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GJESR RESEARCH PAPER VOL. 1 [ISSUE 1] FEBRUARY, 2014 ISSN:- 2349–283X

FDI in Retail Sector in India: Challenges and

Opportunities
*Kahkashan Khan
MBA Department of Deen Dayal Upadhyay
Gorakhpur University
Gorakhpur, India
Email: kahkashan17@gmail.com

ABSTRACT: The Retail Sector of India is very vast, and has capability for development, as the majority of
its constitutes are un-organized. The retail sector of India contributes of about 15% to the national GDP,
and employs a huge workforce of it, after the agriculture sector. The retail sector of India handles about
$250 billion every year, and is expected by veteran economists to reach to $660 billion by the year
2015.The business in the organized retail sector of India is expected to grow at the rate of 15-20% every
year, and reach the level of $100 billion by the year 2015.Despite the recent furore, FDI in retail sector
will boost the Indian economy, creating job opportunities in the next few years. Driven by an increasing
disposable income, purchasing power and now the much awaited FDI, retail has emerged as one of the
fastest growing sectors in India. Moving towards modernisation, India's retail sector, currently growing at
30%, and is expected to generate 54,000 jobs over the next five years — a variety of opportunities from
the entry level to senior management level, for fresher’s as well as for professionals[8]. From the
employment point of view, jobs will be created not only in retail sector area, but also in areas such as
front-end sales, facility management, security management, inventory, merchandising, customer
relationship and visual merchandising, among others. In smaller towns, knowing the local language will
be an asset because it will help one connect with the masses.

Keywords: FDI, GDP, Retail Sectors.

1. INTRODUCTION underlines the importance of manufacturing in

a developing economy[1].
The recent clamour about opening up the retail
sector to Foreign Direct Investment (FDI) Global retailers have already been sourcing
becomes a very sensitive issue, the most from India; the opening up of the retail sector to
important factor against FD) driven modern the FDI has been a political challenges. With
retailing is that it is labour displacing to the politicians arguing that the global retailers will
extent that it can only expand by destroying the put thousands of small local players and
traditional retail sector. This is because the fledging domestic chains out of business. The
primary task of government in India is still to only opening in the retail sector so far has been
provide livelihoods and not create so called to allow 51% foreign stakes in single brand
efficiencies of scale by creating redundancies consumer stores, private labels, high tech
[12]. As per present regulations, no FDI is items/ items requiring specialized after sales
permitted in retail trade in India. Allowing 49% service, medical and diagnostic items and items
or 26% FDI (which have been the proposed sourced from Indian small sector
figures till date) will have immediate and direct (manufactured with technology provided by the
consequences. Entry of foreign players now will foreign collaborations)[2]. Parties supporting
most definitely disrupt the current balance of the FDI suggest that the FDI in retail sectors
the economy; will render millions of small should be opened in a gradual manner, such
retailers jobless by closing the small slit of that it can promote competition and contribute
opportunity available to them. Retailing is not to the growth of the Indian economy. The
an activity that can boost GDP by itself. It is only impact of the FDI would benefit the end user of
an intermediate value-adding process. If there the consumer to a great extent and will help to
aren’t any goods being manufactured, then generate a decent amount of employment as
there will not be many goods to be retailed. This more and more entrepreneurs would be coming
forward to invest and taste the new generation

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in retail marketing[3]. The opening of FDI Successful retailing involves support from
should be designed in such a way that many ancillaries that specialise in setting up
sectors – including agriculture, food processing, distribution centres, training of staff, managing
manufacturing, packaging and logistics would supply chain processes et al. The experts felt
gain benefits. large investments from foreign retailers will
draw specialized global players in the space
FDI in retail sector is an economic reform, (ancillary activities) to India. This will help
which would allow global chains like Wal-Mart improve overall processes and supply chain
Stores Inc and Carrefour to own up to 51 network, leading to improved efficiency and
percent of retail ventures. The policy would let better profitability for Indian retail.
foreign retailers own up to 51 percent of
supermarkets and 100 percent of single-brand Large international retailers have superior
stores[4]. The policy doesn't require platform in terms of IT infrastructure and have
parliamentary approval, but foreign retailers much deeper understanding of their
must get prior approval from the state consumers[17]. This will lead to better
governments where stores will be opened or operational management in the Indian retail
located. sector, especially when the Indian retail sector
is looking for expansion.
The government, as a measure to protect
themselves, has said foreign retailers would FMCG companies in India have several stock
have to source 30 percent of their goods from keeping units (SKUs) in their portfolio; only
small industries. ~20-25% of this is aggressively marketed or
made available to consumers [9]. Thus, Indian
A Citi report says $15-20 billion in FDI could retailers had no choice but to come up with
flow into the country over the next 10 years as a their own private labels rather than focus on
result of FDI in multi-brand retail. sales of existing companies. However, with the
advent of foreign partner and his strong
The report also says the move into retail sector relationship with global FMCG companies,
would help enhance the share of organised Indian retailers can get better product line,
players in the overall retail sector, which which can help to drive sales growth and
currently account for about 6 % of India's $470- improve sales per sq. ft, which currently stands
billion retail market [5]. at almost half that of their global counterparts.
Multi-brand retail in India is largely in the un- 3 FDI IN RETAIL TO TAKE INDIA’S
organised sector is dominated by CONSUMERISM TO A NEW GROWTH
neighbourhood kirana stores and there is a TRAJECTORY
concern among the political parties and the
traders that these stores would be affected by Any process of change is a dialectic process.
the entry of global retailers. Change is the only truth which prevails at the
end if it brings wellbeing to the masses. We
The Indian Retail Sector Can Be Broadly believe sooner or later opposition to the FDI in
Classified Into:- retail will end and new era will begin[6].
Food Retailers Health and beauty Products
Clothing and Footwear Home Furniture & 4 FDI IN RETAIL –THE PRESENT STATUS
Household goods Durable goods Leisure & 51% FDI in multi brand Retail and 100% in
Personal Goods Of these above segment Food single brand is put on hold till the consensus is
and beverage and clothing segment is expected reached between the political parties. There is
to grow exponentially. stiff opposition being seen within the UPA allies
in context of FDI in retail. Also the opposition
2 HOW WILL FDI (Foreign Direct party is seeing this as an opportunity to get the
Investment) HELP INDIAN RETAIL SECTORS political mileage[8].
Future Group and Spencer’s Retail Executives 5 FINE POINTS PROPOSED IN FDI IN RETAIL
are of the views that FDI in Indian Retail will SECTORS
help Indian Economy.
Govt allowed 51 percent FDI in multi brand
The entry of global retailers in the form of joint retail and increased FDI limit in single brand
venture / partners will help Indian retailers, as retail from 49 percent to 100 percent. Right
foreign retailers will bring with them now this is put on the back burner due to
international experience and best practices[7].
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opposition from the political parties. Followings  Investments and improvement in the
are the fine points of the FDI in retail. supply chains and warehousing.

1) FDI is not likely under the automatic route  Franchising opportunities for local
implying that FIPB approval on case by case entrepreneurs.


basis.
2) Minimum Investment to be done is $100 Growth of infrastructure.


million.
3) 50% of the investment should be done in Increased efficiency.


improving the back end infrastructure.
4) 30% of all raw materials have to be procured Cost reduction.


from the small and medium enterprises.
5) Permission to set up retail stores only in Implementation of Information
cities with a minimum population of 10 lakhs. Technology in retail.


6) Govt has the first right to procure or
purchase materials from the farmers. Stimulate infant industries and other
supporting industries [12].
6 GLOBAL RETAILING SCENARIOS
Retail Sectors has been playing a major role in 8 CHALLENGES OF FDI IN INDIAN RETAIL


improving the productivity of the whole
Would give rise to cut-throat
economy at large. The positive impact of
competition rather than promoting
organized retailing could be seen in USA, UK,
incremental business.
and Mexico and also in China. Retail is the
second largest industry in US. It is also one of  Promote cartels and will create
the largest employment generators sectors [10]. monopoly.
It is also important to understand that
Argentina, China, Brazil, Chile, Indonesia,  Increase in the real estate prices.
Malaysia, Russia, Singapore and Thailand have
allowed 100% FDI in multi brand retail. These  Marginalize domestic entrepreneurs.


countries have been benefited immensely from
it. Also small retailers co-exist. The quality of The financial strength of foreign players
services they are providing has increased. China would displace the unorganized players.


permitted FDI in retail in 1992 and has seen
huge investment flowing into the sector. It has Absence of proper regulatory
not affected the small or domestic retail chains provisions and guidelines would induce
and on the contrary small retailers have unfair trade practices like Predatory
increased since 2004 from 1.9 million to over pricing [12].
2.5 million.
Despite the above challenges there are certain
We can take the example Indonesia where still other problem relating to foreign direct
90% of the business still remains in the hand of investment (FDI) in retail in India is that it does
small traders [11]. not provide a level playing field to other players
of the domestic and small sort. In addition, it
7 OPPORTUNITIES OF FDI IN INDIAN RETAIL appears to take a rather naive and simplistic


view on certain aspects, which like myths being
Inflow of investment and funds retail repeated, tend to become urban legends. On the
sectors. other hand, no country can afford to take on an

isolationist approach.
Improvement in the quality of
employment. 9 HOW FARMERS TO GET BENEFITED

 Generating more employment Farmers in India get only 10% to 12% of the
opportunities. price the consumer pays for the agricultural


products which they produce. Coming of
Increased local sourcing. organized retailing will benefit farmers in big

way. Big retailers sell their product at very
Provide better value to the end competitive prices. So, they source it directly
consumers. from the farmers. Thus Middleman get
eliminated or does not have any place or role in
this format of retailing. This will not only
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benefit the farmers but also help in checking the  Knowledge about different products
food inflation. Thus the farmers will get through different mediums like
benefited up to a large extent. Internet, Television etc. Also knowledge
Also India has very inadequate facilities to store about the latest trend and fashion.


the food grains and vegetables. As the
investment will flow into back end 47% of the India’s population is under
infrastructure, supply chain will get the age of 30. This category is driving
strengthened. Storage is a major problem area the consumption story.


and 20% to 25% of the agricultural products
get wasted due to improper storage[10]. Emergence of new retailing format.

PRODUCT WASTAGE  Easy availability of Credit Facilities.

TOMATOES 35% 12 FDI COULD BENEFIT STRESSED

COMPANIES
MANGOES 30% FDI in multi brand will stimulate investment in
the sector. There are companies in the retail
POTATOES 25% sector that are reeling under debt. These
companies could get fresh lease of life[14].

Company Debt (Rs Market Cap

Another area which is also the cause of concern Crore)
is, movement of vegetables and other
perishable agricultural items from one place to Pantaloon 4,200 3, 867
another. Due to lack of proper transportation
facilities farmers sell their produce in local
Vishal Retail 700 42
market. This results in the lower realization on
the produce.
Provogue 400 275
10 IMMENSE GROWTH OPPORTUNITY FOR
RETAILERS

)ndia is Asia’s third largest retail market after 12.1 Beneficiary of FDI in Multi Brand
China and Japan. Organized retailing has a very Retail:-
virgin space in India. It provides immense
growth opportunity. Only 5% of the total sales 12.1.1 Multi Brand Retail Stores: 51% in
are being done by organized retailer. Currently Multi brand retail [16].
Indian Retail sector have sales of around $500 Pantaloon Retail
billion. Retail sector is expected to have sales of Vishal Retail
$900 billion by 2014. It is still far behind China, Shoppers Stop
whose retail sales by 2014 are expected to cross Koutons
$4500 billion[13]. Trent

Purchasing power of the Indian urban 12.1.2 Single Brand Retail: 100% FDI in
consumer is growing and branded merchandise Single Brand Retail.
in categories like Apparels, Cosmetics, Shoes, Archies
Watches, Beverages, Food and even Jewellery, Cantabil
are slowly becoming lifestyle products that are VIP Ind
widely accepted by the urban Indian consumer. Titan
IFB Industries
11 GROWTH DRIVERS OF INDIAN RETAIL
SECTOR: 12.1.3 Real Estate: Especially mall developers.


Retailers like Wal-Mart; Tesco operates in large
Rising Income and increase in area of 50,000 – 60,000 sq.ft. They generally
convergence of consumer taste and pay to the builders certain percentage of the
preferences. total revenue. Real Estate companies into


retailing space to be benefitted.
Dual family Income. Unitech
DLF
Sobha Developers
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12.1.4 FMCG Companies: Big retailers [6] Guruswamy, M., K. Sharma, J. P. Mohanty,
generally sources from the producers, FMCG and T. J. Korah. 2005 . FD) in )ndia’s Retail
companies are going to be benefited. Sector: More Bad than Good? Economic and
HUL Political Weekly, 40(7), pp. 619-623
GSK
Godrej Consumer [7] Kalhan, A. (2007). Impact of Malls on Small
Dabur Shops and Hawkers, Economic and Political
Marico Weekly, 42 (22), pp. 2063 – 2066.

13 SIDE EFFECTS OF THE FDI AND SOLUTION [8] Mukherjee, A., D. Satija, T. M. Goyal, M. K.
Nevertheless the good thing that FDI in retail is Mantrala, and S. Zou (2011). Impact of the
that it will bring growth and opportunities in Retail FDI Policy on Indian Consumers and the
this sector but argument will not be justified if Way Forward, ICRIER Policy Series No. 5
we do not take into account the grey areas.
Some of the grey areas are: [9] Patibandla, M. (2012). Foreign Direct
)nvestment in )ndia’s Retail Sector: Some Issues,
Working Paper No. 366, Indian Institute of
1-Predatory pricing could strangulate the Management Bangalore.
domestic retailers.
2-It has been seen MNCs retailers uses there big [10] www.slideshare.net/dpdas3/impact-of-fdi-
size to kill competitors. in-retail-sector
3-In order to bring goods at lowest possible
[11]www.indiainsouthafrica.com/InvestinIndia
price for customers they squeeze the margins of
/ppts/4%20FDI%20Policy.ppt
their suppliers. So as claimed by thousand that
suppliers will benefit, it still doubted. [12] Bhattacharyya, R. (2012). The
Opportunities and Challenges of FDI in Retail in
In order to correct these grey areas, India need
India, IOSR Journal of Humanities and Social
to have strong regulator for the sector. And at
Science, 5(5), pp. 99 – 109
the same time strengthen the Competition
Commission of India before these Big Retailers [13] Coe, N. M. and M. Hess (2005). The
prowls into the Indian Territory [15]. internationalization of retailing: implications
for supply network restructuring in East Asia
14. CONCLUSIONS
and Eastern Europe, Journal of Economic
We wish row over FDI in retail gets over soon Geography, 5, pp. 449 – 473
and India should embrace new era of retailing.
[14]Department of Industrial Policy and
And Govt makes right kind of body to vigil these
Promotion (2010). Foreign Direct Investment
giants. Indian consumers are waiting to splurge.
(FDI) in Multi-brand Retail Trading. Discussion
)ndian consumers’ balance sheet is still clean,
Paper.
which provide much of room to consumption
related debt. [15]www.iosrjournals.org/ccount/click.php?id
=5897
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[16]http://karkuvelraj1987.blogspot.in/2013/
[1]www.allbankingsolutions.com/Banking-
02/fdi-in-multi-brand-retail-challenges.html
Tutor/FDI-in-India.htm
[17] www.pbr.co.in/Vol-5%20Iss-5/3.pdf
[2]www.spaceandculture.in/index.php/spacean
dculture article view

[3]www.legalindia.in/foreign-direct-
investment-in-indian-retail-sector

[4]www.thehindubusinessline.com/.../fdi-in-
retail-is-30.../article5225758

[5] Gupta, R. (2012). FDI in Indian Retail Sector:

Analysis of Competition in Agri-Food Sector,
Internship Project Report, Competition
Commission of India.

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