Foreign Direct Investment In Indian Retail Sector: Strategic Issues And Implications

G.V.S. Ravindra Babu a, B.V.S.S. Subba Rao b

a

Research Scholar, Acharya Nagarjuna University, Guntur, India b Assistant Professor, Dept. of MBA, SRK Institute of Technology, India

INTRODUCTION:
Indian retail industry is one of the sunrise sectors with huge growth potential. The present paper attempts to analyze the strategic issues concerning the influx of foreign direct investment in the Indian retail industry. FDI become more important than trade as a vehicle for international economic transactions.

FDI inflows in India are a defining feature of free market, liberalization and globalization. Retail sector has emerged as one of the most appealing investment areas for domestic as well as foreign investors. FDI in India has played an important role in the development of the Indian economy.

Organized retail business in India is very small but has tremendous scope. Recently, the Government of India took the decision to allow 100% FDI in Single-Brand Retail and 51% FDI in Multi- Brand Retail. Because of the poor state of Infrastructure and Cold Chains, the end-consumer ends up paying 200%- 400% of what the Farmer actually gets and around 25% of the produced each year goes waste. All these factors, in addition to the mushrooming of the e-tailing industry show that the Indian Retail sector is gearing up for a change.

FDI IN RETAIL:
Single Brand: Single brand implies that foreign companies would be allowed to sell goods sold internationally under a Single Brand. A retail store with foreign investment can only sell one brand. Ex: Nokia, Addidas, Reebok. At present FDI is allowed up to 100%.

Multi Brand: FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof. FDI is allowed upto 51% in Multi Brand Retail.

Benefits of Multi Brand:

multi-brand retails stores will assist in keeping food and commodity prices under control. allowing FDI will cut waste, as big players will build backend infrastructure. Elimination of Intermediaries and Employment Generation. Organized retail would bring more stability to prices. FDI in Thailand and China has given positive results.

Indian Brand Equity Foundation (2011) Reports, India has been ranked as the fourth most attractive nation for retail investment among 30 emerging markets by the US-based global management consulting firm, A T Kearney, in its Global Retail Development Index (GRDI) 2011, and Indian retail sector accounts for 22 per cent of the country's gross domestic product (GDP) and contributes to 8 per cent of the total employment.

Objectives of Study :
To study the need of opening up of FDI in multi-brand retail. To analyze the positive and negative impacts of the reforms to be undertaken. To review the challenges to be faced by FDIs while investing in India. To evaluate the change in the customers requirements after introduction of FDI in retail .

Growth in Retail Industry:

The key factors that drive growth in retail industry are: young demographic profile increasing consumer aspirations, growing middle class incomes and improving demand from rural markets. rising incomes and improvements in infrastructure

increase in spending per capita income advent of dual income families consumer preference for shopping in new environment shift in consumer demand to foreign brands Internet Revolution is making Indian Consumers more accessible to Foreign Retail Chains. Satellite TV Channels are creating awareness about global products for

The Organization of India's Retail Industry: The sector is highly fragmented with about 96 percent of the stores in the unorganized sector. The Kirana stores (Mom and Pop stores) number around 12 million spread across 5,000 towns and 6000,000 villages throughout India. These are mostly family owned with family labor. At the bottom of the pyramid is millions of pavement stalls in India.

Strategic Issues Concerning Retail Sector In India :

Retailing is the largest private industry in India and second largest employer after agriculture. Liberalization of the economy, rise in per capita income and growing consumerism has encouraged large business and venture capitalist in investing in retail infrastructure.

The importance of retail sector in India can be judged from following facts: Retail sector is the largest contributor to the Indian GDP The retail sector provides employment India has world largest retail network. India has the most unorganized retail market in the world. Most retailers of the unorganized retail market have their shops in the front or at the back of their houses.

Currently, the organized sector accounts for only 3 percent, indicating a huge potential market opportunity. A.T. Kearney, the well-known international management consultancy, recently identified India as globally, the 'second most attractive retail destination' from among thirty emergent markets. FDI inflows can be a tool for bringing knowledge, managerial skills and capability, product design, quality characters , brand names, channels for international marketing of products and consequent integration into global production chains, which are the foundation of successful export strategy. Liberalization of FDI policies offers opportunities

FDI could benefit both the domestic industry as well as the consumer. Opportunities for technological transfer and up gradation Access to global managerial skills and practices, Optimal utilization of human capabilities and natural resources Making industry internationally competitive Opening up export markets Providing backward and forward linkages and access to international quality goods and services Increasing Labor Standards and Skills, Improving Infrastructure Transfer of New Technology and Innovative Ideas. Augmenting employment opportunities.

Challenges of Retailing in India:

In India the retailing industry has a long way to go and to become a truly flourishing industry, retailing needs to cross various hurdles. In retail sector, Automatic approval is not allowed for foreign investment. There are restrictions on Foreign Direct Investment imposed in order to protect the interests of the country.

The new FDI policy is currently approved by only Nine states/ Provinces and 2 Union Territories. So the market size is smaller than earlier anticipated.

Arguments in Favor and Against the FDI in Retail Sector :

Supporters of FDI in retail trade talk of how ultimately the consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market. The argument that the multinationals setting up shop in retail would help creates jobs and modernizes agriculture and marketing in the country. With big retail giants coming to India, it will surely improve our back-end storage and procurement process and propel the existing infrastructure. The farmers will benefit from FDI as they will be able to get better prices for their produce. The elimination of the intermediate channels in the procurement process will lead to reduction of prices for consumers.

The Threats of FDI are Millions of small and marginal retailers jobless by closing the small slit of opportunity available to them. Once these giant foreign retailers have monopoly, they will start exploiting the market and in the long run, it will not benefit the Indian economy.

Strategic Implications of FDI in the Retail Sector:

Allowing 51%FDI: This measure will give them controlling interest, foreign retailers will be willing to pay a premium to acquire stakes in Indian retailing companies. 30 Percent Local Sourcing from small industries: This should not be a major issue as 30% - 40% of the merchandise sold is general merchandise and apparel. Investment in back end Infrastructure.

Where the store can come up: Retail sales locations can be setup only in cities with a population of more than one million, as per the 2011 censes. This still allows stores to come up in 53 cities with an aggregate population of 116 million. However, FDIfunded retail companies will be allowed to operate stores only in those states which have agreed to allow foreign investment in retail. With only nine states and two union territories agreeing on foreign investment in retail, only 20 cities are potential locations

Challenges for Global Retailers in Indian Retail Sector :

Many trading associations, political parties and industrial associations have argued against FDI in retailing due to various reasons. It is generally argued that the Indian retailers have yet to consolidate their position. The existing retailing scenario is characterized by the presence of a large number of fragmented family owned businesses, who would not be able to

Conclusion:
Foreign direct investment plays an important role in India's growth dynamics. The examples are software and service industry, two-wheeler, automobile and auto-component industries, electronics and telecommunications. FDI in the these industries expanded home and export markets, benefited consumers, generated employment, increased productivity and wages and generated externalities to local firms. As long as the foreign players such as Wal-Mart do pricing based on long run average costs, the benefits will accrue to consumers and farmers.

The main role of government is to establish and implement effective and autonomous regulatory institutions- restraining anti - competitive conduct by firms, labor and environmental regulation. Although FDI in retail in India is a contentious issue but it should be allowed until and unless it can be established that FDI in retail will do more harm than good for the economy. After weighing both pros and cons in terms of increase in employment, improvement in infrastructure and Technical know how, fear of small shopkeepers getting displaced and monopoly of big retailers etc. government should take appropriate decision.