Impact of FDI on retail in India
The opening of retail trade for foreign direct investment (FDI) promises to usher in revolutionary changes in the Indian consumer market in the days to come.
Recently, in a significant step towards the liberalization of India’s retail trade, the government decided to partially open up the retail sector by announcing 51 percent FDI in single-brand retail, a move that should pave the way for large names like Nike, Versace, Addidas, Marks & Spencer to set up their own stores in India.
This means that foreign companies wishing to enter the Indian market will now be able to invest up to 51 per cent in setting up production facilities, distribution networks and retail stores, with the remainder coming from Indian investors. But for now, multi-brand retail giants like Wal-Mart are not allowed in. The government has yet to announce guidelines that will clarify the picture.
However, experts are still divided on the problems and prospects of this movement. Some say it will reduce employment opportunities, completely disrupt the structure of retail distribution, and deal a death blow to the structure of the corner store.
Optimists, on the other hand, see a whole range of opportunities, from better harvesting, processing and distribution of agricultural products to creating more opportunities for the rural and urban unemployed.
Until now, global retailers were required to sell their products through franchising or wholesale. This move will help them establish their own base in India and attract foreign capital along with better quality products and services for consumers.
India’s retail market, currently estimated to be worth $250 billion, is currently dominated by millions of mom-and-pop stores serving 97 percent of the total market.
According to a recent study, the Indian retail industry is expected to grow by around 36 per cent by 2008 and with increased foreign investment, the industry is expected to do Rs 1.60 trillion in business by the year 2008.
With the new regulations in place, the debate is what will happen to these stores? Will the entry of global retailers kill off these local stores or have no impact at all? If we take the example of China, FDI in retail has little to no impact on local retailers and they still dominate the retail sector.
Second, the decision may not trigger the flow of FDI, as single-brand retailers that wanted to be in India, such as Nike and Reebok, are already here through franchising and may struggle to find local partners. willing to invest in the business.
The Indian retail sector is the second largest employer after agriculture in the country and the entry of foreign companies will not only increase the number of employment opportunities but also exports.
With foreign companies setting up their own stores in India, the consumer will have access to some of the world’s leading brands. The entry of foreign brands would also improve product quality and variety, increase competition, and expand manufacturing.
Organized retailing promises to drive down the prices of foreign goods sold through these big box stores. This also means that some of these retail chains will eventually have to start manufacturing locally or outsource to national manufacturers to keep up with the competition.
This is more true considering the fact that super and corner markets are very likely to co-exist in the Indian market and would make the latter more competitive and empowered in terms of operations.
Also, several Indian corporations like Tatas, ITC, RPG Group and Rahejas have already established their outlet chains. Others, like Viveks in Chennai, have set up multi-brand stores. Mukesh Ambani’s Reliance is also reported to be planning a major foray into the retail business.
All this promises to make the Indian retail market a real hotspot in the days to come and at the same time offer immense business opportunities to the national entrepreneurs. In fact, this is likely to transform all the contours of the Indian market, making it part of the broader global market.
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