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Foreign direct investment plays an important role in Indias economic growth. It curbs inflationary pressures. FDI in retailing leads not only to a greater variety of products for sale and increased consumer choice, but also penetrate deep into the hinterland of Indian economic activity and do much to improve the country's "shunned sectors. FDI in the retail sector can expand markets by reducing transaction and transformation costs of business through adoption of advanced supply chain and benefit consumers, and suppliers (farmers). This also can result in net gains in employment at the aggregate level. This paper discusses the reforms in FDI in retail sector both in single and multiple brands.
Key words-FDI, Retail, Single Brand, Multiple Brand
Liberalization of trade policies during the last one and half decade has led India to become an investment friendly country. Foreign direct investment (FDI) in this country assumed critical importance in the context of this liberalization. However, in the initial stage of liberalization, FDI was centred on the urban manufacturing sectors because of its civic infrastructure, labour availability, flexible taxation mechanism etc. The retail industry in India is the second largest employer with an estimated 35 million people engaged by the industry. There has been opening of Indian economy to foreign organization for foreign direct investment through organized retail.
The Union Government made a major policy announcement permitting Foreign Direct Investment (FDI) in its retail sector. The lucrative Indian retail market, currently dominated by domestic players will now be open to investment from foreign players, who have been eyeing the burgeoning Indian retail sector for some time now.
Under the new policy, the government has announced FDI of 51 per cent for the multi-brand retailers that are interested in setting up operations in India. At the same time, the government also allowed 100 per cent FDI in single-brand retail.
FDI Policy in India
FDI Policy Framework in India There has been a sea change in Indiaâ€Ÿs approach to foreign investment from the early 1990s when it began structural economic reforms encompassing almost all the sectors of the economy.
Historically, India had followed an extremely cautious and selective approach while formulating FDI policy in view of the dominance of "import-substitution strategy" of industrialisation. With the objective of becoming "self-reliant", there was a dual nature of policy intention - FDI through foreign collaboration was welcomed in the areas of high technology and high priorities to build national capability and discouraged in low technology areas to protect and nurture domestic industries. The regulatory framework was consolidated through the enactment of Foreign Exchange Regulation Act (FERA), 1973 wherein foreign equity holding in a joint venture was allowed only up to 40 per cent. Subsequently, various exemptions were extended to foreign companies engaged in export oriented businesses and high technology and high priority areas including allowing equity holdings of over 40 per cent. Moreover, drawing from successes of other country experiences in Asia, Government not only established special economic zones (SEZs) but also designed liberal policy and provided incentives for promoting FDI in these zones with a view to promote exports. As India continued to be highly protective, these measures did not add substantially to export competitiveness. Recognising these limitations, partial liberalisation in the trade and investment policy was introduced in the 1980s with the objective of enhancing export competitiveness, modernisation and marketing of exports through Trans-national Corporations (TNCs). The announcements of Industrial Policy (1980 and 1982) and Technology Policy (1983) provided for a liberal attitude towards foreign investments in terms of changes in policy directions. The policy was characterised by de-licensing of some of the industrial rules and promotion of Indian manufacturing exports as well as emphasising on modernisation of industries through liberalised imports of capital goods and technology. This was supported by trade liberalisation measures in the form of tariff reduction and shifting of large number of items from import licensing to Open General Licensing (OGL).
A major shift occurred when India embarked upon economic liberalisation and reforms program in 1991 aiming to raise its growth potential and integrating with the world economy. Industrial policy reforms gradually removed restrictions on investment projects and business expansion on the one hand and allowed increased access to foreign technology and funding on the other. A series of measures that were directed towards liberalizing foreign investment included: (i) introduction of dual route of approval of FDI - RBI's automatic route and Government's approval (SIA/FIPB) route, (ii) automatic permission for technology agreements in high priority industries and removal of restriction of FDI in low technology areas as well as liberalisation of technology imports, (iii) permission to Non-resident Indians (NRIs) and Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors, (iv) hike in the foreign equity participation limits to 51 per cent for existing companies and liberalisation of the use of foreign â€žbrands nameâ€Ÿ and (v) signing the Convention of Multilateral Investment Guarantee Agency (MIGA) for protection of foreign investments. These efforts were boosted by the enactment of Foreign Exchange Management Act (FEMA), 1999 [that replaced the Foreign Exchange Regulation Act (FERA), 1973] which was less stringent. This along with the sequential financial sector reforms paved way for greater capital account liberalisation in India. Investment proposals falling under the automatic route and matters related to FEMA are dealt with by RBI, while the Government handles investment through approval route and issues that relate to FDI policy per se through its three institutions, viz., the Foreign Investment Promotion Board (FIPB), the Secretariat for Industrial Assistance (SIA) and the Foreign Investment Implementation Authority (FIIA).
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 work in India
FDI in Retail Sector in India
FDI in Single brand retail
While the precise meaning of single-brand retail has not been clearly defined in any Indian government circular or notification, single-brand retail generally refers to the selling of goods under a single brand name.. 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.
FDI in Multi-Brand Retail
In multiband a single retailer come up with the number of new brands in the market to capture the market. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
Entry Options For Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorised in retailing, most general players had 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 policy -over the years
1991 : Liberalization-Indian economy opened FDI up to 51% allowed under the automatic route in select priority sector
1997: FDI in cash and carry(wholesale) with 100 per cent rights allowed under the government approval
2006: i. FDI in cash and carry(wholesale) brought under the automatic route
ii. Up to 51 per cent investment in a single brand retail outlet permitted, subject
to press note 3 (2006 series)
2011: 100% FDI in Single- brand retail permitted
2012: 51% FDI in Multi-brand retail is permitted
Condition for 100 per cent FDI in Single-brand
Up to 100 per cent FDI is permissible in single-brand retail, subject to the Foreign Investment Promotion Board (FIPB) sanctions and conditions mentioned in Press Note 3. These conditions stipulate that:
Only single-brand products are sold (i.e. sale of multi-brand goods is not allowed, even if produced by the same manufacturer)
Products are sold under the same brand internationally
Single-brand products include only those identified during manufacturing
Any additional product categories to be sold under single-brand retail must first receive additional government approval
Pre-conditions for FDI in multi-brand retailing in India
â- A stipulated percentage of FDI in the sector could be required to be spent on building back-end infrastructure, logistics or agro-processing units in order to ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics.
â- At least 50 per cent of the jobs in the retail outlet could be reserved for rural youth and a certain amount of farm produce could be required to be procured from poor farmers.
â- A minimum percentage of manufactured products could be required to be sourced from the SME sector in India.
â- To ensure that the public distribution system and the Indian food security system, is not weakened, the government may reserve the right to procure a certain amount of food grains.
â- To protect the interest of small retailers, an exclusive regulatory framework to ensure that the retailing giants do not resort to predatory pricing or acquire monopolistic tendencies.
Benefits of FDI in Multi-brand retailing
Benefits to Farmers
With FDI in multi-brand retail trading, the farmers will get better remunerations for their produce. The farmers will also get better prices from the heavy reduction in post-harvest losses. It will also result in the strengthening of the backend infrastructure and lead to direct purchase by the retailers. The yes-to-FDI in multi-brand retail trading will also result in the strengthening of the supply-chain infrastructure for all products, ranging from storage to processing and manufacturing infrastructure, which would reduce post-harvest losses. Organsied retail would also drastically reduce the number of needless middlemen.
Benefits to Consumers
The most advantaged section with the implementation of this policy would be the consumers. From the reduction in prices that would result from the supply chain efficiencies to the improvement in the quality of the products, the consumers are going to be benefitted the most. Along with this, food safety standards would also get better with improvised testing and aggregation facilities. The consumers would also have more choices to pick from. This policy measure is most likely to benefit the poorest sections of the society. Lowering of prices would arrest the erosion of real incomes and the current incomes of the economically disadvantaged sections would hence be able to buy more than before.
Benefits to Small Retailers
Foreign direct investment in the retail sector would also incentivise the existing traders and retail outlets to upgrade and become more efficient. This would usher better services to the consumers, and also good remunerations to the producers from whom they source the products. A concern that the small retailers will get displaced by allowing FDI is completely misplaced. It is to be noted here that domestic organised retail services are already provided by entities like Big Bazaar, Shoppers Stop, Croma, Reliance Fresh among others in different parts of India. More interestingly, it constitutes only four per cent of the retail trade and co-exists with small kirana stores and the unorganised retail sector. There has been a strong competitive response from traditional retail to these organised retailers through technology upgradation. As a result, the organised retail chains have closed down in a number of locations, while others have reduced the scale and spread of their operations. Globally too organised and unorganised retail co-exist and grow. Small retailers would continue to be able to source high quality produce, at significantly lower prices, from wholesale cash and carry points. In countries such as China, Thailand, Indonesia, Brazil, Singapore, Argentina and Chile, where there are no caps on FDI and where there are no conditions, small retail stores have flourished, leading to more employment. Therefore, it is a white lie to state that FDI in multi-brand retail trade will force small retailers to shut down.
Benefits to SMEs
Small and medium manufacturers are also going to be benefitted as 30 per cent sourcing from these industries has been made mandatory. This would provide the necessary scales for these entities to expand their capacities in manufacturing, hence adding up to the employed population and also boosting the manufacturing sector of the country. These industries also stand to get added advantages of technology upgradation, which would give them an upper hand in productivity and local value addition, thereby raising the profitability and earnings of the small manufacturers. The 30 per cent sourcing norm would also help the small enterprises to get integrated with the global retail chains. New manufacturing opportunities will also open for the country's micro, small and medium enterprises.
Benefits to Rural Youth
FDI in multi-brand retail trading will also help a large number of young people from rural areas to join the workforce. Youth from the villages spread across the country can engage themselves in activities ranging from backend to the frontend retail business, as also from the skills imparted to them by the prospective investors.
Creates Job and Reduction in Inflation
Investments in the organised retail sector will see gainful employment opportunities in agro-processing, sorting, marketing, logistic management, small manufacturing sector like textiles and apparel, construction, IT, and other infrastructure. The most important aspect of FDI in retail is that it will significantly increase the number of jobs in the front-end. According to a study conducted by the Indian Council for Research on International Economic Relations in 2008, as per the industry estimates of the employment of one person per 350-400 sq. ft. of retail space, about 1.5 million jobs will be created in the front-end alone in the next five years. Assuming that 10 per cent extra people are required for the back-end, the direct employment generated by the organised retail sector in India over the coming five years will be close to 1.7 million jobs. The study also suggested that with direct buying from the farmers, improving supply chain inefficiencies, bettering storage capabilities to control supply/demand imbalances, inflation could also be tamed.
It can be concluded that the FDI would lead to a more comprehensive integration of India into the worldwide market and it leads to overall economic development and social welfare of the country. If done in the right manner, it can prove to be a boon and not a curse. Open up multi-brand retail trading to foreign direct investment would have a multiplier impact on Indian economy. It would act as a strong catalyst for drawing investments in the food processing sector. This would also be a driver for economic growth by accelerating demand.