FDI in Retail: Back to Economic Reform: Civil Services Mentor Magazine November 2012

FDI in Retail: Back to Economic Reform

Henry Ford, the genius inventor once famous said, “Don’t find fault, find a remedy” . This adage reverberates ever so relevantly in today’s Indian retail sector scenario like never before. India, over the latter half of the previous decade, has been one of the most sought after destinations for investors across the globe. The retail sector in particular has been one of the sectors where there has been a constant buzz and excitement surrounding government policy shaping the sector. Though the voices have been growing louder for Multi-Brand FDI to be permitted for retail, there is still a long way to go before all the pieces of the jigsaw are put together. For the moment though, the Indian government aims to take up this case gradually as suggested by the 2010-11 Economic Survey report which states “Permitting FDI (foreign direct investment) in retail in a phased manner beginning with metros and incentivizing the existing retail shops to modernize could help address the concerns of farmers and consumers. FDI in retail may also help bring in technical know-how to set up efficient supply chains which could act as models of development.”

There are a multitude of reasons being floated around to prevent the liberalisation of the FDI norms for Indian retail:

  • Primary among these is the concern regarding the kirana stores as well other locally operated Mom and Pop stores being adversely affected by the entry of global retail giants such as Walmart, Carrefour and Tesco. As these brands would come with advanced capabilities of scale and infrastructure in addition to having deep pockets, it is argued that this would result in the loss of jobs for lakhs of people absorbed in the unorganised sector.

  • There has also been a debate over the kind of employment that would be generated as it is assumed that semi-skilled people would not be absorbed into the system. As majority of the workforce in India falls in this category, doubts have been parlayed about the value that would be generated by opening up the sector.

  • Fears have also been raised over the lowering of prices of products owing to better operational efficiencies of the organised players that would affect the profit margins of the unorganised players.
  • Instability surrounding the political arena with a number of scams of varying magnitudes doing the rounds has also led to a sense of uncertainty among foreign investors.

The Indian retail sector has predominantly comprised of unorganised players in the form of locally owned, Mom and Pop stores or the ‘kirana’ stores as they are known in common parlance, single owner general stores, paanshops, convenience stores, hand cart and pavement vendors, etc. On the other hand, organised retailing involves trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. basically involving the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

However, the tremendous growth prospect of the sector coupled with successfully established models of organised retail in other Asian markets such as China has paved the way for the establishment of organised retail in India as well. In addition to this, a number of home-grown corporate giants such as Future Group and Aditya Birla retail have furthered the cause of organised retail by setting up exclusive outlets across India. Nevertheless, there is still a long way to go before Foreign Direct Investment (FDI) in Indian Retail can be realised in its entirety.

The Indian retail is a robust pillar of the economy with a 13% contribution to the GDP and employs 6% of the nation’s workforce. According to India Brand Equity Foundation (IBEF), the Indian retail is valued at about US$ 450 billion, expected to grow by 10.2% in 2011- 12. Of this, organised retail onlyforms 6.5% of the pie. Hence, there is enormous scope for expansion through infrastructure and investment support. Furthermore, while unorganised retail has been pegged at a rate of 6% annually, organised retail has been booming at a stupendous growth rate of 35%. In fact, it is expected to reach 16-18% of the total market within the next five years.

A recent A.T.Kearney annual Global Retail Development Index (GRDI) confirmed India as the most attractive market for retail investment for a third consecutive year. Despite this, the entry for global retail giants in the form of FDI’s has remained more or less restricted and the government has maintained a tight leash over the FDI policy in retail, primarily owing to perceived threat posed by organised retailers on the small scale kiranashop owners. At present, India’s FDI policy in retail provides for the following guidelines, as issued by the Department of Industrial Policy and Promotion (DIPP):