The Likely Impact Of FDI In Retail On All Stakeholders: All You Need To Know

Posted on May 5, 2014 in Business and Economy, Society

By Ankita Nawalakha:

In December 2012, the Indian Parliament approved of the central government’s decision to allow foreign direct investment (FDI) in multi-brand retailing. There have been many speculations on its potential benefits and costs and, depending on their socio-political-economic ideologies; the commentators have positioned themselves either in favour or against this policy. The policy impacts people across various sections and hence it is important to closely analyse its impact on different stakeholders.

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Firstly, FDI in retail will directly benefit the Indian government. The organised retail sector facilitates the generation of significant tax revenues through the building of a sophisticated supply chain. Also direct tax receipt like income tax will also increase as large number of employees engaged in this stream will get salaries/benefits in transparent way as per laws and rules of employment. Conclusively, there will be an improvement in balance of payment.

The most immediate beneficiary from the coming of multinational players in retailing would be our farmers. Certain regulations have been put in place by the Indian Government, one of which says that at least 50% of the total investment has to be on back-end infrastructure- cold storages, warehouses, transport etc. Thus construction of storehouses and improved transportation will reduce the losses of the farmers and will provide a larger market. The farmers will receive better/fair prices by directly selling to organized retailers and getting away from relying solely on the intermediaries who often pay lower prices.

Furthermore, FDI is likely to benefit micro, small and medium industries. With clause of 30 % sourcing from MSME mandatory, a precautionary approach has been taken to safeguard and promote MSME sector. For the MSME, there will be an increase in demand for their goods from organized retailers provided that they improve the quality of their products and are able to match certain standards. There will also be growth in export opportunities for MSME’s.

Also, there is no dispute over the fact that FDI in retail will improve consumer wellbeing. The entry of foreign retailers will not only provide cheaper prices for products but it would provide larger space for product display, hygienic environment in the shopping area, availability of a large number of products under one roof, and better customer care.

The section of society which people speculate might be harmed from FDI in retail would be of unorganized retailer, local kiranas, street vendors etc. The major apprehensions of those opposed to FDI in retail is that unorganized retailers will lose their business and the large number of people employed in this sector will consequently become jobless. However, this is a gross misinterpretation. FDI in retail can only be implemented in cities which have a population of more than one million. There are only 58 such cities in India. It is true that in these cities unorganized retailers and local kiranas might lose some of their business. However, the experience of other developing countries indicates that the presence of foreign retail and consumer companies contributes to building a new middle class, which drives economic success, prosperity and social progress for all. This can be proved through China’s example. Since 1992 it has attracted huge investments in the retail sector without affecting either small retailers or domestic retail chains. In fact, since 2004 the number of small Chinese outlets has increased to around 2.5 million from 1.9 million. Moreover, we cannot neglect the fact that small retailers have inherent advantages- they are located next to the consumer, they know them well, they give credit too – which no large retailer does. Today, we have retail companies like Big Bazaar and Shoppers Stop but people have not stopped going to kirana stores. Thus even if small retailers and local kiranas lose some of their business, it will be rather small and insignificant compared to the benefits FDI in retail will bring.

Finally, it’s important to assess the likely impact of FDI in retail on job employment. Contradictory to the apprehensions that FDI in retail would lead to massive unemployment; it is more likely that bringing in foreign investors would create jobs that will offer better salaries, work environment, social security as compared to unorganized trade.

The concern about the competition to domestic companies, monopolization of market, loss of employment, procurement of produce from farmer at low price have been addressed properly through provisions in the scheme announced on FDI in retail. However, it is difficult to conduct an objective assessment of potential benefits and costs of FDI in retailing for several reasons. It is also unlikely that all the potential benefits and costs will be realised to their fullest extent, at least in the foreseeable future. The economic dynamics and the political process will play an important role in determining the outcomes of this move to allow FDI in the retail sector and will ultimately determine the effects on various stakeholders.

Sources

1) Department of Industrial Policy and Promotion (2010). Foreign Direct Investment (FDI) in Multi-brand Retail Trading. Discussion Paper.
2)Ernst and Young, “The Great Indian Retail Story”, 2012
3)Dr Hiranya K Nath, “Foreign Direct Investment (FDI) in India’s Retail Sector”; Space and Culture, India 2013
4)Dr. Sheetal Mundraa, Mukesh Mundra and Manju Singh, “A Review of the Impact of Foreign Direct Investment on Indian Retailing”, International Journal of Sciences: Basic and Applied Research (2013) Volume 10, No 1, pp 01-18
5) Federation of Indian Chambers of Commerce and Industry, Impact of FDI in Retail on Stakeholders, 2012

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