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Home » MBA Articles » MBA - Retail Management Articles » FDI in Retail - More Good than Bad

FDI in Retail - More Good than Bad

CLICK HERE : Expert Suggestions on Computer Based CAT : 2017 - 2018

Indian
industry's euphoria over the government's decision to throw open the
country's retail trade to foreign companies gave
way to despair after Finance Minister Pranab Mukherjee
announced suspension of the plans owing to political pressure from both
within the ruling coalition and outside.

The issue of allowing
FDI in the multi-brand retail is
of immense importance because as much as 7.8% of India's
total workforce is engaged in retail trade (NSSO 66th Round), which are
mostly the small groceries, handlooms-textiles-garment shops, family
stores etc. Now with FDI in this
sector, multinational giants with multi-billion dollar
enterprise like Wal-Mart, Carrefour, Tesco etc. who sell from
grocery-items to garments, furniture to fitness-equipments, are allowed
to set up their stores in India.
Notwithstanding the government's claim of
'revolutionizing' the retail sector in India, it needs to be asked that
what will be its impact on the unorganized retail which consists of 95%
of total retail sector in India while
organized trade accounts only for the remaining 5%. Out
of this organized and unorganized retail almost 60% of the household
expense consists of food and grocery expense.

A study reveals
that the average size of a shop in
India is 217sq.ft. Almost 95% of the shops have less
than 500 square feet area. The average business per store per year is
$30,000. And a typical Indian retail shop employs 3-4 persons. On the
other hand, an average size of a
Wal-mart store is a mind boggling 1, 13,142sq.ft, it
runs an annual business of $48 million and each store on an average
employs 238 persons.






India is one of the most leading economies with a strong economic backing and is posing threat to the other developed
economies.

The Indian economy has reached in the orbit
of high economic growth rate. It is being widely acclaimed and
considered as an emerging global economic power.
Presently, the economy of India
 is the 
ninth largest in the world by nominal GDP and the 
fourth largest
 by purchasing power parity (PPP). The country is a part of the G-20 major economies and the BRICS, in addition to
being partners of the 
ASEAN. India has a per capita GDP (PPP) of $1,477 (WBG
)
as per 2010 figures, making it a low-middle income country. India
enjoys a strong position as a global investment hub with the country
registering high economic growth figures
even during the peak of financial meltdown. As a result, overseas
investors rested their confidence in the economy which eventually pushed
foreign direct investments.



These
multinational retail agencies thus have immense storage capacity, and
capability of running business
thousand times bigger than an average Indian retail
shop. In India, where consumer expenditure is not constrained by
supply-chain bottlenecks (rather it is restricted by low income and
purchasing power of the
poor). Such big retail agencies would displace millions
of unorganized retailers destroying their only source of livelihood.
Moreover, if a newly introduced Wal-mart store performs its usual
average business, it can
displace around 1600 average Indian stores rendering
more than 5000 people jobless. Against this, it can create employment
for only 238 people, on an average.


However, as a coin has two sides, so does FDI has its
positive impact on the Indian economy. The criticism is not justified.
There is a fear in the market that the FDI in retail would upset the
import balance by
preferring to global sources than investing in local
production. But, the matter of fact is that India is known to have
cheaper labor and easy availability of raw materials. Also giants like
Arrow, GAP, Levis, JC Penny,
McDonalds and Metro Cash and Carry are already sourcing
their products from India.

Another criticism put forward was
that of predatory pricing policy fear in India. Studies, however has
shown
that a non-competitive nature of current Indian retail
industry is resulting in steeper prices for consumers and higher prices
for the retailers. The sudden move may not have a pervasive effect on
the producers and
consumers, but they stand to substantially gain from the
FDI proposal to allow FDI in retail sector. Few of them are:-

  • Benefits for the consumers
  • o Allowing FDI will increase competition in the
    market which can force domestic consumers to improve their efficiency
    and productivity and thus lowering prices.


    o A very evident fact is that the modernization of
    different sectors has evinced a lot of interest of the foreign investors
    and has attracted massive FDI inflows in the near past.


    o This in turn has generated lot of employment opportunities in the economy.

    o Consumers now have a wide variety of brands and product categories to choose from which has
    made shopping experiences of international quality.

    o
    It will also help focus n the service quality like consistency,
    standardization, pricing, pre-sales activity, after sales services etc.

  • Benefit for producers:-
  • o A significant market shift to the organized sector will help to reduce the producer's problem of counterfeit products.

    o Consumer financing schemes provided by the retailers help the producer's too.

    o Congregation of large number
    of customers under one roof will boost low cost marketing campaigns and
    thus minimizing advertising costs.


    o This will enhance the channel feedback to the
    manufacturers thus helping to formulate better business strategies.


    o By establishing a real time network with the
    retailers, the producers can crash their supply chain and minimize the
    inventory holding cost, response time to market demands resulting in
    economic benefits
    which have a final benefit for the producers as well
    as consumers.

    o  Indian producers will get an opportunity of showcasing their produce in the international markets and foreign retailers.

  • Benefits for the Economy:-
  • o In the era of M&As happening globally, restructuring is a sine qua non for prosperity and survival in the midst of global competitiveness.


    o Postponing FDI in this sector will only help the
    unorganized sector to flourish pulling in almost Rs. 110,000 crore from
    the money market.


    o The risk element can be hedged and easily arbitraged, if the FDI is allowed.


Therefore,
the proposed FDI norms will open up strategic investment opportunity
for global retailers, who have been waiting to invest in India. This may
have a significant impact on the current arrangement of
foreign players.

With the global economy still recovering, investment in
India is lucrative to a retailer attributable to strong consumerism,
rising disposable income, growing middle class population, favorable
macro and micro economic indicators supplemented by a
stable government. Retailers entering the Indian market need to ensure
that they have considered the opportunity along with the challenges to
maximize
their returns. Retailers will need to bank on the local
knowledge brought in by their partners/employees/ service providers to
be able to reduce the lead time required by them to set-up operations
and get a
foothold in the Indian market.





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