FDI IN INDIA’S RETAIL SECTOR MORE BAD THAN GOOD?

A REPORT ON

FDI IN INDIA’S RETAIL SECTORMORE BAD THAN GOOD?

By

DIBYA RANJAN BEHERA

Roll No: 10211

Course of Independent StudyA report submitted in partial fulfilment of the

Requirements of

PGDM (BATCH-XVIII)

6

Vignana Jyothi Institute of Management

DECLARATION

I hereby declare that this project report titled STUDY ON “ FDI IN

RETAILSECTOR IN INDIA MORE THAN GOOD ” submitted by me is a bonafide work

undertaken by me and it is not submitted to any other Institution or university for the award of

any degree/diploma certificate or published any time before.

NAME OF THE STUDENT SIGNATURE OF THE STUDENT

DIBYA RANJAN BEHERA

7

ACKNOWLEDGEMENT

I avail this opportunity to express my deep sense of gratitude to all the people who have helped

me to carry out and complete this project in partial fulfillment of my PGDM degree curriculum.

I am deeply indebted to Mr. KAMAL GHOSH RAY, Director, VIGNANA JYOTHI

INSTITUTE OF MANAGEMENT, Bachupally, Hyderabad for the valuable support and gave

me an opportunity to do my project work.

I want to express my sincere thanks to A. RAMESH for his constant moral support and valuable

guidance in successful completion of the project work.

I wish to express my hearty thanks to all faculty members of VIGNANA JYOTHI INSTITUTE

OF MANAGEMENT, for the help they provided to carry out this project.

Finally, I would like to thank all my friends and staff members without whom this would not

have been successfully completed.

Date: DIBYA RANJAN BEHERA

Place: Hyderabad

8

ABSTRACT

There is growing recognition of the significant effect the activities of the private sector have—on

employees, customers, communities, the environment, competitors, business partners, investors,

shareholders, governments and others. FDI is become more vital for Indian economy. FDI means

foreign direct investment. After globalization foreign companies invested in our country.

In India there are two type of retail sector i.e. organized and unorganized. As India is a

developing country so the Indian market was dominated by unorganized retail sector. In India

there was 98% of unorganized retail sector. In India the standard of living of the people is very

low and there was the problem of unemployment. So that the people were trying to be

independent.FDI at last enter into the Indian market in retail sector. First they targeted the

metropolitan city to establish their business. Due to FDI in retail sector there is a rapid growth in

GDP. The unemployment problem of our country is on control.FDI make a revolution on Indian

retail sector. In the analysis part it is finding that FDI in retail sector will help country for

economy growth and job problem.

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Table of Contents

1. Introduction 6

1.1. Objectives 6

1.2. Limitations 6

1.3. Methodology 6

2. Review of Literature 7

2.1. FDI 7

2.2. Impact OG Globalization 10

2.3. Current Retail Scene 13

International Retail 13

Unorganized Retail Sector 13

Organized Retail Sector 14

Organized Vs Unorganized Sector 14

2.4. Indian Retail 15

2.5 Employment in Indian Retail 16

3. Suggestions 21

4. Conclusion 22

5. References 22

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1. Introduction

1.1 Objectives

1. To see what is the impact of FDI when enter into retail sector.

2. To know what is the impact on economy of our country.

3. To know what is the impact on the unorganized retail sector.

4. To highlight the benefits due to FDI in retail sector.

1.2 Limitations

1. It will destroy the traditional market.

2. It will create the problem of BPL.

1.3 Methodology

There is only the secondary data which is collected from the website. Some important data from

Economic Times. I get some data from the other like the website of CSO.

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2. REVIEW OF LITERATURE

2.1. FDI

These three letters stand for foreign direct investment. The simplest explanation of FDI

would be a direct investment by a corporation in a commercial venture in another country. A key

to separating this action from involvement in other ventures in a foreign country is that the

business enterprise operates completely outside the economy of the corporation’s home country.

It usually involves participation in management, joint-venture and transfer of technology. There

are three types of FDI: inward foreign direct investment and outward foreign direct investment,

resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment".

Direct investment excludes investment through purchase of share.FDI is distinguished from

portfolio investment that does not involve obtaining a degree of control in a company. FDI in

retail trading is not encouraged in any form. Foreign Direct Investment in Retail was taken in the

year 2006. Trading is permitted under automatic route with FDI up to 51% provided it is

primarily limited to export activities, and the undertaking is an export house/trading house/super

trading house/star trading house. However, under the FIPB route 100% FDI is permitted in case

of trading companies for the following activities:

exports;

bulk imports with ex-port/ex-bonded warehouse sales;

cash and carry wholesale trading;

other import of goods or services provided at least 75% of it is for procurement and sale

of goods and services among the companies of the same group and not for third party use

or onward transfer/distribution/sales.

A few foreign retail names appearing in the market like Marks & Spencer, Benetton,

Lifestyle are in the nature of franchisee.

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FDI IN INDIA’S RETAIL SECTOR

As India is a developing country so India allows the foreign retail company to enter into India in 2006. The 54 FDI approvals have been granted by the government and the country has received a cash inflow to the tune of about Rs 901.64 crore.

The scenario at present is:• 100% FDI is allowed in wholesale cash and carry trade• 51% FDI in Single Brand Retail• No FDI in Multi Brand Retail

They are coming with the FDI in India’s retail sector because of some reason which are mention

below:

1. India is a developing country

2. Indian market is a very large market

3. Retail is the top most growing market in India.

4. The environmental factor and the political factor is not so bad in India.

5. The tax rate is low.

Retailing is the interface between the producer and the individual consumer buying for personal

consumption. This excludes direct interface between the manufacturers. A retailer is one who

stocks the producer’s goods and is involved in the act of selling it to the individual consumer, at

a margin of profit. As such, retailing is the last link that connects the individual consumer with

the manufacturing and distribution chain.

The retail industry in India is of late often being hailed as one of the sunrise sectors in the

economy. India is the ‘second most attractive retail destination’ globally from among thirty

emergent markets. With a contribution of 14% to the national GDP and employing7% of the total

workforce in the country, the retail industry is definitely one of the pillars of the Indian economy.

So the FDI in retail sector in India. As per the report prepared by FICCI and ICICI Property Services in Feb 2005, FDI can be a powerful catalyst to spur competition in the retail industry. It

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can bring about: • Supply Chain Improvement • Investment in Technology, Manpower and Skill development • Tourism Development • Upgradation in Agriculture • Efficient Small and

Medium Scale Industries • Growth in market size • Greater Productivity • Benefits to government through greater GDP, tax income and employment generation.

The Indian Scenario

Trade or retailing is the single largest component of the services sector in terms of contribution

to GDP. Its massive share of 14% is double the figure of the next largest broad economic activity

in the sector

Table 1: Components of Service Sector In IndiaComponent Share % in GDP (2002-03) Growth during (2002-03)

Construction 5.3 7.3

Hotel &Restaurant 1.1 4

Trade 14 4.5

Railway 1.1 5.7

Other Transport 4.3 6

Storage 0.1 -7.8

Communication 3.5 22

Banking and Insurance 6.9 11.6

Real Estate, Business/Legal Services 6.1 5.9

Defense 5.9 5.3

Other Community &Social Services 7.8 6.2

Total 56.1 7.2

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Construction Hotel &Restaurant TradeRailway Other Transport StorageCommunication Banking and Insurance Real Estate, Business/Legal ServicesDefense Other Community &Social Services

Observation

1. India is a developing country with high population.

2. So there is less opportunity for employment.

3. Most people are dependent on agriculture and small retail store.

4. From the above pie-chart it is clear that trade is contributing highest to GDP

other than any sector

.

2.2. Impact of Globalization

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After globalization the retail sector was growing over the recent period. As home markets have become crowded and with opportunities for new emerging market, modern retailers from developed countries have been turning to new markets. On an average each of the top 250 retailers in the world has operated on an average in 5.9 countries in 2005-06 (July-June) against five countries in 2000-01 (Deloitte- Stores Report, 2007). Foreign business accounted for 14.4% of retail sales of these companies in 2005-06 up from 12.6% in 2000-01. The retail sales growth of companies which have ventured into foreign markets has been faster than those that have confined themselves to home markets. For the globalization India is the best target for the foreign company to invest because India has the large market with less tax to be paid to the government. The world's largest retailer Wal-Mart has solicited support from the US government for entering the multi-brand doller Indian retail market. The US-based Wal-Mart Stores one of the world’s top revenue grosser with over $400 billion of the total annual sales and present in 15 countries. Its presence in India is limited to business-to-business wholesale market and back-end supply chain management business through a joint venture with Sunil Mittal-led Bharti group and it has been trying for many years now to enter Indian retail market, as India does not allow foreign direct investment in multi-brand retail business, in which Wal-Mart specializes. The company had signed the JV with Bharti Retail in august 2007. Importantly, there is a complete ban on foreign investment in multi-brand, front-end retail. This has resulted in keeping all the giant corporate – backed retailers of the world like Walmart (USA), Carrefour (France), Tesco (UK), and Metro (Germany), who are very keen to foray into India’s retail sector, away from entering into the country. All of these retailers, therefore, to make their presence felt  in the country, have either tied-up or trying to tie-up with local corporates, to offer their services for back-end operations like sourcing, logistics, inventory management, among others, for front-end, multi-brand retail operations of such corporates.

Growth of Retail Outlets in India (000)

Outlets 1996 1997 1998 1999 2000 2001

Food Retail 2769 2943.9 3123.4 3300.2 3480 3682.9

Non-Food retailers

5773.6 6040 6332.2 6666.3 7055.5 7482.1

Total retailers

8542.6 8983.6 9455.6 9966.5 10534.4 11165

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1996 1997 1998 1999 2000 20010

2000

4000

6000

8000

10000

12000

Non-Food RetailersFood RetailersTotal Retailers

Time Series Analysis

YearY (Total Retailers in "000")

X=2t-(1998+1999) xy x2

Trend Value in" 000" yc

=a+bx1996 8542.6 -3 -25627.8 9 8544.651997 8983.6 -2 -17967.2 4 8954.641998 9455.6 -1 -9455.6 1 9364.631999 9966.5 1 9966.5 1 10184.612000 10534.4 2 21068.8 4 10594.62001 11165 3 33495 9 11004.59

Total ∑Y=58647.7 ∑x=0∑xy=11479.7 ∑x2=28  

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In this case, since n, the number of pair is even i.e 6, we shift the origin to the time which is the

arithmetic mean of the two middle times i.e, 1998 & 1999

x=2t-(1998+1999)

2t-3997

The normal equation for estimating a & b

Y=a+bx

∑y=na+b∑x

∑xy=a∑x+b∑

x2

» 58647.7=6*b∑0 »11479.7=9774.62*0+b*28

» a=58647.7/6 »b=11479.7/28

a=9774.62 b=409.99

In 2020 the total production is 2704.9(“ 000 “) in such a way which will we get from normal equation

1 2 3 4 5 6 70

5000

10000

15000

20000

25000

30000

Trend Line

YearTrend Value in" 000"

Year

Reta

ilers

in "

000"

18

Observation

1. Time series analysis is a statistical tool which is used in business for forecasting.

2. It is the tool which is help managers to take proper decision.

3. FDI is playing a great roll for the development of our country.

4. In India retailer sector is very vital because it is provided job opportunity and giving

more profit.

5. For that reason FDI is interested in retail sector.

6. After globalization FDI is coming very quickly to our country.

7. The above table shows that there is an increment in the retail sector in both food and non-

food retail sector.

8. From that the non food retailers are increasing by 4.5% per year.

9. On that data I used time series to know what is the position of both food and non-food

retailers in 2020.

10. The Trend value in 2020 will be 27404190.

11. By the use of Time series analysis a manager can know whether it will be good to invest

or not.

12. . From the above Trend line graph it is very clear that the retail sector positive slope.

13. There are two type of retail sectors i.e Unorganized and Organized.

14. Due to FDI the Organized sector is increasing.

2.3. Current Retail Scene

International Retail

Global retail sales are estimated to cross $12 trillion in 2007.The growth in the world economy,

global retail sales grew strongly in the last five years (2001-06) at an average nominal growth of

about 8% per annum in $ terms. Grocery dominates retail sales with a share of approximately

40% in the world.

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Unorganized Retail sector

It means the retail sector which is not register under government. These retail sectors are not

paying the sale tax, vat etc. In India the unorganized retail sector have a great impact over the

last five decade. These type of retail sector serve many people in our country like kirana shops,

owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement

vendors, etc. Unorganized retailing is by far the prevalent form of trade in India – constituting

98% of total trade, while organized trade accounts only for the remaining 2%.

Organized Retail sector

These type of retail sectors are register under the government. They are paying the sale tax, vat

etc to the government. FDI is the example of organized retail sector. Some of the MNC in retail

sector like Trent Limited, RPG Spencer’s,etc. Bharti-Wal-Mart stores, Future Group, Metro AG

etc.

Organized Vs Unorganized Retail

In the developed economies, organized retail is in the range of 75-80 per cent of total retail,

whereas in developing economies, the unorganized sector dominates the retail business. Modern

retail formats, such as hypermarkets, superstores, supermarkets, discount and convenience stores

are widely present in the developed world, whereas such forms of retail outlets have only just

begun to spread to developing countries in recent years. In developing countries, the retailing

business continues to be dominated by family-run neighborhood shops and open markets. As a

result, wholesalers and distributors who supply the products from industrial suppliers and

agricultural producers to the independent family-owned shops and open markets remain a critical

part of the supply chain in these countries.

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Share of Organized Retail in Selected Countries, 2006

Country Total Retail Sales(US$bn)

Share of OrganizedRetail (%)

USA 2983 85Japan 1182 66UK 475 80France 436 80China 785 20Germany 421 80India 322 4Brazil 284 36Russia 276 33Korea, South 201 15Pakistan 67 1Malaysia 34 55Thailand 68 40Poland 120 20

From the above table is clear that in 2006 there is very less contribution by organized retail

sector

compare to total retail sales of our country. Up to 2006 the retail sectors were dominated by

unorganized retail sector. The contribution by organized retail sector is very less in developing

countries.

2.4. Indian Retail

The growth of the retail trade in India is associated with the growth in the Indian economy. Gross

domestic product (GDP) grew by an annual rate of 6.6% during 1994-00 but the growth

slackened to 4.7% per annum during the next three years before the growth remarkably rose to

8.7% per annum in the last four years. This meant a substantial rise in disposable income of

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Indian households since the mid-1990s. The data from the Central Statistical Organization (CSO)

indicate that the growth of real private final consumption expenditure, which dipped from an

average of 5.7% per annum during 1994-00 to 4% per annum during 2000-03, shot up to 6.7%

per annum during 2003-07. Retail sales (in nominal terms) in the country also followed a similar

pattern: a high annual growth of 13.6% during 1994-00, a low growth of 4.8% during 2000-03

and a smart pick up in the last four years, 2003-07 at around 11%

GDP, Private Final Consumption Expenditure and Retail SalesGrowth, 1994-07 (Compound Annual Growth Rate).

1994-95 to1999-00

2000-01 to2002-03

2003-04 to2006-07

Real GDP 6.6 4.7 8.7

Real private final consumptionExpenditure

5.7 4.0 6.7

Retail sales 13.6 4.8 10.9

1994-95 to 1999-00

2000-01 to 2002-03

2003-04 to 2006-07

02468

101214

GDP,Private final consumption and retail sales Growth,1994-07

Real GDPReal private final con-sumption expenditureRetail sales

Year

Gro

wth

Per

cent

age

From the above table it is clear that after globalization GDP of our country was increasing but in

2001-03 due to some external environmental effect it had decreased but after that it is in growing

stage. For the growth of GDP retail sale is playing a great roll.

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2.5. Employment and Output in the Retail Sector

Retail is a labour-intensive economic activity. According to the Economic Census carried out by

the CSO in 1998, the country had a total of 10.69 million enterprises engaged in retail trade, of

which 5.23 million were in the rural areas and 5.46 million in the urban areas. The total

employment in these enterprises in 1998 was 18.54 million of which 7.88 million was in the rural

sector and 10.65 million in the urban sector. However, according to NSSO’s Employment and

Unemployment Survey for 2004-05, employment in the retail trade has been 35.06 million,

divided between rural (16.08 million) and urban (18.98 million) sectors.4 This constituted about

8 % of the workforce in the country (459 million). Wholesale trade, on the other hand,

contributed to an employment of 5.48 million, of which only 1.71 million was in the rural sector

and 3.77 million in the urban sector. According to CSO estimates, total domestic trade, both

wholesale and retail included, constituted about 15.1 per cent of India’s GDP in 2006-07, a

successive increase in share from 13 per cent of GDP in 1999-00.

A simple glance at the employment numbers is enough to paint a good picture of the relative

sizes of these two forms of trade in India – organized trade employs roughly 5 lakh people

whereas the unorganized retail trade employs nearly 3.95 crores.There are about 8% of the

workforce in the country are dependent on retail.

Share of retailing in employment across Different countries

Country Employment(%)

India 8

USA 16

Poland 12

Brazil 15

China 7

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Share of persons working in Trade (per cent)

Rural Urban

Male Female Male Female

2007-08 7.6 2.3 27.8 12.8

2003-04 5.6 1.7 18.8 8.6

1999-2000 6.8 2.0 29.4 16.9

1993-94 5.5 2.1 21.9 10.0

1993-94 1999-2000 2003-04 2007-080

10

20

30

40

50

60

Persons working in Trade in %

Urban FemaleUrban MaleRural FemaleRural Male

Perc

enta

ge

Observation

1. From the above table it is observe that after FDI enter in to the retail sector the

employment increases mostly in urban area.

2. The retail store by FDI is much bigger than the Indian traditional store.

3. The prices in hotel and restaurants are much higher than the ordinary hotel and

restaurants.

4. They are invested in the urban area because it is so expensive.

5. So that employment increases in the urban area for both male and female.

6. After 2003-04 the employment had increased because it is the beginning time for MNC to

enter in to the retail sector in India.

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7. There is no such improvement in the job opportunity in rural areas because MNC are not

investing there.

Foreign Direct Investment (FDI) in Retail

Opening up the retail sector to Foreign Direct Investment (FDI) becomes a very sensitive issue,

with arguments to support both sides of the debate. Indian government allow FDI in retail sector

believe that in will help in growing Indian economy with greater integration into the Global

economy. It is ultimate benefit for the consumer in both price reduction and product selection.

There is one important factor that against FDI is that it can destroy traditional retail sector. As

per present regulations, no FDI is permitted in retail trade in India. Allowing 49% or 26% FDI.

Sectoral GDP, Employment & Growth Rates (%)

Sectors Share % inGDP (2004)

Employment Growth Rate during1994-2004

Agriculture 22.1 60.5 2.70

Industry 21.7 16.8 6.53

Service 56.2 22.7 7.90

Observation

1. From the above table we can know what the impact of FDI is.

2. After globalization there is huge growth in Indian economy especially in the service

sector.

3. After FDI enter in the retail sector it also increase the job opportunity in our country.

4. From 1994-04 the service sector contributing 56.2% to GDP.

5. After independence agriculture was dominated Indian economy but after globalization the

growth of agriculture had decreased.

6. Now Indian economy is dominated by Service sector because of FDI.

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Employment in Organized Wholesale & Retail Trade Sector, 1992-1997 (Nos. in Lakhs)

Year Employment

1992 1.48

1993 1.61

1994 1.62

1995 1.62

1996 1.64

Retailing is not an activity that can boost GDP by itself. It is only an intermediate value-adding

process. If there aren’t any goods being manufactured, then there will not be many goods to be

retailed! This underlines the importance of manufacturing in a developing economy.

Trend Analysis of Employment in Organized Trade sector,1992-97 Nos. in lakhs

YearY employment in lakhs x=t-1994

x2 xy

yc=a+bx

1992 1.48 -2 4 -2.96 1.52061993 1.61 -1 1 -1.61 1.55731994 1.62 0 0 0 1.5941995 1.62 1 1 1.62 1.63071996 1.64 2 4 3.28 1.6674

Total ∑y=7.97 ∑x=0 ∑x2=9 0.33  

x=t-1994

The normal equation for estimating a & b

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Y=a+bx

∑y=na+b∑x ∑xy=a∑x+b∑x2

» 7.97=5*b∑0 »0.33=1.594*0+b*9

» a=7.97/5 »b=0.33/9

a=1.594 b=0.0367

Observation

1. From the above data I make the forecast for 2015 the employment that is 236470.

2. Organized retail Trade is a growing sector in India.

3. Recommendations

1. The retail sector in India is severely constrained by limited availability of bank finance. The

Government and RBI need to evolve suitable lending policies that will enable retailers in the

organized and unorganized sectors to expand and improve efficiencies.

2. A National Commission must be established to study the problems of the retail sector and to

evolve policies that will enable it to cope with FDI as and when it comes.

3. The proposed National Commission should evolve a clear set of conditionalities on giant

foreign retailers on the procurement of farm produce, domestically manufactured merchandise

and imported goods. These conditionalities must be aimed at encouraging the purchase of

goods in the domestic market.

4. In order to address the dislocation issue, it becomes imperative to develop and improve the

manufacturing sector in India. There has been a substantial fall in employment by the

manufacturing sector.

5. The government must actively encourage setting up of co-operative stores to procure and

stock their consumer goods and commodities from small producers. The government can also

facilitate the setting up of warehousing units and cold chains, thereby lowering the capital costs

for the small retailers.

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4. Conclusion

From the above study I can conclude that FDI in retail sector in India is good than bad. After globalization India is the one of the major country with high economy growth. Consumer’s views are in positive direction towards the introduction of FDI in Multiband Retailing. Consumer think that still there is a need to improve in backend supply chain activities which can be developed by allowing FDI in Retail sector. Consumer’s demand is to make a regulatory body which can put a cap upon foreign investors. India is populated country with the huge problem of unemployment. Due to the FDI this problem is under its control.

5. References

1 www.google.co.in

2 www.ficci.com

3 www.timesofindia.indiatimes.com/.../india...FDI-in-retail.../6812571.cms

4 The Economics Times, edition 30th may 2010

5 Issue of Discussion paper on FDI in Multi-Brand Retail Trading

6 Impact of Organized Retailing on the Unorganized Sector – Mathew Joseph, Manisha Gupta,

Sanghamitra Sahu, Nirupama Soundarajan, May 2008, icrier report

7 Fundamentals of Statistics – S.C Gupta.

8 Statistics for Management – Richard I. Levin, David S.Rubin.

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