FOREIGN DIRECT INVESTMENT IN RETAIL SECTOR: SWOT ANALYSIS

September 1, 2018 admin 0 Comments FOREIGN DIRECT INVESTMENT, RETAIL SECTOR, Supply Chain Management

INTRODUCTION

The term Foreign Direct Investment (FDI) has been more popular during the last decade. FDI means a flow of investment directly into the major areas of the Economy like production and business in a country by another country, either by the take-over (mergers and acquisitions) of a company or by the expansion of operations of the existing business. The size and growth prospects of the economy of a country determine the FDI, which elivates the economic development of the country. Therefore, FDI is especially useful to the developing countries and the emerging market countries like INDIA. According to the International Monetary Fund (IMF), the term FDI means, at least 10% holding of capital by a foreign company. With such minor contribution, the investor which is an MNC, may or may not have controlling power over the operations and policies of the company in which it has invested.

In simple words, FDI refers to capital inflows from foreign countries which are allowed in order to enhance the productive capacity of a country to meet the global requirements. In India, the FDI is governed by the Central Government and the Foreign Exchange Management Act (FEMA), 1999 by the RBI to invest and enjoy profits, without any terms and conditions, in all sectors except a few, which facilitates free flow of FDI into India. For investment in the areas where FDI is barred, the investor has to get prior permission or approval from the RBI or the Foreign Investment Promotion Board (FIPB).

The term ‘retail’ refers to a sale for final consumption. Any sale for reproduction or sale for further sale (wholesale) is contrary to the word ‘retail sale’. The person who is involved in a retail trade is regarded as retailer as, he is engaged in the process of selling of goods to the ultimate consumer. In other words, retailing means the direct interface between the manufacturer and ultimate consumer which are two important wheels of an Economy. It is said to be the last link in the chain of the channel of distribution. In India retail sector is the most crucial and potential sector, like in other countries. Its contribution to GDP is approximately 33% to 35%. Indian retail market is ranked as the 5^th largest in the world. It provides around 7% of total employment opportunities in India. Therefore, retail sector in the Indian Economy is very significant.

Indian retail market is divided into the organized sector and the unorganized sector. The Organized sector consists of the licensed retailers who have registered themselves for Sales Tax/ VAT, Income Tax etc. In other words, organized retailing refers to the trading activities of licensed retailers. These include the corporate owned hypermarkets and retail chains, and also the privately owned large retail businesses, like Tanishq, Croma, Lifestyle, Pantaloons etc. On the other hand, the unorganized retailing refers to the traditional retailers, who do not pay any tax to the government and most of them are not even registered for Sales Tax, VAT or Income tax. Traditional retailers are Kirana shops, Departmental stores, Paan shops, Beedi shops etc. The market share of the unorganized sector is about 97% of the total retail sector as compared to the organized sector, which accounts for only the rest of the portion i.e., 3%. Thus, unorganized sector occupies a significant position in the Indian retail sector.

On the other hand, Indian retail sector includes mono/ exclusive/ single brand retail shops, multi brand retail shops and convergence retail outlets. Mono/ single brand retail shops are also known as exclusive showrooms which sell the products manufactured by a company. A Multi brand retail shop deals with almost all brands that are available for a single product.

Indian retail sector is the second largest sector after the agriculture in employment generation. Keeping in mind the welfare motive, India has kept the retail sector closed for the foreign investors in order to protect the interests of the 15 million small retailers in this sector. As per the FDI policy, the foreign investor can make investments in the following manner.

For cash and carry wholesale trading and export trading FDI shall be allowed upto 100% under the automatic route.
As per notification dated 11 Jan 2012, with the prior Government approval FDI upto 100% shall be permitted in retail trade of single brand products.
FDI upto 51% is permitted in Multi Brand Retail Sector

IMPACT OF FDI ON RETAIL SECTOR IN INDIA – SWOT ANALYSIS

Strengths
1. Ushers in competition: Allowing of FDI into the retail sector will be highly beneficial to India. The flow of FDI into retail sector increases healthy competition in the retail chain at domestic level which leads to the innovation of new models, improvement of quality etc. Increasing of competition in a healthy manner leads to providing qualitative products at reasonable price. Hence, the Customer will have access to greater variety of internationally qualitative branded goods.
2. Better Employment Opportunities: A large and young working population gets more employment opportunities with development of retail sector. At present, the retail sector occupies the second place in employment generation after the agriculture sector. Once the reforms get implemented automatically, that will increase the employment opportunities substantially. For example, Bharati Walmart Training Centre (a joint venture of Bharati Enterprises and Walmart Stores) bridges the gap by providing training in various aspects of retailing to the under privileged youth providing them employment in the retail sector.
3. Contribution to GDP: Generally, the retail sector contributes much to the GDP of India. At present, this sector contributes around 33 – 35% to GDP which is higher than the American retail sector contribution which stood at 20% of the American GDP. Therefore, allowing of FDI into the retail sector may boost its share in GDP in a rapid manner.
4. Better Investment Opportunities: The investors always seek the best return on their investment with least risk. As the Indian retail sector has much more potentiality, the investor is looking to invest more funds in this sector.
5. Free Flow of Technology: With the advent of FDI, we can expect free flow of technology from one country to another. It also helps in capital formation and improvement of managerial skills by adopting new technology from foreign countries.
6. Improvement in Purchasing Power: Introduction of FDI in the Indian retail sector reduces the number of middlemen (who are benefited and are the link between the manufacturer and the ultimate consumer) in the retail sector, which ensures abundant availability of goods at reasonable price. Thereby, the purchasing power of consumers will be increased.
7. High Potential: The Kearny study on Global Retail Market reveals that the Indian retail market sector is considered to be a sector with a lot of potential. It was ranked as the 2^nd in Global Retail Development Index among thirty developing countries.
Weaknesses
1. Lack of Infrastructure: The major problem faced by the Indian retail sector is lack of infrastructure facilities. It is a major stumbling block to develop competent market mechanism. Welcoming FDI into the retail sector leads to improvement in infrastructural facilities. FDI will help India to overcome such drawbacks, by utilizing the available resources in a more fruitful manner.
2. Caters to High End Customers: Generally Walmarts provides services to high-end customers. In other words, they will cater to high-end customers living in the metros and will not deliver mass consumer goods for customers in the rural areas and small towns.
3. Small Size Outlets: Small size retail shops/outlets is one of the major drawbacks of the Indian retail sector. More than 90% of marts are of less than 500 square feet area. At the same time, they are smaller than the outlets of developed countries.
4. Low Sales Volume: Even though India is the second largest in the World after China in terms of population and its economy is growing rapidly, its retail sector sales volume is very low.
5. Industrial Status: In India more than 95% retail shops are functioning under unorganized sector. The retail sector in India does not enjoy the status of an Industry. That prevents the retailer from raising funds for various purposes.
6. High Rentals: Acceleration in the Indian retail sector caused space problem, which escalates, in popular and ideal centres in urban areas real estate rental values in a significant manner. Therefore, real estate rentals will be affordable for a few business houses only. Thus, the retail business houses have to pay high rentals which wear away their profits.
Opportunities
1. Quality Improvement: The flow of FDI into retail sector will help the Indian consumers by improving the quality of a product. This will lead to cost competitive measures helping Indian producers in all the segments of the Indian Economy to flourish in a significant manner. This will ultimately benefit the consumers also.
2. Improvement of Infrastructural Facilities: Free flow of FDI will help in building up the infrastructural base in the sphere of retail sector proving opportunities to growing population. Therefore, for capital formation, the foreign capital has to be allowed into India.
3. High Potential Markets: In our country, the retail sector has high potentiality. Thereby, many foreign business houses are attracted. The organized retail sector is expected to grow stronger and faster in the next few years being driven by changing life styles, increase in income levels etc. which boost up the purchasing power of consumers. The most key drivers of the Indian Retail Sector are food and apparel retailing. Therefore, the global retail giants are choosing the Indian retail sector as a key market segment among the developing countries.
4. Creating Transparency in the System: Presently intermediaries are operating as per norms of Mandi system which are not transparent in terms of their pricing. According to the reports of many surveys, an average Indian farmer realizes only one-third of the price, which an ultimate consumer pays in the market. This drawback is overcome by allowing FDI which ensures direct linkage between the marts and the farmers. Therefore, farmers and producers are benefited much by evicting the intermediaries.
5. Eviction of Mandi System or Intermediaries: With collaboration of Foreign business houses i.e., allowing FDI, the prices of the commodities will be checked frequently and that results in reducing of mandi system rules. Bharati Walmart established a “Direct Farm Project” in Punjab, which consists of more than 100 farmers as its members. The main objective of the project is to purchase or procure vegetables directly from the farmers and eviction of mandi system.
6. Technology Import: The flow of FDI and engaging the personnel from foreign countries into the Indian retail sector leads to flow of the Technical-know-how from global firms. The term technical knowhow includes warehousing technology (cold storage) and technology relating to distribution system which ensures improvement of supply chain in India.
7. Rural Retail Market: The Indian rural retail market is not yet exploited; still it is fresh and attracting the global firms into it. Global retail giants have an opportunity to venture into rural market.
8. Addressing some major problems through sustainable Development of Economy: The major economic problems like, child labour, corruption, black money etc. can be solved to a certain extent with the welcoming of foreign business units into the Indian Economy.
Threats
1. Problems of Supply Chain Management: One of the greatest barriers to welcoming of FDI into the Indian retail market is mismanagement of supply chain management with corresponding changes in retail trade after the flow of FDI. In addition to that problem, the government policies and lack of infrastructural facilities are creating bottlenecks to retail companies.
2. Loss of Job Opportunities: Presently, the Indian retailers are engaging the work-force for all kinds of works. Once the Global retail giants enter, automatically, they implement office automation (mechanization) which reduces the manpower required. This will lead to massive loss of jobs. This is a major threat we have to face on permitting of FDI into the India.
3. Concentration of Economic Power: When FDI is allowed into the Indian retail market, the so called big global giants of retail sector follow the penetration pricing policy with a view to capture the market, which increases the competition to the domestic retailers and damages their position. Thus, the global giants become monopolists in such a sector which paves the way for the concentration of economic power in the hands of a few.
4. Drains out the Country’s share of Revenue: Admittance of FDI into the Indian Economy will drain out the country’s share of revenue to foreign nations which may create a negative impact on the Indian Economy.

Conclusion

In a nutshell, the investment into the business of a country by another country’s business houses is called FDI and this improves the Forex position of country. FDI also provides more employment opportunities to the local peoples that leads to improvement in the standard of living of people, the GDP, the National Income and the Per Capita Income. It helps in importing the technological skills, managerial skills etc. from foreign countries. In addition that, induction of FDI provides access to commodities of international quality thereby, benefiting the consumers. Eviction of intermediaries who are exploiting both producers and final consumers is possible with FDI in the Indian retail sector. As the majority of Indian retailers belong to the unorganized sector and avoid paying taxes to the government, the FDI in this sector will redress or reduce this drawback. The size of organized sector is expected to grow from 3% to 50% in the coming years. Another most advantageous situation is that the FDI will provide a base for capital formation in India. The FDI is a major economic driver in the globalization scenario. In view of the above discussion, the government of India should try to weigh the pros and cons of permitting FDI in India. It will definitely boost up the Indian Economy in every respect.

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