Why is India wary of FDI in retail?

Retail sector in India is a large contributor to GDP and also provides employment to vast section of unskilled labor. Majority of retailing in India is unorganized. Even the largest player in organized retail in India is no way near the average foreign retail player in terms of turnover. Currently Foreign Direct Investment (FDI) in single brand outlets is allowed, which means foreign players can set up exclusive showrooms for a particular product by partnering with local player. FDI is fully permissible in wholesale sector (for example Metro). The proposed policy is to allow FDI in multi-brand outlets, which means players like Wal-Mart can set up shop in India.


Organized players welcome FDI in retail since it will give a positive push to the industry as a whole. Partnering with a foreign player will also ensure their own profitability. India is portrayed as an attractive destination for investment globally. Larger FDI will generate larger employment, incomes and better technology and inventory management. Organized retail requires large investments and the domestic capital generation is not easy. Retail operations are more efficiently managed by foreign players who have experience. The consumers would be glad to welcome larger and hopefully affordable range of products in the market.


The flip side is that the players in the unorganized sector fear that allowing FDI in retail will kill their livelihood and render many people jobless. There is a possibility that global retailers would consider global sourcing which would in turn affect local producers. There might be chances of major players having a monopoly on the prices. There might be asymmetric growth in the cities leading to discontent elsewhere. The political implications of backlash of the stakeholders in unorganized retail are too large for the Government to ignore.


Current global and domestic economic and political scenario is not too conducive for large investments in the retail sector. In other sectors where FDI is already permitted, major investments are not happening currently. So even if Government gives a go-ahead for FDI in retail, foreign players might not queue up in a hurry. The Indian consumers including those in the rural markets want more variety and the organized retail space is bringing out new initiatives to attract them. However, in order to address the issues raised by small players and producers, it is better to open FDI but with reform measures to ensure that there is a level-playing field for all stakeholders.


About the author: Uma Avantsa is a Contributing Editor for TradeBriefs. She can be reached at uma.avantsa@gmail.com