An Analysis of FDI in the Indian Retail Sector

11 Sep

The issue of Foreign Direct Investment (FDI) in retail has been in the news since last year when it became the focus of a fierce, politically charged debate. PRactitioner Priyanka Dhawan gives us a better insight into this topic.
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When the government decided to implement 51 per cent FDI in multi-brand retail, it was beaten back amid the objections of other political parties, including some of its allies. The debate continues with strong opinions on both sides of it. Some feel that the move will spell disaster for the economy while others believe that it will herald a new and improved era in Indian retail. Either way, one thing is clear: FDI is and continues to be a game changer in the country’s retail scene.

Here’s a quick primer on the subject for those who are not completely sure what the fuss is all about. Foreign Direct Investment or FDI simply means a direct investment in the production of a country by a company located in another country (Source: Wikipedia).

In India, this has been permitted in the wholesale category and the government has recently upped the 51 per cent investment allowed in single brand retail to 100 per cent. The increase in the limit is good news for many global brands, which are now eyeing the Indian market with a lot more interest. For example, Swedish furniture giant IKEA is looking at starting operations here as long as it is able to work out the arithmetic of local sourcing requirements that the government is insisting on.

Multi-brand retail, which consists of a single large store housing several brands under its roof, is proving to be a thornier issue given the implications for suppliers and smaller players in the field.

Here is a quick rundown of the pros and cons of allowing FDI in the multi-brand format:

Pros
• Farmers will be able to get a better price for their produce as companies will deal directly with them. The middleman who currently pockets some part of the profits will likely exit the picture.
• Indian consumers will have better choices at more affordable prices as access to international brands and quality increases.
• Technology transfer will improve equipment and infrastructure. This will also mean that back-end logistics and supply chain factors in the industry will get a much needed overhaul.

Cons
• Small or ‘kirana’ stores will see their bottom lines impacted as the likes of Walmart and Carrefour move in.
• Even with the 30 per cent local procurement condition stipulated by the government, many local industries and small-time manufacturers may be adversely affected by the presence of retailing giants with global sources.

International chains, consumers and other groups are still waiting for a final decision in this matter but the question – judging from past trends – seems to be one of when FDI in multi-brand retail will become a reality, not if. Combined with the right policies to protect those affected on the supply side, it has the potential to be a win-win for all concerned.

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