Foreign Direct Investment in the Indian Retail Sector
In July 2006, it was reported that Wal-Mart Stores Inc. (Wal-Mart), the world's largest retailer with annual revenues of US$ 312.4 billion, had received permission from the Indian government to set up two liaison offices in India. These offices, expected to become operational by October-November 2006, would explore market opportunities for Wal-Mart in India and also focus on expanding its supplier base. Though these offices could not undertake business operations in India, analysts saw this as part of the retail giant's long-term plans for establishing operations in India.The Indian retail sector is in the midst of a boom. A report by KPMG, India and the Federation of Indian Chambers of Commerce and Industry (FICCI), estimated the retail market in India to be around US$ 200 billion, of which organized retail accounted for US$ 6.4 billion. Organized retail was expected to increase to US$ 23 billion by 2010. A healthy 7%-8% economic growth, increasing disposable incomes among the middle class, changing consumer tastes and preferences, and a young population with a propensity to spend, were some of the key factors driving growth in the organized retail market in India.
Given the attractiveness of the Indian retail sector, foreign retailers like Wal-Mart, Carrefour SA, Europe's largest retailer, and Tesco Plc, the UK's largest retailer, were keen to enter this growing market, despite the Indian retail sector being closed to foreign direct investment (FDI). In February 2006, the Indian government had announced its decision to allow FDI of upto 51% in single brand retailing. Wal-Mart had said that India was high on its priority and that it was closely monitoring the government's policy on FDI in the retail sector.
In July 2006, the Investment Commission suggested that 49% FDI be allowed in the Indian retail sector without any restrictions on the number of outlets or location of stores. The Indian retail boom and the Investment Commission's suggestions renewed the debate on the issue of allowing FDI in the retail sector.
Proponents for FDI opined that that foreign investment would help in improving the retail and supply chain infrastructure, and generate large-scale employment in the country. In addition, the Indian retailers could absorb some of the best operational practices of these international retailers and gain in experience. Ultimately, the consumers would benefit due to the availability of more product offerings, lower prices, and efficient service.
Those who opposed FDI argued that the entry of foreign retail giants would be detrimental to the livelihoods of unorganized retailers in India. There were an estimated 12 million shops, which accounted for 97% of the retail market in India. There were concerns that these small retail stores would not be able to compete with the operational efficiencies and financial muscle of foreign players. Also, there was the aspect of increased concentration of power among a few large buyers.
Despite this opposition, it was felt that the rapid growth in the Indian retail sector and its huge employment potential could not be ignored for long, and that the government would have to take firm steps toward allowing FDI in the retail sector. Some Indian retailers and industry experts opined that the opening up should be a gradual process so that the Indian companies could gear up to face the increased competition.
However, all things considered, given the lack of consensus on the issue of allowing FDI in retail, the debate was expected to continue.