FDI In Indian Retail Industry

June 29, 2010Retail Industryby EconomyWatch



The Government of India was initially very apprehensive of the introduction of the Foreign Direct Investment in the Retail Sector in India. The unorganized retail sector as has been mentioned earlier occupies 98% of the retail sector and the rest 2% is contributed by the organised sector. Hence one reason why the government was fearing the surge of the Foreign Direct Investments in India was the displacement of labour.

The unorganized retail sector contributes about 14% to the GDP and absorbs about 7% of our labour force. Hence the issue of displacement of labour consequent to FDI is of primal importance.

There are different viewpoints on the impact of FDI in the retail sector in India. According to one viewpoint , the US evidence is empirical proof to the fact that FDI in the retail sector does not lead to any collapse in the existing employment opportunities. There are divergent views as well. According to the UK Competition Commission, there was mass scale job loss with the entry of the hypermarkets brought about by FDI in the UK retail market.

According to another school of thought, there is undoubtedly labour displacement associated with FDI, but employment generation will occur in different dimensions. Varied skills would be specialised.

Taking into consideration the pros and cons of introducing FDI in India, ICRIER has recommended 49% of FDI . The opening up of FDI in India is also expected to be gradual so that the domestic industries can tailor themselves according to the changes. At the formative stage , the idea was to start with 26% of FDI in this sector. But soon the idea changed as China's FDI moved up from 49% to 100% in the retail sector.

While the government is continuing its plans to liberalise FDI in the retail sector in India, foreign companies like Wal-Mart are waiting on the threshold. They basically wish to enter into partnership with various multinational chains. FDI would bring about modern infrastructure that would help to boost the productivity of the organised retail sector in India.

Malls have mushroomed in various locations. They are the centres of entertainment for the new generation.

FDI is not allowed in the retail sector and this is the reason why many prominent global players like Dominos, Levis, Lee, Nike, Adidas, TGIF, Benetton, Swarovski, Sony, Sharp, Kodak etc are entering the retail market via licensee or franchisee. The opening up of the economy to FDI in the retail sector is also expected to generate employment. FDI can be a blessing instead of curse only if it produces backward linkages relating to production and manufacturing. It may also, in the process help to push up domestic production as well as exports.

In the present scenario, 51% Foreign Direct Investment is permitted in India only through single brand retailing. The international retailers are entering the matket through licensees just as Wal-Mart has entered through the franchisee, Bharti Enterprises.

Recent News on FDI in India

Metro AG an Shorite are already in operation. Foreign retailers are in search of investing in wholesale. Wal-Mart as we have mentioned has already joined the retail market of India. Geant is also expected to start its retailing operations soon in Indiahence we may conclude that FDI in retailing in India would require the creation of additional jobs to compensate the resulting job loss. It would result in the reduction in the Kirana shops and Retail Stores. The consumers can benefit from such exposures, it would enhance quality, improve on the supply chain, increase exports, so on and so forth. There are certain other issues that have discouraged FDI in India and they are discussed as under.

Bottlenecks to FDI in Retail Industry

According to the Land and Property laws only the Indians have the right to land and property in India and this law has in a a way inhibited the entry of the foreign players in India. Again the labour laws are so designed that the store workers can be protected , quite contrary to the requirements of the modern formats. The tax structure of India is also unfavourable for the foreign players. The corporate tax rate for the domestic companies is 36.59% whereas it is 41.82% for the foreign companies. The changing sales tax as well as the Value Added Tax is also not favourable in the case of international companies.

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