FDI in retail - Pros and cons

The Indian retail sector has emerged resilient post COVID due to the entry of fast-paced new players in the market. Retail contributes close to 8% to GDP and 10% to employment. However, the Indian retail sector is considered to be one of the most restrictive. In multi-brand retail, up to 51 per cent FDI is allowed subject to government approval and other conditions. FDI is not permitted in the inventory-based model involving the e-commerce entity that owns and controls the inventory of goods sold on its portal. 

Also, as per the new policy, up to 100% foreign direct investment is allowed in SBRT without getting approval from the Department of Industrial Policy and Promotion, DIPP, but this is subject to certain conditions. Not less than 30% of the raw materials used must be sourced from India, especially from cottage industries in rural areas and other micro, small and medium enterprises or even craftsmen and artisans. The product must be branded during manufacturing and items sold should be under a single brand name, internationally.

This move to change the FDI Policy has been a widely controversial debate in the Parliament, thereby making it relevant for our discussion. Let’s head into today’s topic of discussion and have a glimpse at the two sides of the coin.

Advantages

• With foreign companies coming to the retail space, it might bring in the best of technologies like cooling machines and storage devices to India, thereby reducing food wastage.
• ‘FDI in retail would mean the re-birth of an advanced supply chain management (SCM) structure. This new management system is expected to bring economies of scale, benefitting the farmers of this country. 
• With operations research and lean management, the economy can potentially witness great benefits.
• As foreign retail giants have expertise in managing retail businesses which are relatively a new idea for India, FDI will help resolve the loopholes in the present supply chain management.
• Another benefit India will witness is the introduction of advanced technology and the infusion of capital inflow from incoming countries. Hence, for the success of retail business in India, FDI in stores, the investors would have improved business practices and highly skilled technical specialists to control the operations. 
• It will bring in new employment opportunities in India, which is highly needed to channelise demographic dividend. 

Disadvantages

• As has been observed in the Multi-National Corporation culture in India, it is Indians who do all the work whereas the foreign company enjoys all the profit share. Additionally, instability has been observed in the foreign exchange rate when the company takes back profits to its home country, thereby harming India. 
• With retail giants coming to India with the ability to sell at cheaper rates than mom and pop stores, many small businesses will go out of business. It will lead to a massive loss of jobs and discomfort to a large chunk of society. 
• To match up with the sophisticated technology used abroad, India which is a labour-intensive country will move to capital intensive methods of production.  
• As the debate is all about multi-brand retail, with that being allowed there will be a monopoly of such stores over the country which could have a negative impact on the Indian trade. 

Concluding remarks

The Indian market has always been a lucrative choice for foreign companies, especially owing to the massive market size. The government’s outlook has been positive to FDI as observed by “Make in India” and “Ease of Doing Business”. The tax regime has been simplified with GST reforms.

With increasing geopolitical tensions, India is at a tough spot whether to allow higher foreign participation in India or to stress upon “Atmanirbharta”. Whether the benefits outweigh costs is for deep thought, based on the pointers we discussed.

These were D2C’s efforts to help you with your group discussion. What is your stance? Let us know in the comments section below!