NEED AND SIGNIFICANCE OF FDI IN RETAIL SECTOR IN INDIA M S.

SHAILLY SINGH

ABSTRACT
Foreign direct investment (FDI) is an integral part of an open and effective international economic system, which acts as a major catalyst in the development of a country through up-gradation of technology, managerial skills and capabilities in various sectors. Indian retail industry is one of the sunrise sectors with huge growth potential. However, in spite of the recent developments in retail sector and its immense contribution to the economy, it continues to be the least evolved industry in India when compared to rest of the world. Undoubtedly, this dismal situation of the retail sector, despite the ongoing wave of incessant liberalization and globalization, stems from the absence of FDI encouraging policy in the Indian retail sector. In this context, the present paper attempts to review the need and significance of FDI inflows into the Indian retail sector.

INTRODUCTION
India is the tenth most industrialized country in the world, it is well known that it is mainly agro-based with around 70% population engaged in the farm sector. Retail trade contributes around 10-11% of Indias GDP and currently employs over 4 crores of people. In this background the present work makes an attempt to study the likely impact of FDI on Indian retail sector.[1] India is now the last major frontier for globalized retail. In the twenty years since the economic liberalization of 1991, Indias middle class has greatly expanded, and so has its purch asing power. But over the years, unlike other major emerging economies, India has been slow to open its retail sector to foreign investment. In an important policy move, the Indian government gave permission for up to 51% FDI in multi-brand retail in September 2012. The objective of this policy is to boost the retail business through adoption of international standards and practices. The entry of international products, practices and technology is expected to enhance the efficiency of domestic retailers. The government has made it mandatory for foreign multi-brand retailers to place at least 50% of their total investment in back-end infrastructure, thus giving a boost to facilities such as logistics and warehousing. Global supermarket chain stores such as Wal-Mart (United States), Carrefour (France), Marks & Spencer and Tesco (United Kingdom), and Shoprite (South Africa) may finally be allowed to set up shop in India.[2] In this paper we argue that opening up FDI in India to multi-brand retailers from abroad will be a catalyst to growth and the development of the retail industry, with positive externalities for the rest of the economy.[2]

Retail
In 2004, The High Court of Delhi[1] defined the term retail as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit. The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of Indias GDP. [3] According to the provisional estimate by the Census of India 2011, the countrys total population has reached nearly 1.21 billion compared to the 1.03 billion recorded in the previous census of 2001. This tremendous growth in population has led to an unprecedented scale of urbanisation, with the share of urban population increasing to 31.0% in 2011 from 28.0% in 2001. According to the United Nations, India has the highest rate of change in its urban population of all the BRIC nations and this figure is likely to remain above 2.0% annually for the next three decades. Nearly 64% of the Indian population is in the working age group of 15-64 and 35.0% is relatively young, aged 15-34. As per IMF estimates, the per capita GDP of the country was INR 46,221 per annum at end- 2011, a figure that is forecast to rise to INR 58,224 by end 2015. With Indias growing per capita income and a rising middle class, the retail sector has the potential to be the real growth engine of the countrys economy. While demand for a superior shopping experience is evident in the metropolitan cities, the Tier II and Tier III towns are also rapidly acclimatising to the changing landscape of the Indian retail market. Growing consumerism, changes in consumers tastes and preferences, and heightened brand consciousness has been fast replacing traditional mom and pop stores with organised retail malls that house lifestyle and luxury brands from national and international retailers. [1]

FDI Policy in Retail in India

FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a foreign country through the acquisition of a local company or the establishment there of an operation on a new (Greenfield) site[4]. Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in this regard had issued a notification,[5] which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time. The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP). The retail sector in India is organized into three categories. According to the Department of Industrial Policy and Promotion (DIPP) of the Government of India, single-brand retail comprises those retailers selling products of a single brand only, such that products should be sold under the same brand internationally; and singlebrand product retailing covers only products which are branded during manufacturing. In this category, FDI is allowed to the extent of 100%. In contrast, earlier no FDI was allowed in the multi-brand retail category. According to Government of India's notification on 20 September 20121, 51 percent FDI in multi-brand retail is permitted, subject to certain conditions. Some of the top conditions cited are as follows: State acceptance: The stores may be set up in those states which allow FDI in multi-brand retail under this policy. Such stores will be subject to compliance with applicable state laws and regulations. Minimum investment: The minimum amount that a foreign investor has to invest is USD 100 million. Backend investment: At least 50 percent of the total FDI brought in shall be invested in 'backend infrastructure' within three years of the first tranche of FDI. 'Back-end infrastructure' includes capital expenditure on all activities, excluding that on front-end units; for instance, it includes investment made towards processing, manufacturing, distribution, quality control, design improvement, packaging, logistics, storage, ware-house, and agriculture market produce infrastructure, among others. Expenditure on land cost and rentals will not be counted for purposes of backend infrastructure. Procurement: At least 30 percent of the procurement of manufactured/processed products purchased shall be sourced from 'small industries' globally, with investment in plant and machinery not exceeding USD 1 million.

Location: Retail sales outlet may be set up in cities with populations of more than 1 million, according to the 2011 Census and may also cover an area of 10 kilometers around the municipal/urban agglomeration limits of such cities. Only 53 cities in India qualify under this criteria. The third segment, called cash and carry, refers to wholesale retail. The government defines this segment as the sale of goods and merchandise to retailers, industrial, commercial, institutional or other professional business users or to other wholesalers and related subordinated service providers. In India, FDI of 100 per cent is permitted in this segment.

FDI NEED
India is Asias third largest retail market after China and Japan. Organized retailing is very virgin space in India. It provides immense growth opportunity. Only 5% of the total sales are being done by organized retailer. Currently Indian Retail sector have sales of around $500 billion. Retail sector is expected to have sales of $900 billion by 2014. It still far behind China, whose retail sales by 2014 is expected to cross $4500 billion mark. Infrastructure There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Also India has very inadequate facilities to store the food grains and vegetables. As the investment will flow into back end infrastructure, supply chain will get strengthened. Storage is a major problem area and 20%-25% of the agri products get wasted due to improper storage. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. [6] Intermediaries dominate the value chain Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character. According to some reports, Indian farmers realize only 1/3rd of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a higher share of organized retail. Improper Public Distribution System (PDS) There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a farm-to-fork retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages. They say that the supply chain is the heart and soul of a retail businessand it is with prudent reason that they say that ! The Indian retail sector is presently hounded by a flawed and floundering supply chain that has caused humungous monetary losses to all domestic players in the business, both big and small. Coupled with gross mismanagement and an inherent inability to address these deficiencies, the supply chain remains the retail sectors weakest link. Bereft of a sound supply chain system, dogged by managerial and logistical impediments and the absence of proper cold storage facilities and warehouses; the sector incurs losses to the tune of over US$ 1 trillion annually. No Global Reach The Micro Small & Medium Enterprises (MSME) sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3% in 2007-08[7]. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface. Improper Transportation Facility

Another area which is also the cause of concern is movement of vegetable and other perishable agri item from one place to another. Lack of proper transportation forces the farmer to sell their produce in local market. This results in the lower realization on the produce. FDI could benefit stressed companies: FDI in multi brand will stimulate investment in the sector. There are companies in the retail sector that are reeling under debt. These companies could get fresh lease of life. Company Pantaloon Vishal Retail Provogue *[8] Debt (Rs Crore) 4,200 700 400 Market Cap 3, 867 42 275

FDI SIGNIFICANCE
FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity. Also, the mandatory stipulated 50% initial capital investment the establishment and development of efficient back-end structures and processes would serve to strengthen the sector exponentially. The policy of single-brand retail was adopted to allow Indian consumers access to foreign brands. Since Indians spend a lot of money shopping abroad, this policy enables them to spend the same money on the same goods in India. FDI in single-brand retailing was permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of 94 proposals have been received. Of these, 57 proposals have been approved. An FDI inflow of US$196.46 million under the category of single brand retailing was received between April 2006 and September 2010, comprising 0.16 per cent of the total FDI inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of Shoppers Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchanges key index rose 173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would have been had FDI upto 100% been allowed in India for single brand.[9] It is to be noted that the Indian Council of Research in International Economic Relations (ICRIER), a premier economic think tank of the country, which was appointed to look into the impact of BIG capital in the retail sector, has projected the worth of Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to conclusion that investment of big money (large corporates and FDI ) in the retail sector would in the long run not harm interests of small, traditional, retailers.[10] It is also pertinent to note here that it can be safely contended that with the possible advent of unrestrained FDI flows in retail market, the interests of the retailers constituting the unorganized retail sector will not be gravely undermined, since nobody can force a consumer to visit a mega shopping complex or a small retailer/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience. These firms' real competition will be the domestic multi-brand retailers. A recent study by the CII and Boston Consulting Group estimated the size of organized retail of US$28 billion in 2010 to be 6% to 7% of the total retail market in India. The study predicted that the size of retail -- total retail sector size, not just organized retail -- would grow to US$1.25 trillion by 2020 if the efficiencies that typically come from greater competition and modernization of retail supply systems were to be unleashed. Under this scenario, the study predicts that the size of organized retail could grow to US$260 billion or about 20.8% of the total market. So even under this scenario, the idea that a fractional segment that accounts for 20.8% of the total economic activity of a sector can drive the remaining 79% of that sector out of business does not stand the scrutiny of reason.

To ensure that the foreign investors make a genuine contribution to the development of infrastructure and logistics, the government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country. The idea is that the firms must have already created jobs for rural India before they venture into multi-brand retailing. A percentage of FDI should be spent towards building up of back end infrastructure, logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural sphere into a forward moving and prosperous rural sphere can be one of the justifications for introducing FDI in multi-brand retailing. It is expected that technical knowhow from foreign firms , such as warehousing technologies and distribution systems, for example, will lend itself to improving the supply chain in India, especially for agricultural produce. Here there are multiple inefficiencies in the supply chain that leads from farm to the dinner table. While the Indian government is the largest purchaser of food crops for many farmers, the consequence of a poor distribution system is that much of the stockpile fails to reach consumers, and ends up rotting or as waste. India is the worlds second largest producer of fruits and vegetables in the world after China, producing around 1 80 million tonnes per year. Official estimates are that about 25-30 per cent of this produce goes waste between harvest and consumption. Encouraging wholesale trading can create demand throughout the supply chain. In theory, if fresh produce is collected efficiently at the farm-gate, and end-to-end cold-chain is maintained in storage and transportation until it reaches supermarket shelves as in developed countries, this wastage can be eliminated, translating into better prices for farmers and lower prices for consumers besides greater availability of the produce for processing, export and other value-addition. Creating better linkages between demand and supply also has the potential to improve the price signals that farmers receive. This could allow them to better respond to market demand, and thus reduce uncertainty. With FDI now being permitted, these global retailers will bring a wealth of experience, technical knowhow, processes and patented structures that will result in the development of more streamlined and efficient supply chains and distribution networks.[11] Purchasing power of Indian urban consumer is growing and branded merchandise in categories like Apparels, Cosmetics, Shoes, Watches, Beverages, Food and even Jewellery, are slowly becoming lifestyle products that are widely accepted by the urban Indian consumer. Growth Drivers of Indian Retail Sector: Rising Income and increase in convergence of consumer taste and preferences. Dual family Income. Knowledge about different product through different medium like Internet, Television etc. Also knowledge about the latest trend and fashion. 47% of the Indias population is under the age of 30. This category is driving the consumption story. Emergence of new retailing format. Availability of Credit Facilities.

One of the important factors cited for the viability of retail business is the availability of real estate at affordable prices and at suitable locations. Major Indian cities with retail penetration have witnessed a considerable increase in rentals in the last five years. Additionally, the majority of the primary Indian cities are crunched to provide quality and quantity of real estate to the likes of global retailers. Such constraints suggest a joint venture or joint-development kind of model with developers or land owners . To negate the effect of rising rentals, one entry approach that may find flavor with global retailers is scouting for stressed retail assets at an appropriate location. The other important real estate play here is the creation of backend infrastructure, which suggests investments in assets such as cold storage and warehouses. Presently, very few players in India operate coldstorage chains or warehouses. An interesting opportunity may be generated in such a situation, where foreign retailers are likely to approach developers to create and own backend infrastructure.

The indirect impact of investment in multi-brand retail is also expected to generate additional demand for residential real estate. In the wake of limited data points for retail, when investments in 1,000 square feet of office space are made, the result would be to create seven new jobs, of which five are expected to purchase residential apartments[1]. Apart from countering the aforementioned concerns and infuse renewed vigour in the economy, greater FDI in retail will offer myriad multilateral benefits. The consumers would have the luxury of choosing from a wider spectrum of products available at affordable prices and also enjoy internationally standardized retailing experiences. The farmers and suppliers are sure to benefit as they can demand better prices for their produce and supplies. The facilitatory role played by the wily middlemen will be grossly minimized and functionary intermediaries may have to exit the picture altogether. The domestic players will face stiff competition and many of them are now looking to enter into strategic alliances with these global giants in order to safeguard and further their interests and protect their margins. This will also aid in their own evolution as they seek to implement proactive strategies and best practices to establish stronger and more robust supply chains. At the end of the day, it is about delivering value to the consumer and ensuring a veritable level of customer satisfaction. An efficient supply chain, seamlessly integrated into a holistic retail business mainframe, goes a long way in doing just that.[11] Permitting foreign investment in food-based retailing is likely to ensure adequate flow of capital into the country & its productive use, in a manner likely to promote the welfare of all sections of society, particularly farmers and consumers. It would also help bring about improvements in farmer income & agricultural growth and assist in lowering consumer prices inflation.[12] Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms of quality standards and consumer expectations, since the inflow of FDI in retail sector is bound to pull up the quality standards and cost-competitiveness of Indian producers in all the segments. It is therefore obvious that we should not only permit but encourage FDI in retail trade.

CONCLUSION
In light of the above, it can be safely concluded that allowing healthy FDI in the retail sector would not only lead to a substantial surge in the countrys GDP and overall economic development, but would inter alia also help in integrating the Indian retail market with that of the global retail market in addition to providing not just employment but a better paying employment, which the unorganized sector (kirana and other small time retailing shops) have undoubtedly failed to provide to the masses employed in them. Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely allowed but per contra should be significantly encouraged. Allowing FDI in multi brand retail can bring about Supply Chain Improvement, Investment in Technology, Manpower and Skill Development, Tourism Development, Greater Sourcing from India, Upgradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market size and Benefits to Government through greater GDP, tax income and employment generation.[13] These conditions clearly indicate an opportunity for global retailers to harness the vast potential of Indian markets. Meanwhile, from the economy's standpoint, investments in backend infrastructure and local sourcing are expected to create an efficient supply chain and boost small-scale industries. Additionally, the development is likely to generate increased employment opportunities in rural centres, where backend infrastructure is expected to be laid; in urban centres a front-end shopping unit will likely generate employment opportunities.

REFERENCES
[1] Impact of FDI on Indian Retail Trade: Good, Bad or a Mix -Dr. Kakali Majumdar
[2] Foreign Direct Investment in Indias Retail Bazaar: Opportunities and Challenges-Anusha Chari* T.C.A. Madhav Raghavan** University of North Carolina Indian Statistical Institute at Chapel Hill & NBER New Delhi, India March 2011

[3] Indias Retail Sector (Dec 21, 2010) http://www.cci.in/pdf/surveys_reports/indias_retail_sector.pdf [4] Hemant Batra, Retailing Sector In India Pros Cons (Nov 30, 2010) http://www.legallyindia.com/1468-fdi-in-retailing-sector-in-india-pros-cons-by-hemant-batra [5] Notification No. FEMA 20/2000-RB dated May 3, 2000 [6]. Pulkit Agarwal, Esha Tyagi Foreign Direct Investment in India Retail Sector-An Analysis (http://www.legalindia.in/foreign-direct-investment-in-indian-retail-sector-an-analysis) [7] National Accounts Statistics, 2009 [8]. http://www.sharetipsinfo.com/fdi-retail.html [9] Nabael Mancheri, Indias FDI policies: Paradigm http://www.eastasiaforum.org/2010/12/24/indias-fdi-policies-paradigm-shift/shift,

[10] Sarthak Sarin, (Nov 23, 2010) Foreign Direct Investment in Retail Sector http://www.legalindia.in/foreign-direct-investment-in-retail-sector-others-surmounting-indianapping [11]. FDI in retail: India assures full support to Walmart, Tesco ; Press Trust of India | Updated On: January 24, 2013 21:41 (IST) [12] Ibid [13]. Foreign direct investment in Indian Retail Sector: Issues and Implications 1 Kulkarni Keerti, 2 Kulkarni Ramakant & 3 Kulkarni Gururaj A. 1, 2Global Business School,Karnatak University, Dharwad ,3 Department of Physics, SDMCET, Dharwad