Question

Drawing upon academic literature and theory, critically discuss the possible effects, both positive and negative, of the acquisition on the domestic retail market in India.

Answer 1

Greetings for the day,

Drawing upon academic literature and theory, critically discuss the possible effects, both positive and negative, of the acquisition on the domestic retail market in India.

“To make this question clear to you I will be taking the example of Walmart and Flipkart deal, so that will help you understanding the positive and negative impact of the acquisition of retail market in India”

First, we will understand something related to the retail market in India:

Retailing in India is one of the pillars for the Indian economy and accounts for about 10 per cent of its GDP. The Indian retail market is estimated to be US$600 billion and one of the top-five retail markets in the world by economic value. India is one of the fastest-growing retail markets in the world, with 1.2 billion people, and that astonishing data motivates the outsiders to invest in India for the retail sector.

Now we will see some government regulation related to FDI in the retail sector:

Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets.

In November 2011, India's central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well as single-brand majors such as IKEA, Nike, and Apple.

In January 2012, India approved reforms for single-brand stores welcoming anyone in the world to innovate in Indian retail market with 100% ownership but required that the single brand retailer source 30 per cent of its goods from India. The Indian government continues the hold on retail reforms for multi-brand stores but On 7 December 2012, the Federal Government of India allowed 51% FDI in multi-brand retail in India.

Now let’s first see the positive impact of acquisition in the Indian economy:

1. Low prices and more variety: Product differentiation and localization will bring more variety and create a diverse product available at low prices, this will benefit the Indian consumers.
2. Employment opportunities: With more investment flowing in Indian economy especially in retail space, capacity utilization shall improve Output and productivity growth can create new employment opportunities for both skilled and unskilled labour and India it is highly required.
3. Efficient Supply Chain: Expansion of e-commerce requires efficient supply chain and logistics which require infrastructural development. So they will also invest in infrastructural development indirectly by the way of taxes, road toll etc..
4. Economic Growth: With positive business sentiments, it will be an impetus to economic growth and capitalism because they will increase productivity so for that high employment generation will be there.
5. Research and development: For greater market penetration across the country, efficiency is the key which comes with more R&D, if the FDI will invest in India they will be looking for technology up-gradation so it will be beneficial for our economy because they will invest in R&D centres.

Negative impacts of acquisition in the Indian economy:

1. Brick and Mortar Stores may shut down: If we are talking about the current deals of Walmart, It is known for scrapping small businesses which are selling at ultra-low prices through Flipkart. Walmart may bring in its labels with hyper-competitive prices and replace the domestic MSMEs which can be a threat to brick and mortar stores as they fear shut down due to competitive pressures.
2. Big Data Mining: Large data of Indian shoppers will be shared with the US retail giant which give large controls to a foreign firm may use it to control our domestic value chain in consumer goods space and buying patterns.
3. Mom and Pop stores (Kirana shops): We also called it as a small store will be hurt by this as market spaces shrink due to cut-throat competition which forces small firms to exit. And in our India a large number of the sector is unorganised or we can say these small stores owner. In an attempt to survive in the market, firms practice excessive price cutting at the cost of viability and profitability which leads to inefficiency.
4. Unskilled workers will suffer: As we will allow the FDI then they will be more focused on new or high technology so to operate that technology only skilled workers will be required but in our country, we have a very large number of unskilled workers.

So these are some of the points that show the positive as well as negative impacts on the Indian economy.