FDI in Retail

FDI in retail in India has always been a contentious issue. The government has been progressively liberalising the retail sector in India for foreign direct investment. The latest major move came in 2012 when 100% FDI was allowed in single-brand retail.

FDI in Retail Background

The Indian retail market is said to be worth USD 600 billion. It comes in the top-five retail markets worldwide by economic value. It is also one of the fastest-growing markets with a surging population of more than a billion people. The retail market is expected to grow tremendously. The total consumption expenditure is estimated to reach about USD 3600 billion by 2020. The retail market is expected to reach USD 1.1 trillion by 2020. Online retail sales are also estimated to grow at a rate of more than 30%.

In terms of economy, retail is one of the pillars of the Indian economy with the sector contributing to about 10% of the Gross Domestic Product (GDP). In this sector, the organised sector is merely 9% and the unorganised sector dominates. The maximum number of retailers operate out of less than 500 sq. feet of retail space. The unorganised retail sector also absorbs about 7% of the labour force in India.

The central government has approved 100% FDI in single-brand retail and 51% FDI in multi-brand retail.

Organised and unorganised retail

Unorganised retail, which forms the bulk of the retail industry in India, is composed of local Kirana stores, owner-managed single general stores, beedi/pan shops, convenience stores, hawkers and pavement vendors, etc. Organised sector comprises of corporate-backed retail chains, supermarkets, and department stores that can sell only under a license and are liable to huge volumes of sales and taxes.

FDI in retail advantages and disadvantages

There are pros and cons of extending FDI into the retail space in India. Whenever there is a policy liberalisation about FDI in retail, activists are up in arms on both sides of the issue. Both the advantages and disadvantages are discussed below.

FDI in retail – Advantages and benefits

Growth in the economy – when foreign companies come in, new infrastructure will be built. Sectors like real estate and banking will see growth. Also, MNCs will pay a lot of taxes to the Indian government which again can be used to build infrastructure.
Employment generation – FDI in retail will create a lot of jobs in the organised retail sector.
The benefit to farmers – it will benefit farmers and producers by procuring produce from them directly and thus, cutting down on intermediaries. The farmers’ margins will improve.
In the unorganised sector, there is a huge wastage, running to the tune of 40% in the case of vegetables and fruits. Big retail chains can reduce this wastage by investing in supply chains and adequate storage facilities.
Foreign companies can bring in better technology, management best practices, and more learnings for Indian players.
Push to productivity – currently, Indian production in agriculture and food is very low. FDI in retail will give a much-needed fillip to infrastructure in agriculture and farming practices.
Benefits for consumers – FDI in retail implies low prices and better and more variety of products for consumers to choose from. They will also get access to international brands.
Induce competition – it will induce competition in the market benefitting both consumers and producers.

FDI in retail – Disadvantages, and apprehensions

FDI may drain out the country’s revenue share to foreign countries which can harm the nation’s overall economy.
The domestic retail players might not be able to withstand the competition from MNCs and may be wiped out from the market or at least absorbed by the bigger players.
Prices may be brought down initially, but once the MNCs get a stronghold in the market, they can cause price rise and may also form cartels harming the consumers.
Farmers, who may benefit initially, may also be at the mercy of these bigger retailers after they get a strong share of the market.
The predatory pricing policies of these big retailers will harm small and medium players in the sector.