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Fdi In Retail India Essay

The Big Picture – FDI in Multi-Brand Retail: What is its fate?

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Summary:

The debate about allowing or banning Foreign Direct Investment in Multi-Brand Retail has raged in this country for some time now. However in december 2012, then UPA government against much opposition from some quarters including then opposition BJP managed to get the approval. The policy of allowing 51% FDI was accompanied with a condition that individual states will have to clear it. However, eversince there have hardly been any proposals except one from tesco. Meanwhile, the Department of Industrial Policy and Promotion of the government of India has issued a document stating the government’s policy on FDI in multi brand retail. This document reiterated allowing 51% FDI. However, the government has said that it is not in favour of FDI in multi brand retail and the DIPP was only stating the existing policy. Following this the issue has become more complicated with no clarity on what the policy of the government is.

Multi-brand retail was opened up for foreign direct investment, with a 51% cap, in September 2012, when the Congress-led UPA government was in power. In its latest edition of the annual FDI document, the new government had retained the previous UPA regime’s decision allowing foreign retailers to open multi-brand stores with 51% ownership, notwithstanding the political slugfest over the issue.

State governments have some discretionary powers with respect to allowing FDI multi brand retail in India. A key condition is that multi-brand retail outlets can only be set up in those states, which agree to allow FDI in Multi Brand Retail Trading (MBRT). So far, the States of Andhra Pradesh, Assam, Delhi, Haryana, Himachal Pradesh, Jammu & Kashmir, Maharashtra, Manipur, Rajasthan and Uttarakhand and the Union Territories of Daman & Diu and Dadra and Nagar Haveli have approved FDI in MBRT. A foreign investor proposing to invest in MBRT in other states can seek specific consent from the relevant State Government. The policy is so framed because the Constitution of India categorizes “trade and commerce within the State” as a state subject. State Governments have also been given the discretion to prescribe additional conditions to regulate MBRT stores set up in their jurisdiction.

After the release of the FDI document, Finance Minister Arun Jaitley said that the BJP was never in favour of allowing foreign direct investment in multi-brand retail and a recent government notification only published the extant policy on it. This has made the government stand unclear. The BJP in its election manifesto had said that barring the multi–brand retail sector, FDI will be allowed in sectors wherever needed for job and asset creation, infrastructure and acquisition of niche technology and specialised expertise.

After much hue and cry, the government has finally made clear that it will consider repealing the 51% FDI policy in multi-brand retail, while no proposal would be entertained for opening supermarkets in India by foreign players. Traders union CAIT has also asked the government to scrap the policy of 51% IN FDI in multibrand retail sector.

India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment. In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51% investment in a single brand retail outlet was also permitted in 2006.

FDI in multibrand retail is not free from criticism. Some people say that it would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. 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 and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors. Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector and it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.

 

 

 

 

 

 

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FDI in multi brand retail is a boon or bane 
Foreign Direct Investment refers to capital inflows from abroad that are invested to enhance the production capacity of the economy. However, FDI in retail is different from the investment in corporate, manufacturing, or infrastructure sectors. Retail can be single or multi brand and may be described as a sale to the ultimate consumer at a margin of profit. 

FDI in single brand retailing in India was allowed earlier, FDI in multi brand retailing is being allowed now meaning a retail store with a foreign direct Investment can sell multiple brands under one roof. So it is the link between the producer/manufacturer and the individual consumer. India had to open up the retail trade sector to foreign investment as she is a signatory to World Trade Organization’s General Agreement on Trade & services which included Wholesale and retail services.

Indian retail sector is highly fragmented with around 97 percent of its business being run by the unorganized retailers. The organized retail is in its infancy. With the entry of FDI the retail sector will become organized. Foreign investment in food based retailing would ensure adequate flow of capital into the country and its productive use.

It will promote the welfare of farmers by agriculture growth and thereby increasing their income level. Intermediaries, known with different names in different parts of the country, flout the business ethics. Prices lack transparency, due share of farmer is not paid to him. Regulated markets also have developed monopolistic character. Indian farmers at present realize only 1/3rd of the final price paid by the consumer as against the 2/3rd price realized by the farmers in the countries with a greater share of organized retail. FDI will assist in reducing the dominance of value chain by the intermediaries.

FDI in retail will make the consumer happy as well. In the absence of intermediaries the consumer will end up paying fewer prices for a better product. Besides in the unorganized sector, consumer has to argue and fight a lot in case he has to return some faulty product to the retailer. This process will be standardized.

It will serve as an antidote to inflation. The producer will get direct payment from the retailer and the same will be higher than what he was getting earlier due to the foul play by the intermediaries. In accordance to the provisions made, any company going for 51% partnership in retail shall have to tie up with a local partner. This will improve the income levels of all concerned and will make economy flourish with quality branded products at a lower price.

FDI will improve the investment in logistics of the retail chain leading to an efficient market mechanism. India is one of the biggest producers of fruits and vegetables (More than 180 million MT), it does not have a strong integrated cold-chain infrastructure with only around 5400 cold storages which have total capacity of about 24 million MT. The irony is that 80% of the capacity is used only for preservation of potatoes. The perishable horticultural commodities find it difficult to link to distant markets, including overseas market. FDI will become catalyst in avoiding this distress sale and erosion & wastage in quality and quantity of the produce.

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Foreign Direct Investment in retail sector will spur competition as the current scenario is of low competition and poor productivity. India will flourish in terms of quality standards and consumer expectations.

The fears that entry of FDI in multiband retail may cause unemployment as they might not procure material from the domestic producers and might import the same from international market, are unfounded as the entry of big Corporates like Reliance and Tata have substantially improved the life standard of farmers and villages from where they are procuring the material.

The present PDS (Public Distribution System) will also be strengthened with better products and storage facility. Even the FDI retail may be assigned this job.

Allowing FDI in multi brand retail would bring about supply chain improvement, investment in technology, manpower and skill development, upgradation in agriculture sector, benefits to government through greater GDP, tax income. The organized sector would also emphasize to produce more and thus shall generate more employment in production as well as retail industry.

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