Question

Historically, the structure of retailing in India was very fragmented with a large number of very small stores serving most of the market. Supply chains were also very poorly developed and fragmented. As recently as 2010, larger format big box stores, chain stores, and supermarkets only accounted for 4 percent of retail sales in the country (compared to 85 percent in the United States). This might sound like an ideal opportunity for efficient foreign retailers such as Walmart, IKEA, Tesco, and Carrefour. In theory, these multinational enterprises could enter the market and transform India’s retail space, making it more efficient and bringing modern retail formats, technology, and supply chains to the country. This would benefit consumers and producers from farmers to manufacturers. For example, it has been estimated that up to 40 percent of the food produced by Indian farmers is currently wasted because chronically underdeveloped supply chains mean that food rots before it reaches the market.
In practice, small store owners in India have a long history of using their political power to lobby the government to impose restrictions on direct investment by foreigners in the retail space. Like incumbents everywhere, their goal has been to limit competition and protect their businesses and jobs. Until 2011, foreign multi-brand retailers such as Costco, Tesco, and Walmart were forbidden from owning retail outlets in the country. Even single-brand retailers such as IKEA and Nike had to partner with a local retailer, were limited to a 51 percent ownership stake, and had to go through a lengthy bureaucratic approval process.
Chinese customers visit and exit a supermarket of Walmart in Hangzhou city, east China’s Zhejiang province By 2011, the Indian federal government had come to the Page 237 conclusion that foreign investment in retailing was needed to improve India’s supply chain, increase consumer choice, and help farmers bring their products to market. This view was supported by much of Indian industry, which saw the modernization of the retailing sector as an important condition for continued economic development. Clearly, the government believed that greater foreign capital and technology would help India grow its economy.
   In late 2011, the Indian government announced a plan to reform foreign direct investment regulations. The plan was to allow foreign multi-brand retailers such as Walmart and Tesco to open retail stores, although they would be limited to a 51 percent ownership stake. At the same time, the government stated its intention to allow single-brand retailers to set up wholly owned stores, although anything over a 49 percent foreign ownership stake would still require formal government approval. These plans were greeted with strong opposition from small retailers and rival political parties, and the government was forced to temporarily shelve them.
   In early 2012, the Indian government managed to secure approval for plans to allow foreign single-brand retailers to open wholly owned stores, but imposed the requirement that a single-brand retailer had to source 30 percent of its inventory from India. One of the first retailers to respond to these changes was IKEA, which announced that it would invest $1.9 billion and set up 25 stores in the country. More generally though, many analysts viewed the 30 percent sourcing requirement as a major impediment to entering India. Both Apple and Nike, for example, would have to establish significant production facilities in the country in order to meet that requirement and set up their own brand stores.
   In early 2018, the government modified the 30 percent requirement, giving single-brand retailers five years after their initial entry to reach the 30 percent figure. The government also allowed single-brand retailers to establish wholly owned subsidiaries without having to go through the cumbersome government approval process.
   In late 2012, the federal Indian government allowed foreign investors to open multi-brand retail stores in India, but limited ownership to 51 percent. Moreover, in a nod to the strength of the political opposition, the federal government made this requirement subject to approval by individual states within the country, allowing some to opt out. Several states have done so, which reduces the attractiveness of India as a market for foreign retailers. At the same time, India has allowed 100 percent ownership of online retail marketplaces in India. Amazon took advantage of this to enter the country in 2014 and has committed to invest $5 billion in India. Unlike in the United States, however, Amazon does not sell goods that it has taken ownership of because that would classify the company as a multi-brand retailer, limit its ownership stake in Indian operation to 51 percent, and require it to take an Indian partner. Instead, Amazon only sells goods offered through its marketplace platform by third parties. However, Amazon is investing heavily in fulfillment centers and logistics infrastructure to enable it to deliver goods efficiently to Indian customers. Its investment may help to boost the efficiency of supply chains in the country.

How might investment by foreign retailers change retailing in India? What are the potential benefits of such FDI?

Answer 1

Answer to the question-

It is known to all of us that India’s retail sector is largely segmented due to the existence of fragmented and inadequate supply chains, huge number of small firms (because of which they cannot reap the benefit of economies of scale), local monopoly etc. It has been estimated that the retail sector in India provides 8 per cent of total employment and contributes 10 per cent of total GDP of India. Thus, this sector definitely has some tremendous scope in solving the unemployment problem of India to some extent. However, until recently, many Indian politicians, scholars argued that by opening the Indian market for foreign investors would ruin the future of small sized Indian firms as there are not powerful enough to compete with the big entities. However, recently the Government of India reformed the foreign policy to provide a better scope for foreign investment.

It is often argued that, with sufficient foreign investment in the Indian retail sector, the adequate options for employment at all levels could be generated. Moreover with inclusion of the clause of 30 per cent sourcing of inputs from India, the government is expecting that it will create demand for the services of village level industries as well as for the farmers. Similarly, with the foreign investment, the efficient Indian companies will become more competent to compete with foreign firms at the global level. Moreover, foreign investment in retailing would provide a better market for Indian consumers or in other words we can say that it would increase the consumer sovereignty. In short, foreign investment in India will provide more employment opportunities in the retail sector, generate more income (that is it will contribute more to the Indian GDP), create more demand for the products and services of farmers as well as village industries, increase efficiency of Indian retail sector by eliminating the role of middlemen (which is more or less currently exists due to monopoly of local firms) and finally it will increase the size of the market for the Indian consumers.

The potential benefits of FDI are as follows:

1. Increase in employment opportunities: It is known to all of us that increase in investment raises the level of employment in an economy. So, with adequate and smooth flow of investments to Indian retail sector, it is expected that more plants will be established in India and it will increase in scopes of employment in this economy.

2. Expansion of market: with more firms in the market (through foreign investment), the efficiency of market tends to increase. This is because competitiveness among the firms improves the quality of products. At the same time, competitiveness among firms tends to lower the prices of products. So, in a way, we can say that with more firms, the sovereignty of consumers tends to increase.

3. Availability of new and better technologies: India being a developing country cannot purchase/import better technologies at their own expenses. So, with the entry of new foreign firms, India can avail better and new technologies at a lower cost.

4. Availability of funds: The foreign investment also increases money supply in a country apart from increasing the availability of new and better technologies. It gives more liquid funds to the government to spend in their developmental projects.

5. Increase in Growth: By providing more employment opportunities as well as Income opportunities, foreign investments contribute directly to the growth of an economy.

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