FDI and its impact on Indian Retail Industry

The Indian Retail Industry is the largest among all the industries, accounting for over 14-15 per cent of the country’s GDP and around 10 per cent of the employment. The Retail Industry in India has come forth as one of the most dynamic and fast paced industries with several players entering the market. But all of them have not yet tasted success because of the heavy initial investments that are required to break even with other companies and compete with them.

The total concept and idea of shopping has undergone an attention drawing change in terms of format and consumer buying behavior, ushering in a revolution in shopping in India. Modern retailing has entered into the Retail market in India as is observed in the form of bustling shopping centers, multi-storied malls and the huge complexes that offer shopping, entertainment and food all under one roof.

In India the vast middle class and its almost untapped retail industry are the key attractive forces for global retail giants wanting to enter into newer markets, which in turn will help the India Retail Industry to grow faster. Indian retail is expected to grow 25 per cent annually. Modern retail in India could be worth US$ 175-200 billion by 2016. The Food Retail Industry in India dominates the shopping basket. The Mobile phone Retail Industry in India is already a US$ 16.7 billion business, growing at over 20 per cent per year.
Until 2011, Indian central government denied foreign direct investment (FDI) in multi-brand retail, forbidding foreign groups from any ownership in supermarkets, convenience stores or any retail outlets. Even single-brand retail was limited to 51% ownership and a bureaucratic process.

In November 2011, India’s central government announced retail reforms for both multi-brand stores and single-brand stores. These market reforms paved the way for retail innovation and competition with multi-brand retailers such as Walmart, Carrefour and Tesco, as well single brand majors such as IKEA, Nike, and Apple.
Foreign companies have been keen to enter India’s $500 billion retail market since the country allowed foreign investment in its supermarket sector in September 2012 but ambiguity around entry rules has kept them away.

The issue remains politically controversial because of worries that millions of small shopkeepers could go out of business and India has so far not received a single application from any global retailer.

A previously announced rule that foreign chains must source 30 percent of their products locally when they enter had been a major sticking point.

In the new announcement, the government retained the 30 percent sourcing requirement but said it can be met over a period of five years initially and after that it has to be met on an annual basis.

Government also said that global chains will only have to invest 50 percent of an initial mandatory investment of $100 million in setting up cold storages and warehouses as against the earlier policy, which said half of the entire investment by foreign chains in India had to be in building back-end infrastructure.

The new rules have removed some major stumbling blocks and should encourage foreign retailers to enter India in coming future.

Although most retailers are still likely to wait for the outcome of the elections next year before they make a decision. National elections in India are due by May 2014 and a change in government could result in the controversial retail reform, being reversed and any newly opened supermarkets being shut. Therefore industry officials are claiming that FDI in Retail will enter India after National Elections of 2014.

The future of the India Retail Industry looks promising with the growing of the market, with the government policies becoming more favorable and the emerging technologies facilitating operations. The India Retail Industry is gradually inching its way towards becoming the next boom industry. A large young working population, nuclear families in urban areas, along with increasing working women population and emerging opportunities in the services sector are going to be the key factors in the growth of the organized Retail sector in India. The growth pattern in organized retailing and in the consumption made by the Indian population will follow a rising graph helping the newer businessmen to enter the India Retail Industry.