FDI In Retail : Will It Help In Escalating India To New Heights?

Posted on November 13, 2012 in Business and Economy

By Kartik Bansal:

Finally, the long battle between the United Progressive Alliance-2 and opposition parties has come to an end. The UPA has succeeded in implementing Foreign Direct Investment (FDI) in the retail segment, against all odds. They had to face severe criticism and resistance from their supporters, allies and other members of the party. Even the Dravida Munnetra Kazhagam (DMK), the second largest partner in the UPA was opposed to the FDI. The main outside supporter of the government, the Samajwadi party also called it ‘anti-national’. The Trinamool Congress (TMC), headed by Mamata Banerjee also pulled out of the Congress-led ruling coalition, owing to the same.

The reason behind the implementation of FDI is seen as a very important reform to revive the economy and it will ease the pressures of supply and further reduce inflationary pressures. FDI is direct investment into production in country by a company in another country either by buying a company in the target country or by expanding operations of an existing business in the country and taking advantage of cheaper wages, special investment privileges like tax exemptions, subsidies etc. It is very clear that in a country like India, where the population is very large and where 70% of Indians live in rural areas; investment by the countries will give them cheap labour benefits, tax exemptions to boost this sector and allow them to earn profits. To maintain this profit, the accepted threshold for an FDI relationship is 10%. The foreign investors must own at least 10% or more of the voting stock or ordinary shares of the investing company. A recent survey by UNCTAD stated India as the second most important FDI destination sectors that attracted higher inflows into telecommunication, construction activities, computer software and hardware and other services. Now that the government has allowed FDI in multi-brand retail up to 51% and in single brand retail up to 10%, the choice of allowing FDI in multi-brand retails up to 51% has been left to each state.

According to the consulting firm Technopak Advisors, India’s decision to relax foreign investment barriers in its retail sector will create an $80 billion market opportunity for international super market chains by 2021 and nearly quintuple tax revenues from the industry. The major investors are Walmart, Tesco, Brooks Brothers etc. In the next decade while corporatized retails will add another 2.7 million jobs, independent retails will create a million more jobs. Technopak predicts that India’s retails sector will grow from $490 billion in revenues in 2012 to $810 billion by 2021 and modern retailing will increase from 7% to 20%. Walmart has already said that it is expected to open its first store in India in two years. India has said that foreign companies can only set up in cities with more than one million people. The whole exercise will also benefit India in tax collections that are expected to go up from $3.4 billion to $16.2 billion by 2021.

Now, opening the retail industry to FDI will bring benefits in terms of increased economy, advance in employment, increase in imports and exports, availability of quality products at better and cheaper prices and will also enable the country’s products and services to enter into the global market. But FDI is opposed by small retailers and trading people on the grounds that it will put mom-and-pop stores out of business and also be a threat to farmers and people involved in agricultural practices. FDI also has some disadvantages, for instance, 50 million merchants in India will be affected, economically backward people will suffer the price increase, retailers might face losses, inflation may be on the rise and yet again, India may become slaves because of the same.

In my view, the UPA government has taken this decision just to safeguard their position in coming elections in the name of boosting the economy. The other side of this story is that India is such a hugely populated country that we are not able to create our own mega brands, revenues and infrastructures, while other countries, having a population in mere lakhs are investing in our country, earning their countries handsome revenues. This is actually our weakness. Our politicians are interested in earning money by selling the natural resources of our country and indulging in scams on a large scale. It is true that the FDI will provide employment, technology, better infrastructure, organized retails stores, but my question is — can’t we achieve the above on our own with the large human resource our country has? We do not need to depend on other countries and let our natural resources go waste unnecessarily. We should seriously think about it.