The article has been written by Devansh Singh.
It has been published by Rachit Garg.
Foreign Direct Investment (FDI) is regarded as one of the most important and significant aspects when it comes to the economic development of the nation. Over the past few decades, it has become an inseparable part of the economic policy of the developed and developing nations due to the immense growth. Foreign Direct Investment (FDI) is generally said to be a cross border investment where a company invests its money in a foreign company for setting up of business organization to carry out day-to-day business activities.
In other words, FDI is nothing but a kind of investment other than domestic investment, which is done by an investor in a foreign company for the establishment of the business enterprise to carry out business activities. In this contemporary era, this aspect of FDI is not only prevalent in India but is all over the world, and therefore, it is considered to be of the utmost importance for every developed and developing nation across the globe.
The basic concept of FDI is that whenever the investors of a company invest more than 51% of their funds in a foreign company, they, by doing so, automatically acquire the control of that particular foreign company in the form of a majority stake, and thus, the ultimate control of the company lies within the foreign company. In India, the concept of FDI was first introduced by the Britishers during the time of colonial rule, and it was after the LPG Reforms in 1991 which actually had paved the way for FDIs in India. Recently, the government of India has also implemented several rules and regulations regarding FDIs in India, respectively.
As far as Foreign Direct Investment (FDI) in the retail sector is concerned, we all know that, prior to some years back, this issue was much in the limelight before the government, and due to the various controversies involved in it, this issue was debated for a very long period of time. In 2006, the government of India took the first initiative towards permitting FDI in the retail sector. FDI in the retail sector basically means that the foreign companies in certain categories can sell their goods and services via their own retail shop in the country. Before 2006, FDI in the retail sector was not allowed because there was the fear of losing the job and entrepreneurial opportunities amongst the people. However, the government of India later permitted the FDI in the retail sector.
At present, FDI in single-brand retailing is permitted up to 100%, whereas in multi-brand retailing, it is allowed up-till 51% only. Currently, the retail sector of India is considered to be one of the most important emerging sectors, and therefore, Foreign Direct Investment (FDI) in the retail sector plays a very crucial role in the economic growth and development of the country. Hence, we can say that the step taken by the Indian government with regard to allowing FDI in the retail sector is very much a crucial step for undertaking the growth and development of the Indian economy and for integrating with the global economy.
Retail sector in India
The word ‘Retail’ has originated from the French term ‘Retailer’, which refers to the selling of goods and services in small quantities to the ultimate consumers directly. Here, the consumer purchases products from the retail stores and uses that product for his/her personal use apart from business purposes. The retail sector in India includes all the stores and shops that sell goods or commodities to the ultimate consumers.
Moreover, whenever a consumer buys any product from the retail shops, then he/she is not supposed to sell the same to the third party for considering him/her to be the final or ultimate consumer under the retail sector. In 2004, the Delhi High Court had primarily dealt with the issue of defining the word ‘Retail’, and subsequently, it adopted the same definition of the term as connoted to it in common parlance. Thus, retailing is regarded as an intermediary interface between the producer/wholesaler and the final consumer.
If we specifically talk about the retail sector in India, we all know that, in the last few decades, it has achieved greater heights by becoming one of the fastest-growing sectors worldwide. The retailing sector of India has always proven to be an integral part of the service industry and has tremendously grown with faster economic growth, higher disposable incomes, and rapid urbanization.
This sector in India accounts for 14-15% of its GDP and acts as a pillar of the Indian economy. Over the past few years, the retail sector in India has experienced a drastic transformation in it from the traditional format to modern format. It has not only experienced exponential growth in the developed metropolitan cities, but in smaller cities and towns as well. According to the Global Retail Development Index (GRDI), India has consistently performed well in maintaining the top position in the retail index.
The retailing sector in India was started growing back from the time of the pre-liberalization era itself when the government at that time had introduced the Public Distribution System (PDS) in the country. Presently, this system is regarded as India’s largest single retail system, which provides essential commodities like rice, wheat, and sugar to the people at subsidized rates through a network of Fair Price Shops (FPS) known as ration shops. After 1991, i.e., post-liberalization era, the Indian government under the Prime Ministership of Late Shri Rajiv Gandhi, took the crucial step regarding the opening of the economy with the aim of increasing productivity and developing the infrastructure for transforming the organized and unorganized sectors to adopt the modern retailing in India.
Currently, the Indian retail sector constitutes of both organized retailing (modern retailing) and unorganized retailing (traditional retailing), and it predominantly has around 15 million retail outlets, including small independent and owner-managed shops all over the country.
There are basically two common types of retail sectors: –
Organized retail sector
The organized retail sector in India consists of business enterprises, which are incorporated under the government of India, and run by professional management, i.e., licensed retailers in a systematic and scientific manner. This sector includes shopping malls, supermarkets, hypermarkets, departmental stores, etc., where a large variety of the products are kept under a single roof for sale, which provides the consumers more variety, comfort, and convenience along with retailing. Over the recent years, the organized sector in India has shown immense growth in it, which has led to the increase of the competition amongst the business ventures across the country. Nowadays, there is cutthroat competition in almost each, and every part of the country in the organized sector as this sector is emerging and gaining huge importance day-by-day.
Unorganized retail sector
The unorganized retail sector in India is treated as a very prevalent form of trade amongst the traders. This sector is usually run as a small family business where people generally work in low-skilled businesses. The unorganized sector in India comprises of all incorporated private enterprises, which are owned, managed, and controlled by the individuals/households and are not incorporated under the government of India and any legal statutory body. It includes local Kirana stores, convenience stores, general stores, cobblers, fruit sellers, vegetable sellers, melas, mandis, etc. Furthermore, under unorganized sectors, people basically work in small workshops as construction workers, domestic workers, etc.
Kinds of retail sectors in India
There are three kinds of retail sectors in India viz.: –
Single-brand retail simply means selling different products under one brand name. It includes all those products that are manufactured in the name of one brand. The most common examples of single-brand retailing in India are that of Adidas, Bata, Nike, Puma, etc. According to the latest policy issued by the Department of Industrial Policy and Promotion (DIPP), Foreign Direct Investment (FDI) in single-brand retailing is allowed up to 100% with subject to certain conditions.
The basic condition is that the product must be sold under ‘one brand name’ only. However, when the FDI is above 51%, then in that case, 30% of the goods are sourced from India. Therefore, the main reason behind allowing FDI in single-brand retail is to attract investment in marketing and production.
Multi-brand retailing means selling products of multiple brands under a single roof. Under multi-brand retailing, the consumers are provided with the most comprehensive range and variety of products in the markets from where they do the purchasing on a regular basis. The best examples of multi-brand retailing in India could of Big Bazaars, Reliance Fresh, Shopper’s Stop, etc. As far as Foreign Direct Investment (FDI) in the multi-retail sector is concerned, the central government of India in this regard has framed an enabling policy by specifying the maximum FDI, which is permitted and given the procedure of the same as well. At present, the central government has allowed only 51% FDI, that too with subject to certain conditions.
Cash and carry retail
Cash-and-carry retailing basically refers to ‘wholesale retailing’, which is primarily done by the people who are engaged in the business fields. This kind of retailing is broadly based upon bulk buying where goods and commodities are sold from a wholesale warehouse to the professional/registered customers for their shops or companies. The most common examples of this could be restaurants, medical stores, etc. Cash-and-carry retail normally includes larger factories and stores where goods and commodities are available at lower prices than from the normal ordinary shops. Here, the professional customers are targeted more in comparison to the ultimate consumers, and thus, these stores are a little different from the regular stores. Under cash and carry retailing, Foreign Direct Investment (FDI) is allowed up to 100%.
FDI in retail sector
Foreign Direct Investment (FDI) in the retail sector has always been a matter of concern for the governments in the past few years. This issue appeared to be the most contentious and sensitive one in the country, which was debated for a very long period of time due to the several controversies involved in it.
Currently, the retail sector in India is considered to be one of the most important emerging sectors, which contributes around 14-15% of its GDP and acts as a backbone of the Indian economy. This sector being an integral part of the service industry, has immensely grown with faster economic growth since the economic liberalization of the country in 1991 and is still growing very expeditiously day-by-day. The process of inclusion of FDI in the retail sector was actually commenced in the earlier 90s prior to the introduction of LPG Reforms in 1991. After the introduction of the LPG Reforms in the year 1991, i.e., post-liberalization era, foreign nations became more interested in making investments in India as in India, there was not much competition as that of the developed foreign nations.
Therefore, India being the second-most-populous/fastest-growing economy in the world, carried with it a huge potential for attracting FDI in the retail sector, which subsequently led to tremendous scope for retail expansion.
This issue of allowing FDI in India’s retail sector was a hot topic of discussion for years and years between the opposition parties and the government. After the long discussions/debates on the said subject matter, the government of India finally brought about the FDI in the retail sector in 2006. Initially, India was not in favor of allowing FDI in the retail sector because of the fear of losing the job and entrepreneurial opportunities amongst the people, and therefore, had imposed certain restrictions on foreign companies in limiting their share in the equity capital of their Indian subsidiaries, but subsequently, it had permitted FDI in the retail sector.
Thus, the main objective of the government behind allowing FDI in the retail sector was to ensure the flow of capital and to promote the weaker sections of society. Apart from all this, it also generates employment opportunities, increases quality standards, raises productivity, strengthens infrastructure, etc. In this contemporary era, Foreign Direct Investment (FDI) in the retail sector plays a very pivotal role in the economic growth and development of the country. Over the past few decades, it has experienced a drastic transformation in it from the traditional format to the modern format and has experienced exponential growth in the developed metropolitan cities.
As we all know, the retail sector in India is primarily divided into three categories, i.e., Single-Brand Retail, Multi-Brand Retail, and Cash & Carry Retail.As far as FDI in single-brand retail is concerned, according to the latest policy issued by the Department of Industrial Policy and Promotion (DIPP), FDI in single-brand retailing is allowed up to 100% with subject to certain conditions. The conditions are that the product must be sold under ‘one brand name’ only, the product should be sold internationally, etc.
However, when the FDI is above 51%, then in that case, 30% of the goods are sourced from India. On the other hand, under multi-brand retailing, the FDI is permitted to 51%. Here, the basic conditions are that 50% of the total FDI should be invested in “back-end infrastructure” within the time frame of three years. Back-end infrastructure consists of manufacturing, processing, distribution, warehousing, etc. Moreover, at least 30% of the goods must be purchased from Indian domestic markets, i.e., MSMEs. Furthermore, alike single-brand retail trading, multi-brand retail traders are also not permitted to do trade by means of e-commerce. Last but not the least, under cash-and-carry retailing, which is also known as ‘wholesale retailing’, 100% FDI is permitted under it.
So, after taking into account the present situation of FDI in the retail sector, we can proudly say that the step taken by the government of India regarding allowing FDI in the retail sector was very much a significant step, which in turn has helped in the growth of the nation’s economy, and thus, ultimately helped in the progress of the nation. Therefore, it not only proved to be beneficial for the Indian economy but also had helped the Indian economy to integrate with the global economy. Hence, in short, we can draw a clear-cut conclusion that it acted as a key instrument for the nation to become a ‘developed nation’.
Impact of FDI on retail sector
The impact of FDI in the retail sector has an amalgamation of both positive and negative impacts in the sense that there are both optimistic and pessimistic views of the general public towards the inclusion of FDI in the retail industry.As we all know that FDI in the retail sector has undoubtedly seen a very massive change and a phenomenal growth in it, which has now completely changed the whole structure of the retail sector. In a developing country like India, the idea of FDI in the retail sector has majorly proved to be fruitful for the ones who are primarily engaged in the organized sectors, whereas on the other hand, with the coming of big domestic corporations and Multinational Companies (MNCs) in the field of several retailing ventures, the unorganized sectors had faced a lot of difficulties, as for them, FDI in the retail was not that much profitable despite being a very prevalent form of trade due to increase in competition.
Here, we look upon some relevant optimistic views of the people with regard to FDI in the retail sector, we see that most people agree to this fact that with the inclusion of FDI in retail sector, the consumers would get a wide range of better quality of products at the lesser prices, as the competition in the retail sector is increasing day-by-day. Moreover, they are of the view that including FDI in the retail industry will benefit the farmers the utmost as it eliminates the concept of middlemen. Furthermore, it provides effective supply-chain efficiency and ensures employment opportunities, especially in the marketing sector.
Now, if we look upon some pessimistic views, we see that the people generally feels that it creates a fear of job loss amongst the shopkeepers, which leads to unemployment in the manufacturing sector, as the international retail market basically makes the purchases internationally and not from the domestic market. Last but not the least, it negatively impacts the Indian economy and the Indian domestic markets, i.e., Kirana shops, respectively.
Thus, the most common positive and the negative impacts of FDI in the retail sector in India are as follows: –
- The first and foremost benefit of FDI in the retail sector is that it leads to growth in the economy of the nation, meaning thereby, it escalates the Indian economy as the big domestic corporations and Multinational Companies (MNCs) setup their business enterprises in India, which gives rise to the enhancement of the infrastructure. Moreover, with the coming of foreign companies, sectors like real estate and banking witness huge growth, which in turn leads to the overall growth and development of the Indian economy.
- The most significant benefit of the FDI in the retail sector is that it plays a very instrumental role in generating new employment opportunities, especially amongst the youth generation of the country who are usually lacking in skill, knowledge and expertise. Apart from this, it also helps in increasing the standard of living and lifestyle by ensuring quality. Presently, it has been estimated by the government of India that in the upcoming years, the retail sector would create approximately 10 million jobs in the retail and real estate sectors, which would ultimately lead to a rise in income and purchasing capacity of the people, and thus, would lead to an economic boost in the country.
- The major advantage of this scheme of FDI in the retail sector is taken by the consumers only across the country. It basically provides the consumers a wide range of choices of the products according to their tastes and preferences at much lesser prices. Moreover, it proves to be very beneficial for each and every consumer of any kind as it allocates them a variety of choices in the products of international brands at much lower prices in comparison to the market rates.
- The allowing of FDI in the retail sector by the government has actually helped the farmers a lot in general. By allowing FDI in the retail sector, the farmers have now become the prime beneficiaries/giant shopkeepers as they have got a direct interface with the retailers without middlemen who provides goods to the consumers at a very low price, which ultimately helps them in improving their productivity. Thus, it predominantly eliminates the involvement of middlemen.
- The basic disadvantage of FDI in the retail sector is that it may lead to job losses in the manufacturing sector, which means that the people who are engaged in the unorganized sectors, i.e., small retailers or owners of Kirana stores/general stores, might incur huge losses with the coming in of the Multinational Companies (MNCs) and thereby getting displaced by them. The main rationale behind this is that it might be the possibility that the unorganized sector may not be capable enough to tackle such a foreign company’s player and may lose its market share.
- Another disadvantage of FDI in the retail sector is that there is fear of lowering product’s prices amongst the shopkeepers. With the advent of the foreign companies, the shopkeepers working in the domestic organized sectors fear about lowering of prices of their products in the market because when the foreign companies come in, it provides consumers with a wide range of products at lower prices, and therefore, it becomes very difficult for the shopkeepers to run the business in an effective and in efficient manner, and thus, they’re left with no option, but to lower the prices of the products without any cause.
- FDI in the retail industry creates a negative impact on the Indian domestic market that whenever the multi-national corporation’s setup their enterprises in India, it has been observed that it is Indians who perform all the work, whereas, on the other hand, the foreign company only enjoys the profit share, and therefore do not contribute that much in dividing the work. Furthermore, there is instability in the foreign exchange rate when the foreign company takes back the profits earned to its home country and does not provide profits earned properly to India.
- FDI in the retail sector sometimes also negatively impacts the Indian economy by releasing the monetary resources and Indian revenue to international corporations, thereby benefitting the foreign company.
FDI policy regarding retail sector
Foreign investment in India is broadly regulated by the FDI Policy of the government of India along with the provisions of the Foreign Exchange Management Act (FEMA), 1999. This policy predominantly controls the industries in opening foreign companies, thereby keeping a check upon the percentage held by these companies. Basically, all the foreign investors are allowed to invest in India, except for a few sectors where prior approval from the Foreign Investment Promotion Board (FIPB) is needed. The FDI Policy is revised by the Ministry of Commerce & Industry and notified via Press Notes by the Secretariat for Industrial Assistance (SIA), i.e., Department of Industrial Policy and Promotion (DIPP), on a regular basis so as to ensure the proper functioning of the companies.
In India, the companies can receive FDI via two routes, viz. Automatic Route & Government Route. Under the automatic route, there is no requirement of the prior approval of the Central Government in establishing business enterprises, whereas on the other hand, under the government route, prior approval from the Central Government or the Ministry of Finance is a must requirement before setting up any business organizations in India. Thus, according to the general rule, any company receiving FDI under either automatic or government route is required to comply with the provisions of the FDI Policy of India.
As far as FDI Policy vis-à-vis retailing sector in India is concerned, it would be prudent to glance into Press Note 4 of 2006 issued by the Department of Industrial Policy and Promotion (DIPP) along with the consolidated FDI Policy issued in October 2010, which allocate the sector certain for FDI with respect to the conduct of trading activities. According to that previous policy, FDI in single-brand retailing was allowed up to 51% with prior government approval, whereas FDI was not allowed in multi-brand retailing. Under cash-and-carry retailing, FDI was permitted up to 100% under automatic route.
Current scenario regarding FDI in retail sector
FDI in the retail sector of India was first introduced by the central government a way back in 2006 with the goal of undertaking the growth of the Indian economy. Since the past few decades, the FDI in the retail industry has experienced a massive transformation and exponential growth in the developed metropolitan cities of the country. This sector being an integral part of the service industry has immensely grown with rapid urbanization in the past few years and is currently at its peak in terms of growth.
As we all know that in India, the retail sector is categorized into three sub-heads, viz. single-brand retail followed by multi-brand retail and cash-and-carry retail. Single-brand retail includes all those products that are manufactured in the name of one brand, whereas multi-brand retail covers products of multiple brands. Thus, each of its category have a different set of percentages for the FDI, meaning thereby, the percentage of allocation of FDI depends upon the category of the retail.
Now, here, if we look upon the present situation of the FDI with reference to the new FDI Policy of the central government of India, which was announced on 15th September 2012, we see that FDI in the single-brand retailing is allowed up to 100% with subject to certain conditions. The conditions are that the product must be sold under ‘one brand name’ only, and the product should be sold internationally, etc., whereas, under multi-brand retailing, it is permitted up to 51%. Here, the basic conditions are that 50% of the total FDI should be invested in “back-end infrastructure” within the time frame of three years. Back-end infrastructure consists of manufacturing, processing, distribution, warehousing, etc.
Moreover, at least 30% of the goods must be purchased from Indian domestic markets, i.e., MSMEs. Hence, last but not the least, FDI in cash-and-carry retailing, which is also known as ‘wholesale retailing’ is allowed up to 100%.
Foreign Direct Investment (FDI) in the retail sector has indeed proved to be a very crucial step taken by the government of India in transforming the retail environment of the country along with undertaking the growth and development of the Indian economy, thereby integrating with the global economy. Today, it is very much evident that after the introduction of FDI in retail, there has been a drastic transformation in the retail sector from the traditional format to the modern format with exponential growth in the developed metropolitan cities, and thus, in a developing country like India, this idea of FDI in the retail sector has majorly proved to be fruitful for the ones engaged in the organized sectors. FDI in retail predominantly has created job opportunities for the unemployed youth in India and has helped a lot in reducing the cost of production, intermediate costs so that both producers/manufacturers and consumers can be benefitted.
Moreover, it has also contributed to the development of human resource development. Thus, in the past few decades, this sector being an integral part of the service industry, has tremendously grown with rapid urbanization and is currently at its peak in terms of growth. Since FDI in the retail sector has an amalgamation of both positive and negative effects, but here we must focus on its positive part only and try to remove the hurdles that are in between the path of successful implementation of FDI Policy.
Furthermore, it is quite is pertinent to note that after studying all the arguments with respect to FDI, whether in favor or against, it has been concluded that the government’s decision vis-à-vis allowing of FDI in retail is an outstanding decision as the FDI in the retail sector plays a very pivotal role in the economic growth and development of the country. It not only proves to be fruitful for the Indian economy only but also helps the Indian economy to integrate with the global economy. Hence, we can say that the retail sector in India carried a huge potential for attracting foreign direct investment.
- Arpita Mukherjee, Foreign Direct Investment in Retail Sector in India, 4th ed. 2014
- Shiv Kumar Verma, Foreign Direct Investment in India, 2nd ed. 2010
- Ankita Dwivedi, Retail Sector in India, 5th ed. 2013
- Dheerendra Kumar Baisla (LL.M Student, Galgotias University) – Article on “FDI in Indian Retail Sector: Current Position, Impact & Challenges”
- Nidhi Bagariya & Swarup Santra (Assistant Professor, Department of Economics, Delhi University) – Article on “Foreign Direct Investment in Retail Market in India: Some issues and Challenges”
- A. Muthu Kumaran (Assistant Professor, Nalanda University) – Journal on “Foreign Direct Investment in Indian Retail Sector”
- Raghu Agrawal & Anuj Sharma (Assistant Professor, Symbiosis Law School) – Journal on “Study of Foreign Direct Investment with special reference to Retail Sector in India”
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