FDI in Retail – A macro analysis
Posted by संदीप नारायण शेळके on December 7, 2011
I’ve tried to understand the terminologies and impact of FDI and Retail. Finally added my view too.
What is Retail business?
As per the Delhi high court decision in 2004 the term ‘retail’ is defined as ‘a sale for last consumption’ and not for further sale. i.e. A sale to the end consumer. In general terms we can call it ‘Business to Consumer’ sales. Retail business is interface between the producer and the individual consumer buying for personal consumption. A retailer is the person who sell the goods to the individual consumer at a margin profit. Today the Retail contributes 15% of the economy and employs 8% of the total workforce (only agriculture employs more).
Retail industry is divided in two parts:
1. Organized Retailing: These are licensed retailed who are registered for sales tax, income tax, etc. E.g. Retail-chain, Hypermarkets, Supermarkets. Privately owned large retail businesses. This account for only 3-4% of total retail.
2. Unorganized Retailing: These are the traditional formats of low-cost retailing like Kirana stores. Owner runs the shop with the help of family. Nearly 97% of total retail.
What is FDI?
FDI is Foreign Direct Investment. It is an investment by a foreign company into other country than origin. This investment can be done through acquisition of local company or establishing a new business operation. That means it is the capital/funds inflow from foreign entities invested in allowed segments/sectors.
FDI in Bharat is governed by the FDI policy announced by the Govt of Bharat and the provision of Foreign Exchange Management Act(FEMA) 1999. Ministry of Commerce and Industry, Govt of Bharat is the nodal agency for monitoring and reviewing the FDI policy on continued basis and changes in sectoral policy, sectoral equity cap. FDI in some sectors is open for foreign investors directly; where for some sectors they have to be approved by RBI or FIPB.
Who can invest through FDI?
A non-resident entity can invest in Bharat, as per FDI policy. Pakistan citizen or entity is not allowed. Bangladesh citizen or an entity can invest only under government route.
non-resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Bhratiy companies on repatriation basis. OCBs (overseas corporate bodies) can invest through Government route as per FDI policy and approval from Bharat Government; and with prior RBI approval for investment through Automatic route.
Where FDI can be invested?
Any Bharatiy company can issue capital against FDI.
FDI in Partnership Firm/Proprietary Concern:
1. An non-resident Bharatiy or person of Bharatiy origin is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media.
2. Investment can be on non-repatriation basis.
FDI in Venture Capital Fund:
1. non-resident entity with FIPB can invest in a domestic VCF set up as trust.
2. If VCF is incorporated under the Companies Act then non-resident entity can invest in such VCF under Automatic route of FDI Scheme.
FDI in Limited Liability Partnerships:
1. FDI can invest in LLPs operating in sectors/activities where 100% FDI is allowed as per FDI policy. Through govt approval route, automatic route and where there are no FDI-linked performance conditions
2. FDI is not allowed in agriculture/plantation activities, print media, real estate business.
What does mean by FDI in Retail?
1. FDI upto 51% in single brand retail store with prior govt approval.
2. FDI upto 100% for cash and carry wholesale trading and export under automatic route.
3. FDI is not allowed in multi brand retail sector retail segment.
As per the recent developments and reports: The cabinet of Government of Bharat has approved 51% FDI in multi-brand retail. Also FDI ceiling for single brand retail is increased to 100% from current 51%.
State of Retail Business in Bharat today:
Organized retail is just 3% of total trade in Bharat today. Whereas organized retail sector in developed economies makes over 70-80% of total trade. Even in the Asian developing economies these figures are around 20-25% of total trade.
There are more than 1.2 Crore retail outlets operating in Bharat and only 4% of them operate in larger than 500 square feet in size. There were 11 retail outlets per 1000 people in 2001 as per the estimates of AC Neilsen and KSA Technopak.
1. It will cut the middleman and help farmers get more price and consumers less cost.
2. Prices will be brought down at retail level to tame inflation.
3. Big retail chains will invest in supply chains which will cut wastage, estimated at 40% in case of fruits and vegetables.
4. SMEs will have bigger market, along with better technology.
5. It will bring in much needed foreign technology with global best-practices.
6.It will create more employment than displacing people of small stores.
7. It will induce better competition in the market, benefiting both produces and consumers.
8. Franchising opportunities for local entrepreneurs.
1. It will lead to closure of tens of thousands of small retail stores.
2. Which may endanger livelihood of 4 crore people.
3. It may tame inflation initially but will fuel the inflation once MNC companies get a stronghold in retail.
4. Farmers may be given lucrative prices initially, but eventually they will be at the mercy of big retailers.
5. SMEs will become victims of predatory pricing policies of big retailers.
6. It will replace ordinary middleman with sophisticated corporate middleman.
7. Create cultural and ecological problems by twisting the food production and availability as per the profit margin.
8. It will promote cartels and creating monopoly.
As per the statistics 15% i.e. around $401 bn of the GDP today is generated by 40 million work force. Which means that the wealth is distributed among the larger section. If we look at the Wal-Mart revenue is about $300 bn generated by just 2.1 million workforce.
If we allow big retailers to take over retail segment without proper regulations and fair competition then the larger amount of money will be concentrated with few business houses leading to poverty.
If the problem is rural infrastructure then we should not be dependent on outsiders for our development. We must be self-reliant in the infrastructure related activities.
Government must make sure that commodity pricing, procurement, rural infrastructure, supply chains are in place to promote competition.
Big Retailers have the tendency to get into ‘contract farming’ for their needs. This will push farmers to produce what they demand in bulk. Certainly, if retail giant asks for particular sort of produce in large quantity then to make more profits more area will be cultivated for that particular crop. Now due to this scenario if food grains production goes down then wouldn’t there be a threat to our food security? And the farmer himself would be the buyer of the food grains.
Our strength lies in distributed and decentralized development, so in order to improve the life standard of last man of the strata its imperative to take development to every individual by strengthening the small enterprises.
FDI should be allowed there is no need of blanket ban on it, but with appropriate safeguards for strengthening economy to avoid employment and farming crisis like Brazil, Argentina, Thailand etc. [Read more]
Open for discussion and counter-views.