Report on Impact of FDI in Retail in India

12/2/2013

FOREIGN PARTICIPATION IN INDIAN
RETAILSCAPE.. REVOLUTION OR EVOLUTION
ANALYSIS FROM A TECHNOCRATIC PERSPECTIVE

Akshay Seth

Table of Contents
Sno.

Description
Chapter 1 – About the Report

1.
1.1.

4

Abstract

1.2.

Pages

Methodology
Chapter 2 – Indian Retail Sector

2.
2.1.

Introduction

2.2.

Sector Overview

2.3.

5 – 16

Growth and Evolution of Indian Retail Sector
Chapter 3 – FDI policy in Retail

3.
3.1.

Understanding the term FDI

3.2.

Evolution of FDI policy in Retail

3.3.

Structure of FDI policy in Retail

3.4.

FDI in Single Brand Retail Trade (SBRT)

3.5.

FDI in Multi Brand Retail Trade (MBRT)

3.6.

FDI Policy in E – commerce

3.7.

17 – 24

Acceptance of FDI Policy by Indian States
Chapter 4 – Impact of FDI in Retail on Macroeconomic factors in other Countries

4.
4.1.

China

4.2.

Thailand

4.3.

Indonesia

4.4.

Brazil

4.5.

Russia

4.6.

24 – 27

Mexico
Chapter 5 – Impact of FDI in Retail in China

5.
5.1.

Impact on Farmers

5.2.

Impact on Organized Retail

5.3.

Impact on Traditional Retail

5.4.

Impact on Supply Chain

5.5.

27 – 30

Impact on Consumers

Foreign Participation in Indian Retailscape: Revolution or Evolution | Analysis from a Technocratic Perspective

Page 2 of 56

Chapter 6 – Critical Analysis of Impact of FDI in Retail in India

6.
6.1.

Impact on Farmers

6.2.

Impact on Traditional Markets

6.3.

Impact on Consumers

6.4.

Impact on Supply Chain

6.5.

Impact on Employment

6.6.

Impact on Inflation

6.7.

31 – 41

Impact on Government Revenue from Taxes
Chapter 7 – SME Sector‘s viewpoint on Impact of FDI policy in Retail

7.
7.1.

Impact on Sales

7.2.

Impact on Size of Industry, Business / Capacity addition

7.3.

Impact on New Orders / Contracts

7.4.

Impact on Qualitative improvements & Branding of products

7.5.

Impact on Supply Chain efficiencies

7.6.

41 – 45

Impact on Employment
Chapter 8 – Analysis of current entry structure in line with FDI Policy regulations

8.
8.1.

Entry structure for Foreign Retailers

8.2.

FDI policy regulations for Single Brand Retail Trade (SBRT) – an analysis

8.3.

FDI policy regulations for Multi Brand Retail Trade (MBRT) – an analysis

8.4.

Impact of regulation: Minimum investment of USD 100 Mn

8.5.

Impact of regulation: 50% of FDI to be invested in backend infrastructure in 3 years

8.6.

Impact of regulation: 30% sourcing from small industries

8.7.

Impact of regulation: Only cities with population more than 1 Million

8.8.

Impact of regulation: Approval from State Government required

8.9.

45 – 52

Impact of regulation: E – Commerce not permissible

9.

Chapter 9 – Key Challenges

10.

Chapter 10 – SWOT Analysis

11.

Chapter 11 – Conclusion

55 – 56

12.

Chapter 12 – References

56


52 – 53
54

Page 3 of 56

1. Chapter 1 – About the Report

1.1. Abstract
India is one of the top five Retail markets in the world in terms of economic value, and the fastest
growing market in the world with a catchment of over 1.2 billion people.
Retail sector in India is considered to be the sunrise sector with a huge growth potential. Estimated to be
between USD 450 – 550 Billion in 2012, the Retail Sector is expected to grow to USD 750 – 850 Billion
by 2015. In its present state, the Retail sector accounts for nearly 14 – 15% of the country‘s GDP.
However, in spite of its immense contribution to the economy, retailing continues to be the least evolved
industries and the growth of organized retailing in India has been much slower as compared to rest of the
world.
This situation of the retail sector, despite the on – going wave of continuous liberalization and
globalization can be blamed on weak policy framework and the absence of an encouraging and well
structured FDI policy in the sector.
In the above context, this research paper attempts to analyze the strategic impact of the influx of the
Foreign Direct Investment (FDI) Policy introduced in its most current format in September 2012, for the
Indian retail industry.
This paper broadly covers the principal policy decisions of the FDI policy in Retail, and analyses the
effects of these decisions on the retail sector. This paper also attempts to broadly study the impact of the
FDI policy on major stakeholders, covering impact on farmers, traditional retail, consumers, supply chain,
employment, inflation, and Government revenue in form of taxes.
This paper attempts to draw out the benefits of allowing FDI in retail, and broad recommendations most
suited to our country‘s diverse and dispersed retail market.
1.2. Methodology
Reliance has been placed on the information contained in journals, reports, newspapers, research papers,
online databases, etc. No information has been collected directly from primary sources. The research
paper is based on secondary data / resources available for review.


Page 4 of 56

2. Chapter 2 – Indian Retail Sector

2.1. Introduction
Indian retail industry is one of major pillars of the Indian Economy contributing nearly 14% – 15% to the
country‘s GDP.
However, as of date, the Indian Retail scenario has been dominated by owner manned small shops, mom
& pop stores, small ―kirana‖ grocery / daily needs stores, etc. In 2010, larger format convenience
stores and supermarkets accounted for about 4% of the industry, and these were present only in large
urban centers. The sector in its present form is highly unorganized, with organized retail accounting for a
meager 8% of the total sector.
Until 2012, the Indian Central Government denied Foreign Direct Investment (FDI) in multi-brand retail,
forbidding foreign groups from any ownership in supermarkets, convenience stores or other retail outlets.
Even single – brand retail was limited to 51% ownership and a bureaucratic process. In September 2012,
the Government of India passed a Foreign Direct Investment policy which now allows foreign retailers to
own up to 51% in multi – brand retail and 100% in single – brand retail.
With the introduction of the FDI policy, the organized retail sector in India, is estimated to grow at a
staggering growth rate of 30% by 2015, which is twice as fast as the forecasted growth rate of the overall
retail sector, which is expected to grow at a rate of 16%. It is hence anticipated, that these stores will now
have full access to over 200 million urban consumers in India, approximately 47% of which are below the
age of 30 and have high levels of consumption.

2.2. Sector Overview
According to the India Retail Report 2013, the Indian Retail market is estimated to exceed US$ 750
billion by 2015, presenting a strong potential for foreign retailers planning to enter India.
In its present state the sector stays predominantly unorganized, with organized retail counting for only 7%
to 8% of the overall retail market as compared to over 20% in China, and over 85% in developed
countries like the United States of America.


Page 5 of 56

It can be perceived that the Indian retail market
is

in

its

nascent

stage,

dominated

Fig: Retail Penetration across major markets(2012)

by

Organized

Unorganized

unorganized players that controlled the market
with 95% market share during 2009 – 10,

15%

however the organized retailers gained market
share to 7% to 8% by 2011 – 12. There are
over 15 million ‗mom and pop‘ stores in India
which contribute to the large unorganized

92%

70%

80%

60%

45%
85%

30%

8%

20%

India

China

40%

Indonesia Thailand

55%

Malaysia

USA

market, whereas organized retail has been
limited to Urban Centre‘s.

Source: IBEF 2013

Organized retail in India is expected to cross 10% levels (of total retail market) by 2015 and 20% by
2020.
According to A T Kearney‘s Global Retail Development Index (GRDI) 2012, India was positioned the 5th
most favorable destination for international retailers. India also occupied a remarkable position in global
retail rankings, and the country is considered to have a high market potential, low economic risk, and a
moderate political risk. India also ranked 6th in the Global Apparel Index 2011. In terms of market
potential, India ranked second after Brazil. Net retail sales in India were also quite significant among
emerging and developed nations, the country is ranked 3rd after China and Brazil.

Food and Grocery account for a major portion of the Indian

Fig: Indian Retail Pie

Retail Market contributing nearly 60% of the total revenues in
the sector. This translates to nearly 48% of the total household
income being spent on food and groceries.
Apparel ranks second in the overall retail market, however is
the largest segment under the organized retail sector. This can
be attributed to the increasing demand for western outfits and
garments that has been growing at 40% – 45% annually.

Source: Deloitte 2013


Page 6 of 56

Fig: Organized Retail Setup


Online commerce is expected to be next major area for retail growth in India. India‘s e – trailer segment is
expected to grow to a size of USD 1.5 billion by 2015. The key drivers for growing importance of online
retail are a young population aided by easier access to credit and payment options, increasing internet
penetration and speed, 24 hour accessibility, convenient and secured transactions. Computer peripherals,
camera and mobiles, and lifestyle segments account for a majority of total purchases in Online commerce.
Table: Indian Retail Structure at a glance
Type

Characteristics

Benefit to Consumers

Mono / Exclusive
branded retail shops

Exclusive showrooms either owned or franchised
by a manufacturer

Complete range available for a given
brand, certified product quality

Multi Branded retail
shops

Focus on particular product categories and carry
most of the available brands

Customers have more choices as
many brands are on display

Convergence retail
outlets

Display most of convergence as well as
consumer / electronic products, including
communication and IT Group
It is an online shopping facility or buying and
selling products and services, the facility is
widely used for electronics, health and wellness

One–stop shop for customers, many
product lines of different brands on
display
Highly convenient as it provides
24x7 access, saves time, and ensures
secure transaction

e-retailers

Source: IBEF 2013


Page 7 of 56

The Indian Retail Industry has experienced a

Fig: Growth of Indian Retail Sector

growth of 10.6% CAGR between 2010 and
2012 and is expected to further grow at an
estimated CAGR of more than 18% between
2012 and 2015.


Within the retail sector, India has witnessed sustained growth in merchandise retail in the last decade
2002 – 2012. Even despite the economic uncertainty and the slowdown in India‘s economy, the growth of
merchandise retail is expected to continue to grow sustainably.
Table: Retail Market snapshot

GDP (USD Bn)
Estimated merchandize consumption
(Retail Market opportunity) (USD Bn)
Urban Consumption (% and absolute numbers)
Rural Consumption (% and absolute numbers)
Size of Corporatized Retail (%)
Size of Corporatized Retail (USD Bn)

2001
450
120

2012
1958
490

2021
3310
810

40%
(USD 48Bn)
60%
(USD 48Bn)
4%
5

48%
(USD 235 Bn)
52%
(USD 48Bn)
7%
34

56%
(USD 455 Bn)
44%
(USD 48Bn)
20%
162

Source: Technopak 2012

The main reason for this growth can be attributed towards India‘s GDP growth, which is expected
to grow at a sustained rate of nearly 6% in the next decade. This growth in GDP will get
translated to growing consumption in Indian households, which in turn will be manifested as
growth of merchandise retail through an increasing need for food, apparel and other sources of
discretionary spending.
India‘s share in merchandise retail is expected to grow from 48% in 2012 to nearly 56% by 2021.
Ten years ago, this contribution was approx 40%. As expected in future, an increasing share of
incremental merchandise retail will come from urban and semi – urban centers. This inference
can be drawn as an outcome of the rapid urbanization that India has witnessed in the past two
decades of sustained growth. Since 1991, India has witnessed the emergence of urban centers
with a massive scale of consumption. In 2012, there were 53 Indian cities with populations in


Page 8 of 56

excess of 1 million as compared to 23 such cities in 1991, and only 5 such cities in 1951. Apart
from these urban consumption centers (Metros, Tier I, and Tier II cities), urbanization of India
will also include towns and clusters where the majority (more than 50%) of households will no
longer be dependent on agriculture.
The most crucial inference is the fact that corporatized retail‘s share of total merchandise retail
will grow from the current 8% to 20% by 2021. The retail sector started to see private
investments from both Indian and International players in the past fifteen years. In spite of these
spirited efforts, Indian corporatized retailers have managed to garner a mere 7% to 8% of the
Indian retail pie. Thus, 92% of the retail sector still comprises independent retail and is highly
fragmented. This is despite the fact that India‘s GDP grew at more than 7% in the past decade.

Table: Historical & Projected Growth Scenario’s for Indian Retail Sector
2001 – 2007

2007 – 2012

India‘s real GDP CAGR

8.5%

7%

Corporatized Retail CAGR

17%

20%

Share of Corporatized Retail at the end of the period

4%

7%

Historical Growth

Growth Forecast

6% Real
Growth

7% Real
Growth

8% Real
Growth

GDP (USD Bn)

3308

3600

3914

Overall Retail Market (USD Bn)

810

980

1065

Organized Retail Market (USD Bn)

162

246

350

Organized Retail as % of overall Retail

19%

25%

33%


In a recent report by Technopak advisors – a leading research and advisory firm, it has been estimated
that the share of corporatized retail, in a realistic scenario, will grow to no more than 20% of the total
merchandise retail pie by 2021. This will be due to the pressures of inflation and uncertainty in the world
economy, making a sustained real growth exceeding 6% over 10 years as a challenging objective. Other
reasons for this estimate have largely to do with the structural issues that adversely affect the value chain
of the retail sector. This also encompasses issues of real estate, sourcing and distribution. It is thus
opinioned that corporatized retail will not have enough leg – room to grow beyond the stated estimate.
The complexity of these issues is such that, in Technopak‘s view, ten years will not be a sufficient time
horizon for corporatized retail to overcome these hurdles and grow beyond the stated expectation.


Page 9 of 56

It will however be dependent on the actions taken by respective Governments to reform their views on
this aspect of growth, and make necessary provisions accordingly.

2.3. Growth & Evolution of Retail Sector
The retail sector in India has undergone many stages of maturation to reach its present stage. However, it
is still believed to be in a nascent stage, with organized retail accounting for only 7% – 8% of the total
sector. Below figures show the graduation of Indian retail sector over a period of time from Initiation,
Conceptualization, Expansion and Consolidation stage.
Fig: Stage and Type of Indian Retail

Source: resurgentindia 2011

Two most significant and learning phases of the Indian Retail Sector have been the ‗Hyper Growth Phase‘
between 2005 t0 2007 and the ‗Consolidation Phase‘ between 2007 to 2009. It is during these two action
packet phases that the Retail sector has matured by committing several mistakes. During the ‗Hyper
Growth Phase‘ in pursuit to capture market, many companies made strategic as well as operational errors
which were as follows:
Race for increasing retail space resulting in haphazard growth
Unviable formats
High lease rentals
Man power costs and productivity issues
Poor back end infrastructure
Entry of too many new players


Page 10 of 56

Then during the global slowdown 2007 – 2009, the Indian retail players paused to realize their past
mistakes and took time and effort to re – organize themselves by
Focusing on profitable growth
Exiting from unprofitable stores / formats
Rental renegotiation / revenue sharing arrangements
Reduction in salaries / higher man power productivity
Significant investments in backend
Exit of unsuccessful new entrants

Fig: Growth Cycle of Indian Retail Sector

Source: IBEF 2013

During the past decade of the evolution of the Indian Retail Sector, the organized retail segment has tried
to increase its offerings and make itself a one stop shop for its consumers. Traditionally, food and grocery
counted for the largest share of the retail segment, but with the organized sector gaining momentum, the
share of verticals has witnessed a change with the maximum share being taken by the apparels segment.


Page 11 of 56

Fig: Share of Verticals in overall and organized retail

Source: Assocham & Yes Bank 2012

Food and grocery segment accounts for more than two – thirds of the overall retail in India with a
share of approximately 70% of the total market size
However, the Organized Retail Penetration (ORP) in this vertical is the lowest at 2.4%. This
vertical is dominated by kirana stores (mom and pop stores), cart vendors and wet markets in the
unorganized space.

Fig: Sale in Grocery Vs Non Grocery (2006 – 2011)



Page 12 of 56

During the period 2006 to 2011, grocery retailing maintained a steady share between 65% to 68%
of the total retail sales and non – grocery retailing accounted for between 32% to 34% of the total
retail sales
Fig: Sales in store based retailing by category (2006 – 2011)


In Store – based retailing, which accounts for 99% of all sales, grocery retailers had the major
share in sales with 66% share in 2010 – 11and non – grocery retailers accounted for 34% of the
total sales during the same period
Sales by grocery retailers grew by 14.8% in 2010 – 11 and that of non – grocery retailers grew by
12.8% with the overall growth in store – based retailing at 14.1% during the same period
Grocery retailers grew at a CAGR of 12.9% over the period 2006 – 11 whereas non – grocery
retailers grew at 12.1% during the same period. Store – based retailing as a whole grew at a
CAGR of 12.6% during 2006 – 11
In absolute terms grocery retailers grew by 84.3% and non – grocery retailers grew by 72.5%
between 2006 and 2011, with the overall growth of the store – based retail segment pegged at
80.1%
The Indian retail market has traditionally been dominated by the mom and pop stores which made major
household goods available in the immediate vicinity. But with the advent of new concepts which are
better organized, the sales can be seen shifting towards the modern retail stores.
However in no case, do these formats have the potential to completely wipe out the existence of these
kirana stores as they do not reach the smallest towns of the country. Even in the metro cities the location
of the traditional and modern formats is totally varied. Furthermore, the Indian consumers tend to do a lot
of impulse buying, for which the traditional format is preferred.


Page 13 of 56

Fig: Sales in Grocery Retailers by Category: 2006 – 2011 (INR Bn)


Independent small grocers such as kirana stores remained the largest channel for grocery retailing
in 2011, representing almost 68% of the total sales, and growing at 13.8% in 2010 – 11 with a
CAGR of 11.8% during 2006 – 11
Hypermarkets saw a strong and steady growth in 2011, growing by 18.2% and had a CAGR of
37.9% between 2006 and 2011
Supermarkets also witnessed strong growth in 2011 with a 13.3% increase and a 16.2% CAGR
between 2006 and 2011
Convenience stores saw the maximum growth in Modern retail formats at 27% in 2011
Fig: Sales in Modern Grocery Retail by Category (INR billion)



Page 14 of 56

Fig: Sales in Traditional Grocery Retail by Category (INR billion)


Value sales of the traditional grocery retailers accounted for 98% of sales in 2011
Traditional grocery retailers as a whole grew at 14.8% during 2010-11 whereas as modern
grocery retailers exhibited a growth of 16.8% during the same period
In CAGR terms, the growth of Modern grocery retailers was almost double at 25.6% during
2006-11 as compared to that of Traditional grocery retailers which was 12.8% during the same
period
The total contribution of modern grocery retailers expanded to 2% of overall sales value in
grocery retailing, from less than 1% in 2005
Fig: Percentage Value growth in Sales (2006 – 2011)



Page 15 of 56

In its recent stages, the retailing segment has come up with various new forms of selling to the consumers.
Broadly classified under Store based retailing viz the traditional form of retailing which is limited to the
presence of a physical store. Non store based retailing has developed recently with e–commerce gaining
traction. However, the share of sales of non store based retailing has been quite low but is on a gradual
increase with the increasing literacy levels and changing lifestyle of the Indian population.
Store based retailing accounted for the major share of sales in retail by category and comprised
nearly 99.2% of all retail sales in 2011
Store based retailing grew by 14% during 2010 – 11 as compared to 33.3% for non – store
retailing
Overall the retail sector grew by 14.2% during 2010 – 11
Over the period of 2006 – 11, store – based retailing grew at a CAGR of 12.6% as compared to
24.5% for non – store retailing whereas the CAGR for the retail sector as a whole was 12.7% for
the period 2006 – 11
Overall, store – based retailing has grown by 81.2% in absolute terms in the period 2006-11 and
non-store based retailing has grown by a phenomenal 200% during the same period.
The retail sector as a whole has grown by 82% in absolute terms from 2006 to 2011.
Fig: Sales in Retailing by Category (INR Billion): 2006 – 2011



Page 16 of 56

3. Chapter 3 – FDI Policy in Retail

3.1. Understanding the term FDI (Foreign Direct Investment)
Foreign Investment in India is governed by the FDI policy announced by the Government of India and the
provision of the Foreign Exchange Management Act (FEMA) 1999. The Reserve Bank of India (RBI) in
this regard had issued a notification, which contains the Foreign Exchange Management Regulations,
2000. This notification has been amended from time to time. Department of Industrial Policy and
Promotion (DIPP) under the Ministry of Commerce and Industry, Government of India is the nodal
agency for monitoring and reviewing the FDI policy on continued basis and changes in sectoral policy /
sectoral equity cap which goes from 26% to 100% at present. The FDI policy is notified through Press
Notes / Policy Circulars by the Secretariat for Industrial Assistance (SIA), Department of Industrial
Policy and Promotion (DIPP) Ministry of Commerce & Industry. FDI is allowed under Direct Route and
Government Approval Route. The foreign investors are free to invest in India, except few sectors /
activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be
required. FDI in retail sector is allowed through Government Route only.

3.2. Evolution of FDI policy in Retail
PWC‘s 15th Annual Global CEO Survey indicated that half of CEO‘s in developed countries believed
that emerging economies are more important to their company‘s future. With the developed markets
witnessing an economic turmoil, emerging countries are fast becoming the retail hotspot for foreign
players. In the past five years, retail chain giants such as Walmart, Tesco and Metro Group, saw revenues
in developing countries grow 2.5 times faster than their home markets.
In light of the Globalization trends, the Indian Government had been anticipating, the introduction of a
Foreign Direct Investment Policy for the Indian Retail Sector, however amidst severe criticism from
conservative political opposition, the approval of the policy has undergone a long waiting period. Finally
after several years of debate, a somewhat structured FDI policy has been announced by the current
Government in September 2012, permitting FDI in Single Brand Retail Trade, and Multi Brand Retail
Trade, laying out several conditions, conceptually believed to be for the protection of the traditional
retailer, and the indigenous farmer.


Page 17 of 56

Fig: Evolution of FDI policy in Indian Retail Sector

Source: Recreated from IBEF 2013 & Deloitte 2013

3.3. Structure of FDI Policy in Retail
Press Note 4 of 2006 issued by DIPP and consolidated FDI Policy issued in October 2010 which has
further been revised in 2011 and 2012 vide Press Note 1 of 2011 dt.14.2011, Press Note 2 of 2011 dt.
1.10.2011, Press Note 3 of 2011 dt.8.11.2011, Press Note 1 of 2012 dt.10.1.2012, FDI Policy Circular 1
of 2012 dt. 10.4.2012, Press Note 2 of 2012 dt. 31.7.2012, Press Note 3 of 2012 dt. 1.8.2012 and Press
Notes 4, 5, 6, 7 & 8 dt. 20.9.2012 provides the sector specific guidelines for FDI with regard to the
conduct of trading activities. Press Notes 4 & 5 dt. 20.9.2012 particularly pertains to the FDI policy for
Retail Sector. Detailed guidelines are available in the following press notes.
a) FDI up to 100% for cash and carry wholesale trading and export trading allowed under the
automatic route in 2006.
b) FDI up to 100 % with prior Government approval (i.e. FIPB) for retail trade of ―Single Brand‟
products, subject to Press Note 4 (2012 Series)
c) 51% FDI is permitted in Multi Brand Retailing in India under Government Route (Press Note 5 of
2012).


Page 18 of 56

3.4. FDI Policy in Single Brand Retail Trade (SBRT)
Paragraph 6.2.16.4 of 'Circular 1 of 2012 – Consolidated FDI Policy', effective from April 10, 2012,
relating to single – brand product retail trading, presently reads as follows ―6.2.16.4 Single Brand product
retail trading under 100% Government Route
1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in
production and marketing, improving the availability of such goods for the consumer,
encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian
enterprises through access to global designs, technologies and management practices.
2) FDI in Single Brand product retail trading is subject to the following conditions:
a. Products to be sold should be of a 'Single Brand' only
b. Products should be sold under the same brand internationally i.e. products should be sold
under the same brand in one or more countries other than India.
c. 'Single Brand' product-retail trading would cover only products which are branded during
manufacturing
d. The foreign investor should be the owner of the brand.
e. In respect of proposals involving FDI beyond 51%, mandatory sourcing of at least 30%
of the value of products sold would have to be done from Indian 'small industries/ village
and cottage industries, artisans and craftsmen'. 'Small industries' would be defined as
industries which have a total investment in plant & machinery not exceeding US $ 1.00
million. This valuation refers to the value at the time of installation, without providing for
depreciation. Further, if at any point in time, this valuation is exceeded, the industry shall
not qualify as a 'small industry' for this purpose. The compliance of this condition will be
ensured through self – certification by the company, to be subsequently checked, by
statutory auditors, from the duly certified accounts, which the company will be required
to maintain.
3) Application seeking permission of the Government for FDI in retail trade of 'Single Brand'
products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of
Industrial Policy & Promotion. The application would specifically indicate the product, Product
categories which are proposed to be sold under a 'Single Brand'. Any addition to the product,
product categories to be sold under 'Single Brand' would require a fresh approval of the
Government.


Page 19 of 56

4) Applications would be processed in the Department of Industrial Policy & Promotion, to
determine whether the products proposed to be sold satisfy the notified guidelines, before being
considered by the FIPB for Government approval‖
Revision dated 20/09/2012
―Revised Position w.e.f.20.9.2012: 2.1 The Government of India has reviewed the position in this regard
and decided to amend paragraphs 6.2.16.4 (2) (d) & 6.2.16.4 (2) (e) of the existing policy. 3.0
Amendment to paragraph 6.2.16.4: 3.1 Accordingly, paragraph 6.2.16.4 of 'Circular 1 of 2012Conso1idated FDI Policy', effective from April 10, 2012, is amended, as below: 6.2.16.4 Single Brand
product retail trading under 100% Government Route.
1) Foreign Investment in Single Brand product retail trading is aimed at attracting investments in
production and marketing, improving the availability of such goods for the consumer,
encouraging increased sourcing of goods from India, and enhancing competitiveness of Indian
enterprises through access to global designs, technologies and management practices.
2) FDI in Single Brand product retail trading would be subject to the following conditions:
a. Products to be sold should be of a 'Single Brand' only.
b. Products should be sold under the same brand internationally i.e. products should be sold
under the same brand in one or more countries other than India.
c. 'Single Brand' product-retail trading would cover only products which are branded during
manufacturing.
d. Only one non-resident entity, whether owner of the brand or otherwise, shall be permitted
to undertake single brand product retail trading in the country, for the specific brand,
through a legally tenable agreement, with the brand owner for undertaking single brand
product retail trading in respect of the specific brand for which approval is being sought.
The onus for ensuring compliance with this condition shall rest with the Indian entity
carrying out single-brand product retail trading in India. The investing entity shall
provide evidence to this effect at the time of seeking approval, including a copy of the
licensing / Franchise / sub – license agreement, specifically indicating compliance with
the above condition.
e. In respect of proposals involving FDI beyond 51%, sourcing of 30% of the value of
goods purchased will be done from India, preferably from MSMEs, village and cottage
industries, artisans and craftsmen, in all sectors. The quantum of domestic sourcing will
be self-certified by the company, to be subsequently checked, by statutory auditors, from
the duly certified accounts which the company will be required to maintain. This

Page 20 of 56

procurement requirement would have to be met, in the first instance, as an average of five
years total value of the goods purchased, beginning April of the year during which the
first tranche of FDI is received. Thereafter, it would have to be met on an annual basis.
For the purpose of ascertaining the sourcing requirement, the relevant entity would be the
company, incorporated in India, which is the recipient of FDI for the purpose of carrying
out single-brand product retail trading.
f.

Retail trading, in any form, by means of e – commerce, would not be permissible, for
companies with FDI, engaged in the activity of single-brand retail trading.

3) Applications seeking permission of the Government for FDI in retail trade of ‗Single Brand‘
products would be made to the Secretariat for Industrial Assistance (SIA) in the Department of
Industrial Policy & Promotion. The applications would specifically indicate the product / product
categories which are proposed to be sold under a ‗Single Brand‘. Any addition to the product /
product categories to be sold under ‗Single Brand‘ would require a fresh approval of the
Government.‖

3.5. FDI Policy in Multi Brand Retail Trade (MBRT)

51% FDI in Multi Brand retail implies that a retail store with a foreign investment can sell multiple
brands under one roof with the following conditions:
1) FDI in multi brand retail trading, in all products, will be permitted, subject to the following
conditions: Fresh agricultural produce, including fruits, vegetables, flowers, grains, pulses, fresh
poultry, fishery and meat products, may be unbranded
2) Minimum amount to be brought in, as FDI, by the foreign investor, would be US $ 100 million.
3) At least 50% of total FDI brought in shall be invested in ‗backend infrastructure‘ within three
years of the first tranche of FDI, where ‗backend infrastructure‘ will include capital expenditure
on all activities, excluding that on front – end units, for instance, back end infrastructure will
include investment made towards processing, manufacturing, distribution, design improvement,
quality control, packaging, logistics, storage, warehouse, agriculture market produce
infrastructure etc
4) Expenditure on land cost and rentals, if any, will not be counted for purposes of back end
infrastructure


Page 21 of 56

5) At least 30% of the value of procurement of manufactured processed products purchased shall be
sourced from Indian ‗small industries‘ which have a total investment in plant & machinery not
exceeding US $ 1.00 million. This valuation refers to the value at the time of installation, without
providing for depreciation. Further, if at any point in time, this valuation is exceeded, the industry
shall not qualify as a ‗small industry‘ for this purpose. This procurement requirement would have
to be met, in the first instance, as an average of five years total value of the manufactured
processed products purchased, beginning 1st April of the year during which the first tranche of
FDI is received. Thereafter, it would have to be met on an annual basis.
6) Self-certification by the company, to ensure compliance of the conditions at serial nos. (2), (3)
and (4) above, which could be cross – checked, as and when required. Accordingly, the investors
shall maintain accounts, duly certified by statutory auditors.
7) Retail sales outlets may be set up only in cities with a population of more than 10 lakh as per
2011 Census and may also cover an area of 10 kms around the municipal / urban agglomeration
limits of such cities. Retail locations will be restricted to conforming areas as per the Master /
Zonal Plans of the concerned cities and provision will be made for requisite facilities such as
transport connectivity and parking. In States / Union Territories not having cities with population
of more than 10 lakh as per 2011 Census, retail sales outlets may be set up in the cities of their
choice, preferably the largest city and may also cover an area of 10 kms around the municipal /
urban agglomeration limits of such cities. The locations of such outlets will be restricted to
conforming areas, as per the Master / Zonal Plans of the concerned cities and provision will be
made for requisite facilities such as Transport connectivity and parking.
Table: FDI in retail trading – snapshot of recent policy changes
Previous FDI Policy

Revised FDI Policy

Single Brand
Retail Trading
(SBRT)

FDI upto 100% permitted under FDI upto 100% permitted under Government
Government approval route subject to approval route Liberalization of conditions
onerous conditions
w.r.t
 Ownership of ‗brand‘
 Local sourcing obligation

Multi Brand
Retail Trading
(MBRT)

FDI was prohibited in MBRT, except FDI upto 51% permitted in MBRT, under
in Cash & Carry Wholesale Trading
Government approval route, subject to
specified conditions
 Presently possible only in specified
states / union territories

Source: BMR Taxand 2012


Page 22 of 56

3.6. FDI Policy E – Commerce
100% FDI has been permitted in E – commerce under the automatic route
E-commerce understood as activity of buying and selling through the E – commerce platform
Only Business to Business (B2B) E – commerce permitted
As per recent policy, companies engaged in SBRT and MBRT are not permitted retail trading
by way of E – commerce
To provide B2C services, several foreign investors have adopted structures involving tie –
ups with domestic online retail websites
Status is unclear if E – commerce includes M – commerce (mobile commerce)
Need for separate policy / guidelines for E – commerce distinguishing it from retail trading

3.7. Acceptance of FDI Policy by Indian States
The main opposition party of India and its allies constantly opposed the introduction of FDI in multi –
brand retail in 2012. Some of the ruling party allies such as DMK, UDF (Kerala) were also against the
policy.
States in Favor of
1.
2.
3.
4.
5.
6.
7.
8.
9.

Maharashtra
Haryana
Andhra Pradesh
Rajasthan
Jammu & Kashmir
Uttrakhand
Manipur
Assam
Delhi

States Opposing
1.
2.
3.
4.
5.
6.
7.
8.

Gujarat
Uttar Pradesh
West Bengal
Bihar
Tamil Nadu
Kerala
Chattisgarh
Odisha

Source:


Page 23 of 56

However, post elections in Karnataka, Madhya Pradesh, and Chhattisgarh, these states may change their
stance on FDI in MBRT depending on who comes to power.
The principal opposition party supported the FDI in Multi-Brand Retail when it was in power at the
Center in 2002. Further, many of the current allies who oppose the policy are still supporting the UPA
Government.

4. Chapter 4 – Impact of FDI in Retail on Macroeconomic factors in other countries
To understand the impact of FDI in retail on other nations similar to India in terms of demographics and
various macroeconomic factors, major impacts on countries like China, Thailand, Indonesia, Brazil,
Russia and Mexico can be compared.
4.1. China
China developed its open door policy in the aspect of FDI in retail in order to take a transition from a
―planning‖ to a ―market‖ economy.
Following has been the series of events with respect to FDI in retail in China:
i.

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

ii.

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

iii.

After liberalization of the retail sector in China (1996 – 2001), following changes took place
a. Over 600 hypermarkets were opened between 1996 and 2001
b. The number of small outlets increased from 1.9 million to over 2.5 million
c. Number of traditional retailers in China also increased by around 30%
d. Employment in the retail increased from 28 million people to 54 million people.
Employment in the retail and wholesale trade increased from about 4% of the total labour
force in 1992 to about 7% in 2001.
e. The country witnessed an average GDP growth rate of 8% after the introduction of FDI
in Retail
f.

Inflation rate decreased to -0.8% and -1.4% in 1998 and 1999 respectively. Now after 20
years, inflation rate is at 2% rather than 14.6% and 24.2% in 1993 and 1994.

g. The total FDI inflow & outflow in retail also increased significantly after the introduction
of FDI in retail leading to increased trade openness.


Page 24 of 56

4.2. Thailand
FDI in Retail was introduced in 1997 in Thailand. However, many adverse effects of FDI in retail were
observed. Thailand permits 100% foreign equity, with no limit on the number of outlets.
Following has been the series of events with respect to FDI in retail in Thailand:
i.

Traditionally, wet market and small family owned grocery stores dominated the Thai Retail
industry. After the Asian crisis in 1997, the entry ban on foreign players was removed and
soon, the foreign players increased and developed their operations significantly. Eventually,
most of the local players had to close down their business.

ii.

However, there were certain positive effects as well:
a. Expansion of organized retailing and soon Thailand emerged as a major shopping
destination for global travelers.
b. The Agro and food processing industry received huge encouragement and lead to
enhancement of exports

iii.

Impact on macroeconomic factors:
a. GDP growth rate of Thailand plummeted to -10.5% in 1998 due to the shutting down of
local retailers.
b. Unemployment rate remained low.
c. Inflation rate also remained at 0.3%
d. The openness indicator reached its maximum in 2002.
e. FDI inflows increased to 7.3 Bn in 1998.

4.3. Indonesia
Modern retail was introduced in Indonesia in the 1990‘s and mostly involved domestic chains. FDI in
retail led to the multi – nationalization and rapid consolidation of the supermarket sectors.
Following is the sequence of events with respect to FDI in retail in Indonesia:
i.

Currently, Indonesia permits 100% foreign equity in retail business, with absolutely no limit
on the number of outlets.

ii.

In 1958, the leading chain Matahari started as a small shop, and expanded into a chain of
department stores, and was then bought by a giant banking and real estate conglomerate
Lippo Group in 1997. Between 2002 and 2006, Matahari doubled its sales, becoming a
billion-dollar chain.


Page 25 of 56

iii.

Impact on macroeconomic factors
a. A deep economic recession in 1997 – 98 led to inflation of 80% during the mid 1997
b. During the same period, the GDP growth plunged to -13%
c. The Indonesian Government introduced a wide range of institutional reforms and a
redirected monetary policy towards maintaining price and exchange rate stability.
Eventually, price stability was reinstated.
d. Export, imports and the real exchange rate remained consistent
e. There was an increasing effect of FDI in retail on the total FDI inflows in retail.
However, FDI outflows in retail dropped after 1994.

4.4. Brazil
The Impact on macroeconomic factors since the opening of FDI in retail in Brazil (1994) has been as
follows:
i.

According to a report by CUTS International, since opening up to the foreign investment in
1994, the traditional small retailers managed to increase their market shares by 27%

ii.

The annual GDP growth remained stable and positive

iii.

The unemployment rate decreased after 1994 after its maximum at 9.6

iv.

After 1994, the Brazilian currency (Real) appreciated with respect to U.S Dollar

v.

The value of exports and imports too increased after 1994

vi.

In 1998, the total FDI inflows in retail reached their peak

4.5. Russia
Russia witnessed a supermarket revolution in 2000‘s. In 2002, sales of the top – 15 retail chains in Russia
amounted to $2.7 billion, by 2006, the sales of these chains surged to $19.2 billion. The share of the top –
3 retail chains jumped from about 40% in 2002 to 54% in 2006. Sales from foreign retailers stood at 33%
in 2002 and 35 % in 2006 leading to 8 foreign chains being amongst the top 15.
The Impact on macroeconomic factors since the opening of FDI in retail in Russia has been as follows:
i.

The GDP growth has been positive

ii.

Since 2000, the unemployment rate has decreased.

iii.

After 2002, a sharp increase was observed in FDI inflows and outflows in retail.


Page 26 of 56

4.6. Mexico
Until the early 1990s, nearly all the retail sales in Mexico were dominated by domestic chains. Mexico
opened its doors to foreign retailers in 1991. By 2002, 48% of the $24 billion from retail sales was
accounted by the top – 7 chains. By 2006, the sales from these top – 7 chains nearly doubled to $38
billion, and out of which 53% was by foreigners.
The Impact on macroeconomic factors since the opening of FDI in retail in Mexico has been as follows:

i.

With the influx of foreign retailers in 1991, few major retail stores started dominating the
market, and many of the smaller retailers were made to shut down. By 2001, only 4 chains
dominated the market:
a. Wal-Mart de Mexico(Walmex) with almost half (45.6 percent)
b. Comerical Mexicana with a little over a fifth (20.6 percent) market share
c. Gigante with 15.5 percent share
d. Soriana with 14 percent share

ii.

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

iii.

Wal-Mart took over nearly half of Mexico's retail business with just over 200,000 employees

iv.

The unemployment rate increased to 6.9 in 1995

v.

Though the value of exports and imports was consistent throughout but the exchange rate was
seen fluctuating after 1991

vi.

An increase in the total FDI inflows in retail was observed

5. Chapter 5 – Impact of FDI in Retail in China

5.1. Impact on Farmers
As per a research paper by Kaanan Gupta in 2012, on ―FDI in multi brand retailing – Lessons from
China‖, the operations of the global supermarkets in China indicated that the entry of foreign retailers did
not make much difference to the producer‘s share in the consumer‘s rupee. Due to the sheer size and
buying power of foreign supermarkets, the producer prices did get a bit depressed, however, they were
compensated in the long run. As per the research paper; for a farmer from Hebei province in China, who
grew vegetables on a 0.67 hectare plot of land, the opening of retail had increased, not reduced his client
base. He had direct sales in a Beijing neighborhood every evening, while also supplying to a supermarket
chain.

Page 27 of 56

Further there had been an impact in improving the productivity of farmers, by increasing the size of their
landholdings. For another instance, each household in Hebei, had between 0.06 and 0.13 hectare of
cultivable land, but as more farmers moved to the cities for work, they rented out their land to those
farmers who stayed behind.
However, consolidation of the retail sector in China, as a result of the government – supported rise of
local retail giants in order to protect them from foreign retailers, had put many small farmers who could
not cope with lower prices, out of work.

5.2. Impact on Organized Retail
China's largest retail chains in 2010, were all Chinese companies — the Shanghai Bailian group, Suning
Home Appliances, Gome Home Appliances and Dashang Group, all had bigger sales than Walmart in
China.
Table: Top 10 Chinese Retail Chains 2010
Rank
Name of Company
Sales
(Bn. US$ )

Number
of Stores

Operational Format

Region
of Origin

1

Suning Appliance
Group

24.76

1,342

Electronics Specialty

China

2

Gome Electrical
Appliances
Company Limited
Bailian Group
Company Limited

24.55

1,346


China

16.43

5,809

China

4

Dashang Group
Company Limited

13.66

170

5

Vanguard Company
Limited

11.38

3,155

6

RT-MART
International
Company Limited
Carrefour Société
Anonyme (China)

7.96

143

Supermarket, Department
Store, Convenience Store,
Home Improvement
Store, Electronics
Specialty, Home
Improvement
Drug Store, Food and
Beverage
Supermarket

Taiwan

6.66

182

Supermarket

France

8

Anhui Huishang
Group Company
Limited

6.42

2,915


China

9

Wal-Mart Stores,
Incorporation

6.34

219

3

7

China

China

Supermarket


US

Regions of
Operation
More than 300
cities in all
regions, Hong
Kong, Japan
More than 200
cities in all
regions
20 provinces
and cities in
China
Northeast
China, North
China and
West China
27 provinces
and cities in
China
21 provinces
and cities in
China
21 provinces
and cities in
China
50 cities in
China
20 provinces
and cities in
Page 28 of 56

10

(China)
Chongqing General
Trading (Group)
Company Limited

6.06

319

Store, Electronics
Specialty

China

China
Chongqing,
Sichuan,
Guizhou

Source: Kaanan Gupta 2012

This was primarily because the global retail giant‘s strengths in their home countries were based on
factors that are totally absent in other countries. For instance, Wal-Mart was able to drive costs down
because of its incredible logistics and supply chain networks, which were absent in China. Further the
physical infrastructure like roads and ports were not as developed in China, to the same level as they are
in the US and thus it did not provide the kind of scale that they require to negotiate and bargain with the
suppliers and drive down the cost.
Post liberalization, competition became cut-throat in the supermarket and the hypermarket segment of
China‘s retail segment. By 2010, the largest player in the supermarket segment, the China-based Shanghai
Bailian Group (with 5,809 stores in 2010), constituted only 11% in terms of market share. Even Wal-Mart
which dominates the retail market in the United States, occupied only around 6% market share in China,
despite of the fact the big – box retailer had set up shop nearly 15years ago in the country. RT-Mart
International Limited, a Taiwan-headquartered company was the biggest retailer on the Chinese mainland
with 6.3% market share until mid-2011, attracting more than one-fourth of households in the mainland
market. The French retail giant Carrefour Group, the world's second-largest retailer by revenue held a
4.9% market share during 2010. Tesco Public limited company, the world's third-largest grocer by
revenue, had a 2.1% market share in China over the year 2011. CR-Vanguard Group saw its market share
rise from 6.2% in the second quarter of 2010 to 6.7% in the second quarter of 2011.
The overall number of foreign retail stores in China in the Top 100 increased by 25.64%, exceeding the
11.49% of Chinese retail stores in 2010. There were 135 newly-opened stores of the six major foreign
supermarket operators in 2010, up 22.77% over the previous year.
Among the Top 100, foreign retailers had a sales growth of 18.09% in 2010, vs 25.3% sales growth of
Chinese retailers.

5.3. Impact on Traditional Retail
Since the opening up of Retail sector in 1992, China has attracted huge investments without affecting
either the small retailers or domestic retail chains. In fact, between 2004 – 2010, the number of small
Chinese outlets had increased to around 2.5 million from 1.9 million. It was because the market was so
large and growing so quickly that even today, hypermarkets, convenience stores and other examples of

Page 29 of 56

organized retail make up less than half of the urban food market. In China, unorganized retail, represented
by street vendors and neighborhood ―community retailers‖, continued to thrive, offering cheaper prices
than supermarkets and retail chains. Further, the products which are offered at a lower price by modern
retail are less relevant for the poor who buy them loose in small quantities. Likewise, the presence of big
global retailers in rural China is also much smaller.
Certainly consolidation of the retail sector in China, as a result of the government-supported rise of local
retail giants like Bailian, has put many small retailers who could not cope with the surge in number of
competitors and lower prices, out of work. Nevertheless, the job losses in China have not been felt
because of the pace of urbanization and the growth of cities.

5.4. Impact on Supply Chain
Though it is somewhat perceived that in China, the global big – box retailers have mostly focused more
on opening stores in a drive to capture the market share, there has not been much investment in making
supply chain improvements and operational efficiencies. Wal-Mart has a 40,000 square meter, central
distribution centre in Kengzian (China) and Carrefour uses a different approach, it relies more on local
distributors to deliver direct to the stores to reduce the cost of developing its supplier network and supply
chain. Yet, almost two decades after China opened up retail fully, the sector has seen rapid growth against
the backdrop of increased market consolidation, higher production efficiency enabled by rising
investments in rural infrastructure and booming exports made possible by the setting up of new supply
chains.
5.5. Impact on Consumers
It is evident that the entry of global retail giants heats up the competition, giving consumers a better deal,
both in prices and choices. Mega retail chains need to keep price points low and attractive – that is the
USP of their business. This is done by smart procurement and inventory management, good practices.
For Chinese consumers the attractions of hypermarkets are low prices and one stop shopping for food and
general merchandise. China‘s middle class consumers visit hypermarkets once every 10 days on average.
While hypermarkets are gaining market share among food retailers, the majority of consumers still bought
food at supermarket stores and traditional open markets, especially in rural areas where supermarkets do
not exist.


Page 30 of 56

6. Chapter 6 – Critical Analysis of Impact of FDI in Retail in India

6.1. Impact on Farmers
Since the early 1990s, supermarkets have revolutionized retail sector in developing countries. In order to
reach the mass market, supermarkets have now developed beyond the middle class and upper class
segments. This process has affected not only the traditional retailers, but a much broader spectrum
covering the wholesale, processing, and farm sectors within the entire supply chain. With respect to
quality, costs, volume, consistency and commercial practices, supermarkets require more from suppliers
when they modernize their procurement systems. Supermarkets affect suppliers in a biggest way for foodmanufacturing enterprises, since some 80% of contents sold by supermarkets comprise of processed,
staple, or semi-processed products.
In order to suffice the requirements desired by their clients, Supermarkets have to support small farmers
with training, credit, equipment, etc when they are unable to source from large scale or medium scale
farmers, and the small farmers lack the much needed assets.
The farmers in this way are not only be able to increase their output but also get better rewards in terms of
supplying to organized retailers by tying up long term contracts with them.
With the entry of Global retail giants, the farmers across India‘s 6,00,000 villages are expected to gain
with higher profits and better market access. As the competition increases, the farmers would get good
prices for their harvest. The original producers would get a higher price for their produce, since the profit
will flow to them directly, leaving behind the middle men. This is anticipated to happen as the giant
retailers have more access to capital and a high buying power. Direct purchase from farms will hugely
benefit small farmers who are not getting good returns by selling in the local wholesale market. The
payments will be made directly to the producers and will be free from commission agents. In turn these
large retailers will also benefit by saving 10 – 15% in commissions by purchasing fruits and vegetables
directly.
An Empirical analysis carried out by Sinha & Singhal (March 2013) shows that farmers tend to earn from
20% to 50% more in net terms when they enter direct supermarket channels. For example, net profit was
33% –39% higher among supermarket channel participants compared to traditional market participants
amongst tomato farmers in Indonesia. However this would require more up – front investment by the
farmers to meet greater demands for quality, consistency, and volume compared with marketing to
traditional markets.


Page 31 of 56

FDI in multi – brand retail is an important step to push more growth in the sector. Case studies of MNC‘s
helping farmer communities in India like PepsiCo India‘s potato farming program and Bharti Wal –
Mart‘s initiative through Direct Farm Project and several others 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. 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 resulting in higher income to a farmer.
6.2. Impact on Traditional Markets
It is being anticipated that with the advent of major organized retail players in India, the existence of
traditional mom and pop stores will be in question. However, there is a theory that analyses co –
existence. The size, complexity and diversity of retail industry is a huge advantage for the smaller players
in India, however most of the organized retailers have opened shop in the Metros, Tier 1 and Tier 2
towns.
This has been the main reason, believed to be preventing the liberalization of the FDI norms for Indian
retail for very long. Political oppositions have time and again argued:
a) Adverse affect by the entry of global retail giants: Since these retailers have advanced capabilities
of scale and infrastructure along with being cash rich, this may result in the loss of jobs for people
in the Indian unorganized sector.
b) Better operational efficiencies of the organized players: Lower product prices by global giants
may hamper the profit margins of the unorganized players.
On the contrary some theorists believe, Multi – brand retail, if allowed, can transform the retail sector in
the following significant ways:
a) Firstly, the organized players are expected to bring in the much needed investment which will
help the domestic retailers that don‗t have the resources to sail through, during economic crisis.
b) Infrastructure support extended to improve the backend processes would enable to eliminate such
extreme wastages and enhance the supply chain operational efficiency.
c) FDI in multi – brand retail would in no way endanger the jobs of the people employed in the
unorganized retail sector. It would rather lead to the creation of millions of jobs as massive


Page 32 of 56

infrastructure capabilities would be needed to cater to the changing lifestyle needs of the urban
Indian who is keen on allocating the disposable income towards organized retailing like big box
stores along with the local kirana stores. These stores would be able to retain their importance
owing to their unique characteristics of convenience, proximity and skills in retaining customers.
Also, these would be more prominent in the Tier-II and Tier-III cities where the organized
supermarkets would find it harder to establish themselves.
Another way of approaching the problem is to analyze if the growth in market share by the International
Retailers will kill the Independent Retailers. Technopak advisors in their white paper on ―FDI‘s Impact on
Indian Retail sector and Indian Economy‖ (October 2012), have suggested that Corporatized retail is
expected to grow its share from the current 7% to nearly 20% in the next decade. By 2021, this will
translate into USD 162 billion in revenue for corporatized retail.
Table: Comparison of Corporatized, Independent and International Retail

Estimated merchandise consumption (USD Bn)
Share of Independent Retail
Size of Independent Retail
Share of Corporatized Retail
Size of Corporatized Retail
Share of Indian Corporatized Retailers in total Corporatized Retail
Share of International Retailers or International Retailers assisted Retail
Size of International Retailers (USD Bn)

2001
120
96%
~115
~4%
5
~100%

2012
490
93%
436
~7%
34
~95%

2021
810
80%
648
~20%
162
50%
50%
80


In 2011, the total revenue of all hypermarkets (largely international retailers) in China was USD 80
billion including the revenues of Walmart, Carrefour, Tesco and other regional players. This is after a 15
year long journey for these retailers, in China.
Optimistically, if it is assumed that retail sector reforms in India will lead to the creation of a similar scale
for these players then, in 2021, all the international retailers in India can at best aspire for a USD 80
billion revenue share. This translates to approx 50% of the total revenues (USD 162 billion) coming from
organized retail in 2021, with Indian corporatized retailers contributing the balance. This further translates
to around 10% of the total retail market each for international and Indian corporatized retailers by 2021.
Technopak‘s analysis therefore assumes that international retailer‘s share of the Indian retail sector would
be no more than 10% in the next 10 years, even in a best – case scenario. Even with this being the case,
90% of the retail sector will still be attributable to independent retail or Indian corporatized retail.


Page 33 of 56

6.3. Impact on Consumers
India is now home to the largest number of moneyed consumers. One of the key drivers in the growth in
retailing is the increased consumer demand resulting due to the growth of consumer groups with
disposable income between USD 2,500 and USD 10,000 per annum which grew from 47% in 2010 to
50% in 2011. The strongest impact of organized retailing would be seen on these consumers. Along with
the increase in disposable income and increased discretionary expenditure, the consumers will get better
choice of formats.
Due to the Direct Procurement model followed by organized retailers, there would be substantial cost
savings through disintermediation which would ultimately benefit the consumer.
Fig: Illustration for effect of direct procurement on Farmer and Consumer Price.

Source:Assocham & Yes Bank 2012

The Indian consumers will soon have the luxury of world class opportunity of shopping to meet the
requirements of their daily life. They will find a new world of enjoyment of picking up consumer items to
their greatest satisfaction. Big retailers will often allow discounts on selected items which will facilitate
the consumers and they can end up with marginal bargains.


Page 34 of 56

6.4. Impact on Supply Chain
As per Industry estimates 35 – 40% of India‘s total production of fruits and vegetables and nearly 10% of
food grains, is wasted every year due to inadequate storage and transport facilities. Lack of adequate
storage facilities causes heavy losses to farmers in terms of quality degradation and wastage of produce in
general, and of fruits and vegetables in particular. Post-harvest losses of farm produce, especially of
fruits, vegetables and other perishables, have been estimated to be over INR 1 trillion per annum, 57% of
which is due to avoidable wastage and the rest due to avoidable costs of storage and commissions.
Though India is the second largest producer of fruits and vegetables (about 200 million MT), it has a very
limited integrated cold – chain infrastructure, with only 5,386 stand-alone cold storages, having a total
capacity of 23.6 million MT. It is estimated that India is already facing a shortage in Cold Storage space
by about 9 – 10 million MT. Moreover, the existing cold storage facilities now available are mostly for a
single commodity and around 80% of them are utilized for potato storage resulting in poor capacity
utilization. Since Indian agriculture is witnessing a major shift from traditional farming to horticulture,
meat, poultry and dairy products and the demand for fresh and processed fruits and vegetables is
increasing due to rising urban population and transforming consumption habits, the role of cold storages
becomes critical.
Further, the warehousing capacity available in India, in public, co-operative and private sector is about
108.75 million MT and another 35 million MT warehousing capacity is required during the Twelfth Five
Year Plan period for the storage of all major crops. This clearly indicates to the huge demand supply
mismatch. Moreover, the warehouses in our country have been built following traditional norms and
without proper specifications. They lack in optimal size, adequate design, ventilation facility, inventory
management and storage system.
Almost half of this wastage can be prevented if fruit and vegetable retailers have access to specialized
cold storage facilities and refrigerated trucks. Though FDI is permitted in cold – chain to the extent of
100%, through the automatic route, in the absence of FDI in front – end retail, investment flows into this
sector have been insignificant.
The opening up of FDI in Retail will bring in investments in this field compulsorily as the modern retail
formats will procure large quantities to gain economies of scale and will try to avoid wastages due to
improper storage facilities. As the business of organized retailing of food matures, it would increase
private investment in the area of supply chain infrastructure.
The organized retail will bring in efficient practices that will help farmers in the procurement process,
reduce wastage with finally efficient storage and will finally cut the losses. The giant retailers will help


Page 35 of 56

India to have strong storage system with highly developed transportation. This is also going to get a boost
from the various schemes of the Government to incentivize rural infrastructure creation (Terminal
Markets, Mega Food Parks, Rural Godowns etc.). This will benefit the farmers immensely by creating
feasible and competitive marketing alternatives for their produce. Giant retailers with decades of
experience on how to manage mountains of inventories, supply them to key distribution centers and do it
all faster, better, cheaper. The arrival of foreign retailers will definitely bring in synergies in distribution
management practices.
Agricultural value chains have increasingly become complex over time. Market requirements rapidly
change, driven by increasing demand, changing lifestyles and government policies.
In response to these changing market requirements, value chains need to become more coordinated
leading to more integration and concentration to achieve efficiency and minimize risks.
Product and market standards change with time which in turn, require changes from various factors in the
value chain that supply these products to meet market requirements. But this has not been the case with
the Indian Agriculture supply chain which has by and large remained the same over the years, not
incorporating the required changes for development and increased efficiency.
The farmers in India receive a share of less than 30% for most of the food grains and 15% – 20% for
horticultural produce, while in developed countries the share comes to around 50% – 70% for most of the
commodities. This is basically because of the large number of intermediaries involved in the chain.
Intermediaries, no doubt are an essential part of the chain and they add value to the commodities and help
in aggregation.
But this intermediation should essentially be limited to the level where value is actually being added. In
India unnecessary intermediaries get involved along the chain resulting in margin payouts at various
levels and losses due to multiple handling.
The margins taken by the intermediaries are generally product specific and are higher for fresh produce,
having shorter shelf life.
For grains and cereals, around 28% margin is added to the cost, before the produce reaches the
processors. Further costs are added when the produce is processed and passes through the Mandis. This
cost accounts for a 12% increase. These margins considerably increase the prices of grains and cereals for
end consumers.
Similar is the case with fruits and vegetables where significant margins are added up to the cost of
produce. But these margins are significantly higher in case of Fruits and Vegetables owing to their shorter


Page 36 of 56

shelf life and greater perish ability. In case of fresh fruits and vegetables, around 47% margin is added to
the cost of produce before it reaches for processing.
Further margins are added up during processing and movement through different levels in Mandis.
Generally, the prices of the produce double in such cases.
Entry of players in the organized retail tends to make the supply chain more effective and efficient by:


Sourcing directly from the farmers or at least closer to the farm gate and eliminating the
unnecessary intermediaries. This in turn results in better price realization to the farmers.



Overall, farmers are bound to gain from the advent of the organized food retailers under a proper
regulatory environment promoting direct procurement on one hand and machinery to prevent the
exploitation of farmers on the other hand.



Direct procurement also gives the farmers certain indirect benefits like knowledge of what needs
to be produced when, technological inputs and access to credit on account of assured market etc.



FDI in retail will eliminate or greatly reduce the role of middlemen and ensure a sustainable and
reasonable price for both the farmer and the consumer by shortening the supply chain through
increase in direct purchase



The players in the organized retail sector will put in all efforts to reduce wastage at all levels by a
substantial amount. FDI will bring in a spurt of investments in latest technologies for storage,
handling, processing and market information.



Fair grading weighment and payment would be the key areas of benefit for the farmers. This will
also encourage the farmers to grow better quality produce as it would command better prices. The
payment structure in most of the organized retail is prompt and inclusive of the cost of
transportation. This is a great benefit to the farmer.



As the organized retail focuses on good quality products, adulteration of food will be kept under
check.



There is a greater deal of transparency in organized retail and monitoring is much easier.

On the farming front retailers can partner with farmers to enhance their farming practices by providing
access to Finance, technical support and inputs.


Page 37 of 56

Fig: Efficiency in Supply Chain

Source:Assocham & Yes Bank 2012

6.5. Impact on Employment
Employment generation in the retail sector is a function of size and productivity within the sector. As we
are aware that the productivity norms differ between independent and corporatized retail thus an
assessment needs to be made to analyze the respective shares of independent and corporatized retail,
mapped against the respective productivity norms in order to determine the net impact of both
independent and corporatized retail on employment.
India is home to approx 15 million points of sale, or shops, of which a majority are run as standalone
entities owned and operated by members of the same family. These ―independent retail‖ shops thus
provide employment to family members and also paid employees. Almost all the paid employees in these
shops are part of an informal workforce and as such have no minimum wage or fixed working hours.
Employment in this segment averages approx 1.5 employees per shop.

Page 38 of 56

On the other hand, employment in corporatized retail comprises employees working on the shop floor,
clerks manning the billing counters, security guards and employees in central / corporatized functions.
The productivity norms for employment in corporatized retail are a function of sales per square feet, or
sq. ft., and employees per sq. ft.
In 2001, the share of corporatized retail in the retail sector was under 5% and the remaining 95% was
constituted by independent retail. By 2011, the share of corporatized retail grew to 7% and is projected to
grow further to 20% by 2021.
Table: Relation between Retail & Employment

GDP (USD Bn)
Estimated merchandise consumption (retail market opportunity) (USD Bn)
Share of Independent Retail (USD Bn)
No. of direct employees in Independent Retail (Mn)
Share of Corporatized Retail (USD Bn)
No. of direct employees in Corporatized Retail (Mn)

2001
450
120
115
18
5
0.1

2012
1958
490
455
22
34
0.7

2021
3310
810
648
32
162
3.3

Source:Technopak 2012

The above table shows the relation between share of independent and corporatized retail viz the number
of direct employees in the respective segment. It is evident that independent retail has added 4 million
jobs in the last decade. In the next decade, while corporatized retail is expected add another 2.6 million
jobs, independent retail will also create 9 million more jobs.
We can hence conclude, contrary to the belief that opening of FDI in retail will lead to a loss of jobs in
traditional retail, rather it can be inferred that opening up the retail sector will create new jobs in
corporatized retail, but the extent of this job creation will be limited by corporatized retail‘s inability to
grow its share in total merchandise retail, and the Independent retail sector will however continue to add
many more employment opportunities.
6.6. Impact on Inflation
We have seen above that the supply chain for retail operations comprises product development,
merchandising, vendor development, logistics, warehousing, in-store selling etc. Inarguably, retailing
requires scale, precision and efficiency in the supply chain for retailers to be profitable. Retailers do this
by integrating the supply chain thus ensuring that quality merchandise is delivered faster without damage
or leakage of any kind. The efficient working of this supply chain reduces the costs incurred in making
goods reach the consumer.
This reduction in the distribution cost of merchandise is passed on to the consumer through a lower retail
price for that merchandise. Thus, it contributes positively in reducing inflation.

Page 39 of 56

However, it is important to understand the various categories that make up merchandise retail and the
contribution of corporatized retail to each of these categories. Food has the largest impact on consumer
price inflation. This is validated by the fact that today 70% of merchandise retailing comprises food &
groceries. Therefore, mapping the share of corporatized retail in dispensing food merchandise will give an
objective picture of corporatized retail‘s ability (present and future) to tame inflation.
Table: Share of Retail Segments

Food & Groceries
Apparel
Others

Total Retail
USD Bn
343
38
110
490

2012
Corporatized Retail
(Share of Total Retail)
10 (3%)
6 (16%)
17 (15%)
34 (7%)

Total Retail
USD Bn
486
62
262
810

2021
Corporatized Retail
(Share of Total Retail)
24 (5%)
11 (17%)
125 (48%)
162 (20%)


For simplicity, merchandise retail is broadly classified into three categories - Food & Groceries, Apparel,
and Others (Jewelry & Watches, Electronics, Home Improvement, Pharmacy, Footwear etc.)
While 70% of total merchandise retail comprises Food & Groceries, only 3% of Food & Groceries is
retailed through corporatized retail. This scenario is not going to change much in the coming decade.
While, corporatized retail‘s share will register an impressive growth in other categories, Food &
Groceries will prove to be a challenge. By 2021, the share of corporatized retail in Food & Groceries
retail is expected to grow by a mere 2 percentage points, to around 5%. This is largely to do with the
market structure on the supply side of the Indian economy. This market structure will not allow
corporatized retailers to integrate their food & groceries supply chain. The lack of direct access to farmers
for sourcing, interstate movement of goods, tax structures, and inadequate capacities in the food supply
chain will act as the chief barriers to this integration. The inability of corporatized retail to grow its share
in food & groceries retail can therefore limit its impact in achieving the intended objective of taming
inflation to a very large extent.

6.7. Impact on Government Revenue from Taxes
There is a positive relationship between the increase in tax receipts and the increasing share of
corporatized retail. Most retail transactions conducted in the 15 million shops of Independent retailers in
India are in cash. This provides a significant leeway for a parallel economy to thrive. There are tax (VAT)
leakages via under – invoicing or non – reportage of sales. The structure of independent retail also
provides enabling conditions for the trade of spurious and counterfeit goods. With an increasing share of

Page 40 of 56

corporatized retail, the probability of such leakages would diminish leading to an increase in the certainty
of tax receipts which will provide the respective State Governments with extra revenue, which can be
better utilized in the development of other infrastructure.
Table: Tax Revenue from Retail
2001
120
4%
5
0.5

Total Merchandise Retail (USD Bn)
Size of Organized Retail
Size of Organized Retail (USD Bn)
Tax revenue @ weighted average tax rate of 10% (USD Bn)

2012
490
7%
34
3.4

2021
810
20%
162
16.2


7. Chapter 7 – SME sector’s viewpoint on impact of FDI policy in Retail
As per a survey conducted by CII (Confederation of Indian Industries) during December 2011 and
January 2012, on the impact of FDI on SME‘s, which was based on a large sample size of 250 companies
covering different categories of SME‘s according to sales turnover, from different regions of the country
including SME‘s with a turnover of
Rs. 25 Lakhs to Rs. 1 Crore
Rs. 1 Crore to Rs 5 Crore
Rs 5 crore to Rs. 25 Crore
Rs. 25 Crore and Rs. 100 Crore and above
The CII Survey confirmed that almost 96% of the respondents from the SME sector were aware of the
Government‘s earlier decision to allow 100% FDI in single brand retail and 51% FDI in multi-brand retail
and also of the latest notifications issued thereafter. The SME Industry, according to the survey, was in
favor of the government‘s decision to allow 51% Foreign Direct Investment (FDI) in multi-brand retail
and 100% in single brand retail.
A majority of the SME companies that were

Fig: In favor of FDI in Multi Brand Retail

surveyed, had supported the government‘s
decision and the notification allowing 100% FDI
in single brand retail and about 52% of
respondents

were

hoping

for

an

early

implementation of 51% FDI in multi-brand

Source:CII Survey 2012

retail.


Page 41 of 56

On the question how the SME industry

Fig: Entry of MNC Retailers – Opportunity or Threat

considered the entry of MNC retailers as a threat
or opportunity, majority of respondents (66.7%)
saw it as an opportunity for their sector while
around 21 % of respondents perceived it as a
threat. About 12.5 % of respondents were of the
opinion that the decision would have little or no


impact on their company.

The CII survey also tried to find out and make an assessment of the impact of the opening of FDI in retail
on SME‘s in terms of different growth indicators / parameters like sales, size of the industry / capacity
expansion, employment, branding and achieving other efficiencies: -

7.1. Impact on Sales
Majority of the respondents (93.7 %) were of the opinion that, opening of the FDI in retail will result in
growth of sales of their products. Of them, around 21% respondents believed that the impact on the
growth of sales of their product would be in excellent range (> 20%), 31% of the respondents perceived
the impact on growth of sales to be in the high range (10 – 20%), 33 % expected it to be in a moderate
range (5 – 10 %), 8 % felt the growth to remain in a low range (0 – 5%) and the balance 6 % felt that the
decision would have a negative impact on the growth of sales of their products.
Fig: Growth in sales of product



Page 42 of 56

7.2. Impact on Size of Industry, Business / Capacity Addition
On the aspect of the possible impact on the size of the industry, business and capacity addition, majority
of the respondents (97.9 %) expected the size of their Industry / company to grow with the opening of
FDI in multi – brand retail and single – brand retail. Around 22.9% of the respondents perceived that their
industry would grow by an excellent rate (> 20%), 25% of the respondents expected the impact to be in
the high range (10 – 20%), while 33% expected the growth to be in the moderate range (5 – 10%), and
22% felt the growth to be in the low range (0 – 5%). A significantly negligible 2% of the respondents felt
that the decision would have a negative impact on the growth of size of their industry and business.
Fig: Growth in size of Industry, Business / Capacity Addition


7.3. Impact on New Orders / Contracts
Majority of respondents (95.8%) were of the opinion that the decision of opening of the FDI in retail
would impact them positively in the form of new orders / contracts generated. Around 31% of
respondents expected the new orders and contracts to grow substantially with more than excellent rate
(>20 %), 27% expected the impact to be in the high range (10 – 20%), while 31% expected it to be in the
moderate range (5 – 10 %). Around 6% perceived the growth to be in a low range (0 – 5%), however 4 %
felt that the decision would have a negative impact on the growth of size of the industry in terms of new
orders and contracts.


Page 43 of 56

Fig: Growth in New Orders / Contracts


7.4. Impact on Qualitative improvements and branding of products
On the condition of mandatory sourcing of 30% from the SME Sector, over 56 % of the respondents were
of the view that the government‘s decision will help in achieving qualitative improvements and branding
of their products. This in turn, will ensure SMEs in receiving a sure source of market and higher value
realization for their products / supplies. It will also provide for expansion of their scales of production,
facilitating domestic value addition in manufacturing, thereby creating a multiplier effect on employment,
technology up gradation, income generation, demand and further investment.

7.5. Impact on Supply Chain efficiencies
Around 68% of the respondents surveyed, were of the opinion that Fig: Improvement in Supply Chain
the opening up of retail would lead to improvements in the supply
chain efficiency within their sector, which in turn will integrate
small and medium size enterprises with the modern trade process,
resulting in substantial amount of knowledge and skill transfers in
the sector. However, 17% believed that there would be no impact,
and 15% were not sure if the decision could have any impact on
the supply chain at all.



Page 44 of 56

7.6. Impact on Employment
Around 48% of the respondents were of the opinion that the Fig: Impact on Employment
decision would have a positive impact on the employment in their
sector whereas 35% expected no change in the scenario. Around
16% believed the impact on the employment in the SME sector to
be negative.


8. Chapter 8 – Analysis of Current Entry Structure in line with FDI Policy Regulations
Many global retailers like Walmart, Metro, Ikea, Carrefour, Woolworth, Staples, etc which have been
wanting to establish and capture some market share in India are now trying to leverage on the policy of
100% in cash and carry wholesale and 51% in multi-brand retailing. Similarly retailers like Debanham,
Espirit, Nokia, Zara, Mark & Spencer, Hamleys etc. are leveraging policies based on single brand
retailing model. Significant foreign retailers‘ presence is seen in Apparel, Fashion, Luxury and food
retailing using either the franchise or licensing route.
Recently many global players like Amazon, Groupon, etc are taking advantage of online retailing and
hence are targeting Indian consumer by setting up relationship with supply chain companies to deliver
products to end customer therefore bypassing the need to create physical retail stores. To target Indian
consumer, identical efforts are expected by other leading global retailing giants leveraging on 3G and
smart phone apps, spreading virally on internet, and social networking platforms.
8.1. Entry structure for Foreign Retailers
India now provides an opportunity for retailers seeking to make investment in the emerging economies to
participate in the growth and increase their global presence. The nascent stage of organized retail
penetration in India and the shortage of availability of cash for expansion will prompt more business
activity in the sector.


Page 45 of 56

Fig: FDI entry options in Retail at a glance

Source:BMR, Taxand 2012

Retail sector requires significant capital investment. However, currently viable funding is not easily
accessible
Suggested modes of FDI involvement would be in the following formats:
Equity: Likely to be the main source of funding Indian operations
Offshore Debt / External Commercial Borrowings:
Regulatory restrictions on end-use of foreign borrowings will pose a severe challenge.
Foreign debt has also not been permitted in single-brand retail model
However, Offshore debt may be possible for multi-brand retail companies for establishment
of cold storage and warehousing facilities
Hybrid Securities: Some ‗hybrid securities‘ which are classified as ‗equity‘ from a regulatory
perspective will form an interesting format for FDI participation. Formats like CCD‘s, FCD‘s
(fully and compulsorily convertible preference shares and convertible debentures) will become a
major source of bringing Foreign money into India.


Page 46 of 56

Ever since the policy on single brand retail policy was announced in 2006, more than 60 brands have set
up retail operations in India in strategic joint ventures with Indian partners.
Some of these include:
Brand
Marks & Spencer
Fendi
Damas
Burberrey

JV Parner
Reliance Retail
Chordia Fashions
Gitanjali Lifestyle
Genesis Color

Brand
Georgia Armani
Ferragamo
Inditex (Zara)
S Oliver

JV Partner
DLF
DLF
Trent
Orient Craft

Source:PWC, FICCI 2012

Some of the other deals announced recently:
Investor
SAIF Ventures
Tiger Capital, Helion
Ventures, Accel India
Fidelity
Tiger Capital
Sequoia Capital India
Standard Chartered PE

Investee
Ink Fruit
Letsbuy.com

Sector
Online apparel site
Online consumer durables site

Big shoe bazaar India
CaratLane.com
Lovable Lingerie
Privi Organics

Online shoe site for wholesale purchases
Online jewellery site
Innerwear
Indian aroma chemical products manufacturer

Source:PWC, FICCI 2012

Acquirer
Future Venture India Ltd
Peter England Ltd

Target
Big Apple (Convenience Stores)
Pantaloons Retail India Ltd

Year
Sep 2012
Sep 2012

Deal Type
Acquisition
Acquisition

Phoenix Mills Ltd
Flipkart Online Services Pvt. Ltd.
Gitanjali Gems Ltd
Shopper Stop Ltd
TTK Prestige Ltd
TV 18
Shoppers Stop Ltd
TPG Capital, Bain Capital

R & R Salons
Classic Housing Projects Pvt. Ltd.
eTree Marketing Pvt. Ltd.
Crown Aim, China
Gateway Multichannel Retail India
Triveni Bialetti Pvt. Ltd.
On – Graph Technologies Pvt. Ltd.
Home Solutions Retail (India) Ltd
HyperCITY Retail India Pvt. Ltd.
Lilliput Kids wear Ltd.

May 2012
Mar 2012
Feb 2012
Dec 2011
Nov 2011
Sep 2011
Jul 2011
Aug 2010
June 2010
Apr 2010

Private Equity
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Acquisition
Private Equity

Source:IBEF 2013


Page 47 of 56

8.2. FDI policy regulations for Single Brand Retail Trading (SBRT) – an analysis
Issue

Policy Requirements

Impact

Ownership of
the ‗brand‘



Investor entity need not be the owner of
the brand
Copy of licensing / franchise / sublicense agreement required to be
furnished by investing entity at the time
of seeking approval



Inclusion of sub-brands/ differentiated
brands/ variants of brands
All brands should be retailed together in
one or more country outside India
Products should be branded during
manufacturing
All product/product categories to be
sold in India need to be specifically
mentioned and approved
In case of FDI beyond 51%, sourcing of
30% of value of the goods purchased, to
be done from India, preferably from
MSMEs, village, cottage industries,
artisans and craftsmen, in all sectors
Condition to be met by the approved
retail trading entity
Condition would have to be met in the
first instance basis average of five
years; thereafter, to be met on an annual
basis
Quantum of domestic sourcing to be
self-certified by company (validated by
auditors)





Concept of
‗single brand‘






Mandatory

sourcing
of
30% products
from India in
case of FDI
beyond 51%
















Amendment recognizes IP holding
structures established by retail
companies
Provides opportunity to use
investment holding company
structures in SBRT
Investment by Private equity /
financial investors (other than FIIs)
Brands owned by a separate legal
entity, cannot be consolidated in
single store
Any addition to product categories
would require approval

Offers flexibility to foreign retailers
for sourcing products
May still be a deterrent for foreign
investment in trading of high-end
technology niche products
Existing tie-ups for sourcing built
by various foreign companies in
India – whether to continue or
remodel?
Whether products purchased locally
should be exported or retailed in
India? – needs fact based analysis


8.3. FDI policy regulations for Multi Brand Retail Trading (MBRT) – an analysis
Policy Requirements

Impact


Page 48 of 56




Minimum investment – US$ 100 million

At least 50% of total FDI to be invested in
backend infrastructure






Sales outlets can be set up only in the States 
that agree to allow FDI in MBRT
Can only be opened only in cities with 
population of more than 1 million (only 53
cities as per 2011 census)







At least 30% of the value of products to be 
sourced from Indian 'small industries‘
Small industries defined to include industries
having total investment in plant & machinery 
not exceeding US$ 1 million

Mechanics to compute minimum investment in
case of investment at premium or in case of
acquisition will pose a question
Specialty stores may not be able to meet
minimum investment cap
Unbundling of back end infrastructure to a
group entity would pose difficulty
Investor can‘t have pan India presence due to
varied state policies / political circumstances
Need for developing an appropriate legal and
operational structure
Significance of cash and carry wholesale
trading model to continue – however
transactions with retail entity may be subject to
scrutiny from a policy perspective
Risk of future retroactive change in policy by
the Government – could be viewed as breach of
bilateral investment protection agreements and
constitutional laws
Establishing compliance with this condition
would be onerous and would require a robust
data capture process
Potential hindrance to building economies of
scale


8.4. Impact of regulation – Minimum investment of USD 100 Million
Under the revised FDI policy for multi – brand

Fig: Snapshot of major retailers in 2010-11

retail, it has been proposed that a minimum

Segment
Apparel

by the foreign entity with a constraint to obtain a
maximum stake of 51% in the Indian Joint venture.

Mass Grocery

This condition acts as a barrier for entry to the
foreign retailer, as it implies that the minimum

Beauty &
Wellness

investment required by both, the foreign and the
Indian partner together, will be more than INR

Existing
Player
Pantaloon
Shoppers Stop
Westside
Big Bazaar
Reliance Fresh
Apollo

Revenue
(INR Cr)
4097
1927
821
6914
7599
860

Stores

Tata Eye+

investment of USD 100 million is to be brought in

328

>200

>65
>50
>60
>210
>400
>1350


1200 Cr. (considering 1 USD = INR 60).


Page 49 of 56

Mass Grocery and Apparel, which are two of the fastest growing organized retail segments where there
exist large domestic retailers, could be the potential segments for joint ventures with foreign retailers.
However, other segments like will not tend to benefit much from this condition.
8.5. Impact of regulation – 50% of FDI to be invested in backend infrastructure in 3 years
Minimum investment of 50% of total FDI (say more than INR 300 Cr) is to be invested in backend
infrastructure in the first three years of the first tranche of the investment.
Different retail segments have dynamic requirements of backend infrastructure. Mass Grocery needs
significant investment in the backend. (For example food processing unit, cold chains, etc.)
However, other segments such as Apparel, Beauty & Wellness and Consumer Electronics have limited
requirements in the backend. Further, as per the policy, land cost and rentals that might be incurred for
warehousing are not included in the definition of backend infrastructure.
Hence, meeting this policy constraint would be a challenge for any player in the retail segment other than
Mass Grocery.
Fig: Backend Infrastructure of major Retail segments

Apparel

Mass
Grocery

Beauty &
Wellness

Consumer
Electronics

Manufacturing
Do not have their
own manufacturing
units

Warehousing
Own warehouses in
different regions of
India

Many existing retail
chains own
processing centers for
private label brands
Do not own
manufacturing units,
except few stores
such as eyewear
Some products of
other manufacturers

Own distribution
centers with cross
dock facility and cold
chains etc
Own warehouses in
India
Own warehouses in
India

IT
Possess IT
infrastructure for
Inventory
Management
Possess IT
infrastructure for
Inventory
Management
Companies have
centralized database
management

Logistics
Outsourced to third
parties

Possess IT
infrastructure for
Inventory
Management

Either outsourced or
company owned

Own subsidiaries for their
logistics (For example
Future Supply chain and
Reliance Supply)
Outsourced to third
parties


8.6. Impact of regulation – 30% of sourcing from ‗small‘ industries
This policy constraint implies that retailers should have at least 30% sales from private label brands or
unbranded products sourced from small industries. Existing Mass Grocery retailers in India source many


Page 50 of 56

Report on Impact of FDI in Retail in India

Report on Impact of FDI in Retail in India

Recomendados

Recomendados

Mais conteúdo relacionado

Mais procurados

Mais procurados (20)

Destaque

Destaque (20)

Semelhante a Report on Impact of FDI in Retail in India

Semelhante a Report on Impact of FDI in Retail in India (20)

Último

Último (20)

Report on Impact of FDI in Retail in India