FDI in Retail in India. 2012 5) K.L,Chandu The new FDI policy in retail in India : Promises, Problems and Perceptions. 2008 6) D.N,Nayak Canadian Foreign Direct Investment in India: Some Observations 2004 7) V.N, Balasubramanyam Does India need a lot more FDI 2007 8) Raj, Naga Foreign Direct Investment in India in the 1990s: Trends and Issues 2003 9) J.N, Bhagwati Anatomy and Consequences of Exchange Control Regimes. 1978 10) S,Gazioglou and W.D,McCausland An International Economic Analysis of FDI and International Indebtness 2000 11) Afees,Salisu A The Determinants and Impact of Foreign Direct Investment on Economic Growth in Developing Countries: A Study of Nigeria 2004 12) Jenkins,Rhys Globalization, FDI and Employment in Vietnam 2000 13) Johan,Rydqvist FDI and Currency Crisis: Currency Crisis and the Inflow of Foreign Direct Investment 2005 . 14) Dikshit ,Anand The Uneasy Compromise-Indian Retail ,Wall Street journal 12 August 2011 , Print 15) Majumder,Sanjoy Changing the Way Indians Shop The Economic Times 25 December 2011 , Print 16) Agarwal,Vibhuti India Puts retails Reform on Hold , Wall Street Journal 7 December 2011, Print 17) Sharma, Amol, IKEA Shelves Indian Retail Market Move, The Financial Express 22 January 2012 , Print 18) Indian Retail Sector , 21 December 2010 < http:// www.cci.in / > 19) Secretariat for Industrial Assistance, SIA , Newsletters, Annual Issue , 2011 , Ministry of commerce and industry, Government of India.
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20) Secretariat for Industrial Assistance, SIA , Newsletters, Annual Issue , 2012 , Ministry of commerce and industry, Government of India. 21) FDI Policy in India, Reserve Bank of India , http://www.rbi.org.in/. 22) FDI Policy in India, Reserve Bank of India , http://www.rbi.org.in/. 23) The Department of Industrial Policy and Promotion ( DIPP),Newsletter , 2012, Ministry of Commerce and Industry, Government of India. 24) T.K, Arun , Govt clears FDI in single brand retail proposals , The Economic Times , 28 October 2012, Print 25) The Department of Industrial Policy and Promotion ( DIPP),Newsletter , 2012, Ministry of Commerce and Industry, Government of India. 26) Bailay , Rasul, FDI in Retail: Global retailers like Wal-mart, Tesco, Carrefour and others not buying India story, The Economic Times, 01 Feb 2013, Print 27) Schell, O, How Wal-Mart is changing China, The Atlantic, 2011 28) Chandran, P.M, Wal- Marts Supply Chain management Practices, ICFAI ICMR, 2003, Case Collection 29) Schell, O, How Wal-Mart is changing China, The Atlantic, 2011 30) Bharti Walmart Private Limited, http://www.bharti-walmart.in/ 31) The Department of Industrial Policy and Promotion ( DIPP), Ministry of Commerce and Industry, Government of India., http://dipp.nic.in/English/Investor/fipb.aspx. 32) The Associated Chambers of Commerce and Industry of India , http://www.assocham .org/ 33) M.K .Venu, Farmers Organisations Back Retail FDI The Financial Express , 2 December 2011, Print 34) Confederation of Indian Industry, Impact of FDI in Retail on SME sector, Survey Report, Dec 2011 35) Indian Staffing Federation (ISF), Newsletter, 2012 36) Economic Survey, 2011 37) Krishnan, Ananth Chinese Retailers give Global Gaints run for Money, The Hindu, 22 December 2012, Print 38) Main Determinants and Impacts of Foreign Direct Investment on Thailand, OECD, December 2011
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39) Khaliq, Abdul and Noy, Ilan Foreign Direct Investment and Economic Growth: Emprical Evidence from Sectroal Data in Indonesia- 2011 40) Singh, Sagarika, FDI in Retail to Boost Economic Growth , Curb Inflationary pressure: Analyst India Today, 17 September 2012, Print 41) Chishti, Seema FDI in Multi-Brand Retail to push Growth: Goldman Sachs The Financial Express, 5 December 2012, Print 42)
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