FDI IN MULTI-BRAND RETAIL IN INDIA

Retail industry in India in recent times has been hailed as one of the sunrise sectors in the economy. FDI in multi-brand retail is one of the most debated topics over the last few months both in the parliament and in the streets. 51% FDI will open up a wide range of opportunities for the foreign retailers such as Wal-Mart, Metro AG of Germany, Carrefour of France and so on.

A. WHAT IS FDI?

FDI expands to Foreign Direct Investment. It represents investment in Indian companies by foreign entities. GOI has prescribed maximum amount of FDI that can flow into the country in specific industry sectors. For ex: the cap in the insurance sector is 26 %. FDI will be in lasting assets such as equity capital. Because of restrictions on capital convertibility in India, FDI cannot be taken out of the country automatically.

B. WHAT IS SINGLE BRAND AND MULTI BRAND RETAIL?

As the name indicates single brand means that only one brand can be sold at the outlet. In multi brand retail a variety of brands will be available at the retail outlet. Generally speaking in India single brand retailing will not have a significant impact on the retail market and will mostly be patronized by the upper class whereas multi-brand has the potential to dramatically alter the market dynamics of the retail trade and in India’s case the local “kirana “stores.

C. THE INDIAN STORY

FDI in multi brand retail is not allowed in India. 51% FDI in single brand is already allowed .Foreign brands like Nike, Adidas etc are already present in India .100 % FDI is allowed in “ cash and carry “retail where all transactions are by cash up front. FDI participation can only be through franchise relationships or as wholesalers. Foreign chains operating in the “cash and carry” business in India are:

1)      Wal-Mart: It has a franchise relationship with Bharati Enterprises (the parent arm of Bharati Airtel) It operates 14 stores.

2)      Tesco Plc: It has a franchise relationship with Trent’s Star Bazaar.

3)      Metro AG of Germany has 8 wholesale stores.

4)      Carrefour of France has two wholesale stores.

The annual retail sale in India is around US $300 billion million. Nearly 90 to 95 % of this is in the unorganized sector controlled by tiny family run shops or ‘kirana’ shops. The organized retail is growing at 20 %. Their growth is driven by the middle class of around 300 million. To put the organized retail business in India in perspective, let us look at the picture in some other countries.

Countries	Retail sale in US $ Bn	Share of organized sector (%)
USA	2983	85
UK	475	80
France	436	80
Germany	421	80
Japan	1182	66
Pakistan	67	1
China	785	20
India	322	4

Growth in the retail sector has been due to over-crowded agriculture sector, stagnating manufacturing sector combined with low wages in both, has led to an explosion in growth of service sector. Given the lack of opportunities, an individual is forced to set up a small store depending upon the means of capital and so we have millions of small kirana stores.

D.EXPECTATIONS AND CONCERNS:

Cheap and good quality goods become available to the consumer. Cheap because they will buy directly from the farmer or producers eliminating middlemen and in large quantities with bulk quantity discounts. Good quality because they prescribe quality standards which have to be adhered to. At the end of the day the nature and type of competition does not matter. Whatever be its nature and type it will always be beneficial to consumer whether foreign or Indian and whether it comes with 26 % FDI cap or 51 % or 76 % or whatever.

v  They have access to market information globally and have knowledge of global trends as well as seasonality. They can, therefore, take advantage of cheaper sourcing from anywhere in the world.

v  They will invest in good storage facilities especially cold storages particularly helpful in seasonal goods which have to be stored in the non-season for use during the season. The loss of agricultural products in India due to defective storage conditions is estimated at Rs. 50,000 crores yearly which is equal to the subsidy budgeted for the proposed Food Security bill.

v  A compulsory investment US $ 100 million in Infrastructure has been proposed of which 50 % must be in the backend like cold storage. The concern is that this amount is just not sufficient to make a significant impact in an area which requires billions of dollars.

                                            

v  The unorganized retail opportunities in India offers avenues of self-employment (hawker etc) for unskilled labour if a factory in which he is working closes down. In short it acts as a shock absorber in our social system bereft of governmental social security for the unemployed by way of employment dole. He returns to his original job when his factory reopens or the harvesting season begins. Will such safety valves disappear with organised retail taking a firm grip on the market forces? Only time will tell.

v  An important fact that is often not highlighted is that if the share of organized retail in the total retail trade business increases GOI revenue by way of sales tax will also increase as the organized retail players will not evade tax. All sales will be invoiced and taxes paid. This is good news for a country like India where the Tax-GDP ratio is at around 14 % as against 30 % in developed countries. The tax –GDP ratio is an indicator of the amount of funds available with the Govt for discharging their functions and duties.

·         India Inc seems to be gung-ho on the proposal while the political class are divided and are not so enthusiastic citing concerns about job losses, the demise of kirana stores and of MNCs getting a stranglehold on the economy in a historical repetition of the East India Company story.

·         It is interesting to recall the first budget speech of Dr. Manmohan Singh in February 1992 after he announced the new policy in July 1991.

“We must not remain permanent captives of a fear of the East India Company, as if nothing has changed in the last 300 years. India as a Nation is capable of dealing with foreign investors on its own terms. Indian industry has also come of age and is now ready to enter a phase where it can compete with foreign investment.”

v  The new policy proposes that 30 % sourcing should be from local micro and small producers are perhaps another safe guard. This could, however, run counter to WTO regulations which prohibit such reservation. The plus side of the coin is that a complaint to WTO takes years to resolve.

E. CONCLUSION

As far as organized sector is concerned there should be regulatory framework. On the one hand, because of penetrating pricing and because of the fact that it definitely creates monopolistic market and because it has potential to create loss to crores of families, which will occur to unorganized sector.  FDIs shall not be allowed in Retail sector.

Whereas, on the other hand, the concept of global village forces the theme of liberalization. By closing door of your home, world outside will not stop from upgradation. Accepting changes and challenges is the truth of life. Food retailing supply chain is required to be improved and it is need of an hour to adapt the technology. It is right time to invite FDI when USA and Europe are under crisis and India is on the verge of facing heat of inflation.

 Backing efficiency of the system at a cost of potentially social disruptive policy is the main concern. As a countryman I hope for the best but at last it’s all about nature’s law: “Survival of the Fittest!”