1.       Introduction

Today Indian economy is passing through a very critical phase due to macroeconomic imbalances like growing fiscal deficit, growing inflation, shrinking external financial investments and others. The external financial investment is required to fulfill the needs of infrastructure, power and other aspects necessary for development. However off-late our government has initiated various schemes to invite the foreign investments like NRI deposit, Equity investments of which FDI in various sectors has become the most debated and so called sizzler topic among analyst and policy makers. FDI is available in various sectors like ‘ retail, aviation, infrastructure and others’ but the efforts of our government in this regards have met much resistance from ‘pressure groups’ and definitely lack of political certainty on part of our myopic, self-centered politicians.The Indian parliament has allowed FDI in retail on 7 December , 2012. When we talk about FDI we come to know that it is a form of investment, so the question arises who can invest in this form market venture. As per the FDI policy being practiced by the government a non-resident Indian or otherwise can invest in India, but a Pakistani citizen or entity is not allowed in this regard. A Bangladeshi citizen or an entity is allowed to invest only under government route. The Non-resident in Nepal and Bhutan as well as citizens of Nepal and Bhutan are permitted to invest in the capital of Indian companies on repatriation basis. OCBs (overseas corporate bodies) can invest through Government route as per FDI policy and approval from Bharat Government; and with prior RBI approval for investment through Automatic route.

The next question then arises as to where can any sort investment under FDI schemes can be made. Any Indian company can issue capital against FDI. Some other form of FDI’s are:-

FDI in Partnership Firm/Proprietary Concern[1]:

                                I.            A Non-resident Indian or POI (Person of Indian origin) is not allowed to invest in a firm or proprietorship concern engaged in any agricultural/plantation activity or real estate business or print media;

                             II.            Investment can be on non-repatriation basis;

FDI in Venture Capital Fund:

                   I.            A Non-resident entity with FIPB can invest in a domestic VCF set up as trust;

                II.            If VCF is incorporated under the Companies Act then non-resident entity can invest in such VCF under Automatic route of FDI Scheme;

FDI in Limited Liability Partnerships:

                   I.              FDI can invest in LLPs operating in sectors/activities where 100% FDI is allowed as per FDI policy. Through govt approval route, automatic route and where there are no FDI-linked performance conditions;

                      II.          FDI is not allowed in agriculture/plantation activities, print media, real estate business.

2.       Literature Review

Now the kind of the literature review that has been made used in the present topic is vast and highly diversified. The reason for this could be that the topic FDI in itself is very diversified and consuming. As already explained in the introductory paragraph, the FDI is available in various sectors of a nation’s development like Aviation, Retail, Infrastructure, Mining and others, it becomes necessary to scan through these various fields to basically understand the notional outcome of FDI in one particular field, herein Retail. The matter of literature that was scanned for this purpose comprised various government reports on economic analysis and financial policies.

None the less some non-government reports that consisted of various articles written by leading journalists, economists and financial as well as corporate giants were referred in explaining the intricacies of this topic. The topic possessed a great challenge as it was important for the authors to incorporate various aspects both adjacent and diagonal. The reason being that this policy would be implemented in a country that was just two decade ago a closed economy. Besides its more socialistic economic-development history, India at present along with the rest of major world economies, is going through a turbulent economic phase which disfavors FDI type of experiments. This therefore makes it necessary for the authors to scan through all the aspects as public opinion and written material is present on both for and against. This situation has further ensured that there is enough material also present in unconventional form. The unconventional form of material would include the reports, petitions, comments and other form of legal opinions given by various eminent luminaries of both legislative and legal fraternity. Thus there is literature present in volumes but in adjacent sources and thereby making it very necessary for all of it to be compiled and documented in one piece, to make further study of the topic possible.

3.       Methodology

The methodology used in this Article is mostly doctrinal as its research was confined to the mainly Articles and other types of literary works, as already explained in the above paragraph. It involved the searching of the material on the web and scanning through various journals and newspapers in the library. The initial methodology involved the fragmenting of the topic and then dissecting the available material. The material was then perused and then compared with other forms available references. Then it was placed in its place. The later part of the Article mostly involved a mechanical approach. The authors as they were collecting the data and refining to be placed, like a calculative machine it, itself started pouring out the results. The tilt during the outcome of the result clearly showed whether the opinion for or against the FDI policy will prevail. Thus in this regard the authors have complete faith on their article.

4.       Discussion

FDI or ‘Foreign Deposit Investment’ as defined in dictionary of economics by Graham Banncock means, an investment in a foreign country through the acquisition of a local company or the establishment thereof an operation on a new site. To put in simple words FDI refers to capital inflows from abroad that is invested in or to enhances production capacity of economy[2]. Now when we discuss the FDI we need to specify the particular sector on which we want to discuss its impact. In this article the authors have focused FDI in ‘retail sector’, for the simple reason that it has most far-reaching effect on common man. In the case of Association of Traders of Maharashtra v. Union of India[3], the hon’ble Delhi High Court categorically defined the term ‘retail’ as ‘a sale for last consumption’ and not for further sale. This would thereby imply that a sale to the final consumer. In layman’s dialect we can describe this as ‘Business to Consumer’ sales. Retail business is basically a medium between the producer and the individual consumer buying for personal consumption. Therefore our retailer is an individual who, at a margin of profit, sell the goods to the individual consumer. Today the Retail contributes 15% of the economy and employs 8% of the total workforce. The present retail based industries are in a dismal state of affairs. The Indian retail sector is highly fragmented into organised and un-organised sector. The latter comprising of 97% while the former is still in its nascent stage. To explain briefly[4]:-

                                 I.          Organized Retailing: Referring 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 also the privately owned large retail businesses.

                              II.          Unorganized Retailing: Referring 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.

According to press note 4 of 2006 issued by DIPP[5] and consolidated FDI policy issued in the month of October in 2010, which provides sector specific guidance for FDI with regards to the conduct if guidelines for FDI with regards to the conduct of trading activities[6].

                                  I.          FDI for cash and carrying of wholesale trading as well as export trading allowed up to 100% under the automatic route.

                               II.          In Multi Brand Retailing FDI has been recently allowed in India[7].

Before we go any further it would be better to understand what is basically meant by term ‘brand’. This term can be explained in general sense as a name or trademark of the product which distinguishes it from the other similar product having a competitive relationship in the supply market. These ‘brands’ can be further explained by help of following illustration. In the world market we have two brands of hair-shampoo, one is ‘Sunsilk’ and other is ‘Panteen’. Now these are two different brands and as such if a corporate giant wants to open a store and sell both these in products in retail to a local partner, then that are not allowed. The reason being that these two brands would be treated as separate legal entities, and under Indian law would require a separate store. Contrary to above situation it can be noticed that the retailers would be able to sell multiple products under the same brand, e.g., a product range under brand ‘Sunsilk’ Further, it appears that the same joint venture partners could operate various brands, but under separate legal entities.

When we discuss about FDI in Multi Brand Retail we need to understand that Multi-brand retail comes in different formats like supermarket, hypermarket, compact hyper and the ubiquitous mall. The success of this sector is best reflected in the fact that the shares of retail companies are well represented in all top mutual funds. However, the sector is constrained by several factors, primarily by a highly restrictive licensing regime and overall poor infrastructure. These factors have contributed to restrict organized retail to only about 3% of the total retail industry[8]. Although the Indian government has also not clearly defined the term “multi-brand retail,” FDI in multi-brand retail generally refers to selling of multiple brands under one head. At present, this sector is limited to a maximum of 49 percent foreign equity participation.

In July 2010, Department of Industrial Policy and Promotion (DIPP), Ministry of Commerce   circulated a discussion paper on allowing FDI in multi-brand retail. The paper did not suggest any upper limit on FDI in multi-brand retail. If implemented, it would open the doors for global retail giants to enter and establish their footprints on the retail landscape of India. Opening up FDI in multi-brand retail will mean that global retailers including Wal-Mart, Carrefour and Tesco can open stores offering a range of household items and grocery directly to consumers in the same way as the ubiquitous ’kirana’ store[9].

An important question that might arise in the minds of the readers would be as to how this FDI was being dealt before policies regarding it were modified by the government. There must have been some alternate means by which the investment must have been happening by the foreign players. The answer to this question is in affirmative as there were in reality some other alternate routes for the investment. They were as following:-

         I.          Cash and Carry Wholesale trading: Under this scheme wholesaler had to deal with the retailer and not directly with the consumer. The wholesaler was supposed to build large distribution networks to assist the manufacturer. Metro AG of Germany was the first significant global player to enter India through this route.

      II.          Manufacturing and Wholly owned Subsidiaries: In this system some of the foreign companies that are having wholly-owned subsidiaries in manufacturing are treated as Indian companies and thereby are allowed to do retail. Some such foreign brand companies are of Adidas and Reeboke. They are selling their products in Indian market by franchising, own outlets, existent Indian retailers, internal distributors, etc.  For instance, Nike entered through an exclusive licensing agreement with Sierra Enterprises but now has a wholly owned subsidiary, Nike India Private Limited.

4.1  Franchise Agreements

This happens to be the easiest methods of all for FDI in Indian market. In franchising and commission agents’ services, FDI (unless otherwise prohibited) is allowed with the approval of the Reserve Bank of India (RBI) under the Foreign Exchange Management Act. This is a most usual mode for entrance of quick food bondage opposite a world.  Apart from quick food bondage identical to Pizza Hut, players such as Lacoste, Mango, Nike as good as Marks as good as Spencer, have entered Indian marketplace by this route.

4.2  Strategic Licensing Agreements

Under this method some of the foreign ‘brands’ give their Indian partner companies exclusive distribution rights and licences. The net result is that the Indian companies through these rights either sell the product through their own stores, or often they enter into shop-in-shop arrangements. At times they also distribute the ‘brands’ to their franchisees. Mango, the Spanish apparel brand has entered India through this route with an agreement with Piramyd, Mumbai, SPAR entered into a similar agreement with Radhakrishna Foodlands Pvt. Ltd

5.  Results

The decision of the government to allow 51% Foreign Direct Investment in multi-brand retail was taken at a very crucial time. The Indian retail market size was of $28 billion and was expected to rise almost ten-times to a whooping $260 billion by 2020. Now this time also it was taken at a period when many States including the politically significant Uttar Pradesh went to polls in few months of this decision in 2012[10]. The decision may cause disaster with the lives of millions of poor retail traders but it is certain to boost the coffers of political parties and some corporate giants. It might turn out at a later stage a boon for the country but the way and time-period decided for the announcement of these policies hints on a political benefit rather patriotism. The Government had taken precautions to shut its critics, including some of its allies, who have been saying that FDI in multi-brand retail would hurt small retailers. Chairman of the Prime Minister’s economic advisory council Dr C Rangarajan had made a public statement that, “The existence of large retail chains even in advanced countries has not wiped out the small shopkeepers or what are called ‘Mop and Pop’ stores.” Not only this, he accepted the repercussions which FDI would have on small trader, he advised the such small traders to take part in the modern retail change story and get assimilated into organized retail, upgrade through infusion of capital and better training and organize themselves under their banner through franchises[11]. Now the million dollar question is what would happen to those unemployed small traders who are not able assimilate in organized retail.


The government opined that the companies have to invest a minimum of $100 million to start business here. The corporate are flush with funds and $100 million is not an obstacle that they cannot handle. As a necessity therefore we will have to look into the opinions given by both the sides favouring and criticizing the policy of FDI in India. Then only we can come to the conclusion as whether this policy is workable or just a mere attempt by the ruling government to earn few brownie points for it in elections.


Some of the opinions given by the legislators, policy makers and other members of the government in favouring this scheme are as follows:-

        I.            The companies that would be coming to India like Wall-mart, etc will have to invest a minimum of $ 100 Million. Now it so happens that the Indian market is very vast and requires to be tapered and as such these companies will not hesitate in investing this much of money, which would eventually help the economy of the country to grow.

     II.            Then in 2007, India received $34 billion in FDI, which led to a giant growth compared to the earlier years however it was much less compared to the $134 billion that flowed into China. As a result China still continues to outshine India as a choice for foreign investors.

   III.            Again the money that would be invested by the companies 50% of it would be used in building the infrastructure development which is required to sustain such policy. As a result double motive of infrastructural development in the wake of ‘favourable farmer policy’ would be served. Necessity is mother of all inventions and development and same would happen in case of infrastructure.

  IV.            The government has also made it clear that 30% of all the raw material will have to be procured from India’s small and medium industries. This would ensure that Indian raw material does not fade out from the market due to unequal competition which would destroy small and medium industries. 

     V.            Infrastructural development would also help in problem of maintaining the perishable goods during the post-produce. The major problem faced by the farmers is that the perishable goods like fruits and other vegetables often rot and become damaged due to lack of proper shelter and become waste, thereby incurring high losses. This would be solved as the cold storages and other modern granaries and store-houses would be available.

  VI.            The government further ensures that the permission to set up the malls has been given only for the cities where the population is more than 10lakh. There are only 53 cities with such a benchmark. As such it would not affect the local kirana and other outlets because these are mostly concentrated in small under-developed towns, while all the populated cities have showrooms and multiplex malls.

VII.            With the fact that it would be necessary for the foreign owner to be the owner of the land, it is also sine qua non that the products should be sold under the same brand internationally. The significant benefit which would squeeze out from such policy is that the farmers would get a better deal.

VIII.            Often the Indian farmer living in some distant village, devoid of proper transportation means had to resort to the middle man for sale of his goods. It has been clearly proved that out of all the total cost paid by the ultimate consumer, only 1/3rd is received by the farmer while rest goes to the middle man. This problem will be solved as the companies would directly purchase from the farmer and sell it. The farmers will get a better deal.

  IX.            The arrival of companies would actually force the un-organised retail sector to end and will lead to the development of the organised sector, by removal of middleman and as such the prices will be reduced benefitting the common man. This will make it easier to enforce labour laws and also check its implementation.

     X.            Monopoly of the market would be reduced as both national and international companies would be competing for providing the services. This would not only secure food inflation but also improve the qualities of the goods produced in the market, since the pre-harvest waste and losses would be reduced.

  XI.            It is not that we would be facing such type of situation for the first time. Already we have local players like Reliance Fresh, Vishal mart and Big Bazaar. Our local players have faired well while the local traders and middle men are still working and the economy did not suffer any catastrophic phenomena. 

XII.            In India we allow this policy with only 51% share not to mention the tagged along measures while on the other hand China, Brazil, Argentina, Singapore, Chile, Thailand, Russia and Indonesia all allow 100% and their economies have benefited from this move.

XIII.            The question is not to be worried as the monopoly of the market will be taken care of by the Competition Commission of India. They were established with this aim only and will handle all anti-competitive practices which include predatory pricing.


If one has read through the above without any prejudice and with a child like innocent mind, the person would surely be mesmerised by this policy. However as far as the reality goes every coin has its flip side. The story is same ‘Foreign Direct Investment in Retail’ also. This policy has been vehemently criticised and several questions have posed to the government in general and Mr. Anand Sharma, Commerce Minister, in particular.


I.            The need for change with this policy is actually not needed as nobody in urban India is suffering for lack of ‘access to food or grocery items’. If at all it is the public distribution system (PDS) that is diseased with corruption and needs to be replaced or removed. Even if  this issue is there it is there in the remote and rural impoverished areas of the country, where as the fine print tells you, FDI in retail will not be implemented. To imagine that FDI in retail exemplifies a progressive mindset shames us into thinking that an ability to buy in the comfort of a twenty  thousand square feet air conditioned space is more indicative of progress than providing similar quality housing for its citizen or schools for our children. We already get what we need for our daily needs through local general stores and local big format stores. The gloss of a shiny international brand name atop a store is not enough of a differential.

II.              The mis-conception that the middleman will be removed from the    supply chain should end with the simple fact that middlemen will not be removed from the operation but that he will be simply replaced by bigger, more organized, more prosperous middlemen. Anyone who knows the business of distribution knows that there is nothing called a direct sale from farmer to retail, unless it is self-owned farm by the retailer. The process requires a minimum of three-tier transactions. The other charge, that a policy failure produced such layers of middlemen can be countered with a simple answer – FDI in Retail cannot remedy a policy failure. It is the government’s job to fix that, not Walmart’s.

III.               Consumers will not be getting any lower prices because prices never come down. Whether it is Big bazaar or  Cafferiour. This argument is weak on the grounds of principle of growth and inflation. Big retail can at best sell you cheaper potatoes or five such items carefully selected on seasonal variations or bulk deals with producers cheap for only a week and no more.  A comment from a KPMG expert Anand Ramanathan in Economics Times of 1st Dec 2011 was :  “To draw consumers, [big] retailers squeeze suppliers and ensure efficiencies in categories that drive foot falls. They balance it out by enjoying higher margins in categories where impulse buying is high”  

IV.              To think that the farmer will get a better price for his produce if FDI in Retail is allowed is a sweeping statement. We must not forget that the open market does not work on charity. It negotiates the best deal for itself so it can corner the most for itself. To suggest that foreign retailers would be so teary eyed at the plight of farmers that they would offer a premium on produce which is available at less is plain stupidity. Once again we shouldn’t forget that more clout a buyer has, the lesser the seller gets per capita. That is a law of the free market. FDI in retail cannot do any more than local big format retailers are already doing.

V.              Again the farmers will be forced to grow the things that are required by the companies. Big retail and food processors alter crop selection to have farmers produce to order. For example, Pepsi needs potatoes for their chips, farmers skip the Dal season and other such produce in favour of extensive cultivation and specialization towards potato cultivation. Precisely why Dal and cereals and vegetables are becoming costlier by the day.

VI.              A situation where big retail can coexist with kirana is a absolutely impossibility. The only reason being that big retail alters the playing field permanently. The instruments of small retail are redundant in the schema of big retail. The grammar of big format selling influences the buying habits of people. The kirana sells on the basis of daily consumables of a middle class. The big-format pushes for bulk sales, weekly big purchases where you buy four when you need one simply because it is priced in an attractive deal for the day. The kirana and the small retailer cannot bundle promo packs because it can’t deal directly with producers.

VII.              To think that more jobs will be created when big retail comes in is a dream. In Indian economy where 80% of the population engaged in trade and local retailing is self employed, how would the balance happen if even 20% of that population is dislodged. There is no guarantee that the amount of total unemployment happening will be consumed by these companies.


6.       Conclusion

FDI in retail in India is not very much advantageous since there is extreme poverty and highly growing population leading to unemployment. Again the benefits being expected to come out are still very doubtful while the problems which it possess, are easily evident. The benefits like removing of middleman do not hold much ground as the problem remains that the prices would not fall unless the companies totally decide to go for a charity in the market. Thus under these circumstances unless the government chalks out a clear cut policy which will in no way damage the industries and employed people. Therefore we need to understand that FDI is not acceptable and for controlling the prices the government needs to change its policy and not ask Wallmart to do the dirty work.

Submitted by:

VAIBHAV DIXIT,4th year student of BA LLB (HONS) at Dr. Ram Manohar Lohia National Law University, Lucknow, Uttar Pradesh.

SHREY SINGH,3rd year student of BA LLB (HONS) at Dr. Ram Manohar Lohia National Law University, Lucknow, Uttar Pradesh.


[1]Sandeep Narayan. FDI in Retail- a microanalysis. [ONLINE] Available at: . [Last Accessed 7 December, 2011].

[2]Hemant Batra. Retailing Sector In India Pros Cons. [ONLINE] Available at:[Last Accessed 30 November, 2010]

[3]Association of Traders of Maharashtra v. Union of India ,2005 (79) DRJ 426,Supreme Court Case Online.

[4]Pulkit Agarwal and Esha Tyagi (e.g. 2011). Foreign Direct Investment in Indian Retail Sector – An Analysis. [ONLINE] Available at: http://< [Last Accessed 12 November, 2011].

[5]Department of Industrial Policy and Promotion

[6]FDI_Circular_02/2010, DIPP(last accessed 21 September , 2012)

[7]<>(last accessed 21 September , 2012)

[8]PSA Legal Counsellor. Multi-Brand Retailing in India: curse or boon? . [ONLINE] Available at: [Last Accessed 24 June , 2012].

[9]Supra note  4

[10]Shivaji Sarkar. FDI in Multi brand retail will hurt all. [ONLINE] Available at:  http://< Accessed 5 October ,2011)

[11]C R Sukumar. FDI in multi-brand retail bound to affect small traders, C Rangarajan says . [ONLINE] Available at: “”(Last Accessed 21 September , 2012)

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