Foreign Direct Investment (FDI) in Indian Retail

Introduction to Foreign Direct Investment (FDI) in Indian Retail

The recent clamor about opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue, the most important factor against FDI driven “modern retailing” is that it is labour displacing to the extent that it can only expand by destroying the traditional retail sector. This is because the primary task of government in India is still to provide livelihoods and not create so called efficiencies of scale by creating redundancies. As per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI (which have been the proposed figures till date) will have immediate and direct consequences. Entry of foreign players now will most definitely disrupt the current balance of the economy; will render millions of small retailers jobless by closing the small slit of opportunity available to them. Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding process. If there aren’t any goods being manufactured, then there will not be many goods to be retailed! This underlines the importance of manufacturing in a developing economy.

Global retailers have already been sourcing from India; the opening up of the retail sector to the FDI has been fraught with political challenges. With politicians arguing that the global retailers will put thousands of small local players and fledging domestic chains out of business. The only opening in the retail sector so far has been to allow 51% foreign stakes in single brand consumer stores, private labels, high tech items/ items requiring specialized after sales service, medical and diagnostic items and items sourced from Indian small sector (manufactured with technology provided by the foreign collaborations). Parties supporting the FDI suggest that the FDI in retail should be opened in a gradual/ phased manner, such that it can promote competition and contribute to the growth of the Indian economy. The impact of the FDI would benefit the end user of the consumer to a great extent and will help to generate a decent amount of employment as more and more entrepreneurs would be coming forward to invest and taste the new generation in retail marketing. The opening of FDI should be designed in such a way that many sectors – including agriculture, food processing, manufacturing, packaging and logistics would reap benefits. The table below lists the pros and cons of allowing FDI into retail.

Benefits of FDI in Indian Retail

  • Inflow of investment and funds.
  • Improvement in the quality of employment.
  • Generating more employment.
  • Increased local sourcing.
  • Provide better value to end consumers.
  • Investments and improvement in the supply chains and warehousing.
  • Franchising opportunities for local entrepreneurs.
  • Growth of infrastructure.
  • Increased efficiency.
  • Cost reduction.
  • Implementation of Information Technology in retail.
  • Stimulate infant industries and other supporting industries.

Drawbacks FDI in Indian Retail

  • Would give rise to cut-throat competition rather than promoting incremental business.
  • Promoting cartels and creating monopoly.
  • Increase in the real estate prices.
  • Marginalize domestic entrepreneurs.
  • The financial strength of foreign players would displace the unorganized players.
  • Absence of proper regulatory guidelines would induce unfair trade practices like Predatory pricing.

Conclusion: Thus it can be said that this investment boom (Foreign Direct Investment) could change the face of Indian retail by offering quality goods at lower prices to the consumers. In addition to this, the presence of global retailers in Indian retail industry will further enhance exports from India as they would also source Indian goods for their international outlets in a big way leading to a remarkable increase in Indian exports.

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