Advantages and Disadvantages of Fdi in India

Topics: Retailing, Shopping mall, Investment Pages: 24 (6918 words) Published: September 18, 2013
FDI in Multi-brand Retail in India:
Signs of New Resolve
S Narayan1
1 Dr S Narayan is Head of Research and Visiting Senior Research Fellow at the Institute of South Asian Studies (ISAS), an autonomous research institute at the National University of Singapore. He was formerly Economic Adviser to the Prime Minister of India. Dr Narayan can be contacted at The views expressed in this paper are those of the author and do not necessarily reflect those of ISAS. In September 2012, the Government of India announced several economic policy reform measures that included a move to allow 51 per cent foreign direct investment (FDI) in multi-brand retail. In the same announcement, it relaxed norms for foreign direct investment in the aviation sector, allowing international airlines to invest in domestic peers and cleared a slew of other reform-oriented measures – an increase of FDI in some broadcasting services. The issue of FDI in retail has attracted considerable political debate. The matter was first proposed by the Government in 2010, but had to be withdrawn because of political opposition. This time, the Government appears to be firm in pushing the policy through. It is possible to adduce several reasons for the determination of the Government. First, the ruling United Progressive Alliance (UPA) Government, and in particular the Congress party, has been battered by allegations of corruption and scams all through 2012, and needs a breather to establish its authority to govern. The criticism in the foreign media and by academics that the Government has been in a state of policy paralysis, which has prevented it from taking even basic measures to improve governance, has hurt its image. 2

The crisis in coal supply for power generation and the poor progress of infrastructure projects have given the impression that executive decisions have come to a halt. On the trade front, the growing current account deficit, as well as the weakening of the rupee, has been seen as warning signals for the economy. The growing fiscal deficit, the inability to control expenditure on subsidies, and a slowing economy have caused international investors and rating agencies to downgrade expectations about the Indian economy. The latest GDP growth figures of 5.3 per cent are lower than the expectations of the Government and the Reserve Bank of India alike, and the persistent inflation is hurting the entire population, especially those with fixed incomes. There was, therefore, a need to induce some confidence about the economy. In the past, the current account deficit was bridged by FDI, inflows into capital markets, and through inwardremittances. Of these, the first two had seen a sharp drop in 2010 and 2011. The equity markets were trading 30 per cent below pre-2008 crisis levels, with little appetite for fresh capital issues. FDI was dropping steadily after 2008 and dropped to 40 per cent of the 2011-12 level in the subsequent year. The high fiscal deficit was also crowding out private borrowings. In short, there was need for a correction to infuse external capital into the economy by improving the sentiment in the financial markets and by giving a signal that could restore FDI flows. The reform announcements of September 2012 were an attempt at that. There were other arguments as well. The retail sector in India has been growing at a combined annual growth rate of 6.4 per cent over the period 1998-2010, and is estimated to be worth around Rs. 50,000 crores (US$ 10 billion) in 2010. However, the contribution of organised retail remains low. As against the United States, which has the organised to unorganised ratio of 85:15, in India, it is only 10:90. Organised retail has been growing rapidly and is expected to have a share of 22 per cent before 2017. There are also several consumption-related growth drivers for retail. India’s per capita income, in real terms, has doubled between 2000 and 2011, and income levels are expected to...
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