March 05, 2013


FDI (Foreign Direct Investment) is an investment in a foreign country with an intention to gain managerial interest in a company operating in that country. There are many foreign players who have invested and are investing in this way in India.

The government of the host country may limit the percentage of foreign stake in any company with the intention to avoid foreign control over its country’s economy and people. This percentage varies from industry to industry depending on how crucial the industry is for the country. Even India limits the percentage of foreign stake. The industry-wise limitations are 100% for tourism, hospitality, education, roads and highways, pharmaceuticals, petrochemicals; 51% for multi-brand retail; 49% for civil aviation, insurance, D2H, public sector banks; and 26% for print media, defence, etc to name a few.
Retail industry in India is on of the most developing industries and has a huge potential to grow further. It contributes about 15% to GDP and 8% to employment of the country. It can be classified into single-brand and multi-brand retail. Only 4% of the retail in India is organised. The FDI limit for single-brand retail and multi-brand retail in India was increased to 100% and 51% respectively in 2012.

The increase in the FDI limit in retailing by the Indian government has led to top brands from various countries trying to enter India. Few foreign brands like Zara, Mango, Tommy Hilfiger are already present in the country as joint ventures, franchises, etc. Success stories of these companies are further attracting the investors more. More than a dozen brands are said to be eyeing Indian market for entry. Few of the brands seeking to enter the country are IKEA, Gap, H&M, Sketchers, Celio, Prada, Uniqlo, Decathlon SA, Lotus Arts de Virve, etc. Germany's Esprit, which decided to exit India last year, is now once again evaluating the markets to relaunch its brand.

Increasing the limit of FDI in retail has both advantages and disadvantages. Let us first look at the positive side of it. The rationale behind the decision might be:
1. For the wholesalers, one advantage is to reduce transaction costs to consumers of finding out prices of different qualities of end products.
2. Results in positive changes in the organisation of supply chain as it happened in the case of automobile industry and thus leads to in low procurement costs.
3. Producers would get better prices for their products because of elimination of middlemen.
4. The efficient supply chain would increase producers’ surplus and thus release people from agricultural sector to manufacturing. Thus both the sectors are improved.
5. Improvement in supply chain also results in low cost end products. This is an advantage for low and medium income consumers.
6. Because of the presence of large retail stores, revenue (in the form of service tax and VAT) of the government due to computing billing is followed in the organised sector
7. Foreign retailers add to the choices available to the consumers. Competition also leads to availability of end products at low prices and better
8. Infrastructure would be improved.
9. Cash-deficient organised domestic retailers can raise capital from foreign investments in the form of joint ventures, etc.
10. It leads to improved technology in the spheres of processing, grading, handling, etc and also improved logistics.
11. Quantity and quality of employment opportunities would increase.
12. The traditional mom and pop stores would not be affected because of the proximity to households, selling on credit, home delivery, choice of unpacked items and customer relations.
13. The knowledge that comes from the foreign players is huge. This may be in the field of management or operations or technology. Once the industry demands, the education systems would change accordingly to provide the skills. So indirectly the education standards would improve. 

Now let us look at the flip side of it i.e. the disadvantages of having increased FDI limit in the retail sector.
1. The main losers would be middlemen. As the large retailers but directly from producers, the middlemen would lose their jobs.
2. The MNCs might form a cartel and the buying power of a single buyer would leave lesser profits to the farmer.
3. The competition might be so high that the mom and pop stores might find it difficult to sell at such low prices.
4. We might lose the self competitive strength for the Indian organised retail sector.
5. The war for space might increase the real-estate costs.
6. There are chances of distortion of Indian culture.
7. The foreign players might import goods from their mother countries that is against the interest of domestic suppliers.

However, the government has a role to play to see the success of this policy. It must implement effective regulations to ensure healthy competition, welfare of employees and environmental protection. It must put in place a law related to retail so that there are no ambiguities. It must also provide credit to small domestic players in this sector at lower interest rates so that they can compete with the giants. The government should support the suppliers to develop these large retailers so that the MNCs would not go for imports. This would result in a win-win situation.

The main interest of any person interested in operations in this issue would be supply chain. The large retailers would complement the investment of government in supply chain i.e. roads, energy. This would lead to decrease in transaction costs of business- both B2B and business to customer such as information costs, search costs, transport costs, communication costs, contractual costs, distributional costs, etc.

Bhattacharyya, R. (2012). The Opportunities and Challenges of FDI in Retail in India. IOSR Journal Of Humanities And Social Science (JHSS) , 5 (5), 99-109.
Bisaria, D. G. (2012). Foreign Direct Investment in Retail in India. International Journal of Engineering and Management Research , 2 (1), 31-36.
Kulkarni Keerti, K. R. (2012). Foreign Direct Investment in Indian reatil sector: Issues and Implications. International Journal of Engineering and Management Sciences , 3 (3).
Patibandla, M. (2012). Foreign Direct Investment in India’s Retail Sector: Some Issues.

This article has been written by SINDHUJA  A. She is a graduate in Electronics and communication Engineering from University college of Engineering, Osmani University.She is interested in corporate banking.She can be reached at