went to help plain B.Com people who are not coming from any professional stream

1. 1
SMT.CHANDIBAI HIMATMAL MANSUKHANI COLLEGE
ULHASNAGAR- 421003
PROJECT REPORT ON
ECONOMICS
SUBMITTED BY
AKASH RANA
(ROLL NO: 46)
M.COM (SEM.II): FDI IN RETAIL SECTOR OF INDIA
SUBMITED TO
UNIVERSITY OF MUMBAI
2015-16
PROJECT GUIDE
Prof. Shyam lilani

2. 2
Department of Commerce
Certificate
This is to certify that, Mr. AKASH RANA of M.Com.-I, Sem.-I (Roll NO-46) has successfully
completed the project titled “FDI IN RETAIL SECTOR OF INDIA” under my guidance
for the Academic Year 2015-16. The information submitted is true and original as per my
knowledge.
Prof. Shyam lilani
(Project Guide)
Prof. Gopi Shamnani Dr. Manju Lalwani pathak
(Coordinator, M. Com Course) ( I/C Principal)

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External Examiner
ACKNOWLEDGEMENT
I acknowledge the valuableassistance providedby SMT.CHANDIBAIHIMATMAL MANSUKHANI
COLLEGE, for twoyearsof degree course inM.Com.
I specially thankthe principal Dr. Manju Lalwani pathak forAllowingusto use the facilities
such as library, computerlaboratory, internetetc.
I sincerely thankthe M.Comco-ordinator Prof. Gopi Shamnani forGuidingusin the right
direction goprepare the project.
I thankmy guide Prof. Shyam lilani whohas givenhis/hervaluable time, knowledgeand
guidance tocomplete the projectsuccessfully intime.
My family andpeerswere greatsource of inspiration throughoutmyprojecttheirsupportis
deeply acknowledged.
Signature

4. 4
DECLARATION
I, AKASH RANA OF SMT.CHANDIBAI HIMATMAL MANSUKHANICOLLEGE OF M.Com
SEMESTER I, hereby declare thatIhave completed the projecton‘FDI IN RETAIL SECTOR
OF INDIA’ inthe academicyear 2015-16. The information submittedistrue andoriginal tothe
bestof myknowledge.
(AKASH .P. RANA)
M.Com part-1, ROLL NO: 46
SEMESTER II

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FDI In Retail Sector Of
India

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Executive Summary
Foreign direct investment (FDI) has played an important role in the process of
globalization during the past two decades. The rapid expansion in FDI by multinational
enterprises since the mid-eighties may be attributed to significant changes in
technologies, greater liberalization of trade and investment regimes, and deregulation and
privatization of markets in many countries including developing countries like India.
Capital formation is an important determinant of economic growth. While domestic
investments add to the capital stock in an economy, FDI plays a complementary role in
overall capital formation and in filling the gap between domestic savings and investment.
At the macro-level, FDI is a non-debt-creating source of additional external finances. At
the micro-level, FDI is expected to boost output, technology, skill levels, employment
and linkages with other sectors and regions of the host economy.
The present study aims at providing a detailed understanding of the spatial and sectoral
spread of FDI-enabled production facilities in India and their linkages with the rural and
suburban areas. The corresponding impact on output, value added, capital and
employment in the regions receiving FDI has also been worked out.
The analysis is based on primary as well as secondary data. While the primary survey
provides limited information for
he requisite analysis, the secondary database has been a major source of detailed firm-
and plant-level analysis. The secondary database provided a rich source of plant-level
data which has been used extensively in the analysis. The Capitalize database provides
data on more than 14,000 Indian listed and unlisted companies classified under more than
300 industries. The information used is based on FDI actually received.
All firms with foreign equity participation of 10 per cent and above have been considered
to be FDI-enabled firms or “FDI firms”. All other firms, with less than 10 per cent
foreign equity, are referred to as “domestic firms”. The analysis of the secondary data has
been undertaken to cover the issues of a) spatial spread and reasons thereof; b) sectoral
clustering; c) depth of value added; d) employment-generating effects; e) labor and
capital intensity; f ) comparative performance of FDI and domestic firms; and g) export
potential.

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INDEX
Sr.No Topic Name PAGE NO.
1. Introduction To FDI 9-10
2. Types Of FDI 11-13
3. Changing Dynamics Of Foreign Investment 14-16
4. Methods Of Foreign Direct Investment 17
5. Foreign Direct Investment Incentives 18
6. Entry Mode 19-23
7. Foreign Investment Policy 24-29
8. Determinants Of Foreign Direct Investment 30
9 The Advantages & Disadvantages Of FDI 31
10. India Gets Limited FDI 32-33
11. Introduction Of FDI In Retail Sector Of India 34-36
12 Definition Of Retail 37
13 Division Of Retail Industry –Organized & Unorganized Retailing 38
14 FDI Policy In India 39
15 FDI Policy With Regard To Retailing In India 40
16 Entry Options For Foreign Players prior to FDI Policy 41
17 FDI in Single Brand Retail 42-43

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18 FDI in Multi Brand Retail 44
19 Foreign Investor’s Concern Regarding FDI Policy in India 45
20 Impact Of Government Policies Towards Foreign Capital 46-47
21 Concerns for the Government for only Partially Allowing FDI in
Retail Sector
48
22 Limitations Of The Present Setup 49
23 Rationale behind Allowing FDI in Retail Sector 50-51
24 Prerequisites before allowing FDI in Multi Brand Retail and
Lifting Cap of Single
52
25 Issues & Problem: FDI in India 53
26 Conclusion 54-55
27 Bibliography 56

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Introduction
Foreign direct investment (FDI) refers to long term participation by country A into
country B. It usually involves participation in management, joint-venture, transfer of
technology and expertise. There are three types of FDI: inward foreign
direct investment and outward foreign direct investment, 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.
It is the policy of the Government of India to attract and promote productive FDI from
nonresidents in activities which significantly contribute to industrialization and socio-
economic development. FDI supplements the domestic capital and technology.

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India has one of the most transparent and liberal FDI regimes among the emerging and
developing economies. By FDI regime we mean those restrictions that apply to foreign
nationals and entities but not to Indian nationals and Indian owned entities. The
differential treatment is limited to a few entry rules, spelling out the proportion of equity
that the foreign entrant can hold in an Indian (registered) company or business.
Foreign direct investment (FDI) has become an integral part of national development
strategies for almost all the countries globally. Its global popularity and positive output in
augmenting of domestic capital, productivity and employment; has made it an
indispensable tool for initiating economic growth for nations.
India is evolving as one of the ‘most favored destination’ for FDI in Asia and the Pacific
(APAC). It has displaced US as the second-most favored destination for foreign direct
investment (FDI) in the world after China according to an AT Kearney's FDI Confidence
Index. FDI in India has contributed effectively to the overall growth of the economy in
the recent times. FDI inflow has an impact on India's transfer of new technology and
innovative ideas; improving infrastructure, a competitive business environment.

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.
BY DIRECTION
Inward FDI
Here, investment of foreign capital occurs in local resources.
The factors propelling the growth of Inward FDI comprises tax breaks, relaxation of
existent regulations, loans on low rates of interest and specific grants. The idea behind
this is that, the long run gains from such a funding far outweighs the disadvantage of the
income loss incurred in the short run. Flow of Inward FDI may face restrictions from
factors like restraint on ownership and disparity in the performance standard.

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Outward FDI
Foreign direct investment, which is outward, is also referred to as “direct investment
abroad”. In this case it is the local capital, which is being invested in some foreign
resource. Outward FDI may also find use in the import and export dealings with a foreign
country. Outward FDI flourishes under government backed insurance at risk coverage.
BY TARGET
Greenfield FDI
Greenfield investments involve the flow of FDI for either building up of new production
capacities in the host nation or for expansion of the existent production facilities of the
host country. The plus points of this come in form of increased employment
opportunities, relatively high wages, R&D activities and capacity enhancement.
The flip side comes in the form of declining market share for the domestic firm and
repatriation of profits made to a foreign country, which if retained within the country of
origin could have led
To considerable capital accumulation for the nation.
Horizontal FDI
Horizontal FDI is an investment made by a multinational company in different nations.
The investment is made for conducting the similar business operations as already
operated by the company. For example, if a soft drink manufacturing company makes its
plant outside its national borders then it is horizontal FDI. Horizontal FDI results in
expansion of the parent company and brings FDI in the other economy.

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Vertical FDI
There are two types of vertical direct investment. The first type of foreign investment is
called foreign vertical direct investment which invests in the industry of foreign country.
Historically most backward vertical foreign direct investment has been in
extractive industries like oil extraction, bauxite mining, tin mining and copper mining.
The objective has been to provide inputs into a firm's downstream operations for example
oil refining, aluminum smelting and fabrication. Firms such as Royal Dutch/Shell, British
Petroleum, RTZ and Alcoa are among the classic examples.
The second type of the foreign direct investment included forward vertical foreign direct
investment in which an industry abroad sells the outputs of a firm's domestic production
process. Forward vertical foreign direct investment is less common than backward
vertical foreign direct investment. For example when Volkswagen entered
the United States market it acquired a large number of dealers rather than distribute
its cars through independent United States dealers.

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Changing Dynamics Of Foreign Investment
Overall FDI into almost all the sectors had declined in the year 2010-11, a reason for
which could be the global situation that prevailed during that time frame. Although
services sector remain the sector attracting the highest FDI inflows since 2006-07 its
share has been constantly declining. The FDI flows into computer hardware and software
has been downward ever since 2005-06. It has drastically gone down from 24.8 per cent
in 2005-06 to 4.0% in 2010-11.Housing & Real Estate have shown an upward trend in
terms of their share in FDI inflows. Investments in chemicals and metallurgical industries
have been erratic as no clear trend could be observed for the time period 2005-06 to
2010-11.Citizens of Pakistan or an entity incorporated in Pakistan are permitted to invest
in India, under the Government approval route. FDI in Civil Aviation Sector by foreign
airlines has been permitted up to 49% (cumulative of investment vide FDI and foreign
institutional investors). FDI in multi-brand retail trading sector up to 51% under
government approval route. Policy of the Indian Government related to SEZ is mainly
responsible for the FDI inflows. It is because government announced the SEZ Act, SEZs
scheme was launched with the specific intend of providing an internationally competitive
and hassle free environment for exports.
Mauritius has been the largest direct investor in India. Mauritius has low rates of taxation
and an agreement with Indian double tax avoidance regime. The United States (US) is the
second largest investor in India. To take advantage of double tax avoidance regime, many
companies have set up dummy companies in Mauritius before infesting to India. Since
2000, India signed many regional arrangement & agreements like ASEAN, Gulf
Cooperation Council, BIMSTEC, South Asia Free Trade Agreements, Bilateral
Investment Treaty, SAARC. Tax Holiday for companies who are involved in R&D
having commercial application.
There were list of sectors in which FDI is prohibited such as (a) Lottery Business
including Government /private lottery, online lotteries, etc. (b) Gambling and
Betting including casinos etc. (c) Chit funds (d) Nidhi company (e) Trading in
Transferable Development Rights (TDRs) (f) Real Estate Business or Construction
of Farm Houses (g) Manufacturing of Cigars, cheroots, cigarillos and cigarettes,

15. 15
of tobacco or of tobacco substitutes (h) Activities / sectors not open to private
sector investment e.g. Atomic Energy and Railway Transport (other than Mass
Rapid Transport Systems).
Similar to that there are sectors in which FDI is permitted like in Agriculture
where 100% foreign investment with automatic approval with general conditions
attached to it like complying with compliance with environmental laws &
conditions laid down in notifications issued under Foreign Trade (Development
& Regulation ) Act, 1992
Similarly for different sectors separate policy is made to with different conditions
like tea plantations, mining, media, telecommunication, service sector etc. with
the general or specific conditions attached to it either through automatic or
government approval route.
In 2012 India attractiveness survey was carried out at a time when the dialogue
among business leaders about the leaders about the economic crisis was at its
peak and investors were in “caution” mode. Regardless of today's crisis, a strong
increase in the number of foreign direct investment (FDI) projects in India is a
clear indication that global investors view the country as an attractive investment
destination.

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 India Inc witnessed an increase of 25 per cent year-on-year (y-o-y) to record US$
2.32 billion of FDI in April 2013. Sectors that attracted highest levels of FDI
include hotels and tourism sector (US$ 2.32 billion), followed by pharmaceuticals
(US$ 987 million), services (US$ 238 million), chemicals (US$ 51 million) and
construction sector (US$ 32 million).
Singapore alone infused FDI flows worth US$ 1.29 billion in April 2013,
followed by Mauritius, the Netherlands and the US with FDI inflows worth US$
355 million, US$ 173 million and US$ 149 million respectively. FDI inflows
aggregated at US$ 22.42 billion in 2012-13.
 India's foreign exchange (forex) reserves stood at US$ 280.167 billion for the
week ended July 5, 2013, according to data released by the central bank. The
value of foreign currency assets (FCA) - the biggest component of the forex
reserves – stood at US$ 252.103 billion, according to the weekly statistical
supplement released by the Reserve Bank of India (RBI).
 Private equity (PE) firms upped their investments in India Inc by a hefty 42 per
cent to US$ 5.4 billion through 197 deals during the first half of 2013; major deal
being the US$ 1.2 billion-BhartiAirtel deal, according to a report by EY India
(formerly Ernst & Young).
 Meanwhile, Merger and acquisition (M&A) activity in India was also quite
intense April-June 2013 period. The deal tally stood at US$ 10.9 billion across
130 transactions, according to global deal tracking firm Merger market.

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Methods Of Foreign Direct Investment
The foreign direct investor may acquire 10% or more of the voting power of an enterprise
in an economy through any of the following methods:
 by incorporating a wholly owned subsidiary or company
 by acquiring shares in an associated enterprise
 through a merger or an acquisition of an unrelated enterprise
 participating in an equity joint venture with another investor or enterprise

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Foreign Direct Investment Incentives
Foreign direct investment incentives may take the following forms:
 low corporate tax and income tax rates
 tax holidays
 other types of tax concessions
 preferential tariffs
 special economic zones
 EPZ - Export Processing Zones
 Bonded Warehouses
 investment financial subsidies
 soft loan or loan guarantees
 free land or land subsidies
 relocation & expatriation subsidies
 job training & employment subsidies
 infrastructure subsidies
 R&D support
 derogation from regulations (usually for very large projects)

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Entry Mode
A foreign company planning to set up business operations in India has the following
options:
1) As an Indian Company
A foreign company can commence operations in India by incorporating a company under
the Companies Act, 1956 through
 Joint Ventures; or
 Wholly Owned Subsidiaries
Foreign equity in such Indian companies can be up to 100% depending on the
requirements of the investor, subject to equity caps in respect of the area of activities
under the Foreign Direct Investment (FDI) policy. Details of the FDI policy, sectoral
equity caps & procedures can be obtained from Department of Industrial Policy &
Promotion, Government of India.
Joint Venture withan Indian Partner
Foreign Companies can set up their operations in India by forging strategic alliances with
Indian partners.
Joint Venture may entail the following advantages for a foreign investor:
 Established distribution/ marketing set up of the Indian partner
 Available financial resource of the Indian partners

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 Established contacts of the Indian partners which help smoothen the process of
setting up of operations
Wholly Owned Subsidiary Company
Foreign companies can also to set up wholly owned subsidiary in sectors where 100%
foreign direct investment is permitted under the FDI policy.
Incorporation of Company
For registration and incorporation, an application has to be filed with Registrar of
Companies (ROC). Once a company has been duly registered and incorporated as an
Indian company, it is subject to Indian laws and regulations as applicable to other
domestic Indian companies.
2) As a Foreign Company
Foreign Companies can set up their operations in India through
 Liaison Office/Representative Office
 Project Office
 Branch Office
Such offices can undertake any permitted activities. Companies have to register
themselves with Registrar of Companies (ROC) within 30 days of setting up a place of
business in India.

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Liaison office/ Representative office
Liaison office acts as a channel of communication between the principal place of
business or head office and entities in India. Liaison office cannot undertake any
commercial activity directly or indirectly and cannot, therefore, earn any income in India.
Its role is limited to collecting information about possible market opportunities and
providing information about the company and its products to prospective Indian
customers. It can promote export/import from/to India and also facilitate
technical/financial collaboration between parent company and companies in India.
The approval for establishing a liaison office in India is granted by the Reserve Bank of
India (RBI).
Project Office
Foreign Companies planning to execute specific projects in India can set up temporary
project/site offices in India. RBI has now granted general permission to foreign entities to
establish Project Offices subject to specified conditions. Such offices cannot undertake or
carry on any activity other than the activity relating and incidental to execution of the
project. Project Offices may remit outside India the surplus of the project on its
completion, general permission for which has been granted by the RBI.
Branch Office

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Foreign companies engaged in manufacturing and trading activities abroad are allowed to
set up Branch Offices in India for the following purposes:
 Export/Import of goods
 Rendering professional or consultancy services
 Carrying out research work, in which the parent company is engaged.
 Promoting technical or financial collaborations between Indian companies and
parent or overseas group company.
 Representing the parent company in India and acting as buying/selling agents in
India.
 Rendering services in Information Technology and development of software in
India.
 Rendering technical support to the products supplied by the parent/ group
companies.
 Foreign Airline/shipping Company.
A branch office is not allowed to carry out manufacturing activities on its own but is
permitted to subcontract these to an Indian manufacturer. Branch Offices established with
the approval of RBI may remit outside India profit of the branch, net of applicable Indian
taxes and subject to RBI guidelines Permission for setting up branch offices is granted by
the Reserve Bank of India (RBI).

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Branch Office on "Stand Alone Basis"
Such Branch Offices would be isolated and restricted to the Special Economic zone
(SEZ) alone and no business activity/transaction will be allowed outside the SEZs in
India, which include branches/subsidiaries of its parent office in India. No approval shall
be necessary from RBI for a company to establish a branch/unit in SEZs to undertake
manufacturing and service activities subject to specified conditions.

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Foreign Investment Policy
With an intent, as government also put in place a policy framework on Foreign Direct
Investment, which is transparent, predictable and easily comprehensible. This framework
is embodied in the Circular on Consolidated FDI Policy, first issued on 2005 & then on
2013 which may be updated every year, to capture and keep pace with the regulatory
changes. The Department of Industrial Policy and Promotion (DIPP), Ministry of
Commerce & Industry, Government of India makes policy pronouncements on FDI
through Press Notes/ Press Releases which are notified by the Reserve Bank of India as
amendments to the Foreign Exchange Management (Transfer or Issue of Security by
Persons Resident Outside India) Regulations, 2000 (notification No.FEMA 20/2000-RB
dated May 3, 2000). This can be done through introduction of dual route of approval of
FDI – RBI’s automatic route and Government’s approval The Foreign Investment
Promotion Board (FIPB) route, automatic permission for technology agreements in high
priority industries and removal of restriction of FDI in low technology areas as well as
liberalisation of technology imports, permission to Non-resident Indians (NRIs) and
Overseas Corporate Bodies (OCBs) to invest up to 100 per cent in high priorities sectors.
Indian companies can issue equity shares, fully, compulsorily and mandatorily
convertible debentures and fully, compulsorily and mandatorily convertible preference
shares subject to pricing guidelines/valuation norms prescribed under FEMA
Regulations.
In sectors/activities with caps, including inter-alia defence production, air transport
services, ground handling services, asset reconstruction companies, private sector
banking, broadcasting, commodity exchanges, credit information companies, insurance,
print media, telecommunications and satellites, Government approval/FIPB approval
would be required in all cases where: (i) An Indian company is being established with
foreign investment and is not owned by a resident entity or (ii) An Indian company is
being established with foreign investment and is not controlled by a resident entity or (iii)
The control of an existing Indian company, currently owned or controlled by resident
Indian citizens and Indian companies, which are owned or controlled by resident Indian
citizens, will be/is being transferred/passed on to a non-resident entity as a consequence

25. 25
of transfer of shares and/or fresh issue of shares to non-resident entities through
amalgamation, merger/demerger, acquisition etc. or
(iv) The ownership of an existing Indian company, currently owned or controlled by
resident Indian citizens and Indian companies, which are owned or controlled by resident
Indian citizens, will be/is being transferred/passed on to a non-resident entity as a
consequence of transfer of shares and/or fresh issue of shares to non-resident entities
through amalgamation, merger/demerger, acquisition etc.
(v) It is clarified that these guidelines will not apply to sectors/activities where there are
no foreign investment caps, that is, 100% foreign investment is permitted under the
automatic route.
(vi) It is also clarified that Foreign investment shall include all types of foreign
investments i.e. FDI, investment by FIIs, NRIs, ADRs, GDRs, Foreign Currency
Convertible Bonds (FCCB) and fully, mandatorily & compulsorily convertible preference
shares/debentures, regardless of whether the said investments have been made under
Schedule 1, 2, 3 and 6 of FEMA (Transfer or Issue of Security by Persons Resident
Outside India) Regulations.
FDI up to 100% is allowed under the automatic route in all activities/sectors except the
following which will require approval of the Government:
• Activities/items that require an Industrial License;
• Proposals in which the foreign collaborator has a previous/existing venture/tie up in
India in the same. Prior Government approval for new proposals would be required
only in cases where the foreign investor has an existing joint venture, technology
transfer, trade mark agreement in the same field. With the amendment of the Press
Note 18, joint ventures formed with foreign investment before December 12, 2004
would be considered as “existing JVs” which will fall under the ambit of Press Note
18. The foreign partner in such JV has to obtain a No Objection Certificate (NOC)

26. 26
from the Indian partner for starting new venture in India in the “same” field of
activity.
• All proposals relating to acquisition of shares in an existing Indian company by a
foreign/NRI investor.
• All proposals falling outside notified sectoral policy/caps or under sectors in which FDI
is not permitted.
FDI policy is reviewed on an ongoing basis and measures for its further liberalization are
taken. Change in sectoral policy/sectoral equity cap is notified from time to time through
Press Notes by the Secretariat for Industrial Assistance (SIA) in the Department of
Industrial Policy & Promotion. Policy announcement by SIA are subsequently notified by
RBI under FEMA.
Automatic Route
FDI Policy permits FDI up to 100 % from foreign/NRI investor without prior approval in
most of the sectors including the services sector under automatic route. FDI in
sectors/activities under automatic route does not require any prior approval either by the
Government or the RBI. The investors are required to notify the Regional office
concerned of RBI of receipt of inward remittances within 30 days of such receipt and will
have to file the required documents with that office within 30 days after issue of shares to
foreign investors.
The present Automatic Route allows Indian companies engaged in all industries except
for certain select industries/sectors to issue shares to foreign investors up to 100% of their
paid up capital in Indian companies. There are also some areas where though Automatic
Route is available, foreign investors cannot invest beyond a certain percentage of the paid

27. 27
up capital of the Indian companies or where investment is subject to some other
conditions.
Foreign investors have to, however, keep in mind that they may invest freely under the
Automatic Route described above but where such investment does not conform to
policies of Government of India, a specific approval from Government must be sought.
For example, there are Government guidelines on location of industrial units, or there are
certain items like explosives or liquor that need an industrial license.
Government approval route
All activities which are not covered under the automatic route, prior Government
approval for FDI/NRI shall be necessary. Areas/sectors/activities hitherto not open to
FDI/NRI investment shall continue to be so unless otherwise decided and notified by
Government.
An investor can make an application for prior Government approval even when the
proposed activity is under the automatic route.
Proposals requiring Govt’s Approval
Application for proposals requiring prior Govt’s approval should be submitted to FIPB in
FC-IL form. Plain paper applications carrying all relevant details are also accepted. No
fee is payable. The following information should form part of the proposals submitted to
FIPB: -

28. 28
(a) Whether the applicant has had or has any previous/existing financial/technical
collaboration or trade mark agreement in India in the same or allied field for which
approval has been sought; and
(b) If so, details thereof and the justification for proposing the new venture/technical
collaboration (including trade marks).
(c) Applications can also be submitted with Indian Missions abroad who will forward
them to the Department of Economic Affairs for further processing.
(d) Foreign investment proposals received in the DEA are placed before the Foreign
Investment Promotion Board (FIPB) within 15 days of receipt. The decision of the
Government in all cases is usually conveyed by the DEA within 30 days.
FDI Prohibited
FDI is not permissible in the following cases
i. Gambling and Betting, or
ii. Lottery Business, or
iii. Business of chit fund
iv. Nidhi Company
v. Housing and Real Estate business (to a certain extent has been opened. For details
please see note on Construction)
vi. Trading in Transferable Development Rights (TDRs)
vii. Retail Trading (discussions are being held to open this area-B2B and Cash &Carry
are permitted)
viii. Atomic Energy

29. 29
ix. Agricultural or plantation activities or Agriculture (excluding Floriculture,
Horticulture, Development of Seeds, Animal Husbandry, Pisiculture and
Cultivation of Vegetables, Mushrooms etc. under controlled conditions and
services related to agro and allied sectors) and Plantations(other than Tea
plantations)

30. 30
Determinants of Foreign Direct Investment
One of the most important determinants of foreign direct investment is the size as well as
the growth prospects of the economy of the country where the foreign direct investment
is being made.
It is normally assumed that if the country has a big market, it can grow quickly from
an economic point of view and it is concluded that the investors would be able to make
the most of theory investment in that country.
The population of a country plays an important role in attracting foreign direct investors
to a country. In such cases the investors are lured by the prospects of a huge customer
base. If the country has a high per capita income or if the citizens have reasonably good
spending capabilities then it would offer the foreign direct investors with the scope of
excellent performances.
The status of the human resources in a country also helps in attracting direct investment
from overseas. If a country has plenty of natural resources it always finds investors
willing to put their money in them.
Inexpensive labor force is also an important determinant of attracting foreign direct
investment.
Infrastructural factors like the status of telecommunication and railways play an
important role in having the foreign direct investors come into a particular country.

31. 31
Advantage of FDI
 Causes a flow of money into the economy which stimulates economic activity
 Employment will increase
 long run aggregate supply will shift outwards
 Aggregate demand will also shift outwards as investment is a component of
aggregate demand
 It may give domestic producers an incentive to become more efficient
 The government of the country experiencing increasing levels of FDI will have a
greater voice at international summits as their country will have more
stakeholders in it.
Disadvantages of FDI
 FDI has adverse effects on competition.
 FDI will be make the host country lost the control over domestic policy.
 Certain foreign policies are adopted that are not appreciated by the workers of the
recipient country
 Another disadvantage of foreign direct investment is that there is a chance that a
company may lose out on its ownership to an overseas company.
 Local market is affected badly
 If there is a lot of FDI into one industry e.g. the automotive industry then a
country can become too dependent on it and it may turn into a risk that is why
countries like the Czech Republic are "seeking to attract high value-added

32. 32
India Gets Limited FDI
Image and Attitude: There is a perception among investors that foreign businesses are
still treated with suspicion and distrust in India.
Domestic Policy: While the FDI policy is quite straightforward and getting increasingly
liberalized for most sectors, once an investor establishes his presence, “national”
treatment means that this investor is subject to domestic regulations, which are perceived
as being excessive.
Procedures. Although approval for investment is given quite readily, actual setting up
requires a long series of further approvals from central, state and local authorities. This
introduces substantial implementation lags.
Quality of infrastructure. Foreign investors are concerned about a number of problems
with the infrastructure sector – in particular, electricity and transport. Irregular and
undependable supply complicates problems for foreign investors.
State government level obstacles. This issue is tied up with one of the most pressing
agenda items for reform. At the level of actual investment the practices of state (and often
lower levels) governments become important. There is widespread agreement among
most observers that state government practices in issues such as land records, utility
(power, water etc.) connections, providing clearances of various sorts may make an
important difference in the time it takes to get a plant up and running. Differences in state
practices in such matters partly explain the disproportionate flow of FDI to some states in
the peninsular region of India. In addition, there are some fiscal barriers to unimpeded

33. 33
flow of goods and services within the country, although the level of such barriers has
come down in recent times.
Delays in legal process. Despite a highly structured legal system, dispute settlement and
contract enforcement are time consuming activities in India. Such apprehensions deter the
rapid flow of foreign investment.

34. 34
Introduction
In 1991, India was under great debt, to overcome such financial crisis Indian government
open the gates of foreign investment, to invest in India. This led to the economic
development, stability & foreign money which overcomes the economic depression &
capital crisis. This step boost the government to inflow the money through various sectors
like industry, health, infrastructure, service etc. to process development in a planned
manner & not depend only on the tax payers money which can be improvise through
liberal fiscal & monetary policy & also to improve the condition of banking sector. To
put India at the forefront, improve GDP & to generate employment opportunities with
better diagnostic techniques. In the 1970s there was almost no foreign investment, with
little in 1980, with liberalization in 1991 and in year 1996 inflow to India exceed
$6billion. Though dampened by global financial crises after 1997, net direct investment
flows to India remain positive. India similar to international market in different economy

35. 35
permit foreign investment and open gates through RBI route or through Government
approval route.
With the rapid economic development & changing scenario of market, India also permit
foreign investment in various sectors like energy, power, health, education, media,
aircraft, telecom etc. through either mode foreign direct investment, foreign portfolio
investment scheme, foreign venture capital investment, investment in government
securities by Non-Resident Indian, Person of Indian origin, Foreign entity in partnership
firm, companies, LLP etc. through various investment securities like issues of shares,
debentures etc.
Due to foreign investment, it supplement domestic market, enable high growth rate,
generate employment, improvise technology & more importantly at macro-economic
level it relax potential balance of payment requirement, inflexible demand of foreign
debt, foreign investment, presence of foreign firms reduces market concentration &
promotes a more competitive market with consumer driven economy.
Just back from first frenzied shopping experience in the UK, a four year old ever-
inquisitive daughter asked to her father, “Why do we not have a Harrods in Delhi?
Shopping there is so much fun!” Simple question for a four-year-old, but not so simple
for her father to explain. As per the current regulatory regime, retail trading (except under
single-brand product retailing — FDI up to 51 per cent, under the Government route) is
prohibited in India. Simply put, for a company to be able to get foreign funding, products
sold by it to the general public should only be of a ‘single-brand’; this condition being in
addition to a few other conditions to be adhered to. That explains why we do not have a
Harrods in Delhi.
India being a signatory to World Trade Organization’s General Agreement on Trade in
Services, which include wholesale and retailing services, had to open up the retail trade
sector to foreign investment. There were initial reservations towards opening up of retail
sector arising from fear of job losses, procurement from international market, competition
and loss of entrepreneurial opportunities. However, the government in a series of moves
has opened up the retail sector slowly to Foreign Direct Investment (“FDI”). In 1997, FDI

36. 36
in cash and carry (wholesale) with 100 percent ownership was allowed under the
Government approval route. It was brought under the automatic route in 2006. 51 percent
investment in a single brand retail outlet was also permitted in 2006. FDI in Multi-Brand
retailing is prohibited in India.

37. 37
Definition of Retail
In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption
in contrast to a sale for further sale or processing (i.e. wholesale). A sale to the ultimate
consumer.
Thus, retailing can be said to be the interface between the producer and the individual
consumer buying for personal consumption. This excludes direct interface between the
manufacturer and institutional buyers such as the government and other bulk customers.
Retailing is the last link that connects the individual consumer with the manufacturing
and distribution chain. A retailer is involved in the act of selling goods to the individual
consumer at a margin of profit.

38. 38
Division of Retail Industry – Organized and Unorganized
Retailing
The retail industry is mainly divided into:- 1) Organized and 2) Unorganized Retailing
Organized retailing refers to trading activities undertaken by licensed retailers, that is,
those who are registered for sales tax, income tax, etc. These include the corporate-
backed hypermarkets and retail chains, and also the privately owned large retail
businesses.
Unorganized retailing, on the other hand, refers to the traditional formats of low-cost
retailing, for example, the local kiranashops, owner manned general stores, paan/beedi
shops, convenience stores, hand cart and pavement vendors, etc.
The Indian retail sector is highly fragmented with 97 per cent of its business being run by
the unorganized retailers. The organized retail however is at a very nascent stage. The
sector is the largest source of employment after agriculture, and has deep penetration into
rural India generating more than 10 per cent of India’s GDP.

39. 39
FDI Policy in India
FDI as defined in Dictionary of Economics (Graham Bannock et.al) is investment in a
foreign country through the acquisition of a local company or the establishment there of
an operation on a new (Greenfield) site. To put in simple words, FDI refers to capital
inflows from abroad that is invested in or to enhance the production capacity of the
economy.
Foreign Investment in India is governed by the FDI policy announced by the Government
of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. The
Reserve Bank of India (‘RBI’) in this regard had issued a notification, which contains the
ForeignExchange Management (Transfer or issue of security by a person resident outside
India) Regulations, 2000. This notification has been amended from time to time.
The Ministry of Commerce and Industry, Government of India is the nodal agency for
motoring and reviewing the FDI policy on continued basis and changes in sectoral policy/
sectoral equity cap. The FDI policy is notified through Press Notes by the Secretariat for
Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP).
The foreign investors are free to invest in India, except few sectors/activities, where prior
approval from the RBI or Foreign Investment Promotion Board (‘FIPB’) would be
required.

40. 40
FDI Policy with Regard to Retailing in India
It will be prudent to look into Press Note 4 of 2006 issued by DIPP and consolidated FDI
Policy issued in October 2010 which provide the sector specific guidelines for FDI with
regard to the conduct of trading activities.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed
under the automatic route.
b) FDI up to 51 % with prior Government approval (i.e. FIPB) for retail trade of
‘Single Brand’ products, subject to Press Note 3 (2006 Series).
c) FDI is not permitted in Multi Brand Retailing in India.

41. 41
Entry Options For Foreign Players prior to FDI Policy
Although prior to Jan 24, 2006, FDI was not authorized in retailing, most general players
had been operating in the country. Some of entrance routes used by them have been
discussed in sum as below:-
1. Franchise Agreements
It is an easiest track to come in the Indian market. In franchising and commission agents’
services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve
Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual
mode for entrance of quick food bondage opposite a world. Apart from quick food
bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks
as good as Spencer, have entered Indian marketplace by this route.
2. Cash And Carry Wholesale Trading
100% FDI is allowed in wholesale trading which involves building of a large distribution
infrastructure to assist local manufacturers. The wholesaler deals only with smaller
retailers and not Consumers. Metro AG of Germany was the first significant global player
to enter India through this route.
3. Strategic Licensing Agreements
Some foreign brands give exclusive licenses and distribution rights to Indian companies.
Through these rights, Indian companies can either sell it through their own stores, or
enter into shop-in-shop arrangements or distribute the brands to franchisees. Mango, the
Spanish apparel brand has entered India through this route with an agreement with
Pyramid, Mumbai, SPAR entered into a similar agreement with Radhakrishna Food lands
Pvt. Ltd
4. Manufacturing and Wholly Owned Subsidiaries
The foreign brands such as Nike, Reebok, Adidas, etc. that have wholly-owned
subsidiaries in manufacturing are treated as Indian companies and are, therefore, allowed
to do retail. These companies have been authorised to sell products to Indian consumers
by franchising, internal distributors, existent Indian retailers, own outlets, etc. For
instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises
but now has a wholly owned subsidiary, Nike India Private Limited.

42. 42
FDI in Single Brand Retail
The Government has not categorically defined the meaning of “Single Brand” anywhere
neither in any of its circulars nor any notifications.
In single-brand retail, FDI up to 51 per cent is allowed, subject to Foreign Investment
Promotion Board (FIPB) approval and subject to the conditions mentioned in Press Note
3 that (a) only single brand products would be sold (i.e., retail of goods of multi-brand
even if produced by the same manufacturer would not be allowed), (b) products should
be sold under the same brand internationally, (c) single-brand product retail would only
cover products which are branded during manufacturing and (d) any addition to product
categories to be sold under “single-brand” would require fresh approval from the
government.
While the phrase ‘single brand’ has not been defined, it implies that foreign companies
would be allowed to sell goods sold internationally under a ‘single brand’, viz., Reebok,
Nokia, Adidas. Retailing of goods of multiple brands, even if such products were
produced by the same manufacturer, would not be allowed.
Going a step further, we examine the concept of ‘single brand’ and the associated
conditions:
FDI in ‘Single brand’ retail implies that a retail store with foreign investment can only
sell one brand. For example, if Adidas were to obtain permission to retail its flagship
brand in India, those retail outlets could only sell products under the Adidas brand and
not the Reebok brand, for which separate permission is required. If granted permission,
Adidas could sell products under the Reebok brand in separate outlets.
But, what is a ‘brand’?
Brands could be classified as products and multiple products, or could be manufacturer
brands and own-label brands. Assume that a company owns two leading international
brands in the footwear industry – say ‘A’ and ‘R’. If the corporate were to obtain
permission to retail its brand in India with a local partner, it would need to specify which
of the brands it would sell. A reading of the government release indicates that A and R
would need separate approvals, separate legal entities, and may be even separate stores in
which to operate in India. However, it should be noted that the retailers would be able to
sell multiple products under the same brand, e.g., a product range under brand ‘A’
Further, it appears that the same joint venture partners could operate various brands, but
under separate legal entities.
Now, taking an example of a large departmental grocery chain, prima facie it appears that
it would not be able to enter India. These chains would, typically, source products and,
thereafter, brand it under their private labels. Since the regulations require the products to
be branded at the manufacturing stage, this model may not work. The regulations appear

43. 43
to discourage own-label products and appear to be tilted heavily towards the foreign
manufacturer brands.
There is ambiguity in the interpretation of the term ‘single brand’. The existing policy
does not clearly codify whether retailing of goods with sub-brands bunched under a
major parent brand can be considered as single-brand retailing and, accordingly, eligible
for 51 per cent FDI. Additionally, the question on whether co-branded goods
(specifically branded as such at the time of manufacturing) would qualify as single brand
retail trading remains unanswered.

44. 44
FDI in Multi Brand Retail
The government has also not defined the term Multi Brand. FDI in Multi Brand retail
implies that a retail store with a foreign investment can sell multiple brands under one
roof.
In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of
Commerce circulated a discussion paper on allowing FDI in multi-brand retail. The paper
doesn’t suggest any upper limit on FDI in multi-brand retail. If implemented, it would
open the doors for global retail giants to enter and establish their footprints on the retail
landscape of India. Opening up FDI in multi-brand retail will mean that global retailers
including Wal-Mart, Carrefour and Tesco can open stores offering a range of household
items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store.

45. 45
Foreign Investor’s Concern Regarding FDI Policy in India
For those brands which adopt the franchising route as a matter of policy, the current FDI
Policy will not make any difference. They would have preferred that the Government
liberalize rules for maximizing their royalty and franchise fees. They must still rely on
innovative structuring of franchise arrangements to maximize their returns. Consumer
durable majors such as LG and Samsung, which have exclusive franchisee owned stores,
are unlikely to shift from the preferred route right away.
For those companies which choose to adopt the route of 51% partnership, they must tie
up with a local partner. The key is finding a partner which is reliable and who can also
teach a trick or two about the domestic market and the Indian consumer. Currently, the
organized retail sector is dominated by the likes of large business groups which decided
to diversify into retail to cash in on the boom in the sector – corporate such as Tata
through its brand Westside, RPG Group through Food world, Pantaloon of the Raheja
Group and Shopper’s Stop. Do foreign investors look to tie up with an existing retailer or
look to others not necessarily in the business but looking to diversify, as many business
groups are doing?
An arrangement in the short to medium term may work wonders but what happens if the
Government decides to further liberalize the regulations as it is currently contemplating?
Will the foreign investor terminate the agreement with Indian partner and trade in market
without him? Either way, the foreign investor must negotiate its joint venture agreements
carefully, with an option for a buy-out of the Indian partner’s share if and when
regulations so permit. They must also be aware of the regulation which states that once a
foreign company enters into a technical or financial collaboration with an Indian partner,
it cannot enter into another joint venture with another Indian company or set up its own
subsidiary in the ‘same’ field’ without the first partner’s consent if the joint venture
agreement does not provide for a ‘conflict of interest’ clause. In effect, it means that
foreign brand owners must be extremely careful whom they choose as partners and the
brand they introduce in India. The first brand could also be their last if they do not
negotiate the strategic arrangement diligently.

46. 46
Impact Of Government Policies Towards Foreign Capital
India measures to control inflation, fiscal consolidation will improve investor climate,
India’s economic growth slowed down in 2008-09 in the wake of the international
financial crisis. But the recovery was rapid; the economy grew at 8% in 2009-10and at
8.5% in 2010-11. There are fears that the Indian economy may grow at a slower rate in
the current fiscal .India remained very attractive for FDI in2011. FDI projects increased
by 20% in India in 2011, attracting 932 projects ,which created an estimated 255,416
jobs. This is despite a global economic growth that had not fully recovered from the
financial crisis of 2008–09 and has beg unto slow again, from over 5% in 2010down to a
projected 3.3% through 2012. Investors came to India to find growth opportunities for
their business and the possibility to operate at lower cost. Fifty percent of our panel
claims that India’s massive and growing domestic market is their number one draw and
45% of them see India as a highly cost-competitive location.
The number of FDI projects increased by 20% in 2011 reaching 932 projects, supported
by the consumer demand, the easy access to financing and the increased approvals by the
FIPB. Investment ratio declined in 2009 and 2010, following the financial crisis, but
returned in 2011. Projects have also decreased in value; in 2007, the average project was
worth US$73 million and, in 2011, it was worth US$63 million. Despite the uncertain
global economy and the slight majority of businesses that are putting their investment
projects on hold, there was not only an increase in the number of FDI projects in India
from 2010 to 2011, but the value also increased by 12% and the number of jobs by 15%.
Investors perceive that India presents value and promising growth dynamics in this
increasingly unstable global economy. With a rapidly expanding middle class to consume
products and the presence of a large, well-trained labor force keeping costs down, India
presents opportunities both to investors who want to produce and to investors who want
to sell.

47. 47
During 2011, investors committed US$58,261 million in India, 71% of which went into
the manufacturing sector, creating 320 projects and 144,449 jobs (57% of the total jobs),
and producing an average of 451 jobs per project. @**@Since 2007 the attractiveness
profile of India has evolved. Although industry was always important, it has grown from
supplying 47% of every FDI job in India in 2007 to 57% of every FDI job in 2011. At the
same time, services jobs have fallen from creating 36% of every FDI job in India in 2007
to creating 31% in 2011.

48. 48
Concerns for the Government for only Partially Allowing FDI
in Retail Sector
A number of concerns were expressed with regard to partial opening of the retail sector
for FDI. The Hon’ble Department Related Parliamentary Standing Committee on
Commerce, in its 90th Report, on ‘Foreign and Domestic Investment in Retail Sector’,
laid in the LokSabha and the RajyaSabha on 8 June, 2009, had made an in-depth study on
the subject and identified a number of issues related to FDI in the retail sector. These
included:
It would lead to unfair competition and ultimately result in large-scale exit of domestic
retailers, especially the small family managed outlets, leading to large scale displacement
of persons employed in the retail sector. Further, as the manufacturing sector has not been
growing fast enough, the persons displaced from the retail sector would not be absorbed
there.
Another concern is that the Indian retail sector, particularly organized retail, is still under-
developed and in a nascent stage and that, therefore, it is important that the domestic
retail sector is allowed to grow and consolidate first, before opening this sector to foreign
investors.
Antagonists of FDI in retail sector oppose the same on various grounds, like, that the
entry of large global retailers such as Wal-Mart would kill local shops and millions of
jobs, since the unorganized retail sector employs an enormous percentage of Indian
population after the agriculture sector; secondly that the global retailers would conspire
and exercise monopolistic power to raise prices and monopolistic (big buying) power to
reduce the prices received by the suppliers; thirdly, it would lead to asymmetrical growth
in cities, causing discontent and social tension elsewhere. Hence, both the consumers and
the suppliers would lose, while the profit margins of such retail chains would go up.

49. 49
Limitations Of The Present Setup
1. Infrastructure
There has been a lack of investment in the logistics of the retail chain, leading to an
inefficient market mechanism. Though India is the second largest producer of fruits and
vegetables (about 180 million MT), it has a very limited integrated cold-chain
infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6
million MT. , 80% of this is used only for potatoes. The chain is highly fragmented and
hence, perishable horticultural commodities find it difficult to link to distant markets,
including overseas markets, round the year. Storage infrastructure is necessary for
carrying over the agricultural produce from production periods to the rest of the year and
to prevent distress sales. Lack of adequate storage facilities cause heavy losses to
farmers in terms of wastage in quality and quantity of produce in general. Though FDI is
permitted in cold-chain to the extent of 100%, through the automatic route, in the absence
of FDI in retailing; FDI flow to the sector has not been significant.
2. Intermediaries dominate the value chain
Intermediaries often flout mandi norms and their pricing lacks transparency. Wholesale
regulated markets, governed by State APMC Acts, have developed a monopolistic and
non-transparent character. According to some reports, Indian farmers realize only 1/3rd
of the total price paid by the final consumer, as against 2/3rd by farmers in nations with a
higher share of organized retail.
3. Improper Public Distribution System (“PDS”)
There is a big question mark on the efficacy of the public procurement and PDS set-up
and the bill on food subsidies is rising. In spite of such heavy subsidies, overall food
based inflation has been a matter of great concern. The absence of a ‘farm-to-fork’ retail
supply system has led to the ultimate customers paying a premium for shortages and a
charge for wastages.
4. No Global Reach
The Micro Small & Medium Enterprises (“MSME”) sector has also suffered due to lack
of branding and lack of avenues to reach out to the vast world markets. While India has
continued to provide emphasis on the development of MSME sector, the share of
unorganized sector in overall manufacturing has declined from 34.5% in 1999-2000 to
30.3% in 2007-08. This has largely been due to the inability of this sector to access latest
technology and improve its marketing interface.

50. 50
Rationale behind Allowing FDI in Retail Sector
FDI can be a powerful catalyst to spur competition in the retail industry, due to the
current scenario of low competition and poor productivity.
The policy of single-brand retail was adopted to allow Indian consumers access to foreign
brands. Since Indians spend a lot of money shopping abroad, this policy enables them to
spend the same money on the same goods in India. FDI in single-brand retailing was
permitted in 2006, up to 51 per cent of ownership. Between then and May 2010, a total of
94 proposals have been received. Of these, 57 proposals have been approved. An FDI
inflow of US$196.46 million under the category of single brand retailing was received
between April 2006 and September 2010, comprising 0.16 per cent of the total FDI
inflows during the period. Retail stocks rose by as much as 5%. Shares of Pantaloon
Retail (India) Ltd ended 4.84% up at Rs 441 on the Bombay Stock Exchange. Shares of
Shopper’s Stop Ltd rose 2.02% and Trent Ltd, 3.19%. The exchange’s key index rose
173.04 points, or 0.99%, to 17,614.48. But this is very less as compared to what it would
have been had FDI up to 100% been allowed in India for single brand.
The policy of allowing 100% FDI in single brand retail can benefit both the foreign
retailer and the Indian partner – foreign players get local market knowledge, while Indian
companies can access global best management practices, designs and technological
knowhow. By partially opening this sector, the government was able to reduce the
pressure from its trading partners in bilateral/ multilateral negotiations and could
demonstrate India’s intentions in liberalizing this sector in a phased manner.
Permitting foreign investment in food-based retailing is likely to ensure adequate flow of
capital into the country & its productive use, in a manner likely to promote the welfare of
all sections of society, particularly farmers and consumers. It would also help bring about
improvements in farmer income & agricultural growth and assist in lowering consumer
prices inflation.
Apart from this, by allowing FDI in retail trade, India will significantly flourish in terms
of quality standards and consumer expectations, since the inflow of FDI in retail sector is
bound to pull up the quality standards and cost-competitiveness of Indian producers in all
the segments. It is therefore obvious that we should not only permit but encourage FDI in
retail trade.
Lastly, it is to be noted that the Indian Council of Research in International Economic
Relations (ICRIER), a premier economic think tank of the country, which was appointed
to look into the impact of BIG capital in the retail sector, has projected the worth of
Indian retail sector to reach $496 billion by 2011-12 and ICRIER has also come to
conclusion that investment of ‘big’ money (large corporate and FDI) in the retail sector
would in the long run not harm interests of small, traditional, retailers.
In light of the above, it can be safely concluded that allowing healthy FDI in the retail
sector would not only lead to a substantial surge in the country’s GDP and overall

51. 51
economic development, but would inter alia also help in integrating the Indian retail
market with that of the global retail market in addition to providing not just employment
but a better paying employment, which the unorganized sector (kirana and other small
time retailing shops) have undoubtedly failed to provide to the masses employed in them.
Industrial organizations such as CII, FICCI, US-India Business Council (USIBC), the
American Chamber of Commerce in India, The Retail Association of India (RAI) and
Shopping Centers Association of India (a 44 member association of Indian multi-brand
retailers and shopping malls) favor a phased approach toward liberalizing FDI in multi-
brand retailing, and most of them agree with considering a cap of 49-51 per cent to start
with.
The international retail players such as Wal-Mart, Carrefour, Metro, IKEA, and TESCO
share the same view and insist on a clear path towards 100 per cent opening up in near
future. Large multinational retailers such as US-based Wal-Mart, Germany’s Metro AG
and Woolworths Ltd, the largest Australian retailer that operates in wholesale cash-and-
carry ventures in India, have been demanding liberalization of FDI rules on multi-brand
retail for some time.
Thus, as a matter of fact FDI in the buzzing Indian retail sector should not just be freely
allowed but per contra should be significantly encouraged. Allowing FDI in multi brand
retail can bring about Supply Chain Improvement, Investment in Technology, Manpower
and Skill development, Tourism Development, Greater Sourcing From India, Up
gradation in Agriculture, Efficient Small and Medium Scale Industries, Growth in market
size and Benefits to government through greater GDP, tax income and employment
generation.

52. 52
Prerequisites before allowing FDI in Multi Brand Retail and
Lifting Cap of Single Brand Retail
FDI in multi-brand retailing must be dealt cautiously as it has direct impact on a large
chunk of population. Left alone foreign capital will seek ways through which it can only
multiply itself, and unthinking application of capital for profit, given our peculiar socio-
economic conditions, may spell doom and deepen the gap between the rich and the poor.
Thus the proliferation of foreign capital into multi-brand retailing needs to be anchored in
such a way that it results in a win-win situation for India. This can be done by integrating
into the rules and regulations for FDI in multi-brand retailing certain inbuilt safety valves.
For example FDI in multi –brand retailing can be allowed in a calibrated manner with
social safeguards so that the effect of possible labor dislocation can be analyzed and
policy fine tuned accordingly. To ensure that the foreign investors make a genuine
contribution to the development of infrastructure and logistics, it can be stipulated that a
percentage of FDI should be spent towards building up of back end infrastructure,
logistics or agro processing units. Reconstituting the poverty stricken and stagnating rural
sphere into a forward moving and prosperous rural sphere can be one of the justifications
for introducing FDI in multi-brand retailing. To actualize this goal it can be stipulated
that at least 50% of the jobs in the retail outlet should be reserved for rural youth and that
a certain amount of farm produce be procured from the poor farmers. Similarly to
develop our small and medium enterprise (SME), it can also be stipulated that a
minimum percentage of manufactured products be sourced from the SME sector in India.
PDS is still in many ways the life line of the people living below the poverty line. To
ensure that the system is not weakened the government may reserve the right to procure a
certain amount of food grains for replenishing the buffer. To protect the interest of small
retailers the government may also put in place an exclusive regulatory framework. It will
ensure that the retailing giants do resort to predatory pricing or acquire monopolistic
tendencies. Besides, the government and RBI need to evolve suitable policies to enable
the retailers in the unorganized sector to expand and improve their efficiencies. If
Government is allowing FDI, it must do it in a calibrated fashion because it is politically
sensitive and link it (with) up some caveat from creating some back-end infrastructure.
Further, To take care of the concerns of the Government before allowing 100% FDI in
Single Brand Retail and Multi- Brand Retail, the following recommendations are being
proposed:-
 Preparation of a legal and regulatory framework and enforcement mechanism to
ensure that large retailers are not able to dislocate small retailers by unfair means.
 Extension of institutional credit, at lower rates, by public sector banks, to help
improve efficiencies of small retailers; undertaking of proactive program for
assisting small retailers to upgrade themselves.
 Enactment of a National Shopping Mall Regulation Act to regulate the fiscal and
social aspects of the entire retail sector.
 Formulation of a Model Central Law regarding FDI of Retail Sector.

53. 53
Issues & Problem: FDI in India
1. Restrictive FDI regime
The FDI regime in India is still quite restrictive. As a consequence, with regard to cross
border ventures. Foreign ownership of between 51 and100 percent of equity still requires
a long procedure of governmental approval. In our view, there does not seem to be any
justification for continuing with this rule. This rule should be scrapped in favor of
automatic approval for 100-percent foreign ownership except on a small list of sectors
that may continue to require government authorization.
2. Lack of clear cut and transparent sectorial policies for FDI
Expeditious translation of approved FDI into actual investment would require more
transparent sectorial policies, and a drastic reduction in time-consuming red-tapism.
3. High tariff rates
India’s tariff rates are still among the highest in the world, and continue to block India’s
attractiveness as an export platform for labor-intensive manufacturing production. On
tariffs and quotas, India is ranked 52nd in the 1999 GCR, and on average tariff rate, India
is ranked 59th out of 59 countries being ranked. Much greater openness is required which
among other things would include further reductions of tariff rates to averages in East
Asia.
4. Lack of decision-making authority with the state governments
The reform process so far has mainly concentrated at the central level. India has yet to
free up its state governments sufficiently so that they can add much greater dynamism to
the reforms. In most key infrastructure areas, the central government remains in control,
or at least with veto over state actions. Greater freedom to the states will help foster
greater competition among themselves. The state governments in India need to be viewed
as potential agents of rapid and salutary change. Brazil, China, and Russia are examples
where regional governments take the lead in pushing reforms and prompting further
actions by the central government.
5. Limited scale of export processing zones
The very modest contributions of India’s export processing zones to attracting FDI and
overall export development call for a revision of policy. India’s export processing zones
have lacked dynamism because of several reasons, such as their relatively limited scale.

54. 54
Conclusion
FDI provides India with stability in inflow of funds, access to international markets,
export growth, transfer of technology and skills and improves balance of payments.
More FDI does not necessarily guarantee high growth rates. The relative emphasis must
shift from a broad (scatter shot) approach to one of targeting specific companies in
specific sectors. Socially responsible FDI should be encouraged through the development
of national and international investment guidelines and regulations.
FDI is beneficial to India’s growth and India’s growth is beneficial for FDI. India needs
to create a talent pool suitable for the investors and it needs to develop infrastructure that
will encourage the investors. These steps taken by India to bring FDI will also help India
to grow on its own. FDI if monitored and nurtured in such a way that it will bring more
skills and resources to India will be mutually beneficial.
A Start Has BeenMade
Wal-Mart has a joint venture with Bharti Enterprises for cash-and-carry (wholesale)
business, which runs the ‘Best Price’ stores. It plans to have 15 stores by March and enter
new states like Andhra Pradesh, Rajasthan, Madhya Pradesh and Karnataka.
Duke, Wal-Mart’s CEO opined that FDI in retail would contain inflation by reducing
wastage of farm output as 30% to 40% of the produce does not reach the end-consumer.
“In India, there is an opportunity to work all the way up to farmers in the back-end chain.
Part of inflation is due to the fact that produces do not reach the end-consumer,” Duke
said, adding, that a similar trend was noticed when organized retail became popular in the
US.
Many of the foreign brands would come to India if FDI in multi brand retail is permitted
which can be a blessing in disguise for the economy.
Back-end logistics must for FDI in multi-brand retail
The government has added an element of social benefit to its latest plan for calibrated
opening of the multi-brand retail sector to foreign direct investment (FDI). Only those
foreign retailers who first invest in the back-end supply chain and infrastructure would be

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allowed to set up multi brand retail outlets in the country. The idea is that the firms must
have already created jobs for rural India before they venture into multi-brand retailing.
It can be said that the advantages of allowing unrestrained FDI in the retail sector
evidently outweigh the disadvantages attached to it and the same can be deduced from the
examples of successful experiments in countries like Thailand and China; where too the
issue of allowing FDI in the retail sector was first met with incessant protests, but later
turned out to be one of the most promising political and economical decisions of their
governments and led not only to the commendable rise in the level of employment but
also led to the enormous development of their country’s GDP.
Moreover, in the fierce battle between the advocators and antagonist of unrestrained FDI
flows in the Indian retail sector, the interests of the consumers have been blatantly and
utterly disregarded. Therefore, one of the arguments which inevitably needs to be
considered and addressed while deliberating upon the captioned issue is the interests of
consumers at large in relation to the interests of retailers.
It is also pertinent to note here that it can be safely contended that with the possible
advent of unrestrained FDI flows in retail market, the interests of the retailers constituting
the unorganized retail sector will not be gravely undermined, since nobody can force a
consumer to visit a mega shopping complex or a small retailer/sabjimandi. Consumers
will shop in accordance with their utmost convenience, where ever they get the lowest
price, max variety, and a good consumer experience.
The Industrial policy 1991 had crafted a trajectory of change whereby every sectors of
Indian economy at one point of time or the other would be embraced by liberalization,
privatization and globalization.FDI in multi-brand retailing and lifting the current cap of
51% on single brand retail is in that sense a steady progression of that trajectory. But the
government has by far cushioned the adverse impact of the change that has ensued in the
wake of the implementation of Industrial Policy 1991 through safety nets and social
safeguards. But the change that the movement of retailing sector into the FDI regime
would bring about will require more involved and informed support from the
government. One hopes that the government would stand up to its responsibility, because
what is at stake is the stability of the vital pillars of the economy- retailing, agriculture,
and manufacturing. In short, the socio economic equilibrium of the entire country.

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Bibliography
Books:-
FDI IN RETAIL SECTORIN INDIA
OXFORD dictionary
Notes & journal:-
Dr. Brajaballav Pal :- INNOVATIVE JOURNAL OF BUSINESS AND
MANAGEMENT
Magazine:-
INDIA Forbes, The greatIndian FDIConundrum
Websites:-
www.google.com
www.wikipedia.com
www.slideshare.com
www.hindustantimes.com
www.economictimes.com
www.blog.wsj.com