General Awareness

April 04, 2017 @ 01:15 PM

FDI in Retail - Pros & Cons

General awareness on current topics is essential as not only you will be getting questions on   GK in various MBA entrance exams but it will be useful for   Essay writing test and WAT.  

Today, you will read General Awareness Topic :  FDI in Retail – Pros & Cons 
 
Indian retail industry is one of the sunrise sectors with huge growth potential. According to the Investment Commission of India, the retail sector is expected to grow almost three times its current levels to $660 billion by 2015. 
 
However, in spite of the recent developments in retailing and its immense contribution to the economy, retailing continues to be the least evolved industries and the growth of organized retailing in India has been much slower as compared to rest of the world. Earlier, in December 2011, Indian government removed the 51 percent cap on FDI into single-brand retail outlets in and opened the market fully to foreign investors by permitting 100 percent foreign investment in this area
 
After much dilly dallying, India recently allowed the 51percent FDI in multiband retail. The decision was criticized in the political circles and appreciated in the economic circle. Prime Minister of India in his address to the nation called the decision as a need of the economy. AT Kearney (a globally famous international management consultancy) recognized India as the second most alluring and thriving retail destination of the world. 
 
Other profitable retail destinations of the world include China and Dubai. Diverse foreign direct investment in Indian retail is greatly cherished by most of the major and leading retailers of USA and European countries, including Walmart (USA), Tesco (UK), Metro (Germany), and Carrefour (France). 
 
There are many conditions attached with the 51percent FDI in retail –
 
•FDI is not likely under the automatic route implying that FIPB approval on case by case basis
•Minimum Investment to be done is $100 million
•50percent of the investment should be done in improving the back end infrastructure
•30percent of all raw materials have to be procured from the small and medium enterprises
•Permission to set retail stores only in cities with a minimum population of 10 lakhs
•Government has the first right to procure material from the farmers
•Moreover, retailers had to seek no objection certificate from each state. So far, nine states and two union territories lave allowed to invest in their state/UTs
 
Many political parties are opposing the FDI in retail on the grounds that it eat away the employment. Since unorganized retail sector is one of the largest employment providers in the country, there are fears that it may eat away their employment. Moreover, they are also opposing on the grounds that it will negatively affect the farming community.  
 
As far as threat to local stores is concerned, positive impact of organized retailing could be seen in USA, UK, and Mexico and also in China. Retail is the second largest industry in US. It is also one of the largest employment generators. Moreover, in China, between 2004-11, number of unorganized retailers increased from 1.9 millions to 2.5 millions and in Indonesia, despite presence of foreign retailers, 90 percent of the retail business in the hands domestic retailers. However, in Thailand, after the entry of foreign retailers, number of domestic retailers reduced by 60percent. In Indian case, domestic organized retail chains like Future Group and Reliance have not affected the unorganized retailers. Therefore, Walmart, Tesco may affect the domestic retailers in a big way.
 
Farmers are also likely to be benefitted by the foreign investment. Farmers in India get only 10%-12% of the price the consumer pays for the agri-products. Coming of organized retailing will benefit farmers in big way. Big retailers sell their product at very competitive prices. So, they source it directly from the farmers. Middle man does not have any place in this format of retailing. This will not only benefit farmers but also help in checking the food inflation. Moreover, since 50 percent of the investment must come up in the back end infrastructure, supply chain will be improved which will result in reduction in post harvest loss of agriculture commodities. Storage is a major problem area and 20-25 percent of the agri-products get wasted due to improper storage. Furthermore, if there is some substance in the threat, government had taken adequate measures to protect unorganized retailers.
 
The advantages outweigh the disadvantages of allowing unrestrained FDI in the retail sector, as successful experiments in countries like Indonesia and China demonstrate. In both countries, the issue of allowing FDI in the retail sector was first met with incessant protests, but allowing such FDI led to GDP growth and a rise in the level of employment.
 
Moreover, the critics of the move neglect the impact on consumers who will ultimately respond to the incentives of convenience, price, variety and service. The states which are opposing the FDI in retail may open the doors for it after seeing its benefits in neighbor states as happened during the implementation of VAT.   
 
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