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FDI in India: An analysis on theimpact of FDI in Indias Retail

sector

By Subhajit Ray

3rd year student

Department of HSS, IIT Kharagpur


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This presentation aims to briefly discussthe critical aspects of FDI in India, present acase study on the success of reforms in thetelecommunications sector, analyze both sides

of the arguments currently going on regardingFDI in retail and conclude with suggestivemeasures on the part of the government whichcan eliminate the negative effects of allowing

FDI in Indias retail sector.


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What is FDI?

Investment made to acquire lastinginterests in enterprises operating outside of

the economy of the investor.Consists of a parent enterprise andforeign affiliate which together form a MNC.

Eg: Hero Honda


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Why FDI?

No debt creation on the part of thegovernment.

Triggers technology transfer.

Assists Human capital formation.

Contributes to international integration by

promoting exports.Increases productivity and

competitiveness.


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Improves efficiency of resources.

Promotes innovation.


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Drawbacks of FDI

Local firms may loose business becauseof the oligopolistic power of foreign firms.

The repatriation of profit may drain out thecapital of the host country.

Local population may be displaced out oftheir jobs if they are unable to cope withthe technologically advanced foreign firms.


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Assessing the impact of FDI on host

economy-Review of literatures.

FDI may have a negative impact on the growthof the developing countries (Singer,1950; Griffin,1970).

Hanson (2001) argues that evidence that FDIgenerates positive spillovers for host countries isweak.

FDI could have a favorable short-term effect on

growth as it expands the economic activity.However, in the long run it reduces the growthrate due to dependency, particularly due todecapitalization (Bornschier, 1980).


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Aitken, et al. (1997) showed the external effectof FDI on export with example of Bangladesh,where the entry of a single Korean Multinationalin garment exports led to the establishment of anumber of domestic export firms, creating thecountrys largest export industry.

Hu and Khan (1997) attribute the spectaculargrowth rate of Chinese economy during 1952 to1994 to the productivity gains largely due tomarket oriented reforms.

A study by Xu (2000) concluded that in order tobenefit from the technology transfer by theMNEs a country needs to achieve a basicminimum human capital threshold.


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Studies on FDI in India

Banga (2005) demonstrates that FDI, trade andtechnological progress have differential impacton wages and employment.

Higher extent of FDI in an industry leads tohigher wage rate, it has no impact on itsemployment.

Higher export intensity of an industry increasesemployment in the industry but has no effect onits wage rate.

Import of technology has unfavorably affectedemployment in India. The study by Sharma(2000) concluded that FDI does not have astatistically significant role in the export

promotion in Indian Economy.


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FDI is not growth stimulant rather it is

growth resultant.

Study by Sahoo and Mathiyazhagan (2003)support the view that FDI in India is not able toenhance the growth of the economy.

Pailwar (2001) argues that the foreign firms aremore interested in the large Indian market ratherthan aiming for the global market.

Export oriented sectors should be opened up forFDI so that a higher growth of the economycould be achieved through the growth of thesesectors.


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FDI policy in India:

Currently FDI is permitted:a) Through financial collaborations.b) Through Joint Ventures and technicalcollaborations.

c) Through preferential allotments. India had opened up its economy and allowed

MNEs in the core sectors such as Power andFuels, Electrical Equipments, Transport,

Chemicals, Food Processing, Metallurgical,Drugs and Pharmaceuticals, Textiles, andIndustrial Machinery as a part of reform processstarted in the beginning of 1990s.


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Telecommunications, Banking, Insurance,Hotel & Tourism, IT.

Mining of titanium keeping India's civilian

nuclear ambitions in mind upto100%,amineral which is abundant in India.

single Brand product retailing whereForeign Investment up to 51% is permittedwith prior Government approval. Majordebate going on about approving FDI inIndias Retail sector.

Currently FDI is also allowed in:


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Year wise FDI inflow in the post

reforms era (1990-2001)

2439

0 1000 2000 3000 4000

1992-1993

1993-1994

1994-1995

1995-1996

1996-1997

1997-1998

1998-1999

1999-2000

US $ MILLIONS

FDI


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0 10000 20000 30000 40000

2000-2001

2001-2002

2002-2003

2003-2004

2004-2005

2005-2006

2006-2007

2007-2008

2008-2009

2009-2010

US $ MILLIONS

FDI

37763

Year wise revised FDIInflow since 2000-2001 with

expended coverage toapproach International

Best Practices.


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The growth of FDI inflows in India was not

significant until 1991 due to the regulatory policyframework.There has been a steady build up in the actual

FDI inflows in the post-liberalization period.

Actual inflows have steadily increased from US $143.6 million in 1991 to US $ 37,763 million in2010.

the pace of FDI inflows to India has definitely

been slower than some of the smallerdeveloping countries like Indonesia, Thailand,Malaysia and Vietnam.


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India had registered a declining trend of FDI inflows andthe FDI- GDP ratio especially in 1998 and 2003 could beattributed to many factors, including the US sanctions

imposed in the aftermath of the nuclear tests andSwadeshi movements. But since 2006 India has seen a remarkably higher

growth of FDI in accordance with the general trends ofthe global economy with a slight dip in the year 2009-

2010. Capital goods sector has more or less been bypassed byFDI. This clearly points out the tendency of foreigninvestment to exploit the pent up domestic demand forconsumer durable goods.

A gradual increase in the mergers and acquisitionsduring the 1990s which show a tendency of FDI inflowsto acquire existing industrial assets and managerialcontrol without actually engaging in new productiveactivities (Nagraj, 2006).


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Top Investors in India:

42

9

7

54 4 4

2 2

19

0

5

10

15

20

25

30

35

40

45

Mauritius

Singapore

U.S.A.

U.K

Netherlands

Japan

Cyprus

Germany

France

Others

%ageto

totalInflows

(interms

ofUS$)

%


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Telecommunications sector-

A success story

large number of private operators startedoperating in the basic/mobile telephony andInternet domains after several series of reformsin the telecom sector. FDI is permitted up to 74%with FDI, beyond 49% requiring Governmentapproval.

As a result of the New Telecom Policy 1999(NTP99) Total FDI in telecom is currently overUS $ 15 billion.

Tremendous improvement in infrastructure,lowest tariff rates in the world and over 250million users.

In 2007-2008 Vodafone took over Hutch for

about US $ 11 billion.


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Retail Sector in India

Retail industry in India is one of the fastestgrowing.Contributes 14% to the national GDP and

employs 7% of the total workforce.The retail industry is divided into

organised and unorganised sectors.Organised trade employs roughly 5 lakh

people whereas the unorganized retailtrade employs nearly 3.95 crores.

Growth in Retail as a result of economic

expansion as well as jobless growth.


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Major arguments against adoption of

FDI in Retail in India:

FDI driven modern retailing is labourdisplacing.

It can only expand by destroying the

traditional retail sector.Foreign retail firms have deep pockets and

can cause even the organized retail sector

to go out of business.Will buy big from India and abroad and be

able to sell low. When monopoly situationis created will will buy low and sell high.


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It is true that it is in the consumers bestinterest to obtain his goods and services

at the lowest possible price. But collectivewell being should take precedence.


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Major arguments in favour of adoption

of FDI in Retail in India:

Will improve back-end infrastructure, and ultimatelyreduce post-harvest losses and other wastage.

Farmers will get a better price, easy credit availability willhelp tackle the problem of farmer suicides.

We must differentiate between the interests ofconsumers, who constitute our population of nearly 115crore, from the interests of retailers, who may numberover 5 crore.

Lower prices psychologically propel buyers to spendmore than they otherwise would. The resulting growth inprivate consumption creates jobs.

Inflation is controlled.


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The tax revenue collected by thegovernment can be used for infrastructure

development.Similar negative arguments were used

during the era of industrial licensing, which

was meant to protect small-scaleindustries.

India will become more integrated with

regional and global economies in terms ofquality standards and consumerexpectations.


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Suggestive measures to eliminate the

negative effects of FDI in Retail

FDI should be aggressively promoted inR&D, Manufacturing, Entertainment toaccommodate the people who have lost

their jobs.Import duty should be imposed to protect

domestic production units.

Labour laws should be imposed to ensurethat no management jobs are outsourced.Jobs should be reserved for the poor

people.


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Hindi and local languages as a mode ofoperation should be encouraged.

Cooperative societies should be formedfor the farmers and other agriculturalsuppliers to take care of their rights.

The foreign retail units should be made todivest a certain percentage of their equityin the Indian financial markets.

Social infrastructure like schools, collegesand hospitals should be developed topromote human capital formation


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References:

Economic Reforms, Foreign Direct Investment and its Economic Effects in India by ChandanaChakraborty Peter Nunnenkamp. March 2006.

Indias Economic Growth and the Role of Foreign Direct Investment: By Lakhwinder Singh 2006. FDI in Indias Retail Sector More Bad than Good? By Mohan Guruswamy Kamal Sharma Jeevan

Prakash Mohanty Thomas J. Korah Rethinking the linkages between foreign direct investment and development: a third world

perspective By: Shashank P. Kumar Indias FDI inflows Trends and Concepts By K.S. Chalapati Rao & Biswajit Dhar Impact of liberalization on FDI structure in India. By Dr. Gulshan Kumar. Impact of foreign direct investment on Indian economy: A sectoral level analysis. By Dr Maathai

K. Mathiyazhagan. Foreign Direct Investment in Post-Reform India: Likely to Work Wonders for Regional Development? By Peter Nunnenkamp and Rudi Stracke. FDI in India in the 1990s. Trends and issues. By R Nagaraj. China and India: Any difference in their FDI performances? By Wenhui Wei. June 2005 Fact sheet on FDI in India by the Planning Commission. Data on GDP growth rate from the Planning Commisiion. Wikipedia.com Planningcommission.nic.in

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