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WAT Topic for MBA: FDI in multi brand retail is a boon or bane
This article is on the WAT/Essay writing Topic “FDI in multi brand retail is a boon or bane” to help you prepare for your Essay Writing/ Written Ability Test at Top B schools for Admission 2014.
FDI in multi brand retail is a boon or bane
Foreign Direct Investment refers to capital inflows from abroad that are invested to enhance the production capacity of the economy. However, FDI in retail is different from the investment in corporate, manufacturing, or infrastructure sectors. Retail can be single or multi brand and may be described as a sale to the ultimate consumer at a margin of profit.
FDI in single brand retailing in India was allowed earlier, FDI in multi brand retailing is being allowed now meaning a retail store with a foreign direct Investment can sell multiple brands under one roof. So it is the link between the producer/manufacturer and the individual consumer. India had to open up the retail trade sector to foreign investment as she is a signatory to World Trade Organization’s General Agreement on Trade & services which included Wholesale and retail services.
Indian retail sector is highly fragmented with around 97 percent of its business being run by the unorganized retailers. The organized retail is in its infancy. With the entry of FDI the retail sector will become organized. Foreign investment in food based retailing would ensure adequate flow of capital into the country and its productive use.
It will promote the welfare of farmers by agriculture growth and thereby increasing their income level. Intermediaries, known with different names in different parts of the country, flout the business ethics. Prices lack transparency, due share of farmer is not paid to him. Regulated markets also have developed monopolistic character. Indian farmers at present realize only 1/3rd of the final price paid by the consumer as against the 2/3rd price realized by the farmers in the countries with a greater share of organized retail. FDI will assist in reducing the dominance of value chain by the intermediaries.
FDI in retail will make the consumer happy as well. In the absence of intermediaries the consumer will end up paying fewer prices for a better product. Besides in the unorganized sector, consumer has to argue and fight a lot in case he has to return some faulty product to the retailer. This process will be standardized.
It will serve as an antidote to inflation. The producer will get direct payment from the retailer and the same will be higher than what he was getting earlier due to the foul play by the intermediaries. In accordance to the provisions made, any company going for 51% partnership in retail shall have to tie up with a local partner. This will improve the income levels of all concerned and will make economy flourish with quality branded products at a lower price.
FDI will improve the investment in logistics of the retail chain leading to an efficient market mechanism. India is one of the biggest producers of fruits and vegetables (More than 180 million MT), it does not have a strong integrated cold-chain infrastructure with only around 5400 cold storages which have total capacity of about 24 million MT. The irony is that 80% of the capacity is used only for preservation of potatoes. The perishable horticultural commodities find it difficult to link to distant markets, including overseas market. FDI will become catalyst in avoiding this distress sale and erosion & wastage in quality and quantity of the produce.
Foreign Direct Investment in retail sector will spur competition as the current scenario is of low competition and poor productivity. India will flourish in terms of quality standards and consumer expectations.
The fears that entry of FDI in multiband retail may cause unemployment as they might not procure material from the domestic producers and might import the same from international market, are unfounded as the entry of big Corporates like Reliance and Tata have substantially improved the life standard of farmers and villages from where they are procuring the material.
The present PDS (Public Distribution System) will also be strengthened with better products and storage facility. Even the FDI retail may be assigned this job.
Allowing FDI in multi brand retail would bring about supply chain improvement, investment in technology, manpower and skill development, upgradation in agriculture sector, benefits to government through greater GDP, tax income. The organized sector would also emphasize to produce more and thus shall generate more employment in production as well as retail industry.