Munich Personal RePEc Archive

FDI in Retail in India: An Empirical Analysis

Sinha, Pankaj and Singhal, Anushree (2013): FDI in Retail in India: An Empirical Analysis.

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Abstract

Allowing FDI in multi brand retailing has recently generated tremendous euphoria for some and fear for others. It is based on the notion that it will open floodgates for foreign retailers to invest and will change the retail landscape forever in India. The factors that attracted investment in India are stable economic policies, availability of cheap and quality human resources, and opportunities of new unexplored markets. Besides these factors, there are a number of macroeconomic factors that are expected to affect FDI in retail in India. Using the experiences of four other emerging economies- China, Indonesia, Brazil and Thailand, this research paper examines the relationship between FDI in retail and seven macroeconomic factors - Exchange rate (yoy%), Inflation (CPI), GDP growth, Index of Industrial Production, Trade Openness, Unemployment rate and Tax as a percentage of nominal GDP using quarterly data for the period starting from January 2000 to December 2012. The research has shown that the year 2009 was a more appropriate time in India to have policies in place to invite FDI in retail. It is observed that there has been no such case of domination of foreign retailers in past years of globalization wherever markets for global retailers have opened up. Only limited numbers of retailer had entered into these markets with lot of caution as they had soon realised that retail thrives on local knowledge rather than imitating and transplanting global retail strategy, concepts and formats. In major emerging countries, fewer foreign retailers had been successful while several failed due to their inability to gather customer insights, comprehend local nuances and fight local competition. In fact, in many countries the local retailers have better market shares, sizes and performances. The research findings also indicate that with the introduction of FDI in retail in India, there will be an initial displacement of middlemen from the supply chain. However, the organized retailing will induce an increase in the food processing sector and these middlemen will be absorbed by it. It is also expected that the government will take innovative measures to mitigate the adverse effects on small retailers and traders involved in the supply chain. Direct accessibility to the market will be provided to the farmers and hence, a better remuneration. With respect to consumers, they will benefit from assured weights and cash memos, enhanced competition due to the presence of bigger retailers and better quality of produce. The government revenues are also expected to rise due to elimination of intermediaries, enhanced operational efficiency, and control on post harvest wastage, however competition in the retail market would gradually be advantageous for end customer.

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