FDI in Retail Sector

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The Indian parliament has allowed FDI in retail on December 7, 2012. Manmohan Singh, the Prime Minister of India, feels that this will be beneficial for both consumers and farmers. Agricultural marketing is also expected to be benefited with the introduction of new technologies.
He has also stated that this decision had the support of the farmers in Punjab. The Prime Minister has also been responsible for bringing about this policy that aims to make India friendlier for businessmen.

With this decision, international companies, especially the supermarkets, will now be able to increase their presence in the multi brand retail sector of India. However, they will not be allowed to own more than 51% stakes in these establishments. This step is being regarded as the most important one in the last 2 decades, especially with regards to reforms in India.

As far as regulations are concerned, the Indian government does not really need any approval regarding this matter from the legislators. However, legislative consent has still been sought keeping in mind its importance and value in the overall context.

FDI in retail: Political Controversies

There has been a fair share of controversy surrounding the decision to permit FDI in multi brand retail sector. In the Rajya Sabha, the upper house of the bicameral Indian legislature, the motion against the decision faced a substantial defeat with UPA, the reigning coalition, receiving the votes of BSP.

Previously the proponents of the move were trailing by 14 votes (109 votes for as opposed to 123 votes against) and this was after a debate where the decision to enable 51 percent FDI in the multi-brand retail sector came under attack from the opposition. The government had, on its part, aimed to justify the decision saying it was only for the best interests of India.

Reasons for promotion of FDI in Retail

The major benefit of FDI is that it is both supplementary and complimentary with regards to local investment. FDI lets a company gain better access to top class technology and supplementary funds. They are also exposed to management practices in vogue around the world and also get the chance to become a part of the global market system.

The Indian government had commissioned Indian Council for Research on International Economic Relations (ICRIER) to perform a study on the effect of organized retailing practices on its unorganized counterpart.

ICRIER submitted the report during 2008. The study hinted at the advantages that the growth of organized retail will have for various participants like the consumers, manufacturers, and farmers.

The government has decided on the basis of the results in other countries and the ICRIER study that this decision will result in a greater influx of FDI in both back and front end infrastructure. It is expected that the agricultural sector will become more efficient and be in a better position to use technology.

It is also expected that this decision will result in more and better jobs being created and the best practices around the world will be introduced in India. Both farmers and consumers will see more convenient prices and higher quality in future and this will help both the classes.

The government has also put in an obligatory condition for procuring 30 percent in order to provide a fillip to the manufacturing sector in India. Jobs are expected to be available in both rural and urban areas thanks to greater back and frontal operations resulting from more FDI.

Present retail entities and traders are also expected to brush up their acts and increase their efficiency as a result of this decision. As a result of this the consumers are expected to receive better services and the producers who provide the source products can also gain better payment.

Process of FDI in Retail

There is no such procedure for short listing the companies. International companies who are willing to invest in either single or multi brand retail can put in their applications with the Department of Industrial Policy and Promotion.

Here the applications will be reviewed in an effort to determine their suitability as per the stated guidelines. Afterwards the Foreign Investment Promotion Board, Ministry of Finance will consider the applications before providing the final approval.

Advantages and possible positive impact of FDI in retail

The retailing industry is one of the biggest around the world when it comes to the privately owned ones. The industry has seen some major restructuring thanks to the FDI structure becoming more liberal than before. The benefits of FDI in retail, as per experts, carry greater weightage than the cost related implications.
With FDI in retail, operations in distribution and production cycles are expected to become better. Owing to factors such as economic operation, the cost of production facilities will come down as well. This will mean a greater choice of products at lesser and justifiable prices for the customers.

As a result of FDI, companies will be able to bring in technology and skills from other countries and this will help in infrastructural development of India. This will also help in creating more value for money for the buyers.

After FDI in retail, it will be possible to set up a properly organized chain of retail stores as the capital to do so will be there readily. The investment can be regarded as a long term one as the physical capital put into a domestic company is not liquidated easily. This is its main difference from equity capital.

ICRIER had also predicted that if FDI in retail was introduced in India during 2011-12 the Indian economy could have grown by 13%, the unorganized sector could have seen a 10% growth and the organized sector could have increased by 45%.

Disadvantages and possible negative impact of FDI in retail

Experts say that while analyzing the positives and drawbacks of FDI in retail both the government and the opposition did not refer to the Parliament Committee report where its effects had been studied in great detail. The committee had taken into cognizance many witnesses, NGOs, individuals, and trade associations to come up with the said report.

The Committee visited various corners of India and also went through reports and gathered knowledge about the experience of similar decisions in other countries. It also enquired several government departments regarding the matter.

The Committee had surmised in its report that the number of people getting jobs will be lesser than the amount of people losing the same as a substantial amount of marginal and small farmers will be wiped out as a result. Some other problems expected out of this were aggressive pricing and prevalence of monopoly.

As per the Committee's report almost 8 percent of India's workforce is employed by the unorganized retail sector. This comes up to roughly 40 million people. It has been stated that FDI in retail will generate 2 million jobs. However, the Committee had stated that it is not a proper indication as it does not take into account the number of people who already work in the retail sector.

ICRIER had executed a second study on the effects of FDI in retail during 2011 and in that one it had stated FDI will bring about a fantastic shopping experience for the consumers. It had actually interviewed 300 people from the middle and high income groups. Thus, in effect, the efforts of the Parliament Committee were overlooked for a private organization.

Experts have questioned the logic of ICRIER to question 300 people in a country with a 1.2 billion population and more than 40% who can be termed as poor. In a recent Right to Information (RTI) query regarding whether the Center did any study on the matter of FDI in retail, the Commerce Ministry had stated in the negative.

The Parliamentary Committee report on FDI was never discussed at the parliament itself, and this as per experts, is not a good sign as far as the democratic system in India is concerned.

As per ICRIER consumerism is positive for economic growth. In 2008 the first survey had dealt with 2020 small and unorganized retailers whereas the total count of such entities in India at that time was 6 million. According to experts, not a single study dealt with the reasons for FDI in retail.

Leading economic experts from outside India have also posed the same question. They have also pointed at the labor practices of organizations such as Wal-Mart. Most of these are not exactly healthy for workers as per them. This has also led them to ask if such processes were really required in India.

It is being said that the lobby favoring FDI in retail in India has invested at least INR 52 crore and experts opine this could have had a major say in the way things panned out.

Political opposition to FDI in retail

The main opposition party in India, Bharatiya Janata Party (BJP) was opposed to FDI in retail. As stated by Leader of Opposition in Lok Sabha and prominent leader, Sushma Swaraj, they were okay with FDI in sectors like power and airport. They stated that the UPA never tried to create any consensus regarding the issue or talk with the opposition prior to their campaign in support of FDI in retail.

Swaraj has also expressed her worries regarding the possible condition of small traders and farmers once FDI was introduced in retail. She stated that the big retailers were not coming to India because they wanted to be charitable but because they saw India as a major market.

Mulayam Singh Yadav, the head of Samajwadi Party, and an opponent of FDI in retail has also questioned the logic of introducing the same only in the bigger cities with more than 10 lakh people. He has asked if the big companies are wary that they may not earn as much in the smaller areas.

Yadav is critical as his party is an external supporter of UPA. He feels that this decision will only result in unemployment. Trinamool Congress (TMC), a former ally of UPA, had left the coalition during September 2012 as a mark of protest against steps like FDI in retail.

The party had stated that it will fight in every possible way against the same. Saugata Roy, a TMC leader has stated that the retailers could end up ruling the country the same way British did 3 centuries back.

Economic analysis of effects of FDI in retail

There are two main views regarding how FDI in retail will effect the common people in India and in both of them deregulation is the major issue. The advocates of FDI in retail believe that when the economically affluent have concessions it will lead to greater investments and economic progress, which will in turn help the ones below them.

The opponents think that if the market is deregulated then human expenses will shoot up due to lack of an order. However, it is still possible that when the marginal farmers are displaced they can find jobs in the major establishments in other capacities.

Last Updated on 01/17/2013