Professional Documents
Culture Documents
FDIinIndianRetail AnExhaustiveAnalysis
FDIinIndianRetail AnExhaustiveAnalysis
FDIinIndianRetail AnExhaustiveAnalysis
Abstract
In 2006 the Government has promoted limited FDI in single-brand retailing and has considered opening up further in a phased system with emphasis on joint ventures with domestic players, evident with the highly controversial Wal-Mart joint venture with Bharti. Studying other countries such as China, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate is also on the agenda of the Indian Government. The Indian media regularly discusses the issues of FDI in Retailing. The Hindu Business Line's opinion on the 'Great FDI in Indian Retail debate', is that organized retail at present accounts for a mere 4% per cent of the total market (2008) as against 20% in China and 40 % in Thailand and that there is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop in. This has created significant debate for allowing FDI regulations to open up, although little has changed for multi-brand retailing restrictions to date. Knight Frank revealed in their Market Review (Q3 2006) that the move by the Indian Government to allow FDI in real estate had been an opportune move and although multi-brand retailing is still not allowed, FDI in single-brand retailing has elicited heightened interest.
2 1
1. 2.
02
Contents Page
Abstract Contents Table of Figures & Charts Chapter 1 - Introduction 1.1 Rationale 1.2 1.3 Report Aims & Objectives Layout of Study
02 03 05 06 07 08 09 10-14
Chapter 2 Study Methodology Chapter 3 Historical Perspective on FDI 3.0 Overview 3.0.1 Post Independence & Pre-reform 3.0.2 Post-reform 3.0.3 FDI in Retail Chapter 4 Policy Environment and Growth in Organized Retailing 4.1 Policy and Regulatory Environment 4.2 Growth in 'Organized Retailing Chapter 5 Arguments for and against FDI in Retailing 5.1 Arguments for FDI in Retailing 5.2 Arguments against FDI in Retailing
23-28 29-34
35-42 43-50
Chapter 6 Detailed analysis of factors and conditions attached to FDI 6.0 Survey Design & Sample 51-52 6.1 6.2 6.3 Questions (See Appendix II) Data Analysis Results & Findings 6.3.1 6.3.11 57-64 52 53-56
03
Chapter 7 - Conclusion 7.0 Introduction 7.1 Indian market place and Policy & Regulation 7.2 7.3 Arguments for and against Policy Change Market sentiment and exploration of domestic retailer's thoughts
7.4 Recommendations (7.4.1 7.4.17 inclusive) 7.5 Further Research Appendix I Coding Key (open ended question interpretation) Appendix II Survey Questions Reference List Bibliography
04
Figure 1 Figure 2 Figure 3 Figure 4 Chart S1 Chart S2 Chart S3 Chart S4 Chart S5 Chart S6 Chart S7 Chart S8 Chart S9 Chart S10 Chart S11
20 29 30 51 53 53 54 54 54 55 55 55 56 56 56
05
Chapter 1 - Introduction
India is without doubt a 'growth' economy and many consider it an attractive country to invest in, particularly in its rapidly growing and changing retail market. However, Foreign Direct Investment (FDI) is restricted in the retail sector, and despite many years of debate, the regulations are still only changing very slowly and there are still lots of uncertainties. AT Kearney (2009), the well-established international management consultancy, in their Annual Global Retail Index, ranked India as No. 1 out of 30 of the top emerging markets, and has done for some years. Foreign Investors are watching India, ready for a piece of the action in the retail market, but there are still plenty of uncertainties, restrictions and potential socioeconomic risks.
3
This division of the retail sector, which has a very heavy weighting towards, unorganized, is just one of the issues contributing to the sensitive debate on FDI in India at the moment. What are the potential risks to the unorganized retail sector, and of course to the wider Indian economy? There are several groups who are strongly opposed to FDI in the Indian retail sector, but are their concerns unfounded? Equally, could FDI in retail be a disaster for the sector and the Indian economy? What reforms are necessary, if any, to protect the subcontinent's domestic retail sector and national interests?
India is a very diverse country and it is important to fully understand its nature. There is cultural and religious diversity like nowhere else in the world, a thriving democracy along with bureaucratic inconveniences and serious infrastructure deficiencies.
3.
06
1.1 Rationale
From
street/cart
retailers
working
on
widely debated and heated issue in India's economic and political environment. However, the Government is gradually taking steps to open the sector. (KPMG 2009)
5
pavements/roadsides and small family run businesses to international brands such as Rolex and Nike, the retail market in India is vibrant, colorful and highly fragmented.
We also wish to look at the issues which are Arvind Virmani (2005), the Director & Chief Executive of the Indian Council for Research on International Economic Relations (ICRIER) acknowledged when referring to FDI in India's retail sector that In spite of its importance, there has not been any extensive research in this area.
4
currently under discussion by the domestic players about FDI in India's retail sector, to establish an understanding of the reasoning behind current policy and the controversial viewpoints that keep India divided on FDI Retail policy. This research will provide recommendations for ways in which policy could be changed and improved to reduce the risks of FDI for India, and to benefit the domestic retailers and related industries as well as the economy as a whole. There is a desire to try to assist in facilitating the process of reform by providing a summary of the key issues and suggesting what regulatory reforms could be considered to help India resolve the issues that this report highlights. sector and the Indian economy? What reforms are necessary, if any, to protect the sub-continent's domestic retail sector and national interests?
It is this lack of independent research that specifically focuses on the retail sector that has inspired us to undertake this study so as to provide a balanced and independent review of current opinions/thoughts on FDI in Retail policy, and to assess the potential costs and benefits for the sector and India as a whole. As retailing in India is attracting the attention of many global players, the Indian Government is paying increased attention to the country's retail environment. FDI in retailing remains a
4. 5.
Mukherjee A & Patel, N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, quoted from foreword by A Virmani KPMG, 'Doing Business with India' Report, July 2009, page 85
07
The aim of this report is to provide an analysis of the arguments for and against FDI in India's retail sector, in order to provide recommendations on reforms to government policy that could reduce the risks of lifting restrictions on FDI in retail. The report's objectives are to investigate the Indian market place and review current policy and regulations with regards to foreign investors so as to gain an understanding of the current position on FDI, as well as an overview of the Indian system. This will be followed by an examination of the arguments both for and
against changing current policy and improving the regulatory environment. This will enable us to assess the key factors to be considered in making policy changes in the future. The next objective will then be to compare the thoughts and opinions of people working within or alongside India's domestic retail sector, via a survey, to interpret the domestic market sentiment towards foreign investment, and to explore thoughts on the issues faced by the sector. It will then be possible to consider what solutions could potentially resolve the issues and are supported by the majority of domestic retail players.
Chapter 1 will present the problem and reason behind the study (rationale). It will set out the aims and objectives of the report and give an outline of what the report will involve. Chapter 2 will detail the approach and methods of research used to collect data for the survey. It will also look at data sources and the limitations of the research & data. Chapter 3 will provide a historical perspective starting with an overview of FDI in India. Chapter 4 will explain the current policy framework with respect to FDI in India and chart the growth of organized retailing in India. Chapter 5 will present arguments from both sides those who are for and those who are against FDI in retail in India. Chapter 6 will analyze the factors influencing FDI to a greater level of detail with the aid of a survey conducted amongst the domestic retail and allied industries in India. The survey results will be analyzed and interpreted, with the findings presented. Chapter 7 will present conclusions and recommendations based on the overall findings of the study.
09
10
resources will be reviewed and each source was considered for its reliability, and potential to misconstrue the truth.
11
12
Opportunities, and India FDI Watch's report in association with the Association of Community Organizations for Reform Now (ACORN). All of these helped to provide a wide and balanced understanding of the key issues of this research.
2.3.2 Inconsistency of Data & Statistics available on India and FDI/ Retail
We noted that data available, particularly in relation to India's retail sector, was often inconsistent. However, for the purposes of this research being more of an exploratory nature, this did not have too much impact on the findings. Up-to-date data was also hard to source.
14
Retailing in India is slightly different than in developed markets, in that it is divided in to organized and unorganized retail. Organized retail could be described as when trading is taking place under a License or through people that are registered for sales tax or income tax. Unorganized retail is India's more traditional style of low-cost retailing, for example, the local kirana shops, owner-manned general stores, paan/beedi shops, convenience stores, hand carts and pavement vendors.
9
for
direct
Before beginning however, let us briefly define 'Foreign Direct Investment', and 'Retailing', as they are the key focus of the entire study. Foreign Direct Investment can be defined as the Acquisition or construction of physical capital by a firm from one (source) country in another (host) country.7
6. 7. 8. 9.
Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, August 2003, page 32 http://www-personal.umich.edu/~alandear/glossary/f.html http://en.wikipedia.org/wiki/retailin Mohan Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Alternatives, CPAS (2005)
15
3.0 Overview
Sathyaraj (2006) defines unorganised retailing more specifically as an outlet run locally by the owner or caretaker of a shop that lacks technical and accounting standardization. The supply chain and sourcing are also done locally to meet local needs.10
Radhika (2006) goes on to be more explicit about the differences, saying The major difference between organized and unorganized retailing lies in its number (chain) of store operations. An unorganized outlet may be just stand alone or can have [a] maximum of 2-3 outlets in a city, where as the organized outlets are "any retail chain (more than two outlets) which is professionally managed (even if its family run), has an accounting transparency and organized Supply Chain Management with centralized quality control and sourcing (certain parts can be locally made) can be termed as an "organized retailing" in India.11
India is a democratic Union of States and the Government operates through a parliamentary system. India has also been a member of the World Trade Organization (WTO) since 1995. The World Trade Organization is a place where member governments go, to try to sort out the trade problems they face with each other12 They are currently actively participating in the Doha Round which provides the mandate for negotiations on a range of subjects and other work. The negotiations include those on agriculture and services, which began in early 2000.13
Sathyaraj (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.html Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganized-retailing.htm World Trade Organisation - http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm World Trade Organisation - http://www.wto.org/english/tratop_e/dda_e/dda_e.htm
16
3.0 Overview
India is the most populous democracy in the world, and is the second most populated country at 1.172 billion people, based on United Nation statistics as at 1st July 2009.
14
estimated to make up the working age group (15-60). The large working-age population will no doubt translate to an attractive consumer base compared to other economies of the world, placing India as one of the main targets of the global retail players.15
It
has a largely young population with 35% of India's population being under 14 years of age and more than 60 per cent of the population is
economic activity, isolation and poorly managed fiscal policy. By half way through 1991, the Indian government was about to default on its foreign currency loans; and its foreign exchange reserves were so low that India only had enough dollars for two weeks' worth of imports. Foreign finance had all but closed the door on India. The political problems that this position caused were immense and it was only the recognition of the fiscal problems that finally persuaded the politicians and bureaucrats to release their hold on the economy. The crisis brought around something totally unexpected; it brought around change from a completely uncompromising centralized system of control to a market-orientated system, where regulation in some of the key sectors of the economy was to be enforced independent of the government.
In 1990-91 the current account deficit was 3.1% and inflation was 12%. Things began to get out of hand and the government went to foreign lenders pledging gold held at the Reserve Bank of India (India's central bank) for short term loans so as to help get through the financial crisis. In 1990, just as China was beginning to become a popular place for investors, India was in the middle of economic agony after many years of over-zealous government control over
17
Wikipedia - http://en.wikipedia.org/wiki/List_of_countries_by_population Census of India - http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 22 Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006, page 7
17
3.0 Overview
3.0.2 Post-Reform
Economic reform was now on the agenda after the financial disaster of 1991; and these reforms brought in three elements that India was never previously allowed to have: competition, entrepreneurship and the
18
successive government has supported the reform process and tried to hasten things. Due to the ever decreasing role of the government in the economy, resource allocation began to be influenced by the markets, and as a result, prices & availability across the economy became competitive rather than monopolistic. The post-reform performance of the economy had been good, and between 1994 and1997 Gross Domestic Product (GDP) grew in real terms by over 7%, which placed India among the best-performing countries in the world. However, a study of the economic reforms and liberalisation of the Indian economy by Kalirajan and Sankar (2003) acknowledges this but highlights that whilst this economic growth is encouraging, there is no doubt that given the low per capita income the need for an accelerated growth rate becomes urgent. The inflation rate was on average at a high of 10.7% per annum in the first five years of the reform period, but gradually came down to less than 5% in the last few years.
20
The government of the time, Congress (led by Narasimha Rao), revealed a new 'industrial policy' and the Finance Minister when sending a memorandum dated 27th August 1991 to the International Monetary Fund (IMF), said The thrust will be to increase the efficiency and international competitiveness of industrial production and to utilize foreign investment and technology to a much greater degree than in the past, to improve the performance and rationalize the scope of the public sector, and to reform and modernize the financial sector so that it can more efficiently serve the needs of the economy (Cited by Datt and Sundharam, 2001:231)
19
Between 1991 and 1999 as India moved away from a state controlled economy and slowly developed into a liberalized economy, each
Chase, Aaron, 'An Investor's Guide to the Next Economic Superpower', John Wiley & Sons pte, Ltd 2006, page 11 Sagarika Dutt, 'India in a Globalized World', Manchester University Press, 2006, page 111 Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalization of the Indian Economy', MPG Books Ltd, 2003, page 40
18
3.0 Overview
3.0.2 Post-Reform
The Indian National Congress with the support of the United Progressive Alliance have been in government since 2004 and were re-elected for a further term in May 2009. Although a more liberal approach to foreign investment in India has emerged in recent times, Kalirajan and Sankar (2003) argue that low overall productivity of investment, excessive fragmentation of markets, shortage of invertible funds, and the poor infrastructure may pose significant problems to sustained higher economic growth there is reason to believe that growth impulses from the first generation of reforms may have ebbed.
21
a year. In 2005 and 2006 growth accelerated to over 8% and in 2007 it looked like it might be well over 9%.
23
Farndon (2007) discusses how the development of the Indian economy has been quite unconventional. the emergence He highlights a 'normal' of cheap the & low-cost which pattern of economic development starting with manufacturing to provide a broad base of employment for masses, subsequently encourages urbanization, and as this continues to grow, he notes a shift whereby higher value products that are more sophisticated emerge. Finally, service and high
The Indian government has clearly recognized this, and in the Finance Minister's Budget Speech for 1999-2000, it was stressed that there was a need to debate and make decisions in relation to the next wave of reforms to be put in place to ensure India's economic strength and to make it fully capable of competing successfully in the evolving world order. (cited by Kalirajan and Sankar 2003)
22
tech industries start to emerge. Farndon (2007) highlights the issue of job insecurity in India, and how few people are employed in a recognized position. To explain, he uses the example that in 2006, India had a workforce of 470 million, but only 35 million of these (approx. 7%) were in formal, income tax paying positions and of this 35 million, the majority (21 million) are employed by the government. Essentially, a country with a
The liberalizations subsequently introduced by the Finance Minister (Manmohan Singh) have clearly been successful. Between 1991 and 2004, India's economy grew by an average of 6%
population of over a billion has hardly more income tax payers than the UK. All the rest some 435 million people work in what Indians call the 'unorganized sector'.
24
Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 41 Kaliappa Kalirajan and Ulaganathan Sankar, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003, page 4 Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 15-16 Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007, page 18
19
3.0 Overview
3.0.2 Post-Reform
India has shot straight into the third stage, with an economic boom that has relied almost entirely on high-tech and service industries. It does have a range of manufacturing industries, but they are remarkably small for a country of India's size and prosperity. There is no doubt that India's success in the IT world has transformed the country. A milestone was passed in 2003 when the software sector alone earned more money than the entire cost of the country's oil imports the factor that had brought the country to its financial knees in 1991. This meant that when the invasion of Iraq pushed oil prices up again, India was able to ride out the difficulties almost with equanimity
Economic Indicators between 2003 and 2008, and forecasts for 2009-10 are as below Figure 1
03-07 Average Real GDP (% Growth) Inflation (% year-end) Fiscal Balance (% of GDP) Exports (% Growth) Imports (% Growth) Current Account (% GDP) Reserves (mth of imports) External Debt (% GDP)
Source: EDC Economics25
2009 (forecast) 4.9 5.4 7.0 -8.0 -8.5 -4.0 7.7 14.6
2010 (forecast) 6.5 4.4 -4.8 10.6 12.1 -3.9 6.5 13.8
It is evident that 2009 is going to be a bad year in terms of Imports/Export Growth and GDP for India, but this is consistent with the global financial crisis that has been playing out during this research i.e. 2008-09. Looking at the data going back to 2003-07 however, GDP growth has been very healthy average at 8.9% per annum real growth, and despite a rise in inflation in 2008, this is now beginning to settle and is forecast to drop further.
25.
Peter Whelan, 'India Economics', EDC Economics, May 2009, page 1 - http://www.edc.ca/english/docs/gindia_e.pdf
20
3.0 Overview
government is now starting to take a closer look at liberalising its foreign investment policies. In 2006 the Government has promoted limited FDI in single-brand retailing and has considered opening up further in a phased system with emphasis on joint ventures with domestic players, evident with the highly controversial Wal-Mart joint venture with Bharti. Studying other countries such as China, where restrictions were initially imposed on the locations and formats in which foreign retailers could operate is also on the agenda of the Indian Government. The Indian media regularly discusses the issues of FDI in Retailing. The Hindu Business Line's opinion on the 'Great FDI in Indian Retail debate', is that organised retail as present accounts for a mere 2% per cent of the total market (2005) as against 20% in China and 40 % in Thailand and that there is a growing demand for modern retailing formats that offer a clean and hygienic environment to shop in.
26
The government has created a specific Board to deal with promotion of FDI in India and to be the sole agency to handle matters related to FDI. The 'Foreign Investment Promotion Board' (FIPB) as it is known, is chaired by the Secretary Industry (Department of Industrial Policy & Promotion or DIPP) within the office of the Prime Minister. Its key objectives are to promote FDI in India with investment promotion activities both domestically and internationally by facilitating investment in the country via international companies, NRIs (non-resident Indians) and other forms of foreign investors. The FIPB should review policy and puts appropriate institutional arrangements in place with transparent rules, guidelines, and procedures for investment promotion and approval.
This has created significant debate for allowing FDI regulations to open up, although little has changed for multi-brand retailing restrictions to date.
26. 27.
21
3.0 Overview
28. http://finance.indiamart.com/investment_in_india/fipb.html
22
a.
Automatic Approval route requires no prior approval, and filing of the investment details to the Reserve Bank of India (RBI) post-facto is literally for data records only. The automatic route is appropriate in any sector where there is no 'sector cap' i.e. sectors where 100% foreign ownership is allowed and some other specified sectors, for example <26% of an Insurance company.
b.
FIPB Approval route is for proposals where the shareholding is intended to be above a prescribed 'sector cap', or where the activity is one where FDI is currently not allowed, or where it is mandatory for the application to be approved by the FIPB (for example, sectors requiring an industrial licence.)
(Source: Investment Commission Website)
31
23
32.
IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in
24
The Press Notes do not appear to have instigated amendments to the Foreign Exchange Management Act (FEMA), yet were supposed to come in to effect from the date of announcement, so this is clearly going to cause confusion.
Press Note 2 (2009) introduces the concept of ownership and control33 for the first time. It allows foreign-invested Indian companies to create and invest in downstream companies or associated businesses without the original investment being counted. John Elliott (July 2009), South Asia correspondent for the Financial Times comments that this legitimises cascading investments which have been used to bring foreign capital into sectors such as telecoms that need heavy investment. FDI limits here are bypassed by progressively adding foreign investment through tiers of subsidiary joint ventures so that, though official limits are exceeded overall, the rules are not technically broken.34
The government in a number of statements has said that areas such as multi-brand retailing (i.e. where FDI is totally banned) will not be affected by these Press Note changes. It is however questionable whether there is anything to stop a Joint Venture forming under a wholesale cash and carry operation, and then setting up sub-companies in, for example multi-brand retailing, but present this as an Indian owned and controlled business.
32.
IBEF India, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007, Page 11 (www.ibef.in
25
Cash and carry is a particularly attractive option for foreign investors as complete ownership (100%) is allowed in this format. Several global players including Wal-Mart and Metro have entered the Indian market through this method.
Ministry of Commerce & Industry, 'Guidelines for calculation of total foreign investment', Press Note No. 2 (2009 series), Department of Industrial Policy & Promotion, February 2009, page 3 - http://siadipp.nic.in/policy/changes/pn2_2009.pdf Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html KPMG, Investing in India, 2008, page 32 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf
26
The India Brand Equity Foundation (IBEF) in 2007 has also said that The Government is expected to take a calibrated approach in land and rent reforms to improve the real estate regulatory environment and facilitate easy access to retail space for international investors. The Government is releasing large tracts of unused land for retail development in the Mumbai and National Capital Regions (NCRs). This is soon to be followed by other
of
36. 37.
Investing in India, KPMG, 2008, page 79 - http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf IBEF !India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 12 (www.ibef.in)
27
28
He states that organized retailing (versus the traditional Indian fare of stand-alone retail or department stores) has to be one of the most exciting growth industries in India today, with branded stores and malls thus far covering a miniscule 2% of the total market.
38
The Figure below shows how significant retail is to the Indian economy, contributing 39% of GDP, and yet organized retailing is still in an under-developed early stage at only 6% of total market (2005) when compared to other countries. It is clear from this data that India has a significantly lower percentage of organized retailing compared to other developing markets such as China with 20% of organized retail penetration, and Brazil with 75%. When compared to their respective retail sector contributions to GDP, India is higher at 39% than China and Brazil.
Retail is a significant contributor to indias GDP; however organized retail plays only a small role in that
Although retail is a significant contributor to Indias Economy ... Retail % Contribution to GDP (Yr 2005) 55 39 32 22 23 17 32 22 ... organized retailing is still at a very nascent stage in India Organized Retail Penetration (%)
85 75
20 6
USA
Brazil
South Africa
Vietnam China
India
USA
Brazil
South Africa
39
Vietnam China
India
38. 39.
Chaze, Aaron, India, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons (Asia) Pte Ltd, 2006, page 23 CII / AT Kearney, Retail In India: Getting Organized to Drive Growth', November 2006, page 5
29
Vertical
Organised Retail Penetration (%) 0.98 16.39 17.04 8.76 6.19 3.56 32.84 13.08
Food & Beverages Clothing & Textile Consumer Durables Home Dcor Jewellery & Watches Beauty Care Footwear Books, Music & Gifts
Source: IBEF India
40
The Indian consumer behavior of preferring proximity to retail formats is also particularly pronounced in the food & beverages sector, with food, grocery and allied products largely sourced from the local stores or hand cart vendors very close to home.
40.
IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 75-76 (www.ibef.in)
30
Modern/Organised retailing is growing at an aggressive pace in urban India, fueled by bourgeoning economic activity. Organized retail revenues are expected to increase from an estimated US$ 12.9 billion per annum in 200506 to more than US$ 43 billion by 2009-10. The sector is predicted to grow by 400 per cent, in value terms, by 2007-08. A large number of domestic and international players are setting up base and expanding their business with newer organized retail formats and intense competition driving innovation in formats.
42
Reliance Industries Limited (RIL), one of the largest domestic organized retailers in India, has set up a subsidiary of RIL called Reliance Retail Limited (RRL) to drive forward the groups growth in the organized retail sector, with its 'vision' to generate inclusive growth and prosperity for farmers, vendor partners, small shopkeepers and consumers.43
42. 43.
IBEF India, Retail Markets & Opportunities, A report by Ernst & Young for IBEF, 2007, Page 5 (www.ibef.in) RIL Online http://www.ril.com/html/business/business_retail.html
31
with
It seems fairly safe to assume that even without FDI, the organized retail sector in India is going to grow rapidly, and this is going to have some effect on the traditional unorganized retailers.
RIL Online http://www.ril.com/html/business/business_retail.html http://www.ril.com/html/business/business_retail.html Pankaj Gupta, Organised Retail in India, The Next Growth Frontier, Tata Strategic Management, June 2006, page 2, (http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf)
32
Sajjan Jindal said that providing industry status is the first basic step needed for reforming the Indian retailing sector.48 ASSOCHAM believe that the advantages of having an industry status are that it will allow a better focus on retailing development, fiscal incentives, and availability of organized financing and establishment of insurance norms.
49
retail sector can take place at a faster pace if there is a comprehensive legislation enacted. The legislation should be simple and have a futuristic approach. It should take into consideration the developments that are taking place in this arena worldwide. The legislation should provide broad parameters within which the retail sector should operate and dayto-day functioning and other modalities should be prescribed in the Rules. The underlying idea is to have minimum modifications in the Act in the future.
50
The Associated Chambers of Commerce and Industry of India (ASSOCHAM) are cited in a news-article at www.dare.co.in (an Indian platform for entrepreneurs and business owners), as supporting a proposal to give the retail sector formal 'industry status'. In a note by the Ministries of Commerce & Industry and Consumer Affairs, the Chamber President,
Kattuman, Paul A, recorded discussion - Judge Business School University of Cambridge, 23 September, 9.55am. http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm
33
Kattuman (2009), whilst citing Rama's view on consumption said the following:
Indians can be divided into a number of generations; those born before independence, the product of post-independence socialist India, and those who grew up after liberalization. Each has a different mind set and approach to consumption. As time passes, each generation will pass into history, and new generations will arise. consumption patterns. Their changing outlook has an influence on
51.
http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm
34
both large and small, felt that it would be good to boost the economy by facilitating higher FDI inflows. These arguments for improvements in technology and increases in FDI inflows to boost economic growth are supported by other proponents of FDI in retailing. Singh & Banga (2008) undertook a research paper on the emergence & prospects of FDI in India's retailing, and highlighted that despite the developments in the industry in recent years and the large contribution to India's economy, "retailing continues to be the least evolved industries and the growth of organised retailing in India has been much slower as compared to the rest of the world One important reason for this is that retailing is one of the few sectors where FDI is not allowed.
53
Tripathi (2009) feels that it is essential that FDI be allowed in the retail sector at 100% equity, because this is likely to encourage domestic investment into the sector too, and generate further employment opportunities. In addition to this, he commented that during the economic downturn that is currently being experienced, most of the retail industry players,
52. 53.
Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 http://www.retailing360.com/article/8/2009062420090624193427218739345f/Barring-foreign-players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 http://bimtech-retail.com/downloads/FDI_RetailDude.pdf
35
36
37
FDI would ease the capital constraint and foreign players would bring in best management practices that can be replicated by the domestic players. They would invest in supply chain, source products from India and provide a platform to domestic manufacturers to export their products in international markets through these retailers.
During the study by ICRIER (2005), groups of traders in the unorganized retail sector who had seen organized retailers locate in close proximity to them, were asked questions to find out if they had been adversely affected, and whether they had been displaced by the organized retailers' presence. According to the results, 65% of unorganized players felt that the growth of organized retailing has no major impact on their business. Another 25% said that they initially suffered some losses but had changed their business strategies to face the competition. The remaining 10% faced losses but have not changed their business practices. None of the unorganized players had to close down their operations.
54
The main findings of the ICRIER study revealed that FDI in retailing led to: 1. Increased speed of development in modern formats 2. Improved productivity and efficiency of the retail sector 3. Enhanced sourcing 4. Improved quality of employment no negative impact on employment if the economy is growing. 5. Encouraged investment in supply chain 6. Led to integration of suppliers, logistic service and retailers reduction in the number of intermediaries 7. Linked local suppliers, farmers, manufactures to global markets 8. Low cost global retailers likely to lower prices 9. Consumers are assured of product quality, better service & shopping experience.
54.
Mukherjee & Patel, FDI in Retail Sector India, Academic Foundation in association with ICRIER, 2005, page 120
38
Although some of the above arguments supports FDI being introduced more formally to increase transparency to the regulations, the debate becomes even more complex and relevant when you consider the recent changes by the Government in the series of Press Notes released in February 2009 (as discussed in Chapter 3.1 Policy & Regulatory Environment). The Press Notes from Elliott's (2009) point of view "legitimise cascading investments.
57
It is
important that regulations are made clear so that the possibility of foreign retailers using these grey areas or loop holes to set up cascading businesses dressed up as Indian controlled and owned companies is eliminated. In our opinion this defeats the whole object of having FDI restrictions in place in the retail sector, and makes the entry of foreign retailers harder to control and monitor. In respect of single-brand retailing which is allowed up to 51% equity, Khatore and Parekh (2009) point out that "several major foreign single-brand retailers have already established their presence in India through the permissible franchise route. allowing 100% Thus, the policy of not investment appears
desynchronised, as outflow of funds from India in the form of franchise payments is permitted but inflow
58
of
foreign
investments
is
restricted.
55. 56. 57. 58.
Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th June 2009, page 1 http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm
39
monopoly rents will begin to accrue and bad habits will get entrenched and it will then be more difficult to open the sector. clear head start.
59
Domestic
The second argument is also not substantiated, as Kumar argues that "liberalization of retail raises overall economic welfare and does not result in loss of employment. Some restructuring will take place but local markets will not close down. Both can coexist as they fulfil different needs and serve different clientele.
60
Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-in-retail/articleshow/1882764.cms
40
such as the 'mom and pop' stores, FDI would still bring significant benefits to the Indian consumer and give them value for money. "The standard of living of the people will increase and they will have a better lifestyle which will result in the development of the economy as a whole.
63
When looking at FDI from a general point of view, removed from the constraints of the retail sector focus of this report, it could be argued that FDI, if 'effective', will develop human capital. Subbarao (2008) discusses this in a research paper on FDI and Human Capital Development, saying that "effective FDI indulges in enhancement of human capital of the country.
64
said
Chairman of CB Richard Ellis's South Asia office. Mehta (2007) of the Birla Institute of Management Technology in giving an overview of the Indian retail market implied that regardless of the risks to traditional retailers
means investment that encourages the development of a country that fosters the development of each resident of the country.
Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Infusion into Retail', 12th October 2009 http://www.indianrealtynews.com/retail-market/relax-norms-on-foreign-direct-investment-to-ease-fresh-infusion-into-retail.html Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology, 2007, page 2 http://bimtech-retail.com/article2.html Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 2
41
Therefore,
it is likely that foreign retail investors will look to invest in human capital development as well as provide additional tax streams. With this said, Subbarao acknowledges that different countries have had different experiences with
India's retail sector is already undergoing a change propelled by evolving consumer demand and lifestyles, urban chaos and shortage of retail space, integration of markets, a need for revamping logistics, and above all, global competition. FDI may hasten this change, and even benefit SMEs. It would be better if FDI is allowed in phases, giving time for policy adjustments, and with appropriate riders on procurement to ensure that small producers gain from it. The debate must shift into the realm of 'how' instead of 'why'.
65.
Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 7
42
companies in India.67 Other studies by N. Kumar (1990), S Kumar (1996), Myneni (2000) and Debroy (1996) were all identified by Nayak (2008) as showing positive benefits to the domestic companies and country as a whole. To the contrary, a number of highly compelling studies show that FDI has not been beneficial to host countries. Nair-Reichert and Weinhold (2001) studied the impact of FDI on over 24 countries in different stages of development and found that FDI had a heterogeneous impact. Country specific analyses of host
68
countries show that FDI has not helped them in meeting their national objectives. Nayak (2008) Chakraborty and Basu (2002) had concluded from research that the Indian Government's trade liberalization policy had initially made a positive impact, but as a whole had tended to cause labour displacement. In fact, Nayak (2002, 2004, 2005) had concluded FDI on the whole in India has neither been effective for India nor for the foreign companies in India. (Cited by Nayak (2008)69 (Cited by
Nayak (2008) when discussing the literature that focused on India, pointed out that there were apparent positive and negative effects from FDI. For example, Johri (1983), by studying the business strategies of foreign multinational companies in the drug and pharmaceutical industry, showed that domestic companies benefited greatly by the investments of foreign pharmaceutical
Amar K.J.R. Nayak, 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008, page 13 Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13 Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 13 Amar K.J.R. Nayak, Multinationals in India, FDI and Complementation Strategy in a Developing Country, Palgrave Macmillan, 2008, page 15
43
Mohan Guruswamy, Chairman of CPAS in New Delhi was the former Advisor to the Finance Minister, and a Harvard graduate. Along with several colleagues (K Sharma, J P Mohanty and Thomas J Korah) he produced a document titled 'FDI in India's Retail Sector, More Bad than Good?' Guruswamy et al (2003) highlighted that unorganised retailing accounted for approximately 98% (in 2003) of total trade, with organised retailing only having a share of 2% of the market. The size of the retail market is very hard to gauge, but estimates have placed it at around Rs 4,00,000 crores (US$ 86,021.50 million) which was forecast at the time to double by 2005. They acknowledged that domestic retail businesses that were 'corporate' owned, were only a small amount of the total market, but were growing at a rate of 40%. Federation of Indian Chambers of Commerce and Industry (FICCI) in 2003 estimated total retail business to be 44% of GDP, and food sales made up 63% of total retail sales. With food retail trade being a significantly large segment of India's GDP, and because of its huge employment potential, Guruswamy felt it deserved special attention.
Abrol is not alone in this view. There have been several parties who have spoken out strongly against FDI in Retail. The organisation 'India FDI Watch' argues why India should be kept Independent, and the Center for Policy Alternatives Society (CPAS), a privately funded think tank focused on the study and review of public policy in India, have produced a series of reports on the problems with FDI in Retail. The first in 2003, then in 2006, and a third in 2007. All have compelling arguments that require further consideration.
70.
Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1
44
Guruswamy et al (2003) talked of retail as a 'Forced Employment' sector in India. They argued that one of the main reasons behind the growth of retail and its fragmented nature was that
Retailing was probably the primary form of disguised unemployment/underemployment in the country. Given the already over-crowded agriculture sector, and the stagnating manufacturing sector, and the hard nature and relatively low wages of jobs in both, many millions [of] Indians are virtually forced into the services sector. Here, given the lack of opportunities, it is almost a natural decision for an individual to set up a small shop or store and thus, a retailer is born, seemingly out of circumstance rather than choice.
This would explain why India is so highly fragmented with estimates at the time of the above report suggesting in the region of 11 million outlets with only 4% of them being larger than 500 square feet in size. But unemployment is high and many of the unemployed people turn to very informal retailing to try and make some kind of living, with limited alternative employment opportunities.
45
It was calculated that on the basis that India had 35 towns with over 1 million people in each, and if Wal-mart opened an average store in each city and they performed as well as an average Wal-mart store employing just over 10,000 employees only, then by extrapolating the turnover and no. of employees alongside the average trend, it would be the equivalent of 432,000 people being displaced. The report expanded on this theory further arguing that if FDI retailers were to acquire say 20% of retail trade, this would equate to Rs. 800 billion of turnover, which would lead to the employment of just 43,540 people, but would displace approximately 8 million people employed in the unorganised retail sector.
71. 72.
Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 1 http://rupe-india.org/43/retail.html Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007, page 2 http://rupe-india.org/43/retail.html
46
47
The research study undertaken by ICRIER (2005) revealed that those against FDI in retail argue that the entry of large multi-national retailers could upset India's import balance, as a number of these prefer to source globally (for example, from China) and may prefer this to sourcing from India. This view is supported by CPAS. In a recent study, CPAS's Chairman Guruswamy, Sharma & Jos (2007) suggest the potential problem of a 'China Pipeline'.
big
supermarkets
and
hypermarkets.
It argues that the efficiency of the large global retailers is due to their ability to procure goods globally from the cheapest possible source. They are able to force prices down purely by economies of scale, ie. purchasing such a large volume of any given item. China has "mastered the complexities of the procurement-logistics supply chain and do provide huge standardised volumes of quality household products at a low price within strict time schedules. Wal-Mart procures 18 billion worth of Goods from China giving it a ready pipeline through which cheaper goods can flow into the Indian economic hinterland.
73. Guruswamy, K Sharma, JP Mohanty, TJ Korah, FDI in India's Retail Sector; More Bad than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf 74. Guruswamy, K Sharma, JP Mohanty, TJ Korah, FDI in India's Retail Sector; More Bad than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 16-19 http://cpasindia.org/reports/10-FDI-Retail-more-bad.pdf
48
"after making initial investment on basic infrastructure, the multinational retailers may remit the profits earned in India to their own country.76 India FDI Watch is a national coalition of labor unions, trade associations, environmentalists, NGOs and academics that have formed to block attempts by Prime Minister Singh's government to allow foreign direct investment in India's retail markets (www.indiafdiwatch.org). They have produced several reports that argue that India should say no to FDI in retail unless the foreign retailers "make satisfactory guarantees that would protect communities; insure the stability of existing small businesses and traders; guarantee fair wages and working conditions for their own employees and source employees along with union protection and agreements; and insure that a significant percentage of sourcing derives from the Indian market.
77
http://www.newrules.org/retail/news/walmart-charged-predatory-pricing Mukherjee A, Patel N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, page 118 http://indiafdiwatch.org/index.php?id=80
49
interest79
would provide that an investor would not be subject to the introduction of new barriers to investment in a host country, would be provided with post investment protection, protection against all material and intellectual property, effective protection t hr o ugh against direct expropriation as well as against indirect expropriation d i sc r i mi na t o r y treatment, a mechanism for compensation in the case of expropriation, a mechanism for the settlement of disputes, and the right to determine its own ownership structure and provisions for legal, regulatory
80
and
administrative transparency. The same campaign report argued that Trans National Companies (TNCs) are trying to bring in changes through the World Trade Organisation's GATS (General Agreement on Trade in Services) to "safeguard their vested
This protection could be detrimental if India decides to open FDI in retail, and then find that it is not successful. It will be too late for the government to go back on any decision, as the GATS agreement may prevent them.
India FDI Watch 'Keep India Independent!', 2009, Page 23 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf India FDI Watch 'Keep India Independent!', 2009,Page 25 - http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf
50
headhunting institutions.
firms,
and
educational
Out of the 70,000 participants in the survey, there were 243 respondents. Figure 4 below shows the profile of the survey sample used to distribute the survey questionnaire, broken down by Industry. 91% of the chosen sample is employed in the Indian retail sector, and the remaining 9% are in inter-related industries and sub-sectors.
Retail FMCG / Apparel / Manufacturing Media Real Estate Information Technology Other
91% Retail
A survey sample of this size is more than is required for the purposes of obtaining a representative view of the domestic Indian retail sector. It covers not only participants who are within the retail trade directly, but also others within retail-related sectors (as detailed above) and therefore should provide the researcher with a balanced view from various viewpoints.
51
6.1 Questions
Please see Appendix II for Survey Questions.
52
180 160
140
120
100
80
60 48 40
20 6 0 Yes No No response
Chart S1
Should the Indian Government open up FDI restrictions in the Retail Sector ?
(Question 2)
No. of people 250
203 200
150
100
50
38
2 0 Yes No No response
Chart S2
53
Coded Qualitative Analysis of Reasons why FDI should or should not be opened up in India
(Question 3 - please see Coding Key)
Coded Response X K J I H G F E D C B A 0 1 5 10 20 30 40 50 60 70 8 20 26 25 25 11 11 15 60 36
No. of respondents
Chart S3
Are you happy with the current FDI Retail policy as it is?
(Question 4)
No. of people 250
200
199
150
100
50
41
3 0 Yes No No response
Chart S4
Other Restrictions 8%
No Response 4% An Exclusion Of Specific Products For The Domestic Retailer 3% Equity Limits 4% A Minimum Investment Amount Requirement 8%
Only Allow Certain Retail Formats (Eg: Malls) 12% Certain Products Must Be Manufactured/Sourced In India By The Foreign Investor 31%
Chart S5
54
160
140
120
100
80
70
60
40
20 3 0 Yes No No response
Chart S6
A 7%
B 3%
C 2%
D 1%
E 1% F 1% H 3% I 1%
G 3%
K 0.3% L 1%
W 1%
Chart S7
Will lifting restrictions on FDI in retailing allow more investment, technical skills and consumer choice?
(Question 8)
No. of people 250 223
200
150
100
50
15 5 0 Yes No No response
Chart S8
55
A 5%
B 6%
X 40%
C 11%
D 28% F 8%
E 2%
Chart S9
Coded Analysis of the no. of people who believe the argument that "foreign retailers will not 'own a stake' and therefore will make little investment"
No. of people 200 182 180 160 140 120 100 80 60 40 25 20 0 FALSE (A) TRUE (B) Answer NO RESPONSE (X) 36
Chart S10
How many years should FDI policy be 'phased in' to allow domes industry & market to adjust? tic
(Question 11)
No of people 50 46 45 40 35 30 25 20 17 15 10 5 0 0 1 2 3 Years 4 5-6 7-10 10+ 9 39 43 38
27
Chart S11
56
A very small 'no response' rate was observed from this question at 0.9%. These results show a strong amount of support for the concept of opening up FDI, although the data analysis also highlights that there is still a small but significant (15.6%) group of people within the domestic industry who oppose the idea of opening up FDI.
57
Therefore, 70% of respondents believe that one or more of the above reasons are justification for opening up FDI in the retail sector. This reflects a strong sentiment towards FDI, and is a sign that the domestic market feels positively about the widening of FDI policy and the benefits it could bring to the countries industry and wider economy.
A small number of respondents, 6.2%, made specific mention of the argument of allowing 'free market efficiency' to reign, and for there to be less 'protectionism' within the retail sector. 4.5% were against the idea of opening up FDI yet, because they felt that the domestic market was not developed enough yet. However, they also felt that in the future once the 'organized' retail had grown and reforms had taken place, it would be of benefit to the country to allow FDI in the sector. A further 4.5% of respondents felt strongly that FDI would be of no benefit and should not be allowed. The researcher anticipated the number of respondents in this group to be higher, given that 15.6% of respondents said 'no' to opening up FDI in Question 2 (see Chart S2). However, these figures could differentiate due to the fact that a 15.2% of participants did not respond or make any comments on Question 3.
58
Only 1.2% of people did not respond to this question which is an acceptable level.
The data from question 5 reveals a strong support for conditions that involve sourcing Indian products, and thereby growing the manufacturing/agricultural industries and India's GDP. Branded products and format restrictions were also supported by a number of respondents, but more surprising was the 13% of people who supported 'no conditions' at all.
59
60
7% answered 'No', and there was a 2% 'no response' rate on this question. By comparing these results to Chart S2 (Question 2) it reveals that although 83.5% of people believed FDI should be opened up, we can see that a higher proportion of people (91%) believe it would bring increased investment, skills & consumer choice. This means that a number of respondents whilst having said 'no' they do not believe FDI should be opened up, clearly acknowledge that it would bring benefits to the economy/industry (in terms of investment & skills) and to society (in consumer choice).
61
62
8% of respondents to question 10 argued that providing skills and comprehensive training to existing 'unorganized' retailers would allow them to upgrade their businesses and be innovative so as to continue employment in the retail sector without being displaced. A further 6% thought that foreign retailers should be asked to invest in retail related facilities first and foremost, to offer further employment in back-end services, manufacturing and farming, to compensate for the labor displacement. 5% believed of people believed the Government should be responsible for providing and controlling equal employment opportunities in both the growing 'organized' sector, and in back-end services. These respondents had a tendency to believe that labor laws were in need of upgrading to support .
63
A further 19% thought 5-6 years would be more appropriate, 7% believed 7-10 years, and a small minority at 3% thought that the phasing should be over a period greater than 10 years.
64
Chapter 7 -Conclusion
7.0 Introduction
So as to draw conclusions from this study, it is appropriate to review the objectives that were set out earlier in Chapter 1:1) 2) 3) 4) To investigate the Indian retail market place and current policy & regulations with regards to Examine the arguments for and against changing current policy and improving the regulatory Compare the opinions of the Indian domestic retail sector so as to interpret market sentiment Consider what solutions could potentially resolve the issues and are supported by the
foreign investors. environment towards foreign investment, and to explore thoughts on the issues faced by the sector. majority of the domestic retail players.
Economic growth in India is good (with a 5 year average of over 8% real growth), and the retail industry contributes approximately 40% of this GDP, and yet still has a very under developed 'organized sector', and therefore offers exciting growth potential.
The Food & Beverages vertical has huge potential for the organised retail sector as to date less than 1% of this vertical has been penetrated by organized retailers. Clothing & Textiles also holds a fairly significant share of the retail markets revenue. We believe that these are the two most likely target sectors for foreign investors.
65
Chapter 7 -Conclusion
66
Chapter 7 -Conclusion
7.2 Arguments for & against changing policy and improving the regulatory environment.
Those in favour of FDI in Retail argue the following reasons:1. 2. 3. 4. 5. 6. The technical edge offered by foreign investors is crucial to the survival of domestic retailers, particularly in the current downturn. Knowledge & skills would be transferred. Allowing 100% FDI will encourage domestic investment in the sector Economic boost with increased FDI inflows Improve the standard of living of the country as a whole (enhanced Human Capital) Improve productivity and efficiency in management turn will lower prices for consumers and improve the infrastructure of the country. 8. 9. Increased FDI in Retail will ensure quality products and customer services Will promote links between domestic/local suppliers, manufacturers and agricultural traders with the global market 10. Sourcing / Exports from India would be enhanced. 11. Standards (quality, health & safety etc) & best practices would improve 12. Domestic players would develop new strategies to improve operations to counteract any competition from foreign players 13. Foreign retailers would encourage employment in back-end services 14. Improvements in quality of employment 15. Reduce the number of intermediaries 16. Joint Ventures would help to ease the capital constraints of domestic companies 17. Most acknowledged that phasing-in should be considered and that some restrictions would be required on equity limits, certain products, and certain 'zones' 18. Research suggests that 'unorganised' retailers have not been adversely affected by the location and growth of 'organised' retailers nearby. Those that were affected, tended to adopt new strategies to face competition 19. Improve transparency and prevent 'back-door' entry and 'loop holes'. 20. Not logical to have 51% restriction on single brand retailing when so many foreign single brand retailers have already entered through the franchise route. 21. Retail Growth forecasts may not be achievable without FDI stimulus 22. Additional taxes will be raised for the benefit of India 23. Contribution to the long-term development of the country (ie. investment in education, infrastructure etc)
67
7. Foreign 'low-cost' retailers will set-up/adopt integrated supply chain management, which in
Chapter 7 -Conclusion
7.2 Arguments for & against changing policy and improving the regulatory environment.
Those against the opening up of FDI in the retail sector argue the following reasons:1. FDI has a heterogeneous effect on countries, ie. the results vary. Some studies have shown success of FDI in India, others have shown initial positive results but with a tendency on the whole towards causing labour displacement. 2. The fast growth of domestic 'organised' retailing (40% per annum) would result in efficiency improvements and increased retail sales which would in turn create employment and economic growth, raising the question of whether FDI was required in this sector at all. 3. Retail as a 'Forced Employment' the sector is one of the primary forms of 'disguised employment / under employment' which acts as a shock absorber for the present social system, soaking up unemployed people who have little alternative but to try and make some kind of living. 4. 5. 6. 7. 8. 9. Those displaced by FDI may not show up as a 'visible' increase in unemployment. Foreign retailers may use predatory strategies to force out smaller competition Various issues such as Bank Finance, conditions, safeguards, and improvements to Potential to upset the import balance, with the creation of a 'China Pipeline'. After minimal initial investment in basic infrastructure, Foreign investors may re-patriate profits back home. Foreign retailers should not be allowed until they make satisfactory guarantees to protect communities, support small businesses and traders, guarantee fair wages and working conditions, and ensure minimum sourcing from India. 10. Hire and Fire' Policy in labour law would be more conducive to an FDI environment, but would destroy the safeguards that are in place to protect the labour force. 11. Amendments to GATS Agreements could mean that any policy changes on FDI will be irreversible as investments will be protected and have immunity to new barriers to trade.
manufacturing sector are required to be addressed before FDI in Retail should be considered.
68
Chapter 7 -Conclusion
Interestingly, it was found that 70% of people also felt that reforms should be made to support domestic retailers in the face of competition from FDI, whilst 28% felt that domestic retailers did not need reforms to support them.
The data collated from the survey highlighted a number of recommended reforms to support domestic retailers.
The reforms that were most commonly supported were, subsidies in the form of low-rate loans, provision of equal access to organized wholesale & supply chain infrastructure and tax relief for domestic retailers.
However, 12% of respondents felt that no support was necessary and that domestic retailers would support themselves. It was also suggested that bureaucracy and formalities be reduced as this was currently hindering domestic/foreign retailers and was restricting the growth of the sector.
69
Chapter 7 -Conclusion
We re-iterate that other countries have experienced varying results, and therefore there is no way of knowing whether labour displacement will be non-existent, mild or severe in Indian retail. One would imply that there is likely to be some displacement, but a well thought out plan and policy & regulatory system will minimize the risks here, and perhaps prevent it from happening all together. Survey respondents suggested the following ways in which labour displacement might be dealt with: Provide skills and comprehensive training to 'unorganised' retailers to allow them to evolve/innovate and remain employed in retail trade. Foreign retailers should invest in back-end services, manufacturing and farming initially to compensate for the labour displacement. Government should provide and control equal employment opportunities both in the organised' sector and in back-end services. Compensation, rights and benefits should be provided to those displaced.
Nearly 50% of people believe a 1-4 year phasing in period would allow domestic players to successfully adjust to foreign players, whilst 16% thought a phased system would not allow domestic retailers to adjust anyway. 19% believed a 5-6 year phasing in period would be more successful, while only 10% believed 7+ years was necessary.
70
7.4 Recommendations
Based on the research carried out, we propose several recommendations for areas that have been highlighted as concerning for FDI in retail. These recommendations are by no means an exhaustive list but should serve as a framework for consideration of the various ways forward with policy change:-
7.4.1Recommendation 1
The government should revoke the recent Press Notes that relate to permitting cascading subcompanies, as these are only serving to provide a loop-hole for back-door entry by foreign retailers and are not promoting transparency within the policy.
7.4.2 Recommendation 2
We recommend that the retail sector is granted 'industry status' as soon as possible so that a legislative framework can be put in place for the control and management of the sector and its day to day operation.
7.4.3 Recommendation 3
Begin recording detailed statistical data of the sector, both foreign, and domestic organised and unorganised so that the impact of FDI when introduced can be closely monitored and policy finetuned accordingly.
7.4.4 Recommendation 4
Labour Laws need to be reviewed to be more in line with the requirements of retail sector employment.
7.4.5 Recommendation 5
Investment should be made by the government to improve the efficiency of the manufacturing sector so that this sector can grow and provide more employment opportunities going forward.
7.4.6 Recommendation 6
City Planning needs to be addressed so that development is in such a way that it protects the traditional trader areas and does not clutter the already densely populated city centers.
71
7.4 Recommendations
7.4.7 Recommendation 7
Real Estate Regulations need to be considered for reform so as to facilitate access to land and property for use by the retail sector, and to provide equal access to space for both foreign and domestic players.
7.4.8 Recommendation 8
Certain sensitive products should be restricted from foreign retailing, so as to protect the traditional craftsmen and unorganised traders. The products to be restricted needs to be given thought and researched before any decisions are made.
7.4.9 Recommendation 9
The government should impose local employment quotas on foreign retailers, firstly to reduce the effects of any potential labour displacement, and secondly to encourage foreign retailers to provide training, skills and development to local people who without it would not be able to transfer to the 'organised' retail sector or back-end services.
7.4.10 Recommendation 10
Rules on re-patriation of foreign profits should be revised, to discourage (and restrict) 100% of profits from leaving India. Conditions imposed on requiring foreign retailers to invest a minimum amount in infrastructure and supply chain capabilities would be beneficial.
7.4.11 Recommendation 11
Consider providing Tax relief and/or subsidy by way of low rate loans to domestic retailers to provide support.
7.4.12 Recommendation 12
Implement a 'phased introduction' of FDI to the retail sector, say over 2-4 years, so as to provide gradual adjustment for the domestic players and to allow fine-tuning and adjustment of policy if issues arise.
72
7.4 Recommendations
7.4.13 Recommendation 13
The government should reform price control policies to ensure that foreign retailers cannot sell below a minimum price, rather than the current Maximum Retail Price (MRP).
7.4.14 Recommendation 14
Conditions of minimum sourcing from domestic agricultural and manufacturing sectors should be imposed, so as to prevent the creation of a 'China Pipeline'.
7.4.15 Recommendation 15
Bureaucracy and formalities should be reduced by updating related legislation, for example, reducing the number of licences required by businesses to open a store. This should assist the domestic players in expanding and will help to streamline the efficiency of the sector.
7.4.16 Recommendation 16
Geographical restrictions for foreign investors need to be considered so as to reduce the impact, or prevent the fast expansion of retailers in to rural areas. Special Economic Zones need to be assessed with further research, to review their advantages and disadvantages to both India as a country, and to the foreign players.
7.4.17 Recommendation 17
Other related regulations such as copyright law, need to be updated and brought in to line with the needs of the future Indian retail sector.
73
There are many areas that have been highlighted as requiring further research during this study. Each individual argument for and against almost requires an entire research project to itself so as to delve further into the complexities of each specific scenario, for example, Special Economic Zones which have not been possible to cover in any detail within this study could provide an interesting area of research so as to establish the advantages and disadvantages of operating under a SEZ system. Consumerism is an area that is worthy of further research so as to ascertain whether there is any correlation between changes in consumer dynamics and the emergence of organized retail in specific 'verticals'. The GATS Agreements and World Trade Organisation Doha Round would also be another interesting avenue of research. With the Doha Rounds to conclude in 2010, it would be interesting to investigate how this might impact foreign investment in the retail sector in India.
74
Appendix I
Question 7
A. Invest in and provide for equal access to an organised wholesale & supply chain infrastructure B. Protect Certain Products/formats from FDI and consider keeping 'sector caps' C. Provide 'knowledge' and skills to existing domestic retailers to innovate and modernise D. Remove intermediary middlemen in the supply chain E. Price control regulations F. Copyright/trademark regulations G. Real Estate Regulations (including allocation of land / city planning legal framework) H. Bureaucracy - reduce admin and formalities (inc. exports, legal, business formation) I. Restrict FDI profits allowed to leave India J. Provide subsidy to domestic retailers (including low-rate loans/bank finance) K. Provide Platform for domestic retailer marketing L. Implement procedures for data collection/monitoring of global/Indian retail & FDI data
75
Appendix I
Question 7
M. Compulsory local sourcing for FDI (including policy to protect manufacturers/farmers) N. Regulation/Checking to ensure international standards within retail sector O. Restrictions geographically on FDI (e.g.: Special Economic Zones) P. Tax relief / incentives for domestic retailers Q. Implement Educational Retail Training initiatives R. Require a percentage of Foreigner Investment to go in to Indian development projects S. Friendlier Labour Laws and Goods & Services Tax (GST) introduction across India T. Provide retail business with lawful 'industry status' U. Any reforms necessary to protect the domestic retailers V. Systematic study of each sector required to address reforms required W. Ensure a 'phased' introduction of FDI X. No Response / Uninterpretable / Misinterpreted the question Y. No reforms necessary. Free Market / Healthy Competition preferred
Question 9
A. Believed the statement to be 'false' and disagreed. Were able to counter the argument with solutions to prevent displacement from happening B. Believed the statement to be 'true' and agreed. Offered no counter argument, or were unable to provide solutions to prevent displacement happening X. No Response / Uninterpretable / Misinterpreted the question
Question 10
A. Government should provide and control equal employment opportunities in organised and backend services, and upgrade labour laws to support this. B. Foreign investors should be asked to invest in retail related facilities first, to offer further employment in, for example, manufacturing and farming industries. Includes requiring a fixed quota of employment of Indians by the foreign investor C. No - there are no solutions to the labour displacement that FDI will cause.
76
Appendix I
Question 10
D. No - Don't believe labour displacement will happen (or will be very limited). E. Provide compensation / rights / benefits to those who are displaced. Includes reform of remuneration policy F. Provide skills training to allow existing retailers to upgrade/innovate so as to continue employment in the retail sector X. No response / Uninterpretable response / Misinterpreted the question
77
Appendix II
Survey Questions
1. Are you aware of the current FDI in Retail Regulation & Policy? a. Yes b. No 2. Do you think the Indian Government should open up Foreign Direct Investment (FDI) restrictions in the Retail Sector? a. Yes b. No 3. Please give reasons for your answer to Question 2. 4. Are you happy with the current FDI Retail policy as it is? a. Yes b. No 5. If FDI policy is to open up in the future, do you think any of the following conditions should be imposed on foreign retailers? a. None b. Equity limits c. Only allow FDI in specific cities/areas d. A minimum investment amount requirement e. An exclusion of specific products for the domestic retailer f. Certain products must be manufactured/sourced in India by the foreign investor g. Only allow certain retail formats (e.g. Malls) h. Only allow branded products I. Other restrictions? (please specify) 6. Do you think that government reforms need to be made to support domestic retailers so that they can face the foreign investment competition? a. Yes b. No 7. Following Question 6, what reforms do you think should / should not be made?
78
Appendix II Appendix
Survey Questions
8. Do you believe that lifting restrictions on FDI in retailing will allow more investment, technical skills and consumer choice? a. Yes b. No 9. It is argued by some who are against FDI, that foreign retailers will not 'own a stake' in India, and therefore will make little investment, but reap the profits all the same. How can you counter this argument? 10. Can you think of any solutions to the potential problems of labour displacement in the unorganised retail sector if FDI regulations are opened up? 11. Over how many years do you think FDI policy could be phased in to allow domestic industries/markets to adjust successfully? Please select '0' if you don't think phasing in would allow successful adjustment for domestic players. a. 0 b. 1 c. 2 d. 3 e. 4 f. 5-6 g. 7-10 h. 10+
79
References Appendix
AT Kearney, 2009 Global Retail Development Index http://www.atkearney.com/images/global/pdf/2009_Global_Retail_Development_Index.pdf Chaze, Aaron, An Investor's Guide to the Next Economic Superpower, John Wiley & Sons pte, Ltd 2006 CII / AT Kearney, Retail In India: Getting Organized to Drive Growth', November 2006 Dey, Dipankur, 'FDI in India's Retail Trade: Some Additional Issues', Aspects of India's economy No. 43, July 2007 http://rupe-india.org/43/retail.html Elliott, John 'India's shaky FDI rules need clarification', FT.com, 9th July 2009 http://www.ft.com/cms/s/0/c92b432a-6c6a-11de-a6e6-00144feabdc0.html Farndon, John, 'India Booms, The Breathtaking Development and Influence of Modern India', Virgin Books Ltd, 2007 Financial Express, Is FDI in Retail a Death Knell for SMEs', 27th May 2005 http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1 Gupta, Pankaj, Organised Retail in India, The Next Growth Frontier, Tata Strategic Management, June 2006, page 2, (http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf) Guruswamy et al, FDI in India's Retail Sector, Centre for Policy Alternatives, CPAS (2005) Guruswamy, Sharma, Mohanty & Korah, FDI in India's Retail Sector; More Bad than Good? Centre for Policy Alternatives (CPAS), New Delhi, 2003, page 7 - http://cpasindia.org/reports/10-FDIRetail-more-bad.pdf Guruswamy M, Sharma K, Jos, Maria, 'Implications of Wal Mart's Backdoor Entry' Centre for Policy Alternatives, New Delhi, 2007, page 1 http://indiafdiwatch.org/fileadmin/India_site/Implications-backdoor-entry_of_Wal-Mart.pdf IBEF !ndia, 'Retail Markets & Opportunities', A report by Ernst & Young for IBEF, 2007 (www.ibef.in) India FDI Watch 'Keep India Independent!', 2009, Page 23 http://indiafdiwatch.org/fileadmin/India_site/FDI_in_retail.pdf Indian Realty News, ' Relax Norms on Foreign Direct Investment to Ease Fresh Infusion into Retail', 12th October 2009 - http://www.indianrealtynews.com/retail-market/relax-norms-onforeign-direct-investment-to-ease-fresh-infusion-into-retail.html Kalirajan, Kaliappa and Sankar, Ulaganathan, 'Economic Reform and the Liberalisation of the Indian Economy', MPG Books Ltd, 2003 Kaplowitz, MD et al, Oxford Journals, Public Opinion website, 2004 http://poq.oxfordjournals.org/cgi/content/full/68/1/94 Kattuman, Paul A, recorded open ended email discussion - Judge Business School University of Cambridge, 23 September, 9.55am. (available upon request)
80
References Appendix
Khatore, P & Parekh P, 'Wholesale FDI in Retail', The Hindu Business Line, 4th June 2009, http://www.thehindubusinessline.com/2009/06/04/stories/2009060450260900.htm Knight Frank 'Market Review' Quarter 3 2006 KPMG, 'Doing Business with India' Report, July 2009, page 85 KPMG, Investing in India, 2008, page 32 http://www.in.kpmg.com/TL_Files/Pictures/Investing.pdf Kumar, Rajiv, 'Should India allow FDI in Retail?', The Economic Times, 11th August 2006, page 1 http://economictimes/indiatimes.com/Opinion/Should-India-allow-FDI-inretail/articleshow/1882764.cms Lonely Planet, 'India', 10th Edition, Lonely Planet Publishing Pty Ltd, August 2003 Mehta, Geetu, 'Indian Retail Overview' Birla Institute of Management Technology, 2007, page 2 http://bimtech-retail.com/article2.html Ministry of Commerce & Industry, 'Guidelines for calculation of total foreign investment', Press Note No. 2 (2009 series), Department of Industrial Policy & Promotion, February 2009, page 3 http://siadipp.nic.in/policy/changes/pn2_2009.pdf Rea L, Parker R, 'Designing & Conducting Survey Resaerch, Jossey-Bass Publishers, 1992 Sagarika Dutt, 'India in a Globalized World', Manchester University Press, 2006 Sapford, Roger, 'Survey Research', Sage Publishing, 2004, page 47 Sathyaraj (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganizedretailing.html Saunders M, P Lewis & A Thornhill, Research Methods for Business Students Prentice Hall London, 2003 Singh & Banga (2008), RetailDude.com, Guest Paper, page 2 http://bimtech-retail.com/downloads/FDI_RetailDude.pdf Stewart D & Kamins M, Secondary Research: Information sources and methods, Sage, 2nd Edition, 1993, page 37 Subbarao, P Srinivas, 'FDI and Human Capital Development', Indian Institute of Management, February 2008, page 2 Tripathi, Karthik, Retailing360, Guest Column, 27th April 2009, page 1 http://www.retailing360.com/article/8/2009062420090624193427218739345f/Barringforeign-players-will-hurt-Indian-retailersKarthik-Tripathi-Silk-Hut.html Mukherjee A & Patel, N, 'FDI in Retail Sector India', Academic Foundation in association with ICRIER, 2005, quoted from foreword by A Virmani Naoum, Dr S G, Dissertation Research & Writing for Consttruction Students, Butterworth Heinemann, 2nd Edition, 2007
81
References Appendix
Nayak, Amar K.J.R. 'Multinationals in India, FDI and Complementation Strategy in a Developing Country', Palgrave Macmillan, 2008 Radhika (2006) - http://retail-industry.blogspot.com/2006/04/definition-of-unorganizedretailing.html Whelan, Peter, 'India Economics', EDC Economics, May 2009, page 1 http://www.edc.ca/english/docs/gindia_e.pdf http://www.dare.co.in/news/others/assocham-demand-industry-status-for-retail-sector.htm http://www.newrules.org/retail/news/walmart-charged-predatory-pricin http://www.allindiaretail.com/ http://www.isixsigma.com/library/content/c000709a.asp http://www.answers.com/topic/triangulation?cat=technology http://www-personal.umich.edu/~alandear/glossary/f.htm http://en.wikipedia.org/wiki/retailing http://en.wikipedia.org/wiki/List_of_countries_by_population http://www.censusindia.gov.in/Census_Data_2001/India_at_glance/glance.aspx http://www.wto.org/english/thewto_e/whatis_e/tif_e/tif_e.htm http://www.wto.org/english/tratop_e/dda_e/dda_e.htm http://www.hindubusinessline.com/2005/11/24/stories/2005112403131800.htm http://finance.indiamart.com/investment_in_india/fipb.html http://www.ril.com/html/business/business_retail.html http://www.investmentcommission.in/policies_and_laws.htm
82
Bibliography Appendix
Indian Council for Social Science Research, 'Towards a New Era: Economic, Social & Political Reforms', Har-Anand Publications PVT Ltd, 2001 Denoon, David B H, 'The Economic and Strategic Rise of China and India; Asian Realignments after the 1997 Financial Crisis', Palgrave Macmillan, 2007 Ray, Pradeep Kanta, FDI and Industrial Organization in Developing Countries: The Challenge of Globalization in India, Ashgate Publishing Ltd, 2005 Advanti & Co et al, The New India, Opportunities & Strategies for Foreign Investment, Asia Law & Practice, 1999 Kolanad, Gitanjali Culture Shock! A Guide to Customs and Eqiquette, Kuperard (London) Ltd, 1994 Todaro, Michael P, Economics for a Developing World, An Introduction to principles, probems and policies for development, Third Edition, Longman Singapore Publishers Pte Ltd, 1992 http://www.iariw.org/papers/2009/8b%20Kolli.pdf http://www.ncaer.org/downloads/indianeconomy/services/q2aug07.pdf (NCAER economic stats) http://www.ncaer.org/downloads/indianeconomy/forecast/q2aug07.pdf http://labour.nic.in/ http://www.tsmg.com/download/article/TSMG_Tata_Review-June_2006.pdf http://dipp.nic.in/manual/FDI_Manual_text_Latest.pdf http://siadipp.nic.in/policy/icrier_report_27052008.pdf http://siadipp.nic.in/policy/changes/pn6_2009.pdf http://www.edc.ca/english/docs/gindia_e.pdf http://www.cds.edu/download_files/wp311.pdf http://indiafdiwatch.org/fileadmin/WARNstorage/indiwm.pdf http://indiafdiwatch.org/fileadmin/India_site/FDI_Broch_1_.pdf http://www.bijapurkar.com/printerfriendly.php?filename=ct_cons_india_better.htm http://www.bijapurkar.com/printerfriendly.php?filename=ct_cons_india_better.htm http://www.bijapurkar.com/indiamyland/indi_celebrating_diversity.php http://www.livemint.com/2009/06/08185249/Parliamentary-panel-recommends.html http://www.financialexpress.com/news/Is-FDI-in-retail-a-death-knell-for-SMEs/138090/1 http://www.indianrealtynews.com/category/retail-market/ http://bimtech-retail.com/downloads/FDI_RetailDude.pdf http://bimtech-retail.com/downloads/Retail_Twist_RetailDude.pdf http://bimtech-retail.com/downloads/RetailDude_Interview_1.pdf http://indiafdiwatch.org/fileadmin/WARNstorage/indiwm.pdf
83