Foreign Direct Investment in Retail Sector in India

 

Muhammad Riyazul Ameen Memon

 

 

ABSTRACT:

One of the most notable developments during the last two decades is the stunning growth of FDI in the global economic landscape. Such unprecedented growth of global FDI in 1990 around the world make FDI an vital component of development policy in both developed and developing nations and policies are designed in order to motivate internal flows. Foreign Direct Investment implies the transfer of foreign funds into a country to purchase a service or manufacturing business or to open a new factory or service company[i]. FDI is a direct investment into production or business in a country by a company in another country whichever by buying a company in the target country or by expanding operations of an existing business in concerned country. The shortage or scarcity of all types of resources viz. technological know- how, skills and practices, financial, capital, entrepreneurship,  access to markets- abroad- in their economic development, developing nations accepted FDI as a sole visible answer for all  scarcities faces by them. Foreign Direct Investment in India is govern by sub-section (3) of section 6 of the Foreign Exchange Management Act, 1999 read with Notification No. 20 dated 3.5.2000 as amended from time to time. One of the recent circular on FDI policy was issued by Ministry of Commerce and Industry, ‘Consolidated FDI Policy’ which is effective from 10^th April 2012.

 

Despite some concerns about the large fiscal deficit our Country represents a promising macroeconomic story with potential to maintain sustain high economic growth rates. As per Ernst and Young in June 2008 India has been rated as the 4^th most attractive investment destination in the world after Central Europe, China, and Western Europe. Similarly, UNCTAD’s World Investment Report[ii] 2005 states that India the 2nd most attractive investment destination among the Transnational Corporations (TNCs). All this could be attributed to the rapid growth of the economy and favorable investment process, liberal policy changes and procedural relaxation made by the government periodically.[iii]

 

As per the recent consolidated FDI Policy of India, a list is given in Sec. 3 as to regarding those who are allowed and can invest inside India. Firstly, A non-resident entity (other than a citizen of Pakistan or an entity incorporated in Pakistan) can invest in India, subject to the FDI Policy. A person who is citizen of Bangladesh or an entity incorporated in Bangladesh can invest only under the Government route. Secondly, NRIs resident in Nepal and Bhutan and also citizens of Nepal and Bhutan are allowed to invest in the capital of Indian companies on repatriation basis, subject to the condition that the amount of consideration for such investment shall be paid only by way of inward remittance in free foreign exchange through normal banking channels.

 

 

Further, OCBs have been derecognized as a class of investors in India with effect from Sep. 16, 2003. Erstwhile OCBs which are incorporated outside India and are not under the adverse notice of RBI can make fresh investments under FDI Policy as incorporated non-resident entities, with the prior approval of Government of India if the investment is from the Government route and with the prior approval of RBI if the investment is from the Automatic route.

 

On the other hand the list is given in S. 6.1 of recent consolidated FDI Policy which is effective from 10^th April 2012 and the classes which are prohibited are: (i) Retail Trading (except single brand product retailing), (ii) Lottery Business including Government /private lottery, online lotteries, etc., (iii) Gambling and Betting including casinos etc., (iv) Chit funds, (v) Nidhi company, (vi) Trading in Transferable Development Rights (TDRs), (vii) Real Estate Business or Construction of Farm Houses, (viii) Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes, (ix) Activities / sectors not open to private sector investment e.g. Atomic Energy and Railway Transport (other than Mass Rapid Transport Systems). Foreign technology association in any form including licensing for franchise, trademark, brand name, management contract is also prohibited for Lottery Business and Gambling and Betting activities.

 

After doing research we can find following facts regarding FDI in India up to year 2008:

1.     Because of continued economic liberalization since 1991, India has seen a decade of 7 plus percent of economic growth. In fact, Our Country’s economy has been rising more than 9 percent for three consecutive years since 2006 which makes the country a prominent performer among global economies. At present India is the 4th largest and 2nd fastest growing economy in the world. India is the 3rd largest pool of scientific technical manpower and 11th largest economy in terms of industrial output and.

2.     India has considerably reduced its fiscal deficit from 4.5 percent in 2003-04 to 2.7 percent in 2007-08 and revenue deficit from 3.6 percent to 1.1 percent in 2007-08.

3.     Among the sectors, services sector received the highest percentage of FDI inflows in 2008. Other major sectors receiving the large inflows of FDI apart from services sector are electrical and electronics, telecommunications, transportations and construction activities etc. It is found that nearly 41 percent of FDI inflows are in high priority areas like services, electrical equipments, telecommunications etc.

4.     It is found that India has increased its list of sources of FDI since 1991. There were just few countries (U.K, Japan) before Independence. After Independence from the British Colonial era India received FDI from U.K., U.S.A., Japan, Germany, etc. There were 120 countries investing in India in 2008 as compared to 15 countries in 1991. Mauritius, South Korea, Malaysia, Cayman Islands and many more countries predominantly appears on the list of major investors in India after 1991. This broaden list of sources of FDI inflows shows that India is successful in restoring the confidence of foreign investors through its economic reforms process.

5.     State- wise FDI inflows show that Maharashtra, New Delhi, Karnataka, Gujarat and Tamil Nadu received major investment from investors because of the infrastructural facilities and favorable business environment provided by these states. All these states together accounted for nearly 69.38 percent of inflows during 2000-2008.

 

FDI in retailing is favored by giving several justifications. Admission of large low-cost retailers and adoption of integrated supply chain management by them is likely to lower down the costs. They also encourage the linkage of farmers, local suppliers and manufacturers, no doubt only those who can meet the safety standards and quality, to worldwide market and this will ensure a reliable and profitable market to these local players. India is already a key sourcing country for some global retailers. The entry of foreign retailers is likely to further promote India‘s manufacturing and export sectors, leading to a double bonus for the economy.

 

However, a lot of trading associations, industrial associations and political parties have argued against FDI in retailing due to reasons like, south east Asian countries shows that after permitting FDI, the domestic trader were marginalized and due to this unemployment came into picture. International retailers might resort to predatory pricing. Due to their fiscal clout, they often sell below cost in the fresh markets. When the domestic players are wiped out of the market foreign players enjoy a monopoly position which allows them to increase prices and make profits. The opening up of the retail sector would affect the sales in the unorganized zone. Also, by reducing the figure of intermediaries, organized retailing will lead to some job displacement. It is said that FDI would provide employment opportunities. But, the fact is different that they cannot provide employment opportunities to semi-uneducated people. Even if they can provide employment opportunities like drivers, watchman etc. however, this argument gets more attention because in India semi-illiterate people in quiet large in number. The organizational form of rural producers as they interact with Big Retail is not being done yet.

If we talk about India FDI in Retail trading should be opened up to substantially improve distribution and productivity system through modern format retailing. The government should come out with a policy statement laying down the roadmap for modern retail and permitting foreign investment in retail. If FDI in Retail industry is permitted, then it will help domestic players to capitalize MNCs players supply chains and distribution network experiences. The allowance of industry status will help companies borrow at lower costs, and will also bestow them fiscal incentives etc. Furthermore, India has benefited from large foreign investment flows in recent years. FDI provides a win – win situation to the host and the home countries. Both countries are directly interested in inviting FDI, because they benefit a lot from such type of investment. The ‘home’ countries want to take the advantage of the vast markets opened by industrial growth. On the other hand the ‘host’ countries want to acquire technological and managerial skills and supplement domestic savings and foreign exchange. Thus finally, the government of each country is required to attract more and more FDI investors and must  utilize the fund obtained by this in just, fair and reasonable manner instead of indulging in corruption activities, so that not only one nation but the whole world would get developed and the pace of competition must be at its peak.

 

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