FDI in Retailing: Long Overdue



Authors: B V Kiran,
Faculty Associate
ICMR (IBS Center for Management Research).

The government should allow FDI in the retail sector taking a cue from China.

The Indian retail market, which was largely unorganized till the 1980s, has undergone an immense transformation in the post-liberalization era. Due to the wide range of products available, the increasing purchasing power of consumers, superior supply chain management leading to economies of scale and a world-class customer service, the Indian retail market has been witnessing tremendous growth. Alongside, there has been an increasing pressure from international agencies on the government, to allow Foreign Direct Investment (FDI) in the retail sector. Many industrial giants like Tatas (Westside), Eureka Forbes, RPG (Food World, Giant, Music World, Health & Glow), Pantaloons, Big Bazaar, Shoppers' Stop, and Lifestyle have entered the Indian retail market. These big corporate houses have managed to attract a large number of customers over a period of time and have significantly improved this sector. Moreover, these companies invested huge resources, in terms of capital, personnel and technology, which allowed them to garner a significant market share in this industry. The increase in the double income households (as a result of multinational companies entering the country and creating potential employment opportunities), has given a tremendous boost to the spending power of consumers, thereby opening a plethora of opportunities for retailers.

Unlike earlier, consumers now are spending a major chunk of their income on buying goods and services. A growing number of families with both the spouses working gave impetus to instant and ready-made products (ITC's ready-to-eat foods) and services, which help save time. Retailers are now offering an entire range of convenience products, which a typical household requires.

There are several reasons that have led to the retail sector being more organized. Increased urbanization, growth in the demand for newer and varied products by consumers, and branded goods penetrating the market on a large scale are some of the reasons. Segments in retailing like consumer durables, furniture, healthcare, garments, food and services, personal care products, apparel, music, and books are increasingly getting organized.

Globally, there has been a significant change in the retail sector over the past two decades. More than 70% of retailing in developed countries is organized. The organized retail sector in China is 10 times that of India's. India is next only to China in market size and is the fourth largest economy in the world after the US, China and Japan. (The US accounts for 21.1% of the world's GDP, China 12.6%, Japan 7% and India 5.7%.) The World Trade Organization (WTO) and international agencies have been pushing the Indian government to allow FDI in the retail sector. The WTO has also been planning to withdraw tariff and trade privileges provided to India under the new General Agreement on Tariffs and Trade if FDI is not allowed.

However, in India, the government is still apprehensive about allowing FDI in the retail sector. It is high time that the government allows FDI in this sector. The average Indian deserves consumption of good quality products at prices he can afford. In a developing country like India, a major chunk of a consumer's expenditure is on retail products. This expenditure is only likely to increase in the near future. Retailing in India, in spite of industry majors entering, is still at its nascent stage. According to India's Ministry of Commerce and Industry, only 2% of the retail sector is organized, leaving a huge margin for other players to enter the market. Moreover, the volume of retail turnover in the country is estimated at Rs. 4 lakh crore, which is about 10% of our Gross Domestic Product (GDP). The retail industry is the second largest sector after agriculture in terms of turnover and employment. The growth rate of the retail sector is estimated at about 5% per annum. It is also interesting to note that retailing in India by 2010 will be a $300 bn industry, provided our economy continues to register a growth of 6% of the GDP annually.

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