Till
2011, Foreign Direct Investment (FDI) in Single Brand retail in India was
limited to 51%.Now as per the recent declaration from the Indian Government,
the limit is extended up to 100%.Similarly in multi-brand Retail the limit is
extended up to 51%.The Single brand Retailers who wants to expand their
business with more than 51% owner ship have to procure at least 30% of value of
goods from India, preferably from medium and small enterprises, villages and
cottage industries, artisans, craftsman in all sectors.
Similarly
in multi-brand Retail:
§ The minimum
limit for FDI in multi-brand retail sector will be 100 million $.
§ Super market
will be allowed in only those cities whose population is more than one million.
§ At least 50% of
the overall investment will be made on back-end infrastructure.
§ At least 30% of
the goods and product purchased must be procured from local companies and
industries.
Now
the question which comes in the mind of everyone is what is the need of allowing
FDI in retail at this point of time and how these restrictions are going to
help us in the near future? For this let’s start finding the possible impacts
which can be caused by big retailers in India by looking at the footprints of
big retailers like Wal-Mart across the globe.
Economic impacts
Impacts on consumers
The
multi-brand retailers like Wal-Mart, Tesco are known for their
streamlined supply chain. The efficiency with which the big retailers connects
to producers and reaches consumers allows it to sell the goods far below the
prices that other competing retailers and shopkeepers are offering. Apart from
selling at lower price it also provides much wider varieties of product to
choose from. This is particularly true for supercenters that sell product
ranging from groceries to hardware to optical. Lower prices and availability of
products in one location indeed gives direct economic benefits to consumers.
Consumers will definitely be in the happy condition from the presence of multi-brand
retailers like Wal-Mart.
Impacts on existing retailers
The Wal-Mart ability
to sell at cheaper price as compare to existing retailers definitely pose a
threat to their existence. There is no doubt that some of these existing small
retailers will be forced out of business when a new shopping centre opens its
doors for the business. Other retailers will be forced to downsize their
operations as their customer segment declines. There are some businesses
offering goods and services that are not sold by Wal-Mart are likely to have a
positive impact because of the greater incidence of walk-in shoppers. Despite
this overall we can say the presence of Wal-Mart will have a worsening impact
on the wellbeing of small retailers and Kirana shops.
Impact on revenue because of sales and property Tax
The
big retailers like Wall-Mart, Tesco, and IKEA can be major revenue generator
for the state or place, they are located. This revenue is in the form of Sales
tax and property revenue tax. This is surely going to help in the fiscal
well-being of the government in the city or town where these big retailers are
located. However we should not forget the loss of sales revenue caused by the
downsizing of small retailers because of the presence of big retailers. We also
need to consider additional costs that the local government must assume in
providing new public services to these big giants. Apart from these, as per
govt regulation- At least 50% of total investment will be made on back-end
infrastructure.
Therefore foreign companies will invest huge capital
in India. As a result, refrigeration technology, infrastructure facilities,
transportation, etc. will be re innovated. That will lead to low-inflation
rate.
The sales tax depends on the price of quantity which is being sold. The ability of big retailers to sell things cheaper as comparison to small and medium size retailers shift customer base from these small retailers to big retailers where apart from lower prices customer finds larger variety of goods. In a store like Wal-Mart people gets things cheaper and also they are motivated for purchasing more goods by using different attractive schemes from retailers. This shift determines the net sales tax revenue generated. Lower the shift lower the revenue generated. This is because a customer buying a good from wall mart is paying less tax as compare to same customer buying from kirana shop. But in case of larger shift(which is likely to happen) of the customer base certainly people are paying less tax but as they are motivated to purchase more thus overall sales tax revenue increases.
Impacts on employment and trade deficit
When we try to look at
the impact on employment because of the coming of big retailers, the first
thing which comes in the mind is the disposition of small and medium retailers
which will surely not be able to compete with the price and variety, the big
retailers provide. This is indeed true but the question is -Is this the only
impact?
The
answer is definitely NO. Let’s try to first understand the present economic
condition of India.
The
International Monetary Fund (IMF) survey of global economy has found that:
§ India’s
government debt is found to be highest at 67.57% of its GDP, followed by the
Brazilian government debt at 65.09%. On the other side, debt levels in Russia and
China are comfortably fixed at around 8.37% and 22.03% respectively.
§ The exports from
India reduced for the fifth straight month in September while imports rose, pushing
up the trade deficit to an 11 month high of 18.1billion $.Exports decreased
10.8% from a year ago to 23.7 billion $ while import increased 5.1% to 41.8
billion$. Exports have decreased sharply this fiscal due to reducing demand
from west, a major market for Indian goods and other markets like Korea and
Japan. The sectors affected most include petroleum products, engineering goods,
gems, jewellery, drugs and readymade garments.
Overall we can say our trade deficit is
increasing year after year. The manufacturing sector is a major contributor for
the existing trade deficit. The information above indicates that we are
continuously losing our edge on manufacturing sector because of the presence of
cheaper Chinese goods. This might have a serious implication on the employment
condition in India. Now let’s see how big retailers widens this import export
gap particularly in manufacturing sector
in countries like India whose markets are already flooding up with cheaper goods of China
which ultimately leads to unemployment.
Let’s
consider an example of Wal-Mart, started its business in China. The total value
of the goods and services traded between US and China is $539 billion in
2011.Exports totalled $129 billion; Imports totalled $411 billion. The US goods
and services trade deficit with China is $282 billion. China
is currently the largest supplier of goods for US. The value of US goods
imports from china is $399.3 billion in 2011, 9.4% increase from 2010, and up 299% since 2000.The major import
categories in 2011 were Electrical machinery, Machinery, Toys and Sports
Equipment, Furniture and Bedding, and Footwear.
As per the
report of Economic Policy Institute, The United States is accumulating foreign
debt and losing its expertise in export, and the growing trade deficit with
China has been a major contributor to the employment crisis in U.S.
particularly in manufacturing sector. Between 2001 and 2011, the trade deficit
with China displaced more than 2.7 million U.S. jobs, 76.9 percent of which were
in manufacturing sector.
Some
critics say China has achieved its rapidly growing trade surpluses by devaluing
of its currency artificially and thereby lowering the cost of its exports to
the other countries. They have used various tactics like repressing the labour
rights, suppressing their wages, subsidizing their products and thus making
their product cheaper. China thus gives a conducive environment to big
retailers like Wal-Mart to increase their profits while exporting from China
and selling it across the globe.
We are
nowhere different from America in this case whose manufacturing sector is
struggling because of the presence of cheaper Chinese goods. We need to reduce
the government debt and at the same time we need to decrease the trade deficit
to improve the employment condition in India. To reduce the debt we need
serious reforms which can inject money in to our market. For this allowing FDI
in retail is not at all a bad option. This will indeed inject surplus money in
to Indian market. But then question comes how to reduce the trade deficit.
The
answer is definitely ‘30% rule’
The rule
says:
Atleast 30% of their goods and product must be
procured from local source.
The rule is definitely the trump card
thrown by GOI considering Indian framework and priorities in mind. This might
help in reducing the trade deficit and at the same point small enterprises
producing intermediary goods and ancillary items will benefit.
This 30% rule will help in balancing the
trade deficit caused because of downsizing of manufacturing sector. As the
retailers who wants to expand their business must procure 30% of their goods
from local companies and industries, will help small retailers and dealers to
sustain their profits and also it will provide new market opportunities to
middlemen, small enterprises, local companies and industries.
. Some 20-40% of all fruits and
vegetables grown in the country go waste due to poor storage, transportation
and handling infrastructure. The huge advantage we could see because of FDI with
30% local sourcing condition is the efficiency in supply chain that foreign
retailers can bring, which will provide the huge opportunity in agriculture
sector. Exports will boost agriculture sector. If large retailers, whether
domestic or foreign, directly source through domestic suppliers, realisations
will go up for the local sources, consumers will have to pay less and the
retailers will get higher margins.
