impact of fdi in mbr

8/3/2019 Impact of FDI in MBR

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Introduction

The 1991 reforms marked a paradigm shift in India's policy vis--vis

foreign capital. The 19 years of reforms era has seen progressive liberalizationof the policy particularly with respect to Foreign Direct Investment (FDI) whose

role in economic development is acknowledged by policy makers. India

cautiously opened up to FDI with the hope that it could act as a catalyst for

growth as it is believed to fill up the critical gaps of capital and technology and

also be a facilitator for transfer of managerial and technical skills, for

employment generation and export promotion. Keeping with the policy of

progressive liberalization the Government of India has now initiated a debate of

allowing FDI in multi- brand retail.

100% FDI in wholesale cash-and-carry trade was opened in April 2006

followed by further liberalizing by allowing 51% FDI in single-brand retail in

2008. The impact of this has been an FDI flow of Rs. 7799 crore into the retail

sector. The issue of FDI in multi- brand retail had been put on the backburner

for so long as it had a direct impact on the strong 1.3 crore small retailers in the

unorganized sector. The giant multinational retail players are pushing for the

opening up of India's retail trade as the growing middle class with rising

disposable incomes means huge market potential. Even domestic retailers such

as Future Group, Reliance, Birla, etc are lobbying hard for FDI. By initiating the

current debate the Government has made its intention of removing multi-brandretail from the 'restricted list' very clear and the need is to safeguard all the

stakeholders' interests.

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FDI in Multi-Brand Retail A Step in the right Direction

The strongest argument in favour of retail is that it is in the interests of the

Indian farmer and consumers. Despite the rising food inflation the Indian farmer

gets only one-third of the consumer price and this is due to the lack of an

efficient supply chain connecting the farmers and consumers. This is in contrast

to economies with a higher share of organised retail where farmers get two-third

of the consumer price. The government run agricultural mandis have become

monopolistic and non-transparent in nature over the years and have failed to

protect the interests of farmers and consumers. The large chain of intermediaries

means farm-to-fork supply chain is nonexistent in India and consumers pay a

huge premium which goes into the pocket of the intermediaries and not the

farmers. FDI in retail will ensure creation of a supply chain which will have a

sobering effect on prices, and also guarantee a fair price to both the farmers and

consumers.

The opening up of retail sector would also address the infrastructural

shortages in agriculture. India loses around Rs. 1 lakh crore of food products,

including fruits and vegetables owing to bad farming practices and lack of

structured farm-to-retail cold chain infrastructure. FDI in retail could bring

along huge investments in cold storage chains, agro-processing and other back-

end infrastructure which could reduce the post-harvest losses.

Organised retailing could also encourage direct marketing, access tomodern technologies and even contract farming. This would give farmers a

better price, steady income and better access to changing consumer preferences

through private investors.

FDI in retailing could revolutionize the agricultural sector as it opens the

sector to well functioning markets and enhances its access to infrastructure

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which could drive growth, employment and prosperity in rural India.

The biggest area of concern has been the impact of FDI on small kirana

stores popularly known as Mom & Pop stores. The Department of Industrial

Policy & Promotion (DIPP) discussion paper on retail states that small retailers

may not be impacted after all. Fears of adverse effects on existing retailers are

grossly exaggerated as per industry studies. The large retail players have not

eaten up the small traders livelihood and studies show that kiranas are now

sourcing from supermarket chains. The unorganised retail sector in India has

grown at over 15% per annum in the last few years despite the emergence of

organised retailers. It is also important to note that nine % per annum growing

Indias retail market, huge population, rising incomes can co-exist along with

neighbourhood stores.

FDI in multi-brand retail could throw open employment opportunities.

According to National Sample Survey Organisation (NSSO) data of 2007-08,

retail trade employed 7.2% of total workforce and provided job opportunity to

33.1 million. These numbers increase by a multiple times with FDI in retail

which would add value and hence create jobs.

The advent of FDI in retail would also make India a source for goods for

international outlets of these multinational companies. This would help in

boosting exports and integrating Indian retail chains global supply chains.

Thus the ability to create jobs, securing better returns to farmers and

wider choices at lower prices to consumers are the major arguments in favour ofFDI in multi-brand retailing.

FDI in Retail Need to tread the path cautiously

Despite the entry of big corporate into organised retailing the supply chain

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has not become efficient nor have the consumers got the advantage of lower

prices or superior quality products. Farm-to-Fork remains a distant dream

largely due the following deterrents which organised retailing faces in India

high rentals, no direct sourcing from farmers, the rigidity of Agricultural

Produce Marketing Committee Act, delay in amending the Forward Contracts

Regulation Act and low quantum of FDI inflow into single-brand retail.

The arguments in favour of FDI in multi-brand retail are strong but it is a

sensitive issue therefore there is a need for caution on the part of the

government. The large trading community of the unorganised sector with their

sizeable vote bank power could be difficult to overlook for the policy makers.

But as research shows even the small stores and hawkers may benefit from

organised retailers. The need is to build synergies between small and big

retailers and farmers for the gains to be fairly distributed.

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Literature review

In India, Government is almost ready to allow Foreign Direct Investment

in Multi-Brand Retailing industry. Indian companies as well as multi-nationals

have become aware that the real profitable business is retailing industry in

India. From one of the speculation Indian retail market consists of Rs 12,80,000Crore($ 320 billion). Currently, its 79% share is with 1.2 Crore small retailers.

To tap this expanding business sector several of the Indian companies are trying

hard. Now multinational companies will also combine them. In Indian cities,

the population has rose to 30 crores and by 2015 it will rise to 50 crores. The

disposable income of the middle class is rising outrageously. Nowadays,

housewives dont prefer to buy the grocery at roadside vendors but in the air-

conditioned malls, where they get goods at half rates. In 2015, 27% of the retail

business will be flown to the big companies. For this, 8000 new malls are going

to be opened up in the next year.

From past five years there has been cut throat competition among big

companies. In 2002, there were around 100 shopping malls in Indias 10 lakh

sq. Ft. Area. In 2007, it has rose to 4 crore sq. Ft. Area. Now in this sector when

multinational companies will come up the speed of expansion will increase

drastically. American company Walmart has presence in 15 countries and

operates around 8500 supermarkets employing around 20 lakh people. It is in

partnership with Bharti Group in India for Cash and Carry stores.

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In America, when walmart started its operation, many of the small

retailers had to shut down their businesses immediately. If in India, walmart

gets approval to start its operation in multi-brand retailing then many of the

small traditional shopkeepers will have to close down their businesses.

Relevance of the study

This research study is being carried out to enlighten government, people, small

businessmen and consumers about the huge impact of allowing FDI in multi-brand retailing. There are many pros and cons associated with it. Its huge and

worse impact would be on unorganised small scale businesses in retail. The

purpose of the study is to analyse it in detail. And come up with stringent norms

and regulations so that for growth and curbing inflation it is allowed and

benefits of it are enjoyed. While at the same time saving the economy from its

bad and harsh impact on small scale retailers by introducing certain rules and

regulations on which government is already working upon. To come out with

such a plan, which will be benefitted to every concerned stakeholder.

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Research Methodology

This research methodology will be carried out qualitative as well as

quantitative basis. Qualitative research because certain impacts cant be

measured merely in numbers but by interviewing the small kirana stores and

small shopkeepers. How the location matters to attract more and more street

customers. How far the footfalls have dropped year on year, how quantity

demanded of goods have reduced, whether they source their goods from big

supermarkets, what is the gap of price for consumers, etc. There would be easy

questionnaire for small retailers. To know certain facts and figures, to knowtheir view regarding allowing this policy and to basically know how far has the

Indian super-markets have affected them.

This interview process in different parts of Ahmedabad will provide us better

idea of the current market scenario and difficulties faced by the small scale

retailers.

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Limitations

There are many limitations as far as this research project is concerned for

an individual student to carry out on large scale along with large sample size for

authenticate credibility of the data collected and analysed.

There is time constraint of one month as me as an individual have to

collect as well as analyse the data.

People constraint, there need to be at least 10 people for carrying it out

on considerable no. samples, area would have been covered more too.

Geographic constraint, as research will be carried out only in different

parts of Ahmedabad, where multinational in retail is not going to come

even initially.

Inspite of lots of constraints, the research will be carried out and as far as

possible to represent the true and fair picture of the scenario.

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Research Questions

Quantitative

Q1. Where do you source your goods?

(a)Supermarkets (b) Other sources

Q2. Whose prices are cheaper?

(a)Small retailers (b) Supermarkets

Q3. What is the % of price gap?

a) 0-5 b) 5-10 c) 10-15 d) more than 15%

Q4. Does location of small scale retailer has become crucial now?

(a)Yes (b) no.

Qualitative

Q 1. Do you feel supermarkets affect small shopkeepers?

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Q 2. How far the no. of footfalls has reduced after supermarkets came into

existence?

Q 3. How harshly has it impacted on your mark-up price?

Q 4. How badly has it affected your overall business activity?

Q 5. How will it affect your business as supermarkets are being open up in

many small communities around 3-4 km radius area?

Q 6. What are your opinions on allowing foreign players in supermarkets?

Analysis of Research Questions

As clearly observed that majority of pop n mom stores have already started

procuring from big retailers. They technically fetch benefit from the bulk

purchasing offer and selling in the neighbourhood kirana stores so that near

residents need not to go far.

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It has been observed that majorly big supermarkets or hypermarkets have

proved to be cheaper in most of the items such as vegetables and fruits. Lorry

vendors themselves regularly source it from the big retailers for eg: Reliance

Fresh. Electronics goods are comparatively costlier in organised big malls.

Mostly in FMCG sector, big retailers offers lots of combo discounts and all

which leads price to less than the MRP, but marginal reduction. But in apparels

margin difference is observed higher than 15%.

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The answer should have been 100% yes but there is always a mix response andhence the researches are being conducted all over the world. By this we can

interpret that how cautiously one has to select a location by strategically

speculating the entry of big retailers in that region. As Reliance Fresh has been

expanding gradually in small lanes where once upon a time neighbourhood

kirana stores dominated.

Qualitative

Q 1. Do you feel supermarkets affect small shopkeepers?

Definitely yes, and nowadays to a very high extent as no. of organized retailers

have been increasing drastically and they are into attacking mode as they are

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opening up the outlets in the small lanes in residential areas. They are attacking

the major strength of small retailers. We have been sustaining as we are near to

residential areas in small space shops and catering to the daily requirement of

households although in smaller quantities. They are providing the convenience

part, i.e. delivering at the doorstep, providing credit, maintaining relationship. It

is becoming more n more competitive situation.

Q 2. How far the no. of footfalls has reduced after supermarkets came into

existence?

No. Of footfalls have been reducing drastically and population is being

increasing drastically. So instead of growing they are merely sustaining.

Moreover, the quantity purchase of consumers have been reducing, they buy

from small shopkeepers for temporary purposes. They buy in bulk from big

malls, whether once in a week or a month. But huge bill leads to heavy

discounts under the various schemes for eg. Big Bazaar Currency, on purchase

of Rs. 500 on selected items gives customers Rs 50 currency.

Q 3. How harshly has it impacted on your mark-up price?

As our cost is more than that of big retailers. Our price is also more. And to

sustain in market we have been reducing mark-up. They have to provide better

service, trust in quality.

Q 4. How badly has it affected your overall business activity?

It has been affecting so far. We have to reduce our inventory. As sales volumes

have been decreasing in the recent years.

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Q 5. How will it affect your business as supermarkets are being open up in

manysmall communities around 3-4 km radius area?

It is affecting the regular activities of the business. They are the single most

threat to the retail industry. Opening up of the Reliance Fresh every here and

there has lead to shut down many businesses on irregular intervals. Although

the research shows that in unorganised sector 4.7% businesses are shutting

down annually but the role of organised sector in it is just 1.7%. But still the

pace of thrust among the giant players to tap ever-growing market in retail will

increase the numbers of shutting down more stores.

Q 6. What are your opinions on allowing foreign players in supermarkets?

They should not be allowed. Where would we go when foreign players with

their huge volumes will enter into the market. Unorganised sector is already

facing big competition from domestic organised sectors and it is going to be

end of an era, which defined India as the land of entrepreneurs. The

entrepreneurs will need to shift into some employment if it becomes difficult to

manage the businesses.

Key Findings: -

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It would be impacting too harshly if all doors are kept open for foreign

players. As already big domestic players have entered into the organized sector

and eating up the share of 1.3 crore small shop owners in unorganized sector.

Although research shows that unorganised sector has been growing by more

than 9% a year. But still there profitability and volumes have been decreasing

consistently.

Considering the heavy impact of local big players on the Pop n Mom

stores, we can imagine the future impact of allowing foreign players into one of

the sensitive multi-brand retailing. India loses around Rs. 1 lakh crore of food

products, including fruits and vegetables owing to bad farming practices and

lack of structured farm-to-retail cold chain infrastructure.

FDI in retail could bring along huge investments in cold storage chains,

agro-processing and other back-end infrastructure which could reduce the post-

harvest losses. As expected that the small retailers are being affected

tremendously by such a nominal entry of big retailers. And through this we can

imagine the harsher impact it could lead once the giant players maker their

grand entry. Rising no. of big retail outlets have pressurised the pop n mom

stores to consistently reduce their market share.

Positive Impact:-

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To Consumers: Better Quality, Affordable price, huge variety, easy and

convenient shopping at one junction with high techno savvy arrangement.

To Farmers: They will get better price, contract farming means assured and

stabilised returns, Less wastage, more productivity, water irrigation

development, cold storage facilities will develop, efficient transportation. This

all will lead to efficient utilisation of the agricultural produce, which currently

has been wasted half of the production. Hence, farmers with better price will be

benefitted.

To government: better exports because of efficient farm produce, curbing all

time high inflation rate, more tax revenue as unorganised sector mostly escapes

from paying the right amount of different taxes payable. More employment

generation, more related industries will benefit like transportation facilities will

be required. More infrastructure and reality development will be required.

Small scale manufacturing industries will get contract manufacturing bulk

orders from big retailers. Hence, it would be a win win situation on both sides.

To Society: overall infrastructural development, cleaner and greener

environment, as less waste less pollution, eco-friendly modern techniques for

preserving and storing agricultural goods.

To small retailers: in initial stage government will be restricting some quotas

such as 30% of the whole sales turnover should be in whole cash and carry

model for small retailers. Intention is to integrate inclusive growth among all

and share mutual space and gain from the ample retail sector. There is a ample

market space for all.

Negative Impact:-

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To small retailers: decrease in sales volumes, profitability, mark-up, have to

provide more services at the same price so as to sustain in competition.

Procurement from cash and carry stores at marginally lower price than MRP.

They will be forced to become more transparent and pay taxes. Cost pressure

overall, customer bargain power will increase. In Mumbai, small retailers have

already initiated discount and attractive offers to lure consumers. Their loyal

neighbourhood consumers will switch to big malls, as the price differential

would be higher.

To Government: More open economy exposure leads to more foreign players

control over the market and gradually it may shift to influencing politically.

Influence in policy formulation at a late stage is too possible.

To the middlemen: Big players will try to procure goods directly from farmers

without involving the middlemen in the deal. Although the law is abiding and

says that agricultural produce should be procured only through members of

APMC(Agricultural Produce Market Committee). Regular income of huge no.

Of middlemen and their families will be impacted.

Recommendations:

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After analysing the research over the impact of allowing FDI in Multi-

Brand Retailing, I found that FDI is going to be allowed in recent period only

and it is inevitable to escape too. To get the benefits and eliminate the negative

impacts government can play a vital role by applying stringent norms over the

foreign players. Removing restrictions slowly and gradually by continuously

monitoring the impact in different phases. Following the China model, to allow

in 6 major metro cities and then in urban cities. Not allowing in rural areas.

Proposed % for compulsory wholesale trade is 30%, it should be increased or at

least should be strictly monitored to the mentioned level. The benefit of

wholesale should be rightly delivered to the retail stores. As nicely proposed

that minimum 2000 sq.ft. area to enter in retail. Government should strictly

monitor that 50% of the total investment is at the backend infrastructure as

proposed.

India is popularly known as the Land of Laws, but not abiding it. Complicity

is more but enforceability is less. So it should not be the case in this sensitive

issue. Separate body should be appointed for policy formulation and its strictimplementation.

It should not be allowed in residential areas to lessen its impact on

Neighbourhood kirana stores.

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Conclusion

Allowing FDI in this sensitive sector is going to be a major leap by India

towards improvising its image as open economy and declaring that we are now

well equipped, experienced and ready enough to face the global competition in

any arena.

Initially looks as really on small retailers but actually it is going to be a win win

situation for both as Indias retailing business has ample space for all.

India is being pressurised to open up FDI in controversial multi-brand retailingsince long from WTO members and specially by America. Though it has many

pros and cons, it should be opened up. But after due diligence it can be

cautiously opened up for foreign players to play in Indian huge growing $ 500

billion retail industry. So that interest of every stakeholder is being secured.

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Bibliography

http://dipp.nic.in/DiscussionPapers/RetailTrading_VNPrasad.pdf

http://online.wsj.com/article/BT-CO-20110722-711110.html

http://www.Moneyconrol.com

http://www.atkearney.com/index.php/Publications/at-kearneys-globalretail-development-index.html

Gujarat Samachar

Business Standard

Economic Times

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http://dipp.nic.in/DiscussionPapers/RetailTrading_VNPrasad.pdfhttp://online.wsj.com/article/BT-CO-20110722-711110.htmlhttp://online.wsj.com/article/BT-CO-20110722-711110.htmlhttp://dipp.nic.in/DiscussionPapers/RetailTrading_VNPrasad.pdf


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impact of fdi in mbr

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