Sunday, January 15, 2012
The FDI or Foreign Direct Investment in retail sector of India has remained a very hot topic in the year 2011 and it still remains also. What makes this topic so important for a common-man and why it is so talked about??? Let’s find out…
Present Retail Sector in India
Like every other economy, the retail sector is also one of the most crucial and extremely potential sector of the Indian Economy. As of now, the retail sector in India accounts for approximately 33-35% of the GDP with 46% growth rate in past three years. The Indian retail market is one of the top 5 retail markets in the world and employs 7% of the total Indian work-force.
The retail sector in India is divided into two main heads, viz., organized and unorganized sector. Organized Sector Retailers means to include the licensed retailers i.e. those, who have registered themselves for sales tax/VAT, income tax, etc. These are generally privately owned large businesses, like Westside, Tanishq, Croma, Shoppers Stop, Lifestyle, Pantaloons, Reliance World, Max and many more.
On the other hand, unorganized retailing refers to the traditional kirana shops, general/departmental stores, paan/beedi shops, etc.
If we talk about the statistics, the market share of unorganized retail sector is 97% of the total retail sector, as compared to organized retail sector, which accounts for only 2-3%. This data is even after the presence of big corporate giants like Tata, Reliance, K Raheja Corp Group.
There are three different forms through which retail trade is carried out in India, namely:
|Mono/Exclusive/Single Brand Retail Shops||Multi-branded Retail Shops||Convergence Retail Outlets|
|Exclusive Showrooms either owned or franchised out by the manufacturer. A complete range of all the products manufactured by the said manufacturer under one brand name.||In these kinds of stores, almost all brands are available for a single product type. The customer has a very wide choice for the kind of product he is willing to buy.||These kinds of products have almost all kinds of products, required by a consumer, in them.|
|The focus is on the brand name.||The focus is on the nature of product.||The focus is on the diverse consumer needs.|
|e.g.: Exclusive showroom / franchise outlets of Nike, Liberty, Samsung, Nokia, etc.||e.g.: Max, Shoppers Stop, Croma, etc.||e.g.: Big Bazaar, In & Out, Subhiksha, Grand India Bazaar, etc.|
Current FDI Policy in respect of Retail Sector in India
Keeping in mind the ‘welfare’ motive, India has kept the retail sector closed for the foreign investors in order to protect the interest of the 15 million small retail store-owners. Currently, the foreign investor can make investments as per following guidelines:
- FDI up to 100% for cash and carry wholesale trading and export trading allowed under the automatic route.
- FDI up to 51% with prior Government approval for retail trade of ‘Single Brand’ products. (now 100% allowed vide notification dated 11/Jan/2012).
- FDI is not permitted in Multi Brand Retailing in India.
Present entrance routes for the Foreign Investors
In view of the restrictive entrance policies for the foreign investors in the retail sector, they followed one or more of the following routes to expand their business in India:
|A. Franchise Agreement||B. Cash and Carry Wholesale Agreement||C. Strategic Licensing Agreement||D. Manufacturing and Wholly-owned Subsidiary|
|o Most basic and widely used entrance route by the multinational retailers.
o The MNC’s may enter into a franchise agreement with Indian companies, with prior approval of RBI.
|o 100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers.
o The wholesaler deals only with smaller retailers and not Consumers.
|In this kind of arrangement, foreign brands give exclusive licenses 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.||o Some of the brand-owners have 100% subsidiaries, who manufacture the products on behalf of the brand-owners.
o These subsidiary Indian companies are authorized to sell their products to consumers in India though franchising, internal distribution, other retailers or own outlets.
|e.g.: Domino’s, Nike, Lacoste, have entered the Indian market through this route||e.g.: Metro AG of Germany was the first significant global player to enter India through this route.||e.g.:
o Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai.
o SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd.
|e.g.: Levi’s, Reebok, Woodland, have subsidiaries in India who manufacture the products with these brand-name.|
PROSPECTED changes in FDI Policy for Retail Sector in India
The government (led by Dr.Manmohan Singh), announced the following prospective reforms in the retail sector in India:
- India will allow foreign direct investment of up to 51 per cent in “multi-brand” sector;
- single brand retailers, such as Apple and Ikea, can own 100 percent of their Indian stores, up from the previous cap of 51 percent. This has been allowed lately on 11/Jan/2012.
The bill has following important drivers:
- The retailers (both single-brand and multi-brand) will have to source at least 30% of their goods from small and medium sized Indian suppliers.
- All retail stores can open up their operations in having population over 1 million. Out of approximately 7935 cities and towns in India, 55 cities satisfy such criteria.
- Multi-brand retailers must bring a minimum investment of US$ 100 millions. Out of this, half of the amount must be invested in back-end infrastructure facilities such as cold chains, refrigeration, transportation, packing, sorting and processing, in order to reduce the post harvest losses and to bring the remunerative prices to farmers.
- The opening of retail competition (policy) will be within the parameters of state laws and regulations.
ISSUES / CONTROVERSIES
|Oppositions’ reaction against retail sector reforms|
A lot of objections have been raised by the opposition parties and public at large, as a result of which the said bill has been kept on hold.
Those who are criticising these reforms took support of the following points: [Threats]
- Current Independent stores will be compelled to close, leading to massive job losses. The operations in big stores like Walmart are highly automated and employ very less work-force.
- Big players can afford to lower the prices in initial stages in order to knock-out the competition and become a monopoly and later on raise the prices. This kind of phenomenon was evident earlier in the case of soft-drinks. Eviction of CampaCola by Pepsi and Coke is one such example.
- India doesn’t need foreign retailers, since homegrown companies and traditional markets may be able to do the job.
- Just like in BPO industry, work will be done by Indians, profits will go to foreigners.
- Remember East India Company. It entered India as a trader and then took over politically.
- The government hasn’t built consensus.
In a politically and culturally diverse country like India, every ECONOMIC issues turns out to become an POLITICAL issue. On December 1, 2011, there was a nation-wide “Bandh” (close all business in protest) was called up by various political parties opposing the retail sector reforms. Many nation-wide newspapers such as the Times of India and the Hindu, claimed that there was a mixed response to that protest. Many stores ignored the shutdown call and remained open also during the whole “bandh” day, whereas many other opened during the second half of the day. This was because of the fact that many of the opposition parties privately supported and encouraged these reforms. As a result of this, these reforms have been kept on hold.
A Wall Street Journal article reports that in Uttar Pradesh, Uma Bharti, a senior leader of the opposition Bharatiya Janata Party (BJP), threatened to “set fire to the first Wal-Mart store whenever it opens;” with her colleague Sushma Swaraj busy tweeting up a storm of misinformation about how Wal-Mart allegedly ruined the U.S. economy.
According to Bloomberg, on 3 December 2011, the Chief Minister of the Indian state of West Bengal, Mamata Banerjee, who is against the policy and whose Trinamool Congress brings 19 votes to the ruling Congress party-led coalition, claimed that India’s government may put the FDI retail reforms on hold until it reaches consensus within the ruling coalition. Reuters reports that this risked a possible dilution of the policy rather than a change of heart.
India Today claimed that the resistance to Indian retail reforms is primarily because it has been badly sold, even though it can help fix the exploitation of Indian farmers by the decades-old “arhtiya” and “mandi” monopoly system. India Today claims the policy is good for the small Indian farmer and the Indian consumer.
Pratap Mehta, president of the Centre for Policy Research, claimed any U-turn or postponement of retail reforms will cause an immense loss of face to the Congress-led central government of Manmohan Singh. The mom-and-pop farmers of India support these reforms. The consumers of India want the reforms. The government has already annoyed those who oppose change and innovation in retail. By putting retail reforms on hold, the government will additionally alienate much larger segment of India’s population supporting FDI. So they will now have the worst of both worlds, claims Mehta. Apart from these, many of the economic leaders like Deepak Parekh and Ashok Ganguly are in support of such reforms. They urged farmers, consumers and the common people to raise their voice against this false drama of apprehension against investment and modernising trade in organised retailing. They called upon Indians to come out and strongly support progressive measures and reforms with the same spirit and gusto with which we take the liberties to criticize policies or issues we do not appreciate.
In order to conclude this issue let us draw a SWOT analysis of the situation.
- Major contributor to the GDP: The retail sector in India is hovering 33-35% of the GDP, as compared to around 20% in USA.
- High growth rate: The retail sector in India enjoys an extremely high growth rate of approximately 46%.
- High potential: Since the organised portion of retail sector in India is only 2-3%, thereby creating a lot of potential for the future players.
- High employment generator: The retail sector employs 7% of the total work-force in India, which is rite now limited to unorganised sector only. Once the reforms get implemented this percentage is likely to increase substantially.
- Lack of Competition: AT Kearney’s study on global retailing trends found that India is least competitive as well as least saturated markets of the world.
- Highly unorganised: The unorganised portion of total retails sector is 97% as compared to US, which is only 20%.
- Low productivity: A McKinsey study claims retail productivity in India is very low as compared to its international peers.
- Shortage of talented professionals: The retail trade business in India is not considered as a reputed profession and it is mostly carried-out by the family members (self-employment/captive business). Such people are generally not academically and professionally qualified.
- No ‘Industry’ status, hence creating financial issues for retailers: The retail sector in India do not enjoy the “Industry” status, thereby making difficult for the retailers to raise funds for the expansion projects.
- There will be more organization in the sector. Organized retail will need workers. This is quite evident in Unites States of America, where the 80% of the retail sector is organised and it employs 13-16% of the work-force of that country. Moreover, according to the findings of KPMG, one of the world’s largest audit companies, in China, the employment in both retail and wholesale trade increased from 4% in 1992 to about 7% in 2001, post reforms and innovative competition in the retail sector in that country.
- Healthy competition will be boosted and their will be an check on the prices (inflation). Retail giants such as Walmart, Carrefour, Tesco, Target, Metro, Coop and 350 other global retail companies are already have operations in many countries for over 30 years. Until now, they have not at all become monopolies, rather they have managed to keep a check on the food inflation through their healthy competitive practices.
- Create transparency in the system. The intermediaries operating as per mandi norms do not have transparency in their pricing. According to some of the reports, an average Indian farmer realise only one-third of the price, which a final consumer pays.
- Intermediaries and ‘mandi system‘ will be envicted, hence directly benefiting the farmers and producers. The prices of the commodities will automatically checked. For example, according to the Business Standard, Walmart has introduced “Direct Farm Project” at Haider Nagar near Ignore in Punjab, where 110 farmers have been connected with Bharti Walmart for sourcing fresh vegetables directly.
- Quality Control and control over leakage and wastage. Due to organization of the sector, 40% of the production does not reach the ultimate consumer. According to a news in the Times of India, 42% of the children below the age group of 5 are malnourished and the Prime Minister Dr.Manmohan Singh has referred to it as “a national shame”. Food often gets rot in farm, in-transit and in antiquated state-run warehouses. Cost-cautious and highly competitive retailers will try to avoid these wastage and looses and it will be their endeavor to make the products available at lowest prices, hence making food available to the weakest and poorest segment of Indian society.
- Heavy flow of foreign capital will help in building up the infrastructure for the growing population. India is already operating in the budgetary deficit. Neither the Government of India nor the Indian domestic investor are capable to satisfy the growing needs (schools, hospitals, transport, infrastructure) of the ever-growing Indian Population. Hence foreign capital inflow will enable us to create a heavy capital base.
- There will be sustainable development and many other economic issues will be focused upon. Many Indian small shop owners employs many workers, who are not under any contract and make them work for long hours. Many of such employs under-aged workers, thus giving rise to child-labor. Not only this, lack of contract between worker and employer and no registration of such shops boosts corruption at grass-root level and generates black money.
Emergence of foreign players in Indian retail sector can give rise to a number of threats also, which are discussed above. Out of the above mentioned drawbacks, most of them are politically created.
In view of the above discussion, if we try to balance the opportunities and prospects attached to the given economic reforms, it will definitely cause good to Indian economy and consequently to the public at large, if once implemented.
This has been evident on January 11 & 12, 2012, when the notification increasing FDI limit in single-brand retail from 51% to 100%, was announced. According to the news in the Economic Times website, the stock prices of existing retailers rose substantially. As per the news, shares of Pantaloon Retail gained 4%; Shoppers Stop rose 4.9% and Koutons Retail surged almost 10%.
I believe that, the reform of ‘51% FDI in multi-brand retail’ should also be given a green signal as soon as possible, subject to the above mentioned bill driver / riders (conditions). Keeping in view the above benefits (or opportunities mentioned above), it is very reasonable to say that the period for which we delay these reforms will be a loss for the Government only, since majority of the public is in favor of this reform. Needless to mention, the above list of opportunities or benefits is illustrative. There could be many more benefits of such a reform.
If this policy is implemented then it will be of benefit for the Indian corporates, since 49% of the profit share will remain with the Indian companies only. Thus, both the Government, corporates and public in large will be benefited with this reform.
I personally believe that instead poking the political game in the economic reform issues like these, all the political parties (ruling party and all other opposition parties also) of India, should work in symbiosis, not only for their selfish benefits, but for the welfare of the public at large. Needless to say India is a WELFARE State… !!!
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