FDI in India’s Retail Trade: Some Additional Issues

FDI in retail trade is as yet restricted, the Government of India has a more liberal policy towards wholesale trade, franchising, and commission agents’ services, thus preparing the ground for FDI in retail as well. Foreign retailers have already started operations in India through various routes:

• joint ventures where the Indian firm is an export house;
• franchising2 (eg. Kentucky Fried Chicken, Nike);
• sourcing of supplies from small-scale sector;
• ‘cash and carry’ operations (Giant in Hyderabad, Metro in Bangalore);
• non-store formats – direct marketing (Amway).

Large international retailers of home furnishing and apparels such as Pottery Barn, The Gap and Ralph Lauren have made India one of their major sourcing hubs. Up to 100 per cent FDI is allowed in ‘cash and carry’ operations. The Great Wholesaling Club Ltd is one such example.4 In February 2002, the world’s largest retailer, Wal-Mart, opened a global sourcing office in Bangalore. In November 2006, it announced its entry under a joint venture with the Indian corporation Bharti. For the time being, Bharti is to own the chain of front-end retail stores, while the two firms will have an equal share in a firm that will engage in wholesale, logistics, supply chain and sourcing activities. This is seen as a preliminary step by Wal-Mart pending the removal of all restrictions on FDI in retail trade.

Distinct character of Indian retail trade

The Indian trading sector, as it has developed over centuries, is very different from that of the developed countries. In the developed countries, products and services normally reach consumers from the manufacturer/producers through two different channels:

1. via independent retailers (‘vertical separation’) and
2. directly from the producer (‘vertical integration’).

In the latter case, the producers establish their own chains of retail outlets, or develop franchises.

In India, however, the above two modes of operation are not very common: For in India, today, less than three per cent of the retail transactions are done in the organised sector; and this is projected to increase to 15-20 per cent by 2010.6 To date, the organised sector is restricted to metropolises. The second mode is found in a few national firms and some subsidiaries of global firms. Indian wholesale trade too is not organised. The few government initiatives (such as the formation of Boards for tea, coffee, and spices, and the State Trading Corporations) have largely become defunct by now, and private initiatives have mostly remained localised.

Small and medium enterprises dominate the Indian retail scene. The trading sector is highly fragmented, with a large number of intermediaries. So also, wholesale trade in India is marked by the presence of thousands of small commission agents, stockists and distributors who operate at a strictly local level. Apart from these, in many cases small producers such as artisans and farmers sell their goods directly to end consumers (often one family member is a producer and another sells the products). The existence of thousands of such individual producer-cum-sellers is an example of  ‘vertical integration’ as it is found in the Indian retail sector. There is no ‘barrier to entry’, given the structure and scale of these operations.

‘Customer relationship management’ (to use the marketing jargon) is handled in India by numerous small vendors locating themselves close to their customers – either by opening a tiny outlet in a residential area or by hawking goods at the consumer’s doorstep. In this process, a personal relationship develops, often extending beyond immediate business interests.

Have your say. What should be the FDI limit in Retail, or should there be no limit. I think there should be no limit and all should be left open in the market to compete.

Do let me know your views.