Foreign Direct Investment (FDI) In Retail

According to the IMF and OECD definitions, direct investment reflects the aim of obtaining a lasting interest by a resident entity of one economy (direct investor) in an enterprise that is resident in another economy (the direct investment enterprise). The Balance of Payments and the International Investments Position are complied under the same framework of methodological rules laid in the fifth edition of the IMF Balance of Payments Manual. According to this, FDI transactions should be recorded in the Balance of Payments at the accrued value, i.e. transactions are recorded when economic value is created, transformed, exchanged, transferred or extinguished. Thus, the flows recorded do not necessarily coincide with the liquid proceeds and payments generated .In practice, it is very difficult to apply the accrued principle to all transactions and many of them are therefore recorded at the time when the proceeds or payments are generated.

FDI in India has been a point of debate for some time now. To start with, let us understand what is meant by the term ‘Foreign direct Investment’. The most common definition of FDI has been originally provided by the International Monetary Fund and was subsequently endorsed by the Organization for Economic & Cooperative Development.

Foreign direct investments reflects the objective of obtaining a lasting by a resident entity in one economy (direct investor) in an entity resident in an economy other that of the investor (direct investment enterprise) The lasting interest implies the existence of a long term relationship between the direct investor and the enterprise and a significant degree of influence on the management of the enterprise. Direct investment involves both the initial transaction between the two entities and all subsequent capital transactions between them and among affiliated enterprises, both incorporated and unincorporated.

FDI is a method of allowing external finance into an economy. FDI also facilitates international trade and transfer of knowledge, skills and technology. FDI in India constituted a small per cent of Gross fixed capital formation in 1993, which went up to 4 per cent in 1997. The Tenth Plan approach paper postulates a GDP growth rate of 8 per cent during 2002-07. This implies an increase in FDI from the present levels of $ 3.9 billion in 2001-02 to at least around US $ 8 billion a year during 2002-07.

India is fast emerging as a key destination for FDI. According to the FDI Confidence Index prepared by AT Kearney, India ranks second in FDI attractiveness ranking, the first being China. Developing countries emerging economies and countries in transition increasingly see foreign direct investment (FDI) as a source of economic development, modernization and employment generation, and have liberalized their FDI regimes to attract investment.

In India FDI in retail is not allowed. An international retailer can enter the Indian retail market through any of the following methods:

1) Hi-tech items/items requiring specialized after sales services.
2) Social sector items
3) Medical and diagnostic items
4) Items sourced from the Indian small sector (manufactured with technology provided by the foreign collaboration)
5) Two year test marketing (simultaneous commencement of investment in manufacturing facility required).

Foreign owned Indian companies cannot own and run retail shops to sell other category of goods to consumers in India. Hundred per cent FDI is though permitted on specific approval basis in case of trading companies in India, for carrying out any of the following:

1) Export Trading
2) Bulk imports with sales either through custom bonded warehouses / high seas sales
3) Cash and carry wholesales trading
4) Sales substantially to group companies