FDI and its impact on the Retail Sector in India


Remember the time when going to cafe coffee day was a luxury and now if you don’t walk into office with a starbucks to-go coffee cup you aren’t the cool one. That is simply Foreign Direct Investment playing its charm on the Indian mindset.

Foreign Direct Investment is an investment made by an outside country in the host country having most of the ownership and controlling power. For a host country it can provide a source of new technologies, capital, processes, products, organizational management, skills, and a strong impetus to the economy.  FDI in India has been on the rise since 2014 and steadily has been finding its growth.

The retail sector in India is one of the biggest contributors to the economy in terms of revenue and contributes about 15% towards its GDP. It provides the second highest rate of employment after agriculture. The retail sector in India is vast and has huge scope for development as majority of the constituents are of the unorganised sector.

The organized retail sector refers to the trading activities undertaken by licensed retailers who are registered under the GST Act. These include our big guns like Big Bazaar, Star Bazaar, D-Mart etc. The unorganised sector refers to the traditional formats of low cost retailing aka, the kiranasotre down our road, pan/beedi shops, handcart and street vendors.

FDI in Retailing

Walking into a Lifestyle showroom gives you so many options of different brands under one roof. That is multi-brand retailing. The cabinet has approved a 51% FDI in multi-brand retail in India opening doorways to mega retail chains like Wal-Mart and Tesco.

What’s a single-brand retail chain? It is expected to sell all its products under only one label across its stores. Think Levi’s, Starbucks, or Zara.There are a few strings attached, though. If an MNC operates a single-brand retail chain, the product must also be sold under the same brand name globally. Our country has approved a 100% FDI in single-brand retail. That means if you have always fancied the furniture at IKEA and wished you could have the portable furniture in our tiny home spaces it is going to happen soon enough.

The Impact

It is advantageous to the government as the tax revenue collected can be used for infrastructure development. It will also be beneficial to the farmers and consumers by a great extent. On the other hand it will cause cut throat competition especially in the organised retail sector promoting formation of cartels, monopolies, increase prices etc. The notion that it will cause loss of job is actually perceived incorrectly.  It will cause re-distribution of jobs with some drying up (like middlemen) and new ones sprouting up.

Those against:

– It will lead to closure of tens of thousands of mom-and-pop shops across the country and endanger livelihood of 40 million people
– It may bring down prices initially, but fuel inflation once multinational companies get a stronghold in the retail market
– Farmers may be given remunerative prices initially, but eventually they will be at the mercy of big retailers
– Small and medium enterprises will become victims of predatory pricing policies of multinational retailers
– It will disintegrate established supply chains by encouraging monopolies of global retailers

Those in favour:
– It will cut intermediaries between farmers and the retailers, thereby helping them get more money for their produce.
– It will help in bringing down prices at retail level and calm inflation
– Big retail chains will invest in supply chains which will reduce wastage, estimated at 40 percent in the case of fruits and vegetables.
– Small and medium enterprises will have a bigger market, along with better technology and branding.
– It will bring much-needed foreign investment into the country, along with technology and global best-practices.
– It will actually create employment than displace people engaged in small stores.
– It will induce better competition in the market, thus benefiting both producers and consumers.

Why should you care?

If you are a retail seller in India selling homogeneous products there is a high chance you will have a shift in your supply curve due to the reducing demand. However you can beat the competition by being a supplier to the big guns itself, reducing the margins but increasing the quantity. If you are a heterogeneous product seller like selling Kolhapuri Chappals online or home-grown products that have its USP in India, FDI is not going to affect you on a large scale and you can continue the normal business process, and also take advantage of FDI and tap on the niche markets accordingly.

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