Saturday, July 10, 2010

Is FDI required in India's Retail Sector?

Is FDI required in Retail Sector?

Definition of FDI

Foreign direct investment (FDI) is defined as "investment made to acquire lasting interest in enterprises operating outside of the economy of the investor." The FDI relationship consists of a parent enterprise and a foreign affiliate which together form a Multinational corporation (MNC).

India has been ranked as the 5th most desired retail destination. The total size of Indian retail sector, including organized and unorganized sector, is $300 billion, where currently the organized sector accounts for 4% only. It is expected to grow to anywhere from 12-20% by 2010. It contributes of 14% to the national GDP and employing 8% of the total workforce (second to agriculture.) in the country. An estimated 40 million Indians work in retail outlets. India is the second most attractive destination for retail among thirty emerging nations. The IT industry has projected that organized retail will have a 25-30% market share of total retail by 2011.

The retail industry is definitely one of the pillars of the Indian. If the growth of organized retailing sector (corporate owned retails) is already progressing at good rate, where does this need come from?
FDI can have some positive results on the economy:

-lead to greater efficiency

-improvement of living standards,

-apart from greater integration into the global economy,

-Better operations in production cycles and distribution.

- boost tourism as seen from experience in Singapore and Dubai.

-consumer is benefited by both price reductions and improved selection, brought about by the technology and know-how of foreign players in the market.

-One of the benefits of FDI/Foreign players is that they provide access to global markets for Indian Producers as it might ultimately lead to increased sourcing from India as was the case in China.

Retail trade with around 12 million grocery shops in India, is fragmented, unorganized and small, with little capital for either expansion or to extend credit to consumers. FDI in retail with influx of better managerial practices and IT-friendly techniques would synergies these stores. This would facilitate lowering of prices and offering benefits to consumers, apart from providing jobs. IT helped Wal-Mart reduce its distribution costs to 3% of sales compared to 4.5 % for others. Expected reduced wastage due to setting up of integrated supply chain is another factor favouring FDI. McKinsey estimates that India wastes nearly Rs 50,000 crore in the food chain. Retail giants such as Wal-Mart or Carrefour can help develop the food processing industry by providing a cold chain. It is argued that linking up retailers will confer biggest benefits in terms of higher exports, as is happening in China.

FDI can have some negative results on the economy:

-Render millions of unorganised retail sector jobless

-will transfer lower technology or goods in India (Dumping of goods)

-Foregn goods will be sought, so flow of foreign exchange and also loss of domestic industries

-Domestic Industries (Manufacturers) will also have to face competetion in both pricing as well as quality

-Will also start influencing government laws and regulations (As done in China, Malasyia,etc.)

-Buyer's monopoly: increased buyer concentration if FDI allowed in retail.

Example: in Canada, one single retailer, Wal-Mart, controls 52 per cent of the retail market.

-Infrastructure and Traffic problems: findign adequate space for stores,parking,etc.

-Labour: employment incrase but lot of cost-cutting too... low wages.


  1. An insightful piece of writing on the FDI impact on retail.