The Indian Foreign Direct Investment (FDI) Debate

This topic is about 1 year old. Yet, this topic has the most chances of being repeated this year. The reason is the same reason that’s there behind a lot of things that’s happening in India these days and you guessed it right. It’s Aam Aadmi Party or AAP. The newspapers on Jan 13, 2014 screamed that the newly-formed state government in Delhi (AAP) has asked the Centre to remove Delhi from the list of states which have conveyed their agreement to the policy of FDI in multi-brand retail trading. And just before The Centre could term this announcement as another Aam Aadmi tactic, on Jan 31, Rajasthan Chief Minister Vasundhara Raje wrote a letter to Commerce and Industry Minister Anand Sharma to reverse FDI in Rajasthan as well. Rajasthan was one of 12 states that had agreed to allow global companies to open supermarkets.

Now if the political parties differ on a topic, it is important for you and me to know about that topic. And on FDI, I would like to start by giving you some history and statistics.

INDIA AND FDI:

In the simplest terms, Foreign direct investment (FDI) is a direct investment into production or business in a country by an individual or company of another country, either by buying a company in the target country or by expanding operations of an existing business in that country. Needless to say, this includes a lot of mergers and acquisitions.The Indian Foreign Direct Investment (FDI) Debate_1

In India, Foreign investment was introduced in 1991 under Foreign Exchange Management Act (FEMA), driven by then finance minister Manmohan Singh. As Singh subsequently became the prime minister, this became one of his top political agenda. On September 2012, the government announced its new FDI policy in retail, allowing 100% FDI in single brand retail and 51% in multi brand retail. Starting from a baseline of less than $1 billion in 1990, a 2013 UNCTAD survey ranked India 16th among the top 20 global economies receiving the most FDI, witnessing a 17 per cent growth to USD 28 billion (despite economic turmoil).

Apart from retail, India allows FDI in pharma (100%), telecom (100%), and insurance (49%) amongst others. Among countries, Mauritius topped the chart with $3.41 billion FDI in India during April-November 2013, followed by Singapore ($3.05 billion), UK ($3.12 billion) and the Netherlands ($1.5 billion).

FDI has been debated over and over again. Till date, not all states have agreed upon its enactment and the recent state level reversals reveal how divisive the topic remains in India. Let’s discuss it.

POINTS IN FAVOUR:

Economic growth: A remarkable inflow of FDI in various industrial units in India boosts the economic life of country. It provides an opportunity for cash-deficient domestic retailers to bridge the gap between capital required and raised. In fact FDI is one of the major sources of investments for a developing country like India wherein it expects investments from Multinational companies to improve the countries growth rate, create jobs, share their expertise, back-end infrastructure and research and development in the host country. It has also been noted that foreign direct investment has helped several countries when they faced economic hardship. An example of this can be seen in some countries in the East Asian region (Indonesia and Thailand). It was observed during the 1997 Asian financial crisis that the amount of foreign direct investment made in these countries was held steady while other forms of cash inflows suffered major setbacks. Similar observations have also been made in Latin America in the 1980s and in Mexico in 1994-95.

Improvement in Supply Chain: Improvement of supply chain/ distribution efficiencies, coupled with capacity building and introduction of modern technology helps arrest wastage. In the present situation improper storage facilities and lack of investment in logistics have been creating inefficiencies in food supply chain, leading to significant wastages. We have to accept that India is BAD at supply chain management, be it PDS or private and foreign expertise only helps to improve it for good.

Benefits for the Farmers: Though India is the second largest producer of fruits and vegetables, it has a very limited integrated cold-chain infrastructure. Lack of adequate storage facilities causes heavy losses to farmers, in terms of wastage in quality and quantity of produce in general, and of fruits and vegetables in particular. With FDI, there could be a complete overhaul of the currently fragmented supply chain infrastructure. Extensive backward integration by multinational retailers, coupled with their technical and operational expertise, can hopefully remedy such structural flaws. Also, farmers can benefit with the “farm to fork” ventures with retailers which helps (a) to cut down intermediaries ; (b) give better prices to farmers, and (c) provide stability and economics of scale which will benefit, in the ultimate analysis, both the farmers and consumers.

Improvement in Customer Satisfaction: Consumers in the organized retail have the opportunity to choose between a numbers of internationally famous brands with pleasant shopping environment, huge space for product display, maintenance of hygiene and better customer care. There is a large segment of the population which feels that there is a difference in the quality of the products sold to foreign retailers and the same products sold in the Indian market. With increasing spending power in an emerging country, there is an increasing tendency to pay for quality and ease and access to a “one -stop shop” which has a wide range of different products. FDI definitely challenges the monopoly of certain domestic Indian companies and the ultimate benefit goes to the end-consumer.

Boost Healthy Competition and check inflation: The entry of the many multinational corporations obviously promises intensive competition between the different companies offering their brands in a particular product market (including domestic companies), thereby resulting in availability of many varieties, reduced prices, and convenient distribution of the marketing offers. Products of superior quality are manufactured by various industries in India due to greater amount of FDI inflows in the country. Some may argue because of FDI, big businesses will destroy local economies by displacing many people affiliated with small businesses, including shopkeepers, hawkers, vendors, and workers. But retail in India is $450 billion industry – 90% controlled by unorganized small and medium traders. For a country with size and plural cultural, ethnic and linguistic population fragmentation of retail business will always be present.

The Indian Foreign Direct Investment (FDI) Debate_2Improved technology and logistics: Improved technology in the sphere of processing, grading, handling and packaging of goods and further technical developments in areas like electronic weighing, billing, bar-code scanning etc. is a direct consequence of foreign companies opening retail shops in India. Further, transportation facilities get a boost, in the form of increased number of refrigerated vans and pre-cooling chambers which can help bring down wastage of goods.

More and Better Employment Opportunities: Several studies have pointed out the benefits of allowing global retail chains in the multi-brand retail sector. The overall impact of modern retail on the economy is immense. A report by the Boston Consulting Group and the Confederation of Indian Industry showed that nearly three to four million direct jobs will be created while another four to six million indirect jobs would be available in the logistics sector, contract labour in the distribution and repackaging centres, housekeeping and security staff in the stores. Government estimates show that nearly one crore jobs would be created in the sector. The entry of foreign companies into Indian Retailing not only creates employment opportunities but also ensures quality in them. This helps the Indian human resource to find better quality jobs and to improve their standard of living and life styles on par with that of the citizens of developed nations.

POINTS AGAINST:

Domination of Organized Retailers: FDI in retail definitely strengthens organized retail in the country. These organized retailers will tend to dominate the entire consumer market. It leads to unfair competition and ultimately results in large-scale exit of domestic retailers, especially the small family managed outlets. When FDI hit Thailand, 60000 small shops closed. It may all look good on paper now but eventually, big businesses will monopolize their respective markets in India by destroying all small competitors, and then they will be in complete control of prices, so it will ultimately come at a cost. Also, after monopolizing, product quality will stop mattering, since all small businesses whose products competed in quality would be destroyed. Also, vegetables and fruits that will be imported from outside India will be not fresh and stale due to long distance transportation and constant refrigeration.

The Indian Foreign Direct Investment (FDI) Debate_3Loss of jobs: Retail in India has tremendous growth potential and it is the second largest employer in India. Any changes by bringing major foreign retailers who will be directly procuring from the main supplier will not only create unemployment on the front end retail but also the middleman who have been working in this industry will be thrown out of their jobs. Jobs in the manufacturing sector will be lost because foreign giants will purchase their goods from the international market and not from domestic sources. This has been the experience of most countries which have allowed FDI in retail. Although, our country had made a condition that they must source a minimum of 30% of their goods from Indian micro and small industries, we can’t stop them from purchasing goods from international markets as per WTO law. So after coming to India, they can reduce this 30% by litigating at the WTO. Another argument is that is 30% enough?

Loss of Self Competitive Strength: The Indian retail sector, particularly organized retail, is still underdeveloped and in a nascent stage and that, therefore the companies may not be able to compete with big global giants. If the existing firms collaborate with the global biggies they might have to give up at the global front by losing their self-competitive strength. We have never heard of an Indian counterpart of Walmart and by asking Walmart to invest in India, we never will.

Distortion of Culture: Though FDI in Indian retail will indirectly or directly contribute for the enhancement of Tourism, Hospitality and few other Industries, the culture of the people in India will slowly be changed. The youth will easily imbibe certain negative aspects of foreign culture and lifestyles and develop inappropriate consumption patterns, not suited to our cultural environment.

Farmers’ woes: Because of FDI, there is a negative impact on farming, since large corporations will push farmers to work for them and get involved in single-crop farming and the use of artificial means of farming. Due to monopolization, farmers will have to sell their products to corporations at the offered price, whatever it may be. The farmers will have to bear the cost of reduced MRPs eventually.

Rise in unethical practises: Due to lack of transparency and proper regulation norms in our country, FDI would act as another source of increasing corruption and red tape in the country. In fact, Unethical behaviours like corruption, red-tapism and selfishness is increasing day by day because of huge potential of money making, which is their ultimate aim and not quality or providing jobs or reviving the economy. Example include Walmart, which in October 2013 had to break the alliance with Bharati due to continuing US investigation of fraud in Mexico, Brazil, China and India. Even the Indian government is investigating whether a loan made by Walmart to Bharti broke foreign investment rules. This is a very good example how substandard law and regulation mechanism in India can be exploited by the foreign players, negating all good things that FDI provide.

CONCLUSION:

We are in the 21st century and we can’t ignore the universal trends easily. The co-operation is the key to success. FDI would lead to a more comprehensive integration of India into the world market where India can also make a strong position in global market by exporting their quality products and services. According to the World Bank, opening the retail sector to FDI would be beneficial for India in terms of price and availability of products. While FDI in India has been opposed by several in the past citing fears of loss of employment, adverse impact on traditional retail and rise in imports from cheaper sources like China, adherents of the same indicate increased transfer of technology, enhanced supply chain efficiencies and increased employment opportunities as the perceived benefits. Considering the inflation rise and economic recession in India, FDI looks like something that can put a check on this and provide some relief to the ailing economy.

Please add more points and suggestions in the comments section and share the article.

Please like our Facebook page and follow us on twitter to remain updated. We are also on Google Plus. Do follow Us.

Download our free android app and read our articles on the go.

Share this article...

14 thoughts on “The Indian Foreign Direct Investment (FDI) Debate

  1. Sir,
    Very good article that provide a insight about FDI, but the thing which concerns me that what will be effect on 90 percent of the un-organised retails in INDIA.What are the solution for them as many family will be coming under this.

    1. The unorganized retails in INDIA like the local kirana stores provide employment to only the owners' family and their relatives while the organized retail companies would provide employment on a meritorious basis and thus would open up opportunities and give a fair chance to the upcoming youth of INDIA…

    2. Also, I dont think kirana shops will all close. They will learn to adapt to the changes, by offering supermarket type services. They already have a strong personal bond with their customers. FDI will only teach them to value the customer more and be quality driven.

  2. The only -ves which overpower the +ves are Corruption and degradation of Indian culture. Apart from these the +ves suggest that India should go ahead with 100% FDI in single brand retail India to improve the sliding economy.

  3. The point mentioned about the single crop farming can be disastrous not only for the farmer but also to the fertility of the land.
    Farmers will become mere puppets.
    As far as kirana shops go, they will surely be out of business because an average shopper would prefer to get all his daily requirements at a single place at a lesser price.
    FDI will force indian companies to merge with the foreign companies and cause loss of indigenous products.

    1. Yes, you are correct. But the solution to that cannot be to boycott FDI, but to control it with regulatory laws, so that its side effects are controlled or nullified.

Leave a Reply