FDI- FOREGIN DIRECT INVESTMENT (IN RETAIL)
Introduction
As per the current regulatory regime, retail trading (except under single-brand product retailing — FDI up to 51 per cent, under the Government route) is prohibited in India. Simply put, for a company to be able to get foreign funding, products sold by it to the general public should only be of a ‘single-brand’; this condition being in addition to a few other conditions to be adhered to. That explains why we do not have these retailers in India.
But it seems that recently the tables have turned. Yes, The Government has now allowed FDI up to 100 per cent in Single-brand and up to 51 per cent in Multi-brand. This has created a lot of commotion among the people. “So what’s the big deal!!” one may ask. To know why this sudden change of policy has caused so much, let us first understand what FDI is all about.
Definition of Retail
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate consumer
Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers. Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a meager margin of profit.
The retail industry is mainly divided into: - 1) Organized and 2) Unorganized Retailing
Organized retailing
Organized retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.
Unorganized retailing
Unorganized retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP.
FDI Policy in India
Foreign Direct Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (‘RBI’) in this regard had issued a notification, which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/ sectoral equity cap. The foreign investors are free to invest in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be required.
Entry Options for Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had been operating in the country. Some of entrance routes used by them have been discussed in sum as below:-
1. Franchise Agreements
It is an easiest track to come in the Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world. Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.
2. Cash And Carry Wholesale Trading
100% FDI is allowed in wholesale trading which involves building of a large distribution infrastructure to assist local manufacturers. The wholesaler deals only with smaller retailers and not Consumers. Metro AG of Germany was the first significant global player to enter India through this route.
3. Strategic Licensing Agreements
Some foreign brands give exclusive licenses and distribution rights to Indian companies. Through these rights, Indian companies can either sell it through their own stores, or enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd
4. Manufacturing and Wholly Owned Subsidiaries.
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed to do retail. These companies have been authorized to sell products to Indian consumers by franchising, internal distributors, existent Indian retailers, own outlets, etc. For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.
FDI in Single Brand Retail
The Government has not categorically defined the meaning of “Single Brand” anywhere neither in any of its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note 3 that (a) only single brand products would be sold (i.e., retail of goods of multi-brand even if produced by the same manufacturer would not be allowed), (b) products should be sold under the same brand internationally, (c) single-brand product retail would only cover products which are branded during manufacturing and (d) any addition to product categories to be sold under “single-brand” would require fresh approval from the government.
While the phrase ‘single brand’ has not been defined, it implies that foreign companies would be allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok, Nokia, Adidas. Retailing of goods of multiple brands, even if such products were produced by the same manufacturer, would not be allowed.
Going a step further, we examine the concept of ‘single brand’ and the associated conditions:
FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only sell one brand. For example, if Adidas were to obtain permission to retail its flagship brand in India, those retail outlets could only sell products under the Adidas brand and not the Reebok brand, for which separate permission is required. If granted permission, Adidas could sell products under the Reebok brand in separate outlets.
FDI in Multi Brand Retail
The government has also not defined the term Multi Brand. FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple brands under one roof.
In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper doesn’t suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store.
The Political Game
At the beginning of the 2010 Prime Minister Manmohan Singh assures us that inflation will come down by March.
In March, after the Budget was presented the same year, Finance Minister Pranab Mukherjee assures us that the effect of his budgetary proposals in controlling inflation will be visible by May. In May, Deputy Chairman of the Planning Commission Montek Singh Ahluwalia tells us that inflation will come down once monsoon is fully active across the country.
But monsoon in real life is either in excess or in deficit; never 'perfect' or 'normal'. So by August, the economic advisor to the prime minister tells us that inflation continues to be high because of drought or floods, or for that matter, both. In October, the economic advisor to the finance minister takes over and tells us that inflation is high on account of higher demand during the festival seasons between September and November.
The prime minister then takes over at the beginning of 2011 and resumes the same story all over once again.
Voodoo economics at its best
In the last week of May 2011, a high level government committee headed by Kaushik Basu, chief economic advisor, recommended the contentious policy issue of opening up of multi-brand retail to foreign direct investment -- ostensibly to rein in inflation.
While the copy of the report has not yet been made public, press report suggests that the core arguments contained in the report were that inflation prevailing in the country was primarily on account of issues contained in managing supplies from the farm gate to the consumers.
It is indeed pertinent to note that organized retail in India is less than 5 per cent when compared to 20 per cent in China and in excess of 50 per cent in some of our Asian counterparts.
A command performance?
In the run up to the visit of American President Barack Obama to India in 2010, Wal-Mart chief executive Mike Duke arrived in India a few days earlier to set the stage with a strong pitch for liberalizing this industry.
Duke is reported to have stated that 100 per cent FDI in the Indian retail sector would 'help contain inflation in India'. He added that FDI in retail would contain inflation by reducing wastage of farm output, as 30 per cent to 40 per cent of the produce does not reach the end-consumer.
Also, "In India, there is an opportunity to work all the way up to farmers in the back-end chain. Part of inflation is due to the fact that produces do not reach the end-consumer," Duke said.
If controlling inflation was supposed to be an incentive to the consumer, Duke offered palliatives for Indian manufacturers too. According to him, allowing FDI into this sector "will also enable Wal-Mart to increase sourcing of products from India by developing more vendors here."
Well, if press reports are to be believed, the Kaushik Basu report in 2011 faithfully reproduced these arguments put forth by Mike Duke.
For the uninitiated, fashioning policy formulations by working through the government is part of a larger business strategy adopted by multinational retail giants.
Those who have been following developments in the past few years know that Wal-Mart alone must have spent millions of dollars in India for lobbying with our government to open up retail sector for FDI.
President Obama, no less, too is reported to have lobbied hard with the Indian government during his visit to India last year.
Why India?
Retailing in India is one of the pillars of its economy and accounts for about 15% of its GDP. The Indian retail market is about USD 450 billion and one of the top five retail markets in the world by economic value. The market is estimated to reach USD 615 billion in few years from now. The sectors provides livelihood to 1.2 Billion people. The sector has an extraordinary growth and well above the GDP growth. The 95% of the retail business can be classified as un-organized Sector which means only 5% of the sector is organized i.e. run by the corporate. Bulk of the investment needs of the sector is met by the domestic savings. The policy makers put forth the following advantages of FDI in Retail:
Ø Good Supply Chain
Ø Improvement in Farmer Income
Ø High quality products at low cost
Ø Better Employment
If FDI in retail is allowed in India the retail hulks like Wal-Mart, Tesco will start their operations in India. For simplicity we will take the case of Wal-Mart and restrict our points on that. Wal-Mart is Multi-National Retailer Corporation that runs chains of large discount department stores and warehouse stores. It is the largest retailer in the world and biggest private employer in the world with over 2 Million employees. Its revenue for the year 2011 is USD 422 billion with a Profit of about USD 15.3 billion. The scale at which these companies operate is huge and is incomparable to the players in India. Post economic crisis of 2008, the Asian countries like India were able to grow quickly. For this reason the retail giants like Wal-Mart eyed India as the most profitable place of investments. Moreover the low cost of labor in our country, added icing to the cake.
Perils of the FDI Policy
The advantages as mentioned above, through which the FDI policy is marketed, are actually a source of danger to our country’s economic growth. We will try put forth counter arguments for each of the advantages mentioned above:
Ø Good Supply Chain
A typical Retail trade involves various intermediary activities like transportation of goods, storage of goods at warehouse, selling it to the end customer. Assuming somebody like Wal-Mart enters India’s retail trade they endanger the livelihood of the intermediaries since they will have their own transport, their own warehouse and they will sell at their own outlets.
Ø Improvement in Farmer Income
A brief understanding of our agricultural system would be in order. The Indian agriculture system consists of about 59 million farming families. The average land holding will be 5 acres. The 60% of the total agricultural produce is consumed locally that is they are used by the farmers for paying their laborers, for own consumption and for seed for further cultivation. Only 40% of the agriculture produce will be marketed in the markets. In these markets apart from economic activity, lot of social activity also takes places as people from various villages meet. If somebody like Wal-Mart enters the system they will initially pay a higher price to the farmer for the produce. Farmers for extra income will sell extra produce out the 60% meant for own consumption. Even if small portion of this 60% comes to the market famers face the difficulty in the meeting their consumption needs. Consequently they are forced to buy from the Wal-Mart at a higher price which will disastrous in the long run. More over if Wal-Mart get hold of the market, it will destroy the social system and is does a mass destruction to our social capital.
Ø High quality products at low cost
It is wrongly perceived that somebody like Wal-Mart will be able to deliver quality product at very low cost. This can be true initially when they start their operation since they can digest losses at the initial stage because of huge profits they make in other countries. Once they get hold of entire competition in the sector, they will gradually increase the price of the products where consumers have no other choice other than buying the product at higher price. Remember the case of Pepsi and Coke in India. By allowing these kinds of players we are digging our own Grave Pit.
Ø Better Employment
As mentioned above Wal-Mart is a huge player with 8,500 stores in 15 countries. It provides employment to about 2 Million people. But the employment outside US is amounts to only about 660,000. With this piece of information we ourselves can judge the maximum amount of employment opportunity Wal-Mart can bring in and at the cost of life of 1.2 billion people. The argument of better employment is only an eye-wash and strategies followed by marketers of FDI policy.
FDI and Black Money Connection
Sri M R Venkatesh in his book titled Sense, Sensex and Sentiments clearly explains the nexus between the FDI and Black money. A glance at the FDI statistics will tell that the 45% of the total FDI of our country is coming from Mauritius. Mauritius is the hottest place to the big shots in our country where the whole junk of ill-gotten money has been parked. According to the tax treaty between India and Mauritius, capital gains arising from the sale of shares are taxable in the country of residence of the shareholder and not in the country of residence of the company whose shares have been sold. Therefore, a company resident in Mauritius selling shares of an Indian company will not pay tax in India. Since there is no capital gains tax in Mauritius, the gain will escape tax altogether. All the illegal money will become legal with the help of FDI route.
PS: THIS ARTICLE WAS FRAMED AFTER READING SEVERAL ECONOMISTS VIEWS ON FDI
