Impact of FDI in Retail Sector in India

Foreign Direct Investments (FDI) in Retail sector in India
Will the recently introduced FDI reforms in Retail sector benefit the Indian
economy ?
Author(s):
Arvind PALANISAMY
Harshal VED
Master Thesis presentation - FDI in Retail sector in India
Mentor:
Prof. Dr. Vanessa STRAUSS-KAHN
1

Agenda
• Motivation
• Overview: India's retail sector
– Organized and unorganized retailing
– Why India persisted with unorganized sector for so long?
• Timeline: India’s FDI policies
– Pre-liberalization period
– 1991-2010 Reform trends
– Factors leading to opening up of retail sector
• Implications of FDI reforms
– A brief about Regression model
– Will reforms actually aid in minimizing the Current Account Deficit (CAD)?
• Impact of FDI on traditional markets: Evidence from Indonesia
• Conclusion
Master Thesis presentation - FDI in Retail sector in India 2

• Motivation
• Conclusion
Agenda

• Opening of retail sector to Foreign investments by the
Government of India
– A Decision that government had delayed for almost 20 years
– The most important pro-growth reform since 1991
– Possible impact on the employment of 8% of working
population (400 million)
– Could revive India's sluggish growth and narrow the Current
Account Deficit
Significance the current reforms hold
4Master Thesis presentation - FDI in Retail sector in India

• Motivation
• Conclusion
Agenda

• The unorganized retail
– Kirana Stores (Mom & Pop stores)
• Family owned, operate with help of casual labor
• Sell Food grains, milk products and vegetables
• Offer unique credit facility, form personal relations
– Street vendors, push cart and street hawkers
• Sell fruits and vegetables door to door
• Execute perfect price discrimination
• Major Challenges
• Limited Storage facilities
• Managing Working Capital on a day to day basis
Unorganized Retail: 95% of $410 billion
market

• The organized retail
• Hypermarkets, Supermarkets and mini-stores
• Employ 500,000 people (almost all in urban areas)
• Dominated by corporate houses (no prior experience of retailing)
• Would welcome foreign capital and technology expertise to attain profits
• Major Challenges
• Achieving profitability (especially in food and grocery segment)
• Logistic and infrastructure development, Tax rules, regulatory
requirements
• Competition from kirana stores and street vendors
Organized Retail: Showing 15-20% CAGR

• Motivation
• Conclusion
Agenda

• FDI policies post independence
• Focus on shielding sectors (textile, food processing, agriculture, footwear
manufacturing) providing mass employment to low skilled labor
• Foreign investments encouraged in high tech sectors (chemicals,
electronics, industrial machinery, metallurgy)
• 15-20% higher tax rates for foreign companies
• Restrictions imposed on foreign companies to limit their share in equity
capital of their Indian subsidiaries
1947-91: A sense of fear and distrust

1991: Major economic crises

• FDI policies post 1991
• The government of India gradually allowed investments in IT,
Telecommunications, Energy, Banking and Insurance sector
• No major reforms regarding land and labor laws were passed
• India missed its own growth target of 7.5% in decade following 1991
• Emergence of India as IT hub further diminished the need for strong
reforms in other sectors (agriculture, retail, manufacturing)
1992-2010: Gradualist approach

• Why is FDI in retail being pushed now?
• Growth rates recorded in last 2 years are well below 8% mark
• Immediate need of foreign capital to fund audacious social programs
• Downgrade of India’s sovereign outlook from stable to negative
• Big opportunity in wake of slowdown in the US and Europe
• Is this the right way to go ?
• Will FDI solve India’s CAD woes ?
• What impact will it have on traditional retailers?
Current state: All time high CAD (5% of GDP)

• Motivation
• Conclusion
Agenda

Brief: Regression Model
• Model
• Estimated FDI in retail retrospectively for 4 years (2008-11)
• Used Fixed Effects Panel Data Analysis
• Source: FDI Determinants
• Analyses of FDI determinants in developing countries,by Recep
Kok and Bernur Acikgoz Ersoy (2009)
• UNCTAD: World Investment Report, 2012
• Choice of comparable countries
• Limitations
• Availability of Segmented Data
• Causality tests

Explanatory Indicators chosen I

Explanatory Indicators chosen II

Model(s) with high correlation coefficients

• Favorable Indicators
• Gross Savings, (as % of GDP)
• Cash surplus/deficit (% of GDP)
• Current account balance (BoP, current US$)
• Detrimental Indicators
• Vulnerable employment(as % of total)
• Unexpected results - Explained
• GDP per capita growth (annual %)
• Population in urban agglomerations of more than 1 million (% of total
population)
• Unexpected results - Unexplained
• Corporate Tax Rates (% of profits)
• Inflation, GDP deflator (annual %)
Inferences about the indicators used

FDI in retail reduces India’s CAD by 15%

• Motivation
• Conclusion
Agenda

• Impact of FDI on traditional retailers in Indonesia
• Share of traditional markets fell from 88% in 1997 to 50% 2010
• Stores selling niche products or those located outside vicinity of
supermarkets were not affected
• Other possible factors for decline of traditional retail
• High rents and lack support from local administration
• Absence of large parking spaces and irregular cleaning
• Why are kirana stores in India better off ?
• No regulatory requirements
• Unique credit facility
• Ease of access to customers
• Less or no competition from other kirana stores
Kirana stores are better placed to face
competition

• Motivation
• Conclusion
Agenda

• Opening up of retail sector needs to be backed up by:
• Infrastructure Development
• Urban Planning
• Further Tax and labor reforms
• Regulating timings and location of supermarkets
• Credit facilities for the Kirana stores and street vendors
Need for further reforms

Q&A Session

Appendix

• Model built upon existing data rather than forecasted
data
• Minimize forecasting errors on top of the assumptions
taken earlier
Why we chose to predict retrospectively?

Fixed Effects Panel Data Analysis
• ‘i’ and ‘t’ are indices for individuals and time
• ‘y’ is the dependent variable, i.e., Net FDI inflow in retail
sector that is regressed against the independent variables
• ‘x’ represents independent variables like Literacy Rate,
GDP Growth, etc ...
• ‘Є’ represents the error matrix
• ‘a’ and ‘b’ are regression coefficients

Why Fixed Effects model?
We use the Fixed Effect model here under the assumption
that the individual errors (specific to countries) are not
random variations and indeed reflect the intrinsic nature of
the data respective to individual countries.

Analyses of FDI determinants in
developing countries (2009)

UNCTAD's Investment Report 2012

Choice of Comparable Countries
• Hungary,
• Korean Republic,
• Turkey,
• Mexico,
• Slovak Republic,
• Slovenia,
• Chile,
• Estonia and
• Czech Republic
The choice of comparable countries is purely subjective based on factors
including but not limited to, GDP growth, level of corruption, technological
advances, ease of doing business, strength of legal system, and a series of
other factors that would explicitly aid/deter foreign entrants to invest capital
in the domestic retail market.

Impact of FDI in Retail Sector in India

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (19)

Destaque

Destaque (20)

Semelhante a Impact of FDI in Retail Sector in India

Semelhante a Impact of FDI in Retail Sector in India (20)

Último

Último (20)

Impact of FDI in Retail Sector in India

Notas do Editor