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.

1. What explains the fragmented nature of India’s retail sector? What are the benefits of this system? What are the costs?

Answer 1

Indian retail is fragmented into about 11million outlets, which are operating are over the country.India's retail sector used to be fragmented more 5years ago.After FDI was allowed for retaining of multi brand along with wholesale retailing many foreign traders started invading in India.This ensured entry of cash and traders.The unorganised nature of India's retaining leads to the roots of poverty.Also a large number of educated people who are unemployed engage in retail business.Retail business of India compromise of 10% of Indian GDP and act as a pillars of Indian Economy.There are many challenges witnessed by the India's retail sector.Some include lack of absorbing proper technology, deficiency of infrastructure, customers inability of understanding,cost of operations are high,lack of skilled labour, existence of frauds.
India's retail sector is fragmented,witness some benifits also.Investments by foreign investors in India have increased.Indian retail business contribute to about 10% of the GDP.This retail market stands in the top 5 retail markets of the world on the basis of economic value.
Cost of Indian retail market was estimated to be US$600billion.