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FDI in Indian Retail - The Dilemma

Posted in Finance Articles, Total Reads: 4950 , Published on December 05, 2011

Retail Industry in India is one of the most important sectors of its economy. It contributes around 14% to the Indian GDP and provides 7% employment to the total workforce. It has made India the cause of a good deal of excitement and cynosure of many foreign eyes. Amidst huge political drama, the Indian Government finally decided to allow up to 51 percent FDI in multi- brand retail and 100 percent in single brand retail, subjecting to certain conditions but revoked it later due to political pressure. It could have been a welcome step in strengthening India’s FDI regime with making it in tune with country’s needs. As per the Indian cabinet perspective , the FDI policy has been moving away from the license raj mentality of protection against imagined foreign dictators towards a more open, healthy and competitive environment. This policy would have provided a window for the world class retailer chains like Carrefour, Wal-Mart, etc. to set their foot in the booming Indian retail sector.

FDI in Retail

The policy, if implemented, would have allowed multi-brand foreign retailers to set up their stores only in the cities having a population more than 10lacs, as per the 2011 census. The foreign investors would have been required to put 50% of total FDI in back end infrastructures inclusive of capital expenditure on the activities. The single brand retailers exceeding the limit of 51% would have needed to source a least of 30% of the products from the small industries. All compliance was through self-certification of the foreign retailers either for the backend investment or the procurement from small sectors.
Now, the question that speaks for itself is that, does this sector really requires FDI, obviously having no dearth of indigenous capital. The entry of foreign retailers can have optimistic results on the economy initiating momentum in the long run leading to greater quality, efficiency and improved standards of living. Another issue arise the question of FDI being in kind rather than cash. The foreign partners may contribute with the latest technology, equipments and the know-how in returns but the Indian FDI policy being inflexible, counting only financial flows toward FDI. This issue of FDI in retailing has been a baffled one. Large retail businesses might put out small shopkeepers off the market. This policy permits the foreign retailers to purchase locally all agricultural produce and sell them unbranded in their stores, leading to cornering the trade in rural areas. More than 50 percent of the rural economy is made up of services, and a big part of this is trading and supplying to urban India.

The Indian Government believes that the opening up of FDI in multi-brand retail and further liberalization of single-brand retail trade will facilitate greater FDI inflows providing new opportunities and benefits besides quality improvement. At a time when declining investments have led to slower GDP growth, the entry of foreign funds would go a long way in boosting confidence. However, a healthy competition, between the large domestic retailers and those with FDI, should be maintained. Imposing socially-desirable constraints on FDI funded retailers would lead into unfair competition.

This article has been authored by Amritesh Singh, PGDM-DCP, IMT Ghaziabad.

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