INTRODUCTION TO FDI

FDI occurs with the purchase of the “physical assets or a significant amount of ownership (stock)
of a company in another country in order to gain a measure of management control.”

FDI is distinguished from portfolio investment that does not involve obtaining a degree of
control in a company.

Internationally, FDI inflows are counted from 10% stock or asset ownership in a company.

FDI may take the form of “greenfield” projects

FDI is also often accomplished through “merger and acquisition” activities or through
international franchising.

FDI is especially critical in both emerging and transition economies. FDI helps to answer the
question:

“How do you create capitalism in a nation where there are neither capitalists nor capital?”

Introduction

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
business models. However, retailing is one of the few sectors where foreign direct investment
(FDI) is not allowed at present.

FDI in retail industry

FDI in retail industry means that foreign companies in certain categories can sell products
through their own retail shop in the country. At present, foreign direct investment (FDI) in pure
retailing is not permitted under Indian law. Government of India has allowed FDI in retail of
specific brand of products. Following this, foreign companies in certain categories can sell
products through their own retail shops in the country.

It is a very positive step and it will encourage international brands to set up shop in India. On the
other hand, this will also lead to competition among Indian players. it will be the consumers who
stand to gain,'' This would not change the market dynamics immediately as it will take some time
for these plans to fructify. The growing dominance of multinational companies in the country's
$200 billion retail business, had warned that any move to increase FDI in the retail sector would
ruin the business of small and medium traders scattered over the country
Organized retailers in India are opposing the entry of MNCs in retail trading because of their
predatory pricing strategy that wipes out competition, when the Government decides to allow
foreign players to enter the retail space, it should first restrict them to lifestyle products segment
before permitting them to spread their wings into other areas like grocery marketing that has a
direct impact on `kirana stores'.
FDI in retail trade has forced the wholesalers and food processors to improve, raised exports, and
triggered growth by outsourcing supplies domestically. The availability of standardized products
has also boosted tourism in these countries. FDI in retail sector has been a key driver of
productivity growth in Brazil, Poland and Thailand. This has resulted in lower prices to the
consumer, more consumption and higher profit for the producer.

Should India Allow F.D.I?

Three arguments are generally extended against allowing FDI in the retail sector. First, this will
prevent the growth of domestic organized retail industry. Second, it will result in closure of small
retail stores, the so-called mom-and-pop stores and third, that it will disrupt the social
community and the given way of life. The first argument is passes simply because with the entry
of Reliance, Tatas and other large domestic players the

domestic retail industry has surely come of age. These corporates don’t need protection.
Actually, if these infants are protected any longer they have good chances of becoming
delinquent adults. Soon enough, monopoly rents will begin to accrue and bad habits will get
entrenched and it will then be more difficult to open the sector. Domestic players have the best
locations anyway and a clear head start. The equity argument does not have solid empirical basis.
As the ICRIER study on the same subject has shown, liberalization of retail raises overall
economic welfare and does not result in loss of employment. Some restructuring will take place
but local markets will not close down. My favourite example is that the entry of Haldiram has
not led to the demise of Nathus and Agarwal mishthan bhandars. Both can coexist as they fulfill
different needs and serve different clientele. Organized retailing generates additionality of
demand by reducing costs, lowering prices and also improves returns to producers by eliminating
unnecessary intermediaries. The third argument has greater substance. Malls could lead to
greater urban anonymity and a complete break down of the bazaar culture and the disappearance
of the ‘down town’ space that has its own charm. But in France, Germany, the Nordic countries
and also other parts of Europe, experience has shown that local communities can thrive if they
are empowered and involved in urban planning. Organized retail does not necessarily result in
the dreaded mid-west. So FDI in retail improves growth prospects, does not harm equity and
discourages monopoly rents and therefore should be allowed. Recommendations:
1. The retail sector in India is severely constrained by limited availability
of bank finance. The Government and RBI need to evolve suitable
lending policies that will enable retailers in the organised and
unorganised sectors to expand and improve efficiencies. Policies that
encourage unorganised sector retailers to migrate to the organised sector
by investing in space and equipment should be encouraged.
2. A National Commission must be established to study the problems of
the retail sector and to evolve policies that will enable it to cope with FDI
– as and when it comes.
3. The proposed National Commission should evolve a clear set of
conditionalities on giant foreign retailers on the procurement of farm
produce, domestically manufactured merchandise and imported goods.
These conditionalities must be aimed at encouraging the purchase of
goods in the domestic market, state the minimum space, size and specify
details like, construction and storage standards, the ratio of floor space to
parking space etc. Giant shopping centres must not add to our existing
urban snarl.
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4. Entry of foreign players must be gradual and with social safeguards so
that the effects of the labour dislocation can be analysed & policy finetuned.
Initially allow them to set up supermarkets only in metros. Make
the costs of entry high and according to specific norms and regulations so
that the retailer cannot immediately indulge in ‘predatory’ pricing.
5. In order to address the dislocation issue, it becomes imperative to
develop and improve the manufacturing sector in India. There has
been a substantial fall in employment by the manufacturing sector, to the
extent of 4.06 lakhs over the period 1998 to 2001, while its contribution
to the GDP has grown at an average rate of only 3.7%17. If this sector is
given due attention, and allowed to take wings, then it could be a source
of great compensation to the displaced workforce from the retail industry.
6. The government must actively encourage setting up of co-operative
stores to procure and stock their consumer goods and commodities from
small producers. This will address the dual problem of limited promotion
and marketing ability, as well as market penetration for the retailer. The
government can also facilitate the setting up of warehousing units and
cold chains, thereby lowering the capital costs for the small retailers.

Reviews
Retailing is one of the few sectors where foreign direct investment (FDI) is not allowed at
present. Stakeholders, trading associations, politicians, etc. have given various arguments for and
against FDI in retailing. However, such arguments are largely based on perception and there has
not been serious academic research in this area. To fill this lacuna, this survey-based study
analyses the current retail scenario in India, investigates the growth across different segments of
retailing and evaluates the likely impact of allowing FDI on various stakeholders in different
retail segments. Experiences of other countries in allowing FDI and its impact are also discussed.
Presently, foreign players are entering the market through different routes. The entry process and
their perception about the Indian market are analyzed. The study investigates the structural,
regulatory, fiscal and other barriers affecting the performance of retail trade and suggests reforms
for the removal of such barriers. It also provides valuable policy inputs in terms of the time
frame in and the process through which the Indian government can open up this sector to FDI so
as to maximize the welfare and minimize the adjustment. It also lists the conditions that may be
imposed on foreign retailers if FDI is allowed.