FDI in Retail in India

Foreign Direct Investment or FDI is any capital inflows from abroad that is invested in or to enhance the production capacity of the economy. This month the Government has taken a cabinet decision to allow FDI in multi-brand retail with foreign ownership upto 51% and raise the limit in single brand to 100%.The decision also states:

1) Minimum amount of investment by a foreign retailer should be $100 million.

2)At least 50% of the total FDI brought in shall be invested in “backend infrastructure”.

3) At least 30% of the procurement of manufactured/processed products shall be sourced from ‘small industries’.

4) Retail sales location may be set up only in cities having minimum 10 lakh population.

5) Government will have the first right to procurement of agricultural products

The decision has invited protests from the opposition parties and traditional forms of retailers demanding a roll back of the decision.

Presently, FDI is permitted in cash and carry (wholesale) with 100 % ownership and in single brand retail upto 51% ownership. 

The unorganised form of retailing in India consists of 97% of the total retail market. It is the largest source of employment after agriculture and generates 10% of India’s GDP.

Parliamentary standing committee in its 90th report on “foreign and domestic investment in retail, 2009 had stated its concerns about allowing FDI in retail:

1.    The large cost effective retailers would displace the traditional kirana stores and render them unemployed. There are approx. 1.25crore Kirana shops employing 4 crore people. Together with their families 20 crore people depend on kirana shops.

2.    The Indian retail market is still in the nascent stage to withstand competition from foreigners.

3.    Also the foreigners due to bulk purchase would acquire monopolistic powers to reduce prices by the suppliers.

4.    It would enter the market with exceptionally cheap prices and drive competition away. Then it would acquire monopoly over the prices.

5.    It would lead to asymmetrical growth.

The rationale behind allowing FDI in multi-brand retail:

1.    Developing retail infrastructure. Though FDI is allowed in single brand retail, the investment in infrastructure has been insignificant. Farmers in India incur loss of 1trillion out of which 57% is avoidable due to lack of storage facilities.

2.    Indian farmers get only 1/3rd of the price paid by the consumers. The foreign retailers would buy goods directly from the farmers thus eliminating the intermediaries and give them remunerative prices for their supplies.

3.    It would also provide the consumers with cheap goods due to economies of large scale and control consumer inflation.

4.    The retailers in India would come out of there complacency and become competitive. They will have greater access to technology and improve their marketing interface to go global. The global food chains like KFC, pizza hut   did not drive Nathus and Nirulas out of the market.  Haldirams and Bikanerwala have gone global.

5.    Real estate is also expected to get a boost.

6.    It would provide employment to the people displaced and provide better remuneration. Govt. estimates nearly 10 million jobs in 3yrs.

7.    It would also boost Government revenues.

The experience of countries like China, Thailand, Russia, Singapore, Malaysia etc. shows FDI is beneficial to the economy. Protestors of the reforms often say that even East India Company came to India as traders. Even China had permitted FDI in 1992. Has it been occupied by foreign powers?
Chegal Reddy, head of consortium of Indian farmers favours foreign investment in retail. The farmers in Punjab are very happy with the way things have shaped up for them post Bharti-Walmart. Farmers have a large lobby in India.

The FDI policy should be implemented in India with a proper regulatory framework. Also the Government should make it compulsory that atleast 50% of the jobs generated is for the rural youth. The Government should look at both sides of the coin before arriving at any decision.

Mridushmita Choudhury