FDI is done for many reasons - take advantage of cheaper wages in the country, and special investment privileges such as tax exemptions offered by the country as an incentive to gain tariff-free access to the markets of the country or the region. FDI is in contrast to portfolio investment which is a passive investment in the securities of another country such as stocks and bonds.
As part of the national accounts of a country, FDI refers to the net inflows of investment to acquire a lasting management interest (10 per cent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown the balance of payments. It usually involves participation in management, joint venture, transfer of technology and expertise. There are two types of FDI: inward FDI and outward FDI, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment," which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares.
FDI in India
Starting from a baseline of less than $1 billion in 1990, a recent UNCTAD survey projected India as the second most important FDI destination (after China) for transnational corporations during 2010-2012. As per the data, the sectors which attracted higher inflows were services, telecommunication, construction activities and computer software and hardware. Mauritius, Singapore, the US and the UK were among the leading sources of FDI. According to Ernst and Young, FDI in India in 2010 was $44.8 billion, and in 2011 it experienced an increase of 25% to $50.8 billion. India has seen an eightfold increase in its FDI in March 2012.
Foreign direct investment in retail
The retail industry is a sector of the economy, which consists of individuals, stores, commercial complexes, agencies, companies, and organisations involved in the business of selling or merchandising diverse finished products or goods to the end-user consumers directly and indirectly. Goods and products of the retail industry or sector, are the finished final objects/products of all sectors of commerce and economy of a country.
The country's retail market, worth roughly $528 billion, is expected to more than double to $1,248 billion in the next eight years by which time organised retail is expected to increase its share to $262 billion or 21% of the total retail market. However, FDI in multibrand retail is still restricted. The government is likely to revive an order allowing foreign investors to own majority stakes in Indian super markets and department stores. The Cabinet had allowed foreign investors to own 51% in Indian supermarkets last November, but had to keep the move in abeyance after protests from its ally.
The business in the organised retail sector of India, is to grow most and faster at the rate of 15-20% every year, and can reach the level of $100 billion by the year 2015. Here, it is noteworthy that the retail sector of India contributes about 15% to the national GDP, and employs a massive workforce of it, after the agriculture sector. India's growing economy with a rate of approximately 8% per year, makes its retail sector highly fertile and profitable to the foreign investors of all sectors of commerce and economy, of all over the world. Global Jurix, a full-fledged legal organisation prominent worldwide, provides all-encompassing services and advice for most lucrative and secured FDI in the Indian retail sector.
Alluring position
A T Kearney recognised India as the second-most alluring and thriving retail destination of the world, among other 30 growing and emerging markets. At present, other profitable retail destinations of the world are China and Dubai. Diverse FDI in Indian retail is greatly cherished by most of the major and leading retailers of USA and European countries, including Walmart (USA), Tesco (UK), Metro (Germany), and Carrefour (France). Liberalisation of trade policy and loosening of barriers and restrictions to the foreign investment in the retail sector of India, have collectively made the FDI in retail sector quite easy and smooth.
The FDI in India's retail business can be made through any of the following routes: Joint Ventures; Franchising; Sourcing of Supplies from Small-Scale Sector; Cash and Carry Operations; and Non-Store Formats.
A leading world business survey revealed that Indian economy is a key economy in Asia. With the annual GDP growth rate of 8.7% (first quarter of 2011) and a country of billion plus population offers lucrative and diverse business opportunities across all industries and sectors. India is the destination of many leading investors from developed countries including USA, the UK, Canada and Germany as business in India promises good return on investment. Being an emerging economy and one of the largest democracies in the world, India offers stable and business-friendly rules and regulations to start a new enterprise. Indian legal environment and policy attracts foreign association and collaboration for doing business in India. Globaljurix, a leading Indian law firm has clients including small and medium and large business houses, multinational companies, public sector undertakings, ministries and government authorities, and provides all business solutions relating to business law.
Indian market
The Indian business market is very wide, offering new business opportunities. Doing business in India is promoted by professional efficiency with several years of global experience in diverse industry verticals. It has been observed that Indian domestic market has huge potential which is untapped for many years, but now catching the attention of global investors because of stable business environment, easy rules and regulations and last but not the least good return on investment.
Over the last three to four months, the department of industrial policy and promotion (DIPP) has received applications from overseas for investing in single-brand retail. Brands including Skechers, Quicksilver, Tommy Hilfiger, Brooks Brothers, Promod, and Pavers England have filed for joint ventures or fully-owned subsidiaries with the DIPP. The mother of all investment proposals came from Sweden's IKEA Group, which plans to invest $1.9 billion in the country to set up a chain of big-box outlets, a supply chain, and restaurants, among other formats.
In its application to the DIPP, IKEA, the world's largest single-brand retailer, has said it has "identified India as a potential major retail market." Meanwhile, other foreign brands including US-based designer shoe label Steve Madden, LVMH-owned cosmetic and beauty care retailer Sephora, high-end French bakery chain L'Opera, Spanish designer brand Adolfo Dominquez, Armani Jeans, and Buddha Bar are either foraying into India or scaling up operations.
Tommy Hilfiger now plans to roll out 500 new stores in India over the next five years in addition to about 130 outlets it currently operates. The marketer has told DIPP that it plans to invest Rs 60 crore to set up 45 stores; the bulk of the new outlets, though, would be opened by franchisees.
Boston Consulting Group (BCG) says India's $1-trillion overall consumption market is set to more than treble to $3.6 trillion by 2020. Enticed by such numbers global retailers are making their way into India to sell their products to a middle-class.
Organised retail in fruits and vegetables
India is emerging as a reliable fruit supplier to European retail chains. Exporters are tying up with farmers for identity-preserved fruits, wherein consumers can trace the fruit they eat to the farm it is grown on. EU's safety and health norms, possibly the strictest in the world, and retailers are educating farmers on the need to maintain standards.
Processing and storage technology has had a huge role to play in the success of fruit cultivation and export. The controlled atmospheric cold store storage (CA) storage systems, for instance, lower oxygen and increase carbon dioxide levels and help reduce ethylene generation, ensuring that fresh produce has a longer shelf life.
Processing has played a big part in the development of Mahabaleshwar, a hill station near Pune. For many years, the local population found work only during the summer months, when tourists would come visiting. In the mid-90s, the state government and local farmers took up commercial plantation of strawberries, which were first introduced by the British and were grown till then only for tourist consumption. Grapes, too, are profitable when exported and processed.
Farmers in Himachal have been making a fortune from apples. Production has risen to 15 crore boxes in August-December 2010 from 8-9 crore boxes (50 boxes make one tonne) in 2009 and traders and corporates such as Adani, Concor, Bharti and Dev Bhumi Cold Chain are queuing up, to procure the fruit.
Investment in technology
With the advent of corporates and large traders farmers are realising the importance of investment in technology and value-added products like juices and jams.
Retailers too find it lucrative to keep the fruit chain going. With growing affluence, customer preferences have shifted to more nutritious products. As a result, the organised retailer has found customers for exotic, non-seasonal, imported as well as premium fruits in various markets. Bharti Wal-Mart sources all its fruit from India, with imported fruits accounting for just 1-2% of sales. Bharti sources fresh grapes, pomegranates, melons and some other agricultural products from India.
Bharti Walmart works closely with Walmart's Europe team, Indian suppliers and farmers to ensure implementation of globally accepted practices and other requirements in the area of farming, quality assurance and post-harvest management.
Mother Dairy's Safal retail chain promotes neem-based products which it manufactures in-house. It also helps farmers in sorting fruit and vegetables into different grades, packaging and transportation.
Delhi-based Dev Bhumi has tied up with French retail giant Carrefour, extending technical support to apple farmers in Matiana region of Shimla district. So far, they have selected progressive farmers willing to go enter modern retail. More than 100 large farmers and over 2,000 small and marginal farmers are working with them.
One of the chief benefits for farmers is that middlemen are bypassed and there are savings on transportation. Commission agents charge farmers a good 5% to 7%, while transportation costs add up to another 5% to 10%, depending on the condition. By removing intermediaries like middlemen, companies ensure quality and consistent supply of produce apart from bringing costs down.
Another incentive for farmers is that they get spot payments and assured cheque payments reach them within two to three days. Besides, corporates give farmers immediate price updates, transparent weighing systems, quality incentives, technical guidance and good quality raw material. Importantly, farmers are insulated from market risk and post-harvest damage.
Earlier, a farmer had to run after a trader for his payment, even after plucking, loading and bringing his produce to the mandi. Now the traders and companies do all the post-harvest work and pay by cheque the same day.
Exporters are also working overtime to educate farmers about the risks associated with pesticide residues. The Agricultural and Processed Food Export Development Authority, (APEDA) on its part, has established the Grapenet and Anarnet chemical residue traceability systems for grape and pomegranate exports to the EU respectively. The Maharashtra government, too, bears part of the cost of procuring a Global GAP certification, which gives farmers access to the quality-conscious European market.
Retail FDI in dairy industry
While the government claimed farmers support on FDI in retail, the country's largest dairy co-operative and food brand Amul felt such a move will hurt the interest of both producers and retailers. Farmers get the least returns from the modern trade and the "so called efficiency" benefits only the large retailers as they constantly drive down the prices.
The milk producers in the US get only 38 per cent share of the consumer's dollar spent on milk, while the rest is earned by the processor and retailer. In the United Kingdom, the milk producers get only 36 per cent. However, in India, the milk producer gets more than 70 per cent of the consumer's rupee on an average. Moreover, the milk producer affiliated to co-operatives get more than 80 per cent share of organised retail increases.
In the US, the farmer's share in the consumer's price has declined from 52 per cent in 1996 to 38 per cent in 2009, while in the UK it has declined from 56 per cent in 1996 to 38 per cent in 2009. This decline clearly demonstrates that the milk producers suffer when the share of organised retail increases.
For the government, the share of taxes would remain the same irrespective of the format of retail, while on the contrary, foreign retailers will demand more and more concessions and liberal policies to earn better. Further, the labour prices of large retailers were not employee-friendly and that the government may have to deal with huge labour issues if liberal FDI policies are implemented in retail. If largest and most reputed Indian corporate houses like Reliance, Tata and Birla have invested in retailing in India, we do not need to look to foreign investors to invest in Indian retail.
The small retailers in India over the past decade have improved their outlets, presentation, service levels and consumer orientation significantly. The modern retail and their deep pockets due to foreign investment will destabilise the retail trade, which gainfully employees a very large section of our society. The promised employment generation in modern retail will be at the cost of unemployed shopkeepers who form the backbone of our commerce and economy.
