Foreign Direct Investment In Indian Food Retail Sector

Published Date: 02 Nov 2017

INTRODUCTION

India enjoys a strong position as a global investment hub with the country registering high economic growth figure even during the peak of financial meltdown. As a result the investors rested their confidence in the economy which eventually pushed Foreign Direct Investment (FDI) in India. The retail industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. But all of them have not yet tasted success because of the heavy initial investments that are required to break even with other companies and compete with them. The Indian retailing industry is gradually inching its way towards becoming the next boom industry. Successful retail organizations must understand their market, their customers and the importance of strategic location. Because of completion in the retail industry can be fierce, such organization need the best micro marketing tools available to analyse where to place new stores, establish customer profile, and determine best marketing practices in order to find new customers. India, over the latter half of the previous decade, has been one of the most wanted and desired destinations for investors across the globe and is being considered as one of the world’s most lucrative retailing destinations. It is of late often being hailed as one of the sunrise sectors in the economy. The retail sector in particular has received a constant buzz and excitement surrounding government policy to reframe and revisit the policy framework. India's retail sector is on its way of modernisation.

LITERATURE REVIEW

India has today become a budding target for FDI. India today offers the most persuasive investment opportunity for mass merchants and food retailers looking to expand overseas as Indian economy is growing at a rapid pace with consumers having high purchasing power. With a robust economy experiencing unrelenting growth, India has exerted a pull and an irresistible enticement to companies looking to expand their scope of operations. FDI is a sturdy source for the intensification of retailing and will create enormous opportunities for innovation in retail sector in India but at the same time it is quite likely that a section of the domestic retailing industry will be severely hurt due to the entry of foreign retailers.

There is a major division on the opinion on the impact of the growth of organized retail in the country. But there is no doubt on the role that FDI can play in supplementing domestic resources and in ensuring employment generation in the development of an economy. Nevertheless, still there is an elongated way to go before Foreign Direct Investment (FDI) in Indian Retail can be realised in its totality.

There are linkages and relation between important parameters like between economic development, rise in per capita income, growing consumerism, proliferation of branded products, and retail modernisation. With high economic growth, there is rise in per capita income which in turn changes the consumption pattern. With the persistence of globalisation and liberalisation various international brands enter the domestic market. There is amplification of awareness level of Consumers as they lean to experiment with different international brands. The proliferation of brands leads to increase in retail space. Thus, retail modernisation is an essential part of the development process.

Despite the present FDI restrictions, a number of studies such as A.T. Kearney (2011) [1] , McKinsey & Company (2007) [2] and A C Nielsen (2008) [3] predict that modern retail will continue to witness double-digit growth in India. The Indian market is unsaturated and A.T. Kearney 2011 has pointed out that it is the right time for global retailers to enter the Indian market.

There is global race for attracting FDI, but how much it would contribute to host country’s economics development is to be assessed. Developing countries need to have reached a certain level of educational, technological and infrastructure development before being able to benefit from a foreign presence in their markets.

Blomstrom et. al., (1994) [4] have rightly observed that, the host country must be capable of absorbing the new technology manifested in FDI. An additional factor that may prevent a country from reaping the full benefits of FDI is imperfect and underdeveloped financial markets (OECD 2002) [5] .

India appears to be well placed in terms of reaping benefits because it has relatively well developed financial sector, strong industrial base and critical mass of well educated workers (Rajan et. al., 2008) [6] .

The new policy would benefit both foreign retailers and Indian companies. The foreign retailers' will get better local market knowledge and thus an increased consumer base, whereas Indian companies will gain advantage from global best management practices and technological know-how. The primary aim of the policy is to attract greater FDI inflows and to create a friendly business environment. Foreign investors may experience a liberalized legal and financial framework to have the potential growth in the multi-brand retail sector. Researchers (Palit and Nawani 2007; Pires, Stanton and Salavrakos 2010; Jain and Sukhlecha 2012) argued that FDI will infuse technological advancement

and induce capital flow which enhances production possibilities and maintains general macroeconomic stability. To revive the Indian economy, FDI policy in multi-brand retail is an important reform that would ease supply side pressures and mitigate inflation. This would bring better prospects and higher profit margins for the small and medium enterprises as it creates greater market access.

The new FDI policy has become a key battleground in the emerging multi-brand retail markets, researchers (Henley 2004; Palit and Nawani 2007; Pires, Stanton and Salavrakos 2010; Jain and Sukhlecha 2012; Moghe 2012) have highlighted a number problems related to backend infrastructure, implementation of improved technology, improvement in supply chains, issues of real estate and human resources. It is observed deficiency of appropriate investment in logistics and storage facilities which are two alarming factors leading to an inefficient market mechanism. The technology used in Indian retail is also largely obsolete, resulting poor efficiency at the supply side economy. Overall food based inflation has been a matter of concern though it is given substantially good subsidies to farmers. Henley (2004) study shows China is in better position in attracting FDI when compared to India. India's performance is understated because of various reasons like high tariffs, poor physical infrastructure, unfriendly regulatory system etc. It concludes with a hope of liberalization which would be driven by external pressures and state level initiatives.

Joseph et.al (2008) study on organized retailing shows all segments of the Indian economy could be affected by the entry of large corporate giants in the multi-brand retail business. It has found that unorganized retailers experienced a decline in their sales and profit with the organized retailers. The liberalization of FDI for Multi-brand retail sector would affect unorganized small retailers by giving rise to monopolies of large corporate houses with respect to pricing and availability of goods.

Pires, Stanton and Salavrakos (2010) argue that the legal, technical and socio-economic problems at the macro-level interlink FDI and economic growth. The study stress on the importance of prioritizing the incentives offered to the FDI infrastructure. The entry of other players would create a competitive landscape for the e-commerce business, leading to the larger benefits for the Indian customers. The only challenge they fore see is the state approval clause. Indian government has put a clause that allows state government to opt out of the system, which would bar multi-brand retailers from opening up the physical stores in the states. They are not clear how this clause is going to affect the e-commerce. The investors would be more comfortable investing in a company that is complying with all the requirements set by the cabinet and the letter of law. From the company's perspective the investors will now be able to pursue foreign investments but have to be cautious to comply with the regulations.

Economic Survey (2011-12) for FDI in multi-brand retail states that the Inter-Ministerial Group (IMG) on inflation has recommended for leveraging FDI as it noted concerns for high rates of food inflation and low prices grasped by Indian farmers. Study (McKinsey Report, 2012) states that the retail productivity in India is very less compared to other International counterparts. The over-all retail employment in India, account for about 6% of current Indian labour force, mostly unorganized, and which is about half when compared to the other emerging economies. A comprehensive expansion of retail sector in India would create more than 50 million jobs. Training and development for labour in the retail sector for a better productivity is considered to be a challenge.

Jain and Sukhlecha (2012) studied FDI in multi-brand retail and tried to establish the need of the retail community to invite FDI in multi-brand retailing. It was noticed that there are few issues to be addressed for the consumer's right to be saved, for the employment opportunities to be generated and also for the regularization of the retailers working in different areas. But it inferred that in spite of having all these problems the entry of foreign investment in retail sector is found to be the most effective for the country's development and supremacy in the world scenario.

The government's decision to allow up to 51% Foreign Direct Investment (FDI) in multi-brand retail, has been challenging for all the sectors mentioned in the various studies throughout the literature review. Additionally, more than 20 crore people are selling vegetables on footpath without a fixed shop throughout the country. There are other farmers, milkmen, fruit producers and others also make their lives through retail trading upon footpath and hand carts across the country. It is reported that the notification would hit the livelihood all these small retailers (Hindu, 2012). In India life of a farmer is very much cheaper than their western counterparts. The current market system is not farmer supportive, as the big giants are directly dealing with agents. If the other retail players are allowed to enter over this market segment, small retailer in organic food shops will close down. The gap between farmer prices and consumer prices would be very high even with the entry of large retailers. Small retailers would be squeezed and the movement will suffer in the long run (Hindu, 2012). This movement has to be taken up more in urban cities as the people needed this most. Small retailers must be allowed to exist with their independent shops as such to enable them to have a peaceful livelihood.

Moghe (2012) critically analyzed the decision of Indian government to open retail sector for FDI in single-brand and multi-brand category and it's likely to have impact on various components of Indian economy. In addition, it was suggested to have a strong enforcement mechanism to ensure that big retailers do not dislocate small retailers by unfair means and to build a co- existence of both the arms. The high-level group which is to be constituted under the Minister of consumer affairs is expected to look into the aspects such as internal trade and recommendations on trade reforms to the government. Reforms in the internal trade will ensure distribution efficiencies and overall development to all sections of the society.

Research Questions

To initiate this study, three questions were originally designed to help construct aims and objectives, and to provide some initial focus.

The three questions were:

1. What methods of FDI in Food retail are currently permitted and what is the policy?

2. What are the key issues concerning FDI policy change in India's Food retail sector?

3. How can policy help to reduce the risk of FDI in Food retail for India and its domestic markets?

I also wish to look at the issues which are currently under discussion by the domestic players about FDI in India's Food retail sector, to establish an understanding of the reasoning behind current policy and the controversial viewpoints that keep India divided on FDI Retail policy. This research will provide recommendations for ways in which policy could be changed and improved to reduce the risks of FDI for India, and to benefit the domestic retailers and related industries as well as the economy as a whole.

RESEARCH METHODOLOGY

After having reviewed the literature, this section focuses on the research methodology. Research philosophy, research design, data collection method, sampling methodology and tools used in analysis will be explained in this section.

Research Philosophy

The research will be based on positivist paradigm. Under this approach, the research is independent of and neither affects nor is affected by the subject of the research. The study will attempt to have impact on only two variables, problem and prospects of Indian food retail industry and foreign Direct Investment. Attracting FDI and forging more effective international linkage is the key to this objective. If there are policy obstacles, efforts should be made to overcome these in other ways. In order to achieve the purpose of the study the research will be based on positivist approach. For data collection both primary ad secondary data will be used.

Research Design

On the basis of this particular research, exploratory research is used. In exploratory research the possible causes will be recognized, the most suitable causes will be selected, hypothesis will be developed and research actions will be taken accordingly (Saunders et al, 2009). Survey of retailers Economists will be useful for exploratory research.

Management and Research question Hierarchy

Select sample type

Non probability

Probability

Define Relevant Population

Select the Sampling Technique

Identify Existing Sample Frames

Evaluate and Select Sampling Frame

Modify or construct Sampling frame

Accept

Determine Sampling Frame rules

Probability

Non probability

Draw Sample

(Source: Cooper & Schindler, Business Research methods, 2003 Tata McGraw-Hill, p.183)

Data Collection

The primary data will be collected with the help of well structured questionnaires. In total 25 questionnaires will be distributed and each questionnaire will take approximately 10-15 minutes. Questions relating to general awareness about the present status of Indian food retail industry, FDI theories, advantage and disadvantages, social and economic impact, hurdles and opportunities of MNC’s. The questionnaire will be undergone opinion from experts in food retail sector. The secondary data will be collected from working papers of different authors, survey reports, magazines and web portals etc.

The appropriate data for this research will be selected through samples. Non probability sampling will be chosen and particularly convenience sampling which attempts to obtain a sample of convenient elements. New Delhi, the capital of India will be selected as the location to conduct the survey.

The aim of this study is to investigate the determinants of FDI in India from the perspective of country characteristics, identifying the most significant factors in India that influence foreign investors’ decision to invest in the country. Several location advantages as determinants of FDI in India, drawn from previous studies, will be tested.

The researcher proposes to use a structured questionnaires that will be presented to respondents to gather their opinion on the impact of FDI in Indian Food Retail. The results recorded by the researcher will be analyzed by applying the T-test.

The t-test is a useful analysis used to assess whether the means of two groups are statistically different from each other or not. This analysis is appropriate in this case to identify the respondents, who were in favour of FDI in Food Retail in India and others who had a different perspective.