FDI in Retail in India
FOREIGN DIRECT INVESTMENT IN THE RETAIL SECTOR IN INDIA
FDI in Retail in India
I. What is FDI? What are the features of FDI ? Foreign Direct Investment, or FDI, is a measure of foreign ownership of domestic productive assets. Foreign direct investments have become the major economic driver of globalization, accounting for over had of all cross-border investments. Foreign direct investment (FDI) in India has played an important role in the development of the Indian economy. FDI in India has in a lot of ways enabled India to achieve a certain degree of financial stability, growth and development. This money has allowed India to focus on the areas that needed a boost and economic attention, and address the various problems that continue to challenge the country. India has continually sought to attract FDI from the worlds major investors. In 1998 and 1999, the Indian national government announced a number of reforms designed to encourage and promote a favorable business environment for investors. FDIs are permitted through financial collaborations, through private equity or preferential allotments, by way of capital markets through euro issues, and in joint ventures. FDI is not permitted in the arms, nuclear, railway, coal or mining industries. Foreign Direct Investment only targets a specific enterprise. It aims to increase the enterprises capacity or productivity or change its management control. In an FDI, the capital inflow is translated into additional production. The FII investment flows only into the secondary market. It helps in increasing capital availability in general rather than enhancing the capital of a specific enterprise. The Foreign Direct Investment is considered to be more stable than Foreign Institutional Investor. FDI not only brings in capital but also helps in good governance practices and better management skills and even technology transfer. Though the Foreign Institutional Investor helps in promoting good governance and improving accounting, it does not come out with any other benefits of the FDI. While the FDI flows into the primary market, the FII flows into secondary market. While FIIs are short-term investments, the FDIs are long term. FPI usually aims at short term benefits and typical target countries for this type of foreign investment, given its transient nature, are developing countries. It offers easier escape routes compared to FDI, where an investor can easily withdraw from a foreign portfolio either when targets have been realized or when theres an unexpected occurrence affecting the economic standing of that country which may adversely affect foreign investments.
FDI in Retail in India
II. What will be the beneficial effects of FDI in the retail sector. Allowing FDI in the retail sector, which has long been facing several supply side constraints, will certainly help unclog supply bottlenecks of which we are complaining for a long time as a cause of high inflation. In addition, the retail sector is expected to grow ten times in the next ten years but this level of growth is not possible without expansion of the organized retail sector, which, in turn, is not likely without participation of big global players. The opening up will be of benefit for us to generate not only new employment but also better paid and better quality employment instead of killing jobs. Coexistence of small and big retailers This is happening in many countries with the latter creating niche and finding innovative ways to compete. In fact, Indian retailers already have some competitive edge in form of low overhead costs, cheap labour and less use of technology. As far farmers are concerned nobody can deny the fact that at present there is a big difference in farm gate prices, wholesale prices and retail prices. Allowing big global players in retail will help to unlock the true potential of the agricultural value chain in the country where the majority of the population is employed in agriculture, not unorganized retail. Removal of the long chain of intermediaries will also benefit customers. The Indian industry will benefit to a great extent once global retailers will start setting up local operations here and sourcing products from local manufacturers, particularly from sectors like handicrafts, textiles, and food processing. It will also avail opportunities for SMEs to benefit from partnership with big players in product development, deal under signed contract, timely payment, new knowledge about supply chain management, and more connectivity with international channels.
FDI in Retail in India
III. What will be the harmful effects of FDI in the retail sector. A crucial argument against foreign investment in retail is the belief that small retailers will suffer. This, in some sense, suggests that low price is all that counts in the retailing industry. Small retailers offer of personalized service, home delivery and credit seems to have been given little importance.
The following are the harmful effects of FD in retail sector.
FDI has and adverse effects on competition. FDI will be make the host country lost the control over domestic policy. One of the most indirect disadvantages of foreign direct investment is that the economically backward section of the host country is always inconvenienced when the stream of foreign direct investment is negatively affected. It has been observed that the defense of a country has faced risks as a result of the foreign direct investment in the country. Certain foreign policies are adopted that are not appreciated by the workers of the recipient country. Foreign direct investment disadvantageous for the ones who are making the investment themselves. Foreign direct investment may entail high travel and communications expenses. Another disadvantage of foreign direct investment is that there is a chance that a company may lose out on its ownership to an overseas company. This has often caused many companies to approach foreign direct investment with a certain amount of caution. There is considerable instability in a particular geographical region. This causes a lot of inconvenience to the investor. The host country is not well connected with their more advanced neighbors, it poses a lot of challenge for the investors. Inflation is increased Local market is affected badly Anonymous
FDI in Retail in India
IV. Steps that can be taken for inviting FDI and their success. Improving the infrastructure. Physical infrastructure is the biggest hurdle that India currently faces, to the extent that regional differences in infrastructure concentrates FDI to only a few specific regions. While many of the issues that plague India in the aspects of telecommunications, highways and ports have been identified and remedied, the slow development and improvement of railways, water and sanitation continue to deter major investors. Indian government has opened the gates for Walmart and TESCOs of the world to enter Indian market by allowing 51% FDI in retail. The cabinet has also allowed 100% FDI in single-brand retail, though the two recommendations come with riders like 50% of the investment and jobs should go to the rural areas, 30% of the inputs should be sourced from medium and small enterprises and investment in infrastructure. Whats also important to note is that one of the riders of this recommendation is that such retail chains can only be opened in towns with population of more than 10 lakhs, restricting the target segment to only 51 towns in India. At present, for single-brand retailers, 51 per cent FDI is permitted. Removal of investment cap would help global fashion brands especially from Italy and France to strengthen their interest in the growing Indian market. Many big names have already set up their operations in the country by partnering with Indian partners. The new policy would allow them to buy out the domestic partners. The government said the move which comes into effect immediately would enhance competitiveness of Indian enterprises through access to global design, technologies and management practices. According to the riders, however, the products by the global chains should be of 'single brand' only and be sold under the same brand internationally. Single brand retailing would cover products which are branded during manufacturing and the foreign investor should be owner of the brand. Though 51 per cent FDI in single brand was allowed in February 2006, not much investment has come in the sector. During last three and half years, FDI worth only Rs 196 crore was received in the sector.
