Foreign Direct Investment in Retailing in India – Its Emergence Prospects

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Within the country, there have been protests by trading associations and other stakeholders against allowing FDI in retailing. On the other hand, the growing market has attracted foreign investors and India has been portrayed as an important investment destination for the global retail chains. The present paper attempts to analyze the reason why foreign retailers are interested in India, the strategies they are adopting to enter India and; there prospects in India

It is worth mentioning that retailing in India has been hailed as one of the sun-rise sectors in the economy. Till now unorganised retailing sector was dominating retail trade in India by constituting 98% of all retailing trade but now not only traditional Indian retailers but giant Indian retailers like Reliance has entered in the area and is planning to expand its activities in this sector in a big wag. Even world renowned retailing organisation like Wal-Mart has decided to enter in India via joint venture with Bharti and French retailer Carrefour is busy in chalking out strategy to enter the hyper market and supermarket retail format in India through Dubai based retail major Landmark group.

; In this context an effort has been made in this paper to review the emergence of global retailers in India, to examine the govt. policy relating to FDI in retailing and to evaluate the prospects of global retailing in India.

More specifically the global players are interested in India due to following reasons:

I) Strategic Location ; Geography:; India enjoys unique geographical advantage. This variety of religions provides India with a diverse culture. Besides, India has versatile population of urban and rural nature. This versatility of population makes India a ready made market for foreign retailers.

Country

India

IV) ;Retailing: The Emerging Revolution: Retailing is the largest private industry in India and second largest employer after agriculture. With over 12 million retail outlets, India has the highest retail outlets density in the world. This sector witnessed significant development in the past 10 years from small unorganized family owned retail formats to organized retailing. The importance of retail sector in India can be judged from following facts (a) Retail sector is the largest contributor to the Indian GDP (b) The retail Sector provides 15% employment (c) India has world largest retail network with 12 million outlets (d) Total market size of retailing in India Is U.S $ 180 billion (e) Current Share of Organized Retailing is just 2% which comes around to $3.6 trillion (f) Organized retail sector is growing @ 28% per annum.

V); Indian Retailing: Opportunities Unexplored: India is sometimes referred to as the nation of shopkeepers. As compared to China (Table 2) the presence of global players in India is very less

Table 2: Number of Foreign Retailers in India ; China

India

India in such a scenario presents following facts to foreign retailers:

  • There is a huge, huge industry with no large players. Some Indian large players have entered just recently like Reliance, Trent
  • India can support significant players averaging $1 bn. in Grocery and $0.3- 0.5 bn. in apparel within next ten years.

Table 3: Top 30 Global Retailers with their Sales in Grocery and Percentage

Share of Domestic and Foreign sales in Total Retail Sales, 2003

; Rank

Domestic Sales(%)

Foreign Sales(%)

1.
USA
Germany
Germany
France
USAGermany
Germany
USA
France
Japan
Germany
UK
Germany
USA
USA
USA

Arguments in favour of FDI in Retailing ;

FDI in retailing is favoured on following grounds:

(3); FDI in retailing can easily assure the quality of product, better shopping experience and customer services.

Arguments against FDI in Retailing

(1); Indian retailers have yet to consolidate their position.

(3); FDI in retailing can upset the import balance, as large international retailers may prefer to source majority of their products globally rather than investing in local products.

(4); Global retailers might resort to predatory pricing. Once the domestic players are wiped out of the market foreign players enjoy a monopoly position which allows them to increase prices and earn profits.

(5); Indian retailers have argued that since lending rates are much higher in India, Indian retailers, especially small retailers, are at a disadvantageous position compared to foreign retailers who have access to International funds at lower interest rates. High cost of borrowing forces the domestic players to charge higher prices for the products.

(6); FDI in retail trade would not attract large inflows of foreign investment since very little investment is required to conduct retail business. On the contrary; after making initial investment on basic infrastructure, the multinational retailers may remit the higher amount of profits earned in India to their own country.

FDI in Retailing in India – Policy and Entry Routes

; In India, till recently, FDI was not allowed in retailing, but the Union cabinet on January 24, 2006 rationalised and simplified the FDI policy and allowed the contentious issue of foreign investment in retail sector by allowing FDI up to 51 percent with prior government approval for retail trade in single brand products.; This would imply that foreign companies would be allowed to sell goods sold internationally under a single brand, viz. Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products are produced by same manufacturer would not be allowed.; However, there are indications that the Government may allow foreign investments in retail segments where small domestic players do not operate.

It is worth mentioning that FDI restrictions have not deterred prominent international players from entering India. Many U.S and other international retailers and consumer goods companies consider India a top-priority market with the potential for breakthrough growth.

(a); Manufacturing and Local Sourcing:; Companies that set up manufacturing facilities are allowed to sell the products in the domestic market.; Consumer durable companies such as Sony and Samsung have entered the retail sector through this route.; Due to high labour cost in their domestic market, many international brands are setting up manufacturing bases in developing countries such as India and China and / or are sourcing products from local manufacturers.; For example, Levi’s and Tommy Hilfiger are sourcing products from Indian manufacturers like Arvind Mills.; Benetton has a manufacturing unit in India.; Other international brands like GIVO from Italy have set up export-oriented manufacturing facilities.; These companies are allowed to sell products to Indian consumers through franchising, local distributors, existing Indian retailers, own outlets, etc.

; The test marketing route allows foreign players to test the demand for their products in Indian market before undertaking investment.; Even if FDI is allowed in retailing, many foreign players would like to enter the Indian market through this route.

Table 4: Some Existing Foreign Players and Prospective Entrants

Retailers

Multi-format retailers

Cash ; carry

Wholesale cash-and-carry and franchising

Source: FDI in Retail Sector, Department of consumer affairs, Government of India, p. 115.

; Conclusion

  1. FDI should not be allowed for multi brand stores in near future, as Indian retailers will not be able to face competition with these stores immediately.
  • FDI in Retail Sector in India, Department of Consumer Affairs, Ministry of Consumer Affairs, Public and Food Department, Government of India.
  • The World Bank Group Website : documents.pdf
  • Swapna Pradhan: Retailing Management, The McGraw-Hill Companies(2007)
  • Chetan Bajaj, Rajnish Tuli ; Nidhi Srivastav: Retail Management, Oxford University Press (2006)
  • Suja Nair: Retail Management, Himalaya Publishing House (2006)
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