FDI IN RETAIL IN INDIA
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FDI IN RETAIL IN INDIA
- 1. Group Members: SRIJAN MISHRA BHAVANI SINGH MADHURESH MADHUKAR AKHIL PRUTHI Supervisor : ANKUR CHHABRA Shyam Lal College (Evening) University of Delhi Session 2013-14 ( Semester-II ) MARCH 31, 2014 FC-BUSSINESS,ENTREPRENEURSHIPAND MANAGEMENT FDI IN DETAIL BACHELOR WITH HONOURS IN ECONOMICS
- 2. Abstract In this topic we have done a project on FDI . We have discussed what is FDI,what are the types of FDI, what are the procedure to bring FDI, what's it's importance in our day to day life and why do we need FDI. As the defination of FDI states that Foreign direct investment(FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. There may be adverse effects of bringing FDI in INDIA. The most important is about being unemployment between the middle class people or 'aam aadmi'. India’s share of world FDI inflows 0.78% in 2005 to 3.11% in 2009 which is a good for them who are in favour. For our country FDI many benefits as it have employment, resource transfer and balance of payment(BOP) for citizen.
- 4. Introduction {Insert introduction text here. The introduction opens the report with a presentation of study background and objectives. It should address motivation and context of study . You can discuss about the project background, historical aspects etc. Explain what are the specific problems that you are going to address. It is important to detail out not only the problem, but also how are you going to study or solve those problems. You can also insert figures, tables or any other data available from reliable sources. Suggested length : 2-5 pages.} Major Issues/Problems {Discuss the major issues that you found challenging or interesting during reading about the topic. Suggested length : 1-2 pages.} Suggested solutions/ Your learning {Discuss here the solution or your viewpoints in your own simple words as what do you think about the available solution. You may also write about any new idea or perspective about the topic that you think should be studied further. Suggested length : 1-2 pages.} Observations and Discussion {Discuss the observations that you made during the study including results and discussion here. This section also reports implications of results. Suggested length : 1-2 pages.}
- 5. FOREIGN DIRECT INVESTMENT Foreign direct investment(FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Foreign direct investment is in contrast to portfolio investment which is a passive investment in the securities of another country such as Stocks and Bond. Broadly, foreign direct investment includes "mergers and acquisitions, building new facilities, reinvesting profits earned from overseas operations and intra company loans".In a narrow sense, foreign direct investment refers just to building new facilities. The numerical FDI figures based on varied definitions are not easily comparable.
- 6. TYPES OF FDI a) Horizontal FDI : Horizontal FDI arises when a firm duplicates its home countrybased activities at the same value chain stage in a host country through FDI. b) Platform FDI : Foreign direct investment from a source country into a destination country for the purpose of exporting to a third country. c) Vertical FDI : Vertical FDI takes place when a firm through FDI moves upstream or downstream in different value chains i.e. when firms perform valueadding activities stage by stage in a vertical fashion in a host country. THE MERITS OF HORIZONTAL FDI VERSUS VERTICAL FDI Vertical FDI takes place when the multinational fragments the production process internationally, locating each stage of production in the country where it can be done at the least cost. Horizontal FDI occurs when the multinational undertakes the same production activities in multiple countries. We consider a model where the riskneutral multinational must commit its investment prior to the realization of shocks.
- 7. The multinational has monopoly power and confronts two types of risk. It may face random productivity shocks or encounter a host country that tries to confiscate its rents. We show that greater uncertainty reduces the expected income from vertical FDI but increases the expected income from horizontal FDI. In addition, predatory actions by the host country are more costly to the multinational that has structured its production vertically rather than horizontally. Consequently, increased uncertainty should encourage horizontal FDI but discourage vertical FDI. If vertical FDI is more likely to flow into emerging markets and horizontal FDI into mature markets, then the empirical finding that most FDI is horizontal rather than vertical might be due, in part, to the greater uncertainty associated with emerging markets. We report cross country regression results that provide some support for the predictions of the model. Volatility appears to have a differential impact on FDI inflows into mature and emerging markets. For mature markets that supposedly attract mainly horizontal FDI, greater volatility significantly increases FDI inflows. For emerging markets that receive relatively more vertical FDI inflows, increased volatility does not increase FDI inflows.
- 8. What is the procedure for receiving Foreign Direct Investment in an Indian company? An Indian company may receive Foreign Direct Investment under the two routes as given under: i. Automatic Route FDI is allowed under the automatic route without prior approval either of the Government or the Reserve Bank of India in all activities/sectors as specified in the consolidated FDI Policy, issued by the Government of India from time to time. ii. Government Route FDI in activities not covered under the automatic route requires prior approval of the Government which are considered by the Foreign Investment Promotion Board (FIPB), Department of Economic Affairs, Ministry of Finance.
- 9. The importance of Foreign Direct Investment There is a strong relationship between foreign investment and economic growth. Larger inflows of foreign investments are needed for the country to achieve a sustainable high trajectory of economic growth. There are several irrefutable reasons for this. For the economy to grow by 7 to 8 per cent a year there is a need to invest around 35 to 40 per cent of GDP. National savings fall far short of this by nearly 10 per cent. Foreign borrowing and foreign investments have to meet this investmentsavings gap. This is generally recognized and successive governments have attempted to provide various incentives to foreign investors. Now that there is peace and security, the biggest hindrance for attracting foreign investments has been removed. Therefore higher amounts of foreign direct investments are expected.
- 10. Why FDI? Foreign investment comes in several forms. Portfolio investment, foreign loans and foreign direct investment are the three important types. Of these foreign direct investments in industry and services are the most useful. Foreign loans are generally used for investment in infrastructure. This is important as a serious bottleneck for domestic as well as foreign investment is the poor state of infrastructure. However the development of infrastructure alone would not suffice. The significance of private FDI is that such investments are risk free to the country and bring with it the advantages of advanced technology, management practices and assured markets. In due course there is a technology transfer as the local workforce gains knowledge of the manufacturing processes and management practices. The value added in these industries is a contribution to GDP and foreign exchange earnings. Therefore FDI contributes to foreign exchange earnings, employment creation and increases in incomes, especially of skilled and semi skilled workers in these industries.
- 11. Prospects and preconditions There is not much point in crying over spilt milk. What is needed is the correct environment to attract investment in a global context when even developed countries are vying for foreign investment. Sri Lanka needs to develop the physical and technological infrastructure, enhance its human capital and improve its labour market conditions and administrative capabilities to induce higher levels of foreign investment. There has been progress in the development of infrastructure. The road network has been improved though urban traffic congestion remains a problem. The power situation is much better though electricity tariffs are high. Skills development leaves much scope for development. Labour legislation is considered a serious disincentive. It is unlikely that the government would formulate the necessary labour reforms to allow for flexibility in the recruitment and discontinuance of workers. This may continue to be a disincentive for FDI as other countries are far more flexible in their labour laws allowing workers to be discontinued when business conditions necessitate a reduction in labour force. Despite peace and political stability foreign direct investment has not increased.
- 12. Besides the quantum of FDI, the types of FDI also matter. There are foreign investments in the hospitality trade but little in industry and manufactures, investments in manufactures are especially needed. To attract such investment it is essential to ensure an attractive investment climate. Consistent macroeconomic stability, guarantee of property rights, rule of law and absence of corruption are among the conditions required to attract FDI. Recent events have tarnished the country’s political image and foreign perceptions of the country. These noneconomic factors too have an influence on FDI. CONTROVERSY OVER ALLOWING FOREIGN RETAILERS Independent stores will close, leading to massive job losses. Walmart employs very few people in the United States. If allowed to expand in India as much as Walmart has expanded in the United States, few thousand jobs may be created but millions will be lost.
- 13. Walmart's efficiency at supply chain management leads to direct procurement of goods from the supplier. In addition to eliminating the "middleman", due to its status as the leading retailer, suppliers of goods are pressured to drop prices in order to assure consistent cash flow. The small retailer and the middle man present in the retail industry play a large part in supporting the local economy, since they typically procure goods and services from the area they have their retail shops in. This leads to increased economic activity, and wealth redistribution. With large, efficient retailers, goods are acquired in other regions, hence reducing the local economy.
- 14. ECONOMISTS AND ENTREPRENEURS Many business groups in India are welcoming the transformation of a long protected sector that has left Indian shoppers bereft of the scale and variety of their counterparts in more developed markets. B. Muthuraman, the president of the Confederation of Indian Industry, claimed the retail reform would open enormous opportunities and lead to muchneeded investment in cold chain, warehousing and contract farming. Organized retailers will reduce waste by improving logistics, creating cold storage to prevent food spoilage, improve hygiene and product safety, reduce counterfeit trade and tax evasion on expensive item purchases, and create dependable supply chains for secure supply of food staples, fruits and vegetables. They will increase choice and reduce India’s rampant inflation by reducing waste, spoilage and cutting out middlemen.
- 15. OBSERVATIONS AND DISCUSSIONS The Cabinet has approved 51% FDI in multibrand retail, a decision that will allow global mega chains like WalMart, Tesco and Carrefour to open outlets in India. The Cabinet also increased the foreign investment (FDI) ceiling to 100 per cent from the present 51 per cent in singlebrand retail. The following are the main issues raised by those in favour of foreign equity in multibrand retailing and those opposed to it : ✗ Those against : ➢ It will lead to closure of tens of thousands of momandpop shops across the country and endanger livelihood of 40 million people. ➢ It may bring down prices initially, but fuel inflation once multinational companies get a stronghold in the retail market. ➢ Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers. ➢ Small and medium enterprises will become victims of predatory pricing policies of multinational retailers. ➢ It will disintegrate established supply chains by encouraging monopolies of global retailers.
- 16. ✔ Those in favour : ➢ It will cut intermediaries between farmers and the retailers, thereby helping them get more money for their produce. ➢ It will help in bringing down prices at retail level and calm inflation. ➢ Big retail chains will invest in supply chains which will reduce wastage, estimated at 40 percent in the case of fruits and vegetables. ➢ Small and medium enterprises will have a bigger market, along with better technology and branding. ➢ It will bring muchneeded foreign investment into the country, along with technology and global bestpractices. ➢ It will actually create employment than displace people engaged in small stores. ➢ It will induce better competition in the market, thus benefiting both producers and consumers (With IANS inputs).
- 17. CONCLUSION ● What is Scope of FDI in India? ● Why World is looking towards India for Foreign Direct Investments ? India is the 3rd largest economy of the world in terms of purchasing power parity and thus looks attractive to the world for FDI. Even Government of India, has been trying hard to do away with the FDI caps for majority of the sectors, but there are still critical areas like retailing and insurance where there is lot of opposition from local Indians / Indian companies. Some of the major economic sectors where India can attract investment are as follows: Telecommunications Apparels Information Technology Pharma Auto parts Jewelry Chemicals
- 18. In last few years, certainly foreign investments have shown upward trends but the strict FDI policies have put hurdles in the growth in this sector. India is however set to become one of the major recipients of FDI in the AsiaPacific region because of the economic reforms for increasing foreign investment and the deregulation of this important sector. India has technical expertise and skilled managers and a growing middle class market of more than 300 million and this represents an attractive market.