Saturday, 10 December 2011

Foreign Direct Investment:

I have collected information from internet and news papers. There are 2 exactly opposite views for allowing FDI in retail sector although it has been accepted in other sectors like insurance, banking etc. Opposition puts forth disadvantages of FDI in retail as under:-
1.      This is exactly like permitting East India Company from UK to trade in India during 19th century. This means the FDI investors would make India a slave country.

2.      There are over 40 million retailers in the business in whole India. They would loose their business.
Ideal FDI investors and Retailers
3.      There are over 50 million unskilled workers who would loose job and over 450 million people (including dependents of unskilled workers and retail traders) would starve.
4.      Country would became slave to western powers especially USA.
5.      FDI investors would dump foreign goods and indigenous product won't find place in the market.
6.      FDI investors can wait for making profit because of their large capacity. They can also sustain losses easily. Once they find the opponents have given up they would change their strategy and sale products at high rate.
7.      FDI investors would not give facilities like medical insurance etc.

Fear expressed by retailers is true to great extent. However, the government can take precaution to avoid all the disadvantages. Point by point these are given below.
1.      There is a great difference between old East India Company of Briton and FDI investors of today. East India Company was totally a foreign company. What government has proposed that fdi would be limited to 51%. This percentage could be reduced to 49% to be on safer side. There should be laws to suit Indian condition. For example facilities like health insurance, pension etc. should be added in the interests of the employees. Present retailers could have 25% of shares (stocks) and those who are not in retail business should have 26% or more shares in the company. In management 50% directors should be resident Indians who could safeguard interests of Indian public. There would be more restrictions which would not stall such investment. Indian politicians and intelligentsia can always find a solution.
Retailers protest against FDI
2.      Fear of retailers that there business would be taken over by fdi investors is baseless. This investment is allowed only in cities over 1 million population. Presently there are 53 cities with over 1 million population. The total population of such cities is approximately 100 million. India's population is 1250 million. Therefore, fdi investors would be allowed to serve less than 8% population. Customers in these cities cannot be wholly dependent on hyper malls. There are reasons like distance from residence, home delivery on sending message, direct contact between retailer and customer, easy way to exchange goods, relationship between customer and the retailer, availability of requirements at suitable time, availability of information directly from the retailer, credit for a short period say 1 month etc. Because of these reasons customers would still prefer to get their requirement from retailers rather than go long distance, pay for parking wait in line etc. in hyper malls. The only disadvantage for retailers as per my guess is they would not be able to charge high rates and their profit margin would be limited to say 10%.
Fear of unemploment
3.      Fear of unemployment of unskilled labour also is not justified. FDI investors shall not be working personally in day to day working of hyper malls. They would need manpower. This manpower need may be for semi-skilled and skilled jobs. India need to accept this change and people should acquire skills to get job. This is in the interest of people, in the interest of development. Even if direct manpower requirement is reduced, indirect requirement shall increase and total requirement may be more than today. Hyper mall would need transport, wider roads, cold storages, account maintenance etc. Indians should accept this change and help in their own development.
FDI is Beautiful
4.      There is a truth in the statement that Indian politicians could become slaves to fdi investors. Even in USA big players in hyper malls control American Congress. Politicians are slaves to easy wealth. However, this is not a big problem. Fundamentally, politicians need huge money in present system to get elected. This must be changed. How? Read here. Once the present system is reformed politicians would not need money to get elected and fdi investors cannot make politicians as their slaves.
5.      FDI investors shall be interested in dealing in goods needed by customers and their own profit. They shall try to sell high price items with the best quality as well as low cost articles affordable to customers. If Indian goods with high quality and low price are available they shall not think about goods from their own country. After all they are traders not the gods! What is needed is to compete with foreign goods. India must study why foreign goods are cheaper and still possess high quality. We must find our own way to achieve higher quality and lower price. India has done this in past much number of times and we could face this challenge. Indian scientists have developed indigenous rocket engines when there were restrictions placed for importing those. In addition India could place some restriction that certain percentage of goods must be purchased from local industry/small scale industry for certain period i. e. till Indians are in a position to compete with foreign goods.
6.      It is true that in business to establish monopoly traders sustain low profit or even losses till the competitors are driven out from business. FDI investors may adopt this policy. However, present Indian retailers can fight this situation bravely. They should form a association and that would be much bigger and stronger than the fdi investors put together. This association should have its own bank, own good preservation and storage facility, good transport facility and research cell etc. They should encourage customers to open bank account with association's bank at Zero balance with chequebook facility. Research cell should develop a flawless system for payment by customers by cheque instantaneously. This would need a computer programme and internet. Amount of bill should be filled on a signed (and or thumb impression) and the cheque should be processed for finding availability of balance. If balance is adequate the cheque should be signed (and or thumb impression) again and presented to machine to complete transaction. The money should be transferred only to the account of retailer from whom goods are purchased. This method of money transfer shall be as good of payment through cash and still much safer. Money shall be instantaneously transferred to the account where a customer purchases his requirement. This shall prove to be safer than credit/debit card and requirement of holding cash or "Change" The government need not print paper currency, specially high denomination currency.
7.      The government can always insist on facilities to be provided by fdi investors for their employees.

China is No. 1 in FDI
I have found that the government has taken great lead in making India as the most suitable destination for fdi investors. India ranks second (First is China) in fdi investment and for our development we need investment. All Indians should welcome this move and suggest modifications and not place obstacles in fdi. I have found some useful information on fdi from internet and news papers. This is available in the next section of this article. 
Wikipedia defines FDI as follows. Foreign direct investment (FDI) or foreign investment refers to the net inflows of investment to acquire a lasting management interest (10percent or more of voting stock) in an enterprise operating in an economy other than that of the investor. It is the sum of equity capital, other long-term capital, and short-term capital as shown in the balance of payments. It usually involves participation in management, joint-venture, transfer of technology and expertise. There are two types of FDI: inward foreign direct investment and outward foreign direct investment, resulting in a net FDI inflow (positive or negative) and "stock of foreign direct investment", which is the cumulative number for a given period. Direct investment excludes investment through purchase of shares. FDI is one example of international factor movement.
A foreign direct investor may be classified in any sector of the economy and could be any one of the following:
  1. An individual;
  2. A group of related individuals;
  3. An incorporated or unincorporated entity;
  4. A public company or private company;
  5. A group of related enterprises;
  6. A government body;
  7. And, trust or other social institution; or
  8. Any combination of the above.
  1. The foreign direct invest or may acquire voting power of an enterprise in an economy through any of the following methods:
  2. By incorporating a wholly owned subsidiary or company
  3. By acquiring shares in an associated enterprise
  4. Through a merger or an acquisition of an unrelated enterprise
  5. Participating in an equity joint venture with another investor or enterprise
  6. Foreign direct investment incentives may take the following forms:
  7. Low corporate tax and income tax rates
  1. Other types of tax concessions
  2. Preferential tariffs
  3. Special economic zones
  4. EPZ-Export Processing Zones
  5. Bonded Warehouses
  6. Maquiladora
  7. Investment financial subsidies
  8. Soft loan or loan guarantees
  9. Free land or land subsidies
  10. Relocation & expatriation subsidies
  11. Job training & employment subsidies
  12. Infrastructure subsidies
  13. R&D support
  14. Derogation from regulations (usually for very large projects)

World wide foreign direct investment statistical data available gives information as follows.

United States
Hong Kong SAR, China
United Kingdom
Russian Federation
Saudi Arabia
Cayman Islands

Growth od FDI
Crisil chief economist DK Joshi said India provides good opportunities for growth and the declining trend will not continue. There are some exceptions i. e. certain area like attracting compulsory licensing or for acquisition of shares in an existing company. Also sectors like gambling and lottery are not open to fdi. Investor has to bring automatic route cases for Foreign Investment Promotion Board approval. Foreign technology collaborations are freely allowed under automatic and government approval routes. India is rated best destination for outsourcing and 6th most attractive destination for FDI, according to AT Kearney. Global competitive report ranks India at first place in terms of prevalence of foreign technology licensing. Today's India is a land of huge opportunities for global investors. The reforms process that the nation embraced a decade ago is now paying off. India's economy is sizzling and is one of the fastest growing in the world. It has also seen a surge in foreign investment lately. Key reasons why India is a great place to invest are liberalised norms 4th largest economy, in terms of purchasing power parity, tenth most industrialised economy, strong macro-economic performance, political stability, broad consensus on reforms, liberal and transparent foreign investment regime, well developed banking system, vibrant capital market, third largest national stock exchange (Bombay Stock Exchange is fifth largest in terms of number of trades), strong and independent judicial system. Among the highest rates of returns on investment. Profitability of US investments in India: 19.33% in 2000 (according to US Department of Commerce).

India provides strong pool of scientific and technical manpower (Prowess of IITs, IIMs where 255 Fortune and 500 other companies are getting services), 2nd largest English-speaking population, high-quality, cost-effective and competitive manpower (Over100,000 IT professionals added each year), job creation capacity is a million direct & 2-3million indirect jobs per annum. Other advantages available in India are prevalence of foreign technology licensing (Rank 1 in the world), availability of scientist and engineers (Rank 2), quality of management schools (Rank 9), firm level innovation (Rank 12), firm level technology absorption (Rank 16), companies spending on R&D (Rank32). (Source: Global Competitiveness Report, 2003)

India is among world's fastest growing economies. (Graph shows Indian GDP growth since 1996-97, average GDP (gross domestic product) growth of 5.4% during the 9th Five-Year Plan i. e. 1997-2002, exports registered growth of over 19% in 2002-03, foreign exchange reserves at all-time high of over $90 billion, increase in forex during the fiscal year in 2002-03 to $20 billion, India's economic growth is sustained, Indian GDP is expected to grow by over 7.0% or more per year.

Under the Industries (Development & Regulation) Act, 1951, industrial license is needed only for items falling under the list of compulsory licensing, reserved for small-scale sector, if location attracts restriction, all industries are exempt from industrial licensing required to file an Industrial Entrepreneur Memorandum. Only notification need and not prior approval.
Industries retained under compulsory licensing under the Industrial (D&R Act-1951) are distillation and brewing of alcoholic drinks, cigars and cigarettes of tobacco and manufactured tobacco substitutes, electronic, aerospace defence equipment, industrial explosives and hazardous chemicals.

Following financial sector reforms have been adopted. These are setting up of the competition commission, amendments to companies act, fiscal responsibilities, and securitisation act for creditors' security. Further modifications are computerisation of customs interface, only 3 rates of indirect tax, trade facilitation measures, Foreign Exchange Management Act, 1999 providing a liberal regime, allowing selling of shares without prior approval, allowing repatriation of profits, dividends and capital investment allowing payment of loyalties by wholly owned arms to parent companies.

There has been improvement in infrastructure and its policy. Development of over 13,000 km of highways is near completion, the Electricity Act, 2003 facilitates reforms in power sector such as permitting trading in electricity and no prior approval for captive generation, airports at New Delhi and Mumbai have been upgraded, Sagar Mala is a major programme aimed at developing ports and shipping sector at an estimated investment of $22 billion is in progress, forward development in telecommunication sector like wider band and sharp decline in telecommunications cost, an empowered sub-committee of the National Development Council has been setup on creating an investor friendly climate and removing regulatory barriers to investment, all IPR Laws are TRIPS compliant, simplification and re-engineering of work procedures has been undertaken. (More information is available at
West Bengal Economy
Political analysts and observers however, are of the opinion that political turbulence, workers' unions (those intending to put money in the state often back track at the last minute taking into account the unfriendly nature of the workers' unions along with other political disturbances), red-tapism and associated corruption and have are mostly responsible for driving investors-domestic and foreign-away. Examples are departure of Tata Motors' Nano factory from Singur, Bengal bandhs have cost Rs. 11,000crore (Assocham report shows frequent bandhs cause the state to lose 12.5 lakh man days in 2006, Andhra Pradesh lost 240000 man days, Rajasthan 130000 man days and Tamil Nadu 70000 man days. In 2006, Tamil Nadu topped the strikes' list (50 bandhs), followed by West Bengal (29), Gujarat (23), Andhra Pradesh (18) and Haryana (14). As far as wage loss because of bandhs is considered West Bengal topped this list registering a total loss of Rs 35.8 crore followed by Andhra Pradesh Rs26.3 crore, Karnataka Rs 13.2 crore and Tamil Nadu Rs 14.9 crore. A parallel survey done by West Bengal Applied Economic Research for 2007 and 2008 had a similar story to tell. According to it, man days lost through disruption in Bengal stood at over 30 lakh in 2007 and 19.5 lakh during 2008.
Dr. Man Mohan Singh, PM addressing Youth Congress Rally on FDI
Prime Minister Man Mohan Singh addressing the Youth Congress rally during Nov 2011 assured that foreign direct investment (FDI) reforms would be beneficial for the farmers. He however said that the Centre was not forcing any of the state governments to implement FDI in retail if the state government thinks it is not profitable.


Patra said...

I think we have not learned any lessons from 150 years of Gulami and the British Raj!.

British came to sell us what we Did Not Wanted, Now we are already biggest producer of retail items and we are Self Dependent, but now with FDI's our 'Self Dependency' will go away!. Just imagine 51% stake in your daily Kirana that means from day one we are at least 51% dependent on someone who doesn't care how we live! so sad.

Jana said...

@ Patra, Dear Sir,
Thank you for your comments to improve this article

Time has changed. 150 years before we were not alert, we were not together but divided in to small princely states, our power was divided and hence East India Company could capture us and market. Now it is impossible for any FDI investor to do so. The only danger is from our own elected members (I don't consider them as people's representatives as 100% or at least 50% voters have not elected them) could be slaves to the FDI investors. We need to find a solution for this though.

We should take this as an opportunity to develop ourselves to face all dangers. This would need restructuring, adopting modern technology, making things cheaper, dependable and highest quality. This is possible only with competition. Our local wholesales and retailers should work at less than 10% profit and then FDI investors would return back from where they came.

This is an opportunity to get capital (funds) for development, compete with the world and refine ourselves. This is the opportunity Indian wholesalers and retailers improve and make India superior to others. We have taken this challenge in past and have come out with flying colours.

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