FDI

What is FDI?
Foreign Direct Investment is the investment which is done in productive assets and participation in the management of the company as the stake holders by a company which is based in one country, into a company based in another country. Recently the cabinet said OK for 51% FDI in multi-brand retail sector & 100% FDI in single brand. Foreign Investment in India is governed by the FDI policy announced by the Government of India and the provision of the Foreign Exchange Management Act (FEMA) 1999. RBI also issues notifications which contains the Foreign Exchange Management (Transfer or issue of security by a person resident outside India) Regulations, 2000 and had been amended many times. The Ministry of Commerce and Industry, Government of India is the nodal agency for motoring and reviewing the FDI policy on continued basis.

Ways of investment?
The investing company may make its overseas investment in a number of ways - Joint Ventures, merger, Franchising, Sourcing of Supplies from small-scale sector, Cash and Carry whole sale trading, Non-Store Formats, Strategic Licensing Agreements, either by setting up a subsidiary or associate company in the foreign country, by acquiring shares of an overseas company.
The foreign retail chains will need to make very expensive real estate investments which may or may not be feasible in the long run.

Who are the target group for FDI?
The people who prefer going to shopping malls instead of kirana shops constitute not a sizable percentage and who belong to affluent, upper middle and middle class. As such there is no immediate threat to the kirana shops or small venders, as they have their own share of customers with whom they share a special relationship.

Why only India?
India has a population of nearly 1.2 billion, and many countries feel it as most alluring and thriving retail destination. Liberalization of trade policy and loosening of barriers and restrictions to the foreign investment in the retail sector of India, have made the FDI in retail sector quite easy and smooth. India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. In 1997, FDI in cash and carry (wholesale) with 100 percent ownership was allowed under the Government approval route. It was brought under the automatic route in 2006. 51 percent investment in a single brand retail outlet was also permitted in 2006. India being an open economy with skilled workforces and good growth prospects tend to attract larger amounts of foreign direct investment among other growing and emerging markets.
Advantages of FDI:

1. There would be increase in revenue to the state exchequer in the form of taxes
2. Counties which have shortage of funds for developmental activities would find it beneficial if they go for FDI thereby improving the country's "shunned sectors" -- infrastructure and logistics. So in order to grow faster and compete with the other countries foreign investment would turn out to be very fruitful.
3. There would be increase in employment opportunities
4. All multi brand products are available under one roof and there would be greater range and variety of products for sale and increased consumer choice
5. Competitive spirit and good managerial skills would be introduced in the country
6. Festival discounts would be available to the people
7. Many under developed and developing countries will be benefited with the introduction of FDI.
8. Best corporate and management practices would be introduced in the country
9. Better usage and utilization of natural resources
10. Helps in bridging infrastructural gaps (especially rural infrastructure) and technological hiccups.
11. Services at large would be benefited to people belonging to urban and semi urban areas
12. There would be improvement in the quality standards
13. Acceptance of credit, debit and Sodexo cards also encourage the purchases in big shopping malls
14. Permitting foreign investment in food-based retailing is likely to increase the capital flow into the country.
15. Usage of latest technologies in the farming sector can improve farmer’s income (by reducing wastage of agricultural produce, enabling them to get better prices) & agricultural growth thereby lowering consumer prices inflation.
16. By selling their goods directly to the foreign players would help the farmers in getting remunerative prices by their produce therefore reducing the long chain of intermediaries or middlemen.

Disadvantages to FDI:

1. Multi national companies require high investment, infrastructure facilities, packaging costs, advanced security system, high maintenance costs and very high variable cost of operation. And may be in the long run incurring huge losses.
2. Many fear that a time would come when these MNC’s making direct investments start dictating terms over the company into which the investment is made may influence the political system in the country. And many politicians felt allowing FDI in retail will push the country towards economic slavery
3. Small vendors and hawkers feel that these big giants would badly affect the domestic industry, thereby affecting their livelihood.
4. The items which these Multinational companies introduce in the market are beyond the competitive capacity of the small venders.
5. Multi National Companies (MNC)s could generate meager employment opportunities that is to for selected professional people. Farmers would be affected due to monopolization of the MNCs, competition, loss of entrepreneurial opportunities and self employed indigenous retailers who provide employment to many will be forced to close down their shops as they unable to face the highly unhealthy competition from the MNCs
6. Due to increase in multi brand products and increased purchasing power people are introduced to a new kind of lifestyle which they are not used to may force to change their lifestyle which may affect their future economically.
7. Unlike in America where the shopping malls are in the outskirts of the city and the family shops for a month and it is considered as a family activity. Whereas in India food items are purchased in small quantities as many do not have adequate money to buy for a month nor do they have massive storage facilities at home. Unlike Americans, Indians do not drive miles and do bulk purchasing.

In what way FDI is beneficial to farmers?
The Indian Farmer and Industrial Alliance (IFIA), a joint venture of the Consortium of Indian Farmers Associations (CIFA), recognized the potential benefits of eliminating middlemen and has expressed its support for opening the retail sector to foreign investment.

Views against the FDI :

1. Small traders feel they will not be able to withstand the competition. self employed indigenous retailers who provide employment to many will be forced to close down their shops, unable to face the highly unhealthy competition from the MNCs
2. Some felt that the government should impose a blanket ban on foreign retailers from entering into retail trade

Published date : 21 Jan 2013 01:36PM