Impact of 51% FDI in Retail

The opening up of retail trade for foreign direct investment (FDI) promises to usher in revolutionary changes to the Indian consumer market in the days to come.
Recently, in a significant step towards liberalizing India's retail trade, the government had decided to partially open the retail sector by announcing 51 percent FDI in single brand retailing - a move that should pave way for big names like Nike, Versace, Addidas, Marks & Spencer to set up their own stores in India.

This means that foreign companies willing to enter the Indian market will now be able to invest up to 51 percent in setting up production facilities, distribution network and retail shops and the rest will come from Indian investors. But at the moment, the entry of retail giants of multiple brands like Wal-Mart is not allowed. The government is yet to announce the guidelines that will make the picture more clear.

However, experts are still divided on the problems and prospects of this move. Some say it will shrink employment opportunities, completely alter the retail distributional structure and deal a death blow to the corner shop structure.

The optimists, on the other hand, see a whole range of opportunities -- from improved collection, processing and better distribution of farm products to generation of more opportunities for the rural and urban unemployed.

Until now, global retailers were required to sell their products through franchises or wholesale trading. This move will help them setting their own base in India and will attract foreign capital along with better quality products and services for the consumers.

The Indian retail market currently estimated to be worth $250 billion is presently dominated by millions of mom-and-pop stores that cater to 97 percent of the total market.

According to a recent study, the Indian retail Industry is expected to grow at about 36 percent by 2008 and with the increase in foreign investment the industry is expected to do a business of Rs. 1.60 trillion by the year 2008.

With the new regulations in place, the debate is that what will happen to these stores? Will the entry of global retailers wipe out these local stores or will it make no impact? If we take China's example, the FDI in retail has little or no impact on the local retailers and they still dominate the retail sector.

Secondly, the decision may not trigger the FDI flow as such as single brand retailers who wanted to be in India like Nike and Reebok are already here through franchise and may find it tough to find local partners willing to invest in the business.

Indian retail sector is the second largest employer after agriculture in the country and the entry of foreign companies will not only increase the number of employment opportunities but also exports.

With foreign companies setting up their own stores in India, the consumer will get access to some of the major global brands. Entry of foreign brands would also improve the quality and variety of products, increase competition and expand manufacturing.

Organised retailing holds the promise of lowering the prices of foreign goods sold through these large stores. This also means that some of these retail chains will eventually have to start manufacturing locally or outsource from domestic manufacturers in order to be in the competition.

This is more so considering the fact super and corner markets are very likely to co-exist in the Indian market and it would make the latter more competitive and skilled in terms of operations.

Also, several Indian corporates such as the Tatas, ITC, the RPG Group and the Rahejas have already established their outlet chains. Others such as Viveks in Chennai have established multi-brand stores. Mukesh Ambani's Reliance, too, is reported to be planning a major foray into retail business.

All this promises to make the Indian retail market a real happening place in the days ahead while at the same time offering immense business opportunities to the domestic entrepreneurs. In fact, this is likely to transform the whole contours of the India market, making it a part of the overall global market.