Executive Summary

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Despite encouraging signs, India’s retail market remains largely off-limits to large international retailers like Wal-Mart and Carrefour. Opposition to liberalizing FDI in this sector raises concerns about employment losses, unfair competition resulting in large-scale exit of incumbent domestic retailers and infant industry arguments to protect the organized domestic retail sector that is at a nascent stage. Based on international evidence, we suggest that allowing entry by large international retailers into the Indian market may help tackle inflation especially in food prices. Moreover, technical know-how from foreign firms, such as warehousing technologies and distribution systems can improve supply chain efficiency in India, in particular for agricultural produce. Better linkages between demand and supply have the potential to improve the price signals that farmers receive and also serve to enhance agricultural and other exports.

1. Introduction
India is now the last major frontier for globalized retail. In the twenty years since the economic liberalization of 1991, India’s middle class has greatly expanded, and so has its purchasing power. But over the years, unlike other major emerging economies, India has been slow to open its retail sector to foreign investment. Recent signals from the government however suggest that this may be about to change: global supermarket chain stores such as Wal-Mart (United States), Carrefour (France), Marks & Spencer and Tesco (United Kingdom), and Shoprite (South Africa) may finally be allowed to set up shop in India. Foreign direct investment (FDI) in the retail sector in India is restricted. In 2006, the government eased retail policy for the first time, allowing up to 51 per cent FDI through the single brand retail route (see Section 2 for a classification of organized retail in India). Since then, there has been a steady increase in FDI in the retail sector, and the cumulative FDI in single-brand retail stood at $195 million by the middle of 2010 (DIPP, 2010). Foreign investment in the single-brand retail sector in India has been resilient to the global economic crisis of 2007-08. Given India’s large population and rapidly expanding middle-class, there is robust and growing demand and a rapidly expanding market. Table 1 shows the growth in private consumption expenditures across categories to highlight this trend. Table 1: Growth Rates in Private Final Consumption Expenditure: 2005-2009 (%) in constant prices. Category 2005-06 2006-07 2007-08 2008-09

Food and Beverages 11.7% 11.1% 13.0% 10.4%
Clothing & Footwear 18.0% 25.0% 7.7% 5.2%
Rent, Fuel and Power 10.5% 12.5% 14.2% 16.6%
Furniture and Appliances 17.7% 22.2% 19.4% 9.4%
Medical Care 10.1% 10.1% 10.1% 10.1%
Transport and Communication 10.6% 14.1% 9.3% 16.5%
Recreation, Education and Culture 12.3% 12.9% 18.3% 13.3%
Miscellaneous Goods and Services 12.9% 27.1% 29.7% 29.0%
Total Private Consumption Expenditure 12.0% 14.8% 14.1% 14.2% Estimated Retail Trade Sales 12.4% 14.9% 15.1% 12.5%

In the past few decades large retailers have experienced substantial growth around the world. Evidence suggests while the impact of entry by large retail chains on employment and incumbent mom-and-pop stores is mixed, there can be substantial benefits to consumers in the form of lower prices and lowered food price inflation in particular. Similarly, by employing improved distribution and warehousing technologies, large retail chains are in a position to provide better price signals to farmers and to serve as a platform for enhanced exports. At the same time, public outcry over the impact of these chain stores on other retailers and local communities is reported around the world. Small retailers, farmers, and even large organized competition have concerns about the entry of large global chain stores. On balance, however, in this paper we argue that opening up FDI in India to multi-brand retailers from abroad may be a catalyst to...
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