SUBJECT: ISSUE OF DISCUSSION PAPER ON FOREIGN DIRECT
INVESTMENT (FDI) IN MULTI-BRAND RETAIL TRADING
1.0 INVITATION OF VIEWS:
1.1 The Department of Industrial Policy and Promotion has decided to release Discussion Papers on some subjects on FDI. In the series of these Discussion Papers, this is the second paper on ‗Foreign Direct Investment (FDI) in multi-
brand retail trading‘. Views and suggestions are specifically invited on Section 7 of the paper entitled ‗Issues for Resolution‘ apart from any other issues of
concern relating to FDI in multi-brand retailing. These views/ suggestions backed up by facts, figures and empirical evidence may be furnished by 31 July, 2010.
1.2 The views expressed in this discussion paper should not be construed as the views of the Government. The Department hopes to generate informed discussion on the subject, so as to enable the Government to take an appropriate policy decision at the appropriate time.
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DISCUSSION PAPER ON FOREIGN DIRECT INVESTMENT (FDI) IN MULTI-
BRAND RETAIL TRADING
1.0 PRESENT SCENARIO
1.1 FDI in Multi-Brand retailing is prohibited in India. FDI in Single-Brand Retailing was, however, permitted in 2006, to the extent of 51%. Since then, a total of 94 proposals have been received till May, 2010. Of this, 57 proposals were approved. An FDI inflow of US $ 194.69 million (Rs. 901.64 crore) was received between April, 2006 and March, 2010, comprising 0.21% of the
total FDI inflows during the period, under the category of single brand retailing.
The proposals received and approved related to retail trading of sportswear, luxury goods, apparel, fashion clothing, jewellery, hand bags, life-style products etc., covering high-end items. Single brand retail outlets with FDI generally pertain to high-end products and cater to the needs of a brand conscious segment of the population, mainly attracting a brand loyal clientele, which often has a pre-set positive disposition towards the specific brand. This segment of customers is distinctly different from one that is catered by the small retailers/ kirana shops.
1.2 FDI in cash and carry wholesale trading was first permitted, to the extent of 100%, under the Government approval route, in 1997. It was brought under the automatic route in 2006. Between April, 2000 to March, 2010, FDI inflows of US $ 1.779 billion (Rs. 7799 crore) were received in the sector. This comprised 1.54 % of the total FDI inflows received during the period.
1.3 Trade is an important segment in India‘s Gross Domestic Product (GDP).
As per the National Accounts, released by the Central Statistical Organisation (CSO), GDP from trade (inclusive of wholesale and retail in organised and unorganised sector), at current prices, increased from Rs 4,33,963 crore in 2004-05 to Rs 7,91,470 crore, at an average annual rate of 16.2 per cent. The share of trade in GDP, however, remained fairly stable at little over 15 per cent in last four
1. The share of the private organised sector in total GDP from trade was years
23.2 per cent in 2008-09 and it grew at 15.0% during the year. The share of the retail trade in GDP remained stable at 8.1 per cent during this period.
1Quick Estimates of National Income, 2008-09, Central statistical Organisation
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1.4 Though the data on volume of turnover by retail is not separately maintained, commodity composition of private consumption expenditure provides reasonable estimates of the size of the retail sector.
1.4.1 As per the National accounts, private final consumption expenditure, increased from Rs 19,26,858 crore in 2004-05 to Rs 32,26,826 crore in 2008-09,
2. However, expenditure on some at an average rate of 13.8 per cent per annum
items like transport and communication; expenditure on food in hotels and restaurants; expenditure on rent, fuel and power; and expenditure on education and recreation are distinct from trade. Private consumption expenditure adjusted for items which could be considered a close approximation to trade, increased from Rs 11,92,405 crore in 2004-05 to Rs 19,93,380 crore in 2008-09, at an
3average rate of 13.7 per cent.Rate of growth of GDP at current market prices during this period at 14.5 per cent, was higher than this growth. Table A: Private Final Consumption Expenditure- Commodity Composition (Rs. in crore)
2004-05 item 2005-06 2006-07 2007-08 2008-09
Food and Beverages 852,798 947,856 1,070,794 1,182,211 763,345
Clothing & Footwear 150,633 188,276 202,797 213,344 127,608
Rent, Fuel and Power 277,310 311,915 356,197 415,436 250,986
Furniture and Appliances 76,458 93,401 111,536 121,984 64,944
Medical Care 105,244 115,900 127,648 140,584 95,560
Transport and Communication 418,363 477,521 521,858 608,048 378,217
Recreation, Education and Culture 73,348 82,778 97,962 110,954 65,327
Miscellaneous Goods and Services 204,195 259,562 336,564 434,265 180,871
Total Private Consumption 2,158,349 2,477,209 2,825,356 3,226,826 Expenditure 1,926,858
4Estimated Trade Sales 1,339,646 1,538,827 1,771,252 1,993,380 1,192,045
1.4.2 When seen at constant 2004-05 prices, however, private final consumption expenditure increased from Rs 19,26,858 crore in 2004-05 to Rs 26,51,786 crore
2 Quick Estimates of National Income, 2008-09, Central Statistical Organisation 3 Estimates of Retail Trade by ICRIER at Rs 11,308 billion in 2004-05 are close to these estimates. 4 Excluding expenditure on Rent, fuel and power; Transport and communication; Recreation, education and cultural activities; and expenditure on Food in hotels and restaurants
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in 2008-09, at an average rate of 8.3 per cent per annum. Private consumption expenditure adjusted for items like transport and communication etc , increased from Rs 11,92,045 crore in 2004-05 to Rs 16,67,286 crore in 2008-09, at an average rate of 8.8 per cent. Rate of growth of GDP at constant market prices during this period at 8.4 per cent was lower than the growth of private consumption expenditure that could be attributed to trade.
Table B: Private Final Consumption Expenditure- Commodity Composition (1999-2000 prices, Rs. in crore)
2004-05 item 2005-06 2006-07 2007-08 2008-09
Food and Beverages 820,702 851,630 912,807 937,064 763,345
Clothing & Footwear 158,249 194,922 210,720 209,361 127,608
Rent, Fuel and Power 259,624 270,039 283,040 292,771 250,986
Furniture and Appliances 74,133 85,917 98,474 102,148 64,944
Medical Care 101,101 105,657 108,278 117,067 95,560
Transport and Communication 397,148 427,332 464,794 521,957 378,217
Recreation, Education and Culture 71,128 76,085 86,159 90,780 65,327
Miscellaneous Goods and Services 209,554 254,083 319,085 380,638 180,871
Total Private Consumption 2,091,639 2,265,665 2,483,357 2,651,786 Expenditure 1,926,858
Estimated Trade Sales 1,192,045 1,316,391 1,432,667 1,582,125 1,667,286
1.5 The National Accounts do not provide disaggregated data of retail turnover originating from the organised or unorganised sector. As per the study on ―Impact of Organised Retailing on the Unorganised Sector‖ by ICRIER, organised
5retail accounted for 4.1 per cent of the total retail turnover in 2006-07.
1.6 A number of concerns have been expressed with regard to opening of the retail sector for FDI.
1.6.1 The first is that the retail sector in India is the second largest employer
thafter agriculture. As per the latest NSSO 64 Round, in 2007-08 retail trade
5 ICRIER study- Impact of Organised Retailing on the Unorganised Sector-May, 2008
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6 of total workers and provided job opportunities to 33.1 million employed 7.2%
7persons. The share of employment in the broad sector of trade, hotels and restaurants in 2007-08 was significantly higher compared to its share in 1993-94
8rdfor both males and females, in rural, as well as urban areas. More than 2/3 of
the total employment, in the broad category of trade, hotels and restaurants, is in the retail sector.
Table C: Share of persons working in Trade, Hotels and Restaurants (per cent)
Male Female Male Female
7.6 2.3 27.8 12.8 2007-08
5.6 1.7 18.8 8.6 Of which in Retail Trade
6.8 2.0 29.4 16.9 1999-2000
5.5 2.1 21.9 10.0 1993-94
1.6.2 A second concern is that it would lead to unfair competition and ultimately result in large-scale exit of domestic retailers, especially the small family managed outlets, leading to large scale displacement of persons employed in the retail sector. Further, as the manufacturing sector has not been growing fast enough, the persons displaced from the retail sector would not be absorbed there.
1.6.3 A third argument is that the Indian retail sector, particularly organised retail, is still under-developed and in a nascent stage and that, therefore, it is important that the domestic retail sector is allowed to grow and consolidate first, before opening this sector to foreign investors.
2.0 LIMITATIONS OF THE PRESENT SETUP
2.1 There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year. Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress
6 NSSO, Report No 531, Employment and Unemployment Situation in India, 2007-08 7 Estimates using NSSO- Principal and Subsidiary employment ratio and population in 2007-08 8 Share of employment in retail trade, as per the 2004-05 NSSO Survey, was estimated at 7.3%, marginally higher than its share as per 2007-08 Survey.
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sales. Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of fruits, vegetables and other perishables, have been estimated to be over Rs. 1 trillion per annum, 57 per cent of which is due to avoidable wastage and the rest due to
9. As per some industry estimates, avoidable costs of storage and commissions
1025-30% of fruits and vegetables and 5-7% of food grains in India are wasted.
Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has not been significant.
2.2 Intermediaries dominate the value chain. They often flout mandi norms
and their pricing lacks transparency. Wholesale regulated markets, governed by State APMC Acts, have developed a monopolistic and non-transparent character.
rdAccording to some reports, Indian farmers realize only 1/3 of the total price
rdpaid by the final consumer, as against 2/3 by farmers in nations with a higher
11share of organized retail. A study commissioned by the World Bank attributes the export non-competitiveness of India‘s horticulture produce to its weak supply
chain. The study shows that the average price that the farmer receives for a typical horticulture product is only 12–15 per cent of the price the consumer
12pays at a retail outlet.
2.3 There is a big question mark on the efficacy of the public procurement and PDS set-up and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food based inflation has been a matter of great concern. The absence of a „farm-to-fork‟ retail supply system has led to the ultimate customers paying a premium for shortages and a charge for wastages.
2.4 The MSME sector has also suffered due to lack of branding and lack of avenues to reach out to the vast world markets. While India has continued to provide emphasis on the development of MSME sector, the share of unorganised sector in overall manufacturing has declined from 34.5% in 1999-2000 to 30.3%
13in 2007-08. This has largely been due to the inability of this sector to access latest technology and improve its marketing interface.
Table: GDP from Organised and Unorganised Manufacturing (Rs. crore)
9 CRISIL Research, 2007 10 Annual Report 2006-07, Ministry of Agriculture, Department of Agriculture and Cooperation. 11 ICRIER Report on Impact of Organized Retailing on the Unorganized Sector, May 2008 12 Mattoo, A., D. Mishra, and A. Narain. 2007. From competition at home to competing
abroad: A case study of India’s horticulture 13 National Accounts Statistics, 2009
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2000 2004-05 2005-06 2006-07 2007-08
Organised 173003 312622 360409 428533 488578
Unorganised 91110 140981 159334 189115 216552
Share of Unorganised
Manufacturing in total
Manufacturing sector 34.5 31.1 30.7 30.6 30.7
3.0 NEED FOR INVESTMENTS IN AGRICULTURE INFRASTRUCTURE AND
LINKED RETAIL SECTORS
3.1 It is estimated that India will need substantial investment to develop infrastructure for supporting retail development. A significant portion of this will need to be earmarked for up gradation of the supply chain for fruits & vegetables. A major portion of his investment is expected to come from the private sector, for which an appropriate regulatory and policy environment is necessary.
thAn 11 Plan working group has estimated a total investment of Rs. 64,312 crore in agricultural infrastructure. A storage capacity gap of 35 million tonnes has been assessed, requiring an estimated investment of Rs. 7,687 crore during the th11 Plan.
4.0 GIST OF RECOMMENDATIONS OF VARIOUS STUDIES:
4.1 A number of views have been expressed regarding the subject of FDI in the retail trade sector. Various issues have also been raised on the possible approach to opening the retail trade sector for FDI. Some of the views expressed/issues raised are summarized ahead.
4.2 ‘FDI IN RETAIL- A POLICY PERSPECTIVE’, PREPARED BY FICCI AND
ICICI PROPERTY SERVICES IN FEBRUARY, 2005
i. Competition within the host country sector is a critical driver of
improvements in sector performance as a result of FDI.
ii. However, FDI's potential for impact can be greater because of the
combination of scale, capital, and global capabilities which allow MNCs to
close existing large productivity gaps more aggressively.
iii. FDI can be a powerful catalyst to spur competition in industries
characterized by low competition and poor productivity. Examples include
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the cases of consumer electronics in Brazil and India, food retail in Mexico, and auto in China, India, and Brazil.
iv. Competition is also key to diffusing FDI-introduced innovation across an industry. In Brazilian food retail, high competitive intensity caused by informal players forced all modern retailers to rapidly increase productivity; in Mexican and Brazilian auto cases, increasing competition from imports induced foreign players themselves to increase their productivity.
v. Increasingly, foreign direct investment is integrating developing countries into the global economy, creating large economic benefits to both the global economy and to the developing countries themselves. Industry restructuring enables global growth as companies reduce production costs and create new markets. For the large developing countries, integrating into the global economy through foreign direct investments improves standards of living by improving productivity and creating output growth. The biggest beneficiaries from this transition are consumers - both global consumers that reap the benefits from global industry restructuring, and consumers in the host countries that see their purchasing power and standards of living improve.
vi. FDI can be a powerful catalyst to spur competition in the retail industry, due to the current scenario of low competition and poor productivity. It can bring about:
; Supply Chain Improvement
; Investment in Technology
; Manpower and Skill development
; Tourism Development
; Greater Sourcing From India
; Upgradation in Agriculture
; Efficient Small and Medium Scale Industries
; Growth in market size
; Greater Productivity
; Benefits to government: through greater GDP, tax income and employment
vii The report inter alia made the following recommendations:
; Permit FDI in retail
; Remove Bottlenecks in the supply chain
; Relax SSI Reservation
; Remove distribution constraints
; Organize market for real estate
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; Increase land supply
4.3 CENTRE FOR POLICY ALTERNATIVES: ‘FDI IN INDIA’S RETAIL SECTOR:
MORE BAD THAN GOOD?’
i. The retail sector is severely constrained by limited availability of bank
finance. The Government and the RBI need to evolve suitable policies to
enable retailers in the organized and unorganized sector to expand and
ii. A National Commission should be set up to study the problems of the retail
sector which should also evolve a clear set of conditionalities on foreign
retailers on procurement of farm produce, domestically manufactured
merchandise and imported goods. These conditionalities must state
minimum space, size and other details like construction and storage
iii. Entry of foreign players must be gradual with social safeguards so that the
effects of labour dislocation can be analysed and policy fine tuned. Foreign
players should initially be allowed only in metros.
iv. Manufacturing sector in India must be developed to address the dislocation
of existing retailers.
4.4 RECOMMENDATIONS IN THE MID TERM APPRAISAL OF TENTH PLAN
; Mid Term Appraisal of the tenth Five Year Plan made a strong case for FDI
in modern retailing as entry of modern foreign retailers through joint
ventures in India would help develop backward linkages to sources of
supply and thus develop a domestic supply chain capable of meeting
; Review of the existing policy as part of general strategy of promoting labour
intensive manufacturing by the same retailers has been suggested.
; Fears of large adverse effects on existing retailers are grossly exaggerated
especially since modern domestic retailing has begun in any case.
; Allowing FDI in joint ventures is likely to provide access for domestic
suppliers to international retailing which purely domestic modern retailers
may not be able to offer.
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4.5 ICRIER STUDIES ON: (i) FOREIGN DIRECT INVESTMENT IN RETAIL
SECTOR-INDIA (2005) and (ii) ‘IMPACT OF ORGANIZED RETAILING ON
THE UNORGANIZED SECTOR’-2008
4.5.1 The 2005 study recommended:
i FDI be allowed in retail trade as it would speed up the growth of organized
ii Gradual opening of the retail sector over a period of 3-5 years to give
domestic industry enough time to adjust to the changes.
iii In the initial stage, FDI up to 49% could be allowed to enable domestic
players to enter into joint ventures have access to investment,
technological know-how and best management practices while retaining
4.5.2 The 2008 study has observed that organized retail, which now constitutes a small four per cent of the total retail sector, is likely to grow at a much faster pace of 45-50 per cent per annum and quadruple its share in total retail trade to
14 However, this represents a positive sum game in 16 per cent by 2011-12.
which both unorganized and organized retail not only coexist but also grow substantially in size.
4.5.3 Unorganized retailers in the vicinity of organized retailers experienced a decline in their volume of business and profit in the initial years after the entry of large organized retailers. The adverse impact on sales and profit, however, weakens over time. There was no evidence of a decline in overall employment in the unorganized sector as a result of the entry of organized retailers. The rate of closure of unorganized retail shops in gross terms was found to be 4.2 per cent per annum, which is much lower than the international rate of closure of small businesses. The rate of closure on account of competition from organized retail was found to still lower, at 1.7 per cent per annum. There was competitive response from traditional retailers through improved business practices and technology upgradation.
4.5.4 Consumers definitely gained from organized retail on multiple counts. Overall consumer spending has increased with the entry of the organized retail. While all income groups saved through organized retail purchases, the lower income consumers saved more. Thus, organized retail is relatively more beneficial to the less well-off consumers. Proximity is a major comparative advantage of unorganized outlets.
14 The expected growth, however, has not taken place
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