The Liberalization of Retail Services in India

Despite the recent controversy about opening up the distribution sector to foreign retailers, there is political will that remains in favor of pushing through reforms in India. In this paper, we quantify the economic impact of the removal of barriers to foreign investment in multi-brand retailing on different stakeholders using a newly developed general equilibrium model. The model accounts explicitly for both foreign direct investment and the activities of foreign affiliates using heterogeneous production technologies. We find that the unilateral reduction of barriers to FDI in distribution services in India benefits the economy as a whole, consumers, and foreign producers but hurts domestic distributors. Nevertheless, when we consider the associated productivity improvements documented in the literature to downstream and upstream industries, we find that domestic producers are expected to benefit from the liberalization of the distribution sector as well.