impact of fdi in mbr
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Introduction
The 1991 reforms marked a paradigm shift in India's policy vis--vis
foreign capital. The 19 years of reforms era has seen progressive liberalizationof the policy particularly with respect to Foreign Direct Investment (FDI) whose
role in economic development is acknowledged by policy makers. India
cautiously opened up to FDI with the hope that it could act as a catalyst for
growth as it is believed to fill up the critical gaps of capital and technology and
also be a facilitator for transfer of managerial and technical skills, for
employment generation and export promotion. Keeping with the policy of
progressive liberalization the Government of India has now initiated a debate of
allowing FDI in multi- brand retail.
100% FDI in wholesale cash-and-carry trade was opened in April 2006
followed by further liberalizing by allowing 51% FDI in single-brand retail in
2008. The impact of this has been an FDI flow of Rs. 7799 crore into the retail
sector. The issue of FDI in multi- brand retail had been put on the backburner
for so long as it had a direct impact on the strong 1.3 crore small retailers in the
unorganized sector. The giant multinational retail players are pushing for the
opening up of India's retail trade as the growing middle class with rising
disposable incomes means huge market potential. Even domestic retailers such
as Future Group, Reliance, Birla, etc are lobbying hard for FDI. By initiating the
current debate the Government has made its intention of removing multi-brandretail from the 'restricted list' very clear and the need is to safeguard all the
stakeholders' interests.
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FDI in Multi-Brand Retail A Step in the right Direction
The strongest argument in favour of retail is that it is in the interests of the
Indian farmer and consumers. Despite the rising food inflation the Indian farmer
gets only one-third of the consumer price and this is due to the lack of an
efficient supply chain connecting the farmers and consumers. This is in contrast
to economies with a higher share of organised retail where farmers get two-third
of the consumer price. The government run agricultural mandis have become
monopolistic and non-transparent in nature over the years and have failed to
protect the interests of farmers and consumers. The large chain of intermediaries
means farm-to-fork supply chain is nonexistent in India and consumers pay a
huge premium which goes into the pocket of the intermediaries and not the
farmers. FDI in retail will ensure creation of a supply chain which will have a
sobering effect on prices, and also guarantee a fair price to both the farmers and
consumers.
The opening up of retail sector would also address the infrastructural
shortages in agriculture. India loses around Rs. 1 lakh crore of food products,
including fruits and vegetables owing to bad farming practices and lack of
structured farm-to-retail cold chain infrastructure. FDI in retail could bring
along huge investments in cold storage chains, agro-processing and other back-
end infrastructure which could reduce the post-harvest losses.
Organised retailing could also encourage direct marketing, access tomodern technologies and even contract farming. This would give farmers a
better price, steady income and better access to changing consumer preferences
through private investors.
FDI in retailing could revolutionize the agricultural sector as it opens the
sector to well functioning markets and enhances its access to infrastructure
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which could drive growth, employment and prosperity in rural India.
The biggest area of concern has been the impact of FDI on small kirana
stores popularly known as Mom & Pop stores. The Department of Industrial
Policy & Promotion (DIPP) discussion paper on retail states that small retailers
may not be impacted after all. Fears of adverse effects on existing retailers are
grossly exaggerated as per industry studies. The large retail players have not
eaten up the small traders livelihood and studies show that kiranas are now
sourcing from supermarket chains. The unorganised retail sector in India has
grown at over 15% per annum in the last few years despite the emergence of
organised retailers. It is also important to note that nine % per annum growing
Indias retail market, huge population, rising incomes can co-exist along with
neighbourhood stores.
FDI in multi-brand retail could throw open employment opportunities.
According to National Sample Survey Organisation (NSSO) data of 2007-08,
retail trade employed 7.2% of total workforce and provided job opportunity to
33.1 million. These numbers increase by a multiple times with FDI in retail
which would add value and hence create jobs.
The advent of FDI in retail would also make India a source for goods for
international outlets of these multinational companies. This would help in
boosting exports and integrating Indian retail chains global supply chains.
Thus the ability to create jobs, securing better returns to farmers and
wider choices at lower prices to consumers are the major arguments in favour ofFDI in multi-brand retailing.
FDI in Retail Need to tread the path cautiously
Despite the entry of big corporate into organised retailing the supply chain
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has not become efficient nor have the consumers got the advantage of lower
prices or superior quality products. Farm-to-Fork remains a distant dream
largely due the following deterrents which organised retailing faces in India
high rentals, no direct sourcing from farmers, the rigidity of Agricultural
Produce Marketing Committee Act, delay in amending the Forward Contracts
Regulation Act and low quantum of FDI inflow into single-brand retail.
The arguments in favour of FDI in multi-brand retail are strong but it is a
sensitive issue therefore there is a need for caution on the part of the
government. The large trading community of the unorganised sector with their
sizeable vote bank power could be difficult to overlook for the policy makers.
But as research shows even the small stores and hawkers may benefit from
organised retailers. The need is to build synergies between small and big
retailers and farmers for the gains to be fairly distributed.
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Literature review
In India, Government is almost ready to allow Foreign Direct Investment
in Multi-Brand Retailing industry. Indian companies as well as multi-nationals
have become aware that the real profitable business is retailing industry in
India. From one of the speculation Indian retail market consists of Rs 12,80,000Crore($ 320 billion). Currently, its 79% share is with 1.2 Crore small retailers.
To tap this expanding business sector several of the Indian companies are trying
hard. Now multinational companies will also combine them. In Indian cities,
the population has rose to 30 crores and by 2015 it will rise to 50 crores. The
disposable income of the middle class is rising outrageously. Nowadays,
housewives dont prefer to buy the grocery at roadside vendors but in the air-
conditioned malls, where they get goods at half rates. In 2015, 27% of the retail
business will be flown to the big companies. For this, 8000 new malls are going
to be opened up in the next year.
From past five years there has been cut throat competition among big
companies. In 2002, there were around 100 shopping malls in Indias 10 lakh
sq. Ft. Area. In 2007, it has rose to 4 crore sq. Ft. Area. Now in this sector when
multinational companies will come up the speed of expansion will increase
drastically. American company Walmart has presence in 15 countries and
operates around 8500 supermarkets employing around 20 lakh people. It is in
partnership with Bharti Group in India for Cash and Carry stores.
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In America, when walmart started its operation, many of the small
retailers had to shut down their businesses immediately. If in India, walmart
gets approval to start its operation in multi-brand retailing then many of the
small traditional shopkeepers will have to close down their businesses.
Relevance of the study
This research study is being carried out to enlighten government, people, small
businessmen and consumers about the huge impact of allowing FDI in multi-brand retailing. There are many pros and cons associated with it. Its huge and
worse impact would be on unorganised small scale businesses in retail. The
purpose of the study is to analyse it in detail. And come up with stringent norms
and regulations so that for growth and curbing inflation it is allowed and
benefits of it are enjoyed. While at the same time saving the economy from its
bad and harsh impact on small scale retailers by introducing certain rules and
regulations on which government is already working upon. To come out with
such a plan, which will be benefitted to every concerned stakeholder.
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Research Methodology
This research methodology will be carried out qualitative as well as
quantitative basis. Qualitative research because certain impacts cant be
measured merely in numbers but by interviewing the small kirana stores and
small shopkeepers. How the location matters to attract more and more street
customers. How far the footfalls have dropped year on year, how quantity
demanded of goods have reduced, whether they source their goods from big
supermarkets, what is the gap of price for consumers, etc. There would be easy
questionnaire for small retailers. To know certain facts and figures, to knowtheir view regarding allowing this policy and to basically know how far has the
Indian super-markets have affected them.
This interview process in different parts of Ahmedabad will provide us better
idea of the current market scenario and difficulties faced by the small scale
retailers.
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Limitations
There are many limitations as far as this research project is concerned for
an individual student to carry out on large scale along with large sample size for
authenticate credibility of the data collected and analysed.
There is time constraint of one month as me as an individual have to
collect as well as analyse the data.
People constraint, there need to be at least 10 people for carrying it out
on considerable no. samples, area would have been covered more too.
Geographic constraint, as research will be carried out only in different
parts of Ahmedabad, where multinational in retail is not going to come
even initially.
Inspite of lots of constraints, the research will be carried out and as far as
possible to represent the true and fair picture of the scenario.
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Research Questions
Quantitative
Q1. Where do you source your goods?
(a)Supermarkets (b) Other sources
Q2. Whose prices are cheaper?
(a)Small retailers (b) Supermarkets
Q3. What is the % of price gap?
a) 0-5 b) 5-10 c) 10-15 d) more than 15%
Q4. Does location of small scale retailer has become crucial now?
(a)Yes (b) no.
Qualitative
Q 1. Do you feel supermarkets affect small shopkeepers?
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Q 2. How far the no. of footfalls has reduced after supermarkets came into
existence?
Q 3. How harshly has it impacted on your mark-up price?
Q 4. How badly has it affected your overall business activity?
Q 5. How will it affect your business as supermarkets are being open up in
many small communities around 3-4 km radius area?
Q 6. What are your opinions on allowing foreign players in supermarkets?
Analysis of Research Questions
As clearly observed that majority of pop n mom stores have already started
procuring from big retailers. They technically fetch benefit from the bulk
purchasing offer and selling in the neighbourhood kirana stores so that near
residents need not to go far.
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It has been observed that majorly big supermarkets or hypermarkets have
proved to be cheaper in most of the items such as vegetables and fruits. Lorry
vendors themselves regularly source it from the big retailers for eg: Reliance
Fresh. Electronics goods are comparatively costlier in organised big malls.
Mostly in FMCG sector, big retailers offers lots of combo discounts and all
which leads price to less than the MRP, but marginal reduction. But in apparels
margin difference is observed higher than 15%.
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The answer should have been 100% yes but there is always a mix response andhence the researches are being conducted all over the world. By this we can
interpret that how cautiously one has to select a location by strategically
speculating the entry of big retailers in that region. As Reliance Fresh has been
expanding gradually in small lanes where once upon a time neighbourhood
kirana stores dominated.
Qualitative
Q 1. Do you feel supermarkets affect small shopkeepers?
Definitely yes, and nowadays to a very high extent as no. of organized retailers
have been increasing drastically and they are into attacking mode as they are
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opening up the outlets in the small lanes in residential areas. They are attacking
the major strength of small retailers. We have been sustaining as we are near to
residential areas in small space shops and catering to the daily requirement of
households although in smaller quantities. They are providing the convenience
part, i.e. delivering at the doorstep, providing credit, maintaining relationship. It
is becoming more n more competitive situation.
Q 2. How far the no. of footfalls has reduced after supermarkets came into
existence?
No. Of footfalls have been reducing drastically and population is being
increasing drastically. So instead of growing they are merely sustaining.
Moreover, the quantity purchase of consumers have been reducing, they buy
from small shopkeepers for temporary purposes. They buy in bulk from big
malls, whether once in a week or a month. But huge bill leads to heavy
discounts under the various schemes for eg. Big Bazaar Currency, on purchase
of Rs. 500 on selected items gives customers Rs 50 currency.
Q 3. How harshly has it impacted on your mark-up price?
As our cost is more than that of big retailers. Our price is also more. And to
sustain in market we have been reducing mark-up. They have to provide better
service, trust in quality.
Q 4. How badly has it affected your overall business activity?
It has been affecting so far. We have to reduce our inventory. As sales volumes
have been decreasing in the recent years.
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Q 5. How will it affect your business as supermarkets are being open up in
manysmall communities around 3-4 km radius area?
It is affecting the regular activities of the business. They are the single most
threat to the retail industry. Opening up of the Reliance Fresh every here and
there has lead to shut down many businesses on irregular intervals. Although
the research shows that in unorganised sector 4.7% businesses are shutting
down annually but the role of organised sector in it is just 1.7%. But still the
pace of thrust among the giant players to tap ever-growing market in retail will
increase the numbers of shutting down more stores.
Q 6. What are your opinions on allowing foreign players in supermarkets?
They should not be allowed. Where would we go when foreign players with
their huge volumes will enter into the market. Unorganised sector is already
facing big competition from domestic organised sectors and it is going to be
end of an era, which defined India as the land of entrepreneurs. The
entrepreneurs will need to shift into some employment if it becomes difficult to
manage the businesses.
Key Findings: -
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It would be impacting too harshly if all doors are kept open for foreign
players. As already big domestic players have entered into the organized sector
and eating up the share of 1.3 crore small shop owners in unorganized sector.
Although research shows that unorganised sector has been growing by more
than 9% a year. But still there profitability and volumes have been decreasing
consistently.
Considering the heavy impact of local big players on the Pop n Mom
stores, we can imagine the future impact of allowing foreign players into one of
the sensitive multi-brand retailing. India loses around Rs. 1 lakh crore of food
products, including fruits and vegetables owing to bad farming practices and
lack of structured farm-to-retail cold chain infrastructure.
FDI in retail could bring along huge investments in cold storage chains,
agro-processing and other back-end infrastructure which could reduce the post-
harvest losses. As expected that the small retailers are being affected
tremendously by such a nominal entry of big retailers. And through this we can
imagine the harsher impact it could lead once the giant players maker their
grand entry. Rising no. of big retail outlets have pressurised the pop n mom
stores to consistently reduce their market share.
Positive Impact:-
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To Consumers: Better Quality, Affordable price, huge variety, easy and
convenient shopping at one junction with high techno savvy arrangement.
To Farmers: They will get better price, contract farming means assured and
stabilised returns, Less wastage, more productivity, water irrigation
development, cold storage facilities will develop, efficient transportation. This
all will lead to efficient utilisation of the agricultural produce, which currently
has been wasted half of the production. Hence, farmers with better price will be
benefitted.
To government: better exports because of efficient farm produce, curbing all
time high inflation rate, more tax revenue as unorganised sector mostly escapes
from paying the right amount of different taxes payable. More employment
generation, more related industries will benefit like transportation facilities will
be required. More infrastructure and reality development will be required.
Small scale manufacturing industries will get contract manufacturing bulk
orders from big retailers. Hence, it would be a win win situation on both sides.
To Society: overall infrastructural development, cleaner and greener
environment, as less waste less pollution, eco-friendly modern techniques for
preserving and storing agricultural goods.
To small retailers: in initial stage government will be restricting some quotas
such as 30% of the whole sales turnover should be in whole cash and carry
model for small retailers. Intention is to integrate inclusive growth among all
and share mutual space and gain from the ample retail sector. There is a ample
market space for all.
Negative Impact:-
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To small retailers: decrease in sales volumes, profitability, mark-up, have to
provide more services at the same price so as to sustain in competition.
Procurement from cash and carry stores at marginally lower price than MRP.
They will be forced to become more transparent and pay taxes. Cost pressure
overall, customer bargain power will increase. In Mumbai, small retailers have
already initiated discount and attractive offers to lure consumers. Their loyal
neighbourhood consumers will switch to big malls, as the price differential
would be higher.
To Government: More open economy exposure leads to more foreign players
control over the market and gradually it may shift to influencing politically.
Influence in policy formulation at a late stage is too possible.
To the middlemen: Big players will try to procure goods directly from farmers
without involving the middlemen in the deal. Although the law is abiding and
says that agricultural produce should be procured only through members of
APMC(Agricultural Produce Market Committee). Regular income of huge no.
Of middlemen and their families will be impacted.
Recommendations:
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After analysing the research over the impact of allowing FDI in Multi-
Brand Retailing, I found that FDI is going to be allowed in recent period only
and it is inevitable to escape too. To get the benefits and eliminate the negative
impacts government can play a vital role by applying stringent norms over the
foreign players. Removing restrictions slowly and gradually by continuously
monitoring the impact in different phases. Following the China model, to allow
in 6 major metro cities and then in urban cities. Not allowing in rural areas.
Proposed % for compulsory wholesale trade is 30%, it should be increased or at
least should be strictly monitored to the mentioned level. The benefit of
wholesale should be rightly delivered to the retail stores. As nicely proposed
that minimum 2000 sq.ft. area to enter in retail. Government should strictly
monitor that 50% of the total investment is at the backend infrastructure as
proposed.
India is popularly known as the Land of Laws, but not abiding it. Complicity
is more but enforceability is less. So it should not be the case in this sensitive
issue. Separate body should be appointed for policy formulation and its strictimplementation.
It should not be allowed in residential areas to lessen its impact on
Neighbourhood kirana stores.
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Conclusion
Allowing FDI in this sensitive sector is going to be a major leap by India
towards improvising its image as open economy and declaring that we are now
well equipped, experienced and ready enough to face the global competition in
any arena.
Initially looks as really on small retailers but actually it is going to be a win win
situation for both as Indias retailing business has ample space for all.
India is being pressurised to open up FDI in controversial multi-brand retailingsince long from WTO members and specially by America. Though it has many
pros and cons, it should be opened up. But after due diligence it can be
cautiously opened up for foreign players to play in Indian huge growing $ 500
billion retail industry. So that interest of every stakeholder is being secured.
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Bibliography
http://dipp.nic.in/DiscussionPapers/RetailTrading_VNPrasad.pdf
http://online.wsj.com/article/BT-CO-20110722-711110.html
http://www.Moneyconrol.com
http://www.atkearney.com/index.php/Publications/at-kearneys-globalretail-development-index.html
Gujarat Samachar
Business Standard
Economic Times
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http://dipp.nic.in/DiscussionPapers/RetailTrading_VNPrasad.pdfhttp://online.wsj.com/article/BT-CO-20110722-711110.htmlhttp://online.wsj.com/article/BT-CO-20110722-711110.htmlhttp://dipp.nic.in/DiscussionPapers/RetailTrading_VNPrasad.pdf -
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