fdiinindiaananalysisontheimpactoffdiinindiasretailsector-111031075433-phpapp02
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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