Question

1) Regarding the "Foreign Direct Investment in Retailing in India" opening case, why has the Indian government allowed FDI? What restrictions have they placed on it? Why?

Answer 1

As India is one of the largest economy in the world in terms of PPP(Purchasing Power Parity), India is a preferred destination for Foreign Direct Investment. India has a largest pool of skilled managerial and technical expertise. The size of the middle class population stands at approx 300 million and represents a growing consumer market. India has liberalized FDI policy, which allow up to 100% FDI stake in ventures. FDI policy allows a foriegn company to directly invest in Indian market, which helps in the development of Indian Market. As pet the policy, the foreign company may shift the place of manufacture, or can have additional manufacturing facility, in India to capitalise on low cost labour, avoid high import taxes, reduce high cost of transportation to market. It can also exploit locally available raw material and to gain access to the market having potential buyer for their products. FDI has resulted in successful economic growth of India by affecting its transfer to a new technologies, innovative ideas and improved infrastructure.

There are few restriction placed on FDI as below.

1. There are certain industry FDI is not allowed

• Lottery Business including Government /private lottery, online lotteries, etc;
• Gambling and Betting including casinos etc.;
• Chit funds;
• Nidhi company (borrowing from members and lending to members only);
• Trading in Transferable Development Rights (TDRs);
• Real Estate Business or Construction of Farm Houses;
• Manufacturing of Cigars, cheroots, cigarillos and cigarettes, of tobacco or of tobacco substitutes;
• Activities / sectors not open to private sector investment e.g. Atomic Energy.
• Legal, accounting and architecture services
• B2C e-commerce

2. FDI in India has raised some restrictions on Retail and E-commerce. Few are as below.

• When It comes to Multi Brand retail Business, the investment is restricted to 51%, that too through Government route.
• Wholesale Trading of goods would be permitted among companies of the same group. However, such WholesaleTrade to group companies taken together should not exceed 25% of the total turnover of the wholesale venture.
• Duty Free Shop entity shall not engage into any retail trading activity in the Domestic Tariff Area of the country.

• 100% FDI under automatic route is permitted in marketplace model of e-commerce and it is not permitted in inventory based model of e-commerce.

• The food products should be manufactured and/or produced in India.

• Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.

• At least 30% of the value of procurement of manufactured/processed products purchased shall be sourced from Indian micro, small and medium industries, which have a total investment in plant & machinery not exceeding US $ 2.00 million.

• Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per 2011 Census or any other cities as per the decision of the respective State Governments.

• Retail trading, in any form, by means of e-commerce, would not be permissible, for companies with FDI, engaged in the activity of multi-brand retail trading.

Ther are certain reasons for above restrictions. One of the most disadvantage of FDI in retail sector is that as we know that the retail sector is one of the major employment provider and permitting FDI in this sector can displace the unorganized sector and leading to loss of livelihood the most favoring example is if wall mart entry in retail sector is allowed then it will kill the millions of local shops and jobs. The global retailers would exercise monopolistic power to raise prices and monopolistic power to reduce the prices received by the supplier. Hence both the consumer and supplier would lose while the profit margin in such retail would go up and hence such restrictions are laid upon FDI to overcome such issues.