FDI Policy for Indian Retail Sector – Major Implications

The retail sector in India has seen significant growth over the last decade, with a noteworthy shift towards the organised retailing format. Now more than 10% of the country’s Gross Domestic Product (GDP) is contributed by the retail sector, providing almost 8% of employment in the country. For a long time, the Indian retail sector was deemed to be sensitive because of the employment it generates and its being at a relatively nascent stage (especially the domestic organized retail segment), both of which put it at a disadvantage to compete with other large entities. Consequently, the government mostly aimed at protecting agriculturists and small retailers, discouraging bigger retailers from entering the market. This has now changed with the revision of the foreign direct investment policy (FDI Policy) which allows FDI in the retail sector.

The Policy

The FDI policy in the retail sector in India enlists varying rules for the different areas in this sector. Earlier, foreign players could own up to 49% in a local single-brand retail trading (SBRT) chain but had to approach the Department of Industrial Policy and Promotion (DIPP) for permission to acquire the remaining 51%. Under the new policy, up to 100% FDI is allowed in SBRT without getting approval from the DIPP. However, this is subject to certain conditions. At least 30% of the raw materials need to be sourced from India, especially from rural cottage industries and other micro, small and medium enterprises or even artisans and craftsmen. The product should be branded during manufacturing and the items should be sold under a single brand name, internationally.

In case of multi brand retail entities, up to 51% of FDI is allowed subject to prior government approval and some other conditions. The FDI Policy also allows for investment without any additional requirement of approval from the government in case of units which are a part of the marketplace model of e-commerce, wherein the role of the e-commerce unit is to merely provide a platform for connecting buyers and sellers. On the other hand, FDI is not permitted in the inventory-based model wherein the e-commerce entity owns and controls the inventory of goods sold on its portal. This move to change the FDI Policy was widely contested and debated in the Parliament.

The Government’s View

The government advocated that foreign direct investment can prove to be a powerful catalyst which can spur competition in the retail industry. An increase in FDI in the retail segment can allow the creation of employment opportunities in the retail sector, increasing the market size and leading to enhanced productivity. It would provide an opportunity to farmers to increase their incomes by eliminating the role of middlemen, and would also help them in securing remunerative prices for their goods. Established foreign retail chains would also aid in bringing about supply chain efficiencies, providing a precedent for local retail players to learn and emulate.

The policy mandates a minimum investment of $100 million, half of which has to be used for back end infrastructure like cold storage, refrigeration, and processing, which would in turn reduce post harvest losses for Indian farmers. The local sourcing of at least 30% of raw materials would generate further employment opportunities, increasing income generation and leading to advancements in technology.
A similar FDI policy in retail led to impressive growth in other developing countries like China, Thailand, and Indonesia. Going by their example, it is fair to believe that it would benefit India in a likewise manner as well.

The Opposition’s View

According to the opposition, FDI in the retail sector would lead to massive job losses. The international retail giants would replace the small retailers, leading to losses of income worth crores for Indians. They pointed to the experience of the USA and Europe where small retailers had almost been wiped out as a consequence of FDI, and in South Asian countries, strict licensing and zoning policies had to be employed to prevent a similar fate. In India, there is a very high shopping density and where most of the small shop owners are self employed, their displacement would adversely affect the economy on the whole.

The global retailers could also resort to predatory pricing, which would lead to the formation of an oligopoly or monopoly. The market for essentials could end up being controlled by foreign organizations, knocking out the local stores from the market.

Foreign investment would lead to consolidated markets, making the consumer captive with limited choices, unlike fragmented markets which provide more options. It would not create more markets, but just displace the existing ones. It would also lead to job losses in the manufacturing sector as well, since most structured international retail entities make their purchases internationally.

Laxmikant Vajpayee pointed out that the move allowing FDI in multi brand retail was taken under pressure from USA whose interests did not align with those of small indigenous traders and farmers. Moreover, India cannot be compared to China as China is mostly a manufacturing economy which supplies raw materials to major global players such as WalMart.

Impact on Major Stakeholders

The major stakeholders in the implementation of the policy are consumers, farmers, all the retailers and the government. The FDI policy is still very new and it is not possible to determine its actual impact on the economy and the society but many economists have made certain predictions about it.

The consumers stand to extract the most number of benefits from the onset of FDI in the Indian retail sector. They will be exposed to a wider range of options with better quality of goods at lower prices. Especially in the telecommunication and automobile retail sectors, the consumers have benefited a lot from the liberalization of FDI. In the telecommunication sector, the consumers were exposed to a wider scope for access to better quality services at lower prices. The entry of foreign players in the automobile sector has resulted in a more globally competitive domestic industry, enabling even middle and low-income consumers in India to afford cars. The existing organised retail sector also seeks to benefit from the increased global competition and the possibility of many joint ventures from the global players.

In the case of farmers, though the incoming of FDI is supposed to make the agriculture sector more efficient and the farmers better off, it is also speculated that it will make these farmers vulnerable to exploitation by the incoming retail giants. However, the experience with the PepsiCo potato farming regime and Bharati Walmart in India has shown positive responses for the Indian farmers. There has been an inclusive growth and the farmers’ yield and incomes have received a boost as a result.

The Indian retail sector is mostly unorganised and in the form of small family-owned enterprises, known as mom and pop stores. People prefer these stores to giant retailers due to convenience and the lax credit facilities. The advent of FDI is expected to move the purchasers’ preferences from these traditional sellers. In China, the implementation experience, however, did not live up to this expectation.

This policy would also be a win-win for the government. The increase in FDI would reflect in an increased GDP, leading to more revenue generation for the government from the increased GST collection and also enabling the creation of more employment opportunities across the country.

Overall, it seems that the FDI policy in retail will benefit most sections of the society based on the implementation experience in the already existing sectors and markets, though some stringent safeguards need to be in place so that the loopholes in the system do not make the challenges more evident than the benefits accrued by the society. There is a real threat to the unorganised retail sector constituting almost 97% of the entire retail structure which cannot be ignored. However, it is practically impossible to make a policy that will be beneficial for all sections. Judging by the outcome of the policy in India and the intent of the government in undertaking this initiative, as is evident from the government’s position on its advocacy of the reforms, the FDI policy in the retail sector seems to be an ethical one benefiting a major chunk of the society, albeit some more safeguards need to be put in place in order to derive the maximum amount of benefit from it.

Picture Credits: WSJ / AFP / GETTY IMAGES

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