FDI in Retail: Background, Statistics, Advantages and Disadvantages

In India, FDI in the retail sector has historically been contentious. India’s retail industry has been gradually opened up to foreign direct investment by the government. The most recent significant change was the 2012 authorization of 100% FDI in single-brand retail.

This along with FDI Confidence Index are important topics for the IAS Exam and questions based on the same may be asked in the General Studies-III paper of the UPSC Mains exam.

On that note, let’s discuss the issue of FDI in retail in India and the advantages and disadvantages of the same in detail.

FDI in Retail Background

According to estimates, the Indian retail market is worth USD 600 billion. According to economic value, it is among the top five retail markets globally. With a soaring population of more than a billion people, it is also one of the markets that is expanding the fastest. The retail market is anticipated to expand significantly. By 2020, it is predicted that total consumer spending will amount to about USD 3600 billion. By 2020, the retail market is anticipated to have grown to USD 1.1 trillion. Additionally, it is predicted that online retail sales will increase by more than 30%.

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With the sector accounting for about 10% of the Gross Domestic Product, retail is one of the economic pillars of the Indian economy (GDP). Only 9% of this industry is organised, and the unorganised sector predominates. The majority of retailers utilise retail spaces that are less than 500 square feet in size. In India, the unorganised retail industry employs 7% of the total labour force.

51% of FDI in multi-brand retail and 100% in single-brand retail have received approval from the central government.

FDI Inflows in India 2020-21

The information for FDI inflows into India between July 2020 and September 2020 is provided below:

FDI Inflows for the second quarter of the 2020–21 fiscal year (July to September 2020)
Total FDI inflows into India (as per the RBI’s monthly bulletins) (Equity inflows + ‘Re-invested earnings’ + ‘Other capital’)US$ 28,102 Million
Inflows of FDI EquityRs. 174,793 CroreUS$ 23,441 Million

FDI in retail advantages and disadvantages

The benefits and drawbacks are discussed further below.

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FDI in retail – Advantages and benefits

  • Growth in the economy – New infrastructure will be constructed in response to the entry of foreign businesses. The real estate and banking industries will expand. MNCs will also give the Indian government a sizable tax payment, which can be used to fund infrastructure development.
  • Employment generation – FDI in retail will lead to a significant increase in employment in the organised retail sector.
  • The benefit to farmers – By buying directly from producers and farmers and reducing the need for middlemen, will help farmers and other agriculturalists. The margins for the farmers will increase.
  • 40% of fruits and vegetables are wasted in the unorganised sector, which is a significant amount. By investing in supply chains and adequate storage facilities, large retail chains can lessen this waste.
  • Better management techniques, better technology, and more learning opportunities for Indian players can all be brought by foreign companies.
  • Benefits for consumers – FDI in retail entails lower prices and a better selection of products for customers to choose from. Additionally, they will have access to global brands.
  • Induce competition – This will encourage market competition, which will be advantageous to both consumers and producers.
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FDI in retail – Disadvantages, and apprehensions

  • The country’s overall economy could be harmed by FDI, which could drain the nation’s revenue share with foreign nations.
  • The MNCs’ competition may be too strong for the domestic retail players, who may be eliminated from the market or at least absorbed by the larger players.
  • Prices may be initially lowered, but once MNCs gain a firm foothold in the market, they may raise prices and even form cartels that harm consumers.
  • Farmers, who may initially benefit, might also be at the mercy of these larger retailers once they gain a sizable market share
  • These large retailers’ predatory pricing practices will hurt the industry’s small and medium-sized players.

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