“FDI in India’s Multi Brand Retail Sector”: How to Get Ready for the Big Play

Introduction

Retailing is one of the most active and attractive sector of the decade. In the recent past it has witnessed a large number of big players like Reliance, Tata, Pantaloon, Birla etc leaping into it. Emergence of organized retail sector in India has more to do with increasing purchasing power of buyers and modern supply and logistic management techniques. This has created an immediate necessity for a revolution in marketing strategies and innovations in retail sector. It is a known fact in today’s marketing scenario that it is easy and cost efficient to maintain existing customers than to attract new customers. The Government’s decision to allow foreign investors to open single brand retail stores would stimulate multiple effects and stimulate mall culture. Single brand retail having received 51% FDI investment sanction would improve investment scenario of the country. This in turn will lead tough competition in Indian retail sector and hence the need for innovative marketing strategies.

Retailing is 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 customers. A retailer is one who stocks the producer’s goods and is involved in the act of selling it to the individual consumer, at a margin of profit. As such, retailing is the last link that connects the individual consumer with the manufacturing and distribution chain.

AT Kearney, the well-known international management consultancy, recently identified India as the ‘second most attractive retail destination’ globally from among thirty emergent markets. It has made India the cause of a good deal of excitement and the cynosure of many foreign eyes. With a contribution of 14% to the national GDP and employing 7% of the total workforce (only agriculture employs more) in the country, the retail industry is definitely one of the pillars of the Indian economy.

Indian Retail Sector: An Over View

A study conducted by ICRIER on Indian retail industry estimates that the total retail business in India will grow at 13 per cent annually from US$ 322 billion in 2006-07 to US$ 590 billion in 2011-12. The unorganized retail sector is expected to grow at approximately 10 per cent per annum with sales rising from US$ 309 billion in 2006-07 to US$ 496 billion. Organized retail, which constituted a low four per cent of total retail in 2006-07, is estimated to grow at 45-50 per cent per annum and attain a 16 per cent share of total retail by 2011-12. In short, both unorganized and organized retail are bound not only to coexist but also achieve rapid and sustained growth in the coming years. This is clearly not a case of a zero sum game as both organized and unorganized retail will see a massive scaling up of their activities.

Share of Organized Retail in Selected Countries, 2009

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Source: Planet Retail and Technopak Advisers Pvt. Ltd http://www.planetretail.net/Reports/ReportDetails?catalogueID=61069

From the above table it is clear that Indian organized retail sector is far behind when compared to other developed and developing nation and hence there is always a huge scope for growth.

Main Reasons why Indian retail sector is booming?

Changing age profile: India is witnessing a change in the age and income profiles of its over 1 billion population, which is likely to fuel accelerated consumption in the years to come. The country is believed to have an average age of 24 years for its population as against 36 years for the USA and 30 years for China. A younger population tends to have higher aspirations and spends more as it enters the earning phase.

Disintegration of joint family: Besides, the gradual disintegration of the traditional Indian joint family system has led to nuclearisation of families, which in turn has led to enhanced demand. Add to this an increasing population of working women and new job opportunities in emerging service sectors such as IT-enabled services, retail, food services, entertainment and financial services.

Growing disposable income: More Indian households are getting added to the consuming class with the growth in income levels. The number of households with income of over Rs 45,000 per annum is expected to grow from 58 million in 1999-2000 to 125 million by 2011.

What is FDI? An Overall View of FDI allocation in India

Foreign direct investment is the acquisition of assets in a country by foreign entities for the purpose of control. FDI is ownership of at least 10% of a business.

According to the Ministry of Commerce & Industry, "FDI is freely allowed in all sectors including the services sector, except a few sectors where the existing and notified sectoral policy does not permit FDI beyond a ceiling. FDI for virtually all items/activities can be brought in through the Automatic Route under powers delegated to the Reserve Bank of India (RBI), and for the remaining items/activities through Government approval. Government approvals are accorded on the recommendation of the Foreign Investment Promotion Board (FIPB).” Ministry of Commerce and Industry has fixed limits for other sectors are as follows:

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Present Scenario of FDI in Retail Sector in India

FDI in Multi-Brand retailing is prohibited in India. FDI in Single- Brand Retailing was, however, permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010. Of this, 57 proposals were approved. An FDI inflow of US $ 194.69 million (Rs. 901.64 Crore) was received between April, 2006 and March, 2010, comprising 0.21% of the total FDI inflows during the period, under the category of single brand retailing. The proposals received and approved related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, lifestyle products etc., covering high-end items. Single brand retail outlets with FDI generally pertain to high-end products and cater to the needs of a brand conscious segment of the population, mainly attracting a brand loyal clientele, which often has a pre-set positive disposition towards the specific brand. This segment of customers is distinctly different from one that is catered by the small retailers/ kirana shops.

FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997. It was brought under the automatic route in 2006. Between April, 2000 to March, 2010, FDI inflows of US $ 1.779 billion (Rs.7, 799 Crore) were received in the sector. This comprised 1.54 % of the total FDI inflows received during the period.

FDI in Multi Brand Retailing – Global Scenario

FDI is permitted in the retail sector in Brazil, Argentina, Singapore, Indonesia, China and Thailand without limits on equity participation, while Malaysia has equity caps on FDI in the retail sector.

FDI in retailing was permitted in China for the first time in 1992. Foreign retailers were initially permitted to trade only in six Provinces and Special Economic Zones. Foreign ownership was initially restricted to 49%.

Thailand permits 100% foreign equity, with no limit on the number of outlets. For the retail business, it has a capital requirement of TBH100 million and TBH20 million for each additional outlet, while it has a capital requirement ofTBH100 million for each wholesale outlet.

Indonesia permits 100% foreign equity in retail business, with no limit on the number of outlets. It also does not impose any capital requirements.

Analysis of the Possibility for allowing FDI to India’s Multi Brand Retail Sector

While analyzing the total FDI flow into the country as per Department of Industrial Policy & Promotion Ministry of Commerce and Industry, FDI in single brand retailing was 909.77 Crore rupees which is 0.16% of the total FDI in India.

India having a total of 5, 42,773 Crore rupees FDI inflow during the last year had only 909.77 Crore rupees from retail single brand sector. Why the Government is reluctant to allow more FDI flow in retail sector?

FDI Equity Inflows (Month-Wise) During the Calendar Year 2010

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Source: Dept. of Industrial Policy and Promotion, Ministry of Commerce and Industry

http://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm

Though the data on volume of turnover by retail is not separately maintained, commodity composition of private consumption expenditure provides reasonable estimates of the size of the retail sector.

As per the National accounts, private final consumption expenditure, increased from Rs 19,26,858 Core in 2004-05 to Rs 32,26,826 Crore in 2008-09, at an average rate of 13.8 per cent per annum-. However, expenditure on some items like transport and communication; expenditure on food in hotels and restaurants; expenditure on rent, fuel and power; and expenditure on education and recreation are distinct from trade. Private consumption expenditure adjusted for items which could be considered a. close approximation to trade, increased from Rs 11,92,405 crore in 2004-05 to Rs 19,93,380 crore in 2008-09, at an average rate of 13.7 per cent3.Rate of growth of GDP at current market prices during this period at 14.5 per cent, was higher than this growth.

Private Final Consumption Expenditure - Commodity Composition

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Source: Dept. of Industrial Policy and Promotion, Ministry of Commerce and Industry

http://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm

India is being seen as a potential goldmine for retail investors from over the world and latest research has rated India as the top destination for retailers for an attractive emerging retail market. India’s vast middle class and its almost untapped retail industry are key attractions for global retail giants wanting to enter newer markets. Even though India has well over 5 million retail outlets, the country sorely lacks anything that can resemble a retailing industry in the modern sense of the term. This presents international retailing specialists with a great opportunity. The organized retail sector is expected to grow stronger than GDP growth in the next five years driven by changing lifestyles, burgeoning income and favorable demographic outline.

Another cap to the retailing industry in India is allowing 51% FDI in single brand outlet. The government is now set to initiate a second wave of reforms in the segment by liberalizing investment norms further. This will not only favor the retail sector develop in terms of design concept, construction quality and providing modern amenities but will also help in creating a consumer-friendly environment. Retail industry in India is at the crossroads but the future of the consumer markets is promising as the market is growing, government policies are becoming more favorable and emerging technologies are facilitating operations in India. And this upsurge in the retail industry has made India a promising destination for retail investors and at the same time has impelled investments in the real estate sector. As foreign investors cautiously test the Indian Markets for investments in the retail sector, local companies and joint ventures are expected to be more advantageously positioned than the purely foreign ones in the evolving India's organized retailing industry.

Reasons for not allowing FDI in Multi brand Retail Sector

The main reasons for not allowing FDI in multi brand retail sector:

1. Fear of foreign companies taking monopoly of Indian retail market

2. Price rise due to the monopoly of foreign retailers

3. Loss of employment opportunities, most of the Indian youth are considering opening a retail outlet in their locality as the last resort for earning livelihood. It is also the second most employed sector after agriculture.

4. Organized Indian retail sector holds only 5.5% of the total retail sector and that allowing FDI at this nascent stage will be adverse to the domestic sector.

5. Foreign retailers will squeeze suppliers and engage in predatory pricing to wipe out competition.

6. Disruption of current balance of the economy by rendering millions of small retailers jobless.

Arguments in Support of Allowing FDI in Multi Brand Retail in India

- Those in favour of FDI argue that India has already provided `backdoor' entry to international retailers. Current norms allow foreign retailers to set up shop in India via the franchisee route, as has been done by the likes of Marks & Spencer and Mango. Foreign retailers are allowed outlets if they manufacture products in India (Benetton) or source their goods domestically. FDI is also permitted in cash-and-carry outlets, where goods are sold only to those who intend using them for commercial purposes (Metro, Shoprite). Foreign retailers therefore, have access to the Indian retail market, while India loses out on the investment.

- India is not an integrated homogeneous market; it is a hierarchy of markets catering to people of many different income levels and tastes. Hence small retailers can very well survive in our economy.

- Entry of sophisticated branded products affects the unbranded mass market only marginally as income of vast population in India lies in low level income zone.

- It is more convenient and cost-effective for customers to purchase many of their daily requirements from the neighborhood stores, especially as these establishments stock goods that are in particular demand in the locality. Hence, the pop-and-mom street corner shops can very well survive.

- The benefits from greater exports would be particularly high in the farm sector if FDI is allowed. Right now, there is a tremendous amount of wastage and value loss of agricultural products due to lack of storage, refrigeration, transportation and processing facilities. As a result, farmers' price realisation remains low while the consumers in the cities end up paying a high price. Given the fiscal problems of the government, it is too much to expect it to build the required infrastructure.

- To the extent the large retailers establish a direct linkage with the farmers by cutting out many layers of middlemen, develop the processing facilities and export the products to meet their global requirements, farmers would get better prices and bigger markets while the consumers would benefit in terms of lower prices, better quality and greater variety.

- The benefits from higher exports are likely to offset any direct job loss in the local ‘kirana’ as result of competition from big global retailers. Anyway, if the domestic big players are allowed to operate, the job loss problem for the small shops would remain, while the benefits from larger exports would not be there. So, clearly, if big players are to be permitted in retail, this must extend to FDI. Otherwise, the full range of benefits will not be realized.

Current Entry Routes of Foreign Retailers in India

Even though FDI in multi brand retailing is not allowed, many foreign players have already entered Indian market through different routes such as:

- Manufacturing and local sourcing
- Franchising
- Test Marketing
- Wholesale cash and carry
- Distribution

Rationale for Allowing FDI in Multi Brand Retail Trading

- The Agriculture sector needs well-functioning markets to drive growth, employment and economic prosperity in rural areas of the country. Further, in order to provide dynamism and efficiency in the marketing system, large investments are required for the development of post-harvest and cold-chain infrastructure nearer to the farmers' field. FDI in front end retailing is imperative to fund this investment.

- Allowing FDI in front end retail operations will enable organized retailers to generate sufficient cash to fund this investment. Investment in organized retail by domestic players will be ineffectively deployed if FDI is delayed. International retailers should be mandated to bring with them technology and management know-how which will ensure that investment in organized retail works to India's advantage. In order to provide dynamism and efficiency in the marketing system, large investments are required for organized retailing, linked with the back end of the value chain. FDI in front-end retailing is imperative to derive full advantage of the value chain for the producer and the consumer. International retailers will bring with them technology and management know-how that will finally impact our whole retail sector through the adoption of best practices.

- There is a need to ensure that issues of cost and quality, relating to consumers, are adequately addressed. This could be achieved through stabilizing prices and reducing inflation, which, in turn, could be achieved through direct buying from farmers, improving supply chain inefficiencies to lower transit losses, improved storage capabilities to control supply j demand imbalances, better quality and safety standards through farmer development and increased processing of produce.

- Similarly, there is a need to address issues relating to farmers, through removal of structural inefficiencies. This could be achieved through liberalized markets, with direct marketing and contract farming programmes, from which farmers could profit, as also more predictable farm-gate prices, steadier incomes and better access to evolving consumer preferences through private investors, especially the organized retail sector. There is also a need to improve post-harvest management, which could be achieved through investments in supply chains and cold storage to minimize losses and improving processing, as also value addition for better farm incomes. Further, there is a need for yield improvement, which could be achieved through use of contract farming to disseminate technological know-how, working with farmers to promote awareness about soil quality, pesticides and fertilizer usage, grading, sorting capabilities and increasing availability of low interest credit for farmers.

- The benefits are not limited to farmers alone. Foreign retailers would be inclined to source from the Indian market to ensure that goods reach customers on time.

- FDI in retailing can boost exports of our country, this can happen because the foreign company will have close contact with farmers and they will have through knowledge of different markets, which will help in export. Unless they are allowed to enter our market they will not have good knowledge about our potential which will adversely affect our exports.

- FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity. It can bring about:

-

1. Supply Chain Improvement
2. Investment in Technology
3. Manpower and Skill development
4. Tourism Development
5. Greater Sourcing From India
6. Up gradation in Agriculture
7. Efficient Small and Medium Scale Industries
8. Growth in market size
9. Greater Productivity
10. Benefits to government: through greater GDP, tax income and employment generation

Issues for Resolution before allowing FDI in Indian Multi Brand Retail Sector

- Should FDI in multi brand retail be permitted? If so, should a cap on investment be imposed? If so, what should this cap be?
- To develop the retail trade in food grains, other essential commodities and multi-brand retail in general; should FDI be leveraged for creating back-end infrastructure? To ensure that foreign investment makes a genuine contribution to the development of infrastructure and logistics, should it be stipulated that a percentage of the FDI coming in (say 50%) should be spent towards building up of back end infrastructure, logistics or agro processing?
- It is necessary to encourage only genuine players in this sector and avoid a situation where retail outlets are run through working capital support from financial institutions. Should a minimum threshold limit for investment in backend infrastructure logistics be fixed? If so, what should this financial threshold be?
- To develop our rural sector, should conditionality be put on the FDI funded chains relating to employment? For example, should we stipulate that at least 50 % of the jobs in the retail outlets should be reserved for the rural youth?
- How best the small retailers can be integrated into the upgraded value chain? Can they be provided access to the logistics/ supply chain set up by the FDI funded retailers? Should it be stipulated that a minimum percentage of the latter's sales should be made to retailers through special wholesale windows?
- As a part of a calibrated reform process, should foreign investment for such stores be initially allowed only in cities with population of more than 10 lakhs (2001 census)? As there may be difficulties faced with regard to availability of real-estate in such cities for setting up such ventures, should an area of 10 kms around the municipal/urban agglomeration limits of such cities be included within the definition of the city?
- What additional steps should be taken to protect small retailers? Should an exclusive legal and regulatory framework be established to protect their interests? Is a Shopping Mall Regulation Act required? Does this require intervention at national level or should this be left to the States?
- The present public distribution system provides a valuable safety net to vulnerable sections of society. To ensure that the integrity of the PDS system is not weakened and buffer stock is maintained at the desired level, should Government reserve the right of first procurement for a part of the season or put in place a mechanism to collect a certain amount of levy from private traders in case the level of buffer stock falls below a certain level?
- How should compliance be ensured with the above stipulations? Should a centralized agency, to be nominated by the State Governments concerned, be empowered to grant permissions to every outlet to be opened? The onus of proving compliance with these conditions could rest with the concerned retail chain. The chains could submit an annual statement to such State Government agency providing proof of compliance. Should this agency be empowered to monitor compliance of the present cash and carry outlets too?
- The penalty for non-compliance could include cancellation of approvals as well as denial of future permissions for such activities. What additional penalties could be levied? Should civil penalties be imposed? Or criminal? Or both?

Steps to be taken for the smooth introduction of FDI in Multi brand Retailing

- When allowing foreign players to enter Indian market through FDI in multi brand retail sector, let them start by joining hands with domestic companies.
- The percentage of FDI in the initial stage should be low (25%) and gradually they should be allowed to raise their share over years. This will give the domestic companies their tome to establish themselves and get ready to face the competition from foreign players.
- Initially the Foreign players should be allowed to make their presence felt in limited cities. They should be allowed to expand their business slowly.
- Give permission to maximum number of foreign retailers to enter Indian economy so that competition among them will help control the price hike.
- Establishment of in-built policy to re-employ/ re-locate people dislocated due to opening of big malls in the vicinity of their shops.
- 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.
- Establishment of a National Commission to study the problems of the retail sector; Enactment of an Act to protect medium and small retailers.
- Providing a level playing field for small retailers; Analysis of traffic and economic impacts before a store is given permission to open.
- Setting-up of a Retail Regulatory Authority to look into problems and to act as a whistle-blower.
- Adequate safeguards to prevent diversion of agricultural land for building malls etc.
- 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.
- Local players (Domestic companies) can be encouraged to become big organizations through mergers and acquisitions; this will make them capable of competing with foreign retailers.

Conclusion

FDI in Multi brand retailing can be allowed in a slow and steady manner. According to World Bank, opening up the retail sector to foreign direct investment (FDI) would be beneficial for India in terms of price and availability of products. The Indian Council for Research on International Economic Relations (ICRIER) has suggested phased opening-up of the retail industry, with 49 per cent foreign direct investment allowed initially. In a report it released jointly with the Department of Consumer Affairs, ICRIER said it strongly advocates that FDI should be allowed in retailing since it would speed up the growth of organized formats. The council has said that since foreign retailers are allowed to enter the Indian market through other routes, the existing ban on FDI has not acted as an entry restriction. On the contrary, the country is losing foreign investment while the entry process has become non-transparent and complicated. India is the only major country which has still not allowed FDI in retailing.

The study strongly advocates that foreign direct investment should be allowed in retailing since it would speed up the growth of organized formats. Organized retailing has significant backward linkages through setting up of supply chains, investment in food processing industry and manufacturing units increased productivity of agriculture, growth of interlinked sectors such as tourism and IT. Consumers will also gain from organized retailing since it leads to lower price, improves the quality of the product and widens the choice of products available to them. The slow growth of organized retailing is affecting the progress of allied sectors such as agriculture, food-processing industry etc.

References

- Retail in India. A Critical Assessment by Mathew Joseph and Nirupama Soundararajan - Published by Academic Foundation in association with ICRIER.
- FDI in India’s Retail Sector More Bad than Good ? - By Mohan Guruswamy, Kamal Sharma, Jeevan Prakash Mohanty, Thomas J. Korah, CPAS- Centre for Policy Alternatives.
- The Department of Industrial Policy and Promotion - Subject: Issue of discussion paper on Foreign Direct Investment (FDI) in Multi-Brand Retail Trading.
- Official Website of Department of Industrial Policy and Promotion, Ministry of Commerce and Industry http://www.dipp.nic.in/fdi_statistics/india_fdi_index.htm.
- FDI in retail : More benefits than costs by Alok Ray, The Hindu Business Line, November 2005.
- India among top nations to offer strong retail potential : PwC study, The Hindu Business Line, October 2005.
- Govt. should open up FDI in multi-brand retail : Montek, The Economic Times, December, 2010.
- FDI in Retail Sector India by Arpita Mukherjee, Nitisha Patel. Published by Academic Foundation in association with The Indian Council for Research on International Economic Relations (ICRIER).
- Indian Retail Sector – A primer by Nitin Mehrotra, Published by ICFAI University Press, First Edition.