1

RESEARCH REPORT
ON

ROLE AND SIGNIFICANCE OF FDI IN RETAIL

SECTOR OF INDIA: PRESENT AND FUTURE
SCENARIO

A REPORT SUBMITTED TOWARDS THE FULFILLMENT OF THE

REQUIREMENT OF THE THREE YEAR FULL TIME MBA CURRICULUM OF
UTTAR PRADESH TECHNICAL UNIVERSITY, LUCKNOW
SESSION: 2004-2006

SUBMITTED TO: SUBMITTED BY:

Mr. Prashant Srivastava Nishi Kumari Satyarthi

HOD MBA – VI Sem
Roll # 0415870007

JANHIT INSTITUTE OF EDUCATION & INFORMTAION

GREATER NOIDA

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Acknowledgement

I take this opportunity to extend my sincerest and unflappable admiration to

Mrs Kalpana Sharma, Faculty, Janhit Institute of Education & Information for the
cooperation and support she has rendered me in my endeavor. She provided me with the
facilities and utmost co-operation for working on my project. She helped me facilitate my
research by providing me with adequate assistance at all times, valuable inputs &
guidance at every stage of research process thus charting the project towards its successful
completion.

I would also like to thank Janhit Institute of Education & Information for having presented
me with the opportunity to undertake such a project which has helped me develop deep
insights about the Study of Role and significance of FDI in retail sector of India: present
and future scenario. Every kind of possible help and support was shown by the to make
this project a success.

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TABLE OF INDEX

1. INTRODUCTION

DEFINITION

UNORGANISED RETAILING

ORGANISED RETAILING

FDI IN RETAIL SECTOR IN INDIA

2. RESEARCH METHODOLOGY

HYPOTHESIS

RESEARCH DESIGN

SAMPLE DESIGN

DATA

SCOPE OF STUDY

EXTENT OF RESEARCH

3. CRITICAL REVIEW OF LITERATURE

Retail FDI: Just do it

FDI would help growth in retail sector

Wholesale gains from FDI in retailing

BJP to oppose move for FDI in retail

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The New Challenges Of Organized Retailing

Organized retail to cross Rs 1000 billion mark by 2010

Good bye mom and pop, organised retail will grow to $300bn by ’10

4. GOVT POLICIES REGARDING FDIs

5. DOES INDIA NEED FDI IN RETAIL?

6. FDI PROS AND CONS

7. ADVERSE IMPACT OF FDI IN RETAIL ON EMPLOYMENT

8. SCENARIO AFTER FDI IN RETAIL

9. WHY ONLY SINGLE BRAND ?

10. EFFECTS

11. CASE STUDY

12. CONCLUSION

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INTRODUCTION

DEFINITION : The word retailing is derived from the old French word
‘Retailer’ which means ‘to cut up’ or ‘to break the bulk’. In the words of
fillip kotler “ Retailing involves all the activities involved in selling goods or
services directly to the final consumer for personal, non business use”.
Retailing is the final stage in the distribution process.

UNORGANISED RETAILING : Retailing in India is thoroughly

unorganised. There is no supply chain management perspective. In India a
proportion of the Rs. 400,000 crore retail market is UNORGANISED. In
fact, only a Rs. 20,000 crore segment of the market is organised . Most of the
retail market in India is unorganized only 2% is organized on the othe rhand
organized retail makes up for over 70-80% of the total business in developed
countries. Traditional retailing has established in India for some centuries. It
is a low cost structure, mostly owner-operated, has negligible real estate and
labour costs and little or no taxes to pay on the other hand players in the
organised sector have big expenses to meet, and yet have to keep prices low
enough to be able to compete with the traditional sector. High costs for the
organised sector arises from: higher labour costs, social security to
employees, high quality real estate, much bigger premises, comfort facilities
such as air-conditioning, back-up power supply, taxes etc. Consumer
familiarity that runs from generation to generation is one big advantage for
the traditional retailing sector but for organized retailing they has to cope
with the middle class psychology that the bigger and brighter a sales outlet is,
the more expensive it will be.

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ORGANIZED RETAILING:

What does retailing comprise of?

Organized retailing is not just about stocking and selling, it is more about
smart management of the supply chain (back-end vendor relationships),
quality customer service, slick visual merchandising, timely promotional
campaigns and robust customer relationship management (loyalty
programmes). The core job functions can be broadly classified as retail
marketing and merchandising management, customer service and operations.
Apart from this, conventional back-office staff functions like accounting and
human resources are additional inclusions. Like any organisation, there are
hierarchies and clear growth paths in all these job functions. Typically you
start at the bottom as a shop-floor sales person, buyer or assistant
merchandiser before moving up as floor manager, store manager,
merchandising head or operations head.

Retail marketing and merchandising management :

These are the people who are responsible for your getting pulled to a product
lying mutely on the shelf as you enter a store. Retail merchandisers select,
purchase, promote and sell products for a retail store, department, division or
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chain. They study trends, visit manufacturers, designers and merchandise

markets, and make forecasts based on the information they collect. They
work with a team of buyers and managers to decide the most effective way to
sell their products. A very special sub-function includes visual merchandising
that focuses on advising advertising and display departments on the best
ways to position and place merchandise in the store. In addition to this, the
function may also be responsible for organising and co-ordinating
promotional activities. Merchandisers may also specialise in specific lines of
products like furniture or clothing. A trade marketing manager or retail
services manager looks after the retail trade. Typically, they appoint
distributors and dealers; and appoint franchisees for expansion of company
outlets. They take care of all marketing services such as events, promotion,
point of sales etc.

Operations:

How would a retail outlet survive if its most-selling items ran out of stock
while nobody inside in the organisation was aware of this big gap? This is
where operations people step in. The function is famously called supply
chain management (SCM). In a large scale retailing business, this function is
completely IT driven and includes areas like vendor management, warehouse
management and inventory management. This is a loaded back-office
operations role which is an absolute must for gaining and maintaining a
competitive edge. Most retail businesses deploy extensive SCM software
systems available from large vendors like TCS.
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Marketing and customer support service

There is a strong likelihood that those of us residing in metros have been

offered a privilege card while making major purchases at large retailing
houses like Lifestyle’s Inner Circle card or Westside’s Club West card. Also,
chances are that those of us who hold such a privilege card have received a
special first-day, first-hour invitation to the launch of the store’s season sale.
Technically speaking, this is termed as a loyalty programme and aims at
encouraging a customer to make repeat purchases, while rewarding her with
redeemable points. This is much like the frequent flyer schemes offered by
nearly all airlines. Again, this is mainly an IT driven back-office function
integrated with front-end sales counter point-of-sale software and involves a
dedicated marketing support team. This function is mainly driven by CRM
software and includes retailer-customer interaction, including sales force
automation, opportunity management, customer support, and a full spectrum
of customer analysis. As we can clearly see, apart from conventional job
functions, organised retailing offers both the aspiring youngster or
experienced marketer, a depth in career path and some exciting job functions
to choose from.

FDI IN RETAIL SECTOR IN INDIA : India is in the midst of a retail

boom. The sector witnessed significant transformation in the past decade-
from small unorganized family-owned retail formats to organized retailing.
Indian business houses and manufacturers are setting up retail formats while
real estate companies and venture capitalist are investing in retail
infrastructure. Many international brands have entered the market. With the
growth in organized retailing, unorganized retailers are fast changing their
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business models. However, retailing is one of the few sectors where foreign
direct investment (FDI) in not allowed at present. Stakeholders, trading
associations, politicians, etc. have given various arguments for an against
FDI in retailing. Presently, foreign players are entering the market through
different routes.

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RESEARCH METHODOLOGY

HYPOTHESIS : Hypothesis is a specific statement of prediction. It

describes in terms that what is expected to happen in the study. In any study
always two hypotheses are set up one that describes the prediction and other
one that describes all other possible outcomes. Normally the predicted
hypothesis is called alternate hypothesis and the other one is called null
hypothesis. In this study the predicted hypothesis i.e. alternate hypothesis is
“foreign direct investment in retail sector in India will have positive effect on
Indian economy and will not harm the traditional unorganized retail.”

RESEARCH DESIGN : Research projects are basically of three types a)

Descriptive research

b) Exploratory research

c) Causal research

here the study is of descriptive and causal both types, as descriptive studies
are primarily to describe what is going on or what exists and after that
according to data gathered, findings and history we try to find out what may
happen further, and here the study is focusing on the current Indian retail
market and how it is going to be effected by foreign direct investment. And a
causal study tells whether one or more variables causes of affects the
outcome and the study here entails FDI and its effects on Indian retail
market.

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SAMPLING DESIGN : As the study tries to find out the effect of FDI in
Indian retail market the sample here will Indian metros , cities and towns. As
the study is not public opinion based or questionnaire based so the sample
size can not be defined and it doesn’t have any relevance also. Thus the study
basically talks about how Indian retail industry both organized and
unorganized will be affected by foreign direct investment and for this Indian
cities and towns will be analyzed.

DATA : the data used for such researches are of two types primary data and
secondary data. Normally the researches are based upon any one of or
combination of these type of data. Primary data is the data collected by
researcher himself by observation, surveys, experiments or questionnaires
etc. and secondary data is a data which already stored by someone else , and
can be used as it is or can be used indirectly also. This study is based upon
secondary data. All the data and information is from newspapers, magazines,
or from websites.

SCOPE OF STUDY : The Indian retail sector is witnessing tremendous

growth with the changing demographics and an improvement in the quality
of life of urban people. The growing affluence of India’s consuming class,
the emergence of a new breed of retail entrepreneurs and a flood of imported
products in the food and grocery space, has driven the current retail boom in
the domestic market. This study would be of immense interest to retailers,
manufacturers, trading associations, chambers, real estate developers, venture

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capitalists, foreign retailers and their representatives, consultants, industry

associations, government ministries/ departments, academicians, and all
those who have an interest in the growth of this sector.

EXTENT OF RESEARCH : As the study is focusing upon the retail

industry of India so the geographical locations considered will be Indian
cities and towns. The research talks about FDI in retail so for comparison the
secondary data of china may also be used as china has allowed FDI in retail
sector. Basically the extent of research would be Indian metros , towns and
cities.

CRITLCAL REVIEW OF LITERATURE

1.1 Retail FDI: Just do it : NANDAN NILEKANI the CEO, president and
managing director, Infosys posted online to THE INDIAN EXPRESS that
in the early nineties an unusual window of opportunity opened up for
India. As western companies kept increasing their dependence on
information technology, they began to look at India and its large pool of
technically qualified human capital. Advances in communication
technology made it possible to connect remotely to computers in New
York and San Francisco using satellites and fiber optic cables. This
external opportunity coincided with the opening up the Indian economy.
The reduction in tariffs, freeing up of the rupee, abolishing of licenses,
and reforms in the capital markets unleashed enormous entrepreneurial
energy which was ready to face the global competition. This led to
policies that allowed free flow of foreign capital, massive investment in
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broadband capabilities, zero tariffs on imported software and a favorable

tax regime. Surprisingly, rather than the much touted technology
companies from the West, it was a set of indigenous companies who soon
took the leadership position.

As by putting the example of IT sector in India Mr. NILEKANI is

supporting the opening up the Indian economy. He supports this thing by
putting the points that FDI in retail sector will create the supply chain
pipes that will connect our farms and factories to the consumers of the
world , provide employment by creating millions of jobs in factories,
farms and transport companies and improve the economy. But he is not
considering the unorganized family owned retail business, which is more
than 95% of this sector as in India only 3-4% retail is organized. FDI in
retail sector will definitely affect those people who are associated with
this traditional retail business. And comparing IT with retail sector has no
point because both the things are very different in nature.

3.2 FDI would help growth in retail sector Consumer Affairs

Department Secretary, Mr L Mansingh on Friday said that FDI was
"necessary for the growth of the organised retailing sector i n India." "If
FDI is allowed gradually, this is unlikely to happen," he said, referring
to fears that the entry of organised retailers such as Wal-Mart would
render jobless those employed in the Indian retail sector, dominated by
small and medium shops.

But on the other hand the free entry of these global players will provide
millions of jobs also as supply chain will improve , Indian food and
grain producers will be employed. Apart from this retail sector in India
will grow at a faster rate and according to McDonalds India Managing
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Director, Mr Vikram Bakshi said, "In India, organized retailing is

growing at 40 per cent per annum.” So opening up the Indian market for
foreign investors will be beneficial for the Indian economy.

3.3 Wholesale gains from FDI in retailing Deepankar Sanwalka

Nandini Chopra Executive Director and Associate Director, respectively,
KPMG says that A decade ago, China was a different story — very little
organised retail, virtually no malls and a not-too-significant middle-
class, with the average Chinese not exposed to foreign brands. Today,
China's retail industry is worth upwards of $580 billion with more than
14 global mega retailers setting up shop in the last ten years. retail sales
in China, which was nearly $554 billion in 2003, will continue to grow
rapidly to $900 billion by 2009. In India, retail sales reached an
estimated $285 billion in 2003 and are estimated to grow in excess of 8
per cent over the rest of this decade.

Modern retail chains in the country, most of which sprang up in the past
five years, account for just 2 per cent of retail sales, compared with 55
per cent in Malaysia, 40 per cent in Thailand and 10 per cent in China.
Differences between urban and rural consumers are significant in both
China and India. Most foreign entrants wrongly assume that anything
Western will sell. The initial fascination for Western brands wears off
once the discerning consumer finds local products of the same quality at
affordable prices. Getting the price right is essential. Initial trials, despite
high prices, are a common phenomenon. However, the average
consumer is extremely value conscious and seldom accepts dollar-
denominated prices, which are often the benchmarks set by global
entrants.

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These are the similarities between Indian and Chinese market by which
author is supporting to allow FDI in Indian retail industry as china did
but there are considerable differences also like India, with its distinctive
regions, and diverse religions, languages and cultures, is as diverse as
many sub-markets within a market and, hence, is akin to an
agglomeration of small markets such as Thailand, Korea, Malaysia,
Taiwan, and so on. Retail formats that have worked in South India have
not received the same response in the other regions. It has been no
different in China. The acceptance of Westernization in East China is
much more than in the Central and Western parts. Hence, aggregate
comparisons for China and India vis-à-vis their smaller regional
neighbors may be unfair. Also the Regional analysis for China and India
may throw up a very different picture.

3.4 BJP to oppose move for FDI in retail The BJP decided to oppose
the government’s move on allowing FDI in the retail sector, in tandem
with a decision to move two crucial amendments to the National Rural
Employment Guarantee Bill, if changes suggested by the Standing
Committee are not incorporated. Party spokesman V K Malhotra said it
was ironical that the government was trying to move a Bill on jobs for
millions of people, while at the same time rendering crores of small-time
shopkeepers and vendors jobless all over the country through the move
on FDI in retail. The party has demanded that jobs for all those who seek
employment, including those in urban areas, should be considered under
the employment guarantee Bill.

But BJP is not looking towards the other side of the coin that opening
up of the retail sector would benefit domestic producers and

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manufacturers. both rural and urban areas will be benefited by foreign

investment. The FDI in retail will help in growing the organized
retailing. On the other hand it is not going to affect the unorganized part
of retail.

3.5 The New Challenges Of Organized Retailing ADVAIT

KURLEKAR Director, Cedar Enterprise Solutions Private. Limited says
that As the eponymous Hindi film goes on to say, Roti, Kapada aur

Makaan are truly the basic necessities of life. In that order! This ?roti?,
which accounts for anything between 40 to 70 per cent of the
household’s shopping and consumption basket in India (depending on
what kind of household you are talking about) has suddenly evinced a
lot of interest from the so-called “organized” retailers in India.
Organized food and groceries retailing has been in vogue in the southern
parts of the country for quite some time now. Southern cities and towns
have got used to the Food Worlds, Nilgiris and Subh-ikshas
mushrooming in their friendly neighborhood. As newer players enter
this field (Trent, Food Bazaar, etc.) there are several issues (some
strategic, many others operational) that the industry as a whole might
need to consider. Organized retailing: As an organized retailer, one
needs to differentiate oneself, when it comes to one’s relationships with
key vendors and I am not just talking of benefits of scale economies
here. That’s obvious. But the issue is nurturing a win-win partnership
with key vendors on a collaborative model. In the fast moving consumer
goods sector, 22 companies have come together to ensure faster and
more efficient and cheaper service to the customer.

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In this scenario of fast growth of retail industry India must go for

foreign direct investment in retail market.

3.6 Organised retail to cross Rs 1000 billion mark by 2010 The

retailing industry in India estimated at Rs 9300 billion (2003-04) is
expected to grow at 5% p.a. and the organized retailing is well on its
way to become a Rs 350 billion market by 2005 according to INDIA
RETAIL REPORT 2005 : An IMAGES-KSA Technopak study released
at the KSA Retail Summit 2005 by Mr Kishore Biyani, managing
director of Pantaloon Retail, India’s largest retailer. “The size of the
organized retailing market stood at Rs 280 billion in 2004, thereby,
making up a mere 3% of the total retailing market. Moving forward,
organized retailing is projected to grow at the rate of 25%-30% p.a. and
is estimated to reach an astounding Rs 1000 billion by 2010. Further, its
contribution to total retailing sales is likely to rise to 9% by the end of
the decade,” said Mr Arvind Singhal, chairman, KSA Technopak.

Briefing on the report Mr R S Roy, editorial director, IMAGES group

said that the presentation of India Retail Report 2005 required a
yearlong interaction with over 1000 companies representing the entire
gamut of manufacturing, retailing and the services sector that had direct
or indirect impact on consumer spending. The study required a thorough
understanding of the world market, major players, strategies and
emerging trends and the evolution of Indian retail across multiple
segments.

According to Mr Amitabh Taneja, group head, IMAGES & director,

International Council of shopping Centres (ICSC - India) and Indian
Retail School, currently the fashion sector in India commands a lion’s
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share in the country’s organised retail pie. This is in line with the retail
evolution in other parts of the world, where fashion led the retail
development in the early stages of evolution and was followed by other
categories like food & grocery, durables etc. The report covers major
sectors like apparel, footwear & sportswear, jewellery, watches, health
& beauty (including services), food & grocery, consumer electronics,
mobile handsets & peripherals, books, music & gifts, home,
entertainment, and oil.

Detailing reasons why Indian organized retail is at the brink of

revolution the IMAGES-KSA report says that the last few years have
seen rapid transformation in many areas and setting scalable and
profitable retail models across categories. Indian consumers are rapidly
evolving and accepting modern formats overwhelmingly. Retail space is
no more a constraint for growth. India is on the radar of global retailers
and suppliers/brands worldwide are willing to partner with retailers here.

Further, large Indian corporate groups like Tata, Reliance, Raheja, ITC,
Bombay Dyeing, Murugappa & Piramal groups etc and also foreign
investors and private equity players are firming up plans to identify
investment opportunities in the Indian retail sector. The quantum of
investments is likely to sky-rocket as the inherent attractiveness of the
segment lures more and more investors to earn large profits. Investments
into the sector are estimated at Rs 20-25 billion in the next 2-3 years,
and over Rs 200 billion by end of 2010.

3.7 Good bye mom and pop, organised retail will grow to $300bn by
’10 MAYUR SHEKHAR JHA say that The organised retail business in
India is expected to double every year for the next five years. By the end
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of ’10, the sector is expected to emerge as a $300bn (Rs 1,350,000-crore)

industry, from around $7.5bn (Rs 35,000 crore) currently. In the past five
years, the cumulative growth in the sector has been 133%, according to a
report prepared by McKinsey and the Confederation of Indian Industry
(CII).

The major part of retail business in the country is currently in the hands of
the unorganised sector, o r what is commonly known as ‘mom & pop’
stores. India is still dominated by traditional forms of retailing — the
corner grocery store, weekly haats, hardware stores and so on. In
comparison to the retail industry in developed countries, the sector’s
highly fragmented here. India is estimated to have around 1.1 crore retail
outlets, out of which, only one-twentieth are bigger than 500 sq ft in
terms of floor area.

On the other hand, though the volume of retail market in the US is 13

times that of India, there are only 9 lakh outlets. A study by AT Kearney
recently identified India as the second-largest retail destination among
developing markets. It contributes to almost one-seventh of our national
gross domestic product (GDP). India is also the second-largest in terms of
employment generation, employing 7% of the total workforce, next only
to agriculture.

Industry in India is exploring possible measures for transition of the retail

market. For this government of India is arguing for allowing FDI in retail
sector.

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GOVT POLICIES REGARDING FDIs

India is one of the most liberal FDI regimes in the world. We have
unshackled FDI policies in telecom, publishing, real estate and in asset
reconstruction firms in the last couple of months. Up till now Barring the
financial, retailing and coal mining sectors, we are extremely liberal in
welcoming FDI. There is a Group of Ministers, which is examining ways
of rationalizing the current FDI regime so that there is less red tape. as far
as FDI is concerned, it is not policy but badly designed procedures and
poor infrastructure, which are today the most important constraint. As for
FDI in retail, we are engaged in an intellectually stimulating exercise to
understand the possibilities that exist in opening up this sector and how
best we can harness it for our needs. A few days earlier, his pilot for
Operation “Thrust Retail FDI”, Mr. Kamal Nath, had this to say at the
Economic Editors Conference: "We are in agreement with Left parties that
FDI should not replace or displace jobs. We are yet to evolve a model .
The main problem is between large and small players and not domestic
versus FDI.” On final count, one major issue, that of big retailers
displacing the small retailers, saying: "It makes no difference whether the
investment is domestic or foreign. The debate now is big versus small and
not FDI versus small `kirana' stores. The idea is to see that small
shopkeepers do not get displaced and employment is generated" The issue
of FDI in retail was not that of Foreign versus Domestic, but essentially of
the Big versus the Small, adding that the right model for India was yet to
be evolved and the whole issue was under discussion. We are examining
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FDI in retail. We are keen to see that retail leads to modernization of our
agriculture. The challenge is to find a model which does not displace or
replace the existing investment and small shopkeepers". He said the
model that the Government was looking at must bring technology and not
replace existing investment. Stating that the interests of the small grocery
owners must be safeguarded not by the "colour of money" alone, the
small-time shop owners would also be hurt by the emerging super marts
being put up by the large domestic retail houses. In this regard, he
underlined the urgent need to step up investment in food processing and
foster backward linkages, including marketing, particularly when 40 per
cent of the fruit and vegetable produced in the country rotted every year
for lack of modern preservation technology, including cold chains. That is
why the Government was looking into different models of FDI in retail
and was open to one that would not displace existing employment in this
sector. The Minister conceded that there were problems in free movement
of agricultural products within the country and this should be addressed
before any FDI model for retail trade was put in place. So far as FDI in
Retail goes, the only way we can move is through a public debate, which
is going on. We expect that the Commerce Ministry will be able to arrive
at a decision which is acceptable to all in three to four months. He also
sought to link the issue of FDI in Retail with the larger issue of attracting
FDI into the country to achieve growth rate of 8% in GDP. At the time of
the 58th AGM of Assocham, the Deputy Chairman of Planning
Commission, Mr. [Link] said: "We are looking into the pros and
cons to allow FDI in retail. Internal discussions are on. It is expected that
FDI should be allowed in retail in the MTA of the Tenth Plan,

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"These comments coming from those in a position of authority within a

short time, are mentioned to show that the Government is hell-bent on
rushing to FDI in Retail at any cost, having discovered FDI in Retail as
the panacea for all the problems of development affecting the country.
However, this rather disproportionate emphasis on FDI in Retail only
tends to distract from the issue of real and major concern, which the Prime
Minister’s own speech above has indicated. At the core of the debate on
FDI at the macro level is the failure of the Government in attracting FDI
in key areas. By the Prime Minister’s own contention in his speech above,
the country has one of the most liberal FDI regimes in the world today.
The Finance Minister too had a point when he cited the example of China
in attracting FDI. But as all concerned with the subject within the
Government must know, China’s success lies not merely in attracting high
levels of FDI but also in attracting it in the right areas. China started on
the FDI path in 1979 and between then and 2004, it contracted FDI
amounting to US$ 1094.94 billion. Out of this, as much as US$ 1062.58
billion was contracted between 1990 and 2004 and the amount utilized
was US$ 544.82 billion. Even during 2005 (January-July), China
contracted for FDI amounting to US $ 98.64 billion and utilized US$
33.09 billion. Even considering that a significant amount is being
reflected as FDI due to round tripping, the figures are enormous, when
compared with our optimistic projections of US$ 8 billion for this year. In
the years in which China had enormous inflows, Retail was NOT the
sector that brought FDI inflows to an appreciable extent. If the
Government really intends to carry out an ‘intellectually stimulating
exercise’, the same should be concerned with looking into the reasons for
its inability to garner FDI for manufacturing and infrastructure and the
consequences of continuing failure to make any headway in this direction,
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rather than emphasizing on the Retail sector and trying to turn

development economics on its head. Once the reasons for the small flow
of FDI are examined in depth, our shortcomings in critical areas, too well
known as they are, will come to the fore. For example, at a Conference on
24th November 2004 on Improving Investment Climate, the World Bank,
an external agency that we like to listen to carefully, listed four key areas
that are proving to be a roadblock to progress. These are: Infrastructure,
bureaucracy, labour markets and access to finance by SMEs.

Even conceding that some of the allies of the present Government have
strong views on labor reforms, the Government it seems, has not been
giving even enough lip service to the matter, let alone conceptualizing and
crystallizing its thoughts in this direction. The Left parties at the political
level and more so the labour sector have justifiable apprehensions about
altering the status quo. However, having accepted the path to globalisation
and liberalisation, the unpalatable consequences also need to be faced at
some stage. Delaying or avoiding a debate is unlikely to open up any
miraculous solutions. Instead of the faint murmurs on the subject
emanating from the Government side in the last few weeks, it needs to
urgently apply its mind to the problem and available options and present
them before the country so that a transparent debate can ensue and a road
map to reforms worked out. Tough as the debate may turn out to be, it
may be tempered by the fact that the Labour has already experienced at
first hand the impact of liberalization and the havoc it can wreck on an
industry that does not have the possibility to take measures to maintain
competitiveness and cost leadership. The Left Parties too, despite their
traditional sensitivities, are learning to be realists and pragmatic about the
new situation in the world that has changed forever. It is certain that a

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practical solution that will serve the country well can be found, because it
has to be found. The other aspect relating to FDI at the macro level is that
the Government’s approach has been less than purposeful so far. Its half-
hearted actions emphasizing different sectors at different times and trying
to simply push for higher ownership limits for foreign investors in one
sector or the other do not inspire enough confidence. There appear to be
no sector-wise priorities or overall road map, as evident from the way the
emphasis has shifted to Retail sector from more critical sectors, like
clutching at straws. It is not known if any targets for FDI in critical areas
have been set and the bottom line seems to be simply to ‘get whatever
maximum we can’. The results are there for all to see. China has pre-
empted huge amounts in FDI including in efficiency-seeking
manufacturing FDI. This has enabled China not only to become an export
powerhouse but also to achieve internal development that leaves India far
behind. Not only is it necessary to rectify the situation but also necessary
for the country to know what specific actions are being actually taken.
Therefore, in the first instance, the Government needs to publish a
detailed Position Paper on FDI based on the present position that will
clearly spell out inter alia, a comprehensive approach to FDI, the reasons
for failure to secure adequate FDI so far, the corrective actions and most
importantly, broad targets. This would show its sincerity and transparency.

For the present, however, the Government’s energies are primarily

concentrated in proving the case for FDI in Retail despite strong objection
from different stakeholders. In pushing its case, the Government does not
seem to think much of the valid and cogent arguments put forward by the
Left parties recently supporting its consistent opposition.

External Pressures and Lobbying

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Walmart's Menzer

Apart from the inability to secure FDI where needed, the other unstated
impetus for the urgency is apparently the tremendous pressure from
foreign governments and International agencies like World Bank and
strong lobbying by multinational Retailers. The U.S. in particular, has
been turning on the heat for quite some time, the latest gratuitous message
having been delivered on 8th November by US Treasury Secretary John
Snow. Even the British Government is now taking up the case for
allowing FDI in Retail. "We are all lobbying like mad," said Sir Michael
Arthur, high commissioner at the British High Commission in New Delhi,
speaking in Bangalore on 15.11.05. He further said, "It's a hot topic in
Delhi this autumn,” The British Government is supporting the attempt of
TESCO, the major UK Retailer to enter the Indian market. At the same
time, Tesco’s Chief Executive too urged the government to allow foreign
retailers majority ownership of Indian retail operations. Earlier in the year,
John Menzer of Walmart also visited India to lobby hard for this purpose.
Clever comments in the media by the multinational retailers are also
designed to put further pressure. Example: “Foreign retailers, which have
become increasingly exasperated with the government’s failure to
announce a clear policy for the sector, said the call for further national
debate was another thinly disguised delaying tactic that pandered to
vested interests.” (Financial Times, London, 30.11.05) It is strange that
these retailers who themselves have a vested interest brazenly describe
attempts by domestic stakeholders who are vitally concerned, as ‘thinly
disguised delaying tactic’. Another gem is found in this comment: “..
unless India allows FDI in retail it would not be even in the radar of
potential investors.” the implication being that no other FDI of any kind

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would flow unless FDI in Retail is allowed!! Unfortunately, the actions of

the Government seem to suggest that it goes along with this line of
thinking. Read further: “If the door remains half shut, both India and those
eager foreign investors will be frustrated.” Oh? The investors in Retail
Trade will come whenever they are allowed, in the world’s most attractive
market after China. There is no ‘now or never’ scenario as far as FDI in
Retail is concerned. There is also a concerted push by academics and
consultants of all kinds presenting the FDI in Retail prescription to
developing countries, and particularly to India, the most important market
for the developed world. It is clear that the Indian Government is unable
to withstand such sustained onslaught of high pressure lobbying and
advice from various external sources to influence its policy direction. The
decision to allow FDI in Retail seems to have been taken a year back. In
the middle of the year, the Prime Minister, speaking to Financial Times
said he hoped the sector would be opened by year-end. Thus, the decision
is ‘on course’. The FT report also mentioned that the Prime Minister sees
the liberalization of this sector as a “test case of his ability to govern…”
In fact, the announcement, which could have been made during his recent
visit to USA, was apparently staved off only following cautioning by the
Left Parties prior to the visit against an announcement. But the temptation
to tell the world is apparently too much. The Prime Minister, already
anticipating the conclusion of a so-called ‘public debate’, has just
announced on 12th December 2005 while attending the ASEAN meet that
the UPA government expects a ‘positive outcome’ on FDI in Retail in 5-6
months.

Need for a Green Paper

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Many of the concerns and issues related to allowing FDI in Retail at this
stage of our development, have been dealt with in earlier articles.
However, the latest posture and the line of arguments adopted by the
Government to push through its plan appear to present a misleading
picture. These are dealt with in a separate article that follows. The main
issue is that a decision even to allow FDI in Retail at all at this time,
which is of crucial importance for millions, needs to be based on a
transparent public debate. Although the Finance Minister has attempted to
convey that the Government is conducting a public debate, the Deputy
Chairman of the Planning Commission indicated that internal discussions
are on. The debate on this subject has not gone beyond discussions with
the vocal allies, speeches at a few seminars, pronouncements of
government’s intent through the media, and some consultations with
business interests that may not represent all those who may be affected.
Even if the Government has been pursuing the matter for a year now, it
cannot be said that a meaningful, objective and transparent debate has
taken place. If nearly a year has gone by, the reason is that efforts have not
been based on coherent objectives, cogent arguments or systematic
approach. What was required from the beginning and is now essential is
that the Government should publish a Green Paper on the subject for a
wider and proper public consultation and debate. The Green Paper should,
inter alia, detail with complete clarity: The Objectives for allowing FDI
in Retail at this point in time Estimate of FDI expected for this sector and
the workings for the estimate, the assumptions and the formula for
ownership that the Government has in mind upon which the estimate is
worked out If the Objective is to secure vertical spillovers, in what
manner and by what mechanisms would the Global Retailers be
participating in backward linkages Other objectives, if any, which are a
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function specifically of FDI being allowed in Retail, i.e. they could not be
achieved by other means, e.g. foreign participation in other ways or by
domestic players Outcomes expected, Deliverables and quantification of
benefits which are capable of being quantified, against the stated
objectives The Pros and Cons to which consideration has been given by
the Government Assessment of negative impacts, if any, on any
stakeholders or a sector of the economy The alternative formulations and
conditions being considered for FDI in Retail Details of policy initiatives
necessary in other areas to realize the objectives of FDI in Retail Outflows
related to the estimated FDI receipts by way of dividends, bonus share
issues etc. over a period A Government that claims to be transparent and
willing to be accountable to the people should be ready to have a proper
public debate on this policy issue as much as on other development issues.

It is clear that the ghost of FDI in Retail has so seized the Government
that no one seems to be capable of exorcising the ghost. The enfeebled
BJP and its other partners in the NDA have so far not found it necessary to
unambiguously and forcefully articulate their position on this major issue
of Trade Policy. Indeed, they seem to lack the will to function as a
responsible Opposition beyond making perfunctory noises over issues of
no great consequence. It is also clear that the Government is all set to
ignore or steamroller objections from the domestic business community.
The only real objections that have received the Government’s ears have
been from the Left parties. It remains to be seen, however, whether the
Left would continue to advance its valid objections to resist the
Government’s intentions or let the Government have its way due to
political expediency. The Left parties have already succeeded in putting
on hold the Government’s decision on disinvestments in BHEL, which is

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being seen as a major victory by them. They are also at loggerheads with
the Government over its unexpected stand on the Iran issue where it
obviously succumbed to pressures from our ‘could-be’ mentors, the USA.
Sandwiched between these two major issues, FDI in Retail is an issue
where the Left may well decide to give up its valid stand. It would be sad
if that happens. As far as objections within the various components of the
UPA in Government are concerned, NCP has itself become a votary of
FDI in Retail with the Ministry headed by Sharad Pawar actually mooting
an extreme proposal to allow 74% FDI. RJD of Lalu Yadav is hardly
capable of taking any principled stand on issues of Trade Policy. The other
parties in UPA are likely to meekly accept the proposal without any
serious objection.

The real reasons for persisting with this issue are not hard to seek. They
are: Tremendous pressure being brought to bear on the Government by
USA Government and the private interests like Walmart and the informal
assurances that already seem to have been extracted by them from the
Indian Government. Lobbying of the right kind with the powers-that-be,
both within the Government and the key UPA parties, that can influence
the Government’s decision. Miserable and abject failure to attract
adequate FDI in other areas where it is really needed. In pushing this
proposal, the Government is all set to fool the people, by projecting that it
is going to allow FDI in Retail only based on ‘tough’ conditions. The
Government’s intent to hoodwink the people becomes clear when these
‘restrictive’ clauses are examined. Minimum Capitalisation of US $ 5 mn.
As any one who is familiar with the Indian Retail scene would realize,
this is not a restriction at all because any major Retailer that expects to
enter the Indian Retail market in an organized way, would actually have to

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spend much more just to set up an economic operation in the Metro cities.
Permission to operate only in ‘just’ six metros. Those in the Government
who have thought of this ‘brilliant’ restriction must really have very low
opinion of the intelligence of our people. As every one familiar with the
Indian scene knows, the major action in Retail is taking place precisely in
these metros. The Business Plan of any foreign Retailer entering the
Indian market would naturally involve initial operations only in the
metros where the maximum opportunities lie. Setting up shop in non-
metros would be farthest from any foreign Retailer’s plans in the initial
stages, without first achieving success in the metros. Putting this
condition is actually favoring, not restricting the foreign Retailer.
Restrictions on number of outlets to 15 in each of the metros. This is
purely a restriction on ‘paper’, as it is naïve to think that a foreign Retailer
would suddenly want to or be able to set up 16 or more outlets in a metro.
Minimum space of 5,000 sq. metres. This is another instance of a
laughable condition as a Retailer of the level of Walmart or Carrefour
would certainly have a minimum space of that size in any case. At the
same time, the dramatic impact of such large spaces being taken by
foreign retailers on the prices of retail space in the metros could make it
well neigh impossible for others to buy even small retail spaces. Already
in parts of some metros, the prices are touching the astronomical level of
Rs. 50,000 per [Link]. even without the presence of foreign retailers.
Reserving minimum 50% space for food items. This is just what the
doctor ordered. This condition, which is made out to be a restrictive
condition would actually be music to the ears of the foreign Retailer. As
pointed out in one of the earlier articles, food and grocery are the
mainstay of a major retailer and the customers coming to buy articles of

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daily necessities as food actually help generate business for the other
products that a major retailer sells.

The FDI limit would be limited to 49% or 74% initially.

This limitation, so goes the argument, would enable the Indian JV partners
to “imbibe the best management and procurement practices followed by
international retail giants.” There is plenty of empirical evidence to
suggest that the Indian JV partners would be bought out, sooner rather
than later and as soon as feasible, by the multinational partners by
adopting a host of tactics. Till the time that the Indian partners do remain,
they will be merely name-sake partners having position on the Boards but
no say in the business management. In pushing this proposal, once again
the now familiar arguments about helping the farmers are also raised. As
has been pointed out in earlier articles, this would turn out to be wishful
thinking. In any case, if farmers are indeed going to be helped by
organized retail, they would as well be helped by the domestic retail
players of whom there is no dearth. Once again, also the bogey that ‘mom
and pop’ stores would not be harmed, has been raised. These arguments
have already been dealt with in earlier articles. The note prepared for the
Cabinet supposedly cites that the Planning Commission, Finance Ministry
and Commerce Ministry, all have endorsed the idea. Incidentally, it does
seem that the Planning Commission may be getting too much involved
with micro management of the economic development process, by
specifically suggesting FDI in Retail. As far as the three conditions for the
Left supporting FDI are concerned, viz. augmenting technology,
generating employment and increasing productivity, FDI in Retail cannot
be shown to satisfy these conditions except by convoluted and stretched
reasoning at which this Government seems to be quite adept. The
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Government also seems to be unable at this stage to quantify the level of

FDI in Retail that would flow into the country. The reason is simply that
the level of FDI in Retail would be too low to make any worthwhile
impact, a point that was admitted at one time by the Finance Ministry. If
the Government is convinced that significant FDI will flow in, let it make
public its quantification and the calculations on which such estimation is
based. It is futile at this stage to once again highlight the real issues,
which the Government prefers to obfuscate and gloss over. These have
been discussed extensively in earlier articles. It is only hoped that wiser
counsel, especially from the Left, will prevail and this unnecessary
decision pushed back for a few years to allow the domestic retailer a
reasonable time to meet the competition from international giants at least
from a minimum level of strength, as was done by China. Heavens are
certainly not going to fall, nor is the country's economic development
likely to be jeopardised just because the Retail sector is not opened for
FDI immediately. The talk of needing foreign investment for retail is
bunkum. So many Indian groups are involved in retail. Even Reliance
group has announced a massive investment in retail just recently.

A good analysis indeed of the FDI investment scenario...but, its sad that,
only one side of the picture had been presented. Let me give u the other
side of the story. Why should everything be seen in a narrow context of
Foreigners looting Indian Money?...Why is the customer left in lurch?..As
a customer, I would have many a times been put at discomfort because of
non availability of a particular item- rather worse, expired/damaged
stock etc...with all these being in unorganized sector, I cant even take the
legal course of action...

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Think of the improvements in productivity/ infrastructure development,

employment generation that this will lead to. Please put up the other side
of the story too- how much ever strong ur cause may be!

The comments of reader krish are appreciated and his point of view has to
be respected. If the issue is deeply examined and also the experience of other
countries taken, the improvements in productivity, employment generation,
infrastructure etc. are not directly related to FDI in Retail being allowed
freely although those who are interested in seeing FDI in Retail would like
to present it to be so. To achieve this, the emphasis has to be rather on FDI in
other critical areas which will directly help achieve all these improvements.
This is what China has done admirably and is now a role model for many
developing countries. This is not to say that we should blindly follow China.
At the same time, FDI in Retail is hardly the medicine for accelerating our
development at this stage, as can be seen from earlier discussions especially
the article on the China Story.

As to the customer being left in the lurch, the situation is changing very
fast already in favour of the customer, with a lot of organized retailers
coming in and also the small retailers beginning to see the need to change. At
October 17, 2005, Sivarama from Bangalore said... The possible impact on
retail space prices is rightly highlighted. Let our own entrepreneurs have the
opportunity to develop their full potential. In a few years, they will be
capable of meeting the new challenges from the multinationals. Its not fair
to allow MNC retailers so soon.

At October 17, 2005, A Retailer, Mumbai said...

The Government is apparently trying to play divide and rule amongst the
organized and unorganized retailers to gather support for its proposal.
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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At October 17, 2005, pandian said...

To put the minimum space requirement of 5,000 [Link]. in perspective,

even Big Bazaar, one of the existing retailers has 3 stores in Mumbai/Thane,
1 in Bangalore, 1 in Ahmedabad and 1 in Ghaziabad larger than this size!!

At October 17, 2005, N. Dastoor said...

I think many Indians are so enamoured by the prospect of having foreign

companies that they have lost pride in the country's own entrepreneurs and
would not like to encourage them. How will the country ever become a real
force in the world if we have to perpetually rely on foreigners? This simple
fact should be understood by those in authority and the people at large as
well. Whether the foreigners loot us or not is a moot point.

At October 17, 2005, Anonymous said...

As one who has seen the raw deal not only the customer but the people in
general got earlier, the customer is much better off today than previously. The
small retailers who cannot improve will anyhow fall by the wayside. For that
to happen, one doesn't need foreign retailers.

At October 18, 2005, Anonymous said...

FDI in retail is a good thing and it should have happened sooner, not only
will it help bring prices down and improve the quality of goods available to
the people it is going to have a significant impact on the economy because it
will help increase employment, more taxes to the govt, help push the
consumer products, real estate, construction industry. I dont see any
negative impact of FDI into retail. The left's demand to stop investment is
bogus just like other silly demands they have to slow progress in India keep

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them underdeveloped and poor so that they can continue to thrive on poor
for votes. I am yet to see the left make a demand for any kind of
development projects......so far they have opposed every thing.

At October 18, 2005, sivarama said...

some comments above supporting fdi in retail seem to overlook the basic
arguments against the same. it is all very well to make sweeping statements
against left parties because they do have their share of dogmas. but in this
instance, if one looks at the overall perspective, not just going by
uninformed views, they are right in opposing it. all the supposed benefits
cited above by a reader above, in reality flow from economic growth in
general, not specifically resulting from FDI in retail. For retail growth,
foreign investment in the sector is not absolutely essential. It is simply not
true that without foreign investment, retail will not grow. Look around you,
Indian retail is growing on its own steam.

At October 26, 2005, Anonymous said...

It is apparent that also the Left parties have been 'tackled' by the Walmart
lobbyists.

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ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA

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DOES INDIA NEED FDI IN RETAIL?

If there are three areas of economic policy where we have been often wrong
for much of the past 50 years, these are the external sector, agriculture and
the importance of distribution and retailing.

The topic currently under hot debate, namely foreign direct investment in the
retail sector, combines all these issues -- no wonder we keep debating it
endlessly. Quite apart from the economic logic or ideology, perhaps there is
also a cultural/philosophical issue.

In a recent book, Eastern Philosophy, Chakravarthi Ram-Prasad argues that,

while ancient Indian philosophers wrestled with abstract issues like the
nature of being and reality, their Chinese counterparts focused on how best to
live.

Does Chinese pragmatism about the "colour of the cat" being immaterial, as
contrasted with our endless debate on the subject, illustrate the same
difference even in the 21st century? To be sure, Marxists, who oppose FDI in
the retail sector, claim ideological descent from the German economist, not
ancient Indian philosophers, but Marx's economic model has been abandoned
wherever it was tried, except in Cuba and North Korea.

But to come back to where we began, our erroneous policies on the external
sector started with export pessimism. Therefore, the focus of the industrial
policy was on import substitution regardless of economic cost.

The consequential rigidities of industrial and import licensing ensured that

much of Indian industry remained high cost and uncompetitive, thus
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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perversely proving the thesis of export pessimism! Indeed, in that era,

Manmohan Singh's was a lonely voice not subscribing to the received
wisdom. No wonder he was later the architect of the far more rational
industrial, trade and exchange rate policies of the last 15 years -- the effect on
balance of payments has been wholly positive.

During the first few plans, agricultural output was also not given its due
importance till the prospect of perpetual food shortages focused the attention
of our political masters. But we continue believe more in subsidising than in
reducing waste or adding value to the output.

This has led to continued rural poverty, except in some isolated pockets. One
problem is that a huge proportion of perishable agricultural output like fruits
and vegetables is left to rot in the fields in the absence of cold storages and
transport infrastructure, and becomes a dead loss to the economy.

An all too visible manifestation of the inefficiencies is the huge disparity

between the price which the producer gets and the price the consumer pays --
sometimes as high as 10-20 times! Clearly, what is needed is an efficient
supply chain backed by improved infrastructure, cold storages, packing and
transportation. And, the traditional system of distribution, ending with the
mom and pop shops or the street-side vegetable seller, is just not capable of
creating it.

This brings me to the third blind spot: distribution and retailing. First,
umpteen indirect taxes hamper a smooth chain. Again, for decades, financing
of manufacturing was considered virtuous while finance for trade or
consumption was discouraged.

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The middlemen were, broadly speaking, thought to be parasites standing

between the producer and the consumer, contributing little to economic
growth or output. The fact is that the circle of economic activity cannot be
completed until what is produced reaches the consumer and, therefore,
efficient distribution and retailing are very important.

To quote just one example, can we imagine a vibrant automobile sector

without an efficient distributor and service network and, indeed, vehicle
finance? Or a fast-growing and needed housing sector without availability of
housing finance?

The entry of the organised sector in retail trade is capable of mitigating, if not
solving, the huge waste involved in the current system, simultaneously
paying better prices to the producer and lower prices for the consumer.

This is manifest to anybody visiting some of the newer supermarkets in

urban/metropolitan India: the produce is cleaner, fresher, well-packed, and
often cheaper than the vegetable seller on the street.

This is possible because of the far more efficient distribution system which
organised retail chains are employing, by cutting layers of middlemen. One
very positive sign is that a way seems to have been found for the corporate
sector to enter the rural economy through contract farming -- almost every
day one sees major corporate names making forays in the area.

If the huge margin between producer and consumer prices is one attraction,
they are also perhaps inspired by what Pepsi succeeded in doing for the
potato farmer in Punjab, partly to fulfill the export obligations imposed on it
when it entered India.

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But do we really need FDI in the retail sector besides the domestic corporate
sector?

FDI PROS AND CONS

Indian retailing industry has made huge strides over the last 10 years. The
retail trade in India is expanding by 22 per cent per annum with addition of
25 million middle class customers. Despite the recent boom in the retail
sector in India, organized retail forms only around 3 per cent of the entire
industry. Despite being one of the largest employing industries in India and
contributing a significant portion to GDP, it still lacks a clear policy which
would allow Indian retail players to firmly establish themselves and enable
them to face competition on an equal footing.

With heightened activity in the retail scenario the debate over whether FDI
in the sector should be allowed or not is getting heated. Here there are two
issues which are getting entwined. The first is the question of the benefits of
organized retail, and the second is allowing FDI in the retail sector. There is
no doubt that organized retail sector holds a number of benefits. The entry of
the organized sector in retail trade is capable of mitigating, if not solving, the
huge waste involved in the current system, simultaneously paying better
prices to the producer and lower prices for the consumer.

The recent arguments in favour of allowing FDI into the retail sector all
pertain to organizing the retail sector. There is no argument to support FDI
over investments by Indian retail players. Here the advocates of FDI in the
sector need to understand that the social commitment which will come from
local industry naturally will be absent in foreign companies entering the

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market. Foreign players might give in on some issues under pressure from
the government but there overriding factor for all decisions will be the
bottom-line.

Organizing the retail sector is the need of the hour. But it has to be
understood that change will bring with it a lot of upheaval and teething
problems. The local retail players—large as well as small, need to be given
support and time to adjust to changed environment. To bring in FDI at this
hour will be an error of judgment, as it will not bring any significant benefit
to the country. Investment bought in through FDI in retail will find its way
back to the country of origin.

Commerce and Industry Minister Kamal Nath stated recently that, “More
investment has to flow into the retail sector, but it has to be seen whether the
investment should be domestic or foreign,” he said. He stated that the sector
would be opened up only if labour was not displaced or replaced. The
minister added that the government was studying the matter closely as
Thailand had also faced serious problems with FDI in retail.

The Left has been extremely vocal in its opposition to FDI in retail. They
have also stated that they are not opposed to FDI, but bringing in FDI into the
retail sector does not make any sense. Besides opposition from the Left and
BJP, local retail groups like Pantaloon and RPG are strongly opposed to the
idea. Their argument is that the Indian retail sector in the organized sphere is
still in a nascent stage. It should be given policy support and time by the
government to establish itself firmly. Indian industry is amongst the best in
the world and is competing with the best in the world in various fields. In the
retail sector, the local industry and big financial houses need to be allowed

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time to step up their retail plans and create enough barriers before the
competition hits the shelves.

A position paper prepared by the national retail committee of the

Confederation of Indian Industry (CII) has said that FDI should be gradually
allowed first in relatively less sensitive sectors. The paper argues that checks
should be injected to ensure overall growth of the domestic retail industry
and to create a “level playing field.” CII has stated that the domestic retailers
will need at least a few years time for the kind of capital formation that is
required for their growth and development. Foreign players could displace
the unorganized retailers because of their superior or financial muscle and
induce unfair trade activities such as predatory pricing. The local retail
industry should be allowed time and given policy buffers to organize itself
and meet the challenge ahead on an equal footing

With the recent announcements of yet another closure of the proposed

disinvestment in Government PSU like BHEL etc, the chances of FDI in
Retailing in India is a distant dream. BJP and the Left are both opposed to
opening up of the Retail Sector and within the government giving into Left's
pressure, the outcome is nothing short of anyone's expectation.

The only silver lining is the government has double standards and a backdoor
entry for every single policy. With the so called entry option through the
Franchise route, every international brand and retail company has already set
foot into India or is stepping in. We are already working in an international
environment with International Brands in every product category. Many
Indian brands and companies have just vanished over the last 15 years with
the governments double standards. Retailing is no exception to this and

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although there is a delay in opening up, the sector would be opened sometime
in the future.

Will the entry of Wal-Mart kill the neighborhood Kirana Store?

Prime Minister Manmohan Singh has assured Wal-Mart to allow FDI in

retailing very soon, and has also told Wal-Mart about the concerns in India
about the likely fate of local retailers and fears about loss of employment
opportunities.

There are nearly 200 + urban malls which are under construction, of the 600
planned. Multinational retailers can get an expeditious entry into a large
market where the share of organized retailing is galloping. Wal-Mart, Tesco,
Carrefour and many others are waiting in the wings for the government of
India’s approval of FDI. The Government has however decided to delay the
issue, first to please its left partners and to use this as a bargaining point at
the next WTO talks. India wants to offer to open its retailing in exchange for
something valuable like greater access to international markets.
Deliberations, delays will probably be there, the entry of big-box retailers is a
surely going to happen – The question is only one about timing.

We are a nation of shopkeepers with more than 5 million shops, 97% of them
in the unorganized sector. Thanks to the ubiquitous kirana store, Indians are
used to buying their convenience products very close to their homes. Recent
Research by a large international research company indicates that
‘convenience’ is a critical shopping decision parameter for Indian consumers.

Retailing has been growing at a hectic pace thanks to continuing

urbanization, growing middle class, and macro economic growth. Organized

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retailing is also making steady growth and is possibly accounting for a major
part of the growth of retailing in the last couple of years.

The possible impact of big box retailers is like many things in life: a mixed
bag.

Positive impact of big box retailers

The major advantage of the large retailers is that they have access to efficient
supply chains, which can reduce prices for customers. Many jobs within the
retail industry and with those providing support to organized retailing will be
created. Sales associates, people greeters, store managers, back-end positions
across the supply chain in purchase, vendor development, accounting, mall
maintenance, food technology, support services like Interior
designers/decorators, packaging design and supplies are some of the new
employment opportunities that have started to emerge and will deluge as
soon as the 200+ malls that are under construction are ready and FDI begins
to flow in.

The farmer is likely to gain by reductions in wastage, and better realizations

for produce. Good farmers might get access to foreign markets too, through
these global retailers.

Small and medium enterprises that supply ‘private label’ products to big
retailers will find opportunity without the big bucks needed for brand
building.

Supply chain efficiencies will benefit society at large. On one hand

[Link] of Pantaloon has been quoted, as saying that one of the mistakes
his group made was the investment decision in the cold chain, on the other
hand Wal-Mart who are yet to enter India also emphasize their plans of
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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investing in a cold chain. A good cold chain will be very useful, only thing is
that someone has to start at harvest stage itself – stuff like pre-coolers and
other items closer to the harvest, not just cold transport and cold stores.

According to Wal-Mart, “Wal-Mart’s impact on local business is based on the

philosophy of operating globally and giving back locally. Studies show that
new businesses spring up near Wal-marts and existing stores flourish as they
take advantage of the increased customer flow to and from our stores. ”
Kenneth E. Stone, Professor of Economics, Iowa State University;
Georgeanne Artz, Extension Program Specialist, Iowa State University, and
Albert Myles, Extension Professor, Mississippi State University, in their 10
year study of the impact of Wal-Mart on smaller cities; which probably is the
basis for Wal-Marts statement, developed two primary conclusions that are
worthy of note.

“The entry of a new super center in a community can have dramatic

implications for existing merchants. Two general rules-of-thumb summarize
the economic impacts of a new super center on local merchants:

Rule-of-thumb 1: Local merchants that sell merchandise different from the

super center or other big box stores tend to fare well and may gain sales as
the additional traffic generated by the big stores spills over into their stores.

Rule-of-thumb 2 is not so pleasant: Local merchants that sell the same

merchandise as the big stores will probably face a reduction in sales because
of the difficulty in competing with major chains.”

Organized retailing will get a shot in the arm with FDI, even as institutions
and retail investors have recognized the value of Indian companies those are
into organized retailing. Retailing provides an opportunity as another

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potential business to invest in apart from software and automobiles which

currently interest small investors.

Whether consumers will get better prices is a debatable issue and we need to
wait for the future to unfold, however consumers can expect greater
transparency about products, better replacement/warranty policies, and best
of all a much more pleasant environment to shop in. Car parking space, one
stop shopping, every day low pricing, appealing product display, wide range
of products, what else can the consumer ask for? Too much of a good thing
must have a price!

Negative Impact of Big box retailers

The greatest fear is that small Kirana stores will be out of business soon,
putting millions of ‘dukandar’ families in crisis. Remember that many of
these families have run shops for generations and might not be trained or
prepared for anything different from ‘dukandari’. The fear is well founded.
Researches in many communities in USA, and recently in Poland have
established that big box retailers do kill many small retailers. Organized
retailing also means much lesser people required per unit of sales
(efficiency!), which will cost society at large, in terms of unemployment. The
study carried out by Kenneth E. Stone also confirms the negative impact on
those shops carrying the same merchandise. What does a typical Kirana store
carry? Rice, Wheat, Dhal, cooking oil, some local condiments-all well suited
for large discount department stores. Some well paying jobs will be created;
many small shopkeepers will be affected.

That price will be less is also likely to be a misnomer, especially if one goes
by the experience in Food-world and other such chain stores. Usually the big
box retailers will have a ‘loss leader’-a popular product at a low price, well
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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advertised to attract shoppers. Everything else will either be on par with

small stores or more. People see the prices for the few popular items and
assume that all prices are low. In course of time these large retailers will
invest in more people, interiors and supply chain so much that they begin to
become inefficient, passing on the burden of higher prices to consumers.

Also, whenever ‘private label’ is discussed, it is only as greater margin for

the retailer, never as lower prices for the customer.

The Customer gains

Competition will only benefit the customer. While many, including large
Indian retailers have confused low prices with greater value, International
retailers will hopefully provide better value. We can definitely see better
customer service, greater depth of merchandise, more convenient store
timings, better packaging, and reduced rejects at these multinational retailers,
and at every other retailer big or small who wants to survive.

What to do if you are an independent retailer

It is likely that much of what has happened in other countries in the evolution
of retailing will repeat itself in India. Different formats will co-exist. It will
be a long time before the handcart vendors of fruits and vegetables will
disappear, specialty stores, halwais, and services like dry cleaning will
continue to grow. Kirana shops that accept the new reality and reinvent
themselves will survive and the inefficient ones have to go.

There are many books on how independent retailers can survive the
onslaught of big retail chains. The way is through better customer service,
personalized service, unique product assortment by identifying niches in the

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market (and there must be many considering just the sub-cultures that form a
city/town), and most importantly improve efficiency in purchasing and
managing inventory professionally.

On Balance

In an interesting study titled ‘The Impact of Wal-Mart on Host Towns and

Surrounding Communities in Maine’ by Georgeanne M. Artz, Iowa State
University and James C. McConnon, Jr., University of Maine discuss a
concept of ‘The net redistribution effect’

“It measures the net effect of Wal-Mart on the sales of the existing retail
businesses in the host town. It is calculated by subtracting an estimate of
Wal-Mart sales from the change in host town retail sales after Wal-Mart
opens. Some businesses may gain sales as a result of Wal-Mart coming town;
other businesses may lose sales and some may not be affected at all. If the net
redistribution effect is positive, it means that there has been a net gain in
retail sales for existing business in the community.” While this is not a
concept so relevant to India just now, it is worth looking at it as it might point
to the possibility of greater accumulation of retailing towards urban/suburban
areas. We can expect that while FDI may impact the Kirana stores, many new
retail businesses will surely emerge.

Wal-Mart is known to operate in many formats and considering that Indians

seek convenience in shopping more than any other thing, they will probably
look at formats that can bring their stores closer to consumers.

According to Harvard Professor Pankaj Ghemawat and Ken A. Mark, in their

article titled ‘The Price is Right’ which appeared in The New York Times,
Aug 3 rd 2005
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“First, Wal-Mart hasn't just sliced up the economic pie in a way that favors
one group over another. Rather, it has made the total pie bigger. Consider, for
example, the conclusions of the McKinsey Global Institute's study of United
States labor productivity growth from 1995 to 2000. Robert Solow, a Nobel
laureate in economics and an adviser on the study, noted that the most
important factor in the growth of productivity was Wal-Mart. And because
the study measured productivity per man-hour rather than per payroll dollar,
low hourly wages cannot explain the increase.

Second, most of the value created by the company is actually pocketed by its
customers in the form of lower prices. According to one recent academic
study, when Wal-Mart enters a market, prices decrease by 8 percent in rural
areas and 5 percent in urban areas. With two-thirds of Wal-Mart stores in
rural areas, this means that Wal-Mart saves its consumers something like $16
billion a year. And because Wal-Mart's presence forces the store's
competitors to charge lower prices as well, this $16 billion figure understates
the company's real impact by at least half.

These kinds of savings to customers far exceed the costs that Wal-Mart
supposedly imposes on society by securing subsidies, destroying jobs in
competing stores, driving employees toward public welfare systems and
creating urban sprawl.”

Most large business groups are in organized retail or planning to get into it.
Most have got hold of prime retail properties. My guess is that at least some
of them have not got everything right. It will be difficult to run a retail chain
like a large corporate managed by paternalistic top management. Professional
retailing is all about ‘god is in the details’ philosophy and I hope a few of the
Indian retail giants survive. Worst case, the Rahejas, Munjals, Piramals,

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Biyanis or Tatas may sell their retail businesses for a tidy profit to any of the
giants planning to enter India.

Quality regulation, certification & price administration bodies can be

created at district and lower levels for upgrading the technical and human
interface in the rural to urban supply chain.

Credit availability for retail traders must be encouraged with a view to

enhancing employment and higher utilization of fixed assets. This would lead
to less wastage (India has currently the highest wastage in the world) of
perishables, enhance nutritional status of producers and increase caloric
availability.

Several successful models of integrating very long food supply chains in

dairy, vegetable, fish and fruit have been evolved in India.

These one off interventions can be replicated in all states, segments

and areas. Cross integrations of these unique food supply chains will

provide new products in new markets increasing consumer choice,

economic activity and employment.

Government intervention in food retail segment is necessitated by:

a) The lack of any other body at remote/grassroots level.

b) Need to provide market for casual and distant self-employed

growers and gatherers.

c) Maintain regulatory standards in hygiene.

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d) Seek markets in India and abroad (provide charter aircrafts,

freeze frying, vacuuming, dehydrating, packing facilities for

small producers at nodal points).

e) Provide scope and opportunity for productive self-employment

(since Govt. can’t provide employment).

At a subsequent stage, these interventions can be integrated into the

supply chains of the foreign retailers in India and abroad, creating

ADVERSE IMPACT OF FDI IN RETAIL ON EMPLOYMENT

It is often argued that in case FDI is allowed in retail, the Indian consumers
would benefit from the low prices offered by the multinational retailers. It is
also argued that if the multinational retailers are allowed to operate in India
they would develop an “efficient” supply chain, not only to cater to the
Indian consumers but also the international market and therefore our
manufacturing and agriculture sector would benefit from their entry. The
ability of the multinational retail chains to sell at low prices is often
attributed to their “efficiency” in sourcing goods from their lowest cost
producers around the world. What underlies this so-called “efficiency” or
“cost reduction through better inventory and cost management” is the ability
of these retail chains to squeeze producers across the globe using their
monopsony power. The sheer size of a giant retail chain like Wal-Mart
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enables it to exercise buyer power over the producers of all kinds of goods,
from agro products to FMCGs, across the globe. If these retailers are to sell
goods to Indian consumers at prices, which are cheaper than what prevails
today while sourcing their goods from Indian producers, the latter are
definitely going to be at the receiving end in terms of declining incomes. In
case the multinational retailers import the cheaper goods from abroad,
domestic producers would be displaced anyway. It is difficult to understand
therefore how the domestic producers would benefit from these multinational
retailers.

It can of course be argued that the Indian farmers and manufacturers are
going to enjoy access to international markets by supplying commodities to
these multinational retailers. However, the experience of the producers,
especially those producing primary commodities in the developing world, is
not encouraging in this regard. According to a source, while a cocoa farmer
from Ghana gets only about 3.9 per cent of the price of a typical milk-
chocolate bar, the retail margin would be around 34.1 per cent. (The New
Internationalist, [Link] The same source suggests that a
banana producer gets around 5 per cent of the final price of a banana while
over 34 per cent accrues to distribution and retail. Similarly, 54 per cent of
the final price of a pair of jeans goes to the retailers while the manufacturing
worker gets around 12 per cent. International market access available to the
global retail chains do not benefit the producers from the developing
countries since they are unable to secure a fair price for their produce in the
face of enormous monopsony power wielded by these multinational giants.
The growth of global supply chains have only ensured enhanced profit
margins for the multinational retailers. The terms of trade for producers in
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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developing countries, especially for the primary products, have been

worsening steadily.

It is true that the entry of multinational retailers can initially make a certain
range of luxury goods available at cheaper prices for consumers, especially
those belonging to the upper classes of society. Using their deep pockets the
multinational retailers can under price domestic retailers thus pushing them
out of business. However, once these multinational retailers capture a
sizeable market share the consumers are going to be squeezed as well.
According to the Economic Research Service, United States Department of
Agriculture, the share of the 20 largest retailers in the US had reached 58.7
per cent of total grocery sales in 2001, up from 36.5 per cent in 1987 (see
Chart 3). Similarly, the share of the top ten grocers in Europe went up from
27.8 per cent to 36.2 per cent of the European market between 1992 and
1997, according to the retail analysts M+M Eurodata. In the developed
countries, a wave of mergers and acquisitions in the backdrop of a stagnant
market since the mid-1990s has led to heightened concentration in retailing,
particularly in food retail. According to retail analysts PlanetRetail the 10
largest businesses accounted for 40 per cent of modern grocery distribution
sales in the US in 2004, 15 per cent of which was for Wal-Mart alone. In
2004, the top five businesses accounted for 29 per cent of total modern
grocery distribution sales in the US, 56 per cent in the UK, 67 per cent in
Germany and 65 per cent in Canada. ([Link] The
growing domination exerted by a handful of powerful players in the retail
sector further enables them to command market power over suppliers and
consumers alike and earn super-normal profits as a result. In the context of
growing concentration in the retail sector in the developed countries, the
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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promise of cheaper goods being made available to Indian consumers through

competition induced by the entry of the multinational retailers may at best be
a short-lived one.

Further, the introduction of very large retail chains would push large brands,
mostly MNC brands, much deeper into the domestic economy. Since large
retail chains find it much easier to negotiate with a few large brands, which
are then carried by all its branches, the rich diversity of products and
producers that exist in an economy like India would be destroyed. The big
branded producers achieve a larger market presence less due to lower costs or
better products and more due to their ability to ‘sell’ life styles. Celebrity
involvements through powerful media campaigns play a crucial role in
ensuring their market dominance. Their surplus is used to power even more
advertisement campaigns for the consumers’ eye. It is not an accident that a
shoe produced by Nike that costs 5 dollars to produce but sells for 50-100
dollars while Nike pays its entire Indonesian workforce less than what it pays
Michael Jordan for endorsing Nike Products. The competition between Coke
and Pepsi is not waged through better products or lower prices but through
competitive ad-campaigns. The consumer therefore benefits little from this
victory of the larger brands while the local domestic producers get
progressively eliminated in the process.

DISTORTION OF URBAN DEVELOPMENT AND CULTURE

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The promotion of large retail stores with huge retail space also fosters a
different kind of urban development than what we have followed in India till
date. Large shopping malls with all known retail chains with their
showrooms as a part of urban development is familiar in the US where the
consumer lives in suburbs, drives long distances for his/her shopping and
lives in a community that hardly knows each other. Instead of this atomised
existence and high transport costs, we have chosen a model of mixed land
area where every small urban cluster has local markets and local facilities for
their needs. It is this model of urban development that is sought to be
changed in favour of a mall culture with huge retail chains and branded
products. The problem with this model is that it neglects the simple Indian
reality where most households do not have cars and need local markets. The
malls that have already come up in our metropolitan cities are failing to
attract consumers who find local shopping much more attractive. The myth
of a huge and fast growing affluent middle class is counter to the reality that
this section is still too small to support the remodelling of the urban
landscape as is being planned with malls, large retail chains and branded
products.

Unfortunately, the failure of the mall-retail chain-brand culture does not only
affect the real estate developers and the Wal-Marts. The East Asian crisis was
triggered precisely by this kind of distorted urban development, which saw a
real estate boom and then a collapse, dragging down developers and the
banks that had funded that process. The issue here is not only of FDI in retail
alone. This entire model of ‘branded’ products sold through high-powered
ads and dominant retail chains coupled with lopsided urban development
would promote monopoly in the market, kill diversity and displace small

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producers on a large scale. This model of development would fail in India, as

it has done over much of Asia, but not before it does enormous damage.

PREDATORY PRACTICES OF THE MULTINATIONAL

RETAIL CHAINS

The case for FDI in retail is often made on the basis of the need to develop
modern supply chains in India, in terms of the development of storage and
warehousing, transportation and logistic and support services, especially in
order to meet the requirements of agriculture and food processing industries.
While the infrastructure and technology needs are undeniable, the belief that
the entry of the multinational food retailers is the only way to build such
infrastructure or upgrade technology is unfounded. That can also be achieved
by increasing public investment and government intervention. Moreover, the
pitfalls of relying upon an agrarian development strategy driven by food
retail chains and giant agribusinesses have already become clear through the
experiences of several developing countries like Malaysia, Thailand and
Vietnam. Small horticultural farmers find it almost impossible to meet the
private quality and safety standards set by the food retailers, which are
generally much higher than the national standards. Even the big farmers have
to bear high risks while supplying their produce to the food retailers and
many get eliminated under the “preferred supplier” system. A FAO paper
based on the proceedings of a FAO/AFMA/FAMA workshop states,
“Farmers experience many problems in supplying supermarkets in Asia and
in some cases this has already been reflected in fairly rapid declines in the

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numbers involved, as companies tend to delist suppliers who do not come up

to expectations in terms of volume, quality and delivery.” (Shepherd, Andrew
W., “The implications of supermarket development for horticultural farmers
and traditional marketing systems in Asia”, paper presented at
FAO/AFMA/FAMA Regional Workshop on The Growth of Supermarkets as
Retailers of Fresh Produce, Kuala Lumpur, October Moreover, farmers also
face problems related to depressed prices due to cut throat competition
among the food retailers, delayed payments and lack of credit and insurance.
The emergence of such problems in India, especially in the context of the
deep crisis that has engulfed the agrarian economy, is totally avoidable.

SCENARIO AFTER FDI IN RETAIL

EARLIER this year, global management consultant A.T. Kearney identified

India as the top destination for global retailers. And when John Menzer, CEO
of Wal-Mart International, made a high-profile visit to India in May, he made
no secret of Wal-Mart's plans to enter India should FDI be allowed in the
sector. Now British retailer Tesco's Chief Executive, Sir Terry Leahy, is
expected to make his first business trip to India later this month to make a
case for his company.

With the big daddies of foreign retail knocking on India's doors, it is no

surprise that there is now a raging debate on whether foreign investment
should be allowed. The entry of big foreign retailers threatens to displace
labour in the retail sector, which employs a massive workforce, the majority
of which is unskilled. This makes retail FDI a contentious issue for the Left-
backed Government.

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But with every passing week, the FDI buzz only grows louder, with a strong
case being built for allowing foreign investment. There is a growing demand
for modern retailing formats that offer a clean and hygienic environment to
shop in. But organised retail at present accounts for a mere 2 per cent of the
total retail market in India, as against 20 per cent in China and 40 per cent in
Thailand.

Proponents of FDI in retail believe that only foreign investment can hasten
the pace of organised retailing. Their case in point: China. In just ten years
after China permitted FDI in the sector, the share of organised retail has
grown from 10 per cent to 20 per cent.

Those in favour of FDI argue that India has already provided `backdoor'
entry to international retailers. Current norms allow foreign retailers to set up
shop in India via the franchisee route, as has been done by the likes of Marks
& Spencer and Mango. Foreign retailers are allowed outlets if they
manufacture products in India (Benetton) or source their goods domestically.
FDI is also permitted in cash-and-carry outlets, where goods are sold only to
those who intend using them for commercial purposes (Metro, Shoprite).
Foreign retailers therefore, have access to the Indian retail market, while
India loses out on the investment, so goes the argument.

The argument that the unorganised retail market would be affected by the
entry of foreign players has also been contested. Competition for the
neighbourhood kirana store could come just as easily from the Big Bazaars
and Food Worlds of modern Indian retail. This point was also made by the
Minister for Commerce and Industry, Kamal Nath, at a recent conference of
economic editors. As he said, the country's retail trade was expanding 22 per
cent each year with the addition of 25 million middle-class consumers. In this

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scenario, he said, the interests of small-time grocers had to be protected, not

by the "colour of money" alone.

Menzer of Wal-Mart International argues that kirana stores have unique

advantages such as an understanding of local needs and superior service in
the form of home delivery, which will help them retain their edge over the
large supermarkets/ hypermarkets, foreign or Indian.

The most compelling argument that has liberal policymakers sit up and take
notice has been the significant backward linkages in organised retail. For
retailers to succeed, they will have to invest substantially in setting up a
supply chain, cold chains and training farmers to produce goods that meet
quality standards. In order to offer inexpensive, quality products, retailers
need to cut down on the number of intermediaries. Through contract farming,
some Indian retailers have been able to ensure that farmers adhere to quality
standards and eliminate middlemen. By the same token, farmers get better
realisation for their produce. But most retailers have succeeded in this only at
the regional level. They do not have the financial muscle to set up a supply
chain on a national level.

Foreign retailers would in this respect be better placed. Fast-food chain

McDonald's, for instance, invested Rs 800 crore in building its supply chain
and improving the quality of lettuce that its suppliers grow.

The benefits are not limited to farmers alone. Foreign retailers would be
inclined to source from the Indian market to ensure that goods reach
customers on time. As they grow familiar with Indian products, they are also
likely to increasingly source from India for their international operations.

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The argument draws strength from the fact that China has, after opening its
markets to foreign retailers, emerged as one of Wal-Mart's most important
suppliers. If Wal-Mart were an individual economy, it would be China's
eighth-biggest trading partner.

Wal-Mart is already considering sourcing more from India, which appears a

good alternative to China, and this scenario can only improve once it set up
shop here, pro-FDI sections contend.

But there are also enough people lobbying against FDI, from trade
associations to political parties to organised retailers.

They believe that foreign retailers will squeeze suppliers and engage in
predatory pricing to wipe out competition, only to raise prices again once
they gain monopoly over the market. Their fear is understandable. Even in
the US, Wal-Mart's reputation for marginalising mom-and-pop stores has
often preceded it.

There are others who believe it is too early to allow FDI in retail. Organised
retailers feel they need to be given time to gain critical mass so that they can
hold their own against FDI. In China, the top four retailers are domestic
retailers, thanks to China's policy of allowing domestic retailers to merge and
grow in size.

The ruling Government, in the meantime, is under pressure to ensure

alternative jobs for displaced workforce.

But with the benefits too many to ignore, the decision to allow foreign
retailers may not be too far away.

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The Government appears to be considering a policy of allowing FDI in a

phased manner by way of joint ventures with domestic players. It may also
study the experience in other countries, where restrictions were initially
imposed on the locations and formats in which foreign retailers could
operate.

However, going by the Commerce Minister's comments at a recent

conference, a decision on retail FDI could be delayed as the Government has
been unable to evolve a model that protects the interests of small
shopkeepers, as also generate additional employment. "It makes no
difference whether the investment is domestic or foreign. The debate now is
big versus small and not FDI versus small kirana stores," said the Minister in
a report that appeared in this newspaper.

Meanwhile, the middle-class with its growing purchase power, stands with
purses ready.

And now

The Centre has issued guidelines for Foreign Direct Investment in retail that
permit multinational companies to offer multiple products under a single
brand with prior government [Link] government has also issued
notification liberalising FDI regulations in various other sectors through the
automatic [Link] notification pertaining to retail sector states that FDI up
to 51 per cent in retail trade of single brand products would cover only those
that are sold under the same brand internationally and are branded during
[Link] guidelines said that the application for retail FDI would
specifically indicate "the product or product categories which are proposed to
be sold under a single brand."Any addition to the product or product
categories to be sold under single brand would require a fresh approval of the
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Government," the Department of Industrial Policy and Promotion said in the

[Link] notification, through Press Note 3 of 2006, which comes into
effect immediately, says that FDI in retail would be allowed only with prior
government approval.A company would have to file an application to the
Secretariat of Industrial Assistance under the Department of Industrial Policy
and Promotion. The application would later be considered by the Foreign
Investment Promotion [Link] move is "aimed at attracting investments in
production and marketing, improving 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 [Link] sectors include
greenfield airports, distillation and brewing of potable alcohol, manufacture
of industrial explosives and hazardous chemicals, laying of natural gas/LNG
pipelines and cash-and-carry wholesale [Link] DIPP issued Press Note 4
of 2006 series that permits 100 per cent FDI in existing airports with prior
permission from FIPB and subject to sectoral regulations notified by the
Ministry of Civil [Link], 100 per cent FDI in manufacture of
alcohol under the automatic route is allowed subject to licensing from state
governments where the unit will be set [Link] Government permitted 100
per cent FDI in cigarettes and cigar manufacturing through the FIPB
[Link] up to 100 per cent has been permitted in coal and lignite mining
for captive use in all sectors, in power trading and processing and
warehousing of coffee and [Link] setting up infrastructure
relating to marketing of petroleum and natural gas and undertaking mining of
diamond and precious stones will be able also to invest 100 per cent through
the automatic [Link] government has also removed the mandatory
requirement of disinvestment of 26 per cent foreign equity in favour of
resident Indian shareholders within five years for companies engaged in B2B
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[Link] press note also extended the ambit of the automatic route to
transfer of shares from residents to non-residents in financial services and
where SEBI regulations are attracted and in all cases where approvals are
required from RBI/SEBI or insurance regulator [Link] the debate over
fully opening India's retail sector to foreign direct investment continues to
simmer, the government on Wednesday cautioned neighbourhood stores that
they would be "killed" by competition if they do not promote consumer
[Link] or not the sector is fully thrown open to foreign players,
domestic retailers would have to face stiff competition from home-grown
organised retail chains, warned Department of Industrial Policy and
Promotion Secretary Ajay Dua."What difference does it make if you are
going to be killed?... Whether by domestic (retailers) or outsiders," he asked
at a seminar 'Shifting Paradigm in Retail Management' organised by industry
chamber Assocham and NIS Sparta.

While the government has already allowed 51 per cent FDI in single-brand
retail, Dua, however, said that no decision had been taken yet on fully
opening the sector to [Link]'s organised retail sector has been growing at
18-20 per cent annually, but it accounts for only three per cent of the total
retail [Link] the retail space was "bound to grow anyway, so why not
maximise benefits to consumers," Dua [Link] said organised retail
promised benefits to consumers in the form of cheaper and quality goods, as
large corporates would be able to source goods cheaply, process and transport
them [Link] the cost benefits could be passed on only if there was
competition, the DIPP secretary clarified, adding that mom and pop stores
too had advantages in terms of convenience, personalised service and credit
facility they offer to the [Link] whether advantages offered by
the traditional 'kirana' (grocery) stores like personalised service and credit to

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consumers could be outweighed by the organised sector, Dua said the fact
remains that entry of large chains would fuel investment in both front-end
and back-end [Link] front-end pertains to infrastructure and
computerisation, back-end investment relates to transport and
[Link] apprehension from labour unions and other quarters about
loss of employment in the un-organised sector once large chains enter the
business, Dua said multinational retail major Wal-Mart has in a report to the
government said that it had rehabilitated those who had lost [Link] DIPP
Secretary acknowledged the fact that allowing FDI did not always yield the
expected results and said safeguards would be provided for whenever a
decision is taken to permit MNCs to invest in the space in [Link] favoured
imposing conditions like allowing MNCs to open stores only in suburbs
(where there are fewer domestic retailers), stocking 50 per cent of their stores
with agri products (to fuel investment in the sector), restricting them to open
only one store in a city per year (which would stagger their expansion) and
finally placing a condition to bring in at least $10 million as investment.

WHY ONLY SINGLE BRAND ?

Govt cautious on opening up retail FDI — Exploring

role model for multi-brand segment

THE Government is fully aware of the dichotomy associated with allowing

foreign direct investment (FDI) in retail trading and would take all necessary
precautions before permitting FDI in multi-brand retailing, according to Dr
A.K. Dua, Secretary, Department of Industrial Policy and Promotion. Dr Dua
said this here today while inaugurating a national seminar on `Shifting

ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA

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Paradigm in Retail Management' jointly organised by the Associated

Chambers of Commerce and Industry of India and NIS Sparta. "While
economic logic suggests that retail should be opened up for MNCs, empirical
evidence say that wherever retail has opened up, it had its adverse impact on
the local people and if the Government of India takes a policy decision for
retail opening, all the apprehensions that are being expressed against MNCs
entry into retail would be adequately addressed to," Dr Dua said. He said that
the Government is weighing all pros and cons and exploring a role model
before deciding to open up multiple brand retail business to foreigners. The
retail sector would be opened up keeping in view the existing social fabric of
India and the Government will ensure that the entry of global retail giants do
not displace the existing employment in the retail business. He, however,
pointed out that the "issue actually is that can our unorganised retail sector
withstand the organised retail sector that would enjoy the economies of
scale." "Whether it is large domestic companies like Reliance that has
announced entry into retail or MNCs like Walmart, the effect on the small
mom and pop shops could be the same. If you are to be killed, how does it
make a difference whether the killer is domestic or foreign?" he questioned
and added that there is no law that can prevent big cash-rich Indian
corporates from entering retail business.

Mr H. Mahadevan, Deputy General Secretary, AITUC, who also spoke on the

occasion, said that trade unions did not oppose FDIs but cautioned that
opening up of retail to MNCs would have dangerous consequences In a
decision that will have devastating consequences for some of the poorest
sections of Indian society, the Indian cabinet last month approved the
opening up of the country’s retail and other sectors of the economy to foreign
investment. There are approximately 40 million people and 11 million outlets

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in India’s retail sector. Many of these are marginal businesses—small shops

and stalls, street vendors and hawkers—which will be destroyed by
competition from large retail outlets and chains. Many people, who have no
alternate source of income or work, will be left completely destitute. The
government decision on January 24 allows up to 51 percent foreign direct
investment (FDI) in “single brand” retail stores. Nike, Nokia or Levi can
establish stores, but multi-brand retailers such as Wal-Mart and Carrefour are
excluded, for now. The Congress-led government also opened up diamond
mining, the development of new airports, the laying of natural gas pipelines,
cash-and-carry wholesale trading and export trading to foreign investors.
Companies investing in these industries no longer need to seek approval from
the Foreign Investment Promotion Board and all FDI limits have been
removed. The government has also approved the removal of restrictions in
aspects of the petroleum, power trading, coal, rubber and coffee sectors.

The latest measures are part of a program of privatisation, deregulation and

restructuring that began in 1991. Over the last decade and a half, successive
governments have opened up transportation, telecommunication, food
processing, electrical equipment, software, hotel and tourism, financial
services, non-financial services, metals and other industries to foreign
investment. Commerce and Industry Minister Kamal Nath announced the
changes before flying to the World Economic Forum conference in Davos in
late January where Indian business and government officials touted for
increased foreign investment. Nath told the leaders of the world’s richest
corporations that India was seeking to increase its FDI to $US10 billion by
2006-2007, up from the $6.5 billion invested in 2005.

India’s team at Davos, which featured Nath as well as the Finance Minister,
the Chief Ministers of Delhi, Kerala and Rajasthan and representatives of
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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Indian business, ran a high-profile campaign to promote the benefits of

investing in India. The Confederation of Indian Industry spent $4 million on
an “India Everywhere” campaign at Davos. Delegates arriving at Zurich
airport were greeted with a billboard announcing India as the “world’s fastest
growing free-market democracy”. The slogan “15 years, six governments,
five prime ministers, one direction” underscored the commitment of all
parliamentary parties in India to the free market agenda.

Although the Indian government hails foreign investment as an economic

boon, the growth has largely benefitted the wealthy to the detriment of large
sections of workers, small business and farmers. The opening up of the
Indian economy and deregulation has resulted in substantial public sector job
cuts, the destruction of industries, land seizures and cuts to food and fuel
subsidies. Nath tried to play down the effects of the latest changes on the
poor, claiming that the opening of the retail sector was “limited” and would
leave existing small retailers unaffected. But any change is going to have a
devastating impact on an economic sector that employs 7 percent of the
workforce or about 40 million people and supports as many as 200 million
people.

Partly due to poor infrastructure, India’s retail economy is backward by

world standards. Approximately 98 percent of those employed in retail are in
what is categorised as the unorganised sector—businesses that are small,
unlicensed and do not pay tax. The sector is far less developed than in most
major countries in Asia. China’s organised retail sector is 20 percent of the
total, while the proportion is 50 percent in Malaysia and 40 percent in
Thailand. Retail activities such as door-to-door selling, street carts and
market stalls, act as a last resort for the unemployed, given the lack of jobs in
manufacturing and agriculture. Many in the retail trade are living below the
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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poverty line. A report published in December 2004 by the Centre for Policy
Alternatives (CPAS) entitled “FDI in India’s Retail Sector: More Bad than
Good” stated that retailing is “probably the primary form of disguised
unemployment/underemployment in the country”. The report continued:
“Given the already over-crowded agricultural sector, and the stagnating
manufacturing sector, and the hard nature and relatively low wages of jobs in
both, many million Indians are virtually forced into the services sector. Here,
given the lack of opportunities, it is almost a natural decision for an
individual to set up a small shop or store, depending on his or her means or
capital. And thus a retailer is born, seemingly out of circumstance rather than
choice.”

Commenting on the likely impact of foreign competition, the CPAS report

stated: “India has 35 towns each with a population over 1 million. If Wal-
Mart were to open an average Wal-Mart store in each of these cities and they
reached the average Wal-Mart performance per store—we are looking at a
turnover of over 80,330 million rupees [$1.82 billion] with only 10,195
employees. Extrapolating this with the average trend in India, it would mean
displacing about 432,000 persons.”

The report added that if large retailers were to obtain 20 percent of the retail
trade “this would mean a turnover of 800 billion rupees [$18 billion] on
today’s basis. This would mean an employment of just 43,540 persons
displacing nearly eight million persons employed in the unorganised retail
sector.” Unlike export-orientated investors, foreign retailers such as Wal-
Mart, Carrefour SA of France and Metro AG of Germany, which have been
lobbying the government to open up the sector, will seek to dominate the
domestic Indian market. Their success as well as those of Indian retail chains
will be at the expense of small traders. Large retailers also threaten the
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livelihoods of small farmers and manufacturers. Through their buying power

they can force down prices. In addition, retail chains will often want to deal
with bigger and more efficient suppliers rather than small producers.

A 2004 paper by Andrew Shepard, an economist with the UN Food and

Agriculture Organisation, confirmed that large supermarkets often push small
farmers out of business. “Farmers experience many problems in supplying
supermarkets in Asia and in some cases this has already been reflected in the
fairly rapid declines in the numbers involved as companies tend to delist
suppliers who do not come up to expectations in terms of volume, quality and
delivery,” he stated. The paper cited, among other examples, the development
of the Giant retail chain in Malaysia which slashed the number of vegetable
suppliers from 200 in 2001 to just 30 in 2003. The Indian decision to open up
the retail trade has provoked opposition. Following the announcement, the
Hindu supremacist Bharatiya Janata Party (BJP) passed a resolution opposing
foreign involvement. The BJP’s president in Delhi, Harsh Vardhan,
complained the measure would make India subservient to foreigners and
would cause major job losses. However, BJP-led governments played a
major role in opening up the economy when in power from 1998 to 2004.
The Communist Party of India-Marxist (CPI-M) and the Communist Party of
India (CPI) complained that they had not been consulted over the measures.
CPI secretary, D. Raja, declared: “We have been opposing it. I don’t know
why the government has to take such a decision.” These parties help prop up
the ruling Congress-led United Progressive Alliance in the national
parliament.

The four Left Front parties—the CPI-M, CPI, the Revolutionary Socialist
Party and All-India Forward Bloc—met privately on January 27 and,
according to the Times of India, decided to activate retail trade merchants’
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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organisations to protest against the decision. There was no hint, however, that
the Left Front would withdraw its support for the UPA government.

Moreover, in the Indian state of West Bengal, the CPI-M led government is a
vigorous advocate of free market policies, including in the retail sector. Last
October West Bengal Chief Minister Buddhadeb Bhattacharjee held talks
with Wal-Mart representatives about the company’s proposal to take over all
the fresh food markets in and around Calcutta. Speaking to the Indian
Chamber of Commerce in October, Bhattacharjee said he had accepted a
proposal by the German company Metro to provide wholesale supplies to
hotels in West Bengal. He also spoke favourably about a proposal from an
Indonesian company to build a three-storey shopping mall in Calcutta that
would stock foreign goods. Neither the BJP nor the Left Front parties, which
falsely claim to be socialist, has any alternative. These parties—left and right
—seek to exploit the hostility of ordinary working people to the devastating
social impact of free market policies, encouraging the illusion that the
policies of national economic regulation remain viable. When in power,
however, the BJP and the Stalinist parties have been just as eager to attract
foreign investors as the present UPA government.

EFFECTS

FDI in retail: More benefits than costs

THE debate on foreign direct investment (FDI) in retail is hotting up. Once
again, the ruling Government and its allies are in sharp disagreement. What is

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the debate about? The opposition to FDI in retail rests on several planks.
One, the entry of large global retailers such as Wal-Mart would kill local
shops and millions of jobs. Two, the global retailers would collude and
exercise monopolistic power to raise prices and monopsonistic (big buying)
power to reduce the prices received by the suppliers. Hence, both the
consumers and the suppliers would lose, while the profit margins of such
retail chains would go up. Three, it would lead to lopsided growth in cities,
causing discontent and social tension elsewhere. Before evaluating these
apprehensions, it should be recognised that even the Left is not against all
kinds of FDI in retail. It is in favour of selectively allowing FDI in food,
dairy and grocery segments of retail trade. In other areas such as readymade
garments and various industrial consumer goods, it would allow only big
domestic retailers to compete with small local kiranas. Even when FDI is to
be allowed in retail food and grocery sectors, it would like to put a cap on
foreign ownership. In other words, foreigners — if they want to enter — will
have to take local partners to start with. Once the local partners and other
local players learn by doing, the FDI cap can be raised gradually. Foreigners
can be allowed to set up 100 per cent foreign-owned retail chains only after
the local players are able to muster enough capital, experience and expertise
to compete with established global giants.

It is interesting to note that the Left approach to the issue broadly follows the
Chinese model. China first allowed FDI in retail in 1992. The initial FDI cap
was 26 per cent. It took China 10 years to raise the limit to 49 per cent. The
100 per cent foreign-owned retail stores were allowed only from 2004.

Further, foreign chains were initially permitted to set up stores only in a few
select cities. Local retailers were officially encouraged to become big by
mergers and acquisitions so that they would be in a position to compete with
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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big global players. In other words, China provided infant industry protection
to domestic retailers, which was gradually reduced as the local players
gathered strength. The supporters of FDI in retail see many advantages. The
biggest benefit, according to them, would flow from higher exports. They
point to the Chinese experience. The global retailers taken together buy about
$60 billion of goods each year from China for exports. Contrast this with
India where less than $1 billion of exports are accounted for by global
retailers (mostly metro dairy farm). Clearly, the scope of exports through the
global retailers is enormous, indeed.

However, one may ask: Can not Wal-Mart or Carrefour source products from
India, even if they are not allowed to set up stores here? Though in principle
that is possible, in reality, things do not work out that way. A global chain
would buy large quantities for exports on a sustained basis only when it
establishes a close linkage with the local market and suppliers. This happens
after they open local stores. By being continuously close to local suppliers
and customers, they are in a better position to control and monitor the entire
supply chain including the designing of products, the quality of inputs, the
manufacturing process, the quality of output, the standardisation, labelling
and packaging, transportation, warehousing, the distribution network,
changing product mix quickly in response to changing global fashions and
establishing the right kind of captive suppliers who would not be selling to
their competitors. The supply chain and the infrastructure, which they would
develop for their local stores, would yield significant cost economies when it
is also used to procure supplies for their global needs. That is why Wal-Mart
sources some $18 billion of goods from China for their global operations.
But this happened only after it was allowed a substantial presence in the
Chinese local retail market.

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How about the potential job loss in local kiranas? True, small retail stores are
an important source of jobs, providing about 7 per cent of the total
employment in India. Moreover, they are providers of employment of the last
resort. Anyone without a job can set up a local retail outlet. However, India is
not an integrated homogeneous market; it is a hierarchy of markets catering
to people of many different income levels and tastes. For example, both Sony
and Santosh can coexist, catering to market segments. Entry of sophisticated
branded products affects the unbranded mass market only marginally in a
vast poor country such as India. Moreover, in malls where the large retail
chains set up their stores, typically, there will also be many small shops
which will attract people.

Further, the street-corner shops will have some advantages over big stores
located many miles away in shopping plazas. In India, transportation and
parking are big problems for people who want to visit shopping malls.

For them, it is more convenient and cost-effective to purchase many of their

daily requirements from the neighbourhood stores, especially as these
establishments stock goods that are in particular demand in the locality.
Hence, the pop-and-mom street corner shops can very well survive. The
benefits from greater exports would be particularly high in the farm sector.
Right now, there is a tremendous amount of wastage and value loss of
agricultural products due to lack of storage, refrigeration, transportation and
processing facilities. As a result, farmers' price realisation remains low while
the consumers in the cities end up paying a high price. Given the fiscal
problems of the government, it is too much to expect it to build the required
infrastructure.

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To the extent the large retailers establish a direct linkage with the farmers by
cutting out many layers of middlemen, develop the processing facilities and
export the products to meet their global requirements, farmers would get
better prices and bigger markets while the consumers would benefit in terms
of lower prices, better quality and greater variety. The resultant rural
prosperity may open up markets for other industrial goods and help a more
balanced regional development as also job creation in other sectors. Similar
gains would flow from higher exports when the global chains are allowed in
other sectors such as readymade garments. As for monopolistic pricing
practices, the best safeguard would be in permitting all global chains to set up
shops. The competition among them (as has happened in the automobile
industry) would ensure better prices for consumers and suppliers alike.

Thus, the benefits from higher exports are likely to offset any direct job loss
in the local kiranas as result of competition from big global retailers.
Anyway, if the domestic big players are allowed to operate, the job loss
problem for the small shops would remain, while the benefits from larger
exports would not be there. So, clearly, if big players are to be permitted in
retail, this must extend to FDI. Otherwise, the full range of benefits will not
be realised. Of course, some lead time can be provided to the local players to
consolidate their position before they face full-fledged competition from
established global players. But, then, temporary protection should be really
temporary. The Government must make a clear commitment to the time-
frame over which protection from foreign competition would be removed
gradually.

FDI in retail: Status quo may prove costly

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India's debate on FDI in retail is gridlocked between extreme perceptions. It

is either hailed as the biggest revolution awaiting rural India or condemned as
a conspiracy to kill small businesses. That is why economists on both sides of
the ideological divide were in for a big surprise when the left stalwart
Budhadev Bhattacharjee made a passionate pitch for FDI in West Bengal's
farm sector. Officially, the CPM shares the extreme right view (of BJP's
'swadeshi' lobby) that FDI in retail would ruin nearly 30 million small
traders. Both welcome FDI, with conditions and caveats, if it brings new
technology and promotes employment without snatching livelihoods.

HT research team attempts to simplify the issue in these columns. Drawing

on several recent studies and surveys, we weigh the potential advantages
against disadvantages. We look at the farm sector opportunities through other
countries' experiences and examine its likely impact on employment, exports
and small industries. Retailing is the world's largest private industry with
sales over $6 trillion. India remains the world's second largest market (after
China) and is set to grow from the present $394 billion to $608 billion by
2009, according to The Economist's Economic Intelligence Unit. China
opened its markets in 1992 in a phased manner. FDI was initially capped at
49 per cent and was restricted to limited areas. The cap and the restriction
have now ended and a major part of China's $22 billion retail FDI has gone
into labour intensive manufacturing. A robust GDP growth rate has created
more jobs than redundancies. Most other developing countries have gained in
employment as the reforms have accelerated their growth rates. The Chinese
example is significant for India. Having started over a decade earlier, the
impact of Chinese reforms can dispel some of India's worst apprehensions.
Organised sector retail stands at 20 per cent in China and 40 per cent in
Brazil against 3 per cent in India. The graphic below shows that the

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employment in China's retail sector has grown in direct proportion to its FDI
growth. Post reforms, India's successive governments have been anxious to
revitalize the farm sector and to reduce the criminal wastage of up to 40 per
cent of its produce. We have on our wish list all the advantages of a modern
retail industry such as new technologies, better farm productivity and a
vibrant food processing industry.

We can also learn from many other countries where FDI was initially allowed
with conditions for minimum capital, product sourcing or export
commitments. In the middle of reforms, it might be too expensive for India to
let the status quo continue.

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CASE STUDY

FOREIGN DIRECT INVESTMENT (FDI) FLOWS AND SUSTAINED

GROWTH: A CASE STUDY OF INDIA AND CHINA

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INTRODUCTION

Increasing integration of countries through growing volumes of trade and

capital flows has been a characteristics feature of the world economy in
recent times. Greater openness to trade and capital flows entailing greater
interdependence among economies as long moved on from the realms of
theoretical debate to that of inevitability. Indeed, the decades of 1980’s and
1990’s have witnessed a generalized shift in policy stance towards openness
among a number of emerging market economies either spontaneously so as
to reap the benefits of greater volumes of trade and external investment or
under the compulsions arising out of unsustainable domestic imbalances.
These two decades however, have also seen a series of financial crisis in
several open economies engendered by volatile capital flows prompting a re-
look into the conventional wisdom regarding the gain from cross-border trade
and investment. This has brought to the fore a number of open-ended issues
relating to the manner and sequencing of such opening up, the challenges
posed by true capital flows and increased cross border market integration and
the role of monetary and fiscal policies in sustaining economic growth in FDI
recipient economies. Access to international capital enables a country to
supplement domestic savings and smooth inter-temporal consumption. This
could strengthen the growth process and foster employment generation in the
recipient country. The actual impact of capital flows on economic growth is
undoubtedly an empirical issue and varies widely across countries. An
increase in capital flows is expected to augment domestic savings and
investment, boost aggregate demand savings and investment, boost aggregate
demand and lead to an increase in aggregate output and income Most
developing countries consider FDI as an important channel for accessing
resources for economic development. FDI represents transfer of a bundle of
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
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assets like capital, technology, and access to export markets, skills and
management techniques and modern environment management system. FDI
inflows are necessary, but not sufficient of globalization. Over the last two
decades there has been a change in the approach towards assessing the
impact of FDI flows on the recipient economy. In the earlier approaches, the
impact of FDI on growth was found to be limited in the short-run since long-
term growth was largely considered to be contingent upon technological
progress

FDI IN RETAIL KEY TO MAKE INDIA A LEADING

DESTINATION

FDI in retail is a must and would help a long way in making India a leading
retail destination in the world, said industry experts at the India Retail
Summit on Friday. Ms Bala Deshpande, Director, Investment, ICICI Venture
Funds Management, said that the issue is not whether FDI should be allowed,
but the way the industry and Government handle it. "FDI would have a
positive impact, as companies would push up scales and quality of
performance. Competition is always healthy." She said that by not allowing
FDI, the Government would be cutting down an investment model. Ms
Deshpande also added that even if FDI were allowed, it would take
considerable time for any effects to surface. "The mom-&-pop and the large-
format stores will continue to be there. Carrefour, for instance, took 15 years
to break even in China. Therefore, nothing will change overnight."

Similarly, Dr Arpita Mukherjee of Indian Council for Research on

International Economic Relations, also said that competition enhances

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productivity. "In China, where organised retail has picked up in a big way,
the major growth has come from domestic retail. The fear of competition
makes one proactive." She said that in India, with the opening up of the
market, small retailers have already benefited a great deal. "The supply chain
has percolated, power balance is shifting from manufacturers to retailers and
Indian manufacturers are developing export capabilities."

Dr Mukherjee said that the Government has to have clear policy objectives,
which are palatable to the players. She said that it has to come up with
employment generation programmes for the rock-bottom categories, because
according to her, even if domestic retail grows there will be displacement of
employment. Giving a real estate developer's perspective, Mr Rajsingh
Gehlot, Chairman, Ambience Infrastructure, said though the coming years
would see as many as 350 malls in the country, India doesn't have enough
brands to showcase in these malls. "If we fill these malls with mom and pop
stores, how do we provide a great shopping experience," he questioned.

CONCLUSION

Domestic industry generally perceive opening up of the economy to FDI as a

threat. But often small, local players find new opportunities, and the larger
ones get bigger and stronger. For instance, FDI in telecom did hit urban STD
booth operators, but most of them have now been converted to kiosks selling
mobile connections and SIM cards . The multinational fast-food chains have
not displaced the roadside dhaba. Foreign apparel brands have not put
Mumbai's Linking Road or New Delhi's South Extension garment stores out
of business. Small traders, with their acute business sense and inherent

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survival instinct, will reinvent themselves and metamorphose into more

efficient businesses or find new hitherto untapped niches for themselves.

Other than employment creation, better wages, wastage reduction, disinter

mediation, and so on, foreign retailers will provide small businesses and
franchises opportunities like never before. Malls will offer a larger variety of
retailers, rather than the same clutch of tenants seen today. Having
recognised the importance and economic benefits of organized retail, the
industry biggies are going all out to make mark in the sector. The Tatas, the
Reliances and the ITCs, to name a few, can threaten small traders as much as
a global retailer.

The need for FDI in sectors such as infrastructure, real estate, telecom and
manufacturing are well-recognized. The retail sector is one of the largest and
requires massive investments as well. Retail straddles a value chain
encompassing virtually the entire population. Consumers will be the biggest
beneficiaries of streamlined low-cost large-scale operations, which will bring
down product costs — the telecom revolution is a case in point. New brands,
technologies, concepts, players and investments bring with them an
intangible aspect of growth and progress — aspiration. This is the biggest
fillip to growth. As we aspire for more, the more progress we make.

BIBLIOGARPHY

1. s. neelamegham, “ Marketing in India ; cases and readingds” , third

edition.
ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA
 82

2. Andrew wileman, “Retail power plays”

3. Rosemary Varley , “ Retail management ; buying and merchandising”

second edition.

4. molcalm Sullivan and Denni Adcock, “Retail marketing” , fourth

edition.

5. R. shrinivasan , “ case studies in marketing; the Indian

context”

6. Phillip kotler, “ Marketing Management “ 11 th edition

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REFRENCES

1. No FDI in retail sector: Left, SP, NDA , Express India , September 09,
2005

2. Planing commission favours FDI in retail, Business standard,

September 5th , 2005

3. FDI in retail sector should lead to incremental growth: Kamal Nath,

Business line , February 24th , 2005

4. Oppn walkout in RS over FDI in retail sector , Chennai Online News,

septembet 10th,2005

5. Retail FDI: Just do it, The Indian Express, September 2nd, 2005

6. FDI would help growth in retail sector, Business Line ,August 12th ,
2005

7. Wholesale gains from FDI in retailing, Business Line ,August 15th ,

2005

8. Food processing ministry favours 50% FDI in retail, Financial

Express, August 24th, 2005

9. Good bye mom and pop, organised retail will grow to $300bn by ’10 ,
The Economic Times.

Retail growth, a boon to job market, The Economic Times. MARCH 13,
2006,

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[Link] in retail: The debate rages, Business Line NOV 24,2005

[Link], NOV 5 ,2005

[Link]

13. THE DAY AFTER

ROLE AND SIGNIFICANCE OF FDI IN RETAIL IN INDIA