Advantages and Disadvantages of Fdi in India free essay sample

Advantages and Disadvantages of Fad in India BY attitude FAD in Multi-brand Retail in India: Signs of New Resolve S Marylyn 1 Dry S Nary is Head of Research and Visiting Senior Research Fellow at the Institute of South Asian Studies (ISIS), an autonomous research institute at the National University of Singapore. He was formerly Economic Adviser to the Prime Minister of India. Dry Nary can be contacted at [emailprotected] Com. The views expressed in this paper are those of the author and do not necessarily reflect those of ISIS. In September 2012, the Government of India announced several economic policy reform measures that included a move to allow 51 per cent foreign direct investment (FAD) in multi-brand retail. In the same announcement, it relaxed norms for foreign direct investment in the aviation sector, allowing international airlines to invest in domestic peers and cleared a slew of other reform-oriented measures an increase of FAD in some broadcasting services. The issue of FAD in retail has attracted considerable political debate. The matter was first proposed by the Government in 2010, but had to be withdrawn because of political opposition. This time, the Government appears to be firm in pushing the policy through. It is possible to adduce several reasons for the determination of the Government. First, the ruling United Progressive Alliance (PUPA) Government, and in particular the Congress party, has been battered by allegations of corruption and scams all through 2012, and needs a breather to establish its authority to govern. The criticism in the foreign media and by academics that the Government has been in a state of policy paralysis, which has prevented it from taking even basic measures to improve governance, has rut its image. The crisis in coal supply for power generation and the poor progress of infrastructure projects have given the impression that executive decisions have come to a halt. On the trade front, the growing current account deficit, as well as the weakening of the rupee, has been seen as warning signals for the economy. The growing fiscal deficit, the inability to control expenditure on subsidies, and a slowing economy have caused international investors and rating agencies to downgrade expectations about the Indian economy. The latest GAP growth figures of 5. Re cent are lower than the expectations of the Government and the Reserve Bank of India alike, and the persistent inflation is hurting the entire population, especially those with fixed incomes. There was, therefore, a need to induce some confidence about the economy. In the past, the current account deficit was bridged by FAD, inflows into capital markets, and through inarticulateness. Of these, the first two had seen a sharp drop in 2010 and 2011. The equity markets were trading 30 per cent below pre-2008 crisis levels, with little appetite for fresh capital issues. FAD was dropping detailed after 2008 and dropped to 40 per cent of the 2011-12 level in the subsequent year. The high fiscal deficit was also crowding out private borrowings. In short, there was need for a correction to infuse external capital into the economy by improving the sentiment in the financial markets and by giving a signal that could restore F flows. The reform announcements of September 2012 were an attempt at that. There were other arguments as well. The retail sector in India has been growing at a combined annual growth rate of 6. Per cent over the period 1998-2010, and is estimated to be worth around RSI. 50,000 scores (IIS$ 10 billion) in 2010. However, the contribution of organized retail remains low. As against the United States, which has the organized to unrecognized ratio of 85:1 5, in India, it is only 10:90. Organized retail has been growing rapidly and is expected to have a share of 22 per cent before 2017. There are also several consumption-related growth dri vers for retail. Indians per capita income, in real terms, has doubled between 2000 and 2011, and income levels are expected to triple in nominal terms in the next 20 years. Average real household income has grown at an annual rate of 3. 8 per cent from 1985 to 2005. The middle class population as defined at an income level of RSI. 200,000 and above at the 2000- price level is expected to increase to 40 per cent of the population by 2025. Per household consumption expenditure has also doubled in the last decade along with rising income levels. The fast pace of arbitration is also changing consumption patterns. As per the United Nations state of the populations report, 40 per cent of Indians population is expected to reside in urban agglomerates by 2030. Finally, the anemographic pattern of the population, with 60 per cent of the population at 35 years or less, is driving consumption towards more modern, technologically advanced products that are the strength of modern retail outlets. In terms of the share of the various sectors in the retail industry in India, clothing and food have a share of 38. 1 per cent and 1 1. 5 per cent respectively, according to the FIEF retail report 2011. 3 As per the Indian Governments announced policy, FAD in multi-brand retail is to be allowed only in towns which have a population of more than one million, which restricts the entry to around 35 cities. The minimum amount to be brought in by the foreign player is IIS$ 100 million; 50 per cent of the total FAD brought in should be invested in back-end infrastructure such as processing, logistics, warehousing and improvements in manufacturing. Fresh agricultural products may be unbranded. FAD in multi-brand retail trading in the form of e-commerce would not be permissible. Asset creation is expected to be done primarily by the foreign player. The advantage, from the Governments point of view, is an increased opportunity for employment. It is estimated that organized retail has created over 1. Million Jobs in the period 2005-2009. The quality of employment is also superior to the opportunities in the unrecognized sector. The organized sector would make a higher contribution to tax revenues through increased VAT and eventually, SST revenues. From the point of view of customers, they are likely to get better products, lower defective items, increased choice and quality of products, and the availability of global products in local markets. For the farmers, there would be a reduction in the level of intermediaries, improvement in supply chain management, requisite infrastructure n cold chain, warehousing and transportation logistics, technological improvements in crop production, and rational and fair pricing of products. The limitation of applicability to cities with a population of one million or more implies that this would be applicable only to 35 cities in 15 states. These are Andorra Pradesh, Briar, Delhi, Gujarat, Harlan, Shorthand, Karakas, Kraal, Madhya Pradesh, Maharajahs, Punjab, Restaurants, Tamil Nadia, Attar Pradesh and West Bengal. It is also stipulated in the policy that State Governments and Union Territories would be free to take their win decisions in regard to the implementation of the policy. In perspective, this policy appears to have several significant positives. It is an executive decision, well within the purview of the executive, with no need for parliamentary approval. First, on the economic side, this would lead to modernization of retail and investment in technology, logistics and the value chain. Second, there would be opportunities of greater, higher quality of employment. Third, multiplier effects can be had in the domestic economy in the fields of warehousing, transportation and ancillary activities. Fourth, this opens up opportunities for improving the quality of employment in these sectors. Fifth, there is an assurance of greater revenue manipulation. Sixth, this would lead to more inward capital flows and investments. Against this backdrop, there has been strong opposition to the move and political parties are lined up to oppose the move. One of the members of the PUPA, the Traditional Congress, has walked out of the alliance on this issue, leaving the Government technically in parliamentary minority, though they have the outside support of two major parties from Attar Pradesh. 4 The opposition puts forth several arguments. First, that unrecognized retail in India is run by a large number of small entrepreneurs who serve the immediate neighborhood, and who would be driven out of business by the advent of large supermarkets. There is evidence that this has happened in some states in the US and in smaller towns in the United Kingdom and Australia. The small stores would not have the technological capability or the financial muscle to compete on equal terms with the large retail chains, and hence would be at a disadvantage. The strength of small retail lies in familiarity with the customer, that enables credit transactions to aka place and provides for customer conveniences like small quantities and home delivery, which would not be possible from a large retail chain. Further, the very nature of large retail investment would require large real estate space, requiring transportation and higher transaction volumes. Therefore the concept is elitist, available only to a select few in the higher income ranges, and not of use to the common man, who constitutes of over 50 per cent of the rural and small-town consumers. So runs the argument. Secondly, it is contended that farmers would be at a disadvantage. The large retailers would be in a position to enforce supply contracts that would push farm prices down, thus affecting farmers incomes. Third, the tendency to stock mass-manufactured goods would lead to more imported goods being on offer, to the disadvantage of local manufacturers. Finally, the smaller retail stores are able to offer employment to even unskilled workers, of whom there are plenty in India. The employment requirement in large multi-brand retail stores would be for the better skilled, thus driving the poorer out of employment. These are some of the other arguments being advanced. Existing traders are lobbying hard with their own state governments against the introduction of FAD in retail. At the same time, large local retailers, who have multi-brand shops, do not also want the international names to come in, as they fear they would not be able to meet the competition. At the level to media, and even at the political level, these arguments are more in the realm of opinions and estimation, and not based on any hard analytical evidence. Firstly, the FAD retail shops would be set up in only 35 towns in the country, thus leaving most of the smaller retail shops untouched. Further, even in the larger urban centre, the requirement of real estate for these large stores is likely to be such that only a small number would be set up in each town. The advent of modern malls and composite shopping centre has not, in the last decade, disturbed local shopping habits or shopping centre. Rather, it has catered to a different class of young, urban consumers who are looking for products that are usually not available at traditional retail stores. It is also difficult to argue that retailing in India does not need to modernism, along with the economy, and that modern warehousing, inventory engagement and efficient logistics will not be of advantage to the consumer. Finally, it is also curious that there is little objection to multi-brand retail if it is owned by Indian retailers; the objection is only to FAD in retail. Perhaps this is because local large retailers do not want to face international brand competition. It is also 5 curious that there is little objection to FAD in single-brand goods. The fear of mom and pop stores being displaced and branded retail taking over the entire retail segment is perhaps overstated. It is of course possible that the arguments are entirely in the realm of politics. No doubt the strong lobbies of the existing small retailers as well as the established Indian multi-brand retailers are adding to the fervor of the arguments, but the epicenter of the issue appears to be the political scene. Currently, the PUPA has lost a major ally in the Look Saba, key lower house of national Parliament, and depends on the support of Samizdat Party and Bauhaus Assam Party, two opposing parties in Attar Pradesh (against both of whom the Congress fought in the recent state elections). In the upper house, the Raja Saba, the Government does not have the numbers for the vote. The ruling alliance, as already mentioned, has been weakened in 2012 by complaints of non-performance and a number of allegations of corruption: it is perhaps natural for the opposition parties to press home their advantage when the PUPA is weak. There is little to be achieved as the FAD decision is an executive decision, unlikely to bring down the Government. So, this political tussle would only reveal the combination of political forces and allies in a kind of muscle-flexing for the next General elections, now slated for in 2014 in the normal course. The downside would be that international inference in governance in India would be further weakened, and in fact, may lead to reluctance to invest in India. It is therefore vital that the Government should sail through these discussions and win a decisive vote in Parliament FAD in Retail sector in India: How does this affect you? Health Lifestyle by Editor Retailing defines the direct interface between the manufacturers and the end users who are basically individual consumers. The retail business owners stock up all goods after purchasing it directly from the manufacturers and then sell it to individual customers keeping a profit margin for themselves. Of late the retailing industry in India NAS bloomed Witt much coveted success causing positive impact on the national economy. As per the recent revelations by the popular International Management Consultancy AT Carney, India has been considered the second most lucrative destinations of the world for retail business. Read what is FAD and buzz around it In India, retailing industry is segregated into two classes- organized retailing and unrecognized retailing. Organized retailing entails trading conducted by licensed retailers and unrecognized retailing includes all types of low cost trading like local shops, small roadside stores ND temporary shops or door to door selling of various goods. Until now, according to the Indian retailing laws, Foreign Direct Investment in multi-brand retail market was prohibited. But government is thinking to open the FAD in retail in India which implies that foreign investment in retailing is possible up to 51%. Now the announcement of retail FAD in India has triggered a series of debates on both positive and negative notes and become political issue. So lets discuss these things, what all this meaner to you through advantages and disadvantages: Advantages of FAD in retail sector in India: Growth in economy: Due to coming of foreign companies new infrastructure will be build, thus real estate sector will grow consequently banking sector, as money need to be required to build infrastructure would be provided by banks. Job opportunities: Estimates shows that this will create about alack Jobs. These career opportunities will be created mostly in retail, real estate. But it will create positive impact on others sectors as well. Read about career options in Retail sector.. Benefits to farmers: In most cases, in the retailing business, the intermediaries have dominated the interface between the manufacturers or producers and the consumers. Hence the farmers and manufacturers lose their actual sha re of profit margin as the lions share is eaten up by the middle men. This issue can be resolved by FAD, as farmers might get contract farming where they will supply to a retailer based upon demand and will get good cash for that, they need not to search for buyers. Benefits to consumers: Consumer will get variety of products at low prices compared to market rates, and will have more choice to get international brands at one place. Lack of infrastructure in the retailing chain has been one of the common issues in India for years which has led the process to an incompetent market mechanism. For example, in spite of India being one of the largest producers of vegetables and fruits, lack of proper count of cold storages has significantly affected the selling of these perishable items. FAD might help India overcome such issues by channeling the resources in the right manner. In the last years, the Public distribution system is proved to be significantly ineffective. In spite of the fact that the government arranged for subsidies, the food inflation has caused its negative impact continuously and it can be handled by FAD. Disadvantages of FAD in retail sector in India: According to the non-government cult, FAD will drain out the countrys share of revenue to foreign countries which may cause negative impact on Indians overall economy. The domestic organized retail sector might not be competitive enough to tackle international players and might loose its market share. Many of the small business owners and workers from other functional areas may lose theorists, as lot of people are into unrecognized retail business such as small hops. However the government is quite stringent on this issue and determined to allow FAD in India. The actual impacts would be observed over time and till then the laymen have nothing but to hope for the best! Walter Lobbying and Political Corruption in Retail FAD: Recent reports presented by Walter to US Gobo. Revealed that it spend RSI. 125 cry in lobbying Indian lawmakers to get access to Indian market. These facts are serious, if Gobo. Is doing all this in favor of bribery and money then results might not be good as it is projected. Since Walter will continue to McCollum things in their favor by bobbing and bribery as political corruption is well known in Indian politics. They can be purchased easily. Showing Results For disadvantages fide in retail DIP circulates Cabinet note on relaxing FAD norms for housing sector 16 Seep 2013 FacebookTweetShareThisEmail [pick] New Delhi: The Commerce and Industry Ministry has circulated a draft Cabinet note on relaxing FAD norms for the housing sector, which proposed easing the three-year lock-in period among other things. DIP, Cabinet note, FAD norms, housing sector, FAD guidelines, RIB notifies definition of control in context of FAD 14 seep 2013 Iambi: The Reserve Bank notified the definition of term control in relation to foreign direct investment and revised the list of states where FAD is permitted in multi-brand retail. RIB, FAD, RIB notification, RIB policy, Reserve Bank, multi- brand retail, Government notifies changes in FAD policy, paves way for larger overseas investments 12 Seep 2013 New Delhi: The government has notified changes in the FAD policy, paving the way for larger overseas investments in sectors such as multi-brand retail and telecoms. FAD policy, FAD notification, India FAD policy, overseas investments, Foreign investment, FEM. regulations, Malls to contribute 35 percent of modern retail sales by 2016, says report 11 Seep 2013 Iambi: With popularity of mall culture on the rise, these swanky shopping centre are expected to contribute to more than a third (35 per cent) of the modern retail sales in the next three years, says a report. Alls, shopping, retail, sales, India, No case for Indians rating downgrade by global agencies: Ranging 13 Seep 2013 New Delhi: Government has already taken a host of reform measures and there is no case for any downgrade of Indians sovereign rating by global agencies, Prime Ministers key economic advisor C Ranging said. C Ranging, India rating downgrade, India growth projection, Prime Ministers key economic advisor, Indian economy, FAD , Walter India plans possibly at final stage, says government official 31 Gag 2013 New Delhi: Global retail giant Walter is expected to soon firm up its plan to foray into Indians multi-brand sector, a top government official on Friday said. Walter, FAD, Foreign Direct Investment, Department of Industrial Policy and Promotions, Walter Asia Chief Scot, multi brand retail, Formation of Civil Aviation Authority crucial for development: Survey 09 Seep 2013 New Delhi: Liberalized FAD norms have the potential to put the aviation sector on the growth track but taxation issues are major impediments for the industry, a survey has found. Civil Aviation Authority, FAD, Indian civil aviation sector, relaxation in FAD, Aviation sector, taxation, India Inc hails relaxation in multi-brand retail norms 02 Gag 2013 New Delhi: Hailing governments announcement to relax investment norms in multi- brand retail and raising FAD caps in several sectors, India Inc said that the reforms were much-needed and will boost the confidence of foreign investors which will help in reviving the economy. FAD in retail, FAD in India, Changes in FAD norms, FAD inflow in India, FAD caps, Government to further liberalize FAD policy, says Academician 31 July 2013 New Delhi: Faced with sliding rupee, Finance Minister P Academician on Wednesday said government will further liberalize the FAD policy and encourage public sector undertakings to raise funds from overseas markets.