Foreign Retail Investment: Transforming India's Retail Landscape

India's retail industry is one of the pillars of its economy, contributing over 10% to the nation's GDP. With a market size of US$1.3 trillion as of 2022, it is the fourth-largest retail market globally. India's retail industry is predominantly unorganised, with 97% of the market made up of traditional owner-staffed small shops. However, the industry is evolving, with the emergence of supermarkets, hypermarkets, and retail chains. The Indian government has also implemented reforms to attract foreign investment in the retail sector, with companies like IKEA, Nike, and Apple showing interest. This raises the question: how might investment by foreign retailers change retailing in India?

Foreign investment in India's retail sector

Historical Context

India's retail sector was predominantly composed of small, owner-staffed shops until the 2000s. In 2010, larger format stores like supermarkets accounted for about 4% of the industry, found only in large urban centres. The Indian government announced retail reforms in 2011, allowing global multi-brand retailers like Walmart and single-brand majors such as IKEA to enter the market. However, intense activism and opposition led to these reforms being placed on hold.

Current Landscape

India has since liberalised its foreign direct investment (FDI) policy, permitting 100% FDI in single-brand retail under the automatic route without requiring government approval. This has attracted major international brands such as IKEA, Nike, and Apple. However, multi-brand retail trading (MBRT) still has restrictions, with FDI limited to 51% and requiring prior government approval.

Impact on the Retail Sector

The entry of foreign retailers has sparked concerns about the potential closure of independent stores and job losses. However, supporters argue that organised retail will create more jobs and provide consumers with better prices, quality, and convenience. Foreign investment is expected to improve supply chains, reduce waste, and enhance the overall retail experience.

Benefits and Challenges

Foreign investment in retail brings benefits such as improved infrastructure, increased competition, and enhanced farmer incomes. However, there are challenges like the mandatory local sourcing requirement, which can be difficult for hi-tech product retailers. Additionally, the presence of foreign retailers may accelerate the transformation of India's retail trade, impacting local retailers.

Future Prospects

India's retail sector is expected to grow significantly, with a projected value of US$2 trillion by 2032. The country's large population, rising middle class, increasing urbanisation, and favourable government initiatives make it an attractive destination for foreign retailers. The e-commerce sector is also expanding, with a projected value of US$91.24 billion by 2029.

The impact of foreign retailers on local shops

Positive Impacts:

• Economic growth and job creation: Foreign investment in the retail sector is expected to contribute to India's economic growth and create new jobs. The entry of branded retailers will increase the market, creating additional employment opportunities in retail and other tertiary sectors. The professional approach of organised retailers will also include allocating resources towards training and development, as seen with the Bharti-Walmart collaboration, which has trained over 5,600 local youth for free.
• Improved supply chain and reduced costs: Foreign retailers can introduce highly advanced supply chains, benefiting local producers and generating positive externalities. This can reduce transaction and information costs, generate surplus for stakeholders such as producers and consumers, and contribute to economic growth and employment gains.
• Better infrastructure: Foreign investment can lead to the development of better infrastructure, including cold chains, transportation, and storage facilities. This will help reduce food spoilage and improve the quality and safety of food products.
• Increased competition and quality: Foreign retailers will bring competition to the market, potentially improving quality and reducing prices. This can help curb India's high inflation rates and provide consumers with more choices.
• Benefits for farmers: Foreign retailers will offer farmers more competing venues to sell their products and increase their income by reducing spoilage and waste. Farmers will also benefit from better prices for their produce due to the elimination of intermediaries.

Negative Impacts:

• Closure of local shops: The entry of foreign retailers may lead to the closure of local shops that cannot compete with the prices and convenience offered by larger stores. This could result in job losses for those employed in the unorganised retail sector, which currently makes up 90% of the market.
• Elimination of intermediaries: Foreign retailers may eliminate the need for intermediaries such as middlemen and small shopkeepers, who play a significant role in supporting the local economy. This could reduce economic activity and impact local sourcing.
• Monopolisation: There are concerns that large foreign retailers could become monopolies, driving out competition and eventually raising prices. Critics argue that this has already happened in the soft drinks industry, where global brands wiped out domestic ones.
• Loss of local character: The presence of foreign retailers may lead to a sterile homogeneity in Indian cities, making them look like any other city in the world and losing their unique character.
• Profit outflow: While foreign investment can bring capital and knowledge, there are concerns that the profits made by these companies will ultimately go to foreign investors rather than staying within the country.

In conclusion, the impact of foreign retailers on local shops in India is complex and multifaceted. While there may be some negative consequences, such as the potential closure of local shops and the loss of intermediary roles, the overall effect is expected to be positive, with increased competition, improved supply chains, better infrastructure, and more opportunities for farmers. However, it is crucial to implement regulations and safety valves to ensure that the interests of small retailers and consumers are protected and that foreign investment contributes to the country's economic growth and development.

The potential for foreign retailers to improve India's infrastructure

India's retail sector is a vital pillar of its economy, contributing approximately 10% of its GDP and employing about 40 million people. However, the country has faced challenges due to an underinvestment in logistics and supply chain infrastructure, resulting in inefficiencies and losses within the economy. In 2011, the Indian government announced economic reforms to attract foreign direct investment (FDI) and modernise the retail sector. This move faced substantial political opposition, particularly concerning the potential impact on local "kirana" stores. Nevertheless, it is believed that foreign investment in retail can bring about significant improvements in India's infrastructure, as outlined below.

Firstly, foreign retailers can address India's underinvestment in logistics and supply chain infrastructure. By investing in modern retail, foreign companies can drive improvements in sourcing and distribution, creating efficiency gains with positive spillover effects across the economy. This includes the development of competitive logistic infrastructures that local stores can also utilise.

Secondly, foreign retailers can contribute to the acquisition of technological knowledge and expertise. This transfer of knowledge can help Indian companies innovate and develop new retail technologies, enhancing the overall efficiency of the sector. Foreign retailers bring best practices and global integration, which can open up export opportunities for Indian farmers and producers.

Thirdly, foreign investment in retail can lead to improvements in cold-chain infrastructure. India currently faces significant challenges with food spoilage and wastage due to inadequate cold storage facilities. Foreign investment can incentivise the development of cold-chain infrastructure, reducing post-harvest losses and improving food security.

Additionally, foreign retailers can play a role in reforming archaic laws and regulations that restrict the efficiency of the retail sector. For example, reforming laws related to private sourcing of agricultural goods and price-setting can further enhance the efficiency of the supply chain.

Lastly, the presence of foreign retailers can contribute to the development of retail real estate. The influx of foreign investment can lead to the creation of new retail spaces, such as malls and supermarkets, providing consumers with a wider range of shopping options.

In conclusion, while there may be valid concerns about the impact of foreign retailers on local stores, the potential for infrastructure improvement through foreign investment in India's retail sector is significant. It can drive efficiency gains, technological advancements, cold-chain development, regulatory reforms, and the creation of modern retail spaces. These improvements have the potential to benefit not only the retail sector but also the wider Indian economy and consumers.

The effect of foreign investment on India's GDP

Foreign investment in India's retail sector has had a notable impact on the country's GDP, with the industry accounting for a significant portion of its economic growth. In 2022, the Indian retail market was valued at approximately $1.3 trillion, contributing to around 10% of the country's GDP.

The liberalisation of foreign direct investment (FDI) policies in retail has played a pivotal role in this growth. Prior to 2018, India imposed restrictions on FDI in single-brand and multi-brand retail trading, but subsequent reforms have relaxed these limitations. As of 2018, 100% FDI is permitted in single-brand retail trading without prior government approval. This shift has encouraged global brands to enter the Indian market, bringing with them advanced supply chain management techniques and externalities that benefit local producers.

The impact of FDI on India's GDP is evident in the quarterly data. In March 2024, FDI registered a growth of 0.8% of the country's nominal GDP, a notable contribution. However, it is important to note that FDI in the tertiary sector, which includes retail, has been found to have a statistically significant negative effect on economic growth in developing countries. This finding underscores the complex relationship between FDI and GDP, as other factors such as manufacturing FDI have a positive influence.

The entry of foreign retailers into India has sparked intense debates about its potential effects on the economy and local businesses. Supporters argue that organised retail will boost competition, improve supply chains, and create jobs. They contend that it will benefit small farmers by offering them more venues to sell their products and reducing spoilage due to improved cold storage infrastructure. Opponents, however, express concerns about the potential closure of independent stores and job losses, particularly in the local retail sector.

Overall, the impact of foreign investment in retail on India's GDP has been complex. While it has contributed significantly to economic growth, the effects are nuanced and depend on various factors, including the sector in which FDI is made and the specific policies governing it.

The challenges and benefits of foreign investment in single-brand and multi-brand retail

Challenges

• Critics of foreign investment in India's retail sector argue that independent stores will close, leading to massive job losses. They claim that Walmart, for example, employs very few people in the United States and that a similar expansion in India would result in net job losses.
• There is a concern that large, efficient foreign retailers will acquire goods directly from suppliers, eliminating the need for "middle-men" and putting pressure on suppliers to drop their prices. This could negatively impact the local economy, as small retailers and middle-men often procure goods and services from their local area.
• Critics also argue that foreign retailers will lower prices to push out competition, become a monopoly, and then raise prices. They point to the example of Pepsi and Coca-Cola, which wiped out domestic soft drink brands in India.
• There is a fear that foreign retailers will harm local businesses and traditional markets, and that the interests of those in the unorganized retail sector will be undermined.
• Foreign retailers may not comply with local regulations, such as the requirement to source a certain percentage of goods from small and medium-sized Indian suppliers.
• Foreign retailers may not contribute to the development of infrastructure and logistics in India, despite this being a condition of investment.
• There is a risk of predatory pricing or the acquisition of monopolistic tendencies by foreign retailers, which could harm local businesses.
• There is a risk that foreign investment in the retail sector will not benefit small farmers, despite this being one of the stated aims of the policy.

Benefits

• Foreign investment in the retail sector can bring in much-needed investment and modernize the sector.
• It can reduce average transaction and information costs, generate surplus for stakeholders such as producers, farmers, and consumers, and contribute to economic growth and net employment gains.
• Foreign retailers can introduce highly advanced supply chains and develop local producers, which can benefit the wider economy.
• Foreign investment can help to reduce waste and improve hygiene and product safety.
• It can reduce counterfeit trade and tax evasion and create dependable supply chains for the secure supply of food staples, fruits, and vegetables.
• Foreign investment can increase choice and reduce India's rampant inflation by reducing waste, spoilage, and cutting out middlemen.
• It can offer small Indian farmers more competing venues to sell their products and increase their income by reducing spoilage and waste.
• Foreign investment can lead to GDP growth and a rise in employment levels, as seen in Thailand and China.
• Foreign retailers can provide consumers with quality products that meet global standards and are handled in a hygienic environment.
• It can move the industry focus away from intermediaries, who add no value to products and contribute to final costs.
• Foreign investment can lead to the adoption of international best practices and modern technology, ensuring maximum efficiency and minimum waste.
• It can lead to the development of infrastructure, such as cold storage chains, which can benefit farmers and reduce food spoilage.
• Foreign investment can provide consumers with the convenience of one-stop shopping and competitive pricing.
• It can lead to the creation of millions of new jobs, particularly in the retail and logistics sectors.
• Foreign investment can benefit small retailers, who will likely copy the organized model of foreign retailers to improve efficiencies, boost margins, and stay in business.
• It can bring greater stability to prices by reducing hoarding and artificial shortages by profiteering intermediaries.
• Foreign investment can benefit farmers by providing more buyers for their produce, leading to better support and improved bids.
• It can benefit consumers by providing higher-quality products at lower prices, along with better service.
• It can benefit small retailers by providing them with access to global designs, technologies, and management practices.
• Foreign investment can help narrow the current account deficit.
• It can lead to the creation of exclusive regulatory frameworks to ensure fair competition between foreign retailers and local businesses.
• Foreign investment can benefit MSMEs by helping their supply chains and increasing the quality and competitiveness of their products.
• It can benefit low-income families by providing access to cheaper goods and services.

Frequently asked questions