Maharashtra Economic Development Council
Foreign Direct Investment
in Indian Retail
– Need for a Holistic Approach
T
he discussion paper released by the Department
of Industrial Policy and Promotion (DIPP),
Ministry of Commerce & Industry on ‘Foreign
Direct Investment (FDI) in Multi-Brand Retail Trading’
is intended to generate fresh debate in the country on
the issue of foreign direct investment in retail. India
permitted foreign direct investment in cash-and-carry
wholesale trade up to 100 per cent through the automatic
route2 and in single-brand retail up to 51 per cent in
2006. The former brought in US$ 1.8 billion during April
2000 to March 2010 and the latter just US$ 195 million
during April 2006 to March 2010. India perhaps remains
the only exception in emerging economies in barring the
multi-brand retail for foreign investment. The reason why
India has not allowed FDI in multi-brand retail is the fear
that it will harm the traditional small retailers.
Small Retailers Thrive
Indian retail sales grew by about 15 per cent per annum
in 2006-07 and 2007-08 but the growth dipped to 12 per
cent in 2008-09 and further to 11 per cent in 2009-10 per
cent as the economy slowed down. During the downturn,
sales growth of organized retail came down to just about
15 per cent from over 25 per cent before whereas retail
sales of traditional small retailers grew by 15 per cent
from about 11 per cent before. As a result, the share of
traditional retail did not decline as thought earlier and has
continued to remain very high at 95-96 per cent. Thus small
retailers prospered during the economic slowdown while it
adversely affected the organized retail. As the economy
recovers and consumption growth revives, organized retail
may grow faster again and the growth of traditional retail
may revert to the past level of 11-12 per cent.
1. Mathew Joseph is a Senior Consultant and Arpita Mukherjee is a Professor at Indian Council for Research on International Economic
Relations (ICRIER), New Delhi,
2. Foreign direct investment in cash-and-carry wholesale trade up to 100 per cent was allowed in 1997 through the Foreign Investment
Promotion Board (FIPB) approval route.
August 2010 Maharashtra Economic Development Council, Monthly Economic Digest
India Review
Mr. Mathew Joseph 1 Ms. Arpita Mukherjee 1
Indian traditional retailers have a number of inherent
strengths which helped them not merely survive the
competition from organized retail but flourish. These
include proximity to consumers, consumer goodwill,
credit sales, amenability to bargaining, sale of loose items,
convenient timings and home delivery. The ICRIER study
(M. Joseph and N. Soundararajan, 2009) has shown that
hardly 1.7 per cent of small shops have closed down due
to competition from organized retail. They have competed
successfully against organized retail through adoption of
better business practices and technology.
Still the fear of organized retail hurting the small retail is
very much alive. Yes, very few small shops have closed
down and employment in the traditional retail did not
fall. According to the Economic Census carried out by
the CSO, India had 14.95 million enterprises engaged in
retail trade in 2005 and the total employment in retail
trade had been 35.06 million according to NSSO’s
Employment and Unemployment Survey for 2004-05.
Retail enterprises recorded an annual growth of 4.9 per
cent during 1998-05 and retail employment a growth of
2.7 per cent per annum during 1999-05. But as shown
by the ICRIER study, the turnover and profit of the small
retailers in the vicinity of large retailers initially decline
with the coming of the big retailers but recovers over
a over a 5-year period. Therefore, traditional retailers
need help to soften the blow from the organized retailers.
The ICRIER study has said, “As in other countries,
government policy can and should play an important
role in modernizing the traditional retail and improve its
competitiveness”.
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 Maharashtra Economic Development Council
Modernization of Traditional Retail
The study advocated that the government should launch
a time-bound “national kirana and wet-market reform”
programme. The key elements of this programme are
listed below:
1. Assist the formation of co-operatives or associations
of kirana stores, which in turn can undertake direct
procurement of products from manufacturers and
farmers. By eliminating intermediaries, kirana stores
can obtain their supplies at lower prices, while farmers
get better prices for their produce.
2. Encourage setting up of modern large cash-and-carry
outlets, which could supply not only to kirana stores
but also to licensed hawkers at wholesale rates. The
case in China where the central government is using
Metro Cash & Carry to modernize the entire supply
chain and source directly from farmers is a case in
point.
3. Make available credit at reasonable rates from
banks and micro-credit institutions for expansion
and modernization of traditional retailers. We may
promote innovative banking solutions for traditional
retail like the Syndicate Bank’s lending for small
business linked with the collection of daily or weekly
pigmy deposits.
4. The local government/ municipalities should convert
all uncovered wet markets to covered ones and
modernize those markets in a time-bound manner with
emphasis on hygiene, convenience to shoppers, proper
approach roads, entry, exits, etc. In India, the route
of public-private partnerships (PPPs) is advocated
for this purpose. PPPs should be formed between
the government and existing small shops on the
pattern of the “Industrial Infrastructure Upgradation
Scheme” being successfully undertaken to improve
infrastructure in existing industrial clusters.
5. Facilitate the formation of farmers’ co-operatives to
directly sell to organized retailers. In this case, while
the government could provide tax incentives and
capital subsidies, equity support should be avoided.
Late Arrival of Organised Retail in India
India stands out as an example for the late coming of
modern organized retail in emerging markets and also for
August 2010 Maharashtra Economic Development Council, Monthly Economic Digest
India Review
the kind of restrictions placed on foreign investments in
retail. As noted in the literature, the arrival of modern
retail in developing countries occurred in three successive
waves (Reardon and Hopkins, 2006; Reardon and
Berdegue, 2007). The first wave took place in the early
to mid-1990s in South America, East Asia outside China,
North-Central Europe and South Africa. The second
wave happened during the mid to late 1990s in Mexico,
Central America, Southeast Asian countries, Southern-
Central Europe. The third wave began in the late 1990s
and early 2000s in parts of Africa, some countries in
Central and South America, Southeast Asia, China, India,
and Russia.
According to the authors, the main reason why the third-
wave countries which include China, India and Russia
lagged behind was the severe restrictions on foreign
direct investment (FDI) in retailing in these countries.
The demand side features of these countries, such as
income, size of the middle class, urbanization, and the
share of women in workforce, etc., have been similar to
countries in the second wave. In China and Russia these
restrictions were progressively relaxed in the 1990s and
in India only partially in the 2000s. In January 2006,
India allowed foreign companies to own up to 51 per cent
in single-brand retail joint ventures (JVs), but multiple-
brand foreign firms are still barred in retail although they
can set up wholesale operations.
The domestically driven organized retail expansion
in India is facing difficulties. Besides the fact that the
growth in organized retail slowed down in recent years, it
has proven ineffective in containing food inflation in the
country which has stayed high for some time now. The
gap between the farm level prices and consumer prices
is very high in India which has not come down with the
expansion of organized retail. Why? While the number
of domestic restrictions on the operation of organized
retail in India is partly responsible for this, the ban on
foreign entry into multi-brand retailing is also partly
responsible.
Domestic Restrictions on Retail
Organised retail relies on a centralized countrywide “hub
and spoke” distribution system to derive economies of
scale and keep prices down at the consumer level. This
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 Maharashtra Economic Development Council
would require direct procurement of supplies, cold-chain
transportation, centralized processing, warehousing
and speedy movement of goods. However, there are
serious impediments to such smooth operations in
India due to disparate amendments to state Agricultural
Produce Marketing Committee (APMC) legislations, and
restrictions on interstate movements of goods arising from
central and state taxes, administration of the Essential
Commodities Act by state governments, entry tax and
toll payments etc. The organized retail is also subject to
a cumbersome licensing system at the central, state and
local levels involving over thirty regulatory approvals
and clearances. All these have stymied the growth of
organized retail in the country.
Foreign Investment in Retail
The contribution of foreign direct investment (FDI)
to domestic economy is well recorded in literature.
Essentially, FDI acts as a catalyst in the growth process.
Studies show that the impact of a unit of foreign direct
investment to economic growth is much more than
a unit of domestic investment as the former brings
with it a host of benefits such as superior technology,
management skills, marketing net work, etc. Besides,
FDI has positive spillover effects on the economy as
its ownership advantages get disseminated to locally
owned enterprises, enhancing their productivity. All
these benefits of foreign direct investment have been
well proven in India in sectors such as automobiles,
telecom and consumer electronics. A study conducted by
Mukherjee and Patel (2005) found that foreign retailers
are working with small manufacturers for in-house labels
and are providing them technologies like packaging
technologies and bar coding. Sourcing from India has
increased with the advent of foreign retailers and they
also bring in an efficient supply-chain management
system. Joint ventures with foreign retailers are helping
the Indian industry to get access to finance and global
best practices. Besides, retailing being a non-tradable
service there is no possibility of improved efficiency
through import competition and foreign investment is the
way forward.
August 2010 Maharashtra Economic Development Council, Monthly Economic Digest
India Review
Conclusion
The objective is modernization of Indian retail. To
achieve it we need to move on three fronts: first, the
government has to proactively assist traditional retailers
in competing successfully with the organized retail by
modernizing themselves; second, remove the domestic
regulatory and interstate movement restrictions on retail;
and third, allow foreign entry into multi-brand retail.
On foreign investment in retail, while up to 49 per cent
could be permitted for the multi-brand retail initially to
enable the domestic industry to enter into joint ventures,
for the single-brand retail it could be raised from the
present 51 per cent to 100 per cent. For the multi-brand
retail foreign investment could be raised up to 100 per
cent gradually over 3-5 years.
However, just opening up the retail sector for foreign entry
with stipulation of a number of regulatory conditions as
detailed in DIPP discussion paper without a strategy
to support the modernization of traditional retail and
removing the domestic restrictions on retail will not only
be futile but also counterproductive.
References
99 Joseph, Mathew and Nirupama Soundararajan (2009), Retail
in India: A Critical Assessment, Academic Foundation, New
Delhi.
99 Mukherjee Arpita and Nitisha Patel (2005), FDI in Retail
Sector: India, Academic Foundation, New Delhi.
99 Reardon, T. and J.A. Berdegué. (2007), “The Retail-Led
Transformation of Agrifood Systems and its Implications for
Development Policies”, Background Paper prepared for the
World Bank’s World Development Report 2008: Agriculture
for Development, Rimisp and MSU: January.
99 Reardon, T. and R. Hopkins (2006), “The Supermarket
Revolution in Developing Countries: Policies to Address
Emerging Tensions among Supermarkets, Suppliers and
Traditional Retailers”, The European Journal of Development
Research, vol. 18, No. 4, pp. 522-545.
Views expressed are personal.
mjoseph@icrier.res.in,
arpita@icrier.res.in.
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