FDI IN INDIAN RETAIL - AND ITS IMPLICATIONS

Natarajan Chandrasekhar
Abstract
The health of a nation is gauged not only by the quantum of FDI it attracts but also the trend it
follows. In turn this is dependent on the economic policies formulated and practiced and the
willingness of all concerned to engage with global economic practices. Since the early 1990s when
the government embarked on a policy of liberalization it has been observed that FDI inflows showed a
steady increase until the last couple of years when in fact there has been a de-growth particularly 2010
over 2009 by almost 30%. On the other hand China has attracted FDI more than 4 times the quantum
of India during the same period.
Investors will look to invest in opportunities as they see bearing the most attractive returns
within a given frame work considering both the home as well as host country. Facts and figures
very clearly indicate the positive impact even in India for certain sectors when FDI has been
embraced. On the other hand, India most urgently requires gathering as much as investment as is
possible to keep the momentum of growth going and one such opportunity is the organizing of our
retail segment which would support development endeavor in a big way. The issue of embracing
partial FDI in retail has seen some level of procrastination which requires more urgent and serious
attention. Can India afford to lose this opportunity?
This paper attempts to study the implications for this investment as also providing some
suggestions.
Keywords: Foreign Direct Investment, Organized retail, Traditional retail, Economic
policies, Employment, Infrastructure development.

FDI -A GLOBAL SCENARIO

For the first ever time since this concept of FDI came into existence this world saw
the flow of money channelized in the direction it originally was intended to and that is
towards economies which are in transition and development. The year 2010-2011 in which
about US$ 1222 billion flowed has been eventful for the world in every sense in terms of
development, both with the financial markets and the political scenario. The two most
important factors for any country in its overall development. The data sourced from
UNCTAD and encapsulated below (Fig 1) amply illustrates the current position.

Faculty Marketing & Retail, University of Applied Sciences, Esplanade 10, 85049, Ingolstadt, Germany, email: [email protected].

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Fig 1. Global and Regional FDI Trends in 2010

Source: UNCTAD
There are three important observations to be made with the overall global picture of
FDI and they are in a way synergizing the very objective/s of this type of investment.

The flow of FDI into developed and matured economies is declining due to home
market saturation.

Transition economies indicate a halt to their FDI slide with their propensity to adopt
more liberal trade attitude and a win-win outcome.

Developing economies have started receiving better inflows due to huge untapped
markets and consumerism besides serving as a profit making opportunity for developed
economies.
To add to above factors another aspect of great importance, namely The Global
Commitment Index `which reflects the mood of leading rich countries is encouraging. A
graphical representation is depicted below (Fig 2) which should be read together with the
UNCTAD report to understand the great opportunity this type of investment presents to the
investor and investee.

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Fig 2. Commitment to development Index 2011

Source: Center for Global Development

At 18 of these 22 countries were above average in their disposition. For the purpose of
this paper we stay focused on the first three policy areas, namely, aid, trade and investment
(FDI) though the other four policy areas Migration policies, Security policies, Environmental
policies and Support for new technology cannot be ignored when actual investment is made.
So each of this investing country gets scored on seven policy areas which are averaged for an
overall score. While a score of 7 is considered good, the average was 5.

The Indian FDI Scenario

Foreign direct investment (FDI) capital flows into India have increased dramatically
since 1991, when India opened it economy to FDI, and inflows have accelerated since 2000.
FDI inflows to India reached $11.1 billion in calendar year 2006, almost double the 2005
figure, and continued to increase in the second half of the decade. The Indian government had
announced a target of $25 billion in new FDI inflows for the 200708 fiscal year. Globally
FDI has experienced a corresponding resurgence since 2004, recording year-on-year increase
of 29 percent in 2005 and 27 percent in 2004, after declining for several years in the early
2000s. Consistent with the global pattern, FDI inflows into India declined between 2001 and
2003, before experiencing a resurgence that surpassed average global growth, with year-onyear increases of 45 and 72 percent, respectively, in fiscal years 200405 and 200506.

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Preliminary data for inward FDI for the 200607 fiscal year show FDI inflows of
$15.7 billion, representing an increase of 184 %, in rupee terms, over the preceding fiscal
year. While there is a large percentage increase compared to the global average, the value of
inward FDI flows to India relative to developing countries remains small. However, FDI
inflows to India surpassed inflows to South Korea in 2006, making India the fourth largest
destination for FDI in Asia, behind China, Hong Kong, and Singapore. The only bad period
being 2010 when there was an actual dip in the inflow the quantum being US$ billion 24.2 ,a
clear downward spiral over 2008 and 2009 and as a percentage a drop of more than 30
percent. However this could be attributed essentially to the upheaval in the global financial
scenario besides the domestic political scenario.
Indias investment policy does not permit FDI in the following sectors: housing &real
estate except development of integrated townships and settlements, retail trading, lottery
business, gambling and betting, agriculture (including plantations other than tea plantation).
What must be noted here is that FDI up to 100% is permitted in some sectors under automatic
route and this includes medical equipments and drugs and pharmaceuticals and pesticides
except those requiring industrial licensing. More recently FDI has been permitted up to 51%
in single brand retail. This sector is presently in focus and a subject of national debate with
three key players involved in the process. The organized retail association, the traditional
retail association and the government.
An Overview of Indias Economic and Fiscal position:
Slides marked a to m: Snapshot Slides. Source: www.dipp.gov.in
A) Economic Performance a picture of reasonable consistency:
Sustained economic growth
Average last 10 years
2004-05

6.5%
6.9%

Forecast up to 2006-07

>7.0%

Forecast till 2050 Goldman Sachs

5 % p.a.

2010 Real growth GDP of 10.1%

Services share in GDP over 50% (52.4% share in GDP in 2004-05)
At mid decade manufacturing sector growth stood at 8.8% in 2004-05 (17.4% share in
GDP in 2004-05).
Fig 3. GDP growth rate (%) and trade as a % of GDP
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SOURCE: Compiled from world development indicators database

Foreign Trade:
Merchandise exports grew by 25% in 2004-05, (US$80 billion) and the 2009-2010 figure
stands at US$ 180 billion.
Imports grew by 36%, (US$106 billion) during the same period and for 2009-2010 stands at
US$280. The figure below clearly depicts these facts.
Investment:
Foreign Investment over US$14 billion in 2004-05 (FDI US$5.5 billion, FII US$8.9 billion)
and for the year 2010 stood at US$ 24.4 billion.
Mature Capital Markets
NSE third largest, BSE fifth largest in terms of number of trades.
A well developed banking system.
Fig 4. Indias growth, exports and imports (fy 2005-2006 till 2009-2010)

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SOURCE: www.ibef.org
B) Rationalization of tax structure both direct and indirect
Progressive reduction in peak rates
Peak Customs duty reduced to 15%
Corporate Tax reduced to 30%
Customs duties to be aligned with ASEAN levels
st
Value Added Tax introduced from 1 April 2005
Fiscal Responsibility & Budget Management Act, 2003
Revenue deficit to be brought to zero by 2008.
C) Industrial Licensing
Progressive movement towards de licensing and deregulation
Licensing limited to only 5 sectors (security, public health & safety considerations)
Foreign Investment
Progressive opening of economy to FDI
Portfolio investment regime liberalized
Liberal policy on technology collaboration
Trade Policy
Most items on Open General License, Quantitative Restrictions lifted
Foreign Trade Policy seeks to double Indias share in global merchandise trade in 5 years
D) Exchange Control
All investments are on repatriation basis
Original investment, profits and dividend can be freely repatriated
Foreign investor can acquire immovable property incidental to or required for their activity
Rupee made fully convertible on current account
Taxation
Companies incorporated in India treated as Indian companies for taxation Convention on
Avoidance of Double Taxation with 65 countries
E&f
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Evolution of FDI Policy

Fig 5. Evolution of FDI Policy

As can be observed from the above diagram (Fig 5) it must be said that India has
progressively but cautiously liberalized its attitude towards FDI though we are tempted to ask
whether the pace of this liberalization is adequate considering the domestic growth rate
projected, the propensity of other developing economies to attract this investment and last but
not the least the predisposition of developed economies to invest considering the fact that they
see very little growth in their home market at present.
Fig 6. FDI Entry Routes

G) New sectors opened to FDI

Defense production, Insurance, print media -up to 26%
Development of integrated townships up to 100%
E-commerce, ISP without gateway, voice mail, electronic mail, tea plantation - 100% subject
to 26% divestment in 5 years
FDI equity limits rose
Private sector banks rose from 49% to 74%
Drugs and pharmaceuticals from 74% to 100%
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Advertising from 74% to 100%

Private sector refineries, Petroleum product marketing, exploration, petroleum product
pipelines 74% to 100%
Procedural simplification
Issue of shares against royalty payable allowed
H) FDI in domestic airlines increased from 40% to 49%. Automatic route allowed
FDI up to 100% allowed under the automatic route in development of townships, housing,
built up infrastructure and construction development projects
Foreign investment limit in Telecom services increased to 74
FDI and portfolio investment up to 20% allowed in FM Broadcasting. Hitherto only Portfolio
investment was allowed.
Transfer of shares allowed on automatic route in most cases
Fresh guidelines for investment with previous joint ventures
A WTO (TRIPs) IPR regime compliant in position since 2005 Patents Act amended to
provide for product patent in pharmaceutical and agro-chemicals also.
I) FDI up to 100% allowed under the Automatic Route in all activities except for
Sectors attracting compulsory licensing
Transfer of shares to non-residents (foreign investors)
In Financial Services, or
Where the SEBI Takeovers Regulation is attracted
Investor having existing venture in same field
Sector specific equity/route limit prescribed under sect oral policy
Investments made by foreign investors are given treatment similar to domestic investors
J) FDI equity limit-Automatic route
Insurance 26%
Domestic airlines 49%
Telecom services-Foreign equity 74%
Private sector banks-74%
Mining of diamonds and precious stones-74%
Exploration and mining of coal and lignite for captive consumption-74%
K) FDI requiring prior approval
Defense production 26%
FM Broadcasting -foreign equity 20%
News and current affairs-26%
Broadcasting-cable, DTH, up-linking foreign equity 49%
Trading-wholesale cash and carry, export trading, etc., 100%
Tea plantation 100%
Development of airports-100%
Courier services-100%
L) Foreign technology agreements also allowed under Automatic route:
Lump-sum fees not exceeding US$2 Million
Royalty @ 5% on domestic sales and 8% on exports, net of taxes
Royalty up to 2% on exports and 1% also permitted for use of Trade Marks and Brand name,
without any technology transfer
Wholly owned subsidiaries can also pay royalty to their parent company
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Payment of royalty without any restriction on the duration allowed.

M) 2nd most attractive investment destination among the Transnational Corporations (TNCs) UNCTADs World Investment Report, 2005
3rd most attractive investment destination AT Kearney Business Confidence Index, 2004
th
th
Up from 6 most attractive destination in 2003 and 15 in 2002
nd
2 Most attractive destination for manufacturing
Among the top 3 investment hot spots for the next 4 years
UNCTAD & Corporate Location April 2004
Most preferred destination for services -AT Kearneys 2005 Global Services Location Index
(previously Offshore Location n Attractiveness Index)
The above scenario is clearly indicative of the potentially optimistic outcome for the
investee and investor.
Retail Scenario India
Retail in India still does nnot enjoy the status of Industry and is essen ntially
dominated by traditional stores and the late est estimate is that this could be to the extent of
95%. There are a few large Indian corporate house es who have ventured into the domestic
retail sspace with organized format and some of them are e well entrenched to capitalize this
early entry a advantage. This being the broad domestic retail p picture the government is
under constant pol litical pressure when discussing the issue of permittting FDI in the retail
sector. It is estimated that thhere are more than 12 million traditional stores acro oss all
categories of products which together contr ribute about 8% of the total national GDP besides
be eing the second largest employer only next to the agricultural sector.
The graphical representation (Figure 7) depicted below furnishes a visually picture for
different categories together with the expected or forecasted spending well into the year 2015.
Again this serves to confirm the potential the country offers. It must be mentioned here that it
is interesting to observe the anticipated growth in dollar value terms.
Fig 7. Consumer spending

SOURCE: Planet Retail

The Indian retail sector is one of the least concentrated in the world. Together the top
five domestic corporate retailers h have a combined market share that is a single d digit. The
Indian retail scenario is one of contrasts, fragmentation and heterogeneous with the
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predominant role still played by the traditional set of family run stores and hawkers who
through their trade associations are vigorously opposed to the entry of foreign retailers or their
investment in this sector.
Despite this resistance there has been rapid growth with some domestic regional
players setting up different retail formats leading to a future possibility of retail market getting
concentrated and more organized.
Currently the Indian government has allowed 51% FDI in single brand retail and
100% in Cash & Carry that is B2B operation. It must be pointed out that a number of
domestic organized players have also entered into collaborative arrangements with
international retailers to take advantage of the huge retail market opportunity which the Indian
market is projected to throw up. So to say just waiting on the sidelines.
The opportunities arising by virtue of getting organized by inviting international
retailers and the consequent implications that this could have on the Indian economy is just
one of the compelling factors for this paper.
As per the Mumbai Mirror report dated 24th of February 2009 FDI inflow in 20082009 is likely to exceed US $25 billion despite the financial meltdown impacting the global
economy. In fact it is expected that this quantum is likely to exceed US $25 billion that came
in during 2007 2008. To quote N N Prasad Joint Secretary in the Ministry of Commerce,
Government of India our FDI will be more than US $ 25 billion. It is a very good sign .... To
make another interesting connection the program of Vision 2020 prepared by the Chemical
and Fertilizers ministry to make India one of the top 5 global innovation hubs requires huge
investment including substantial participation from the private sector under the public
private partnership model. This is what the Chemicals and Fertilizers minister, Government of
India Ram Vilas Paswan had to say: the present state of infrastructure and R & D of the
pharmaceutical industry in the country is rather weak. We need to bolster it immediately.
Once this proposal comes through, India will become a global pharmaceutical hub. Five out
of ten drugs being discovered in the world will be in India. We will also ensure patenting of
our own drugs. Hence there is a huge potential for FDI in the healthcare sector including its
retail element and the policy body should not have any hesitation in permitting the same.
When we consider the pharmacy retail there is a temptation to argue that it is a very
specialized retail and directly impacts the welfare of mankind but on the other hand a closer
look will reveal that all retail is concerned with the end consumer and does impact him one
way or the other. Ultimately it is best quality at the most affordable price whether it is a
prescription drug or a branded consumer product.
Even for a moment if one does consider organized retail just on healthcare retail front
alone a myriad of associated activities are revealed. There is no going back on the fact that
there is a dearth of educated and trained retailers who will by necessity have to be multi
skilled. This in turn will call for competent human resource personal that are not only experts
in their domain but in associated skills. A complete new breed of human resource
professionals we require to generate.
Getting organized implies addressing the training issues of the existing unorganized
employees as well as making provision for future requirements. Issues such as supply chain
management very much a part of organized system will throw up huge opportunities both in
terms of infrastructure and transportation development, not to underscore the role of
information technology which is the very back bone of organized retail. The fact that we get
access to modern and latest technology cannot be overlooked which once again would result
spawning linked industrial sectors like barcode manufacture, RFID, electronic instruments
and gadgets etc. One should not overlook the advantage of a learning experience on a golden
plate as these investors have been through the maze. That is a huge experience in different
formats and markets is shared which would otherwise take decades and consume valuable
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time.
With good inflow of FDI in retail sector and the employment opportunities directly
and indirectly interlinked it is very likely that the impact of FDI in retail will not be restricted
only to the direct retail level but is more likely to be strongly felt by interlinked sectors. As
mentioned in the earlier paragraph there will be a large requirement of Information
technology professionals, experts in supply chain management and logistics system,
transportation and communication besides the core implementation personal from the
regulatory side. For example Vision 2020 for the pharmaceutical industry mentioned earlier
on in this paper talks of Rs 5000-10000 crore being the investment amount and restricts itself
with only drug development and mentions about 5 lakh jobs being created in 4 years time.
India ranks the lowest in terms of per capita total health expenditure as well as per capita
government health expenditure. We have a very long distance to go which in itself is an
opportunity and will have economic ramifications if this issue is not addressed with urgency
(reference to Working paper number 198 Impact Of Preventive Healthcare on the Indian
Industry and Economy- Alka Chadha et al). Take the health insurance industry it reveals that
there are 800,000,000 individuals not covered by any insurance scheme. Some well know
management authors and gurus have referred to this segment as the bottom of the pyramid
or simply BOP. If we have a healthcare system which is possible only if the retail is organized
where the pharmacy forms part of the system a substantial number of these can be brought
into the insurance umbrella with suitable models. A huge opportunity for employment
generation due to infusion of funds into retail. In fact employment generation could be
exponential as it will not be restricted only to the retail alone.
In a very recent article in Hindustan Times dated 27th of December 2011 by Pankaj
Mullick under the title Ready, get set and give retail a go the potential of this sector if it
receives FDI and the treasure trove it is, is revealed. He sums up with the following figures:

Around $8 billion to $10 billion of fresh investments could come into the country in
the next 5 to 10 years

About 35 million people are hired by the Indian retail industry. Allowance of FDI
could add at least another 10 million jobs in the next 5 to 7 years

Employees at the managerial level in the retail sector can expect their salaries to rise
25% to 40%
Clearly the sectors which have been allowed FDI in the process of liberalization have
done well. There is no indication to the contrary in any case. The probable hurdle here would
be the future and role of existing retail workers in general. For example there is scope for
attracting FDI in the healthcare retail segment alone in excess of US $2 billion taking care of
its deployment over a period of time and canalizing the same into specific activities associated
with retail (funding JVs with traditional stores, funding training of employees of unorganized
segment, funding formal and informal education centers). A time window of 2 to 3 years
should be observed to usher in this change. This time frame is essential taking into
consideration the social fabric of India. Extending this logically to the balance of retail market
would indicate huge opportunities both in terms of lifting the economy and generating
employment exponentially.
The government should step forward and take active part in creating awareness for
organizing retail at the bottom of the pyramid thus gradually improving the standard of living,
leading to encouraging demand and thereby fueling supply.
The time to act is now with India exhibiting a very high global services location index
which could enable us to get substantial FDI, useful in upgrading our current living standards
while generating employment opportunities exponentially.

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Implications for India

As would any investor expect it is only fair that he would take for granted a decent
rate of return on investments made with a reasonable assurance of safety coupled with the fact
that this return would be for a period which would substantiate the efforts. Embracing this
investment would entail embracing the system in totality save the peculiarities related to and
impacting the host culture and in turn the return on investments. This implies technology,
infrastructure, manpower, and other related or interlinked aspects.
It is widely believed in the retail sector that for every one person employed directly in
retail there are nine others who are indirectly employed like supply chain, cold storage
warehouse, transportation, back office support and other activities which actually aid in
selling the product to the end consumer. This actually sums up the huge employment potential
in this sector though it is beyond this paper to arrive at a specific figure in these related
employment opportunities. All these activities would require huge investments which could
be attracted as FDI.
In the case of India the problem is neither its lack of attractiveness as a destination for
FDI nor the real need for the same. Both these aspects are apparent. But what really are the
crunch issues then?
The primary issue is with the introduction of FDI in retail the investor will demand a
level of organization of the retail leading to disturbing the existing traditional retail employees
and due to the system of operations demanding better productivity which means better or
improved margins for the retailer thereby cutting away margin eating activities of the existing
system. This implies direct sourcing where the so called middle men (estimated to cost 10 to
15 %) of the total cost will be saved. This can translate into better prices for the consumer. A
direct but distinct advantage of the organized chain concept.
Hence being a serious socio-economic issue these implications will need to be
addressed if we intend going ahead and taking the reforms in our stride.
Issue 1: Retail sector being the second largest employer in India, close to 35 million
people will be impacted directly if we do away with traditional stores. So how do we
gainfully engage them and in the process assure them their livelihood?
Issue 2: Will the government be truly supportive of other developmental issues which
go to support issue 1?
Issue 3: The impact the above mentioned decisions 1 &2 will have on different stake
holders not excluding different political parties.
It must be realized that international retail corporate entering India will have to work
in tandem with governmental authorities and other associations for a predetermined
timeframe in rehabilitating those individual businesses which are likely to be impacted within
a given physical area depending on the location in the host country of the International
retailer.
A super store is typically a put together of a number of different stores offering
different categories of consumer products under one large format. Whatever the extent of
automation there will be a dire requirement of skilled personal and this human resource could
be drawn from these existing traditional stores. This implies that such personal while having
adequate experience may not have the required professional skills. Here comes the
involvement of international and other governmental agencies to fully take part in retraining
such individuals. One method is to (as part of the permission to permit FDI) set aside a budget
for this purpose which could be used in the upgrading of such individuals and the other could
be supporting organizations which do so. Modern retailing also requires learning skills not
directly involved with retailing, like warehousing, cold storage operations, bulk breaking and
logistics. Investments are required here for training and upgrading which could be carried out
in a continuous manner. By adopting this strategy a sizeable number of existing traditional
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stores would get adsorbed and later absorbed into the modern system where their past local
neighborhood experiences can be exploited by international retailers. For instance, local
choice of brands, sentiments, culture etcwhich have often been a huge deterrent to
international retailers success in different countries? Examples of failures, Carrefour in South
Korea and Wal-mart in Germany. The abundance of traditional store retail employees could
very well be a boon to these international operators. This issue requires addressing the
interests of different stakeholders involved in the process and work out a suitable and detailed
plan. It is an issue of building a win-win situation. For one, the existing employees of the
traditional retail outlets could look at opportunities of getting employed formally and
acquiring new skills.
On the second issue it is a question of how swiftly the government can and is willing
to act. This could be in terms of further freeing up FDI norms in infrastructure development
and modernization efforts, technology implementation, swift and committed clearances where
required and perhaps looking at special terms for a fixed time period to motivate the investor.
The other important issue but hidden from sight is the aversion of the next generation in line
to take over and run family owned stores. This is becoming increasingly obvious with rapid
growth in technology and the younger generation not following the footsteps of the earlier
members of the family. There is an increasing trend for them to educate themselves formally
and get better recognized rather than just being shopkeepers. This is in fact a huge social
pressure not obviously seen but felt. With more than 60% of its population in the young age
group segment it is imperative for the government to address this aspect with the next 5 years
in mind. Also it should be noted that the government is indeed having to put up with revenue
leakage of substantial proportion as a bulk of such traditional stores do not generate any
income for the government on one hand but avail all social services and other benefits
expected by any citizen. Hence by formalizing retail such aspects would also get addressed.
This two pronged approach would not only protect the interests of the impacted
population but also speed up the development of the nation in many ways. Scientists have
long ago formulated laws in Physics (Newtons first law of motion) as well as human
resource experts have supporting studies to show and demonstrate the reluctance to change.
We have time and again been hearing that only change is constant. The need of the hour is
to usher in the introduction of FDI in a phased manner taking into concern the issues of direct
stake holders in this case the existing traditional retailers without political parties practicing
vote bank politics. The nations development cannot and should not be held back but in
conclusion take care of the consumers offering them the best of choice, price and service
which would only be possible with inclusive organization.
REFERENCES
[1]
Alka Chadha et al Working paper 198-Impact of Preventive Healthcare on the Indian Industry and
Economy
[2]
Center for Global Development-Commitment to Development Index
[3]
Prasad N N (Feb 2009) Mumbai Mirror
[4]
Pankaj Mullick (27th Dec 2011) Hindustan Times, Ready, get set and give Retail a go
[5]
Ram Vilas Paswan Ministry of Chemicals and Fertilizers Vision 2020
[6]
UNCTAD-Global Investments Trends Monitor, No 5, 17th January 2011
[7]
www.dipp.gov.in
[8]
www.planetretail.com

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