Friday, 13 December 2013

The Opportunities and Challenges of FDI in Retail in India

FDI (Foreign Direct Investment) is an investment in a foreign country with an intention to gain managerial interest in a company operating in that country. There are many foreign players who have invested and are investing in this way in India. The main interest of any person interested in operations in this issue would be supply chain. The large retailers would complement the investment of government in supply chain i.e. roads, energy. This would lead to decrease in transaction costs of business- both Business to business and business to customer such as information  costs, search costs, transport costs, communication costs, contractual costs, distributional costs, etc.

The Growth of FDI in the global economic land scope over the last two decades has made it an integral part of the development strategy of both the developed and developing nations. It acts as a major catalyst in the development of a country through up-gradation of technology, managerial skills and capabilities in various sectors. Rise in purchasing power, growing consumerism and brand proliferation has led to retail modernization in India. The growing Indian market has attracted a number of foreign retailers and domestic corporate to invest in this sector.FDI in the retail can expand markets by reducing transaction and transformation costs of business through adoption of advanced supply chain and benefit consumers and supplier. Oppositions have raised concerns about employment losses, promotion of unhealthy competition among organized domestic retailers resulting in exit of small domestic Retailers from the market and distortion of urban cultural development. the overview of the Indian retail sector along with the opportunities of expansion of FDI in retail in India and the major challenges that it faces.

The government of the host country may limit the percentage of foreign stake in any company with the intention to avoid foreign control over its country’s economy and people. This percentage varies from industry to industry depending on how crucial the industry is for the country. Even India limits the percentage of foreign stake. The industry-wise limitations are 100% for tourism, hospitality, education, roads and highways, pharmaceuticals, petrochemicals; 51% for multi-brand retail; 49% for civil aviation, insurance, D2H, public sector banks; and 26% for print media, defence, etc to name a few. Retail industry in India is on of the most developing industries and has a huge potential to grow further. It contributes about 15% to GDP and 8% to employment of the country. It can be classified into single-brand and multi-brand retail. Only 4% of the retail in India is organized. The FDI limit for single-brand retail and multi-brand retail in India was increased to 100% and 51% respectively in 2012.

The Indian Government, however, recommends that retail firms source a percentage of manufactured products from the small and medium domestic enterprises. With a restriction of this sort, the opening up of the retail sector to FDI could therefore provide a boost to small-and medium enterprises. Moreover, expansion in the retail sector could also generate significant employment potential, especially among rural and semi-urban youth. So it is very difficult to predict the future of Indian retail sector. But the government of India must be cautious about the apprehensions raised by the critics and adequate safeguards must be taken so that the positive effects may outweigh the negative ones and the traditional retailers co exist even after big foreign retailer enter the markets.

  Shariba Tasleem, Faculty of commerce & Management Department

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