THE INSTOR BLOG

FDI 2017 Policy: The Impact on Retail Industry

India is a 1.3 billion population, and third largest in terms of purchasing power parity. In economic terms, this might not seem like much when taken into consideration the population of the country. But for any foreign investor, it is a goldmine for returns. Foreign firms investing in India has always been a political sore point but with the new FDI rules, a lot more freedom has been granted to these firms.  

What is happening?

Foreign companies earlier were allowed to own up to 49% in a local single brand retail chain but to acquire the remaining 51% they had to approach the Department of Industrial Policy and Promotion(DIPP). Now Indian operation can be fully owned by the company without the hassle of obtaining permission. The only catch here is that this only applies to single-brand retail chains.

What are Single Brand Retail Chains?

A company which itself owns or runs a single brand as a retailer and sells its products all under one label e.g. Apple or Starbucks.

The cap for multi-brand retail stores is still 51%. Additionally though if any MNC operates as a single brand retail chain, the global brand name needs to remain the same and 30 % purchases for their business needs to be sourced from India.

As with anything else, there are certain pros and cons attached to the new FDI policy, listed below are some of the most prominent thoughts associated with it.

Employment

There is expected to be a sharp spike in organized retail and the generation of at least 8 million jobs is projected to happen. The organized retail sector will also provide better career opportunities and combined with competitive pay and better health care would elevate the standard of living as a whole.

Farmer and Agriculturist elevation

One of the largest sectors in India agriculture is still defined in its roots by poverty and an inefficient supply chain. 20-40 % of produce is known to go to waste due to incompetent handling of transportation and storage. FDI is expected to change all this and bring in huge reforms in the area owing to the up gradation of technology and practices being followed. With the current levels of wastage somewhere in between 24% – 40 %, they are expected to come drastically down.

Promotion Experts

With the entry of global giants in the country, there is the hope that there would be an increase in the agricultural sector by linking it with the global supply chain.

Reduction in TAX Evasion

Sales tax and property tax are a major source of fiscal revenue for the state government. Organized retail ensures that the tax collected on these parameters goes towards the betterment of the society as a whole.

Inflation Control

Organized retail has a massive controlling effect on inflation. Large organized retailers have the ability to buy from producers directly, thus creating an impact on the prices of goods.

India, with its abundant unorganized players, have limited access to capital, labor, & sustainable real estate options. FDI will ensure that scale of operations and technology in the retail sector evolves.

Disintermediation

Big suppliers have the power to remove middlemen/ Intermediaries from the supply chain. The retail stricture in India is known to highly detrimental to the farming sector. With the entry of big players, it becomes easier to remove the brokers and intermediaries t avid the colossal wastage that currently takes place in the market.

Drawbacks

1.Chances of unemployment at the lower levels

In India, about 80% of the population engaged in trade and retail is self-employed, with the entry of big retailers the displacement of this number too large to be compensated. Big retailers are known to maximize profit, the job market in India is considered to be unfavorable to the lower levels. With the entry of big market players, it would become even more so.

2. The concentration of resources and power with a few retail outlets

Big organizations have the ability to buy directly from the producers at competitive rates leading to a constant control over the price of products. Thus putting the small kirana shops at a disadvantage as there would a be a monopoly across the board in terms of pricing of goods.

3. Reduction of choice as many local merchants may be out of business

The retail scenario right now makes the consumer the king and dictates the choices lie in their hands. With FDI and entry of a more automated form of retail, the loss of jobs would be high. Big stores have the ability to sell at very cheap prices, thus eradicating competition and become a monopoly.

The big retail format pushes for bulk sales whereas the small retail works with daily consumables which may just push one out of the market and create a scenario in which the consumer would have no choice but to go for bulk buying.

India might have introduced a lucrative deal for foreign investment but it had a two-way effect as far as the opinion of the people is concerned. One school of thought promotes the deal as it will bring in an era of technology and better supply chain management whereas the other focuses on how the existing market will be affected. The outcome remains to be seen as very economy reacts differently to the policies implemented.

 

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