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FDI in retail sector

Foreign Direct Investment (FDI) for a developing country like India is a major avenue of forex influx in the economy. It not only boosts the market performance but also provides a sense of security in case of unforeseeable events.

FDI in retail sector in India was restricted initially, but the dire need for forex lead to government liberalizing the policies of making investment upto 51% by way of FDI in ‘single brand’ retail sector and upto 49% equity participation in ‘multi brand’ retail sector, which further escalated steadily in retail sector.

Defining Retail Sector
Retail Sector is inclusive of small, medium to large shops that sell goods to the ultimate consumers for their personal consumption. Retailing to a customer who further sells those goods is not treated as consumer here. It encompasses all kinds of shops, from small groceries to supermarket chains and large departmental stores. In computing the definition of retail sector, traditional bricks-and-mortar shops mail-order and online businesses is also included.

Pros and cons of FDI in retail sector
Following are some advantages which will take place as a result of FDI entering the economy:

  • Overall economic growth: Entry of foreign companies in India will boost the infrastructure and real estate sector will be equally benefitted. Banks and Financial Institutions will also gain momentum as a result of FDI infusion in the economy.
  • Employment Opportunities: Following the trend and analyzing the vast possibility of business expansion, more business ventures will enter the market and create job opportunities for the vast population of the country.
  • Eliminating middlemen: Intermediaries dominate articulation between manufacturers or producers and final consumers resulting in loss of maximum share of profits of manufacturers or producers to the intermediaries. With the introduction of FDI, manufacturers or producers might be offered contractual supply of products, thus, eliminating the loss of profits to middlemen.
  • Benefitting ultimate consumers: Customers or end consumers will get access to a variety of international quality products at lower rates, compared to what they used to pay earlier in the market.

Introduction of FDI in the markets may lead to the following disadvantages:

  • Country’s share of revenue drained: FDI will drain out the country’s fair share of profits by diverting them to foreign countries, causing negative impact on India’s overall economy.
  • Domestic players crushed: Entry of big international players in the market might affect the performance of small domestic companies / individuals negatively. Small companies are not fully equipped to tackle the international company’s strategies and might lose their market share.
  • Jobs in other sectors affected: Many of the small business owners and workers from other functional areas may lose their jobs, as lots of people are into unorganized retail business such as small shops.

FDI policy in India:
Administration of Foreign Investment in India is regulated by the provision of the Foreign Exchange Management Act (FEMA) 1999 and FDI policy announced by the Government of India. The Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 are issued by the Reserve Bank of India (RBI) via a notification. From time to time, this notification has been amended.

The Secretariat for Industrial Assistance (SIA), Department of Industrial Policy and Promotion (DIPP) notified the FDI policy through Press Notes. Foreign investments are freely allowed in India, except few sectors/activities, where prior approval from the RBI or Foreign Investment Promotion Board (FIPB) would be mandatory.

It is believed that FDI can prove to be powerful catalyst which can spur competition in retail industry. Also, organized retail sector is a budding phenomenon in India and leads to exponential growth of markets, despite all the downturns. Need some assistance or more information for investment in India, please click here.

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