India has finally decided to allow global retail giants like Walmart and Carrefour to open stores in India. With this decision, multinational retailers can invest up to 51 percent to open stores in 10 states and Union Territories which, till date, have agreed to implement the decision. Minimum amount to be brought in by the foreign investor would be $100 million and outlets may be set up only in cities with a population of more than one million. There have been many protests from political parties against this decision. The major reason for these protests was that the entry of the global retail companies would displace the small retail shops in Indian cities and towns.
The organized retail market is growing at a higher rate compared to the un-organized market. The organized retail industry is just 5% of the total retail industry in India, and it expected to reach 15% of the total market by 2015. The figure shown below depicts this scenario.
Thus, even without any outside investment the industry is expected to grow at a higher level and going to occupy 15% of the retail industry by 2015.
There are many benefits of allowing FDI (Foreign Direct Investment) in retail. One of the major benefits of the FDI is that the capital will flow from the developed markets such as the USA, European countries to India. As Indian cities are increasing in its size (the urban population is increasing at 3% annually compared to 1-to 1.5% for the overall population growth), it gives great stress to the resources available in urban centers. Here, the foreign retail companies can help Indian cities at least in retail sector. When a foreign retail company sets up its outlet in India, it is often investing the money earned by the company overseas to India. This would also help Indian banking sector which often struggles to support the higher economic growth the country has been experiencing since 2000’s. Further, the Indian Rupee, which has been depreciating for some time, can improve its position if more dollars flow to India. Ever since the FDI investment was allowed, the Indian currency has appreciated and gained more than two rupees in two weeks’ time. Consequently stock market also found bullish growth which further increased the value of investment of common person.
The FDI can bring quality employment to people. Presently, most of the small retails shops in India employ un-skilled manpower. Further, the small retail shops often employ less than 2 employees per shop. When the bigger retail companies open outlets in India, they would be able create jobs in new skills such as accounting, stock keeping, marketing etc. which are non-existent in the smaller retail shops in India. Further, the new employment will come with higher compensation for the employees than what a small retail shop offers now. According to the Government, FDI in the retail sector is likely to create as many as 10 million jobs in a span of 10 years, making it the largest sector in organized employment.
This article is posted by Roopesh, Business Analyst of DART Consulting. He can be contacted at email@example.com