Foreign Direct Investment (FDI) in retail in India

Posted in Finance Articles, Total Reads: 7122 , Published on May 29, 2011

The retail industry in India is regarded as one of the sunrise industry. It has declared by various consulting agencies as the 2nd most attractive retailing destination among the various emerging markets. Further it contributes around 14% of the national GDP. With such figures being put forth the Indian retail industry has come in the radar of all the retailing giants across the world. They visualize a huge opportunity in India and with the sales stagnating in other major markets there is a clamor for opening up FDI in retail industry in India.

FDI in Retail

So far India has not allowed FDI in retail and allows these giants to operate stores which can deal only with registered business. For e.g., Metro, a well known retailing giant of Germany is allowed to sell only to businesses which serve the front end customers like us. The retail industry can be divided into organized and unorganized sector. The organized retailing is which are backed by corporate giants like Reliance, Future etc. Unorganized retailing refers to the traditional shops which are basically no frills business. Organized sector can be compared to premium airlines whereas unorganized sector can be compared to low cost ones. However like in airline industry the unorganized sector contributes 98% of the total trade.

However inspite of being well served by our home grown retailers, the government is toying up with the idea of opening retail for foreign companies. That brings us to the question on what exactly do they bring to the table. The answer is a lot of heartburns and a little respite to the country in terms of managing the food produce in the country.

So let us think what kind of employment is provided by unorganized sector in our country. As per a certain study conducted the total employment provided is around 4crores. Now let's us assume that a retailing giant comes and sets shop in India. With it's technologically advanced set up it would reduce the manpower needed to run the operations. By flooding the length and breadth of the country with its supermarkets, it would result in a massive unemployment in the country. On top of that with its deep pockets it would undercut margins and will literally throw out all the kirana stores out of business. This would lead to monopoly in retail sector which needs to carefully studied by the government before opening up the sector.

But it does not mean that it is bad to allow these giants to enter the retail market of India. The average Indian is now well read and informed. He would have visited various places and would have seen the quality and service provided by the retailing giants in various countries. So he would expect the same in our country as well. Allowing FDI in retail would allow us to integrate with global economy in terms of quality standards and customer expectations. The Indian consumers are sure to be benefited as they would have a wider variety to choose from. This would also increase the standards of every retailer in the country because of more competition.

So does it mean the death of unorganized sector of India if FDI is allowed in retail? The answer is a big NO. The Indian market is unique and it requires a different mindset and the practices adopted in other countries may not hold good in India. Inspire of many Indian corporates setting up shops the market share of unorganized sector has not gone down drastically. The Indian consumer is looking for a relationship which these 'kirana' shops have developed over the years and hence it would be difficult to displace them easily. Thus both organized and unorganized sector can live happily in this big market even in the future. But the government needs to carefully study all the pros and cons and come up with a comprehensive policy before allowing FDI in retail.

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