FDI in Retail- The

Retail conundrum
 Stakeholders involved
• Organized Retail Players
• Farmers
• Kirana Traders
• Consumers
• Governments
 Role of Government
 FDI in India are approved
through two routes:

i. Approval by RBI

ii.Foreign Investment
Promotion Board (FIPB).
 Current Position
• Single brand retailing was permitted FDI in
2006, to the extent of 51%
• Total of 94 proposals were received till May
2010
• FDI inflow of $194.69 million was received
between April 2006 and March 2010
– Equal to 0.21% of the total FDI inflws during the
period.
 Importance of FDI in Multi
Brand
• India is the most attractive market – AT Kearney
• Retail is the second largest employer after agriculture
• Second largest producer of fruits and vegetables in the world
• Post harvest losses upto `1 trillion per annum
• Indian farmers realize only 1/ 3rd of the total price paid by the final
consumer.
• Organized retail at present accounts for a mere 4% per
cent of the total market (2008) as against 20% in China
and 40 % in Thailand
 India Shining??
• Growth Drivers
– favourable demographics,
– rising consumer incomes,
– real estate developments,
– availability of better sourcing options

• Behold the International brands

– economic implications of the government,
– increasing urbanization,
– credit availability,
 Benefits
• Generate huge employment

• Increased investment in technology

• The huge tax revenue generated.

• The consumer gains from the wide variety of choices and a

more diversified basket of prices available under one roof

• The indirect benefits like better roads, online marketing,

expansion of telecom sector etc. Will give a ‘big push’ to other
sectors like agriculture, small and medium size enterprises.
 Concerns against FDI

• Employment by Retail – Organized & Unorganized

• retail trade employed 7.2% of total workers and

provided job opportunities to 33.1 million persons

(%) (%)
 Concerns against FDI
• Unfair competition and ultimately result in large-
scale exit of domestic retailers

• Large scale displacement of persons employed in

the retail sector

• No other sector to absorb employment

Year GDP Growth  CPI
2010 7.20% 4.90%
2011 7.47% 5.22%
2012 7.74% 5.55%
2013 8.03% 5.91%
 Concerns against FDI
• Important that the domestic retail sector is
allowed to grow and consolidate
– Under-developed and in a nascent stage

• Rise in Real estate costs in Urban areas

 Organized Retail Currently
Accounts for 5% of India’s 11

Retail Market
• With an anticipated $ 50 Billion in fresh investments over next 10 years, modern retail will show impressive
CAGR > 25%

US$ Billion

11
 And Is Now Entering 12

Expansion Phase
Initiation Conceptualization Entry of large Indian corporates Consolidation and
and Global Retailers Expansion

I II III
Entry of large global
Large Scale
Consolidation

Increasing
IVMovement to
Pure play Retailers, Smaller Cities
retailers Competition
realizing the potential and Rural Areas
Size of Industry

start to test waters,

More Aggression from

International Players

Manufacturers Large Investment More than 25-30 retail

opening their Commitments by large businesses with
own outlets Indian corporate Revenues in excess of
Expansion by leading US $ 1 Billion
Product Brands Specialty Formats based on
finer segmentation of the
market
Private brands getting
established

Pre 1995 1995 to 2005 to 2010 Onwards

2005 2010
12
 Organized Retailers
• The rate of closure of unorganized
retail shops in gross terms was found
to be 4.2 per cent per annum, which
is much lower than the international
rate of closure of small businesses.
• The rate of closure on account of
competition from organized retail was
found to still lower, at 1.7 per cent per
annum.
 The positive externalities
• Effective FDI indulges in enhancement of
human capital of the country
– Subba Rao(2008) Research Paper

• The existing FDI rules are a constraint.

There is need to open up the sector a bit
more as it will facilitate fresh infusion of
funds and also promote competition
– Real Estate Consultants CB Richard Ellis
 Negative externalities
• Will FDI be necessary at all if there is enough domestic
capital being injected in to the retail sector ?
• If FDI retailers were to acquire say 20% of retail
trade, this would equate to Rs. 800 billion of
turnover, which would lead to the employment of
just 43,540 people, but would displace
approximately 8 million people employed in the
unorganised retail sector.
• Failure of farm and fork model???
 Global scenario
• FDI permitted in the retail sector in Brazil, Argentina, Singapore,
Indonesia, China and Thailand without limits on equity participation
• Malaysia has equity caps on FDI in the retail sector
• FDI in retailing was permitted in China for the first time in 1992.
• The Asian crisis in 1997
– Entry ban on foreign players was removed.
– Within a short span of time, the foreign players expanded their
operations significantly and marginalised the local retailers
 The story of Britain
• Britain was a nation of small shopkeepers
• All of that has changed and this is because of
the supermarkets, led by Tesco. It is impossible
for small shop keepers, who have so much to
offer, to compete with the prices of the
supermarkets
• “literally change the fabric of life in India" by
endangering small shops.”
– David Amess, Britain MP
 Global Scenario
• Russian supermarket revolution has occurred only in the 2000s
• The two largest companies are Russian, but the origin of the
capital, even of the Russian
• companies, is usually a mix of domestic and foreign.
• The supermarket sector in Chile was launched in the 1990s, with
the backing of domestic capital.
• The three market leaders, all domestic, are expanding rapidly
into other Latin American countries in mergers and acquisitions,
becoming regional multinationals.
 Case study
FDI :

Chinese
permitted in retailing
1992. 40 foreign
retailers have secured approval
 Retail sales have grown@13.5%
CAGR since FDI was permitted

 FDI initially restricted to 6 major cities

(including Beijing, Shanghai and
Guangzhou) and SEZs
Chinese
retailing  Foreign ownership initially restricted to
49%

 US$ 22 bn of FDI attracted, 3.6% of

total FDI
 In 2003, FDI in wholesale and retail

was US$ 1.1 bn (Around 30% of our

total FDI in 2003)
 Current restrictions on FDI were phased
out after China’s accession with WTO
 What about Farmers?
• Eighty per cent of 12 crore farm holdings own only 20 per
cent of the cultivated land.
•  Credit to agriculture sector has gone up by 200 per cent
and fertiliser subsidy by 300 per cent.
• Agriculture productivity per hectare or acre is lower than in
almost all the countries cited by the DIPP document
• Minimum Support Price not supporting farmers
• Change in cropping pattern from cereal or staple food-
based crops to high-value crops (in which retailers would be
interested)
• Risk of further land consolidation in favor of rich and
resourceful farmers
 What next?
• Feedback on the the discussion paper was
received.
• A committee, comprising officials from the
ministry of consumer affairs and public
distribution, commerce and industry
ministry, financie ministry, food
processing ministry etc. is looking into the
proposals
• Ministry of consumer affairs is likely to
prepare a cabinet note for the final
decision
 Recommendations
• Entry of foreign players must be gradual with
social safeguards
– Prevent diversion of agricultural land for
building malls
– Preparation of a legal and regulatory
framework and enforcement mechanism to
ensure that large retailers are not able to
dislocate small retailers by unfair means
– Stipulation that certain percentage of FDI
should be spent in Logistics
• Better credit availability to unorganized
retailers
 Recommendation
A Commission to ensure that
• procurement costs are fair for farmers of perishable commodities
– percentage of sourcing derives from the Indian market
– a basic price support mechanism that ensures that costs are covered
– efficient extension services and information centres that provide
information about possible crops and best practices
• Rules on repatriation of foreign profits should be revised, to discourage
( and restrict) 100% of the profits from leaving India
• Revoke Press Notes- 2009 permitting cascading sub-companies
 References
• ISSUE OF DISCUSSION PAPER ON
FOREIGN DIRECT INVESTMENT (FDI) IN
MULTI-BRAND RETAIL TRADING
• INDIA FOOD BRIEF – FDI in Retail – An
Exhaustive Analysis
• FDI Watch – Centre for Policy Alternatives
• Business Magazines in India