Organize Retail Business in India
Till 1990’s : Less than $1 billion
2010-2012 : India is the 2nd most important FDI* destination in the world (after China)
*FDI : Investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new site”
Just back from first frenzied shopping experience in the UK, a four year old ever-inquisitive daughter asked to her father, “Why do we not have a Harrods in Delhi? Shopping there is so much fun!” Simple question for a four-year-old, but not so simple for her father to explain.
As per the current regulatory regime, retail trading (except under single-brand product retailing — FDI up to 51%, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a ‘single-brand’; this condition being in addition to a few other conditions to be adhered to. That explains why we do not have a Harrods in Delhi.
This picture may be changing very soon. There are already signs of the same, the DLF Emporia Mall in Delhi already boasts of a number of global brands; Bang & Olufsen, Bottega Veneta, Burberry, Canali, Cartier, Casa Paradox, Chopard, Christian, Louboutin, Corneliani, de Grisogono, Dior, DKNY, Emporio Armani, Ermenegildo Zegna, Fendi, Giorgio Armani, Gucci, Harry Winston, Hugo Boss, Jimmy Choo, Judith Leiber, Just Cavalli, Louis Vuitton, Mirari, Miri, Orrefors Kosta Boda, Paul&Shark, Paul Smith, Piaget, Salvatore Ferragamo, Tom Ford, Tod’s, Versace…
Voices in favor of allowing FDI in Indian Retail sector
HDFC Chairman Deepak Parekh “I think FDI in retail will help the farming community. We need to invest in farming. We need much more R&D and technology and we need to upgrade our farmers”
And whether you like it or not, FDI in retail will do that to some extent. Government’s image has been tarnished, has been hit, but I must say that the Prime Minister and the Finance Minister have confidently said “we will bring back FDI in retail on the radar and it will be through by June 2012. They have both emphatically said that and I believe in that and I am sure they will try and do that.”
DIPP Secretary PK Chaudhery “The useful feedback that we got from the farmers was not in terms of whether there should be FDI or not; they welcome the investment into retail sector. The point which they were making was in terms of implementation of this policy. They requested for some safeguards to be built and asked the states to be proactive participants. One the things which came up very strongly was that to get the full benefit of retail sector, the APMC Act also has to be suitably modified by the state governments”
“A better cold storage would help since this could help prevent the existing loss of 34% of fruits and vegetables due to inefficient systems in place” SHRIRAM GADHVE – All India Vegetable Growers Association (AIVGA)
“I ask the government to make it mandatory for organized retailers to buy 75% of their produce directly from farmers, bypassing the middlemen monopoly and India’s sabzi mandi auction system” Ajay Vir Jakhar – BHARAT KRISHAK SAMAJ
“Highly perishable fruits like cherry, apricot, peaches and plums have a huge demand but are unable to tap the market fully because of lack of cold storage and transport infrastructure. Sales will boost with the opening up of retail. Even though India is the second-largest producer of fruits and vegetables in the world, its storage infrastructure is grossly inadequate” Prakash Thakur, chairman of the People for Environment Horticulture & Livelihood of Himachal
Why Govt. should be wary of FDI in Retail?
BJP leader Murli ManoharJoshi attacked the government alleging it amounted to “encroachment on agriculture, retail and natural resources by foreign players”.
He said the government’s decision to allow 100 per cent foreign direct investment (FDI) in single-brand retail was “nothing but an encroachment on (the nation’s) agriculture, retail and natural resources by foreign players“
“In the (Parliamentary) Standing Committee Report, we opposed FDI in retail and agriculture…There is no scientific proof that the Western model is beneficial…First understand the Indian arrangement, then improve it instead of copying foreigners”
RS Sodhi, the head of India’s largest milk cooperative Amul in Gujarat’s Anand district, said “you don’t need Walmart and Tesco to make cold storages here. It is not rocket technology”
“India has 600 million farmers, 1,200 million consumers and 5 million traders. I fail to understand why political parties are taking an anti-farmer stand and worried about half a million brokers and small shopkeepers” Chengal Reddy, secretary general of CIFA.
Retail FDI in India : Current Status
- FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
- FDI up to 51 % with prior Government approval for retail trade of ‘Single Brand’ products
- FDI in Multi Brand Retailing in India, this sector is limited to a maximum of 49% foreign equity participation.
Entry Options for Foreign Players in India
- Franchise Agreements: From quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.
- Cash And Carry Wholesale Trading: 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers.
- Strategic Licensing Agreements: Some foreign brands give exclusive licenses and distribution rights to Indian companies. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
- Manufacturing and Wholly Owned Subsidiaries: The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail.
FDI: Concern areas
- Concerns of the Government for only partially allowing FDI in retail sector is because it would lead to unfair competition and ultimately result in large-scale exit of domestic retailers
- Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
- Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.
Retail in India: Challenges
1. Rapid price changes, constant threat of product obsolescence and low margins.
- Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers
- Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character.
2. A threat to Mom & Pop Store
- It will lead to closure of tens of thousands of mom-and-pop shops across the country and endanger livelihood of 40 million people. Small and medium retailers will become victims of predatory pricing policies of multinational retailers
- It will disintegrate established Kiranas by encouraging monopolies of global retailers
- Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general
- Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes
3. Improper Public Distribution System (PDS)
- There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising.
- In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
4. No Global Reach
- The Micro Small & Medium Enterprises (MSME) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets
Ultimately, India would surely need to open up Retail sector for FDI, its just a matter of timing
1. Stimulating Competition
- FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.
- The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India.
3. Knowledge & Tech sharing
- The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner – foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow
- By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate India’s intentions in liberalizing this sector in a phased manner.
4. Flow of capital
- Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation
5. Meeting consumer expectation & Quality checks
- India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.
Online Newspaper Reports
- CPM asks Govt to refrain from FDI in retail (icrindia.wordpress.com)
- FDI norms and the India card for FDI (awardz.wordpress.com)
- Cash and carry sector attracted FDI worth $1.9 billion in 12 years (kackerwords.wordpress.com)
- India FDI: India superpower in application development (E&Y) (awardz.wordpress.com)
- Africa records more than doubled FDI projects of 857 in 2011, investments to hit $150b by 2015 – Ernst & Young (ghanabusinessnews.com)
- India Inc asks govt to give thrust to reforms (news.in.msn.com)
- FDI into Africa accelerates as investor perceptions begin to shift (Ernst & Young’s second African Attractiveness Survey) (appablog.wordpress.com)
- Happy Thursdays! Using treaties to challenge regressive legislation (awardz.wordpress.com)
- FDI momentum for India’s growth (awardz.wordpress.com)
- Traders to protest against FDI in retail (thehindu.com)