1. FDI in India:
An analysis on the impact of FDI in
India’s Retail sector
Submitted By:
Subhajit Ray
Department of Humanities and Social Sciences
IIT Kharagpur
Kharagpur-721302
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2. Introduction:
Initially the Indian policy makers were quite apprehensive about the flow of
foreign capital into the economy. This can be attributed to the colonial past which
saw large investments being made by their colonial rulers in the form of major
infrastructure instruments like railways but only to make huge gains for
themselves and sucking the host country of its resources. But currently the global
economy has been witnessing an incessant form of economic growth
characterized by the flow of capital from the developed world to the developing
countries. During the 1990s Foreign Direct Investment (FDI) became the single
largest source of external finance for the developing countries. When faced with
an economic crisis during the same period the Indian policy makers had to open
up the Indian market and accordingly India has been seeing a consistent increase
in FDI inflows.
Indian economy has been showing high growth rates in the post liberalization
era. In the last fiscal year according to the Planning commission’s data the Indian
economy recorded a growth rate of 8.6% and 8% in the year before. This is reason
enough to call it a high performing economy. All Multi National Enterprises
(MNEs) have been eyeing the Indian market ever since they have opened up. The
policy makers have been vigorously pursuing the reforms program as they believe
that high growth has been the resultant of economic liberalization. FDI has been
seen as a dominant determinant to achieve high rate of economic growth because
of the ease with which it can bring in scarce capital, triggers technology transfer
and enhances the efficiency by increasing the competitiveness of the market. Also
FDI as a form of policy instrument to raise capital is usually preferred over other
forms of external finance because they are non-debt creating, non-volatile and
their returns depend on the performance of the projects financed by the
investors. FDI is successful in human capital formation, increases total factor
productivity and efficiency of resource use. But such benefits are highly
dependent on the policies of the host government. It is furthermore described as
a source of economic development, modernization, and employment generation.
Several factors both political and apolitical have led to a greater acceptance of
FDI. The envisioned role of FDI has evolved from that of a tool to solve the crisis
under the license raj system to that of a modernizing force of the Indian
economy. In support of their endeavor the policy makers have often cited the
example of the Chinese experience of achieving high growth rate through foreign
direct investment.
India has opened up its economy and allowed MNEs in the core sectors such as
Power and Fuels, Electrical Equipments, Transport, Chemicals, Food Processing,
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3. Metallurgical, Drugs and Pharmaceuticals, Textiles, and Industrial Machinery as
a part of reform process started in the beginning of 1990s. Currently FDI is also
permissible in the Telecommunications, Banking, Insurance and IT sector.
Currently there is huge debate going on about allowing FDI in retail. This paper
aims to discuss the critical aspects of FDI in India, present a case study on the
success of reforms in the telecommunications sector, analyze both sides of the
arguments currently going on regarding FDI in retail and conclude with
suggestive measures on the part of the government which can eliminate the
negative effects of allowing FDI in India’s retail sector.
Assessing the impact of FDI on host economy- a review of
various economic literatures:
FDI inflow into the core sectors is assumed to play a vital role as a source of
capital management and technology in countries of transition economies. It
implies that FDI can have positive effects on a host economy’s development effort
(Caves, 1974; Kokko, 1994; Markusen, 1995; Carves, 1996; Sahoo, Mathiyazhagan
and Parida 2001). It has been argued that FDI can bring the technological
diffusion to the sectors through knowledge spillover and enhances a faster rate of
growth of output via increased labour productivity. There have been a lot of
empirical studies to assess the impact of FDI in developing economies and the
results to this date have been found to be mixed. Many reports have questioned
the positive effects of the FDI inflow in the host country. Some studies done
earlier had found that FDI has a negative impact on the growth of the developing
countries (Singer,1950; Griffin, 1970; Weisskof, 1972). Multinational Enterprises
(MNEs) in the name of FDI may drive out the local firms because of their
oligopolistic power, and also, the repatriation of profit may drain out the capital
of the host country. The main argument in this regard was that the main
component of FDI in less developing countries was in the primary sector. Then
these primary products were exported to the developed nations and processed for
import back to the developing nations and thus resulted in the host nations
receiving a lesser value for their resources. Hanson (2001) argues that evidence
that FDI generates positive spillovers for host countries is weak. In a review of
micro data on spillovers from foreign-owned to domestically owned firms Gorg
and Greenwood (2002) conclude that the effects are mostly negative. Lipsey
(2002) takes a more favorable view from reviewing the micro literature which
argues that there is evidence of positive effect. He also argues that there is need
for more consideration of the different circumstances that obstruct or promote
positive spillovers. Rodan (1961), Chenery and Strout (1966) in the early 1960s
argued that foreign capital inflows have a favorable effect on the economic
efficiency and growth towards the developing countries. It has been explained
that FDI could have a favorable short-term effect on growth as it expands the
economic activity. However, in the long run it reduces the growth rate due to
dependency, particularly due to “decapitalization” (Bornschier, 1980). This is due
to the reason that the foreign investors repatriate their investment by contracting
the economic activities in the long run. FDI is an important vehicle for the
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4. transfer of technology and knowledge and it demonstrates that it can have a long
run effect on growth by generating increasing return in production via positive
externalities and productive spillovers. Thus, FDI can lead to a higher growth by
incorporating new inputs and techniques (Feenstra and Markusen, 1994). Aitken,
et al. (1997) showed the external effect of FDI on export with example of
Bangladesh, where the entry of a single Korean Multinational in garment exports
led to the establishment of a number of domestic export firms, creating the
country’s largest export industry. Hu and Khan (1997) attribute the spectacular
growth rate of Chinese economy during 1952 to 1994 to the productivity gains
largely due to market oriented reforms, especially the expansion of the non-state
sector, as well as China’s “open-door” policy, which brought about a dramatic
expansion in foreign trade and FDI. A study by Xu (2000) found a strong
evidence of technology diffusion from U.S. MNEs affiliated in developed
countries (DCs) but weak evidence of such diffusion in the less developed
countries (LDCs). It concluded that in order to benefit from the technology
transfer by the MNEs a country needs to achieve a basic minimum human capital
threshold.
A recent study by Banga (2005) demonstrates that FDI, trade and technological
progress have differential impact on wages and employment. While higher extent
of FDI in an industry leads to higher wage rate in the industry, it has no impact
on its employment. On the other hand, higher export intensity of an industry
increases employment in the industry but has no effect on its wage rate.
Technological progress is found to be labor saving but does not influence the
wage rate. Further, the results show that domestic innovation in terms of
research and development intensity has been labor utilizing in nature but import
of technology has unfavorably affected employment in India. The study by
Sharma (2000) concluded that FDI does not have a statistically significant role in
the export promotion in Indian Economy. This result is also confirmed by the
study of Pailwar (2001) and the study also argues that the foreign firms are more
interested in the large Indian market rather than aiming for the global market.
The study by Sahoo and Mathiyazhagan (2003) also support the view that FDI in
India is not able to enhance the growth of the economy. Though there is a
common consensus among all the studies in the Indian context that FDI is not
growth stimulant rather it is growth resultant. A study by Dr Maathai K.
Mathiyazhagan(2005) demonstrate that the flow of FDI into the sectors has
helped to raise the output, labour productivity and export in some sectors but a
better role of FDI at the sectoral level is still expected. Results also reveal that
there is no significant co-integrating relationship among the variables like FDI,
Growth rate of output, Export and Labour Productivity in core sectors of the
economy. This implies that when there is an increase in the output, export or
labour productivity of the sectors it is not due to the advent of FDI. Thus, it could
be concluded that the advent of FDI has not helped to wield a positive impact on
the Indian economy at the sectoral level. Thus, in the eve of India's plan for
further opening up of the economy, it is advisable to open up the export oriented
sectors so that a higher growth of the economy could be achieved through the
growth of these sectors.
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5. Foreign Direct Investment policy of India:
Foreign direct investment policy of the government of India has been gradually
liberalized. As early as in the year 1948 and 1956 (two industrial policy
resolutions) government policy clearly reflected the need to supplement foreign
capital and technology for rapid economic growth. The core objective of the
foreign capital policy was that the control of industrial undertaking should
remain in the Indian hands. However, the government had granted permission in
certain cases for allowing establishment of exclusive foreign enterprises. Foreign
capital was preferred in specific areas which bring in new technology and
establish joint ventures with Indian partners. Government also granted tax
concessions to foreign enterprises and streamlined industrial licensing
procedures to accord early approvals for foreign collaborations. In the case of 100
per cent export of output, foreigners were allowed to establish industrial units. It
needs to be noted here that under the Foreign Exchange Regulation Act (FERA)
1974 only upto 40 per cent of the equity holding of the foreign firms were
permitted. Foreign investment was permitted under designated industries along
with restrictions in terms of local content clauses, export obligations, promotion
of R&D and prohibition by law the use of foreign brands (Hybrid domestic
brands were promoted such as Ford Escort and Hero Honda). It needs to be
pointed out here that the restrictions have been flouted frequently and
relaxations were also granted. This process has culminated into gradual
liberalization of government policy towards foreign capital. It is reflected in
continuous increase in the number of approvals granted. During the period 1961-
1971, the number of foreign collaborations approved was 2475 which were
increased to 3041 during the period 1971-1980. There was dramatic increase in
the foreign collaboration approvals during the period 1981-1990 (7436
collaborations were approved). This policy enabled to build domestic
technological capability in many branches of industry but generally considered
very restrictive. It has been widely accepted that protection of domestic industry
for a longer period of time resulted into high cost production structure along with
poor quality. Foreign direct investment policy announced by the government of
India in July 1991 was regarded as a dramatic departure from the earlier
restrictive and discretionary policy towards foreign capital. The FDI policy of
1991 proposed to achieve objective of efficient and competitive world class Indian
industry. Foreign investment was seen as a source of scarce resource, technology
and managerial and marketing skills. The major feature of policy regarding
foreign investment up to 51 per cent of equity holding was permitted too.
Automatic approvals were also allowed to foreign investment up to 51 per cent
equity in 34 industries as well as to foreign technology agreements in high
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6. priority industries. The Foreign Investment Promotion Board (FIPB) was set up
to speedily process applications for approvals of the cases which were not covered
under the automatic route. Laws were amended to provide foreign firms the
equivalent status as the domestic ones. Government of India, however, put in
place the regulatory mechanism to repatriate payments of dividends through
Reserve Bank of India so that outflows are balanced through export earnings
during stipulated period of time. Further liberalization measures with regard to
foreign investment were taken during 1992-93. The dividend balance conditions
were revoked except in the case of consumer goods industries. Non Resident
Indian (NRI) and Overseas Corporate Bodies (OCB) were permitted in high
priority industries to invest up to 100 per cent equity along with repatriation of
capital and income. Apart from expansion of the area of operation for FDI in
many new economic activities, the existing companies were also allowed to
increase equity participation up to 51 per cent along with disinvestment of equity.
Foreign direct investment policy has been changed frequently since 1991 to make
it more transparent and attractive to the foreign investors. FDI up to 100 per cent
is allowed under automatic route for all sectors/activities except activities that
attract industrial licensing, proposals where foreign investors had an existing
joint venture in same field, proposals for acquisition of shares in an existing
Indian company in the financial sector and those activities where automatic route
is not available. The only sectors/activities where FDI is not permitted are
agriculture and plantations excluding tea plantations, real estate business
(excluding development of townships, housing, built up infrastructure and
construction development projects-NRI/OCB investment is allowed for the real
estate business), retail trade, lottery, security services and atomic energy.
Government has simplified procedure, rules and regulations on a regular basis
since 1991 to make Indian economic environment foreign investor friendly.
Attempt has been made through FDI policy to make India the hub of global
foreign direct investment as well as in economic activities.
Trend and Dimension of FDI inflow in India:
The dimensions of the FDI flows into India could be explained in terms of its
growth and size, sources and sectoral compositions. The growth of FDI inflows in
India was not significant until 1991 due to the regulatory policy framework. It
could be observed that there has been a steady build up in the actual FDI inflows
in the post-liberalization period (Figures 1.1 and 1.2). Actual inflows have steadily
increased from US $ 143.6 million in 1991 to US $ 37763 million in 2010. This
results in an annual average growth rate close to 6 per cent. However, the pace of
FDI inflows to India has definitely been slower than some of the smaller
developing countries like Indonesia, Thailand, Malaysia and Vietnam. In fact,
India had registered a declining trend of FDI inflows and the FDI- GDP ratio
especially in 1998 and 2003 could be attributed to many factors, including the US
sanctions imposed in the aftermath of the nuclear tests, the East Asian melt-
down and the perceived Swadeshi image different political parties, which was
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7. ruling government during this period in India. It is also important to note that
the financial collaboration has out numbered the technical collaboration over the
years. But since 2006 India has seen a remarkably higher growth of FDI in
accordance with the general trends of the global economy with a slight dip in the
year 2009-2010. This can be attributed to the recessionary situation in the global
economy. In recent years, India’s share in the global FDI inflows has increased
substantially.
Year wise FDI inflow in the post reforms era (1990-2001)
1999-2000 2439
1998-1999
1997-1998
1996-1997
FDI
1995-1996
1994-1995
1993-1994
1992-1993
0 1000 2000 3000 4000
US $ MILLIONS
Figure 1.1
Year 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-00
FDI 393 654 1374 2141 2770 3682 3083 2439
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8. However, China receives a greater percent of global FDI inflows. India’s effort
have not yet realized in comparison to the changes which has been made in the
FDI policy.
Year wise revised FDI inflow since 2000-2001 with expended coverage to
approach International Best Practices.
2009-2010
2008-2009
2007-2008
2006-2007
2005-2006
FDI
2004-2005
2003-2004
2002-2003
2001-2002
2000-2001
0 10000 20000 30000 40000
US $ MILLIONS
Table 1.2
Year 2000- 2001- 2002- 2003- 2004- 2005- 2006- 2007- 2008- 2009-
01 02 03 04 05 06 07 08 09 10
FDI 4029 6130 5035 4322 6051 8961 22826 34835 37838 37763
Capital goods sector has more or less been bypassed by FDI. This clearly points
out the tendency of foreign investment to exploit the pent up domestic demand
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9. for consumer durable goods. Further more, there is a gradual increase in the
mergers and acquisitions during the 1990s which show a tendency of FDI inflows
to acquire existing industrial assets and managerial control without actually
engaging in new productive activities (Nagraj, 2006). India’s large size of
domestic market seems to have been the major attraction for foreign firms.
SHARE OF TOP INVESTING COUNTRIES FDI EQUITY INFLOWS
Others 19
France 2
Germany 2
Cyprus 4
Japan 4
Country
%
Netherlands 4
U.K 5
U.S.A. 7
Singapore 9
Mauritius 42
0 10 20 30 40 50
%age to total Inflows (in terms of US $)
The analyses of the origin of FDI inflows to India show that the new policy has
broadened the source of FDI into India. There were 86 countries in 2000 which
increased to 106 countries in 2003 as compared to 29 countries in 1991 whose
FDI was approved by the Indian Government. The country-wise analysis of the
FDI inflows shows that Mauritius, which was not in the picture till 1992, is the
highest contributor of FDI to India. A major share of such investment is
represented by the holding companies of Mauritius set up by the US firms. It
means that the investment flowing from the tax havens is mainly the investment
of the multinational corporations headquartered in other countries. Now an
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10. important question arises as to why the US companies have routed their
investment through Mauritius. It is because, firstly, the US companies have
positioned their funds in Mauritius, which they like to invest elsewhere.
Secondly, because the tax treaty between Mauritius and India stipulates a
dividend tax of five per cent, while the treaty between Indian and the US
stipulated a dividend tax of 15 per cent (World Bank, 1999).
Telecommunications Sector- A success story:
Further narrowing of FDI in sub-sectors reveals the success story of the
telecommunications sector. Research into Telecommunications furthers the
haphazard nature of FDI investment and policy making. The current process for
FDI in telecommunications can be attributed to two policies that were
undertaken by the government: National Telecom Policy of 1994 and New
Telecom Policy of 1999. Before the economic reforms ‘teledensity’ was low,
infrastructure growth was slow, and the lack of reforms restricted investments
and adoption of new technologies. The existing legislative and regulatory
environment needed major changes to facilitate growth in the sector. It was 1991
when the programme was undertaken to expand and upgrade India’s vast
telecom network. The programme included: complete freedom of telecom
equipment manufacturing, privatisation of services, liberal foreign investment
and new regulation in technology imports.
Simultaneously, the government-managed Department of Telecommunications
(DoT) was restructured to remove its monopoly status as the service provider.
The government programme was formalised on a telecom policy statement called
National Telecom Policy 1994 on 12 May 1994. However the 1994 policy was not
sufficient to make the India’s telecommunications sector fully open and
liberalised. The incumbent monopoly (DoT) was indifferent in implementing the
national telecom policy effectively due to its lack of commitment. This paved the
way for designing a new policy framework for telecommunications which was
called the New Telecom Policy 1999.
The New Telecom Policy 1999 (NTP99) was developed after the reform process
began in 1991. The interest of the government led to the new policy. As a result in
addition to the sectoral caps, the government policy played a major role in the
liberalization of the telecom sector. As a result a large number of private
operators started operating in the basic/mobile telephony and Internet domains.
Teledensity has increased, mobile telephony has established a large base, the
number of Internet users has seen a steep growth, and large bandwidth has been
made available for software exports and IT-enabled services, and the tariffs for
international and domestic links have seen significant reductions. Total FDI in
Telecommunications sector is over US $ 15 billion. The takeover of Hutch by
Vodafone is one of the largest FDI deals for an amount of US $ 11 billion. Tariff
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11. rates are the lowest in the whole world and there are more than 250 million
users.
The Retail sector in India:
The retail industry in India is one of the fastest growing. Even without FDI
driving it, the corporate owned retail sector is expanding at a furious rate. AT
Kearney, the well-known international management consultancy, recently
identified India as the ‘second most attractive retail destination’ globally from
among thirty emergent markets. It has made India the cause of a good deal of
excitement and the cynosure of many foreign eyes. With a contribution of 14% to
the national GDP and employing 7% of the total workforce (only agriculture
employs more) in the country, the retail industry is definitely one of the pillars of
the Indian economy.
.
Trade or retailing is the single largest component of the services sector in terms
of contribution to GDP. Its massive share of 14% is double the figure of the next
largest broad economic activity in the sector. The retail industry is divided into
organised and unorganised sectors. Organised 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. Unorganised
retailing, on the other hand, refers to the traditional formats of low-cost retailing,
for example, the local kirana shops, owner manned general stores, paan/beedi
shops, convenience stores, hand cart and pavement vendors, etc.
A simple glance at the employment numbers is enough to paint a good picture of
the relative sizes of these two forms of trade in India – organised trade employs
roughly 5 lakh people whereas the unorganized retail trade employs nearly 3.95
crores. Given the recent numbers indicated by other studies, this is only
indicative of the magnitude of expansion the retail trade is experiencing, both due
to economic expansion as well as the ‘jobless growth’ that we have seen in the
past decade. It must be noted that even within the organised sector, the number
of individually-owned retail outlets far outnumber the corporate-backed
institutions. Though these numbers translate to approximately 8% of the
workforce in the country (half the normal share in developed countries) there are
far more retailers in India than other countries in absolute numbers, because of
the demographic profile and the preponderance of youth, India’s workforce is
proportionately much larger. That about 4% of India’s population is in the retail
trade says a lot about how vital this business is to the socio-economic equilibrium
in India.
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12. Arguments against adoption of FDI in India’s Retail sector:
FDI driven modern retailing is labour displacing to the extent that it can only
expand by destroying the traditional retail sector. Till such time we are in a
position to create jobs on a large scale in manufacturing, it would make eminent
sense that any policy that results in the elimination of jobs in the unorganised
retail sector should be kept on hold. Studies suggest that about 5 crore jobs will
be lost and only 20 lakhs new jobs will be created.
With their incredibly high capital FDI driven retailing units such as Wal-Mart
will be able to sustain losses for many years till its immediate competition is
wiped out. This is a normal predatory strategy used by large players to drive out
small and dispersed competition. This entails job losses by the millions. Even the
organised retail sector may face serious problems and may eventually be wiped
out.
The FDI driven retail units will typically sell everything, from vegetables to the
latest electronic gadgets, at extremely low prices that will most likely undercut
those in nearby local stores selling similar goods. They would be more likely to
source their raw materials from abroad, and procure goods like vegetables and
fruits directly from farmers at pre-ordained quantities and specifications. This
means a foreign company will buy big from India and abroad and be able to sell
low – severely undercutting the small retailers. Once a monopoly situation is
created this will then turn into buying low and selling high.
Such re-orientation of sourcing of materials will completely disintegrate the
already established supply chain. In time, the neighbouring traditional outlets are
also likely to fold and perish, given the ‘predatory’ pricing power that a foreign
player is able to exert. As Nick Robbins wrote in the context of the East India
Company, “By controlling both ends of the chain, the company could buy cheap
and sell dear”
It is true that it is in the consumer’s best interest to obtain his goods and services
at the lowest possible price. But this is a privilege for the individual consumer
and it cannot, in any circumstance, override the responsibility of any society to
provide economic security for its population. Clearly collective well-being must
take precedence over individual benefits. The primary task of government in
India is still to provide livelihoods and not create so called efficiencies of scale by
creating redundancies.
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13. Arguments in favour of adoption of FDI in India’s Retail
sector:
The main driver for adoption of Retail in India seems to be the recognition that
the Indian economy faces serious supply-side constraints, particularly in the
food-related retail chains. The government would like to improve back-end
infrastructure, and ultimately reduce post-harvest losses and other wastage.
There is also a general concern, highlighted by the persistence of food inflation,
that intermediaries obtain a disproportionate share of value in this chain and
farmers receive only 15% of the end consumer price. Now the farmers will be able
to get a better price for their products. With easy credit availability through
foreign direct investment the situation of farmer suicides in India will improve.
With foreign capital flowing into the economy the current inflationary situation
will be tamed.
One key point is that we must differentiate between the interests of consumers,
who constitute our population of nearly 115 crore, from the interests of retailers,
who may number near five crore. The larger supermarkets, which tend to become
regional and national chains, can negotiate prices more aggressively with
manufacturers of consumer goods and pass on the benefit to consumers.
Undoubtedly, lower prices psychologically propel buyers to spend more than they
otherwise would. The resulting growth in private consumption creates jobs. The
tax collection of the government will improve as it is impossible to tax the
unorganised retail sector. The revenue collected by the government can be used
for infrastructure development.
Also India has had several retailers with deep pockets and access to skills. That
they have not been able to swamp the domestic small retailer says something
about consumer behaviour and small retail’s resilience. The argument that the
advent of FDI and supermarkets will displace a large number of kirana shops is
similar to the argument used during the era of industrial licensing, which was
meant to protect small-scale industries. But eventually the inefficiencies and
quality standards of the protected small-scale companies become apparent even
to socialist politicians and licensing was abolished.
Even a modest chain of 200 supermarkets, to be set up all over India in selected
towns and cities in the next three years, will require an investment of about Rs
2,000 crore (Rs 20 billion), at the rate of Rs 10 crore (Rs 100 million) per
supermarket to cover the infrastructure and working capital. Each supermarket
may take 2 or 3 years before it becomes profitable. There is a risk that a few of
them may even fail. No Indian entrepreneur will be willing and able to commit
this level of investment and undertake the risks involved. That is where the
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14. international experience and skills that may come with FDI would provide the
confidence and capital.
Apart from this, by allowing FDI in retail trade, India will become more
integrated with regional and global economies in terms of quality standards and
consumer expectations. Supermarkets could source several consumer goods from
India for wider international markets. India certainly has an advantage of being
able to produce several categories of consumer goods, viz. fruits and vegetables,
beverages, textiles and garments, gems and jewellery, and leather goods. The
advent of FDI in retail sector is bound to pull up the quality standards and cost-
competitiveness of Indian producers in all these segments. That will benefit not
only the Indian consumer but also open the door for Indian products to enter the
wider global market.
Suggestive measures to eliminate the negative effects of FDI
in India’s Retail sector:
FDI in the retail sector should be accompanied by policy formulations that
encourage the growth of manufacturing sector in India. A growing manufacturing
sector can accommodate the people who will loose their jobs due to the adoption
of retail in India. FDI should be aggressively promoted in case of relatively less
sensitive sectors like entertainment, R&D etc. Moreover import duty should be
imposed to protect domestic production units.
Strict labour laws should be imposed to ensure that no management jobs are
outsourced. The government should also ensure the local population gets
competitive wages and the working environment is proper. Jobs should be
reserved for the poor people. If the language of operation is English then it will
act as a hindrance for job creation for the underprivileged people. Hence Hindi
and local languages as a mode of operation should be encouraged.
Cooperative societies should be formed for the farmers and other agricultural
suppliers to take care of their rights and to ensure that they are getting a fair price
from the FDI driven big retail units.
Strict corporate governance should be ensured to prevent the acquisition of local
business units by foreign firms and to promote investor friendly trade practices.
The foreign retail units should be made to divest a certain percentage of their
equity in the Indian financial markets. Only strict governance can ensure that the
foreign firms adhere to competitive trade practices.
Social infrastructure like schools, colleges and hospitals should be developed to
promote human capital formation as several studies suggest that such initiatives
could enhance the spillover effects of FDI. Furthermore it will help in creating
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15. jobs in the high technology sectors and will put India in the global technology
scenario. Social security should be ensured through different policy measures like
pension plans, employment guarantee programmes and free health care. Strict
environmental laws should be enforced to ensure that the foreign firms do not
indulge in unsustainable trade practices.
Conclusion:
The growth rate of the Indian economy has been very high in the post reforms
era. And hence India has become the cynosure of investment by foreign
multinational enterprises. The relationship between FDI and other macro
economic variables like growth rate, export, employment and productivity has
been found to vary. It has been found that to gain a positive impact of technology
spillovers via FDI the host country should achieve a basic minimum human
capital threshold. Studies exist both in support and against the positive impact of
FDI in the Indian economy. It is self conclusive that the growth of FDI in India is
growth resultant and not growth stimulant. The positive impact of FDI has been
felt in the high technology sectors like telecommunication and IT. The success
story of the telecom sector is a real confidence booster in this regard. It is clearly
visible that the MNEs are more interested in exploiting the Indian markets rather
than investing in capital goods.
The retail sector is one of the fastest growing sectors of India. It also employs a
huge proportion of the population. Hence any measure regarding this sector such
as approval of FDI in the Indian retail sector will have a gigantic impact on
Indian economy. FDI in the Indian retail sector will work wonders in terms of
controlling inflation, creating new jobs and increasing the efficiency and
productivity of the Indian economy. But many believe that it may lead to wide
scale unemployment, drainage of capital from the Indian economy and social
inequity. Hence FDI in India’s retail sector should be accompanied by stringent
policy measures on the part of the government so that the majority of the
population can benefit from the positive spillover effects of FDI. Government
should encourage FDI in the manufacturing sector along with the retail sector to
compensate for the loss of jobs that will be created due to the advent of FDI in
retail. Government should also build social infrastructure to enhance the human
capital formation so that the positive spillover effects of FDI are greatly felt.
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16. References
• FDI in India’s Retail Sector More Bad than Good? By Mohan Guruswamy
Kamal Sharma Jeevan Prakash Mohanty Thomas J. Korah
• Rethinking the linkages between foreign direct investment and
development: a third world perspective By: Shashank P. Kumar
• India’s Economic Growth and the Role of Foreign Direct Investment: By
Lakhwinder Singh 2006.
• India’s FDI inflows Trends and Concepts By K.S. Chalapati Rao & Biswajit
Dhar
• Impact of liberalization on FDI structure in India. By Dr. Gulshan Kumar.
• Impact of foreign direct investment on Indian economy: A sectoral level
analysis. By Dr Maathai K. Mathiyazhagan.
• Foreign Direct Investment in Post-Reform India:
• Likely to Work Wonders for Regional Development? By Peter
Nunnenkamp and Rudi Stracke.
• FDI in India in the 1990s. Trends and issues. By R Nagaraj.
• Economic Reforms, Foreign Direct Investment and its Economic Effects
in India by Chandana Chakraborty Peter Nunnenkamp. March 2006.
• China and India: Any difference in their FDI performances? By Wenhui
Wei. June 2005
• Fact sheet on FDI in India by the Planning Commission.
• Data on GDP growth rate from the Planning Commisiion.
• Wikipedia.com
• Planningcommission.nic.in
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