DAMODARAM SANJIVAYYA NATIONAL LAW

UNIVERSITY
VISAKHAPATNAM, A.P., INDIA

FDI IN RETAIL SECTOR

Submitted To: Ms. S. PRATHYUSHA

Submitted By: ABHIJEET TALWAR

9th Semester (Section A)

CERTIFICATE:
This is to certify that ABHIJEET TALWAR of 9th Semester (Section A) having
registration number 201202 has successfully completed his project in partial
fulfilment of 9th Semester titled FDI IN RETAIL SECTOR in the subject of
Investment Securities & Competition Law.

Faculty Signature

ACKNOWLEDGEMENT:

The present project on Investment in retail sectorable to get its final shape with the
support and help of people from various quarters. I am proud to acknowledge gratitude to the
individuals during our study and without whom the study may not be completed. We have
taken this opportunity to thank those who genuinely helped us in the completion of this
project many people helped us directly and indirectly. First of all we would like to thank my
university

i.e.

DAMODARAM

SANJIVIYYA NATIONAL

LAW

UNIVERSITY,

VISAKHAPATNAM, who gave us the idea and encouragement to venture into this project.
We are grateful to our faculty of ISC Ms. S.Prathyusha who gave the opportunity to make a
project on this topic.

ABHIJEET TALWAR
201202

TABLE OF CONTENTS:

INTRODUCTION
DIVISION OF RETAIL INDUSTRY
FDI POLICY WITH REGARD TO RETAILING IN INDIA
DISADVANTAGES OF FDI IN RETAIL SECTOR
CHALLENGES OF INTRODUCING FDI IN RETAIL SECTOR
POLITICAL OPPOSITION TO FDI IN RETAIL SECTOR
REASONS AS TO WHY FDI SHOULD NOT BE ALLOWED IN RETAIL

SECTOR
FDI IN E-RETAILING
CONCLUSION

INTRODUCTION:

India being a signatory to World Trade Organisations General Agreement on Trade in

Services, which include wholesale and retailing services, had to open up the retail trade sector
to foreign investment. There were initial reservations towards opening up of retail sector
arising from fear of job losses, procurement from international market, competition and loss
of entrepreneurial opportunities. However, the government in a series of moves has opened
up the retail sector slowly to Foreign Direct Investment. In 1997, FDI in cash and carry with
100 percent ownership was allowed under the Government approval route. It was brought
under the automatic route in 2006. 51 percent investment in a single brand retail outlet was
also permitted in 2006. FDI in Multi Brand retailing is prohibited in India.
Until 2011, foreign direct investment was not allowed in multi-brand retail, forbidding
foreign companies from any ownership in supermarkets, convenience stores or any retail
outlets. Even single-brand retail was limited to 51 per cent ownership. In January 2012, India
allowed 100 per cent FDI investment in single-brand stores, but imposed the requirement that
the single brand retailer would have to source 30 percent of its goods from India. On 7
December 2012, India allowed 51 per cent FDI in multi-brand retail1.
Manmohan Singh, the then prime minister of India, felt that this would be beneficial for both
consumers and farmers. Agricultural marketing was also expected to be benefited with the
introduction of new technologies.
There has been a fair share of controversy surrounding the then UPA government's decision,
to permit FDI in retail sector. The decision to allow 51 percent FDI in the multi-brand retail
sector came under attack from the opposition in the Rajya Sabha. The government had, on its
part, aimed to justify the decision saying it was only in the best interests of India2.

DIVISION OF RETAIL INDUSTRY:

1 http://www.indianjournals.com/ijor.aspx?
target=ijor:jpa&volume=3&issue=2&article=001
2 https://www.scribd.com/document/258213975/Advantages-of-FDI-in-Retail-inIndiaert

The retail industry is mainly divided into:

1) Organised and
2) Unorganised Retailing
Organised retailing refers to trading activities undertaken by licensed retailers i.e. 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, 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 GDP3.

FDI POLICY WITH REGARD TO RETAILING IN INDIA:

Sector specific guidelines for FDI with regard to the conduct of trading activities.
a)

FDI up to 100% for cash and carry wholesale trading and export trading allowed under

the automatic route.

b)

FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of Single

Brand products
c)

FDI is not permitted in Multi Brand Retailing in India.

DISADVANTAGES OF FDI IN RETAIL SECTOR:

3 https://www.scribd.com/document/258213975/Advantages-of-FDI-in-Retail-inIndiaert

Experts say that while analysing the positives and drawbacks of FDI in retail, both
the government and the opposition did not refer to the Parliament Committee report
where its effects had been studied in great detail. The committee had taken into
cognizance many witnesses, NGOs, individuals, and trade associations to come up
with the said report.
The Committee visited various corners of India and also went through reports and
gathered knowledge about the experience of similar decisions in other countries. It
also enquired from several government departments regarding the matter.

The Committee had surmised in its report that the number of people getting jobs will be
lesser than the amount of people losing the same as a substantial amount of marginal and
small farmers will be wiped out. Some other problems expected out of this were aggressive
pricing and prevalence of monopoly.
As per the Committee's report almost 8 percent of India's workforce is employed in the
unorganised retail sector. This comes up to roughly 40 million people. It has been stated that
FDI in retail will generate 2 million jobs. However, the Committee had stated that it is not a
proper indication as it does not take into account the number of people who already work in
the retail sector.4
ICRIER had executed a second study on the effects of FDI in retail during 2011 and in that it
had stated that FDI will bring about a fantastic shopping experience for the consumers. It had
actually interviewed 300 people from the middle and high income groups. Thus, in effect, the
efforts of the Parliament Committee were overlooked for a private organisation.
The Parliamentary Committee report on FDI was never discussed in Parliament itself. In
2008 the first survey had dealt with 2020 small and unorganised retailers whereas the total
count of such entities in India at that time was 6 million.
Economic experts have also said that Wal-Mart or most of these are not exactly healthy for
workers. This has also led them to ask if such processes were really required in India.

4 https://essays.win/essay/the-history-and-background-of-landmarkshopsmarketing-essay-254211

It is being said that the lobby favouring FDI in retail in India has invested at least Rs 52 crore
and experts opine this could have had a major say in the way things turned out. A good sign
as far as the democratic system in India is concerned.5

CHALLENGES OF INTRODUCING FDI IN RETAIL SECTOR:

Indian market has high complexities in terms of a wide geographic spread
and distinct consumer preferences varying by each region necessitating a
need for localisation even within the geographic zones. While India
presents a large market opportunity given the number and increasing
purchasing power of consumers, there are significant challenges as well given that over 90
per cent of trade is conducted through independent local stores. Challenges include:
Geographically dispersed population, small ticket sizes, complex distribution network little
use of IT systems, limitations of mass media and existence of counterfeit goods.6
Walmart and Tesco are likely to take advantage of the government's latest liberalisation
policy of allowing 100% overseas capital in processed food retailing. After years of
vehemently opposing any foreign investment in multi-brand retail, the BJP-led government
sprung a surprise with an unexpected announcement in the Budget that paves the way for
retailers such as Walmart and IKEA to sell multi-brand food products as long as they are
sourced and manufactured within India. Such ventures, however, must seek approval from the
Foreign Investment Promotion Board (FIPB).
Top officials with the ministries of commerce and food processing confirmed that finance
minister Arun Jaitley's announcement in the Budget would allow overseas investment in
multi-brand processed food retailing an area considered sensitive as small retailers fear
their businesses will be jeopardised by the entry of large corporations.
That's welcome news for global retailers that have lately been confused by a growing antimulti-brand retailing stand taken by the BJP-led government even as India, in 2012, had
opened the segment for 51% FDI.
5
http://ijariie.com/AdminUploadPdf/Impact_of_FDI_with_reference_to_Indian_Retail
_Sector_C_1116.pdf
6 https://en.wikipedia.org/wiki/Retailing_in_India

Walmart has so far shied away from investing in multi-brand retailing. In 2012, India allowed
51% FDI in multi-brand retailing. Such ventures come with a host of conditions such as 30%
mandatory local sourcing, $100-million upfront investment and half of it in back-end
infrastructure and many other restrictions.
Food processing industries minister Harsimrat Kaur Badal has been advocating FDI in the
space and had written to the Prime Minister's Office pushing for 100% FDI in multi-brand
retail in the food processing sector saying such a move would help create infrastructure,
revenue and uplift farmers.
In 2012, while approving IKEA's Rs 10,500-crore investment proposal, the FIPB had struck
down the Swedish retailer's plans to set up its famous cafes in the stores citing laws that don't
allow FDI in food. Later, the government gave approval to IKEA to set up restaurants as part
of its large outlets only to be consumed in the stores. Similarly, UK chain Marks and Spencer
had shown interest a few years ago in selling food items in India but the government had not
allowed it fearing a backlash.
Jaitley also brought some cheer for small shopkeepers. The government plans to amend the
Shop and Establishment Act to enable small shopkeepers to remain open 365 days. He said
the government will bring a model shop act that can be adopted by the states. "Permission for
keeping stores open 365 days helps retailers increase sales, generates employment, creates
customer convenience and also increases tax collection," said Kumar Rajagopalan, CEO of
Retailers Association of India.7

POLITICAL OPPOSITION TO FDI IN RETAILSECTOR:

The then opposition party in India, (BJP) was opposed to FDI in retail. As stated by the then
Leader of Opposition in Lok Sabha, Sushma Swaraj, the UPA never tried to create any
consensus regarding the issue or talk with the opposition prior to their campaign in support of
FDI in retail.
Swaraj also expressed her worries regarding the possible condition of small traders and
7 http://retail.economictimes.indiatimes.com/news/foodentertainment/grocery/budget-2016-retailers-like-walmart-tesco-to-gain-as-govtallows-100-fdi-in-multi-brand-processed-food-retailing/51203318

farmers once FDI was introduced in retail. She stated that the big retailers were not coming to
India because they wanted to be charitable but because they saw India as a major market.
Mulayam Singh Yadav, the head of Samajwadi Party, and an opponent of FDI in retail also
questioned the logic of introducing the same only in the bigger cities with more than 10 lakh
people.Mr Yadav felt that this decision would only result in unemployment.
Trinamool Congress (TMC), a former ally of UPA, had left the coalition during September
2012 as a mark of protest against steps like FDI in retail.8
Now that the BJP led government is in power at the Centre it is to be seen whether it goes
ahead with the decision to allow 51 per cent foreign direct investment (FDI) in multi-brand.

REASONS AS TO WHY FDI SHOULD NOT BE ALLOWED IN REATIL

SECTOR:

JOB LOSSES: retail Industry in India is the second largest employer after agriculture
and in this case any game changing situation can lead to heavy job losses particularly

in rural areas and small cities.

POWER OF SCALE: unfair competition and abilities of big retailers to sustain losses
can lead to large scale exit of domestic retailers, especially the small family managed

outlets.
PREFER LOCALIZATION: Indian retail sector including organised sector is still
under developed and in a nascent stage, it is critical that the retail sector is allowed to

grow and consolidate first, before opening to foreign investors.

EDUCTION IN EMPLOYMENT: Indian retail labour productivity is 6-8% of US
M ckinsey study, this means Indian retail employs 100 people when US retail employs

6-8 people.9
FDI in retail would give rise to cut- throat competition rather than promoting

incremental business.
Promoting cartels and creating monopoly.

8 http://business.mapsofindia.com/articles/fdi-in-indian-retail-sector/
9 http://worldwidejournals.com/paripex/file.php?
val=May_2016_1463836968__173.pdf

It will lead to increase in the real estate prices.

It will marginalize domestic entrepreneurs.
The financial strength of foreign players would displace the unorganized players.
Absence of proper regulatory guidelines would induce unfair trade practices.

FDI IN E-RETAILING:
E-retailing is the use of technologies such as computers and the internet to sell a range of
products and services online to the world.
The government on Tuesday allowed 100% foreign direct investment (FDI) in online retail of
goods and services under the so-called marketplace model through the automatic route,
seeking to legitimize existing businesses of e-commerce companies operating in India.
It also notified new rules which could potentially end the discount wars, much to the
disappointment of consumers. This is because the rules now prohibit marketplaces from
offering discounts and capping total sales originating from a group company or one vendor at
25%.
This could, however, level the playing field with offline stores, which have witnessed a slump
in footfalls corresponding to the increase in e-commerce.
So far, India has allowed 100% foreign investment in business-to-business (B2B) ecommerce but none in retail e-commercei.e., business-to-consumer, or B2C.
Even so, Indian e-commerce companies such as Flipkart and Snapdeal have been following
the marketplace modelwhich was not definedand attracting large foreign investments.10
Marketplaces essentially act as a platform connecting sellers and buyers.
This has led to allegations from time to time by brick-and-mortar stores that Indian ecommerce companies were flouting existing policy norms to gain an unfair advantage, given
that the government does not allow FDI in multi-brand retail companies.
It led to a legal challenge in the Delhi high court, even as the model came under the scrutiny
of the authorities such as the Enforcement Directorate.
10 https://www.quora.com/What-is-the-new-FDI-policy-for-Ecommerce-in-Indiaalso-the-new-policy-and-regulations-for-Ecommerce

The government, conscious that the sector has seen a big inflow of FDI, has opted for
caution.
An explicit position from the government on where it stood with reference to e-commerce
has been long overdue. In that sense, it is good that some clarity has been provided, said
Vivek Gupta, partner, BMR Advisors, pointing out that close to $10 billion in
funding has been committed to the sector.

The government had very little elbow room to really state a policy position. And hence, it
has chosen to bless the marketplace model with some safeguards that the marketplace should
not act like the retailer, he added.
According to the press note issued by the department of industrial policy and promotion
(DIPP), a marketplace model is an information technology platform run by an e-commerce
entity on a digital and electronic network to act as a facilitator between buyer and seller.
However, DIPP has prohibited FDI in e-commerce companies that own inventories of goods
and services and sell directly to consumers using online platforms.
The marketplace e-commerce companies will be allowed to provide support services to
sellers on their platform such as warehousing, logistics, order fulfilment, call centre and
payment collection.
The new policy also mandates such e-commerce companies to display contact details of the
sellers online. The warranty/guarantee of products or services sold online will also be borne
by the sellers, not the e-commerce company.

Example: Amazon funds discounts by sellers indirectly through a route it calls promotional
funding. This it how it works: Amazon recommends the amount of discounts to its sellers on
products, but doesnt force them to adopt these prices. Sellers, however, go along as Amazon
finances the discounts.
Flipkarts largest seller WS Retail Services Pvt. Ltd easily generates more than 25% of the
companys sales while Cloudtail India Pvt. Ltd, the biggest seller on Amazon India,
contributes even more.
Flipkart has been gradually reducing WS Retails business over the past 15 months as it shifts
to a marketplace model. Following the new regulations, Flipkart may have to accelerate its
transition.

CONCLUSION:
In my opinion, 100% FDI in retail sector will adversely affect the social upliftment in India,
as it will benefit economic growth but major players will exploit maximum and domestic
players will be out of the market. It will generate competition but among foreign countries to
how effectively they can exploit the Indian resources by serving cheap products with
advanced technology but what about the people who indulged in small businesses, more than
270million people in India are engaged in Shop-keeping business it will first give
employment and after that it will take jobs of those 270 million people. FDI is a two faced
coin, policies related to it should be properly formulated to avoid any cumbersome.
Whatever the merits of the official case there is one issue which remains controversial, the
impact that liberalization would have on the existing players operating in the fields where
foreign presence has to be expanded. That question is particularly important in retail which is
known to be populated by small players who often enter this activity because of lack of
opportunities in the commodity providing service.
Returns earned by these enterprises are extremely low since, given the lack of social security,
they need to engage in something to survive.
Hence, we should analyse it on a subjective basis.