Fdi- Pros and Cons Essay Example

FDI, and OECD. It is worth noting that India is a founding member of the World Trade Organization and has ratified GATS. This agreement covers wholesale and retailing services and requires all member countries to allow foreign investment in the retail trade sector. Initially, concerns were raised about potential job losses, international procurement challenges, increased competition, and reduced entrepreneurial opportunities associated with opening up the retail sector.

The retail sector in India has gradually been opened up to Foreign Direct Investment (FDI) by the government. In the 1990s, limited FDI was allowed, resulting in the entry of MNC "Dairy Farm" into India. In 1997, FDI in cash and carry (wholesale) with full ownership was permitted through Government approval, which later became automatic in 2006. The NDA Government attempted to introduce FDI in retail in May 2002 but faced unknown obstacles. However, progress was made as 1% FDI in single brand retail was permitted in 2006 and eventually 100% FDI was allowed in single brand retail (excluding multi-brand) due to political reasons. From September 20th, 2012, revised guidelines enabled 100% FDI in single brand retailing and a maximum of 51% FDI in multi-brand retailing under certain conditions. State governments retain the authority to accept or reject FDI within their respective states' retail sectors.

Despite opposition and protests against Foreign Direct Investment (FDI) in the Retail Sector, particularly in Multi Brand Retail, the Indian Government remains determined to implement this policy to stimulate economic growth. The government assures that local retailers' rights are protected under this policy. FDI involves foreign capital invested in the economy to boost production capacity and can be done through subsidiaries, joint ventures,

mergers, acquisitions, as well as Greenfield and Brownfield projects.

Foreign Direct Investment is when foreign companies or entities invest in companies or entities in a different country. Unlike indirect investments like portfolio flows, which involve overseas institutions investing in equities listed on a nation's stock exchange, direct investments offer more influence and control over the recipient company. Open economies with skilled workforces and promising growth prospects tend to attract more foreign direct investment compared to closed and heavily regulated economies.

Foreign Direct Investment (FDI) is defined by the OECD as when a foreign investor invests in 10% or more of the voting stock or ordinary shares of a company. The term "retail" comes from the French word meaning "to cut it again" and refers to selling goods directly to consumers for immediate use. In 2004, the High Court of Delhi provided a definition of "retail" as sales intended for final consumption, distinguishing them from sales made for further sale or processing, which are commonly known as "wholesale". Essentially, retail serves as an intermediary between producers and individual consumers who purchase goods for personal use.

The retail sector, which operates independently from government institutions, serves as a middleman between producers and buyers. This sector is responsible for selling goods to individual customers in order to generate profit. It can be categorized into two types: Organized Retail Sector and Unorganized Retail Sector. Organized retailing refers to trading activities conducted by licensed retailers who are registered for taxes such as sales tax and income tax.

In India, the retail industry is divided into two main categories: organized retailing and unorganized retailing. Organized retailing encompasses

corporate-backed hypermarkets, retail chains, and privately owned large retail businesses, which only make up 3% of the overall retail business. On the other hand, unorganized retailing consists of traditional low-cost formats such as local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, street sellers, and pavement vendors. Despite making up about 97% of the total retail business, unorganized retailing remains a significant source of employment and contributes over 12% to India's GDP.

Foreign investment in India is regulated by the FDI policy announced by the Government of India and the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) has issued notifications and amendments to regulate the transfer or issuance of security by a person resident outside India under this policy.

The Department of Industrial Policy and Promotion (DIPP) is responsible for monitoring and reviewing the FDI policy in India. It operates under the Ministry of Commerce and Industry, Government of India. The FDI policy includes changes in sectoral policy and sectoral equity cap, which currently ranges from 26% to 100%. Within DIPP, the Secretariat for Industrial Assistance (SIA) communicates the FDI policy through Press Notes and Policy Circulars. FDI can be made through both Direct Route or by the Government.

Foreign investors are permitted to invest in India, except for certain sectors/activities, which would require prior approval from the RBI or Foreign Investment Promotion Board („FIPB? ). The retail sector allows FDI through the Government Route exclusively. To understand the FDI policy for retailing in India, it is advisable to refer to Press Note 4 of 2006 issued by DIPP and the consolidated FDI Policy issued in

October 2010, which were further revised in 2011 and 2012 through various press notes. These press notes provide sector-specific guidelines for FDI in trading activities, with Press Notes 4 and 5 of 2012 specifically addressing the FDI policy for the retail sector. Detailed guidelines can be found in the mentioned press notes. In 2006, FDI up to 100% for cash and carry wholesale trading and export trading was allowed through the automatic route. FDI up to 100% for retail trade of 'Single Brand' requires prior government approval (i.e. FIPB).

The government of India allows 51% foreign direct investment (FDI) in multi-brand retailing under the government route, as stated in Press Note 4 (2012 Series) and Press Note 5 of 2012. The revised FDI policy for single-brand retail, as mentioned in Paragraph 6.2.16.4 of 'Circular 1 of 2012-Consolidated FDI Policy', effective from April 10, 2012, is as follows: 6..16.4

The government has given permission for foreign investment in the retail trading of single brand products, with the aim of attracting investments in production and marketing. The objective is to improve consumer access to these goods, promote sourcing from India, and enhance the competitiveness of Indian enterprises through global designs, technologies, and management practices. However, there are conditions for this foreign direct investment (FDI). The products must have a single brand both within India and internationally. This form of retail trading only applies to products that are branded during manufacturing. The foreign investor must also own the brand. If FDI exceeds 51%, at least 30% of the product's value should come from Indian small industries, village and cottage industries, artisans, and craftsmen. Small industries refer to those with a

total investment in plant and machinery not exceeding US $1.00 million at installation time without considering depreciation. Furthermore, if the valuation exceeds this amount at any point, the industry will no longer be considered a 'small industry' for this specific purpose. Compliance with this condition will be ensured by the company through self-certification while being verified by statutory auditors based on certified accounts maintained by the company itself.

An application will be made to the Secretariat for Industrial Assistance (SIA) in the Department of Industrial Policy & Promotion to seek permission from the Government for FDI in retail trade of 'Single Brand' products. The application will specify the product and product categories proposed to be sold under a 'Single Brand'. Any additions to the product or product categories for 'Single Brand' sales will require fresh approval from the Government. The Department of Industrial Policy & Promotion will process the applications to determine if the proposed products meet the notified guidelines before being considered by the FIPB for Government approval. Effective from September 20th, 2012, the Government of India has reviewed and amended paragraphs 6.2.16.4 (2) (d) & 6.2.16.4 (2) (e) of the existing policy. Amendment to paragraph 6.2.16.4: K. R. Kaushik Page 9 International Journal of Emerging Research in Management &Technology ISSN: 2278-9359

Research Article 2012 3.1 In line with 'Circular 1 of 2012-Conso1idated FDI Policy', paragraph 6.2.16.4 is modified as follows: 6.2.16.4 Single Brand product retail trading I 100% Government Route.(1) The purpose of Foreign Investment in Single Brand product retail trading is to attract investments in production and marketing, increase availability of such goods for consumers, promote sourcing of goods

from India, and enhance competitiveness of Indian businesses through access to global designs, technologies, and management practices. (2) FDI in Single Brand product retail trading must adhere to the following conditions: (a) Only products of a 'Single Brand' should be sold. (b) Products should be sold under the same brand internationally, meaning they should be sold under the same brand in one or more countries other than India. (c) 'Single Brand' product-retail trading applies to products that are branded during manufacturing. (d) Only one non-resident entity, whether or not the owner of the brand, will be allowed to engage in single brand product retail trading in the country through a legally valid agreement with the brand owner for the specific brand being sought for approval.

The responsibility of making sure that this condition is followed lies with the Indian entity engaged in retail trading of single-brand products in India.

The investing entity must provide evidence of compliance with the above condition when seeking approval. This includes submitting a copy of the licensing/franchise/sub-licence agreement. If the proposal involves foreign direct investment (FDI) beyond 51%, the company must source 30% of the value of goods purchased from India, with preference given to MSMEs, village and cottage industries, artisans, and craftsmen in all sectors. The company will self-certify the amount of domestic sourcing and maintain duly certified accounts for verification by statutory auditors.

Companies involved in single-brand retail trading with foreign direct investment (FDI) must fulfill the procurement requirement. Initially, this can be done by calculating the average value of goods purchased over a five-year period starting from April when the first tranche of FDI is received.

Afterward, this requirement must be met annually. The responsibility for determining the sourcing requirement lies with the Indian-incorporated company that receives FDI for conducting single-brand product retail trading. However, companies with FDI engaged in single-brand retail trading are not allowed to participate in e-commerce retail trading.

Applications for FDI in retail trade of single-brand products should be submitted to the Secretariat for Industrial Assistance (SIA) within the Department of Industrial Policy & Promotion. These applications need to specify the proposed product or product categories to be sold under a single brand. Any additions to these products or categories will require fresh approval from the Government.

The term Multi Brand has not been defined by the government. When it comes to FDI in Multi Brand retail, it means that a retail store with foreign investment can sell multiple brands in one place under certain conditions. These conditions include the permission of FDI in multi brand retail trading for all products, with the exception of unbranded fresh agricultural produce such as fruits, vegetables, grains, and meat. Additionally, a minimum amount of US $ 100 million must be brought in as FDI by the foreign investor.

At least 50% of the total FDI brought in must be invested in 'backend infrastructure' within three years of the initial FDI installment. The term 'backend infrastructure' encompasses capital expenditure on all activities except those related to front-end units. Examples of back-end infrastructure investments include processing, manufacturing, distribution, design improvement, quality control, packaging, logistics, storage, warehouse, and agriculture market produce infrastructure.

The back end infrastructure calculation excludes expenses for land cost and rentals. To meet the requirements, at least 30%

of the procurement value for manufactured or processed products must come from small industries in India. These small industries should have a total investment in plant & machinery that is equal to or less than US $1.00 million at the time of installation, disregarding depreciation. If the valuation exceeds this amount at any point, the industry will lose its classification as a small industry for this purpose.

The procurement requirement must initially meet an average of five years' total value of the manufactured and processed products purchased, starting from 1st April of the year when the first FDI tranche is received. After that, it must be met annually. The company will self-certify to ensure compliance with conditions (ii), (iii), and (iv), which can be cross-checked as needed. Investors must maintain accounts that are certified by statutory auditors.

Retail sales outlets may only be established in cities with a population of over 10 lakh according to the 2011 Census. These outlets may also include an area of 10 kms surrounding the municipal or urban agglomeration limits of such cities. The retail locations will be limited to areas that conform to the Master/Zonal Plans of the respective cities. Furthermore, these outlets should have essential facilities such as transportation connectivity and parking. In states or union territories without cities with a population of over 10 lakh as per the 2011 Census, retail sales outlets can be established in the city of their choice, preferably the largest one. The area covered by these outlets should still extend 10 kms around the municipal or urban agglomeration limits of such cities. The locations of these outlets will also be

limited to areas conforming to the Master/Zonal Plans of the respective cities, and necessary facilities such as transportation connectivity and parking will be provided.

The procedure for FDI in the retail sector involves the processing of applications by the Department of Industrial Policy ; Promotion (DIPP), who will determine if the proposed investment meets the guidelines. The applications will then be considered by the Foreign Investment Board (FIPB) for government approval. The final approval will be given by the Foreign Investment Promotion Board.
Foreign investors have concerns about the FDI policy in India, particularly regarding its impact on brands that choose the franchising route. These brands would have preferred more liberal rules to maximize their royalty and franchise fees. However, they will still need to rely on innovative structuring of franchise arrangements to maximize their returns. Major consumer durable companies like LG and Samsung, which operate exclusive franchisee-owned stores, are unlikely to switch from this preferred route immediately.

If companies choose to engage in Multi Brand retailing, they must collaborate with a local company that is reliable and knowledgeable about the domestic market and Indian consumers. Currently, major business groups control the organized retail sector as they have diversified into retail to capitalize on its growth. Industry leaders such as Tata (via its brand Westside), RPG Group (via Food world), Pantaloon of the Raheja Group, and Shopper's Stop dominate this industry. When foreign investors contemplate entering this market, do they pursue partnerships with existing retailers or non-industry companies seeking diversification, similar to many business groups?

Uncertainty surrounds the success of an arrangement if foreign investors decide to terminate agreements with Indian partners

and trade independently. This uncertainty stems from the allowance of 51% FDI in Multi Brand and 100% in Single Brand retail. To navigate this situation, foreign investors should carefully negotiate joint venture agreements that include an option to buy out their Indian partner's share. They should also consider regulations that prohibit a foreign company from entering another joint venture or establishing a subsidiary in the same field without consent from their initial partner, unless there is a conflict of interest clause in the agreement. Therefore, caution must be exercised by foreign brand owners when selecting partners and introducing their brands to India as the success of their initial brand may impact future endeavors. It is important to note that while the aforementioned enabling policy applies only to the national government, State Governments and Union Territories have autonomy in decision-making regarding implementation.

The States and Union Territories that have authorized FDI in MBRT can establish retail sales outlets. The enclosed list comprises the States and Union Territories that have provided their consent. Any future agreements for setting up retail outlets will be communicated to the Government of India through the Department of Industrial Policy ; Promotion, and the attached list will be updated accordingly. Retail sales outlets are required to adhere to the applicable laws and regulations of the respective State or Union Territory, which includes compliance with the Shops and Establishments Act.

Companies that have received foreign direct investment (FDI) and are involved in multibrand retail trading are prohibited from participating in any form of retail trading through e-commerce. Several states, including Maharashtra, Haryana, Andhra Pradesh, Rajasthan, Jammu and Kashmir, Uttarakhand, Manipur, Assam,

and Delhi support FDI in multibrand retail. Although Uttarakhand, Manipur, and Assam do not have cities with populations exceeding one million people, their capital cities can still be considered for the establishment of multibrand retail stores. These states collectively comprise a total of 19 cities such as Delhi Mumbai Pune Nagpur Jaipur Hyderabad Vijaywada Srinagar. Conversely, there are opposing states like Gujarat Uttar Pradesh West Bengal Bihar Tamil Nadu Kerala Chhattisgarh and Odisha regarding FDI in multibrand retail.

FDI Policy in Multi Brand Retail has been approved by the Cabinet, but the states are responsible for granting trade licenses under the respective Shops and Establishment Acts. Additionally, foreign retailers are only allowed to establish their shops in cities with a population exceeding one million. The major players expected to enter the Indian retail sector include WAL-MART STORES INC, CARREFOUR SA, TESCO PLC, METRO AG, and IKEA. A SWOT analysis of the Indian retail sector reveals its strengths. These include its potential to boost economic development, its young and dynamic manpower, the highest shop density in the world, no threat to small outlets, a high growth rate in retail and wholesale trade, and the presence of large business/industry houses capable of absorbing losses.

The retail sector has weaknesses such as low capital investment, lack of trained and educated workforce, lack of competition, higher prices compared to specialized shops, poor infrastructure, and heavy wastage due to insufficient warehouses and cold storage facilities. However, there are opportunities for major employment generation in the future, improvements in farmers' financial conditions, enhanced retailer efficiency, foreign capital inflows, access to big markets with better technology and branding, quality improvement

with cost reduction, and increased export capacity. Additionally, there is an increase in lifestyle changes and status consciousness. These are the potential threats to be considered. K. R. Kaushik Page 12 International Journal of Emerging Research in Management &Technology ISSN: 2278-9359

There are concerns that the entry of foreign investors and big stores in the retail sector may lead to Kirana and retailers losing business in the long run. There is also fear that FDI in multiband retail could result in job losses in the manufacturing sector. Furthermore, roadside bargains may harm farmers, as work will be done by Indians while the profits go to foreigners. It is believed that farmers may be exploited and lose their fields and crops to foreign investors.
However, the government's viewpoint on FDI in the retail sector suggests that at least 50% of total investment will be directed towards villages. This could lead to the transformation of rural India through improved agro processing and cold chain techniques. Additionally, farm produce would be able to reach stores directly, reducing wastage.

The Indian government has recently implemented new policies in the multi-brand retail sector. These policies allow foreign investors to own 51% of companies, while Indian companies retain 49%. Retail stores can now be opened in cities with a population of one million or more. Each state has the authority to decide whether or not they will permit foreign direct investment (FDI) in multi-brand retail. In addition, half of the investment must be used for infrastructure development in villages.

This introduction of FDI is expected to create over one crore new jobs. Retailers who receive support from FDI are required to purchase 30%

of their products from small-scale sector units, which opens up manufacturing opportunities for micro, small, and medium enterprises. This sector also offers employment prospects for young individuals in the country.

As a result of this implementation, consumers will benefit from the direct supply of farm produce to stores. This will lead to improved quality and quantity as well as lower prices by eliminating intermediaries. Additionally, consumers will have a wider range of goods available for selection.

Foreign retailers looking to establish multi-brand retail outlets in India must invest 50% of their FDI amount into developing back-end infrastructure within three years after receiving their first tranche of FDI funding.

The idea is that companies must generate employment opportunities in rural India prior to entering the multi-brand retail sector. The advantages of allowing unrestricted foreign direct investment (FDI) in retail are thought to outweigh the disadvantages, as evidenced by successful trials in countries such as Thailand and China. Although these nations initially faced opposition to permitting FDI in retail, it eventually proved to be a favorable political and economic choice for their governments. This decision not only led to a notable rise in job opportunities but also contributed significantly to GDP growth.

The potential introduction of unrestricted FDI flows in the retail market may not significantly affect the interests of retailers in the unorganized retail sector. This is because consumers have the freedom to choose where they shop based on factors such as convenience, lowest prices, variety of options, and a positive shopping experience. The Industrial policy of 1991 paved the way for liberalization, privatization, and globalization across all sectors of the Indian economy. The Government route

allows for 51% FDI in multi-brand retailing while 100% FDI is permitted in single brand retailing. These measures are seen as a continuation of the progress made under this policy.

In spite of the changes brought about by Industrial Policy 1991, the government has implemented safety nets and social safeguards to mitigate the negative impact. Certain conditions, such as a minimum investment of US$100 million, requiring 50% investment of FDI in backend infrastructure, sourcing 30% of materials from the Small Scale Industry, entering cities with a population of at least 1 million, and using the government route for approval of FDI will discourage non-serious investors. Approving FDI in retail sector fulfills India's commitment to WTO's GATS agreement and motivates local players to become more competitive and quality-oriented, providing consumers with a variety of products to choose from at competitive prices. When implemented wisely and with careful negotiation of agreements with foreign investors, FDI in the retail sector has the potential to boost socio-economic development nationwide. This conclusion is supported by various websites like www.dipp.nic.in ,www.Legalserviceindia.com ,www.Manupatra.com ,and www.Scribd.com along with organizations such as www.cci.in and www.rbi.org.in.

You can find reports, research papers, and government notifications like Press Note 4 of 2006 by DIPP, the Consolidated FDI Policy from October 2010, as well as various press notes from 2011 to 2012 in newspapers such as Indian Express (Delhi Edition) on September 22nd, 2012 and Economic Times (Delhi Edition) on September 20th. These articles were written by K.R.Kaushik.