WHAT IS FDI ?

For all those of you who have missed out on FDI, here is clear understanding of FDI along with its impacts.

FDI (Foreign Direct Investment ) is defined as type of investment that involves injection of foreign funds into an enterprise that operates in a different country from that of the origin of investor. In quantitative terms it is the measure of ownership of productive assets such as factories ,mines and land. But, it is important to note here that FDI does not include foreign investments in stock markets. Instead, it specifically refers to investment of foreign assets into domestic goods and services. Depending on the direction of flow FDI can be classified into:

· INWARD FDI: This occurs when foreign capital is invested in local resources. Measures of increasing inward FDI include tax breaks, low interest rates and grants.

· OUTWARD FDI: It is also known as “direct investment abroad”. So it is now local investors investing in foreign. Measures for increasing this kind of FDI can again be an initiative by government like it can be backed by government against all associated risk.

Another important thing to note here is that investors from abroad can also buy a local company and that too can be considered as an FDI. In fact, share ownership amounting to less than 10% of the ordinary shares is termed as portfolio investment instead of FDI. Also, investors are granted management and voting tights if the level of ownership is greater than the stated amount.

In case of FDI it has both advantages and disadvantages ,and depending on the type of economy it can be more advantageous for a country or may be disadvantageous for an economy. Let us look essentially what are the benefits of this and then we will go on describe why is it inappropriate in Indian context of study(according to my opinion).

FDI plays an extraordinary role and growing role in global business.It can provide a firm with new markets and marketing channels ,cheaper production facilities ,access to new technology, products and skills .For the host country it can provide a source of new technologies ,capital processes and as such can provide a strong impetus to the economic development of the economy .Increasing foreign investment can be used as a measure of growing economic globalization. Basically, it brings the economies more closer and allows the flow of goods and services to flow easily across countries.Also it would lead to the development of the world and will lead lead to maximum efficiency according to the theory division of labour which states that maximum efficiency is achieved when work is distributed. For example let us take example of car .It is manufactured at industry by several workers each specialising in its own domain.Suppose if instead of each working in its domain only ,each were to work to make cars individually then that would not have led to that much efficiency because now each will make car which will lead to more time, less quality and less efficiency. In division of labour each person knows exactly he has to do ,moreover as he has to do only small amount of work again and again it brings in more accuracy with speed. Now this division of labour can be thought of at the scale of world wherein each country can specialise in whatever they are good at or have good conditions for producing.So it is ultimately FDI which leads to globalisation and thus division of labour and thus maximum efficiency.

By now you might have believed that nothing is wrong with FDI and that it is for the progress of all and doesn’t cause any harm .But this is not at all the case.Let us first understand this by first understanding what is retail sector and that how FDI in retail sector will produce the worst impact on our society as a whole.

Retailing is the interface between the producer and the individual customer buying for personal consumption. This excludes the direct interface between the manufacturer and institutional buyers such as the government and other bulk customers.A retailer is the one who stocks the producer’s goods and is involved in the act of selling it to the individual customer at the margin of individual profit .

Retail industry in India has been one of the important sectors of the economy contributing to 14% of the GDP and employing 7% of the total workforce (second largest after agriculture).In India , retail industry mainly consists of two sectors namely organised sector and unorganised sector. Organised retailing refers to trading activities undertaken by licensed

retailers, that is, those who are registered for sales tax, income tax, etc.These include the corporate-backed hypermarkets and retail chains, and alsothe privately owned large retail businesses. Unorganised retailing, on the other hand, refers to the traditional formats of low-cost retailing, for example, the local kirana shops, owner manned general stores, paan/beedi

shops, convenience stores, hand cart and pavement vendors, etc

India predominantly consists of unorganised sector retailing, that is local kirana shops ,hardware stores ,convenience stores and bazaars. There many reasons why there is an explosion of retail sector in India very much. Given the over-crowded agriculture sector ,and stagnating manufacturing sector and hard nature of the low wages jobs people are forced into the services sector. Hence given the lack of opportunities it is almost a natural decision for an individual to set up a small shop or store depending on his pocket. So, we have large number of people who are involved in this sector and let us see what will be the effect on these people from FDI.Even the figures given by many consultancies demonstrate that it is retail sector today on which the employment of large chunk of people depends. It is also demonstrated that share of services sector in GDP is increasing very fast and that retail sector has the largest share in the services sector.Hence retail sector is one of the important sectors of our economy.

WHAT HAPPENS IF FDI IS ALLOWED IN THE RETAIL SECTOR IN INDIA?

Let us understand this with an example of considering a situation of what will happen if a company Wall Mart invest in the Indian market.

The largest retailer in the world ‘Wal-Mart’ has a turnover of $ 256 bn. And is growing annually at an average of 12-13%. In 2004 its net profit was $9,000 mn. It had 4806 stores employing 1.4 mn persons. Of these 1355 were outside the USA. The average size of a Wal-mart is 85,000 sq.ft and theaverage turnover of a store was about $ 51 mn. The turnover per employee averaged $ 175,000.

Now let us consider the present Indian situation: By contrast the average Indian retailer had a turnover of Rs. 186,075. Only 4% of the 12 million retail outlets were larger than 500 sq.ft in size. The total turnover of the unorganized retail sector was Rs. 735,000 crores employing 39.5 mn persons.

Not only the retailers in unorganised sector but also the those in organised sector will not be able to compete head on when it comes to competing with world class firms like walmart. As

Walmart is so rich it will be able sustain the losses uptil its competition is ultimately wiped off and then eventually recovering losses from the competiton free environment.

It is important to realise how much impact it would have on our society.Today promoting FDI to promote modern retailing can only be done at the cost of the jobs of the people in the traditional retail sector.Moreover these people cannot even get jobs in these modern retailing firms as these too want affluent ,English speaking employees.So,another option which is of creating jobs in manufacturing sector for which we are not in postion as of now.Although for future it could be used for creating jobs.

On the ending note it is important to realise that whether FDI is advantageous or not depends from country to country.