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Advantages And Disadvantages Of Fdi In Retail Sector Economics Essay

It typically takes the form of starting a subsidiary, acquiring a stake in venture in an existing firm or starting a joint venture in a foreign country.

Green-field investment, i.e., establishing an entirely new enterprise in the foreign market.

Mergers & Acquisitions, i.e., merging or acquiring an existing firm in the foreign country.

FDI as an investment involving a long –term relationship and reflecting a lasting interest and control by a resident entity in one economy(parent investor) in an enterprise resident in an economy other than that of the foreign direct investor.

FDI IN RETAIL SECTOR

The retail industry is that sector of economy which consists of stores, commercial complexes, individual, agencies, companies and organizations. Etc. involved in the business of selling variety of finished products to the end-user consumers directly and indirectly. The goods in the retail industry are the finished products of all sectors of commerce and economy of a country.

The retail sector in india is vast, and has huge potential for growth and development, as the majority of its constituents are unorganizrd. The retail sector of india handles about $ 250 billion every year, and is expected by economists to reach to $660 billion by the year 2015.

The government led by Dr.Manmohan Singh announced new reform in Indian retail sector.

The FDI in single brand retail which was earlier 51% has been increased to 100%.

The FDI up to 51% is allowed in multi-brand retail stores

The retailers will have to source at least 30% of their goods from small and medium sized Indian suppliers.

All retail stores can open up their operations in population having over 1million. Out of approximately 7935 towns and cities in India, 55 suffice such criteria.

Multi- brand retailers have to bring at least US$100million of investment. Out of which 50% will be used for infrastructure.

The opening of retail competition should be within the parameters of state laws and regulations.

ANALYSIS AND INTERPRETATION

SWOT Analysis of Retail Sector:

1. Strengths:

 Major contribution to GDP: the retail sector in India is hovering around 33-35% of GDP as compared to around 20% in USA.

 High Growth Rate: the retail sector in India enjoys an extremely high growth rate of approximately 46%.

 High Potential: since the organised portion of retail sector is only 2-3%, thereby creating lot of potential for future players.

 High Employment Generator: the retail sector employs 7% of work force in India, which is rite now limited to unorganised sector only. Once the reforms get implemented this percentage is likely to increase substantially.

2. Weaknesses (limitation):

 Lack of Competitors: AT Kearney‘s study on global retailing trends found that India is least competitive as well as least saturated markets of the world.

 Highly Unorganised: The unorganised portion of retail sector is only 97% as compared to US, which is only 20%.

 Low Productivity: Mckinsey study claims retail productivity in India is very low as compared to its international peers.

 Shortage of Talented Professionals: the retail trade business in

India is not considered as reputed profession and is mostly carried out by the family members (self-employment and captive business). Such people are not academically and professionally qualified.

3. Opportunities (benefits):

 There will be more organization in the sector: Organized retail will need more workers. According to findings of KPMG , in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post reforms and innovative competition in retail sector in that country.

 Healthy Competition will be boosted and there will be a check on the prices (inflation): Retail giants such as Walmart, Carrefour, Tesco, Target and other global retail companies already have operations in other countries for over 30 years. Until now, they have not at all become monopolies rather they have managed to keep a check on the food inflation through their healthy competitive practices.

 Create transparency in the system: the intermediaries operating as per mandi norms do not have transparency in their pricing. According to some of the reports, an average Indian farmer realises only one-third of the price, which the final consumer pays.

 Intermediaries and mandi system will be evicted, hence directly benefiting the farmers and producers: the prices of commodities will automatically be checked.

 Quality Control and Control over Leakage and Wastage: due to organisation of the sector, 40% of the production does not reach the\ ultimate consumer. Cost conscious and highly competitive retailers will try to avoid these wastages and losses and it will be their endeavour to make quality products available at lowest prices, hence making food available to weakest and poorest segment of Indian society.

 Heavy flow of capital will help in building up the infrastructure for the growing population: India is already operating in budgetary deficit. Neither the government of India nor domestic investors are capable of satisfying the growing needs (school, hospitals, transport etc.) of the ever growing Indian population. Hence foreign capital inflow will enable us to create a heavy capital base.

4. Threats:

 Current Independent Stores will be compelled to close:

This will lead to massive job loss as most of the operations in big stores like Walmart are highly automated requiring less work force.

 Big players can knock-out competition: they can afford to lower prices in initial stages, become monopoly and then raise prise later.

 India does not need foreign retailers: as they can satisfy the whole domestic demand.

 Remember East India Company it entered India as trader and then took over politically.

In view of the above analysis, if we try to balance opportunities and prospects attached to the given economic reforms, it will definitely cause good to Indian economy and consequently to public at large, if once implemented. Thus the period for which we delay these reforms will be loss for government only, since majority of the public is in favour of reforms. All the above mentioned drawbacks are mostly politically created. With the implementation of this policy all stakeholders will benefit whether it is consumer through quality products at low price, farmers through more transparency in trading or Indian corporates with 49% profit share remaining with Indian companies only.

Advantages and Disadvantages of FDI in Retail Sector

Advantages:

1. FDI shifts the burden of risk if an investment from domestic to foreign investors.

2. Repayments are linked to profitability of the underlying investment

3. FDI is the only capital inflow that has been strongly associated with higher GDP

growth since 1970.

4. FDI contributes to economic growth as it raises the ratio of FDI flow to domestic

investment.

5. FDI has led to potential gains through technology transfer.

FDI has generated large employment opportunities in a number of countries.

FDI has led to the growth of the international trade.

Disadvantages:

Entry of global giants will force the Indian Traditional Kiryana Stores to shut down their business.

Profit will be distributed, investment ratios are not fixed.

An economically backward class person will suffer from price rise.

Market places will be located too far which will increase the travelling expenses.

There will be cross-culture conflicts

Exploitation of natural resources by foreign players

Inflation may be increased.

India will become slave due to entry of foreign players

CONCLUSION

It can be said that the advantages of allowing unrestrained FDI in the retail sector evidently outweigh the disadvantages attached to it and the same can be deduced from the examples of successful experiments in countries like Thailand and China where too the issue of allowing FDI in the retail sector was first met with incessant protests, but later turned out to be one of the most promising political and economic decisions of their governments and led not only to the commendable rise in the level of employment but also led to the enormous development of their country’s GDP.

And also, nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience.

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