Fdi in Multi Brand Retail Essay Example
Fdi in Multi Brand Retail Essay Example

Fdi in Multi Brand Retail Essay Example

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  • Pages: 10 (2622 words)
  • Published: April 7, 2017
  • Type: Analysis
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The article, titled "Risk and Return Analysis of FDI in Multi Brand Retail in India" by Ms. Anita Nyati, investigates the ongoing discussion regarding Foreign Direct Investment (FDI) in Multi Brand Retail (MBR) in India. It explores various aspects related to this subject.

This paper examines the analysis of India's current retail sector and the potential benefits of foreign direct investment (FDI). It highlights how FDI can contribute to improvements in quality, technology, customer service, and infrastructure development. Additionally, it addresses concerns such as unemployment and intense competition that are associated with FDI. To support this discussion, experiences from other countries are incorporated.

In conclusion, allowing foreign players to enter the retail sector can lead to growth in both the retail sector and society. However, it is important to implement proper strategies to maximize r

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eturns and minimize risk. Some limitations may be placed on foreign entities, such as requiring minimum investments in back-end infrastructure or setting caps on scale. Therefore, if done correctly, Foreign Direct Investment (FDI) in the Multi Brand Retail sector can be beneficial rather than detrimental. Keywords: Foreign Direct Investment, Multi Brand Retail, Strategies. Risk and Return Analysis of FDI in Multi Brand Retail in India.

Ms. Anita Nyati, a lecturer in Business Administration at Govt P G College in Pratapgarh, discusses one of the burning issues in India: the retail industry. As the second largest source of employment after agriculture, it is crucial to properly manage policies relating to the retail sector. Before analyzing the impact of FDI in multi-brand retail, it is important to understand the current scenario of the Retail Industry and FDI in India. According to the Delhi High Court, retail

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refers to the sale for final consumption to the ultimate consumer. The Indian retail industry can be classified into two types: unorganized and organized.

The unorganized retail sector includes small shops and kirana stores with low investments, while the organized retail sector consists of well-managed retail chains or hypermarkets with large-scale operations and heavy investments in infrastructure. Currently, foreign direct investment (FDI) is allowed in various sectors in India, including the retail sector, as a result of liberalization under GATS ; WTO. In the retail sector, FDI has seen several developments: in 1997, cash and carry wholesale trading allowed 100% FDI with government approval; in 2006, single brand retailing allowed 51% FDI; and in 2011, parliament cleared the proposal for 100% FDI in multi-brand retail during the winter session. Between 2006 and 2010, this FDI journey resulted in USD 194 million. India currently ranks third among 30 emerging markets as an attractive nation for retail investment. The current discussion involves FDI in multi-brand trading formats such as supermarkets, hypermarkets, and compact hypers.

Although the organised retail sector has potential, it is limited by factors such as restrictive licensing and inadequate infrastructure. Therefore, the idea of allowing foreign direct investment (FDI) in multi-brand retail becomes more appealing. The proposal for FDI in MBR includes allowing 51% FDI with a minimum investment of $100 million. Additionally, at least 50% of the investment should be focused on developing backend infrastructure and 30% of raw materials must be sourced from India's small and medium industries. Malls can only be established in cities with a population of at least 10 lakhs, and the government has priority in procuring materials from farmers. Products

should be sold internationally under the same brand, with the foreign investor being the owner of the brand. The main question is whether opening up FDI in MBR will bring opportunities or create problems, and this paper presents an analysis considering both perspectives.

Before discussing the benefits of FDI, it is important to assess the current state of India's retail industry. Currently, the Indian Retail Sector operates with multiple intermediaries connecting farmers and consumers. Due to India's significant agricultural population, it ranks as the second-largest producer of fruits and vegetables and the third-largest producer of grains worldwide. Unfortunately, Indian farmers are not receiving fair compensation for their products. It is estimated that farmers only receive 20-30% of the actual price paid by consumers.

Insufficient logistic facilities have led to a significant waste of crops as they are unable to reach markets, resulting in inadequate payment for farmers and an increase in suicides and crime rates. Many farmers are forced to migrate to urban areas and live in impoverished slums. According to a report, approximately 182,936 farmers took their own lives from 1997 to 2007. Additionally, inadequate infrastructure and transportation systems have caused substantial financial losses for farmers.

In relation to the infrastructure and logistics,

Currently, inadequate funding in infrastructure and logistics is leading to challenges in maintaining the freshness and safety of agricultural products like fruits and vegetables. Moreover, there is a lack of cold storage facilities, with only 5386 facilities accessible. As a consequence, farmers experience substantial losses in terms of both the quality and quantity of their produce, resulting in an estimated wastage of around 25 to 30% of fruits, vegetables, and grains. Another factor that contributes

to these difficulties is a weaker value chain system where different intermediaries prioritize their own profit sharing. Unfortunately, this has detrimental effects on both farmers and consumers.

Farmers are unable to handle pressure from intermediaries, causing consumers to pay higher prices. The improper public distribution system (PDS) in India, despite heavy food subsidies for the poor, has led to an ongoing increase in food-based inflation, averaging over 10% in the past year. This is a major drawback of the PDS. Additionally, Indian organized retail traders are scattered and have low investments, resulting in a lack of international recognition for any brands.

The potential benefits of FDI in India are numerous. It has the ability to bring better prices for farmers and eliminate their exploitation by eliminating middlemen in the retail industry. This will motivate farmers to increase productivity through better seeds and machinery, resulting in higher earnings and an improved standard of living. Additionally, it can help address social issues like illiteracy, poverty, and health problems. Moreover, allowing FDI can decrease the government's financial burden by reducing subsidies given to farmers for resources such as fertilizers. The Indian Rupee may also receive support as foreign investors are attracted to India due to FDI reforms. Overall, FDI will restructure the cost benefits equation by removing intermediaries and lowering costs/prices, benefiting both farmers with satisfactory returns and consumers with reduced prices. Furthermore, significant investments from foreign companies in agriculture will generate direct and indirect employment opportunities with an estimated creation of 10 million new jobs within three years.The text highlights various job prospects in marketing, agro-processing, packaging, and transportation roles. Minister Anand Sharma predicts the creation of

10 million additional jobs over the next three years, along with indirect employment opportunities. The proposed policies for foreign direct investment (FDI) in retail by Parliament require foreign companies to source a minimum of 30% of their goods from micro and small industries in India. This will promote domestic manufacturing in the micro and small scale sectors and encourage advancements in technology while also generating indirect employment opportunities. Furthermore, FDI implementation is expected to lead to improved infrastructure and logistics as foreign companies are required to invest at least $100 million each in India. These investments will result in upgraded facilities such as refrigeration technology and transportation, which will reduce wastage and contribute to lower food inflation rates. Additionally, the text emphasizes the importance of technological advancements and research and development (R) investment. It suggests that incorporating improved technology will benefit farmers and small-scale manufacturers by encouraging Indian companies to adopt foreign technologies, fostering increased innovation within the country.

The entry of new start-ups in research and development, similar to the mobile applications industry, will occur. A significant portion of these applications is currently being developed by Indians. The driving force behind innovation is believed to be the presence of money. Foreign companies like IBM, Microsoft, and Intel will also heavily invest in research and development, just as they do in the IT industry. This investment will impact real estate development, resulting in the construction of more shopping malls and infrastructure that will boost the Indian real estate sector and create employment opportunities.

Farmers will experience increased productivity, growth in income, and agricultural development. Consumers will benefit from better quality products at reasonable prices due to the

elimination of mark-ups across various channels. The overall improvement of logistics and infrastructure will enhance the quality of life for all involved parties. Furthermore, healthy competition among players will lead to increased technology usage and reduced costs overall, improving productivity for all members involved and ultimately benefiting India's economy.

Regarding kiranas (small neighborhood convenience stores), most of them will not be affected by the entry of foreign retailers.The entry of foreign retailers into the market is uncertain and it may only impact those in large cities. On one hand, the growth of organized retail could inspire domestic retail players to improve their operations to stay competitive. This could result in major Indian brands forming partnerships with smaller local stores, anticipating a decrease in profit margin when dealing with organized retail companies. However, it is important to also consider how the stable Rupee will affect this situation.

Allowing Foreign Direct Investment (FDI) in India is a logical decision as it will bring in essential dollars, thereby helping to stabilize our currency. This stabilization of the rupee will result in less severe consequences on the Indian economy and consumers concerning crude oil imports. Additionally, permitting FDI in retail will reduce the government's subsidy burden. Comparable advantages have been witnessed in other nations like China, Indonesia, and Thailand where retail FDI has contributed to substantial growth in agro processing industry, refrigeration technology, and infrastructure.

Opponents of FDI claim that opening up the retail sector could potentially be detrimental to the unorganized retail industry, small retailers, farmers, and consumers. Their main worry is that granting dominance to large corporate entities may result in monopolies, ultimately impacting the accessibility and pricing of goods.

Furthermore, since the retail sector plays a crucial role in employment generation, there are concerns that FDI could lead to job displacement for unorganized retailers, leading to unemployment fears.

The entry of a significant international player into India may lead to their dominance in the market, causing the closure of unorganized retailers with limited investments. This competition is not only between international and domestic players but also among the domestic players themselves. In the past, instances were seen where Indian players, such as PepsiCo and Coca Cola, entered the Indian market and forced domestic players either to sell their businesses or disappear.

The experiences of other countries regarding Foreign Direct Investment (FDI) in the Modern Brick and Mortar Retailing (MBR) sector demonstrate the benefits. China is a prime example, as it allowed FDI in retailing for the first time in 1992, initially up to 49%. In 2004, China removed all restrictions on FDI in retail. Thailand, Brazil, Argentina, Singapore, Indonesia, Chile, and Russia also permit 100% FDI. Analysis of these countries reveals that the entry of foreign players has supported the development of the organized retail industry and contributed to impressive economic growth.

Increased exports in host countries have been observed through foreign retailer networks, benefiting the economies. Thailand has emerged as a popular shopping destination. In light of the benefits and concerns discussed in the paper, allowing foreign players into the retail sector will result in overall growth and development. The expected returns from foreign direct investment in MBR outweigh the associated risks.

In support of the statement, local players such as Reliance Fresh and Big Bazar can be cited as examples. These players are performing exceptionally well

and have greatly benefited consumers, particularly busy individuals who find it difficult to shop for various items at different places. These consumers have experienced advantages in terms of quality, variety, price, and convenience of shopping, including discounts and exchange offers. The presence of local traders remains unchanged. Similarly, foreign players will not harm the economy; instead, they will contribute human, monetary, and knowledge capital, as well as introduce competition.

The statement explains that the elimination of middlemen, such as kirana stores, can lead to unemployment. However, it suggests that Foreign Direct Investment (FDI) in Multi-Brand Retail (MBR) will actually create more jobs - an additional 10 million within three years, along with indirect employment. This means that instead of reducing employment opportunities, there will be a restructuring of job roles and a decrease in unorganized labor. In addition to this, FDI in MBR will aid in enforcing labor laws and protecting farmers who are currently struggling due to receiving only one-third of the price for their agricultural produce.

During a bumper crop, farmers often encounter the dilemma of selling their produce at reduced prices and confronting obstacles such as restricted direct marketing, losses during transportation and handling, and spoilage of food grains, vegetables, and fruits due to insufficient preservation methods. Nonetheless, these challenges can be addressed through Foreign Direct Investment (FDI). By attracting foreign investors capable of making significant investments in infrastructure like cold storage, warehousing facilities, quality control and testing systems, efficient supply chains, and convenient transportation networks, these issues can be eradicated from the system.

Appropriate storage facilities are an effective way to address wastage. The processing industry, which includes fruits and vegetables, meat and poultry,

milk and milk products, fisheries, plantation, and grain processing, has great potential. There are plenty of opportunities for significant investments in food and food processing technology, skills, and equipment - especially in canning, dairy, and food processing. Foreign Direct Investment (FDI) is vital for achieving these goals.

Instead of fearing that small traders will be dominated by FDI, it is crucial to shift our attention towards the potential societal benefits. At present, if trade associations, political activists, or specific organizations oppose it, the government might permit limited foreign equity ownership in the sector. However, certain requirements may need to be fulfilled, including minimum investment in infrastructure, scale limitations, and agreements with local kirana stores.

India can learn from China on how to coexist and thrive in both organized and unorganized retail. Additionally, Indian local businesses can benefit from foreign companies importing advanced technology and expertise in logistics management. The government can use liberalization to achieve various goals, such as improving infrastructure, accessing sophisticated technology, and generating employment opportunities in this sector.

India's economic development and integration into the global market depend heavily on Foreign Direct Investment (FDI). Therefore, actively promoting this sector is crucial for the government because of its substantial benefits. Allowing foreign players to enter the MBR sector will enhance infrastructure, streamline processes, create jobs, and ultimately improve consumer experience in the long term.

Indian players in both organized and unorganized formats, as well as foreign players entering India, may need to reassess their business strategies to enhance efficiency and remain competitive. It is essential for foreign players to adapt their business models to suit the local market conditions due to India's unique dynamics and price-sensitive nature

compared to other global markets.


Bibliography Websites: • www.Legalserviceindia.com • www.

Below is a compilation of websites, sources, newspapers, and references related to FDI in Indian retail:

  • Manupatra.com
  • Scribd.com
  • cci.in
  • rbi.org.in
  • dipp.nic.in
  • legallyindia.com
  • icsi.edu
  • retailguru.com
  • Newspapers:

    • The Economic Times
    • The Business Standard

    References:

      A. T. Kearney's Report on Indian Retail, 2008
      Fdi Consolidated Policy
      "FDI in Indian Retail- Beneficial or Detrimental" research paper by Dr.R.K Balyan
      "India's Retail Sector" (Dec 21, 2010) http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf
      Hemant Batra, "Retailing Sector In India Pros Cons" (Nov 30,2010) http://www.legallyindia.com/1468-fdi-in-retailing-sector-in-india-pros-cons-by-hemant-batra
      Discussion Paper on FDI in Multi Brand Retail Trading, http://dipp.nic.in/DiscussionPapers/DP_FDI_Multi-BrandRetailTrading_06July2010.pdf
      Economic Times Retail News, "FDI in retail to contain inflation" (Dec 31, 2010) walmart http://retail-guru.com/allow-100-fdi-in-retail-to-contain-inflation-walmart
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