How Various Mncs Are Helping Farmers

Published Date: 02 Nov 2017

PepsiCo India helped farmers improve yield and income to create a cost-effective, localized agro-supply chain for its business by [1] :

Building PepsiCo‘s stature as a development partner by helping farmers grow more and earn more.

Introducing new high-yielding varieties of potato and other edibles.

Introducing sustainable farming methods and practising contact farming.

Making world-class agricultural practices available to farmers and helping them raise farm productivity.

Working closely with farmers and state governments to improve agro-sustainability and crop diversification.

Providing customized solutions to suit specific geographies and locations.

Facilitating financial and insurance services in order to de-risk farming.

Today PepsiCo India‘s potato farming programme reaches out to more than 12,000 farmer families across six states. This partnership helped the farmers in the following ways:

Provided farmers with superior seeds, timely agricultural inputs and supply of agricultural implements free of charge.

Assured buy-back mechanism at a prefixed rate with farmers. This insulates them from market price fluctuations.

Tie-up with State Bank of India, we help farmers get credit at a lower rate of interest.

Arranged weather insurance for farmers through our tie-up with ICICI Lombard.

Built a retention ratio of over 90%, which reveals the depth and success of this partnership.

In 2010, Pepsico’s contract farmers in West Bengal registered a phenomenal 100% growth in crop output, creating in a huge increase in farm income. The remarkable growth has resulted in farmers receiving a profit between Rs.20, 000– 40,000 per acre, as compared to Rs.10000–20,000 per acre in 2009.

Case 2: Bharti Walmart

Bharti Walmart initiative through Direct Farm Project [2] :

Corporate Social Responsibility (CSR) initiatives in Bharti Walmart are aimed at empowerment of the community thereby fostering inclusive growth. Through our philanthropic programs and partnerships, we support initiatives focused on enhancing opportunities in the areas of education, skills training and generating local employment, women empowerment and community development.

In conjunction with the farmers’ development program in Punjab, community-building activities have been implemented in village, Haider Nagar. Due to lack of sanitation facilities, households tend to use the farm fields, thereby affecting yields and impacting the produce that is being supplied to stores. In order to improve the yields and the community‘s way of life, we are working on the issues of Sanitation and Biogas, Education, Awareness Building and Health and Hygiene.

Education: 100% children enrolled in formal education program. Children‘s group had been formed to discuss children issues. All the nonschool going children had been given non-formal basic education required to mainstream them in the government schools. A sanitation block has been constructed, hand pump has been installed and school uniforms have been donated to create a better learning environment for children. Fifteen students have been mainstreamed back in school.

Health and Hygiene: A dispensary has been started in Haider Nagar to help people avail medical facilities in the village itself. Nearly 2000 patients have availed the dispensary facilities. Twenty Community Dustbins have also been installed in the village to bring about a change in the living conditions of the people and to provide them garbage free environment.

Sanitation and Biogas: Ensured that 100% households have toilets in the village. Eighty Bio Gas plants have been installed to help people conserve gas energy and utilize the waste generated from their cattle and toilets; thus making the environment healthier.

Waste Management: twenty Community Dustbins have been installed in the village to bring about a change in the living conditions of the people and to provide them garbage free environment thus ensuring a healthier living.

This and many other cases suggest that opening of Indian retail sector to FDI is a win-win situation for farmers. Farmers would benefit significantly from the option of direct sales to organized retailers. For instance, the profit realization for farmers selling directly to the organized retailers is expected to be much higher than that received from selling in the mandis. Also Rise in the organized retail whether domestic or through entry of foreign players will lead to an increase in investments in both forward and backward infrastructure such as cold chain and storage infrastructure, warehousing and distribution channels thereby leading to improvement in the supply chain infrastructure in the long run. Global majors such as Wal-mart, Carrefour and Tesco are expected to bring a global scale in their negotiations with the MNCs such as Unilever, Nestlé, P&G, Pepsi, Coke, etc. The improved cold chain and storage infrastructure will no doubt lead to a reduction in losses of agriculture produce. It may also lead to removal of intermediaries in the retail value chain and curtail other inefficiencies. And this may, result in higher income for a farmer.

Contrary View,

Traditional retailing has been established in India for many centuries, and is characterized by small, family-owned operations. Because of this, such businesses are usually very low-margin, are owner operated, and have mostly negligible real estate and labour costs. Moreover, they also pay little by way of taxes. Consumer familiarity that runs from generation to generation is one big advantage for the traditional retailing sector. It is often said that the mom-and-pop store in India is more like a father-and-son enterprise. Such small shops develop strong networks with local neighbourhoods. The informal system of credit adds to their attractiveness, with many houses ‘running up a tab’ with their neighbourhood kirana store, paying it off every fortnight or month. Moreover, low labour costs also allow shops to employ delivery boys, such that consumers may order their grocery list directly on the phone. These advantages are significant, though hard to quantify. In contrast, players in the organized sector have to cover big fixed costs, and yet have to keep prices low enough to be able to compete with the traditional sector. [3] 

The other major challenge for retailers in India, as opposed to the US, is the storage setup of households. For the large-scale retail model to work, consumers visit such large stores and return with supplies likely to last them for a few weeks. Having such easy access to neighbourhood stores with whom, as discussed above, it is possible to have a line of credit and easy delivery service, congested urban living conditions imply that few Indian households might be equipped with adequate storage facilities. [4] 

In urban settings, real estate rents are also very high. Thus opportunities in this sector are limited to those retailers with deep pockets, and puts pressure on their margins. Conversely for retailers looking to set up large stores at a distance from residential neighbourhoods may struggle to attract consumers away from their traditional sources of groceries and other products.

Policy Implication of FDI in Single Brand Retail [5] 

100% FDI in single brand retail trading is permitted

Products to be sold should be of a ―Single Brand only

30% sourcing is to be done from micro and small industries (investment in Plant and Machinery not exceeding US $ 1mm) This condition will ensure that SME sector, including artisans, craftsman, handicraft and cottage industry gets the benefits of liberalization

Policy Implication of FDI in Multi Brand Retail [6] 

Individual state governments will decide whether to allow foreign supermarket chains to enter.

Foreign retailers will have to source almost a third of their manufactured and processed goods from industries with a total plant and machinery investment of less than $1 million.

Foreign retailers will have to invest a minimum of $100 million, and put at least half of their total investment into so-called 'back-end' infrastructure, such as warehousing and cold storage facilities.

Foreign retailers will only be allowed to set up shop in cities with a population of more than 1 million. In states where there are no cities with such a big population, individual state governments can choose where to allow foreign chains to open.

Analysis of Impact of FDI in Retail on Macroeconomic factors for other countries

The nations analysed below are similar to India in terms of demographics and various macro-economic factors. A comprehensive study has been done to analyse the impact of FDI particularly in retail in following countries.

China

The evolution of China’s open door policy in the aspect of FDI needs to be understood in the wider context of China’s Political and economic reform, in particular the difficult transition from a planning to a market economy as Deng Xiaoping once said, reform in China is like "crossing the river by feeling the stones on the riverbed". In terms of number of people escaping absolute income poverty, china has undoubtedly made the single largest contribution to global poverty reduction of any country in the past 20 years. [7] 

Although Deng Xiaoping opened the economy in 1979, China opened up FDI in retail only in 1992 and that was limited to 26 per cent. Ten years later, in 2002, that cap was raised to 49 per cent. It was only in 2004 that 100 per cent FDI in retail was allowed, after local Chinese manufacturing had acquired teeth. In the 1990s, the bulk of investment in the leading chains was made by the Chinese government itself. The government used stock market financing at the end of the 1990s for its primary chains—Lianhua, Hualian, and Nonggongshan—with combined sales today of $10 billion. Although the lead chain in the country is Chinese and some 80 percent of total supermarket sales in China are by domestic chains, foreign chains made headway in the late 1990s. Sales of the top-10 chains in 2002 totaled $11.5 billion dollars, of which 18 percent was by two European chains and 28 percent by three chains from Hong Kong and Taiwan. By 2006, the sales of the top 10 (with some one-quarter to one-third of total supermarket sales) had reached $32 billion, of which similar shares were made by the foreign chains. Part of the domestic chain response to foreign competition has been first-tier domestic chain mergers and acquisitions of local chains.

China, in fact, is a really interesting example of how it transformed Walmart USA. As China ramped up its own manufacturing sector, through subsidies, special economic zones and other perks, as many as 15,000 Chinese suppliers were serving Walmart China in 2010; the company had expanded its presence to 352 supermarkets in 130 cities across China. Exports to the US amounted to $60 billion annually. Walmart China now claims that 95 per cent of its goods sold in China are sourced locally.

FDI in retailing was permitted in China for the first time in 1992. Foreign ownership was initially restricted to 49%.

In December 2004 the government lifted up all the restrictions on FDI in Retail.

Employment in the retail and wholesale trade increased from about 4% of the total labor force in 1992 to about 7% in 2001. The number of traditional retailers also increased by around 30% between 1996 and 2001.

Some of the changes which have occurred in China, following the liberalization of its retail sector, include (CII-PwC, 2008):

Over 600 hypermarkets were opened between 1996 and 2001

The number of small outlets (equivalent to kiranas) increased from 1.9 million to over 2.5 million

Employment in the retail and wholesale sectors increased from 28 million people to 54 million people from 1992 to 2001.

GDP growth has been at 8% on an average after the introduction of FDI in Retail

China’s inflation rate plummeted to -0.8% and -1.4% in 1998 and 1999 respectively. Today after 20 years since FDI in Retail was introduced inflation rate stays at 2% rather than 14.6% and 24.2% in 1993 and 1994. The short term effects of FDI in Retail led to high inflation but in the long run inflation is controlled.

The rate of interest was consistent before 1992 but after the introduction of FDI in retail it became negative for 3 consecutive years.

The revenues remained consistent throughout the period.

The value of imports and exports has increased minutely since the introduction of FDI in retail. Also the Chinese Yuan started depreciating with respect to dollar after 1992.

The total FDI inflow & outflow has increasing significantly since the introduction of FDI in retail.

Thailand

FDI in Retail was introduced in 1997 in Thailand. It is frequently referred to as a country in which FDI had an adverse effect on the local retailers. It permits 100% foreign equity, with no limit on the number of outlets.

The factual position, as reflected in the Report of ICRIER, is as follows:

Wet market and small family owned grocery stores dominated the Thai Retail industry.

Prior to 1997, no foreign investment was allowed and hence the retail sector faced limited competition and thus had few incentives to upgrade their operation.

With the start of the Asian crisis in 1997, the entry ban on foreign players was removed. Within a short span of time, the foreign players expanded their operations significantly and marginalized the local retailers who were already suffering from a recessionary trend of economy. Many local players had to close down their business.

Entry of foreign players in a recessionary economy adversely impacted all segments –wholesalers, manufacturers and domestic retailers in the short run.

However, entry of the foreign players had certain positive effects also, such as:

It led to the development of organized retailing and Thailand has now become an important shopping destination;

It encouraged growth of agro-food processing industry and enhanced the exports of Thai-made goods through networks of the foreign retailers

Impact on macroeconomic factors:

Due to the shutting down of local retailers as well as manufacturers, the GDP growth of Thailand declined considerably to -10.5% in 1998. Though the GDP growth improved after that but it never became the same as before the introduction of FDI in Retail.

Unemployment rate remained considerable low in Thailand.

The inflation rate remained as low as 0.3% after the introduction of FDI in Retail. Due to the low prices Thailand’s export increased leading to the current a/c balance of $15,677,509,807US.

The openness indicator has been at a high level, being its maximum in 2002 which indicates that value of exports & imports have risen significantly.

FDI inflows increased exorbitantly in 1998 to 7,314,804,931 whereas FDI outflows remained at a low level.

Indonesia

The takeoff of modern retail in Indonesia in the 1990s primarily involved domestic chains. The current leading chain, Matahari, is indicative. Matahari started as a small shop in 1958, grew into a chain of department stores, and then was purchased by a giant banking and real estate conglomerate, Lippo Group, in 1997, just before the crisis. The crisis created a sharp dip in modern retail sales, which began recovering in the 2000s. Matahari doubled its sales between 2002 and 2006, becoming a billion-dollar chain by 2006. The share of foreign chains (one European and one Hong Kong) in the top seven chains is now 40 percent. However, because the sector is still fragmented, foreign chains do not have more than a 20 percent share, similar to the situation in China. FDI combined with financing from either the competitive or leading local investors led to the rapid consolidation and multi-nationalization of the supermarket sectors in developing countries over the past decade, with the trend again correlated with the waves. The rapid consolidation of the sector in those regions mirrors what is occurring in the United States and Europe. For example, in Latin America the top five chains per country have 65 percent of the supermarket sector compared with 50 percent in the United States (although Kinsey [2004] reports that is rapidly increasing) and 72 percent in France. [8] 

Indonesia permits 100% foreign equity in retail business, with no limit on the number of outlets. It also does not impose any capital requirements.

The current leading chain, Matahari, is indicative. Matahari started as a small shop in 1958, grew into a chain of department stores, and was then purchased by a giant banking and real estate conglomerate, Lippo Group, in 1997, just before the crisis. The crisis created a sharp dip in modern retail sales, which began recovering in the 2000s. Matahari doubled its sales between 2002 and 2006, becoming a billion-dollar chain by 2006.

The share of foreign chains (one European and one Hong Kong) in the top-seven chains is now 40 per cent. However, because the sector is still fragmented, foreign chains do not have more than a 20 per cent share, similar to the situation in China.

Impact on macroeconomic factors

Indonesia faced a deep economic recession in 1997-98 which led to inflation as high as 80% during the mid 1997.

During this period the GDP growth too plunged to -13%

Since the crisis during 1997-99, Indonesia has introduced a wide range of institutional reforms and redirected monetary policy towards maintaining price and exchange rate stability. As the result, price stability has been reinstated. However, the annual economic growth rate in 2001 slipped to about 3.5 percent with the inflation rate of around 13%.

The value of exports & imports & the real exchange rate remained consistent during the period.

There was an increasing effect of FDI in retail on the total FDI inflows. Whereas FDI outflows dropped after 1994.

Brazil

Of the top-seven chains with sales of $24 billion in 2006—including Casino (the leader), Carrefour, Wal-Mart, and Makro—all are foreign owned. The takeoff of the retail sector occurred in the late 1980s and early 1990s, with an intense period in the mid-to-late 1990s of mergers and acquisitions. A typical trajectory was that of CBD. Formerly a domestic chain, CBD became the lead chain in the 1990s and then entered a joint venture with Casino (France), which recently acquired it fully. [9] 

Research on the impact of big players on small retailers in Brazil indicates that since its opening up to the foreign investment in 1994, the traditional small retailers managed to increase their market shares by 27% (according to the report by CUTS International).

The rise in market shares came about when they were able to increase their productivity by adopting better technology and give a tough competition to the foreign firms.

The annual GDP growth remained positive after the introduction of FDI in retail.

The unemployment rate increased after 1994 being its maximum at 9.6

The Brazilian Real appreciated with respect to U.S Dollar after 1994. The value of exports and imports too increased after 1994

The total FDI inflows reached their peak in 1998.

Russia

The Russian supermarket revolution has occurred only in the 2000s. It is still a fragmented sector in a country with a population of 140 million. The growth rates are stunning: In 2002, sales by the top-15 chains totaled $2.7 billion; by 2006, sales by those chains had soared to $19.2 billion. The share of the top-3 chains was 40 percent in 2002 and 54 percent in 2006, with the lead domestic chains acquiring many small regional and local chains. The foreign share of sales was 33 percent in 2002 and 35 percent in 2006—only inching up and spreading over 8 foreign chains among the top 15. The two largest companies are Russian, but the origin of the capital, even of the Russian companies, is usually a mix of domestic and foreign. The Russian banking sector is awash in cash from oil, construction, and financial services.

The Russian supermarket revolution has occurred only in the 2000s. It is still a fragmented sector in a country with a population of 140 million.

Very high growth rates have been recorded.

In 2002, sales by the top-15 chains totaled US$2.7 billion; by 2006, sales by those chains had soared to US$19.2 billion. The share of the top-3 chains was 40 per cent in 2002 and 54 per cent in 2006, with the lead domestic chains acquiring many small regional and local chains.

The foreign share of sales was 33 per cent in 2002 and 35 per cent in 2006—only inching up and spreading over 8 foreign chains among the top 15. The two largest companies are Russian, but the origin of the capital, even of the Russian companies, is usually a mix of domestic and foreign.

The GDP growth has been positive since the introduction of FDI in retail

The unemployment rate too has decreased since 2000.

Though the FDI inflows & outflows were consistent till 2002 but a sharp increase was observed after that.

Mexico

The Mexican case of supermarket development is similar to that of Brazil, but with a lag resulting from a later takeoff. In the early 1990s, nearly all the supermarket sales were by domestic chains. [10] By 2002, 48 percent of the $24 billion dollars in sales by the top-seven chains in 2002 were by foreign chains (primarily Wal-Mart). By 2006, the sales of those chains had nearly doubled to $38 billion, and now 53 percent are by foreigners (again, primarily Wal-Mart). In many cases, however, domestic investment is the main driver, which is particularly relevant to India. Several examples follow. It is instructive that, except in Brazil (where rapid multi-nationalization occurred), the supermarket revolution in the famous "fastest growers" quartet of Brazil, Russia, India, and China was led by domestic capital generated by the growth industries that have placed these countries in the fastest-grower category.

With the influx of foreign retailers in 1991, a handful of major chains came to dominate the market, and many of the smaller retailers were forced to shut down. By 2001, only 4 chains dominated the market:

Wal-Mart de Mexico(Walmex) with almost half (45.6 percent),

Comerical Mexicana with a little over a fifth (20.6 percent),

Gigante (15.5 percent) and

Soriana (14 percent).

By 2002, Walmex’s total sales had grown to 10.1billion (Tegel 2003), and by 2006 to 18.3 billion (Wal-Mart de Mexico 2006)

The retail sector modernized its warehousing, distribution, and inventory management. Also, it changed the way it interacted with its suppliers.

The GDP rate has been consistent except in 1995 when it reached -6.2.

Wal-Mart has taken over nearly half of Mexico's retail business with just over 200,000 employees (the country's population is 112 million). Undoubtedly the unemployment rate increased to 6.9 in 1995.

Though the value of exports and imports was consistent throughout but the exchange rate was seen fluctuating after 1991. There was an increase in the total FDI inflows.

Positive impact of FDI in Retail in India

At present 95% of the total market in India comprises of unorganized sector. They have their unique advantages like home grown processes, nearness, convenience & services which the retail stores can’t compete with. The kirana shops will enjoy their space as supermarkets can only exist in large cities. Also the kirana shops can enjoy more profits by buying the goods from supermarkets & selling them at their stores. Therefore local retailers will not be affected by foreign retailers. [11] 

Pursuant to FDI in the retail, international MNCs are likely to enter India either directly or through Indian companies and they in turn are going to recruit people for sales, customer service, back end logistics and IT, which would mean substantial job creation. [12] 

According to Indian Staffing Federation (ISF), an apex body of the flexi staffing industry in India, the retail sector alone could see as many as 10 million jobs in the next 10 years.

Today India is the second largest producer of fruits and vegetables (about 220 million metric tonnes), it has a very limited integrated cold-chain infrastructure, with only 5386 stand-alone cold storages, having a total capacity of 23.6 million metric tonnes. 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. Through FDI in Retail, the foreign retailers would set up supply chains and logistical capabilities, spurring significant improvements in the infrastructure needed to source, ship, store and deliver products (covering all aspects of value chain and supply chain activities, including storage, warehousing, and information-intensive operations). [13] 

Real Estate Development: Due to the availability of higher disposable income with Indians, changing perception and increasing tendency to pay for quality and ease and access to a 'one stop shop' real estate in India has gone through a revamp. This sector can get a further facelift and receive more investment with the opening up of FDI in multi brand retail, as entrants will need substantial space for setting up high end retail malls. According to Piyush Shrivastava, Manager, Sales, Jaypee Greens said, ―"By allowing FDI in multi-brand retail, the demand for retail spaces would go up, especially in places like Noida and the Greater Noida Expressway. So I expect that retail shopping areas and malls will mark a high growth with the arrival of retail giants".

Low Prices: Use of superior technology and managerial practices would reduce the overhead costs and with the cut down of middlemen, the product would be sold to consumers at significantly low prices. This will curb the soaring inflation rates and thus, would be a great relief to the common man. [14] 

Negative impact of FDI in Retail on India

Unemployment: The examples of south-east Asian countries like China show that after allowing FDI, the domestic retailers were marginalized and this led to unemployment. It is said that FDI would provide employment opportunities. But, the fact is that they cannot provide employment opportunities to semi-illiterate people. Though they can provide employment opportunities like drivers, watchman etc. but this argument gets more attention because in India semi-illiterate people in quiet large in number.

FDI in retail trade would not attract large inflows of foreign investment since very little investment is required to conduct retail business. Goods are bought on credit and sales are made on cash basis. Hence, the working capital requirement is negligible. On the contrary; after making initial investment on basic infrastructure, the multinational retailers may remit the higher amount of profits earned in India to their own country i.e. drainage of wealth would occur causing negative impact on India’s overall economy. [15] 

The organizational form of rural producers as they interact with Big Retail is still not being done. Small farmers can undertake contract farming, but they have no bargaining power and will be at the mercy of their buyers. Therefore the interests of small farmers could be lost.

FDI in retailing can upset the import balance, as large international retailers may prefer to source majority of their products globally rather than investing in local products. As Indian government’s condition, companies will buy 30% from small industries of India, but what about the other 70%? Walmart and all these big giants import their majority goods from China. If we consider Walmart as a country then Walmart will be the one of the top-10 countries which is importing goods from china. These giants will dump goods from China, thus making India a dumping ground for Chinese goods.

Recent reports presented by Walmart to US Govt. revealed that it spend Rs. 125 crore in lobbying Indian lawmakers to get access to Indian market. These facts are serious; if Govt. is doing all this in favour of bribery and money then results might not be good as it is projected. Since Walmart will continue to mould things in their favour by lobbying and bribery as political corruption is well known in Indian politics. They can be purchased easily. [16] 

Research Methodology

Objectives

Examining the relationship between FDI and macro-economic factors has important implications for policy makers and foreign investors. Policy makers need to push reform agenda in domestic market so as to attract more FDI in the Indian economy.

Hence various macroeconomic factors have been analysed vis-a-vis FDI in retail using quarterly data for the period starting from January 2000 to December 2011 for five countries – Russia, China, Mexico, Indonesia and Thailand. It is important to analyse the impact of FDI on macro-economic factors over a period of time. Simultaneously, it is important to examine the role played by macro-economic factors in attracting FDI in any country. Hence, policies should be formulated in accordance to the macro-economic factors which work best for the country. If the economy of the country indicates high probability for the country to accept FDI in a particular sector, the policies should be formulated accordingly to open barriers in order to invite FDI in the country in the respective country.

Methodology Undertaken for Analysis

Dynamic relationship between FDI and macro-economic factors

According to Ernst and Young's 2010 European Attractiveness Survey, India is ranked as the fourth most attractive foreign direct investment destination in 2010.

In their research paper "On Dynamic relationship between FDI and Macro-economic factors: The India Experience", Tripathi, Seth and Bhandari (2011) discuss that the factors that attracted investment in India are stable economic policies, availability of cheap and quality human resources, and opportunities of new unexplored markets. Mostly FDI are flowing in service sector and manufacturing sector recorded very low investments. Besides these factors, there are a number of macroeconomic factors that are expected to affect FDI in India.

This research considers the following macroeconomic factors/determinants affecting FDI:

Market Size: The aim of FDI in emerging developing countries is to tap the domestic market, and thus market size does matter for domestic market oriented FDI. Market size is generally measured by GDP, per capita income or size of the middle class. The size of market and per capita income are the indicators of the sophistication and breadth of the domestic market. Thus, an economy with a large market size (along with other factors) should attract more FDI.

Pfefferman and Madarassy (1992) examine that market size is important for FDI as it provides potential for local sales, greater profitability of local sales to export sales and relatively diverse resources, which make local sourcing more feasible. Thus, a large market size provides more opportunities for sales and also profits to foreign firms, and therefore attracts FDI (Wang and Swain, 1995: Moore, 1993; Schneider and Frey, 1985; Frey, 1984). Here it’s given by (Real GDPi,t- Real GDPi,t-1)/Real GDPi,t-1. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Bloomberg.

Exchange Rate: The appreciation and depreciation of currency does have an impact on the price of exports and imports making their comparative position and competitiveness in international markets fluctuate sometimes towards advantage to the home country and sometimes disadvantage.

It was argued by Aliber (1970) that firms which come from countries that have strong currency are able to financially support their foreign direct investments in a much better manner than those firms which come from countries that have a inherently weak currency. The link between the interest rate and exchange rate also makes it more beneficial for a firm to go in for a FDI as the currency appreciates.

Similarly the reduction in competitiveness of exports also may make the country look for better ways of entering international business. Thus, there appears to be a sure link between the exchange rate and outward FDI, and the relation is expected to be positive for outflows and negative for inflows as shown in the model. The indicator was calculated relative to the U.S. dollar with different base years for different countries. Hence we have EXRit/EXRib*CPIUSt/CPIit where EXR is the exchange rate per U.S. dollar in domestic currency in period t of country i. Here ib refers to the base year of the countries. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Oanda.com.

Trade Openness: Trade Openness refers to the degrees to which countries or economies permit or have trade with other countries or economies. It is calculated as export plus import as percentage of GDP. It is also considered to be one of the key determinants of FDI. The FDI activities of the firms are constrained when there is protectionist policy followed; therefore these activities are encouraged when the country embarks on the path of liberalization.

Scaperlanda (1992) analyzes that the reasons for this change are many. The capital controls are relaxed which makes the flow of capital and funds for investment between countries easier and faster. The management skills of marketing products internationally, innovations, technology advancements and knowledge of external operations become unrestricted in an economy that is export oriented.

Krykilis (2003) studies that the firms of an open economy may choose retaliation against the competition that FDI has brought in by different modes and may also involve themselves in the home markets of the import producing countries. The exports plus imports level of a country is taken as a variable to represent this degree of economies openness i.e. (Exportsi,t + Importsi,t)/GDPi,t. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Bloomberg.

Interest rate: Foreign operations require significant commitment in capital, especially if they are undertaken in capital intensive sectors where production is characterized by extensive economies of scale, as the case is for most FDI. If there is abundant capital in the home country, that may become one of the primary reasons for going in for foreign investment by large firms. Such firms would have adequate financial means and they would also be able to access the capital markets much more efficiently than small capital starved firms. The opportunity cost of capital for such firms also comes down due to relatively low interest rate which occurs as a result of capital abundance. Therefore, it is expected that if the interest rate of the home country is low, then there would be high propensity for FDI inflows and vice versa. Here we have taken the real interest rate of the countries.

Profitability: The profitability of investment is one of the key determinants affecting FDI. Thus the rate of return on investment in a host country influences the investment decision. Foreign firms or MNCs would be more interested in investing in other countries if the companies there are doing well and are profitable. S&P 500 is taken as a proxy for measuring the profitability of investment.

Unemployment Rate: FDI have helped India to attain a financial stability and economic growth with the help of investments in different sectors. FDI has boosted the economic life of India and on the other hand there are critics who have blamed the government for ousting the domestic inflows. After liberalization of Trade policies in India, there has been a positive GDP growth rate in Indian economy. Foreign direct investments helps in developing the economy by generating employment to the unemployed, Generating revenues in the form of tax and incomes, Financial stability to the government, development of infrastructure, backward and forward linkages to the domestic firms for the requirements of raw materials, tools, business infrastructure, and act as support for financial system. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Bloomberg.

IIP: Index of Industrial Production: Investors can use the IPI of various industries to examine the growth in the respective industry. If the IPI is growing month-over-month for a particular industry, this is a sign that the companies in the industry are performing well. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Bloomberg.

Inflation: Bengoa and Sachez-Robles (2003) suggested that Countries with high inflation generally require higher rates of return to compensate for the higher risk associated with inflation that is present within the country. FDI is motivated by investment efficiency and this is generally affected by the condition in degree of inflation. Inflation needs to be stable in order to encourage greater FDI. In this research, wholesale price index (WPI) is taken to measure the inflation. A high rate of inflation would mean lower returns on FDI for the foreign investor. This also represents that the country has macroeconomic instability where the government may have certain budget problems.

The country has a weak economic condition and has poor management in the economy. Increasing inflation signals an economy with internal instability with unstable monetary policy. Hence, FDI inflow will have a decreasing effect. Here we have taken inflation as (CPIi,t-CPIi,t-1)/CPIi,t-1 where CPI is the consumer price index in period t for country i. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Bloomberg.

Total FDI flows: (FDI inflowsi,t + FDI outflowsi,t)/GDPi,t

Tax Revenue Indicator: Tax revenues in country i at time t in local currency unit (LCU) divided by GDP in current LCU i.e. Tax revenuei,t/GDPi,t. This data has been taken for 7 countries from 2000 to 2012 on quarterly basis from Bloomberg.

Methodology 1:

Panel Data Regression:

A panel dataset contains observations on multiple entities (individuals), where each entity is observed at two or more points in time. With panel data we can control for factors that:

• Vary across entities (states) but do not vary over time

• Could cause omitted variable bias if they are omitted

• are unobserved or unmeasured – and therefore cannot be included in the regression using multiple regression

Panel Data regression has been applied in this research to carry out regression for 6 countries – China, Indonesia, Mexico, Brazil, Thailand and Russia simultaneously and observe the results and eventually, apply them in the Indian scenario. Since FDI in retail sector data is not explicitly available for any country, the data about its presence or not has been taken. Hence, FDI in retail in its binary format is taken. A 1 indicates FDI in retail was present in a particular country while a 0 indicates it was not present.

Hence various macroeconomic factors have been analysed vis-a-vis FDI in retail using quarterly data for the period starting from January 2000 to December 2011 for five countries – Brazil, Russia, China, Mexico, Indonesia and Thailand. It is important to analyse the impact of FDI on macro-economic factors over a period of time. Hence all the seven macro-economic factors have been analysed with respect to FDI in retail and other significant factors individually.

Simultaneously, it is important to examine the role played by macro-economic factors in attracting FDI in any country. Thus, Logit-Probit model has been applied to understand the significance of macro-economic factors in attracting FDI in retail in any country.

Multicollinearity Tests

VIF Approach: For each dependent variable Xi, calculate the variance inflation factors:

Y= ao +a1 X1+ a2X2 + a3X3

X2= b0 + b1X1+b2X3

VIFi = 1/(1-Ri2)

where Ri2 is the coefficient of determination of the model that includes all predictors except the ith predictor. If VIF >5, then there is a problem with multicollinearity.

Correlation Matrix: Construct a correlation matrix and look for high values. If any value exceeds 0.8, a correlation exists between the two variables. Reject one of the variable and analyse the regression including one of the correlated variables only.

Logit-Probit Model: In dummy regression variable models, it is assumed implicitly that the dependent variable Y is quantitative whereas the explanatory variables are either quantitative or qualitative. There are certain type of regression models in which the dependent or response variable is dichotomous in nature, taking a 1 or 0 value. The dependent variable is of the type which elicits a yes or no response. There are special estimation / inference problems associated with such models. The most commonly used approaches to estimating such models are the Linear Probability model, the Logit model and the Probit model.

The Logit Model

Logit regression (logit) analysis is a uni/multivariate technique which allows for estimating the probability that an event occurs or not, by predicting a binary dependent outcome from a set of independent variables. The logit of a number p between 0 and 1 is given by the formula:

Logit (Pi)= ln[Pi/(1-Pi)] = Zi = a0 + a1Xi

In this equation, Pi is the probability of FDI in retail being brought to India while (1-Pi) is the probability of FDI in retail being not brought to India. Hence the hypothesis behind constructing Pi is that what should be the policy of India compared to other countries where FDI in retail has already been allowed to a certain extent. The base of the logarithm function is the natural logarithm e. Negative logits represent probabilities below 0.5 and positive logits correspond to probabilities above 0.5. The logit transformation is one-to-one. The inverse transformation is sometimes called the antilogit, and allows us to calculate probability.

The Probit Model

A probit model is a popular specification for an ordinal or a binary response model that employs a probit link function. As such it treats the same set of problems as does logistic regression using similar techniques. The probit model is most often estimated using the standard maximum likelihood procedure, such an estimation being called a probit regression. Probit Model assumes that the function follows a normal (cumulative) distribution, and latent variable probit can be derived from the following model:

Probit = bo +b1X1 +b2X2 +error

Conclusion

Small retailers will not be crowded out, but would strengthen market positions by turning innovative/ contemporary. Growing economy and increasing purchasing power would more than compensate for the loss of market share of the unorganized sector retailers. There will be initial and desirable displacement of middlemen involved in the supply chain of farm produce, but they are likely to be absorbed by increase in the food processing sector induced by organized retailing. Innovative government measures could further mitigate adverse effects on small retailers and traders. Farmers will get another window of direct marketing and hence get better remuneration, but this would require affirmative action and creation of adequate safety nets. Consumers would certainly gain from enhanced competition, better quality; assured weights and cash memos. The government revenues will rise on account of larger business as well as recorded sales Elimination of intermediaries, control on post harvest wastage, enhanced operational efficiency, though competition in the market would ultimately be beneficial for consumer. We have nearly a billion of those five billion poor consumers residing all over the world. So, India would become a natural laboratory for creating both low cost and sustainable products. According to Ombeer Singh Tyagi, senior director at the Associated Chambers of Commerce and Industry of India, said he was confident that the Cabinet’s decision to revive a plan to allow FDI in multi-brand retail ―is definitely going to give a great push in terms of connecting consumers to producers and cutting down on middlemen. But according to the report of Parliament committee which has done a comprehensive study, examining a number of witnesses, individuals, NGOs and trade bodies, travelling around the country, studying reports and experiences of other nations and asking questions of government departments, more people would lose jobs that the number that would find work. They said that FDI in retail would destroy large numbers of small and marginal farmers. They cautioned against the probable monopolistic behavior, predatory pricing and attendant consequences. The Committee found that unorganized retail provides livelihoods for 40 million people, that is, for about 8% of the country’s workforce. Referring to the projection of FDI in retail creating 2 million jobs, the Committee said that this was exaggerated and that this ignores 200 million people who depended on retail trade for a living. The Committee was not only critical of FDI in retail, but also of any large corporate in retail business. The Committee drew a dismal picture of the effect of FDI in retail on the ―Mango Man‖.

Joseph Stiglitz, an American economist & a former World Bank chief economist expressed his views on FDI in retail in India. He asks, ―Why India needs foreign entrepreneurs in any sector, particularly the retail?‖ He then talks of the power of Wal-Mart to drive down prices and suggests that they will use that power to have Chinese goods displace Indian goods. Next, he draws attention to Wal-Mart’s abusive labour practices. He asks, ―Why would you want to import such practices into India?‖ Why indeed? The foreign retail lobby reportedly spent over Rs52 crore in India. Could that be the reason why? He also talked about increasing inequality that Indian reforms are ushering in, accompanied by corruption. Atlast, 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 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/sabji mandi. Consumers will shop in accordance with their utmost convenience, where ever they get the lowest price, max variety, and a good consumer experience. 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.

In the end, based on evidence and experiences of TNR in other emerging economy of limited success, and considering the bottlenecks in India, diverse customer demographics, and fragmented industry, this opening up will attract very few global retailers particularly in food and grocery segment. Out of top 250 retailers, the 36 retailers who are successful in China are most likely to enter into India as 17 retailers out of this have already entered India, hence scope for many global players to enter is very limited. At best, the global players already present in India will expand faster due to opening up.

As retailing still is very local industry (over 90%), the FDI in multibrand retailing will only benefit existing organized players in terms of attracting foreign capital and will not change significantly the retail landscape in terms of formats proliferations benefiting customers, generating huge employment or investment in supply chain or back end investment as has been envisaged in the policy. Many TNRs will use online route to attract Indian consumer to start with before setting up physical presence to test the market.

Instead of paying too much attention to FDI and banking on it as game changer, Indian Government should fast track infrastructure especially road development, set up economic zones for warehousing facility, streamline labour laws, planned urbanisation to ensure adequate availability of quality real estate, high street and implement GST to facilitate modern organized retail to takeoff in India.

At the end of the day, It does not matter whether it the local or foreign retail players leading this next wave of retail revolution in India as long as Indian consumer benefits in terms of access to innovative retails formats, best practices and availability of goods and services from all over the world along with great shopping experience.