Bhattacharjee et al /FDI in Multi –Brand Retail in India: A case-study
FDI IN MULTI –BRAND RETAIL IN INDIA: A CASE-STUDY Dipayan Bhattacharjee & Aravapalli Krishna Thej1 Abstarct The debate which concerns the dilemma of allowing FDI in Indian MultiBrand Retail Trade needs no special introduction. It is common knowledge that the government’s proposal to allow FDI of up to fifty one per cent in Multi-Brand Retail Trade in India has lately been one of the most contentious proposals’. As its decision permits foreign multi-retail behemoths to penetrate into the hitherto closed markets of our country, many nations have gone all out to exert pressure on India to convince it into liberating its markets.As things stand, the Government of India lifted the embargo on foreign investment in Multi-Brand Retail Trade following broad-based deliberations and assessment of several considerations and the impact of decision on all the players involved. In this context, it ispertinent to do a consummate examination of the existent Indian multi-brand retail market andthe possible outcomes of allowing FDI in it. This article deploys the SWOT framework to studythe present Indian retail landscape to comprehend the advantages and disadvantages of allowing FDI in Multi-Brand Retail Market. Part one of this article situates the discussion in the present context.Part twoencapsulates the strengths and weaknessesof the Indian retail markets, while part three; the opportunities and threats of allowing the proposed levels of FDI into them. Part four concludes the article.
I.
INTRODUCTION
Any discussion about liberating the Indian Economy would be vacuous without a mention of how the economy of India was thrown open for International Trade. Likewise, for a detailed discussion on Foreign Direct Investment in multi-brand retailing, it’s wholly imperative to understand the rationale behind it. Therefore, before embarking on a discussion on FDI in multi-retail trade, it’s essential to understand how the Indian economy came about to be liberated, the proposed governmental policy on allowing FDI in multi-brand retail trade and rationale for the debate around it. A. ECONOMIC LIBERALIZATION IN INDIA
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Noorul Hassan is a senior associate with Lakshmi Kumaran&Sridharan, Hyderabad. DipayanBhattarchjee and AravapalliKrishna Thej are undertaking and B.A. LL.B (Hons.) at West Bengal National University of Juridical Sciences and Rajiv Gandhi National University of Law, Punjab, Patiala.
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India had a Socialist Economy until a crisis of balance of payments struck it hard. The word ‘Socialist’ was inserted into the Indian Constitution through the Forty Second Amendment of the Indian Constitution.2 The Constitution of India embodied the right to work and engage in any profession in article 19(1) (g) as an inviolable fundamental right. Trade within states was/and is a subject on the State List in the Seventh Schedule of the Indian Constitution.3 The Government at the Centre could not tinker with the stateadministered trade matters and had minimal role in governing trade. Post- Independence India was predominantly an agrarian economy. Over a half of the population was dependent on agriculture but it’s agricultural practiceswere archaic. The output never matched the time and efforts invested in it by millions of Indians. Incessant dependence on agricultural activities could not scale up the economy. Thus the efforts to industrialize the economy quickly began. Nevertheless, India could not sustain the growth and thus failed to serve its teeming population.The manufacturing and service sectors being in a nascent stage did not help the situation. As a result, India was hard put to rely on imports to serve domestic demands for a very long period. In 1991,India was catapulted intoa crisis of balance of payments.4 It relied onthe International Monetary fund to assist it in recuperating from the crisis. It pledged gold partly to Union Bank of Switzerland and monumentally to Bank of England in return for foreign reserves, 5 and initiateda series of reforms to open up its economy to international trade, thus marking a paradigm shift in its economic history. B. THE PROPOSED GOVERNMENTAL POLICY ON FDI IN THE MULTI-BRAND RETAIL MARKET Ever since the Indian Economy was liberated, there was in inward flow of foreign investment considerable quantities. In time, India’s commercial intercourse with the world community grew by leaps and bounds. It became one of fastest growing super powers along with China. The stagnant economy experienced growth and so did the standard of living in India as 2
The Constitution (Forty-Second Amendment) Act, 1976, ¶ 2, available at http://indiacode.nic.in/coiweb/amend/amend42.htm (Last visited on 26th August, 2012). 3 V.N. Shukla, Constitution of India 131, Eastern Book Co. (M.P.Singh ed., 2008). 4
RanjitSau, “Making of a Payments Crisis: India 1991”, Economic & Political Weekly, Vol. 27, August 15, 1992, 74. 5 ArunabhaGhosh, Pathways Through Financial Crisis India, 12 GlobalGovernance 417 (2006), available at http://www.globaleconomicgovernance.org/wpcontent/uploads/ghosh-pathways_india.pdf (Last visited on 26th August, 2012).
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foreign investment brought state-of-the-art know-how and employment to the burgeoning Indian population. Shortly, India became a signatory to the World Trade Organization in 1995.6 There on, in furtherance of the General Agreement on Trade in Services (GATS) 7 and for the modernization of India, the Government allowed Foreign Direct Investment in many sectors. It allows 100% FDI in the hotel and tourism sector. Likewise, in petroleum refining, coal and lignite mining and non-banking financial companies (NBFCs), India allows FDI of up to 100%. In some sectors, for instance, the scheduled air transport services and the private banking, FDI is capped at 100%and 49%in the order mentioned. 8
In the present scenario inthe trading sector, hundred per cent FDI is permitted in wholesale cash-and-carry segment under the automatic route. FDI in this segment was first allowed in 1996 under the government approval route. In the retail Industry, FDI in single-brand retailing was legitimized in 2006. Thereafter, in 2012, the Government gave the approval for FDI up to the extent of hundred per cent in this segment.9 Per contra, foreign investment in the multi-brand retail trade was prohibited until the Government’s recent decision to allow foreign direct investment in Multi-Brand Retail Trade.Department of Industrial Policy and Promotion, a part of the Indian Ministry of Commerce and Industry, prepared a note to allow Foreign Direct Investment in the Indian Multi-Brand Retail Trade (MBRT). The note so prepared conformed to the recommendations of the Committee of Secretaries headed by Cabinet Secretary Ajit Kumar Seth.10 Immediately, the note was sent to the Ministry of Finance and received its assent. However, the Government gave in to the trenchant criticism of the opposition and ‘put its decision to allow FDI in multi-brand retail trade on 6
The World Trade Organization, India and WTO, available at http://www.wto.org/english/thewto_e/countries_e/india_e.htm (Last visited on 25th August, 2012). 7 See General Agreement on Trade in Services, 1867 U.N.T.S. 187, 33 I.L.M. 1153 (1994) (hereinafter ‘GATS 1994’) (GATS mandates its signatories to liberalize services in trade). 8 Press Release, DEPARTMENT OF INDUSTRIAL POLICY AND PROMOTION, MINISTRY OF COMMERCE AND INDUSTRY, GOVERNMENT OF INDIA, Consolidated FDI Policy (March 31st, 2011), available at http://dipp.nic.in/English/Policies/FDI_Circular_012011_31March2011.pdf (last visited on 25th August, 2012). 9 FDI Industry-Wise Sectoral Caps, Sectoral Caps by persons resident outside India or for foreign companies for each Industry, available at http://www.investinginindia.in/sectoral.htm (Last visited on 28th August, 2012). 10 Press Trust of India, “FinMin gives nod to FDI in multi-brand retail”, Nov. 17, 2011, available at http://www.business-standard.com/india/news/finmin-gives-nod-to-fdi-inmulti-brand-retail/151102/on (Last visited on 28th August, 2012).
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hold’ for a while before shrugging off its inertia and giving a firm nod to the proposal. It allowed the Department of Industrial Policy to amend the Indian FDI policy through a press release dated September 20th, 2012, thereby allowing foreign investment to the tune of fifty one per cent in the multibrand retail trade sector.11 At its core, the government’s policy, inter alia, fixed the threshold level for entry of a foreign investor at $ 100 million.States were to decide on the entry of foreign players into their territories. States may allow foreign players only at will. The government’s proposal further stipulates that foreign investors could only operate in cities with population more than a million. Foreign Investors shall source a minimum of thirty per cent of their products from the “Indian small industries.”12 It contained an obligation on foreign investors to invest a half of their capital on improving the back-end infrastructure.1314 The Government reserved the prerogative of buying the agricultural output first. Foreign retail outlets could sell unbranded agricultural produce, including fruits and vegetables, pulses, fishery and wheat products.15 C. RATIONALE FOR THE DEBATE AROUND THE GOVERNMENT’S PROPOSAL Retail market in India is the one of the biggest markets in the world. Indian retail which are divided into organized and unorganized, like elsewhere, grows at a very commendable rate. The value of trade in the Indian retail market is estimated to be 7, 42, 621 crore, with a Compound Annual Growth Rate (CAGR) of about ten per cent. The value of the market size is guesstimated to go upwards of $ 573 billion by 2012-13. Sales in the last year shrunk by about ten per cent and are in this year are poised to grow at an impressive rate of almost sixteen per cent, noted the Economic Survey
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See Ministry of Commerce and Industry, Press Note no.5, (2012 series) available at http://dipp.nic.in/English/acts_rules/Press_Notes/pn5_2012.pdf (hereinafter Press Note 5). 12 See Press Note no. 5, Department of Industrial Policy and Promotion, Ministry of Commerce and Industry, Government of India, available at dipp.nic.in/English/acts_rules/Press_Notes/pn5_2012.pdf (last visited on 28th August, 2012). 13 Back-end Infrastructure includes capital expenditure on all activities excluding that on front-end units. However, expenditure on land cost and rentals, if any, will not be counted for purposes for back-end infrastructure. 14 See Sangeeta Singh &SapnaAgarwal, “Cabinet Likely to approve FDI in multi-brand retail”, LIVEMINT (New Delhi) Nov 23, 2011, available at http://www.livemint.com/2011/11/23155727/Cabinet-likely-to-approve-FDI.html (Last visited on 28th August, 2012). 15 K.T. Chandy, “Endless wait for FDI in multi-brand retail”, Business LineJuly 8, 2012, available at http://www.thehindubusinessline.com/industry-and-economy/taxation-andaccounts/article3616628.ece (Last visited on 28th August, 2012).
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2011-2012. AT Kearney, an International Management Consultancy firm projected India as one of the top destinations for foreign Investment.16 As such, it is no surprise to learn that foreign retail giants crave to foray into the Indian multi-brand retail markets to harness its potential. Retail giants like Wal-Mart, Carrefour and Tesco have tasted successes in many of their International ventures. It’s been dominating the retail market in China, the United States and Mexico. The likes of retail heavyweight, Wal-Mart,have set their eyes on Indian retail market purely owing to its gigantic size. These companies have been wooing the Indian Government to liberate its MultiBrand Retail Market from way before. However, several concerns lurking in the government’s mind kept it from removing restrictions of foreign investment in this sector. Despite the Governmentarguing that lifting the cap on foreign investment is in tandem with its goal to containing inflation, will prop up confidence in the International Investors; will create employment for millions and back-end Infrastructure, the dissensiondoes not seem to subside. The abundantdissent is because many feel that the lives of millions would be displaced.The fear that the international investors would monopolize trade in retailing also led to wide spread criticism. Adepartment relatedStanding Committee on Commerce headed by MuraliManohar Joshi advised against allowing foreign direct investment in its ninetieth report tabled before the Indian Parliament on Foreign Direct Investment in multi-brand retail sector and recommended that the plan to lift the embargo on foreign investment be shelved.17Many economists spoke in one tune along with the opposition parties against the government’s stance, forcing it to put all its plans in this connection on the backburner.So, the debate around foreign investment in Multi-Brand Retailing acquires significance and does merit a due discussion on the strengths and weaknesses of the extant Indian retail markets to ascertain the opportunities and threatsnow that the government decided to permit foreign investment in the Multi-Brand Retail market.
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Press Trust of India, Allow FDI in multi-retail brand in a phased manner: Survey, March 15, 2012, available at http://businesstoday.intoday.in/story/economic-survey-fdi-in-retailin-phased-manner/1/23233.html (Last visited on 28th August, 2012). 17 Press Release, Department Related Standing Committee of Rajya Sabha on Commerce, Ninetieth Report on Foreign Direct Investment on Retail Sector (8th May, 2009’) (hereinafter ‘The Rajya Sabha Report'), available athttp://www.prsindia.org/uploads/media/vikas_doc/docs/1244460168~~Foreign%20&%20 Domestic%20Investment%20in%20Retail%20Sector.pdf. (Last visited on August 30th, 2012)
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II.
INDIAN RETAIL MARKET: STRENGTHS AND WEAKNESSES
Sections two and three deploy the SWOT framework to piece together the strengthsand weaknesses of the Indian retail market and the opportunities’ and threats on allowing foreign investment in the Multi-Brand Retail sector. This section enumerates in extenso the strengths and weaknesses of the current sector, while the subsequent section explains the opportunities and threats that foreign investment might present to India and its retail sector. A. INTERNAL STRENGTHS The Indian Retail market contributes to very fair share of the Indian Gross Domestic Product by accounting for about twenty two per centof its total value.18The Indian retail market, as opposed to the retail market in several developed countries, is veryunorganized. Organized retail in India has been a recent phenomenon. Unorganized retailing in India accounts for about ninety five per cent of the total retail market in India, leaving out an infinitesimal share close to five per cent to organized retailing.19 Unorganized retail, high and low, is a source of livelihood for millions in India. Due to its unorganized nature, Indian retail market can be said to be a boon for the illiterate and the semi-literate in India. Unorganized retailing, unlike the service sector and the manufacturing sector, which demand a decent amount of skills, requires modicum or little skill. It has been providing a means of livelihood to millions of illiterate people living across the country as it employsin the range four to eight per cent of the Indian population, standing second only to agriculture, in which over a half of the Indian population is engaged. Recent estimates suggest that nearly forty million eke out a living out of unorganized retailing. 20 Further, unorganized retailing stands in good stead of many unemployed as it negatives the impact of a downturn in growth of the manufacturing sector and the unemployment problems that trouble farmers during the lean season. It accommodates the unemployed labor force in the manufacturing and the agriculture sectors with means to survive.21 18
Press Release, Federation of Indian Chambers of Commerce and Industry (FICCI),Indian Retail Industry: An Overview, available at http://www.ficci.com/sector/33/Project_docs/Sector-prof.pdf (Last Visited on August 28th, 2012). 19 Mamta Jain and MeenalLodhaneSukhlecha, FDI in Multi-Brand Retail: Is It the Need of the Hour?2 International Journal of Multidisciplinary Research109 (2012). 20 HemantBatra, FDI in the Retailing Sector- Pros and Cons, 3 INDIA LAW JOURNAL (2010) (hereinafter India Law Journal),available at http://www.indialawjournal.com/volume3/issue_4/article_by_hemant_batra.html(Last visited on 20th August, 2012). 21 Ibid.
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Also, India has‘mom and pop stores’ (the general stores) in every nook and corner of thecountry. More than eighty per cent of these stores, occupying less than five hundred square feet, cater exceedingly well to the needs of their customers. The thick presence of these presumed to be in millions makes buying goods for daily needs an easy task. 22 Akin to any super markets, ‘mom and pop’ stores offer extensive variety of services. Indians choose to stop by at these stores, to buy goods for customary chores. What is more, many of these shops, along with those in the organized retail give immense customer satisfaction. 23 The owners of these storeshavea good rapport with their customers and even sell goods on credit.24 With reference to the quality of the products, it is known that the money spent is tantamount to the quality of the products the market offers. This argument holds more ground in the context of perishable vegetables, fruits and food items. Hyper and super markets, the mom and pop stores, the street hawkers sells products of good and bad quality and fix prices as per the quality. Coupled with the antecedent, the present retail market is witnessing a steady growth. By 2012-13, it is set to scale new heights. By 2018, it is sure to surpass $ 1.3trillion. 25 Despite no foreign players, both organized and unorganized retail in India would grow at very high rates. The organized retail in our country is growing at a rate of thirty five per cent. 26 The unorganized retail market, considering its huge size, is growing at a relatively low but good rate, estimated to be about thirteen per cent.27 And so, organized and unorganized retail are liable to provide more employment opportunities even in the event India decides against allowing foreign investment in multi-brand retail sector.In addition, a sense of competition 22
MeghaBahree, India Unlocks Door for Global Retailers, THE WALL STREET JOURNAL, November 25, 2011. 23 S.P Thenmozhi and D. Dhanapal, Unorganized Retailing in India: A Study on Retail Service Quality, 23 EUROPEAN JOURNAL OF SOCIAL SCIENCES 9 (2011), available at http://www.eurojournals.com/EJSS_23_1_07.pdf (last visited on 28th August, 2012). 24 Mathew Joseph, NirupamaSoundararajan, Manisha Gupta and SanghamitraSahu, Impact of Organized Retailing on the Unorganized Sector, 9 (ICRIER Working Paper Group, Paper No.222, 2008) (hereinafter ICRIER Working Paper, 2008). 25 TazynRahman, Organized Retail Industry in India-Opportunities and Challenges, 2 IJRFM 83( 2012). 26 KamaladeviBaskaran,, The FDI Permit for Multi Brand Retail Trading In India-Green Signal or Red Signal, 5 Business Intelligence Journal177 (2012) (hereinafter ‘KamaladeviBaskaran’). 27 The Hindu, Small retail will grow at 13 p.c. despite FDI, November 26, 2011, available at http://www.thehindu.com/business/article2662832.ece (Last visited on 28th August, 2012).
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does prevail in the present retail sector. The players in the organized sector constantly try to outdo their rivals with softer prices, attractive discounts, and better services. All these work to the advantage of the Indian Consumers, particularly the middle class with scarce means to buy. B. INTERNAL WEAKNESSES Indian retail market is heavily fragmented. As noted prior, a lion’s share of its market is unorganized. In developed nations, the retail markets are sorely organized. In the United States, eighty per centof the retail trade is organized. In Malaysia, fifty per centof the trade is organized. 28 In the United Kingdom, France and Germany, over eighty per centof the trade is organized.29 In China, the retail market is increasingly become organized. About twenty per centof its retail trade is organized. 30 India loses out on the amount of tax it would otherwise accrue, on the account of organized retailing. The present super markets, established under the Shops and Establishments Act, are licensed retailers and pay taxes. On the flipside, retailers in the unorganized sector do no keep tabs on their transactions. The recent Economic Survey 2011-12 bore out the argument thatthe traditional retailers in the unorganized sector have low tax compliance and that foreign investment may bring more tax compliance in retail sector.31 The Indian retail market does not prove to be beneficial to the farmers. Farmers in India receive only a pittance of what the final sellers realize through sale to the end-consumers. Intermediaries who link the farmers and the retail traders, organized and unorganized, sell the farmers produce with high mark-ups to the retailers, who in turn, sell them by adding more value to the same produce.On an average, in case of vegetables and fruits, the output passes through six middlemen. The farmers output is received by consolidators. The output then goes to commission agents, the traders. It subsequently reaches another set of again to the commission agents, then to 28
Economic Times, FDI in India: Just 4 per cent of India's retail is organized, November 30, 2011, available at http://economictimes.indiatimes.com/news/news-byindustry/services/retailing/fdi-in-india-just-4-per-cent-of-indias-retail-isorganised/articleshow/10933160.cms (Last visited 28th August, 2012). 29 Press Release, Inter-Connected Stock Exchange of India Limited, Indian Retail Industry (May, 2010) at http://www.iseindia.com/ResearchPDF/Retail_Update1.pdf (Last visited on August 31st, 2012). 30 Editorial, FDI in India: Just 4 per cent of India's retail is organized, The Times of India, November 30, 2011 31 Press Trust of India, FDI in multi-brand retail could start in metros: Survey, March 15, 2012, available at http://www.thehindubusinessline.com/industry-andeconomy/economy/article2998339.ece, (Last visited on 28th August, 2012) (hereinafter ‘FDI in multi-brand retail’).
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wholesalers and retailers before the end-consumers lay hands on the farmers produce. As a result, farmers in India are cash-strapped and fail to remit their credits or loans.32 Also, another weakness of the present system is the fact that the retail market contributes nothing towards the post-harvest infrastructure.33 India is the second largest producer of the fruits and vegetables. It produces an adequate amount of rice and wheat. Yet, the prices in India are sky-high as India is wanting in the back-end infrastructure to completely tap its production. India abounds in the production of wheat and rice. Its production suffices in feeding the entire Indian population. In 2010, by the month of April, the combined production of rice and wheat totaled 42.4 million tons, a quantity in enough to provide Indians with sufficient food.34 In 2011, India over-produced wheat and rice. 35 In 2012, it produced approximately 75 million metric tons of food grains by August. 36 Nonetheless, inadequate storage facilities result in the wastage of a sizeable amount of production. 37 Resultantly, prices in India remain high and inflation has been a perennial problem. Availability of credit to unorganized retailers is one more problem pestering the unorganized retailers in India. Apparently, a research by Indian Council for Research on International Economic Relations discloses that only twelve percent of unorganized retailers in India have access to Institutional credit and thirty seven percent felt the need for better access to commercial bank credit.38 Lastly and importantly, like the abysmal post-harvest infrastructure, infrastructure in the retail outlets compounds the problem of Indian retail sector. While the organized retail is now adopting the newest technological 32
MuraliPatibandla, Foreign Direct Investment In India’s Retail Sector: Some Issues, 9 (IIM Bangalore. Working Paper Group, Paper No. 366, 2012) (hereinafter ‘MuraliPatibandla’) 33 ChilukuriMaheshwar, Post Harvest Losses due to Gaps in Cold Chain in India – A Solution, available at http://globalfoodchainpartnerships.org/india/Papers/Posters/ChilukuriMaheshwar.pdf (Last visited on August 30th 2012). 34 See N. Chandra Mohan, The Paradox of Hunger amidst plenty,BUSINESS STANDARD, April. 18, 2010. 35 Emily Stephenson, India rice, wheat output seen at record levels-attaché, REUTERS (Washington), March 3, 2011. 36 Lawrence, Stopping the rot: Beating the Grain Storage Crisis in India, World Bank Blog, May 1, 2012, available at http://blogs.worldbank.org/psd/stopping-the-rot-beating-thegrain-storage-crisis-in-india (Last visited on August 30th 2012). 37 Bimani Mukherjee and Rajesh Roy, Indian’s grain storage comes up short, Wall Street Journal, Apr. 12, 2012. 38 See ICRIER working paper, supra note 23, 38.
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meansto service their clientele, the unorganized retail falls behind in using any new means. It employs the outmoded means to warehouse stock and provide services to its patrons.
III.
FDI IN MULTI-BRAND RETAIL TRADE: OPPORTUNITIES AND THREATS
The strengths and weaknesses of the Indian retail market are amply clear by now. The idea of the government to leverage its potential and fight the problems of inflation and infrastructurethrough foreign investment needs no re-iteration. In doing so, the following are the opportunities and threats that India invites: A. OPPORTUNITIES Foreign investment in the multi-brand retail trade is bound to bring in a multitude of benefits. Foremost, the amount of tax receipts is certain to soar. It is known that as the retailing would progressively become organized, the receipt of the sales tax shall move up. In India, unorganized retailers are often frowned upon as they make a dent in the tax receipts. With organized retailers who record every transaction entering the fray, the amount of tax receipts may go up. 39 Second, foreign investment would create umpteen employment opportunities. In Mexico, Wal-Mart was successful in creating a galaxy of jobs. Within a short period of its entry into Mexico, it employed about 2, 09, 000 people, the maximum of any private retailer. 40 In China, Wal-Mart operates about 352 stores in 130 cities.41 It employs thousands of Chinese people and is registering an average annual growth of eighteen per cent. In the United Kingdom, where Wal-Mart was successful, it created elephantine job opportunities. In India, 17 world retail corporations function. In China, 36 retail corporations do.42 Wal-Mart runs as many as 14 cash-and-carry wholesale outlets in India.43 Carrefour runs a handful of such shops, as is the case with Metro, the first retail giant to venture into India’s cash-and-carry market.44 More number of retail behemoths is to soon join the bandwagon. Should 39
See FDI in multi-brand retail, supra note 17. MuraliPatibandla, supra note 27, 10. 41 Orville Schell, How Walmart Is Changing China, the Atlantic, December 3, 2011, 1. 42 SrikantGokhale and Piyush Kumar Sinha, FDI in Retail: A Global Perspective, 4 (IIM Ahmedabad. Working Paper Group, Paper No. 2012-05-02, 2012) (hereinafter ‘SrikantGhokale and Piyush Kumar Sinha’). 43 Samidha Sharma, Walmart may not operate under its brand name, THE TIMES OF INDIA (Mumbai), November 26, 2011. 44 KamaladeviBaskaran, supra note 12, 179. 40
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India allow foreign investment of fifty one per cent, the existing foreign players along with the prospective players would engender unprecedented prospects of employment? A study by the Price Water House Coopers in 2011 showed that for every 50, 000 square feet of space occupied by a super market, 200 jobs would be created. This implies, in case organized retailing seizes about fifteen per cent of the retail market, nearly 1.5 million jobs would be created in the front-end retail operations and about 3 million jobs for the back-end operations.45 Moreover, China manufactures a third of the Wal-Mart’s Merchandise. India should convince Wal-Mart and suchlike to set-up supply chains as in China. China is a middle-income with a per capita income of 5000 dollars. Its status as middle-income would push up manufacturing costs, and India should make the most of this by persuading giants like Wal-Mart to get their products substantially manufactured in India.46 Infrastructure and illiteracy stand as bottlenecks in accomplishing this. India needs to devise strategies to build requisite infrastructure and impart necessary education. Third, since Investment in the back-end infrastructure is a pre-qualification, which is likely to stay, foreign players shall have to invest in the amelioration of the back-end infrastructure. Hitherto, in India, foreign investment in back-end infrastructure was allowed to the tune of hundred per cent.47 No foreign player viewed it as forthcoming as it yielded little to them. By contrast, these foreign players with the modern know-how shall now create infrastructure, to create the like of which the Government would require years. In India, 30-40 per cent of the agricultural yielding is wasted for a host of obvious reasons.48 The advent of foreign players can have a significant impact. To substantiate with a solid example, companies like Nokia, Samsung, LG and Whirlpool reformed the supply chain to effectively serve the demand for their products in the market so that they can replenish their stock within twenty hours in top twenty cities of our country.49 Similarly, foreign players will have to work for an immaculate supply chain to obviate any disruption in their supply, given their largescale and widespread operations.
45
MuraliPatibandla, supra note 18, 19. Ibid. 20. 47 Ms. Shivani Gupta and DrSurender Kumar Gupta, FDI and Impact on Indian Economy, 2 IJRIME 33 (2011). 48 NayanChanda, The Second Chance: Nothing would have a greater, immediate impact in reenergising the economy than allowing FDI in retail, BusinessWorld (Last visited on August 23, 2012). 49 SrikantGokhale and Piyush Kumar Sinha, supra note 36, 8. 46
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Fourth, spill over benefits of standard back-end infrastructure would ease inflation. Inflation is a problem that India is grappling with since a decade.50 Insufficient supply is the prime reason behind reason inflation. Better infrastructure translates into effective usage of all what India produce. India abundantly generates wheat, rice, fruits and vegetablesto satiate its population needs. Estimates suggest that prices would be lowered by about 10% if foreign investment is allowed.51 Therefore, quantity of what India produces shall be in surplus of our needs, thereby lowering the prices, and benefitting every ever-struggling Indian Citizen. Fifth, a face-off between the domestic and foreign retail big wigs would have a similar affect on the Indian consumers. Retailers would improve their services and may even lower prices, not just on bulk purchases, to maintain their market share and garner a better share of the Indian market. Domestic retailers sell products at discounted rates and announce a glut of schemes to increase their clientele. Competition would get fiercer as foreign players become a part of the fray. Fifth, Poverty in India is so entrenched that it kills lakhs of Indians and millions of children in India are under-fed for want of food.52 India has been battling hunger from ages. The Government is nowapparently intent on waging a battle against food insecurity. It draftedthe Food Security Bill, 2011 and promises 7 kilograms of rice to every priority household. 53 Budgetary allocations were always an impediment to enforce this Bill as the cost to procure wheat and rice is very high.With foreign players investing in the back-end infrastructure, the agricultural output is harnessed to the fullest. The price of the rice and what may get softeras the availability of agricultural produce at lower prices increases, tacitly the government to buy the farm produce for cheaper prices and fulfill its commitments under the Food Security Bill, 2011.
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Reuters, India may face its worst financial crisis in decades as rupee retreats, Dec 11, 2011, available at http://timesofindia.com/business/india-business/India-may-face-itsworst-fiancial-crisis-in-decades-as-rupee-retreats/articleshow/10993042.cms (Last visited on 29th August, 2012). 51 India Infoline News Service, Ajay Jakahar led farmers forum advocates FDI in Multibrand retail, August 22, 2012, available at http://www.indiainfoline.com/Markets/News/Ajay-Jakhar-led-farmers-forum-advocatesFDI-in-Multi-brand-retail/5485732483 (last visited on 29th August, 2012). 52 Michele Gragnaloti, Caryn Bredenkamp,India’s Undernourished Children: A Call for reform and Action 16 (2006). 53 See The National Food Security Bill, 2011, Schedule I, available at http://www.prsindia.org/uploads/media/draft/Draft_National_Food_Security_Bill%202011. pdf (last visited 26th August, 2012).
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Sixth, farmers would receive fair prices. Farmers in our country are found in a dilapidated state as they seldom receive compensatory prices; leave out the very idea of getting remunerative prices. The role of intermediaries in selling their output hounds farmers. Thousands of small farmers plunge into neck-deep debts failing to pay their credit. Foreign farms engage with small players directly. Intermediaries shall be eliminated and their role will be erased. They are in constant touch with farmers and work for a better quality produce as their cost-minimization and profit-maximization is their overriding aim. Foreign players like Carrefour, Tesco procure straight from the farmers. Wal-Mart, for example,plans to procurefrom about 35,000 farmers for agricultural produce for its cash-and-carry stores by the end of2015.54 The number is likely to soar if foreign investment in multi-brand retail trade is allowed. But, going by the current modus operandi of these foreign players, it can be deduced that their procurement practices evidence their propensity to buy from farmers who produce in large quantity. A majority of farmers in India own miniscule swaths of land. Foreign players do not usually showcase interest to buy small quantities of produce from small farmers. Instead, they are disposed to buy large quantities from farmers with produce a relatively large amount of agricultural products by a process called ‘Contract Farming’.Hence, only when the Governmenttakes full responsibility of engaging the foreign players with the small farmers in India, its claims that farmers would be helped through foreign playerswould actualize. Therefore, if Government makes concerted efforts to put mechanisms in place to ensure that foreign players would buy even from the small farmers; foreign investment is indeed a boon to the small farmers. Sixth, amidst the cacophony surrounding the loss of jobs that foreign investment is claimed to bring about, the benefits that Indian consumers would reap through foreign investment were pared down. In places where Wal-Mart began to sell grocery products, prices registered a 15% decline. When it comes to the agricultural produce, prices fell by over 8%.55 Foreign giants survive with less mark-up by offsetting the loss with massive footfalls and mammoth sales. Thus, the Indian consumers; more so, the middle class consumers, are to gain a great deal by virtue of foreign players. B. THREATS(PERCEIVED AND REAL)
54
Interview of Scott Price, President and Chief Executive Officer, Walmart Asia by Raghavendrakamath in Mumbai, India (November 15, 2010), available at http://www.business-standard.com/india/news/qa-scott-price-presidentchief-executiveofficer-walmart-asia/414857/ (Last visited on 29th August, 2012). 55 MuraliPatibandla, supra note 27, 7.
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A perceived threat on allowing foreign investment is loss of livelihood to many people in the unorganized sector. Indeed, in the decade that Wal-Mart began its operations in full swing, 31 super market chains declared themselves bankrupt in the United States of America. Of these, 27 ascribed their bankruptcy to the operations of Wal-Mart. 56 In Thailand, within no time; Wal-Mart was able to reduce the share of the unorganized retail by over 14%. In countries like Mexico, China, and United Kingdom, Wal-Mart had a corrosive impact on the local traditional retailers. In India, following the expansion of the Indian retail players, sales in the traditional outlets and the footfalls reportedly took a slump. In Bangalore, the worst-hit place for its deep super-market penetration, and places like Ahmadabad, Chennai and Chandigarh, traditional stores were said to have lost an income of 20-30%.57 An International Research Organization, ICRIER, commissioned by a Committee of the Indian Parliament confirmed that sales in the traditional abated by reasons of an expanded-retailing. 58 The rapid expansion of the stores in the organized sector is not condemnable. Indian players in the organized sector do not have deep pockets as the foreign players. Foreign players are quick in expanding their outreach. The government’s proposal on foreign investment gives them the license to access 53 cities in India, encompassing about a population of about twelve crores. Cities like Mumbai, Delhi and Hyderabad have wider operations of super-markets. Traditionalstores in these cities would have to bear the brunt of big players if foreign investment is allowed. A few retailers may be hitif foreign investment is allowed. There might not be mass bankruptcy of local traditional retailers in India as consumer tasters are region-specific and foreign retailers shall operate only one shop in a radius of ten miles. Wal-Mart is struggling to establish itself in Russia and in Japan, it was a failure.Organized retail market in china constitutes only 20% of the total market even after foreign investment was allowed way before 2000.59Local retailers can bank on parameters like proximity, their long-standing customer base, credit sales. The number of farmers and consumers in India outnumbers those of traditional retailers. A shift in the policy might affect a minority badly and benefit a majority. In 1985, when Rajiv Gandhi brought an IT company named ‘Texas Instruments’ to Bangalore, his move was denounced as being amateur, although it brought millions of jobs to India. The world-class Information Technology services 56
Ibid. 8. Sukhpal Singh, supra note, 15. 58 The Rajya Sabha Report, supra note 11, 6. 59 Chris Devonshire Ellis and AnkitShrivastava, Foreign Direct Investment in India’s Single and Multi-Brand Retail, February 2, 2012, available at http://www.indiabriefing.com/news/foreign-direct-investment-indias-single-multibrand-retail-5232.html/ (Last visited 30th August, 2012). 57
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in India is wide in the open. The Government should hold onto its present policy of allowing big retailers only into cities with over a population of a million. It can permit a phased entry of these foreign players, subject to their successful run in cities. It must ponder over the plan of incentivizing traditional stores to upgrade their technological capabilities as suggested by the Economic Survey 2010-11 to withstand the onslaught of the new players.60 The impact even otherwise shall be minimal at best if the present stipulations in the proposed policy are retained.More, the foreign retailers operate only in cities. The rural India is out of the sweep of the government’s decision. Traditional retailers in rural areas will not suffer in view of the operations of the foreign players in cities. Furthermore, that the condition to obligate foreign players to source thirty per cent of their products from Small Industries61 is untenable is nothing but an ipse dixit. 62 Although this condition violates our country commitments cast on it for having ratified the ‘National Treatment Clause’ of GATS,63 India can hold onto it to shield small enterprises. It canseek shelter under the exceptions in GATS 64 to ward off the loss that might befall these enterprises, lest China’s goods would be dumped into India as explained before in absentia a provision to obligate foreign players from local businesses, which would spell disasters for India, and India may have to discontinue its support to small enterprises. In order to protect the interests of small enterprises, India could take recourse to General Exceptions under GATS. The general exception under Art. XIV allow Members to accommodate other policy goals pursued in step with their domestic law and policy choices made in accordance with societal values and preferences.65 This exception can be invoked when states take any measure either for protecting public morals or maintaining public order66 or protecting human, animal or plant life or health. 67 The Government’s stipulation to procure source 30% from small enterprises may meet an exception in GATS as it
60
The Indian Express, Allow FDI in multi-brand retail: Survey, March 15th, 2012, available at http://www.indianexpress.com/news/allow-fdi-in-multibrand-retail-survey/924116/ (Last visited on 30th August, 2012). 61 Press Note 5, para 3.2, p. 4. Small Industries are referred to as industries with an investment not exceeding $1 Million. 62 Sukhpal Singh, supra note 51, 14. 63 GATS, Article XVII. 64 Ibid. Art. XIV. 65 See generally Thomas Cottier, PanagiotisDelimatsis and Nicolas Diebold, Article XIV General Exceptions, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1280215 (Last visited on September 2, 2012). 66 GATS, Art. XIV (a). 67 Ibid. Art. XIV(b)
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endeavors to give an impetus to small enterprises providing jobs to millions of poor Indians. The open flouting of rules is apparent in the present operations of the foreign retail giants. Wal-Mart’s cash-and-carry stores in north and south India are accused of selling even to non-retailers, i.e., ordinary people to the point that a PIL was filed against it. 68 Every time the debate of foreign investment is brought to fore, the illicit practices of foreign retailers in the cash-and-carry stores the foreign players run are cited, accentuating the lack of any body to monitor the trading activities. The unfair trade practices of the foreign players are not a rarity. In South Korea, Carrefour was fined for its unethical and unfair business practices. It faced a steeped fine in Indonesia for their unfair dealings with their listed supplies. 69 The Government’s policy turns aNelson’s eye to this problem. It should not lose sight of this problem and should address it judiciously. It must keep a watchful eye on-if possible set-up monitoring authorities-to ensure that the foreign players abstain from indulging in illicit trade practices. Besides, the fear of predatory pricing has little truth. India has a strong and pro-active commission in place to clamp down any anti-competitive practices. Domestic players can unhesitatingly approach the Competition Commission of India to put an end to any ant-competitive practice of the foreign players. The entry of Wal-Mart shall exacerbate the trade deficit of India with China. China is the fountainhead of a major part of the Wal-Mart’s goods. The trade deficit between India and China is already yawning.70 Operations of Wal-Mart shall multiply the problem of Indian trade deficit. India can become a dumping ground for the Chinese produce. The trade gap between the China and the United States of America had been on an Increase because of the Wal-Mart-propelled manufacturing market in China. China’s imports to the United States stand nowhere close to the imports of the United States to China.71 Vis-à-vis the problem of inflation, in a bunch of countries; Inflation has been a problem regardless of the broad-based operations of the retail giants. In fact, in China and Thailand, Wal-Mart, Carrefour and Tesco have been 68
Daily Mail, Court notice to Bharati Wal-Mart Illegal retail, 11 July, 2012, available at http://www.dailymail.co.uk/indiahome/indianews/article-2172206/Court-notice-BhartiWalmart-illegal-retail.html (lastvisited on 29th August, 2012). 69 Sukhpal Singh, FDI in Retail: Misplaced Expectations and Half-Truths, THE ECONOMIC POLITICAL WEEKLY December 27, 2011, 14, available at AND http://www.epw.in/commentary/fdi-retail-misplaced-expectations-and-half-truths.html (Last visited on 30th August, 2012) (hereinafter ‘Sukhpal Singh’) 70 BBC, India and China talk trade deficit at high talks, August 27th, 2012, available at http://www.bbc.co.uk/news/19388448 (Last visited on 31st August, 2012). 71 Robert E. Scott, The Wal-Mart Effect, June 15, 2007, available at http://www.epi.org/publication/ib235/ (Last visited on 30th August, 2012).
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running hundreds of stores, but right from 2004, Inflation has been a problem in China, making its heads announce to subsidy to curtail its impact on consumers. 72 Thus, the question of whether or not the entry of foreign players may contain inflation lingers on. If the answer to this question is in the negative, the very purpose of allowing foreign investment may stand partially trumped. And, the problem of protecting small farmers is another threat. Experts argue foreign investment might not bode well for them. It is submitted that arguments of the experts hold some merit. 95% per cent of the farmers in India yield very small quantities. For an uninterrupted supply chain, foreign and the domestic players will be left with no other surrogate but to head to these farmers. In process, foreign retailers may exploit these farmers. The Government’s policy envisions little protection to the small farmers. Small farmers would not better off unless the government crafts a way-out to this problem. It can consider the inclusion of mandatory provisions for ‘contract farming’ with these small farmers and come up with model contracts. Such mandatory provision holds ground asany business is a fundamental right amenable to reasonable limitations as provided for article 19(1)(6) of the Indian Constitution. An ideal method to facilitate ‘contract farming’ would be to form distinct associations for farmers, design mechanisms to overseethe intercourse of the foreign players and Indian farmers who contract with big playersand prepare minimum standards by preparing model contracts for contracting with the small farmers. For the purpose of forming associations, the Government can mull over the idea of clubbing all the farmers in a government-regulated ‘Mandis’ into one association in the regions where foreign players operate or wish to procure from to allow farmers associations to contract straight with foreign players.The constitution of farmers associations is must-do thing to keep a check on the unfair practices of these foreign players. A small farmer cannot approach the courts or any other grievance redressal mechanism for relief. Farmers associations may sue and get sued for violating the terms in contracts with the foreign players. If the farmers choose against joining associations as suggested above, and engage in contract-farming independently, foreign players may become a thorn in their side. Foreign players might maintain double-standards in the light of the experiences in the past as some past incidents show us that big companies did not buy the produce citing its sub-standard nature.73 72
Sukhpal Singh, supra note 51, 15. Moneycontrol, ‘need farmers’ protection under FDI retail policy, 27 September, available at http://www.moneycontrol.com/smementor/news/indian-markets/need-farmers-protectionclause-under-fdi-retail-policy-762160.html (last visited on February 13th, 2012). 73
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To negate the impact of claims of modicum protection to farmers, an independent authority like a Retail Commission at the Central and the State level to superintend the operations of the foreign players with power to investigate into their alleged malpractices, look into their operations with domestic suppliers including farmers and levy fines for illegal activities, if any, must be set-up.74 Doing thus would reduce the scope of foul play by the foreign players and create a level playing field for them and the small farmers. Not only that, the Government should exclude the sale of perishable products out of the ambit of the Agricultural Produce Marketing Committee Act, 2003 (hereinafter APMC Act, 2003) by suitably amending it. Provisions specific to the Indian model ‘Contract Farming’ envisaged under the amended the AMPC Act, 2003 should be re-amended. They are loosely worded, leaving Indian farmers at the mercy of the contracting agencies. Model Contracts should be prepared to safeguard the interests of the farmers.75
IV.
CONCLUSION
Given the foregoing discussion, it’s understandable that the Government’s decision to allow foreign investment does help India. Its policycould have been fine-tuned to be tailored to India’s needs and circumvent any loss to any player involved. In the discussion, the strengths and the weaknesses of the Indian retail market have been thoroughly discussed.It was suggested that it was not uncommon for a radical change to lead to untoward consequences for a few and that the foreign direct investment showers benefits on crores of Indians. The opportunities and threats out of foreign investment were clearly detailed and weighed against each other and suggestions were advanced to tackle the threats. In conclusion, it can be deciphered that the advantages out of foreign direct investment outstrip the disadvantages and that the impact of the disadvantages can be offset with a few legislative and institutional measures. In totality, it is submitted, that the Government’ decision to allow foreign investment in a phased manner is indeed a progressive one, and would offer a lot to India. However,inter alia, the following are chief the measures that could be taken additionally to make sure the government’s decision does result in a win-win situation for India:74
Ibid. Dr. Sukhpal Singh, FDI in multi-brand retailing in India: Issues and Implications for smallholders, available at http://www.iima-kronos.com/images/The%20Hyphen_AgriBusiness%20Club.pdf (Last visited on August 31, 2012) 75
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1) Amend the APMC Act, 2003 to exclude the sale of items of perishable items out of its sweep to allow farmers to contract with the big players and to provide for a legally guaranteed means of contract farming by amending the APMC Act, 2003 so as to include model contracts to assist farmers and pre-empt their exploitation. Unfair practices can only be reined in through the adoption of model contracts; 2) Adoption of the amendments by all states where foreign players operate; 3) Formation of farmers associations to allow them to contract with the big players in line with the recommendations of the Committee headed by MuraliManohar Joshi. Big players cannot reach out to every small farmer. Even assuming they do, they may make unconscionable bargains when they contract separately. A common contract with a barrage of farmers will mitigate the likelihood of foul play by the foreign players. 4) A national level authority to superintend the operations of foreign players must be set up through legislation in a bid to contain the unfair and unlawful practices of foreign behemoths.
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