FDI in Retail Sector: Opportunity or Crisis
Yashasvi Nain
Rajiv Gandhi National University of Law, Punjab
This paper is a scholarly deliberation on a laudatory and brave step taken forward yet again by the government of India. After India announced its New Economic Policy in 1991, it is today, the 15th September, 2012 when finally Indian Government breaks all its shackles and allows fifty one percent of FDI retail (multi branding) in India. With a huge chunk of population ready to take on the Government, there are certain legal perspectives which are necessary for us to analyze and crystallize its pros and cons, as it affects all of us in a way. The researchers attempt to reconcile the above debate into this holistic paper.
Introduction
The end of last year has been quite eventful for the retail sector in India as the Government had proposed relaxing the norms of Foreign Direct Investments. Sometimes, while watching Hollywood movies, we often come across scenes wherein huge retail stores of Walmart are shown or actors buying various universal branded items such as Gucci, Louis Vuitton etc. from various showrooms. The question which generally arises in our minds is that, why in India such huge retail stores are not in existence or why one cannot have access to such global products in India. Arguably, stores of Gucci, Louis Vuitton have been opened in India, but they are located only at the exotic locations in metropolitan cities and are also expensive keeping it away from the reach of people.
The answer to such questions lies in the Foreign Direct Investment (FDI) policy of Government of India in relating to the retail industry. Foreign Direct Investments in the retail sector in India is now open after the Government of India finally showed a green signal against its policy paralysis. Until now, only under single-brand product retailing or Single Brand Retail Trading (SBRT), FDI up to 100 per cent (earlier it was 50 % till January 10, 2012), under the Government route was allowed. Because of this, foreign investors could only invest in a company, dealing in retail sector, which sells only items of a ‘single brand’. In addition, there are few other conditions such as (i) selling of products under the same brand name as sold in other countries, (ii) retailing to cover only products which are branded during manufacturing and (iii) foreign owners to be owner of the brand are to be adhered to. FDI in Multi Brand Retail Trading (MBRT) in India is now permitted, but it has to face a huge upsurge of legal, economic and social issues. This paper will delve into the pros and cons of this leap taken by the Government of India.
Even in the era of globalization and liberalization, where India is at the centre stage of the world’s largest markets, India was hesitant to allow FDI in Multi Brand Retail Trading (MBRT). It is relevant at this departure to mention that India is a signatory to General Agreement on Trade in Services, 1995, which basically obliges the signatory countries, owing to globalization and liberalization, to open up their markets to facilitate trade and commerce and to make the world a global village. It is an accepted trend that FDI in retail industry brings a lot of capital through investments into the market which is very healthy for the economy of any growing or developing country. This is confirmed by the fact that, internationally, most of the developing countries such as China, Thailand, Brazil, Russia, Argentina, Indonesia, Brazil etc. allow 100% FDI in retail sector. Even in India, the Single Brand Retail Trade has brought a lot of investment in the country. It is a fact that even after recent development in retail sector and irrespective of its contribution to the economy; it still continues to be the least evolved industry in our country. If we compare it to the rest of the world, growth of organized sector in India is much slow. In respect to India’s 2 per cent growth in organized sector in over a period of 10 years (1995-2005) Brazil shows growth rate of 10 per cent to 40 per cent and 20 per cent in China[1]. The main cause for the lack of this growth is that in retailing sector unlike other sectors foreign direct investment was not allowed. But the decision of allowing foreign investment in India will definitely provide it a boost to its economy.
The main reason of not allowing FDI in retail sector had been the opposition of trade associations and stakeholders which had discouraged the policy makers from taking steps for allowing the FDI. India, because of its market and growth potential has always attracted foreign investors and it is also seen as a potential market for establishment of global market chains.[2] The Indian retail industry is estimated to be worth $ 450 billion market.[3]
With the interlinking of economies of the world because of the advent of the concept of world trade, the market opportunities for sellers have expanded. Because of this, a company having an origin in Country ‘A’ can sell its products in the market of Country ‘B’ and to regulate such trade activities, institutions like World Trade Organization and International Monetary Fund have been established to regulate international trade and promote economic co-operation amongst nations, respectively. Even, under such framework investors from one country can also invest in the capital of companies of another country. Also, with the advent of internet, consumers are provided with the information about any product being sold worldwide. If we take India as an example, latest trend prevalent with consumers in India, especially in metropolitan cities, is to prefer branded items from non-branded items which itself shows the market potential which is ready to be tapped. And this trend is not terminating at the metro cities but has started to extend to non metropolitan big cities. It is significant to note here that retailing in India has been hailed as one of the boomed sectors in the economy[4] and also has been stated to be the fourth most attractive retail destination globally, among thirty emergent markets.[5] The UNCTAD World Investment Report (WIR) 2009, in its analysis of the global trends and sustained growth of Foreign Direct Investment (FDI) inflows, has reported India as the third most attractive location for FDI for 2009-2011. According to the WIR 2009 report, the top five most attractive locations for FDI for 2009-11 are China, United States, India, Brazil, and the Russian Federation.[6]
Consumers get to know as to what products are available in countries like U.S.A., U.K., France etc. but owing to the restrictions imposed by various governmental policies, such products are not available in India. Even if they are available, they are priced very heavily and way out of the reach of common man because of which the market for such commodities is reduced drastically.
It is a fact that so far India’s unorganized retail sector, such as family run stores or corner stores, constitutes 97 per cent of all retailing trade.[7] Now not only giant Indian retailers like Reliance but also traditional Indian retailers has entered in the area and started planning to expand their activities in this sector in a big way. Because of the recession, domestic and foreign retailers saw an opportunity to invest in the Indian retail market and to an advantage of the untapped market potential in the retail sector. Domestic retail companies are now planning to open up retail stores in tier 2 and tier 3 cities. Reliance retail is planning to open Reliance Trends apparel and accessories stores while Aditya Birla Group is planning to open about hypermarkets and supermarkets.[8] This market potential is not only attracting domestic players but also foreign players wherein Companies like Marks & Spencer, Metro Group, Spar, Zara, and Carrefour are planning to enter Indian market.[9]
Retail and Foreign Direct Investment (FDI)
Now, we shall have a look as to what we mean by the terms “retail” and “Foreign Direct Investment”.
Black’s Law Dictionary (7th Edition, West Group, St. Paul, Minnesota, 1999, USA) defines retail as “The sale of goods or commodities to ultimate consumers, as opposed to the sale for further distribution or processing.
FDI is defined as an investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new site[10]. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.[11]
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. In India, Chapter 2.1.11 of the Consolidated FDI Policy defines FDI as investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000.[12] Under Schedule I(1) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 FDI is defined as purchase by a person resident outside India of equity/preference/convertible preference shares and convertible debentures issued by an Indian company.[13] This notification has been amended from time to time.
FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP[14] and consolidated FDI Policy issued in October 2011[15] which provide the sector specific guidelines for FDI with regard to the conduct of trading activities:
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.
But now recently the Department of Industrial Policy and Promotion (DIPP), Government of India has permitted upto 100% Foreign Direct Investment (FDI) in Single Brand Product Retail Trading under approval route.[16] This increase in foreign participation is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. It is expected to bring in foreign investments which may help in checking inflationary trends in the Indian economy and is also expected to generate employment opportunities in India.[17]
But, FDI in Single Brand product retail trading (SBRT) is subject to several conditions which are as follows:
(a) the products to be sold should be of a 'Single Brand' only.[18]
(b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.[19]
(c) 'Single Brand' product-retail trading would cover only products which are branded during manufacturing.[20]
(d) The foreign investor should be the owner of the brand.[21]
(e) In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen'.[22]
'Small industries' is defined as industries which have a total investment in plant & machinery not more than US $ 1 million.[23]
FDI In Retail And Its Impact
FDI flow in our country does not follow a particular pattern and it tends to change as per the market trends. In India, norms for FDI in retail industry has been relaxed very recently (January, 2012) and thus this market is ready to be tapped to its full potential. The studies in this regard also favour FDI as conclusions drawn from such studies imply that FDI in retailing improves productivity and efficiency of the retail sector of the host country.[24] Also, a World Bank study has indicated that FDI inflows in the retail sector in the 20 largest developing countries amounted to US$ 45 billion in 1998-2002 (about 7 per cent of the total of these countries). The study showed that after liberalization; countries such as Brazil, Poland and Thailand have received significant FDI in retailing helping their economy to further strengthen itself.[25]
India can benefit from FDI in both, Single Brand Retail Trading (SBRT) and Multi Brand Retail Trading (MBRT) (if permitted in future) in several ways.
1. Owing to the lack of infrastructure and manpower in the retail chain leads to inefficieny in the distribution of food through its supply chain. Even though India is the second largest producer of fruits and vegetables, due its lack of cold storage facilities, most of the produce is wasted. As, fruits and vegetables are perishable items, due to lack of such cold storages and adequate infrastructure, fruits and vegetables are not stored appropriately leading to perishing of such items. Wastage of such farm produce results in heavy losses to farmers which again are laden with heavy debts. Scarcity of cold storages also leads to payment of commission by farmers to middlemen which aggravates corruption and inflationary trends. If, FDI is allowed in multi brand retail also, it will bring in retail stores such as Walmart, which can bring along an infrastructure which can be used to store the harvest which can be saved from getting perished and wasted. With the middlemen out of the picture, farmers will be benefitted financially with such a framework in operation.
2. Also, with many players in the competitive market, this may also pay an important role in checking soaring costs of living and the increasing inflationary trends. Competition in market will drive the players to deliver the best services to consumers at the lowest prices. Also, with less wastage of perishable items, such as fruits and vegetables, food inflation can be dealt with more efficiently.
3. Farmers, are most of the times are bereft of the adequate consideration for their products. This is mostly because they have to pay a hefty sum of money to middlemen as commission or as bribe for selling his farm produce. With, large retail industries coming into picture, farmers will be able to sell their farm produce directly to the retailers wherein not only they will not have to pay commission or bribe, but they will be paid for the produce as per the best rates prevalent in the market. This will improve the financial status of farmers and hence strengthening country’s economy. It will cut down involvement of middlemen between the manufacturers and the retailers.
4. Also, with less payment of commission to the middlemen and lowering of corruption, the cost price of a particular commodity will reduce, which may lead to the reduction of selling price of that commodity or a derivative commodity in the market. This may help in checking the soaring high prices, inflation and food inflation.
5. Foreign Retail, if operational, will bring the best practices, technology, know-how, experience, human resource policies with them which may prove to be instrumental in raising the standard of living in the country.
6. With such retail shops and stores allowed to enter Indian market, it will generate a lot of job and employment opportunities for the Indian workforce in organized retail industry. This will not only generate income within a family household but will also improve the social security of such employees as such employment may be covered by labour laws of the country intending benefits to such employees with pensionary benefits, gratuity, health insurance etc.
7. Also, Corporate Social Responsibility of such Companies is expected to help society at large.
Fears of FDI in retail
Government of India, in December, 2011 announced that it was planning to relax the norms of FDI in relation to the retail Sector and on 15 September 2012 has finally allowed it. The above deliberation must be taken into account when discussing its repercussions on India. It has announced that it is planning to allow 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent FDI in single brand retail.[26] But, on account of a large opposition from various trade associations and stakeholders, it was to rolling back from its initial position whereby it allowed only 100% FDI in single brand retail. There is a lot of panic and concern about such relaxation of norms some of which are enlisted below:
1. It is argued that because of the involvement of such huge corporate houses, small, indigenous Indian retail market will suffer and will hit a blow from the former which may result in complete wipe-out of the Indian retail industry. These corporate houses not only come with better technology, experience and know-how but also with very deep pockets which is enough to tolerate large financial losses. It is feared that this deep pocket of such industries will help them in keeping the selling price at minimal costs and hence driving other indigenous, small retailers out of business.
2. Once the small retailers are driven out of the market by the large corporate houses, with no competitor left to compete with them, within the legal framework, they would be free to set a high price for selling the commodities or products. This may lead to the creation of a monopoly in the economy which is not desirable in any developing economy.
3. With large retail stores coming in the market, unorganized and small retail sector will be hit very badly and will result in loss of employment as these small retail shops will then have to compete with corporate giants like WAL-MART.
4. There is also an issue of trust deficit between the Indian community and foreign companies. After, the announcement of the FDI policy, many opposition parties in the parliament had vehemently argued that such a policy will subjugate Indian economy as it will destroy the Indian retail industry and the new retail industry will be run by foreign players who will be interested in increasing their profits rather than catering to Indian needs.[27]
5. Large retail companies are interested in Indian market because it has a huge potential which is yet to be tapped. As stated hereinabove in the article, the target of such foreign layers in retail industry are Tier I, II and III cities. But, such companies, being profit oriented, will not be ready to invest in smaller towns and rural areas. Owing to the hit on Indian indigenous retail industry, the supply of commodities to such smaller towns and rural areas may take a hit. This may tend to increase inflation in such areas.
Conclusion
When the Government has announced that it is planning to relax the norms of FDI in relation to the retail sector, loads of hue and cry was heard from the opposition, various trade associations and stakeholders. They argued that such an investment will destroy Indian economy and in the process will hit the unorganized retail industry the most. The trust deficit between Indian population and anything branded as foreign also emerges. But, we should also try to understand that FDI in retail sector in Multi Brand will further strengthen the Indian economy as it will bring a lot avenues and opportunities in the Indian market. CRISIL in one of its latest report has estimated that such a FDI policy will allow an inflow of $2.5-3 billion over the next five years in multi-brand retail.[28] With such an inflow may lead to employment generation in the organized sector of the retail industry. With the increase of percentage of organized retail sector, employee benefits will also be enhanced. But, as we all know that the ‘fear factor’ and the ‘trust deficit’ which currently dominates the minds of most of the citizens of the country is a deciding factor as to whether such a policy will be implemented or not. Everyone fears that with the relaxation of norms and coming up of foreign investors, Indian market and economy will then be dominated by Foreign stakeholders.
But, we should also keep faith in our Indian legal framework in which there are specific legislations and policies to curb such activities. In India, Section 4 of the Competition Act, 2002 deals with problem of abuse of dominance (monopoly) by market players. Section 4 of the Competition Act, 2002 reads as follows:
Abuse of dominant position
4. (1) No enterprise or group shall abuse its dominant position.
(2) There shall be an abuse of dominant position [under sub-section (1), if an enterprise or a group].—-
(a) directly or indirectly, imposes unfair or discriminatory--
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or service.
(b) limits or restricts--
(i) production of goods or provision of services or market therefore; or
(ii) technical or scientific development relating to goods or services to the prejudice of consumers; or
(c) indulges in practice or practices resulting in denial of market access in any manner; or
(d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or
(e) uses its dominant position in one relevant market to enter into, or protect, other relevant market.
So, this provision of the Act specifically provides for the prohibition of any abuse of dominant position or monopoly. Also, Ministry of Commerce and Industry through its Department of Industrial Policy and Promotion (DIPP) alongwith the Reserve Bank of India, after looking into the position of the economy, from time to time, is responsible for the framing of various policies with regards to FDI inflow, best suited for the economy at that time and for the times to come.
Competitiveness in the market will check inflation, soaring prices and will also bring best practices, boosting the economy, production and innovativeness. FDI can also spur competitiveness in sectors such as supply chain improvement, investment in Technology, Manpower and Skill development, tourism sector, agriculture, Small and Medium Scale Industries. It can also lead us to the growth in market size, greater productivity and can also benefit the government by increasing the revenue through taxes and hence resulting in an increased GDP.
Press note 1 of 2012 issued by Department of Industrial Policy and Promotion categorically provides that small and cottage industries are involved in such FDI giving the policy not only economic perspective but also social and political perspective. Because of such a policy, not only better inflows through FDI will come but also through the involvement of Global giants with the small and cottage industries, best practices and best remuneration could also be delivered to retailers. Hence, through this, preambulary objective of achieving social, political and economic justice could be achieved.
[1] V. Palmade and Andrea Anayiotas, ‘Foreign Direct Investments Trends: Looking Beyond the current gloom in Developing Countries’, (2004) Public Policy Journal, September.
[2] Suja R.Nair, Retail Management (New Delhi, Himalya Publishing House 2006).
[3] Cabinet approves 51 per cent FDI in multi-brand retail < http://www.thehindu.com/business/Industry/article2657113.ece> accessed 10 August 2012.
[4] Swapna Pradhan, Retailing Management (The McGraw-Hill Companies 2007).
[5] A.T. Kearney Global Retail Development Index, 2011, < http://www.atkearney.com/index.php/Publications/global-retail-development-index.html> accessed 10 July 2012).
[6] Chapter 5, Foreign Direct Investment, Annual Report 2010-11, DIPP, Govt. of India, page 50, <http://dipp.nic.in/English/Publications/Annual_Reports/AnnualReport_Eng_2010-11.pdf > accessed 10 July 2012).
[7] Retail Industry in India <http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf> accessed 10 July 2012.
[8] Retail Global Expansion: A Portfolio of Opportunities, < http://www.atkearney.com/index.php/Publications/retail-global-expansion-a-portfolio-of-opportunities2011-global-retail-development-index.html> 10 September 2012.
[9] Ibid.
[10] Bannock, Graham et al. The Penguin Dictionary of Economics, (Penguin Books 7th ed. 2003)
[11] Hemant Batra, Retailing Sector in India Pros Cons <http://www.legallyindia.com/1468-fdi-in-retailing-sector-in-india-pros-cons-by-hemant-batra> accessed 10 August 2012.
[12] Consolidate FDI Policy, <http://dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf >10 August 2012.
[13] Schedule I(1) of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000, Notification No. FEMA 20 /2000-RB dt. 3rd May 2000, <http://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174> accessed 12 September 2012.
[14] Refer to Press Note No. 4 (2006 Series) issued by Ministry of Commerce and Industry, online at http://siadipp.nic.in/policy/changes/pn4_2006.pdf > accessed 10 September 2012.
[15] See Note 14.
[16] Press Note No.1 (2012 Series), <http://dipp.gov.in/English/acts_rules/Press_Notes/pn1_2012.pdf > accessed 10 September 2012.
[17] Ibid
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] Arpita Mukherjee & Nitisha Patel, FDI in Retail Sector, India (New Delhi Academic Foundation 2005).
[25] Chetan Bajaj, Rajnish Tuli & Nidhi Srivastav, Retail Management (Oxford University Press, 2006).
[26] See Note 5.
[27] FDI in retail will impact food chain, says BJP <http://www.thehindu.com/news/national/article2657215.ece > accessed 13 September 2012.
[28] FDI in multi-brand retail: States could be the deciding factor, online at http://www.thehindu.com/business/Economy/article2672009.ece (visited on 14 September, 2012).
Rajiv Gandhi National University of Law, Punjab
This paper is a scholarly deliberation on a laudatory and brave step taken forward yet again by the government of India. After India announced its New Economic Policy in 1991, it is today, the 15th September, 2012 when finally Indian Government breaks all its shackles and allows fifty one percent of FDI retail (multi branding) in India. With a huge chunk of population ready to take on the Government, there are certain legal perspectives which are necessary for us to analyze and crystallize its pros and cons, as it affects all of us in a way. The researchers attempt to reconcile the above debate into this holistic paper.
Introduction
The end of last year has been quite eventful for the retail sector in India as the Government had proposed relaxing the norms of Foreign Direct Investments. Sometimes, while watching Hollywood movies, we often come across scenes wherein huge retail stores of Walmart are shown or actors buying various universal branded items such as Gucci, Louis Vuitton etc. from various showrooms. The question which generally arises in our minds is that, why in India such huge retail stores are not in existence or why one cannot have access to such global products in India. Arguably, stores of Gucci, Louis Vuitton have been opened in India, but they are located only at the exotic locations in metropolitan cities and are also expensive keeping it away from the reach of people.
The answer to such questions lies in the Foreign Direct Investment (FDI) policy of Government of India in relating to the retail industry. Foreign Direct Investments in the retail sector in India is now open after the Government of India finally showed a green signal against its policy paralysis. Until now, only under single-brand product retailing or Single Brand Retail Trading (SBRT), FDI up to 100 per cent (earlier it was 50 % till January 10, 2012), under the Government route was allowed. Because of this, foreign investors could only invest in a company, dealing in retail sector, which sells only items of a ‘single brand’. In addition, there are few other conditions such as (i) selling of products under the same brand name as sold in other countries, (ii) retailing to cover only products which are branded during manufacturing and (iii) foreign owners to be owner of the brand are to be adhered to. FDI in Multi Brand Retail Trading (MBRT) in India is now permitted, but it has to face a huge upsurge of legal, economic and social issues. This paper will delve into the pros and cons of this leap taken by the Government of India.
Even in the era of globalization and liberalization, where India is at the centre stage of the world’s largest markets, India was hesitant to allow FDI in Multi Brand Retail Trading (MBRT). It is relevant at this departure to mention that India is a signatory to General Agreement on Trade in Services, 1995, which basically obliges the signatory countries, owing to globalization and liberalization, to open up their markets to facilitate trade and commerce and to make the world a global village. It is an accepted trend that FDI in retail industry brings a lot of capital through investments into the market which is very healthy for the economy of any growing or developing country. This is confirmed by the fact that, internationally, most of the developing countries such as China, Thailand, Brazil, Russia, Argentina, Indonesia, Brazil etc. allow 100% FDI in retail sector. Even in India, the Single Brand Retail Trade has brought a lot of investment in the country. It is a fact that even after recent development in retail sector and irrespective of its contribution to the economy; it still continues to be the least evolved industry in our country. If we compare it to the rest of the world, growth of organized sector in India is much slow. In respect to India’s 2 per cent growth in organized sector in over a period of 10 years (1995-2005) Brazil shows growth rate of 10 per cent to 40 per cent and 20 per cent in China[1]. The main cause for the lack of this growth is that in retailing sector unlike other sectors foreign direct investment was not allowed. But the decision of allowing foreign investment in India will definitely provide it a boost to its economy.
The main reason of not allowing FDI in retail sector had been the opposition of trade associations and stakeholders which had discouraged the policy makers from taking steps for allowing the FDI. India, because of its market and growth potential has always attracted foreign investors and it is also seen as a potential market for establishment of global market chains.[2] The Indian retail industry is estimated to be worth $ 450 billion market.[3]
With the interlinking of economies of the world because of the advent of the concept of world trade, the market opportunities for sellers have expanded. Because of this, a company having an origin in Country ‘A’ can sell its products in the market of Country ‘B’ and to regulate such trade activities, institutions like World Trade Organization and International Monetary Fund have been established to regulate international trade and promote economic co-operation amongst nations, respectively. Even, under such framework investors from one country can also invest in the capital of companies of another country. Also, with the advent of internet, consumers are provided with the information about any product being sold worldwide. If we take India as an example, latest trend prevalent with consumers in India, especially in metropolitan cities, is to prefer branded items from non-branded items which itself shows the market potential which is ready to be tapped. And this trend is not terminating at the metro cities but has started to extend to non metropolitan big cities. It is significant to note here that retailing in India has been hailed as one of the boomed sectors in the economy[4] and also has been stated to be the fourth most attractive retail destination globally, among thirty emergent markets.[5] The UNCTAD World Investment Report (WIR) 2009, in its analysis of the global trends and sustained growth of Foreign Direct Investment (FDI) inflows, has reported India as the third most attractive location for FDI for 2009-2011. According to the WIR 2009 report, the top five most attractive locations for FDI for 2009-11 are China, United States, India, Brazil, and the Russian Federation.[6]
Consumers get to know as to what products are available in countries like U.S.A., U.K., France etc. but owing to the restrictions imposed by various governmental policies, such products are not available in India. Even if they are available, they are priced very heavily and way out of the reach of common man because of which the market for such commodities is reduced drastically.
It is a fact that so far India’s unorganized retail sector, such as family run stores or corner stores, constitutes 97 per cent of all retailing trade.[7] Now not only giant Indian retailers like Reliance but also traditional Indian retailers has entered in the area and started planning to expand their activities in this sector in a big way. Because of the recession, domestic and foreign retailers saw an opportunity to invest in the Indian retail market and to an advantage of the untapped market potential in the retail sector. Domestic retail companies are now planning to open up retail stores in tier 2 and tier 3 cities. Reliance retail is planning to open Reliance Trends apparel and accessories stores while Aditya Birla Group is planning to open about hypermarkets and supermarkets.[8] This market potential is not only attracting domestic players but also foreign players wherein Companies like Marks & Spencer, Metro Group, Spar, Zara, and Carrefour are planning to enter Indian market.[9]
Retail and Foreign Direct Investment (FDI)
Now, we shall have a look as to what we mean by the terms “retail” and “Foreign Direct Investment”.
Black’s Law Dictionary (7th Edition, West Group, St. Paul, Minnesota, 1999, USA) defines retail as “The sale of goods or commodities to ultimate consumers, as opposed to the sale for further distribution or processing.
FDI is defined as an investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new site[10]. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.[11]
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provisions of the Foreign Exchange Management Act (FEMA) 1999. In India, Chapter 2.1.11 of the Consolidated FDI Policy defines FDI as investment by non-resident entity/person resident outside India in the capital of an Indian company under Schedule 1 of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations 2000.[12] Under Schedule I(1) of Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000 FDI is defined as purchase by a person resident outside India of equity/preference/convertible preference shares and convertible debentures issued by an Indian company.[13] This notification has been amended from time to time.
FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP[14] and consolidated FDI Policy issued in October 2011[15] which provide the sector specific guidelines for FDI with regard to the conduct of trading activities:
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of ‘Single Brand’ products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.
But now recently the Department of Industrial Policy and Promotion (DIPP), Government of India has permitted upto 100% Foreign Direct Investment (FDI) in Single Brand Product Retail Trading under approval route.[16] This increase in foreign participation is aimed at attracting investments in production and marketing, improving the availability of such goods for the consumer, encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian enterprises through access to global designs, technologies and management practices. It is expected to bring in foreign investments which may help in checking inflationary trends in the Indian economy and is also expected to generate employment opportunities in India.[17]
But, FDI in Single Brand product retail trading (SBRT) is subject to several conditions which are as follows:
(a) the products to be sold should be of a 'Single Brand' only.[18]
(b) Products should be sold under the same brand internationally i.e. products should be sold under the same brand in one or more countries other than India.[19]
(c) 'Single Brand' product-retail trading would cover only products which are branded during manufacturing.[20]
(d) The foreign investor should be the owner of the brand.[21]
(e) In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30% of the value of products sold would have to be done from Indian 'small industries/ village and cottage industries, artisans and craftsmen'.[22]
'Small industries' is defined as industries which have a total investment in plant & machinery not more than US $ 1 million.[23]
FDI In Retail And Its Impact
FDI flow in our country does not follow a particular pattern and it tends to change as per the market trends. In India, norms for FDI in retail industry has been relaxed very recently (January, 2012) and thus this market is ready to be tapped to its full potential. The studies in this regard also favour FDI as conclusions drawn from such studies imply that FDI in retailing improves productivity and efficiency of the retail sector of the host country.[24] Also, a World Bank study has indicated that FDI inflows in the retail sector in the 20 largest developing countries amounted to US$ 45 billion in 1998-2002 (about 7 per cent of the total of these countries). The study showed that after liberalization; countries such as Brazil, Poland and Thailand have received significant FDI in retailing helping their economy to further strengthen itself.[25]
India can benefit from FDI in both, Single Brand Retail Trading (SBRT) and Multi Brand Retail Trading (MBRT) (if permitted in future) in several ways.
1. Owing to the lack of infrastructure and manpower in the retail chain leads to inefficieny in the distribution of food through its supply chain. Even though India is the second largest producer of fruits and vegetables, due its lack of cold storage facilities, most of the produce is wasted. As, fruits and vegetables are perishable items, due to lack of such cold storages and adequate infrastructure, fruits and vegetables are not stored appropriately leading to perishing of such items. Wastage of such farm produce results in heavy losses to farmers which again are laden with heavy debts. Scarcity of cold storages also leads to payment of commission by farmers to middlemen which aggravates corruption and inflationary trends. If, FDI is allowed in multi brand retail also, it will bring in retail stores such as Walmart, which can bring along an infrastructure which can be used to store the harvest which can be saved from getting perished and wasted. With the middlemen out of the picture, farmers will be benefitted financially with such a framework in operation.
2. Also, with many players in the competitive market, this may also pay an important role in checking soaring costs of living and the increasing inflationary trends. Competition in market will drive the players to deliver the best services to consumers at the lowest prices. Also, with less wastage of perishable items, such as fruits and vegetables, food inflation can be dealt with more efficiently.
3. Farmers, are most of the times are bereft of the adequate consideration for their products. This is mostly because they have to pay a hefty sum of money to middlemen as commission or as bribe for selling his farm produce. With, large retail industries coming into picture, farmers will be able to sell their farm produce directly to the retailers wherein not only they will not have to pay commission or bribe, but they will be paid for the produce as per the best rates prevalent in the market. This will improve the financial status of farmers and hence strengthening country’s economy. It will cut down involvement of middlemen between the manufacturers and the retailers.
4. Also, with less payment of commission to the middlemen and lowering of corruption, the cost price of a particular commodity will reduce, which may lead to the reduction of selling price of that commodity or a derivative commodity in the market. This may help in checking the soaring high prices, inflation and food inflation.
5. Foreign Retail, if operational, will bring the best practices, technology, know-how, experience, human resource policies with them which may prove to be instrumental in raising the standard of living in the country.
6. With such retail shops and stores allowed to enter Indian market, it will generate a lot of job and employment opportunities for the Indian workforce in organized retail industry. This will not only generate income within a family household but will also improve the social security of such employees as such employment may be covered by labour laws of the country intending benefits to such employees with pensionary benefits, gratuity, health insurance etc.
7. Also, Corporate Social Responsibility of such Companies is expected to help society at large.
Fears of FDI in retail
Government of India, in December, 2011 announced that it was planning to relax the norms of FDI in relation to the retail Sector and on 15 September 2012 has finally allowed it. The above deliberation must be taken into account when discussing its repercussions on India. It has announced that it is planning to allow 51 per cent foreign direct investment (FDI) in multi-brand retail and 100 per cent FDI in single brand retail.[26] But, on account of a large opposition from various trade associations and stakeholders, it was to rolling back from its initial position whereby it allowed only 100% FDI in single brand retail. There is a lot of panic and concern about such relaxation of norms some of which are enlisted below:
1. It is argued that because of the involvement of such huge corporate houses, small, indigenous Indian retail market will suffer and will hit a blow from the former which may result in complete wipe-out of the Indian retail industry. These corporate houses not only come with better technology, experience and know-how but also with very deep pockets which is enough to tolerate large financial losses. It is feared that this deep pocket of such industries will help them in keeping the selling price at minimal costs and hence driving other indigenous, small retailers out of business.
2. Once the small retailers are driven out of the market by the large corporate houses, with no competitor left to compete with them, within the legal framework, they would be free to set a high price for selling the commodities or products. This may lead to the creation of a monopoly in the economy which is not desirable in any developing economy.
3. With large retail stores coming in the market, unorganized and small retail sector will be hit very badly and will result in loss of employment as these small retail shops will then have to compete with corporate giants like WAL-MART.
4. There is also an issue of trust deficit between the Indian community and foreign companies. After, the announcement of the FDI policy, many opposition parties in the parliament had vehemently argued that such a policy will subjugate Indian economy as it will destroy the Indian retail industry and the new retail industry will be run by foreign players who will be interested in increasing their profits rather than catering to Indian needs.[27]
5. Large retail companies are interested in Indian market because it has a huge potential which is yet to be tapped. As stated hereinabove in the article, the target of such foreign layers in retail industry are Tier I, II and III cities. But, such companies, being profit oriented, will not be ready to invest in smaller towns and rural areas. Owing to the hit on Indian indigenous retail industry, the supply of commodities to such smaller towns and rural areas may take a hit. This may tend to increase inflation in such areas.
Conclusion
When the Government has announced that it is planning to relax the norms of FDI in relation to the retail sector, loads of hue and cry was heard from the opposition, various trade associations and stakeholders. They argued that such an investment will destroy Indian economy and in the process will hit the unorganized retail industry the most. The trust deficit between Indian population and anything branded as foreign also emerges. But, we should also try to understand that FDI in retail sector in Multi Brand will further strengthen the Indian economy as it will bring a lot avenues and opportunities in the Indian market. CRISIL in one of its latest report has estimated that such a FDI policy will allow an inflow of $2.5-3 billion over the next five years in multi-brand retail.[28] With such an inflow may lead to employment generation in the organized sector of the retail industry. With the increase of percentage of organized retail sector, employee benefits will also be enhanced. But, as we all know that the ‘fear factor’ and the ‘trust deficit’ which currently dominates the minds of most of the citizens of the country is a deciding factor as to whether such a policy will be implemented or not. Everyone fears that with the relaxation of norms and coming up of foreign investors, Indian market and economy will then be dominated by Foreign stakeholders.
But, we should also keep faith in our Indian legal framework in which there are specific legislations and policies to curb such activities. In India, Section 4 of the Competition Act, 2002 deals with problem of abuse of dominance (monopoly) by market players. Section 4 of the Competition Act, 2002 reads as follows:
Abuse of dominant position
4. (1) No enterprise or group shall abuse its dominant position.
(2) There shall be an abuse of dominant position [under sub-section (1), if an enterprise or a group].—-
(a) directly or indirectly, imposes unfair or discriminatory--
(i) condition in purchase or sale of goods or service; or
(ii) price in purchase or sale (including predatory price) of goods or service.
(b) limits or restricts--
(i) production of goods or provision of services or market therefore; or
(ii) technical or scientific development relating to goods or services to the prejudice of consumers; or
(c) indulges in practice or practices resulting in denial of market access in any manner; or
(d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligations which, by their nature or according to commercial usage, have no connection with the subject of such contracts; or
(e) uses its dominant position in one relevant market to enter into, or protect, other relevant market.
So, this provision of the Act specifically provides for the prohibition of any abuse of dominant position or monopoly. Also, Ministry of Commerce and Industry through its Department of Industrial Policy and Promotion (DIPP) alongwith the Reserve Bank of India, after looking into the position of the economy, from time to time, is responsible for the framing of various policies with regards to FDI inflow, best suited for the economy at that time and for the times to come.
Competitiveness in the market will check inflation, soaring prices and will also bring best practices, boosting the economy, production and innovativeness. FDI can also spur competitiveness in sectors such as supply chain improvement, investment in Technology, Manpower and Skill development, tourism sector, agriculture, Small and Medium Scale Industries. It can also lead us to the growth in market size, greater productivity and can also benefit the government by increasing the revenue through taxes and hence resulting in an increased GDP.
Press note 1 of 2012 issued by Department of Industrial Policy and Promotion categorically provides that small and cottage industries are involved in such FDI giving the policy not only economic perspective but also social and political perspective. Because of such a policy, not only better inflows through FDI will come but also through the involvement of Global giants with the small and cottage industries, best practices and best remuneration could also be delivered to retailers. Hence, through this, preambulary objective of achieving social, political and economic justice could be achieved.
[1] V. Palmade and Andrea Anayiotas, ‘Foreign Direct Investments Trends: Looking Beyond the current gloom in Developing Countries’, (2004) Public Policy Journal, September.
[2] Suja R.Nair, Retail Management (New Delhi, Himalya Publishing House 2006).
[3] Cabinet approves 51 per cent FDI in multi-brand retail < http://www.thehindu.com/business/Industry/article2657113.ece> accessed 10 August 2012.
[4] Swapna Pradhan, Retailing Management (The McGraw-Hill Companies 2007).
[5] A.T. Kearney Global Retail Development Index, 2011, < http://www.atkearney.com/index.php/Publications/global-retail-development-index.html> accessed 10 July 2012).
[6] Chapter 5, Foreign Direct Investment, Annual Report 2010-11, DIPP, Govt. of India, page 50, <http://dipp.nic.in/English/Publications/Annual_Reports/AnnualReport_Eng_2010-11.pdf > accessed 10 July 2012).
[7] Retail Industry in India <http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf> accessed 10 July 2012.
[8] Retail Global Expansion: A Portfolio of Opportunities, < http://www.atkearney.com/index.php/Publications/retail-global-expansion-a-portfolio-of-opportunities2011-global-retail-development-index.html> 10 September 2012.
[9] Ibid.
[10] Bannock, Graham et al. The Penguin Dictionary of Economics, (Penguin Books 7th ed. 2003)
[11] Hemant Batra, Retailing Sector in India Pros Cons <http://www.legallyindia.com/1468-fdi-in-retailing-sector-in-india-pros-cons-by-hemant-batra> accessed 10 August 2012.
[12] Consolidate FDI Policy, <http://dipp.nic.in/English/Policies/FDI_Circular_02_2011.pdf >10 August 2012.
[13] Schedule I(1) of Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000, Notification No. FEMA 20 /2000-RB dt. 3rd May 2000, <http://rbi.org.in/Scripts/BS_FemaNotifications.aspx?Id=174> accessed 12 September 2012.
[14] Refer to Press Note No. 4 (2006 Series) issued by Ministry of Commerce and Industry, online at http://siadipp.nic.in/policy/changes/pn4_2006.pdf > accessed 10 September 2012.
[15] See Note 14.
[16] Press Note No.1 (2012 Series), <http://dipp.gov.in/English/acts_rules/Press_Notes/pn1_2012.pdf > accessed 10 September 2012.
[17] Ibid
[18] Id.
[19] Id.
[20] Id.
[21] Id.
[22] Id.
[23] Id.
[24] Arpita Mukherjee & Nitisha Patel, FDI in Retail Sector, India (New Delhi Academic Foundation 2005).
[25] Chetan Bajaj, Rajnish Tuli & Nidhi Srivastav, Retail Management (Oxford University Press, 2006).
[26] See Note 5.
[27] FDI in retail will impact food chain, says BJP <http://www.thehindu.com/news/national/article2657215.ece > accessed 13 September 2012.
[28] FDI in multi-brand retail: States could be the deciding factor, online at http://www.thehindu.com/business/Economy/article2672009.ece (visited on 14 September, 2012).