FDI in India’s Retail Trade.. Pros and Cons!!!

 The retail industry is mainly divided into:-

1)      Organised and

2)      Unorganised Retailing

Organised retailing refers to trading activities undertaken by licensed retailers, that is, those who are registered for sales tax, income tax, etc. These include the corporate-backed hypermarkets and retail chains, and also the privately owned large retail businesses.

Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi shops, convenience stores, hand cart and pavement vendors, etc.

The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. 

Currently, the organized retail sector is dominated by the likes of large business groups which decided to diversify into retail to cash in on the boom in the sector - 
Tata through its brand Westside, RPG Group through Food world, Pantaloon of the Raheja Group and Shopper’s Stop.

The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating around 15% of India’s GDP.

Entry Options  For Foreign Players prior to FDI Policy 

Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players had been operating in the country.  Some of entrance routes used by them have been discussed in sum as below:-

1. Franchise Agreements 

2. Cash And Carry Wholesale Trading 

3. Strategic Licensing Agreements 

4. Manufacturing and Wholly Owned Subsidiaries.

• ·         51 % FDI in multi-brand retail and 100 % in single-brand formats in India is considered to be a very positive move for the private equity players, especially those who have made meaningful investments in the sector.
• ·         The proposal is to permit FDI in retail only if the foreign investor brings in a minimum investment of $100 million. VC are not such a big fund to write such large-size cheques and this move is essentially a no-game-changer for small and mid-size private equity firm.
• ·         For retail companies who have achieved a certain amount of scale – be it in fast food, QSR (Quick service restaurants) space or pharmacy – it will serve as a platter for strategic and international players who wish to enter the growing domestic sector in India.
• ·          New regulations will clearly open up exit options for PE players. And those who have been able to build a strong brand and distribution network would be attractive targets for international players.

Infrastructure

·          There has been a lack of investment in the logistics of the retail chain, leading to an inefficient market mechanism. Though India is the second largest producer of fruits and vegetables (about 180 million MT), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million MT. , 80% of this  is used only for potatoes. The chain is highly fragmented and hence, perishable horticultural commodities find it difficult to link to distant markets, including overseas markets, round the year.  Storage infrastructure is necessary for carrying over the agricultural produce from production periods to the rest of the year and to prevent distress sales.  Lack of adequate storage facilities cause heavy losses to farmers in terms of wastage in quality and quantity of produce in general. Though FDI is permitted in cold-chain to the extent of 100%, through the automatic route, in the absence of FDI in retailing; FDI flow to the sector has no

•            Investment in Technology
•            Manpower and Skill development
•            Tourism Development
•            Greater Sourcing From India
•            Up-gradation in Agriculture
•           Efficient Small and Medium Scale Industries 

·         The government has added an element of social benefit to its latest plan for calibrated opening of the multi-brand retail sector to foreign direct investment (FDI). Only those foreign retailers who first invest in the back-end supply chain and infrastructure would be allowed to set up multi brand retail outlets in the country