Division Of Retail Industry: Organised And Unorganised Retailing
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Just back from first frenzied shopping experience in the UK, a four year old ever-inquisitive daughter asked to her father, "Why do we not have a Harrods in Delhi? Shopping there is so much fun!" Simple question for a four-year-old, but not so simple for her father to explain.
As per the current regulatory regime, retail trading (except under single-brand product retailing - FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a 'single-brand'; this condition being in addition to a few other conditions to be adhered to. That explains why we do not have a Harrods in Delhi.
India being a signatory to World Trade Organisation's General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. However, the government in a series of moves has opened up the retail sector slowly to Foreign Direct Investment ("FDI"). In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand retailing is prohibited in India.
Definition of Retail
In 2004, The High Court of Delhi defined the term 'retail' as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale).A sale to the ultimate consumer.
Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customersRetailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.
Division of Retail Industry - Organised and Unorganised Retailing
The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing
Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.
Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India's GDP.
ndian retail market is the fifth largest retail destination; globally and owns the credit of being ranked as an attractive market for retail investment by AT Kearneys eighth annual Global Retail Development Index (GRDI). Retail industry is the largest segment in India, employing about 8% of the workforce, and contributing more than 10% of the countrys GDP. During the past decade, retail industries have built up strong lifestyle brands positioning themselves to cater to the tastes and preferences of their consumers and utilizing the increasing income of the end users. With the economy recovering faster than anticipated, there is a drastic change in the consumer spending patterns.
The retail scenario is one of the fastest growing industries in India over the last couple of years. India retail sector comprises of organized retail and unorganized retail sector. Traditionally the retail market in India was largely unorganized; however with changing consumer preferences, organized retail is gradually becoming popular.
Unorganized retailing consists of small and medium grocery store, medicine stores, subzi mandi, kirana stores, paan shops etc. More than 90% of retailing in India fall into the unorganized sector, the organized sector is largely concentrated in big cities. Organized retail in India is expected to grow 25-30 per cent yearly and is expected to increase from ` 35, 000 crore in 2004-05 to ` 109, 000 crore ($24 billion) by 2010.
Quick facts on Indian Retail sector
Indian Retail sector is the fifth largest global retail destination.
India retail market is dominated by the unorganized sector.
The top five companies in retail hold a combined market share of less than 2%.
The Indian retail market has been ranked by AT Kearney's eighth annual Global Retail Development Index (GRDI), in 2009 as the most attractive emerging market for investment in the retail sector.
Currently the share of retail trade in India's GDP is around 12 per cent, and is estimated to reach 22 per cent by 2010.
According to Government of India estimate the retail sector is likely to grow to a value of ` 2,00,000 crore (US$45 billion) and could yield 10 to 15 million retail jobs in the coming five years; currently this industry employs 8% of the working population.
India continues to be among the most attractive countries for global retailers. According to the Department of Industrial Policy and Promotion, approximately US$ 47.43 million was the amount of Foreign Direct Investment (FDI) inflow as on September 2009, in single-brand retail trading.
More than 80% of the retail sector in the country is concentrated in the large cities. A study reveals that among the more than 20 locations, for organized retail in India, Mumbai was found to be the most preferred location followed closely by Bengaluru in the second position.
Key Players in Indian Retail Sector
AV Birla Group has a strong presence in apparel retail and owns renowned brands like Allen Solly, Louis Phillipe, Trouser Town, Van Heusen and Peter England. The company has investment plans to the tune of ` 8000 - 9000 crores till 2010.
Trent is a subsidiary of the Tata group; it operates lifestyle retail chain, book and music retail chain, consumer electronic chain etc. Westside, the lifestyle retail chain registered a turnover of ` 3.58 mn in 2006.
Landmark Group invested ` 300 crores to expand Max chain, and ` 100 crores on Citymax 3 star hotel chain. Lifestyle International is their international brand business.
K Raheja Corp Group has a turnover of ` 6.75 billion which is expected to cross US$100 million mark by 2010. Segments include books, music and gifts, apparel, entertainment etc.
Reliance has more than 300 Reliance Fresh stores; they have multiple formats and their sale is expected to be ` 90,000 crores ($20 billion) by 2009-10.
Pantaloon Retail has 450 stores across the country and revenue of over ` 20 billion and is expected to touch 30 million by 2010. Segments include Food & grocery, e-tailing, home solutions, consumer electronics, entertainment, shoes, books, music & gifts, health & beauty care services.
Retail and recession
The global economic slump has had its impact on the India retail sector. One of the earliest players in the Indian retail scenario Subhiksha's operations came to a near standstill and required liquidity injection. Vishal Retail secured corporate debt restructuring (CDR) plan from its lenders while other players like the Reliance Retail run by Mukesh Ambani and Pantaloon led Kishore Biyani by went slow on expansion plans and even scaled down operations. However, during the last quarter a bit of confidence was restored as the economy showed signs of growth.
Lifestyle International, a division of Landmark Group, plans to have more than 50 stores across India by 2012-13.
Shoppers Stop has plans to invest ` 250 crore to open 15 new supermarkets in the coming three years.
Pantaloon Retail India (PRIL) plans to invest US$ 77.88 million this fiscal to add up to existing 2.4 million sq ft retail space. PRIL intends to set up 155 Big Bazaar stores by 2014, raising its total network to 275 stores.
Timex India will open another 52 stores by March 2011 at an investment of US$ 1.3 million taking its total store count to 120. In the first six months of the current fiscal ending September 30, 2009, the company has recorded a net profit of US$ 1.2 million.
Australia's Retail Food Group is planning to enter the Indian market in 2010. It has plans to clock US$ 87 million revenue in five years. In 20 years they expect the India operations to be larger than the Australia operations.
The Road Ahead
Industry experts predict that the next phase of growth in the retail sector will emerge from the rural markets. By 2012 the rural retail market is projected to have a total of more than 50 per cent market share. The total number of shopping malls is expected to expand at a compound annual growth rate of over 18.9 per cent by 2015. According to market research report by RNCOS the Indian organized retail market is estimated to reach US$ 50 billion by 2011.
FDI Policy in India
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital inflows from abroad that is invested in or to enhance the production capacity of the economy.
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India ('RBI') in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board ('FIPB') would be required.
FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which provide the sector specific guidelines for FDI with regard to the conduct of trading activities.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of 'Single Brand' products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.
Entry Options For Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players ha\d been operating in the country. Some of entrance routes used by them have been discussed in sum as below:-
1. Franchise Agreements
It is an easiest track to come in the Indian market. In franchising and commission agents' services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.
2. Cash And Carry Wholesale Trading
100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.
3. Strategic Licensing Agreements
Some foreign brands give exclusive licences and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
4. Manufacturing and Wholly Owned Subsidiaries.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorised to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
FDI in Single Brand Retail
The Government has not categorically defined the meaning of "Single Brand" anywhere neither in any of its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3 that (a) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed), (b) products should be sold under the same brand internationally, (c) single-brand product retail would only cover products which are branded during manufacturing and (d) any addition to product categories to be sold under "single-brand" would require fresh approval from the government.
While the phrase 'single brand' has not been defined, it implies 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 were produced by the same manufacturer, would not be allowed.
Going a step further, we examine the concept of 'single brand' and the associated conditions:
FDI in 'Single brand' retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets.
But, what is a 'brand'?
Brands could be classified as products and multiple products, or could be manufacturer brands and own-label brands. Assume that a company owns two leading international brands in the footwear industry - say 'A' and 'R'. If the corporate were to obtain permission to retail its brand in India with a local partner, it would need to specify which of the brands it would sell. A reading of the government release indicates that A and R would need separate approvals, separate legal entities, and may be even separate stores in which to operate in India. However, it should be noted that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand 'A' Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities.
Now, taking an example of a large departmental grocery chain, prima facie it appears that it would not be able to enter India. These chains would, typically, source products and, thereafter, brand it under their private labels. Since the regulations require the products to be branded at the manufacturing stage, this model may not work. The regulations appear to discourage own-label products and appear to be tilted heavily towards the foreign manufacturer brands.
There is ambiguity in the interpretation of the term 'single brand'. The existing policy does not clearly codify whether retailing of goods with sub-brands bunched under a major parent brand can be considered as single-brand retailing and, accordingly, eligible for 51 per cent FDI. Additionally, the question on whether co-branded goods (specifically branded as such at the time of manufacturing) would qualify as single brand retail trading remains unanswered.
FDI in Multi Brand Retail
The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesn't suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous 'kirana' store.
Foreign Investor's Concern Regarding FDI Policy in India
For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away.
For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer. Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector - corporates such as Tata through its brand Westside, RPG Group through Foodworld, Pantaloon of the Raheja Group and Shopper's Stop. Do foreign investors look to tie up with an existing retailer or look to others not necessarily in the business but looking to diversify, as many business groups are doing?
An arrangement in the short to medium term may work wonders but what happens if the Government decides to further liberalize the regulations as it is currently contemplating? Will the foreign investor terminate the agreement with Indian partner and trade in market without him? Either way, the foreign investor must negotiate its joint venture agreements carefully, with an option for a buy-out of the Indian partner's share if and when regulations so permit. They must also be aware of the regulation which states that once a foreign company enters into a technical or financial collaboration with an Indian partner, it cannot enter into another joint venture with another Indian company or set up its own subsidiary in the 'same' field' without the first partner's consent if the joint venture agreement does not provide for a 'conflict of interest' clause. In effect, it means that foreign brand owners must be extremely careful whom they choose as partners and the brand they introduce in India. The first brand could also be their last if they do not negotiate the strategic arrangement diligently.
Concerns for the Government for only Partially Allowing FDI in Retail Sector
A number of concerns were expressed with regard to partial opening of the retail sector for FDI. The Hon'ble Department Related Parliamentary Standing Committee on Commerce, in its 90th Report, on 'Foreign and Domestic Investment in Retail Sector', laid in the Lok Sabha and the Rajya Sabha on 8 June, 2009, had made an in-depth study on the subject and identified a number of issues related to FDI in the retail sector. These included:
It would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
Another concern is that the Indian retail sector, particularly organized retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.
Antagonists of FDI in retail sector oppose the same on various grounds, like, that the entry of large global retailers such as Wal-Mart would kill local shops and millions of jobs, since the unorganized retail sector employs an enormous percentage of Indian population after the agriculture sector; secondly that the global retailers would conspire and exercise monopolistic power to raise prices and monopolistic (big buying) power to reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth in cities, causing discontent and social tension elsewhere. Hence, both the consumers and the suppliers would lose, while the profit margins of such retail chains would go up.
LIMITATIONS OF THE PRESENT SETUP
There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.
Intermediaries dominate the value chain
Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail.
Improper Public Distribution System ("PDS")
There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a 'farm-to-fork' retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
No Global Reach
The Micro Small & Medium Enterprises ("MSME") sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.
Rationale behind Allowing FDI in Retail Sector
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity.
The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shopper's Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange's key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.
The policy of allowing 100% FDI in single brand retail can benefit both the foreign retailer and the Indian partner - foreign players get local market knowledge, while Indian companies can access global best management practices, designs and technological knowhow. By partially opening this sector, the government was able to reduce the pressure from its trading partners in bilateral/ multilateral negotiations and could demonstrate India's intentions in liberalising this sector in a phased manner.
Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation.
Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.
Lastly, it is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of 'big' money (large corporates and FDI) in the retail sector would in the long run not harm interests of small, traditional, retailers.
In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the country's GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them.
Industrial organisations such as CII, FICCI, US-India Business Council (USIBC), the American Chamber of Commerce in India, The Retail Association of India (RAI) and Shopping Centers Association of India (a 44 member association of Indian multi-brand retailers and shopping malls) favour a phased approach toward liberalising FDI in multi-brand retailing, and most of them agree with considering a cap of 49-51 per cent to start with.
The international retail players such as Walmart, Carrefour, Metro, IKEA, and TESCO share the same view and insist on a clear path towards 100 per cent opening up in near future. Large multinational retailers such as US-based Walmart, Germany's Metro AG and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-carry ventures in India, have been demanding liberalisation of FDI rules on multi-brand retail for some time.
Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill development,Tourism Development, Greater Sourcing From India, Upgradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to govemment through greater GDP, tax income and employment generation.
Prerequisites before allowing FDI in Multi Brand Retail and Lifting Cap of Single Brand Retail
FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large chunk of population. Left alone foreign capital will seek ways through which it can only multiply itself, and unthinking application of capital for profit, given our peculiar socio-economic conditions, may spell doom and deepen the gap between the rich and the poor. Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in such a way that it results in a win-win situation for India. This can be done by integrating into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves. For example FDI in multi -brand retailing can be allowed in a calibrated manner with social safeguards so that the effect of possible labor dislocation can be analyzed and policy fine tuned accordingly. To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, it can be stipulated that a percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that a certain amount of farm produce be procured from the poor farmers. Similarly to develop our small and medium enterprise (SME), it can also be stipulated that a minimum percentage of manufactured products be sourced from the SME sector in India. PDS is still in many ways the life line of the people living below the poverty line. To ensure that the system is not weakened the government may reserve the right to procure a certain amount of food grains for replenishing the buffer. To protect the interest of small retailers the government may also put in place an exclusive regulatory framework. It will ensure that the retailing giants do resort to predatory pricing or acquire monopolistic tendencies. Besides, the government and RBI need to evolve suitable policies to enable the retailers in the unorganized sector to expand and improve their efficiencies. If Government is allowing FDI, it must do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure.
Further, To take care of the concerns of the Government before allowing 100% FDI in Single Brand Retail and Multi- Brand Retail, the following recommendations are being proposed :-
Preparation of a legal and regulatory framework and enforcement mechanism to ensure that large retailers are not able to dislocate small retailers by unfair means.
Extension of institutional credit, at lower rates, by public sector banks, to help improve efficiencies of small retailers; undertaking of proactive programme for assisting small retailers to upgrade themselves.
Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and social aspects of the entire retail sector.
Formulation of a Model Central Law regarding FDI of Retail Sector.
A Start Has Been Made
Walmart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale) business, which runs the 'Best Price' stores. It plans to have 15 stores by March and enter new states like Andhra Pradesh , Rajasthan, Madhya Pradesh and Karnataka.
Duke, Wallmart's CEO opined that FDI in retail would contain inflation by reducing wastage of farm output as 30% to 40% of the produce does not reach the end-consumer. "In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer," Duke said, adding, that a similar trend was noticed when organized retail became popular in the US.
Many of the foreign brands would come to India if FDI in multi brand retail is permitted which can be a blessing in disguise for the economy.
Back-end logistics must for FDI in multi-brand retail
The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing.
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 economical 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.
Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI flows in the Indian retail sector, the interests of the consumers have been blatantly and utterly disregarded. Therefore, one of the arguments which inevitably needs to be considered and addressed while deliberating upon the captioned issue is the interests of consumers at large in relation to the interests of retailers.
It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since 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.
The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of Indian economy at one point of time or the other would be embraced by liberalization, privatization and globalization.FDI in multi-brand retailing and lifting the current cap of 51% on single brand retail is in that sense a steady progression of that trajectory. But the government has by far cushioned the adverse impact of the change that has ensued in the wake of the implementation of Industrial Policy 1991 through safety nets and social safeguards. But the change that the movement of retailing sector into the FDI regime would bring about will require more involved and informed support from the government. One hopes that the government would stand up to its responsibility, because what is at stake is the stability of the vital pillars of the economy- retailing, agriculture, and manufacturing. In short, the socio economic equilibrium of the entire country.
Foreign Direct Investment in India
The fast and steadily growing economy of India in majority of its sectors, has made India one of the most famous and popular destinations in the whole world, for Foreign Direct Investment. India's ever-expanding markets, liberalization of trade policies, development in technology and telecommunication, and loosening of diverse foreign investment restrictions, have further collectively made India, the apple of investors' eye, for most productive, profitable, and secure foreign investment. According to a recent survey by the United Nations Conference on Trade and Development (UNCTAD), India has conspicuously emerged out as the second most popular and preferable destination in the entire world, after China, for highly profitable foreign direct investment.
In recent years, bulk of the foreign direct investment in indian business sectors of infrastructure, telecommunication, information technology, computer hardware and software, and hospitality services, have been made by investors of countries like US, UK, Mauritius, Singapore, and many others. Global Jurix, one of the leading full-fledged legal organizations of India with global repute, has been helping companies, business corporations, organizations, and other potential investors of countries all around the world, in making foreign direct investment in indian business sectors, in various ways described in the section below.
FDI Law Practice India
The foreign direct investment in indian business sectors, can easily be made in a variety of ways, through the Governmental and Automatic Routes. However, the Joint Ventures are the most popular and preferred forms of making investment in Indian industry. At present, the most lucrative business sectors for FDI in India are, Infrastructure (Power, Steel, Railways, etc.); Telecommunications; Hospitality sector; Education; Retail; Real Estate; Retail sector, Petroleum and Petroleum Products; Biotechnology; Alternative Energy, etc. Global Jurix can help well-rounded the foreign investors of all class and categories for getting highly lucrative and secure FDI in India, through providing the following legal services reliably and economically:
Company Formation and Company Law services
Establishment of Joint ventures
Corporate and Commercial Law services
For making all mandatory Compliances
Drafting all requisite Contracts, Agreements, and other Documents
Setting up Subsidiaries
And, other legal services for FDI in India.
Foreign Direct Investment in Retail
The Retail Industry is the sector of economy which is consisted of individuals, stores, commercial complexes, agencies, companies, and organizations, etc., involved in the business of selling or merchandizing diverse finished products or goods to the end-user consumers directly and indirectly. Goods and products of the retail industry or sector, are the finished final objects/products of all sectors of commerce and economy of a country.
The Retail sector of India is vast, and has huge potential for growth and development, as the majority of its constituents are un-organized. The retail sector of India handles about $250 billion every year, and is expected by veteran economists to reach to $660 billion by the year 2015. The business in the organized retail sector of India, is to grow most and faster at the rate of 15-20% every year, and can reach the level of $100 billion by the year 2015. Here, it is noteworthy that the retail sector of India contributes about 15% to the national GDP, and employs a massive workforce of it, after the agriculture sector. India's growing economy with a rate of approximately 8% per year, makes its retail sector highly fertile and profitable to the foreign investors of all sectors of commerce and economy, of all over the world. Global Jurix, a full-fledged legal organization prominent worldwide, provides all-encompassing services and advice for most lucrative and secured fdi in indian retail sector.
FDI in Retail India
AT Kearney (a globally famous international management consultancy) recognized India as the second most alluring and thriving retail destination of the world, among other thirty growing and emerging markets. At present, other profitable retail destinations of the world are China and Dubai of Asia. Diverse foreign direct investment in indian retail is greatly cherished by most of the major and leading retailers of USA and European countries, including Walmart (USA), Tesco (UK), Metro (Germany), and Carrefour (France). Liberalization of trade policy and loosening of barriers and restrictions to the foreign investment in the retail sector of India, have collectively made the fdi in retail sector quite easy and smooth. Our services are easily and economically available for the following ways of fdi in indian retail.
The fdi in india's retail business can be made through any of the following routes:
Sourcing of Supplies from small-scale sector
Cash and Carry Operations
FDI - Inbound and Outbound
The Foreign Direct Investment (FDI), anywhere in all across the world, is elaborately and impeccably advised, supported, and well-facilitated by Global Jurix. With its well-established and organized offices in major countries of all around the globe, Global Jurix has been providing a rather wide range of diverse legal services for FDI, in a large number of developed and developing countries.
Our well-learned, informed, and experienced corporate lawyers and attorneys have enriched expertise for providing excellent foreign investment law services in most of the fast-growing and stable economies of the world, including US, India, UK, France, Gulf countries, Singapore, Malaysia, Korea, Germany, Canada, China, and others. Both Inbound and outbound fdi services are extended for each of these economies, through our well-connected legal organization with worldwide network and liaison.
Companies, industries, organizations, corporations, multi-national conglomerates, and potential investors of varied sectors, etc., of both the governmental and private sectors, doing business in the fields of Infrastructure, Energy and Power, Oil and Gas, Telecommunications, Real Estate and Construction, Industrial Production, Joint Ventures, Private Equity, Mergers and Acquisitions, Technology Transfers, Foreign Collaborations, Capital Markets, Engineering, Technology, Information Technology, Computer Hardware and Software, and so on, have been our satisfied and loyal clients so far.
Foreign Investment (Inbound & Outbound) Law Services
Providing satisfactory legal services for FDI, is no simple and easy task. It essentially requires comprehensive knowledge, experience, and expertise, in most of the foreign investment law services, in accordance with the field, national and international rules & regulations, mandatory compliances, current business and capital market trends, and a keen acumen for overall safety and profitability. We provide elegant, reliable, and economical foreign investment law services, under the following categories:
Company Formation and Establishment
Foreign Investment in all above mentioned sectors of commerce and economy
Corporate Law Services
Mergers & Acquisitions (M & A)
All Contractual Delegations relating to FDI
All regulatory and mandatory compliances
Foreign Collaborations and Technology Transfer
Wise and expert advice over FDI, for the best possible results.
With strong governmental support, FDI has helped the Indian economy grow tremendously. But with $34 billion in FDI in 2007, India gets only about 25% of the FDI in China.
Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that needed a boost and economic attention, and address the various problems that continue to challenge the country.
India has continually sought to attract FDI from the world's major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage and promote a favorable business environment for investors.
FDIs are permitted through financial collaborations, through private equity or preferential allotments, by way of capitalmarkets through euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal or mining industries.
A number of projects have been implemented in areas such as electricity generation, distribution and transmission, as well as the development of roads and highways, with opportunities for foreign investors.
The Indian national government also granted permission for FDIs to provide up to 100% of the financing required for the construction of bridges and tunnels, but with a limit on foreign equity of INR 1,500 crores, approximately $352.5 million.
Currently, FDI is allowed in financial services, including the growing credit card business. These also include the non-banking financial services sector. Foreign investors can buy up to 40% of the equity in private banks, although there is condition that these banks must be multilateral financial organizations. Up to 45% of the shares of companies in the global mobile personal communication by satellite services (GMPCSS) sector can also be purchased.
In 2007, India received $34 billion in FDI, a huge growth compared to the previous years, but significantly less than the $134 billion that flowed into China. Although the Chinese approval process is complex, China continues to outshine India as a choice destination for foreign investors. Why does India, a country with resources and a skilled workforce, lag so far behind China in FDI amounts?
Physical infrastructure is the biggest hurdle that India currently faces, to the extent that regional differences in infrastructure concentrates FDI to only a few specific regions. While many of the issues that plague India in the aspects of telecommunications, highways and ports have been identified and remedied, the slow development and improvement of railways, water and sanitation continue to deter major investors.
Federal legislation is another perverse impediment for India. Local authorities in India are not part of the approval process and the large bureaucratic structure of the central government is often perceived as a breeding ground for corruption. Foreign investment is seen as a slow and inefficient way of doing business, especially in a paperwork system that is shrouded in red tape.
There is a lot to be said for big retail to come to India, but we cannot simply be taken in and mimic something which is being pushed down our throatsbecause those who make the policy appear to not have the faintest clue on how retail really works in India
If there were clear answers in black and white to the question, there would really be no need for any debate on the issue, but the truth is that it is simply not that simple. On a philosophical and emotional level, the answer could be that any form of foreign participation in a domestic market is rife with dangers of the colonialism sort, but in this day and age, while the core concept of being wary of foreign dominance may still be true, the fact remains that there are plenty of ways to ensure that it works on a win-win basis for all concerned.
The main problem with the current status of foreign direct investment (FDI) in retail in India is that it does not provide a level playing field to other players of the domestic and small sort. In addition, it appears to take a rather naive and simplistic view on certain aspects, which like myths being repeated, tend to become urban legends. On the other hand, no country can afford to take on an isolationist approach.
To start with, it may help to go through the background and policy note on the Cabinet decision on FDI in retail, as put up on various places on the internet. (Facebook, PIB)
As this writer sees it, with a holistic view of the subject and not just based on jingoism of the "burn down the malls" (right view) and "bad for farmers" (left view) sort, but on rational evaluation of larger issues, there are some points which need to be straightened out. Large retail is inevitable, and that is a simple truth, but there has to be larger perspective for public good which seems to be missing from this policy. The people of India come first, including those who want a better product or service buying or selling experience, and at the end of the day it is their wallets which will decide where they go.
But at the same time, the government, with the policy as outlined above, cannot sell the baby with the bath-water, and make things worse. Some suggestions:
1) The present Agriculture Produce Market Committee (APMC) Act requires urgent revamp if we really want to help the rural and agricultural sectors with a better go to market scenario. This, along with rapid introduction of the goods and services tax (GST) as well as ease of inter- and intra-state movement of foodgrain, agri products and fresh produce, would do more to improve matters, as well as do wonders for our economy in a variety of ways-most of all in terms of controlling prices as well as reducing storage and transit losses.
2) The policy shown above makes a case that "brands" by big FDI retailers need to be carried across borders without in any way making it clear that the quality of those brands needs to be same across borders, too. As of now we see that with these manufacturers andretailers there is one lower quality for sale in India and there is a better quality for sale in developed countries-case in point being soft drinks, processed foods, confectionery, electronics, motor vehicles and others. If anything is by way of a different quality for India for price or other reasons, then let it be clearly marked as such.
3) Specifically in the case of packaged and processed foods, the policy does not say anything about adherence to best case scenarios in terms of labelling of ingredients and avoiding misleading marketing ploys, thereby leading to a situation where outright dangerous products are foisted on Indian consumers. The amount of product detailavailable for consumers in developed countries must be matched for India, too. India cannot become a vast chemistry lab for processed foods or anything else.
4) More empirical data needs to be provided on subjects like "improvement in supply chain". India is the country where the passenger rail ticket deliveries, fresh hot cooked food by dabbawallas and diamonds as well as other precious stones by angadias have set better than global standards in supply chains, so the same standards need to be quantified and applied to those seeking 100% FDI in retail. It is not too much to ask for them to match the Indian standards-unless those who made the policy are ashamed of our prowess.
5) The investments in retail by the FDI route, when they come, should come only through a short-list of recognised tax adherence countries. The misused option of FDI coming in through known or suspect tax havens needs to be blocked-firmly. Likewise, full disclosures of the strictest sort need to be made on who the investors are-again, these cannot be suitcase corporate identities hiding behind consultants and banks in shady tax havens or other countries. Unlike what happened in, for example, airlines, Indians need to know who is investing and from where. And in case there are legal issues, then we need to know who the faces are who will go through the Indian legal system, unless those who made the policy are ashamed of our legal system.
6) The payment processing and cash management as well as tax adherence part of this industry, both in terms of procurement and sale, need to be through the Indian banking system. And by fully transparent methods, so that float as well as control remains in India at all times, as is the case in developed countries. Proprietary payment processing and cash management methods of the sort that take this control out of India need to be firmly denied-the FDI retailer needs to be on a level playing field here with other Indian domestic retailers-insistence on co-opting RuPAY needs to be part of this policy.
7) Since such huge benefits are being provided to these FDI retailers by India, it must be imperative that these large retailers subscribe and adhere to the RTI Act of India 2005 from day one, along with their first application. This will be in addition to all other requirements that other large retailers in India, like government controlled Canteen Stores Department (Armed Forces), Super Bazaar (ministry of urban development), central government and state government co-op stores, Khadi Bhandars, state emporia and others adhere to-including best of breed hiring policies.
8) It appears that the policymakers subscribe to the view that more wastage is generated by the present retail system in India and that FDI will reduce wastage. Bearing in mind the huge problem that developed countries have with handling wastage especially of the packaging sort, it will be necessary to quantify this wastage from the outset itself, instead of propagating further the myth that the Indian system generates more waste. And then control the said wastage, again, by defined means.
9) Supermarket design in India should be defined in such a way that fresh food and produce needs to be in front, unlike in other "big box" shops where it is right at the back or hidden along the sides, forcing people to walk through row after row of packaged and processed foods. This is very important if FDI in retail really means it when they say that they wish to bring the farmer's produce to the customer with minimal transaction losses in between of the multiple middlemen sort.
And finally, most importantly,
10) The "big box" FDI model in retail cannot be the reason to do away with the small shopkeeper earning his livelihood on the peripheries of the traditional marketplaces. The big retailer will have to, as policy, provide for space as well as timing to set up options like weekly 'haats' and "farmer's markets", either in parking lots or in specially designated stalls set aside for this.
Certainly, there is a lot to be said for big retail to come to India, but we cannot simply be taken in and mimic something which is being pushed down our throats because those who make the policy appear to not have the faintest clue on how retail really works in India. The concept of big retail is inevitable, in some ways it is already there, but the way this present policy has been structured appears to be a sell-out of the worst sort-designed to destroy the nation's core competencies in trading.
It will be a shame, as well as a major electoral issue, if the present policy is permitted to proceed along its current path. Because it is wide open and visible that it appears that the present retail FDI policy of the present government is to try and make big retail the only port of call for both seller and buyer. That, most certainly, spells death for the country's independence.
FDI is a process of investment in which a foreign investor, invest his money in other country by establishing his own business and also run it with its own existence. For instance Adidas, KFC, Reebok etc.
FDI in India can be granted through automatic route and govt. approval, in the automatic route FDI can be done through the permission of RBI, as RBI has been delegated the authority to do the same. While on the other hand FDI though govt. approval is done with the acceptance of govt. and while giving such type of acceptance govt. will act according to the recommendation of the FIPB ( Foreign investment promotion board)
The present discussion regarding FDI is about purposing of 51% FDI in retail multi brand sector. As there is already FDI in single brand sector.
FDI limit in various sector till date
FDI in India's Retail Sector
Retailing is defined as an interface between the manufacturer and the individual consumer who are basically individual users. Retailers stock the producer's goods, after purchasing it directly from them, and then sell it to the individual consumers keeping a profit margin for themselves. The retailing sector in India had grown with coveted success, terming it as one of the sunrise sector in the economy. A.T. Kearney the well known international management consultancy, considered India as the second most lucrative destination of the world for retail business.
In India retail sector is divided into two classes - Organized and Unorganized sectors.
Organized retailing is the one, trading conducted by licensed retailers. Those who are registered for various kinds of taxes. On the other hand unorganized retailing refers to the traditional format of low cost retailing like local store, small road side stores, door to door selling of various goods etc.
Unorganized form of retailing is the most prevalent form of trade in India, constituting almost 98% of the total trade, while organized sector account only for the remaining 2%
The recent cabinet decision to allowed 51% FDI in the multi brand sector has triggered a series of debates on both positive and negative notes, and has become a political issue.
Some of the merit and demerit of FDI in retail sector:
It is widely acknowledge that FDI can have a positive result on the economy triggering a series of reaction that in the long run can lead to greater efficiency and improvement of living standard apart from greater integration into the global economy.
With the coming of the foreign companies, new infrastructure will be build, thus real estate sector will grow consequently banking sector, as money need to be required to build such infrastructure would be provided by banks.
CII (Confederation of Indian industry) said FDI in multi brand retailing will boost to the organized sector, which positively impact several stake holders, including producers, workers, employees, consumers and government, thus the overall economy. Opening up of FDI can increased organized retail market size to $260 billion by 2020.
This would also result to generation of job and also government can be expected to received an additional income of $25-30 billion by the way of a variety of taxes.
* Increasing price realization for the farmer by 10-20%, through sourcing directly to the farm.
* Upgrading the framer's capabilities by providing know-how and capital.
* Improving farmer output and yield through better extension services and user friendly processes.
* A wider choice for the consumers with better option.
* Assurance of quality with greater transparency and easier monitoring of adulteration, counterfeit product and traceability.
* For low income family organized retails has the ability to lower the cost of the monthly consumption basket as much as by 5-10%.
Lack of infrastructure in the retail sector has been a major issue in India, which has led to an incompetent market mechanism. FDI might help India overcome such issues by channelizing the resources in the right manner.
Many of the small business owner and workers may lose their job as lot of people is into unorganized retail business such as local shops. If the retails giant like Wal-Mart sets up operation in India, their supermarket will sell everything from vegetable to the latest electronic gadgets at a very low price, which will most likely undercut those selling similar goods. Foreign retail giant may buy big from India and abroad and sell it low price, severely under cutting the small retailers. Once a monopoly situation is created this might turn into buying low and selling high.
Nick Robbins wrote in the context of the East India Company that by controlling both ends of the chain the company could buy cheap and sell dear. The producers and the traders at the local level of the operation will never find place in this sector. Having been uprooted from their traditional form of business, they are unlikely to be suitable for other areas of work either. In time the local outlet are also likely to fold and perish by the pricing power that a foreign players is bale to exert.
Dr Murukadas, Chairman Foundation for sustainable development, while describing about the demerit of FDI in retail sector also point out that majority of the consumers who buy essentials goods from their neighborhood stores on credit and pay bill on a monthly basis, will also suffer with the disruption of the traditional system of neighborhood retail stores.
From the above discussion it give a clear picture of the merit and demerit of FDI in retail sector. Many non-governmental organizations have recommended various method to the govt. regarding the method to improved retail industry without FDI, citing the example of developing countries where FDI was allowed in retail sector.
China Malaysia and Thailand who opened their retail sector to FDI in the recent years have been forced to enact new laws to check the prolific expansion of the new foreign malls and hypermarkets.
What is Retail business?
As per the Delhi high c
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