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Impact of FDI on the Retail Sector in India

13 Jun 2019

A country can sustain by itself, but not develop to its full potential without collaborating with another country. This knowledge transfer is crucial for the development of people in almost every domain.

Foreign Direct Investment or FDI in the retail sector in India is one such knowledge exchange that has been a critical driver of India’s technical know-how, instrumental in employment generation and boosting economic growth while also being the major source of non-debt financial resource. Although India was hesitant regarding FDI in initial years and also imposed a restriction on foreign companies to limit their share in the equity capital of their Indian subsidiaries, the new policies have been welcoming and have gradually liberalized foreign investment in various sectors such as stock exchanges, PSU oil refineries, telecom, defence, power exchanges, among others.

As a matter of fact, FDI equity inflows in India in 2018-19 stood at US$ 44.37 billion according to the Department for Promotion of Industry and Internal Trade (DPIIT); an indicator that the government’s effort to improve ease of doing business and relaxation in FDI norms is yielding results. A key factor behind flourishing FDI in the retail sector has also been the Indian government’s robust business environment that has ensured foreign capital keeps flowing into the country.

With foreign retail players willing to make an investment in India, the country is also witnessing strong growth prospects for retail expansion as urbanization and consumerism increases alongside.

Let’s understand the impact of FDI in the retail sector in detail.

What is Retailing in India?

Defined as all activities involved in the selling of services or goods directly to the final consumers for personal or non-business use, retailing is also a crucial part of the integrated supply chain involved in the distribution phase. It also involves procuring at the backend along with storing, processing, packaging and transporting the products which are retailed.

Primarily dependant on transportation, communication, and storage infrastructure of a country, retailing in India has several different formats of trading. One such format that is foremost associated with FDI is multi-brand or multi-product retailing, where a retailer offers a wide range of products, produced by diverse producers, to consumers in geographically dispersed locations and unconnected otherwise with the source of a service or good.

In recent years, faster growth of the economy with higher disposable incomes and rapid urbanization has accelerated this sector potentially generating several benefits to both the producer and the consumer.

What is FDI’s impact in the Retail Sector in India?

Infusion of Capital

Retailing in India is largely dependent on efficient supply chain logistics based upon well-developed networks of transportation, communication, and storage infrastructure. This helps provide timely and uninterrupted market access to the producers while ensuring that the quality and prices are affordable to the consumers.

Without appropriate storage infrastructure, the farmers or producers cannot access an efficient market system. This affects the prices they receive and they eventually fall prey to unscrupulous middlemen. Moreover, a significant portion of the produces are destroyed in this process and the end user then has to pay higher prices for relatively low-quality products. This unorganized and fragmented nature of the retail sector has led to a severe shortage of funds for investment in basic infrastructure and even though the government stepped in, the infrastructure has not been adequate.

FDI in retail goes a long way in alleviating this situation as large multi-brand retailers bring in the necessary infrastructure with them, thus creating an efficient and integrated back-end supply chain.

Technology Transfer

FDI in retail in India in addition to augmenting the physical capital stock also acts as a conduit of technology transfer that increases productivity. These advanced technologies in India’s retailing sector tremendously improve processing, grading, handling and packaging of goods thus lowering the price for the end user, while providing them with improved quality. A good example of this is the usage of cold-storage facilities, pre-cooling chambers, refrigerated vans, etc. which have reduced wastage of perishable items while maintaining the product quality.

Higher Consumer Wellbeing

FDI in multi-brand retail has given an opportunity for the customers to choose from a wide variety of brands and products, particularly in the organized retail sector. Building a market that has more choice has consequently driven manufacturers to strive towards more quality to improve upon consumer wellbeing. A few elements of foreign retailing such as larger spaces for product display, availability of a large number of products under one roof, a hygienic environment in the shopping area, etc. has led to better customer care thus increasing customer satisfaction.

Competition and Inflation Control

The advent of special offers, various free or discounted services, etc. increases competition, prompting the seller to keep low prices, which in turn has helped keep a check on inflation.

A more efficient supply chain logistics also increase the expectation of lower prices as the cost of moving goods from the producers or wholesalers to the retailers and ultimately to consumers is significantly reduced. Development of storage infrastructure further helps reduce the volatility of prices, particularly of agricultural products, thus keeping inflation in control.

Benefits to the Suppliers and Domestic Manufacturers, Employment and Revenue Generation

Extensive backward integration and superior technical and operational expertise have provided stability and economies of scale to the suppliers, assisting them in receiving better and fair prices by directly selling to organized retailers. This has also reduced the excessive reliability on intermediaries and exposed the local suppliers and domestic manufacturers to larger global markets spreading beyond national boundaries.

One of the biggest advantages of FDI in the retail sector in India through the introduction of the organized retail sector has been employment generation in not only front-end retailing but also in activities related to the back-end of retailing. As these jobs are in the organized sector, laws protecting the interests of the workers applied to the retail sector ensure the quality of jobs and better work conditions, thus improving the standard of living for everyone in the chain.FDI also plays an important role in India’s revenue generation through tax payment to the government from the organized sector as the retailers are on the record.

India is an emerging market for global partners (GP) investment. A key element in determining the growth of FDI in India is the economic dynamics and the political processes of various stakeholders involved, however, considering its advantages and benefits to both suppliers and consumers, this sector has and will continue to impact the retail sector in India.

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