DMPQ-. Explain the routes of foreign direct investment in organized retail sector. Also mention the benefits of FDI in retail sector.

. Foreign Direct Investment in organized retail is yet another area shrouded in controversy.  What is organized retail? Let us define retail first, it is household requirement of the people  comprising of food and grocery, clothing, convenience, consumer goods, etc. Secondly,  organized retailing is selling of these household commonly used goods to the people  directly, as branded products across counters in big stores.

Organized retailing is virtually non-existent in India and dominance of the ‘mom-pop’  scores, kirana shops and neighbourhood shops. Unorganized retailing accounts for over 90  per cent of retail business in India.

FDI in organized retailing is  permissible in India through the following four routes:

  • FDI in retail is permitted through the franchise route like McDonalds where the foreign company gives a franchise to an Indian to sell on their behalf and use their brand name.
  • Another way of investment in retail is if the company is sourcing from India and manufacturing the product in India it can use the brand name.
  • FDI is also permitted up to equity participation of 51 per cent but only for single products/brands.
  • Only recently government has permitted 51 per cent equity (shares) as FDI in multi brand retailing business, subject to a minimum investment of USD 100 million, 50  per cent of which has to be in back-end activities. Such retail stores can only be set up  in cities with population more than 10 lakhs and too after approval of the concerned  state government.

FDI can benefit Organized sector in following ways:

  • These foreign companies have the experience, knowledge of such businesses and would bring best practices to the country.
  • They would be able to bring the best in the world to the country and a much wider choice set.
  • Their motto, rightfully is, customer first. They would always work in the interest of customer in providing better quality products and hygienic food items.
  • Their functioning is essentially large volumes less margins, scientific inventory management and minimal wastages which enable them to price goods cheaper than  the market.
  • The present unorganized retailing has huge wastages, not much inventory management resulting in their higher prices.

 

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