Retail is one of the fastest growing sectors in the Indian economy. The Indian retail industry is the Fifth largest in the world and is expected to rise in at a great rate in the coming years, rising at $430million by the end of year 2011 and reaching $635 by the year 2015, and this is the reason why suddenly the foreign retailers have started seeing India as the next hottest business destination. Currently India permits 51% FDI in single brand retail and 100% in cash and carry stores. A cash and carry store is different from regular retail chains which target professional customers rather than End consumers. This concept is based around self service and bulk buying and serves registered customers only. The core customer groups are hotels, caterers, traders and other business Professionals. Such stores aim to prevent any intervention by middlemen and require buyers to make their own arrangements and assume all risk.
“Allowing foreign investments into multi-brand retail has been a hotly debated topic with those opposing it arguing that global retail companies would wipe out existing small mom-and-pop stores, thus taking away livelihood of millions of people.”
However no FDI is allowed in multi brand retail. While, companies like Metro AG (Germany) and Shoprite (South Africa) have already taken advantage of 100 per cent FDI in “cash and carry? business and Carrefour (France) and Tesco (UK) have announced their intention to do so, single brand retailers like Marks & Spencer (UK) and Vision Express (Netherlands) have been forced to accept partnerships with local business houses for entry into single brand retail. Other multi brand retailers like Walmart have taken the franchise route to enter the Indian market. However brands like Ikea are lobbying hard to get the FDI limits in the retail sector revamped, before making a foray in the Indian market.
According to a 2010 A.T.Kearney report, India ranks third after China and the US on the FDI Confidence Index while it is the top location for non-financial investment. The study found that i f the Indian retail sector becomes more open in future , it could become a vital, high potential market like China. In 2006, the Government for the first time eased retail policy in the country by allowing up to 51 per cent FDI through the single-brand retail route. Since then, there has been a steady increase in FDI in the retail sector; the sector’s share in total FDI flows into India have increased from zero to 0.2 per cent in a two year period. The cumulative FDI in single-brand retail stood at $190 million in February 2010. FDI data since 2007 demonstrates a steadily rising trend in the single-brand retail sector. Besides, there has been less volatility in FDI flows even during periods of world-wide recession.
Earlier this year the government hinted on the signs of opening up the FDI in multi brand retail. It is believed that the UPA government was considering a proposal of allowing 51% FDI in the multibrand retail but after protests from significant allies like Trinamool Congress and outside supporters BSP and SP, the government finally reached a consensus of 26%. The ministry of micro, small and medium enterprises (MSME) has proposed allowing only up to 18 percent FDI in multi-brand retail. However the government is still considering all facets of allowing FDI in multi brand retail before finally giving a green signal to the international retailers.
Both industry and the stock market have welcomed the first step towards opening up the sector. “The retail industry in India needs access to more capital. It can definitely go into the investment (for) the supply chain. But we just cannot build the back-end without an equal amount of development in the front-end,” said Rakesh Biyani, CEO of Future Group.
Thomas Varghese, CEO of Aditya Birla Retail Ltd, says he is in favour of allowing 49% FDI in multi-brand retail. “If you are allowing FDI, do it in a calibrated fashion because it is politically sensitive and link it (with) up some caveat from creating some back-end infrastructure,” he added. The relaxation in FDI will accelerate the growth of modern retail and the investments in back end and supply chain will help entire Industry.
Pinakiranjan Mishra, partner, retail & consumer practice at Ernst & Young says, “We already have lots of areas where foreign direct investment is helping the sector to grow. Retail sector requires lots of money for setting up infrastructure and back end and here too, FDI is best option to grow it faster.”
However not everyone has given a thumbs up for the proposal. Both the Bhartiya Janta Party and the left parties have opposed the proposal of allowing FDI in retail. Some of the state governments also have reservations about the issue of FDI limit. Domestic trade associations have also warned that big retail players would eventually control pricing and use their huge procurement requirements to bully farmers into selling at lower prices.
The proposal has also met stiff resistance from organizations like Kisan Jagriti Manch and Bhartiya Majdoor Sangh believe that if the FDI in the multi brand retail is allowed then farmers and small scale retailers will be forced to sell their produce at a cheaper price. They also believe that the entry of global retailers could harm interests of kirana stores as well, which currently employ 33.1 million of India?s population.
But those in favour have been arguing that all such fears are unfounded and that entry of established global companies will strengthen India’s weak supply chain, reduce wastage, bring down prices of various goods and assure farmers of procurement of their produce at right prices. “The unfounded fear that large retailer will kill small ones is wrong. There is room for both to grow over the next foreseeable future,” said Harsh Bahadur, general manager (wholesale) at Tesco Hindustan Wholesaling Pvt. Ltd. He added that if the government went ahead and allowed FDI, it would be “good news for the economy”
The Department of Industrial Policy and Promotion (DIPP) has released a discussion paper on permi tting foreign direct investment (FDI) in multi-brand retail chains. The discussion paper also highlighted the following concerns of the industry:
1. Rs 1 Trillion worth of fresh produce is wasted owing to lack of supply chain infrastructure.
2. Intermediaries flout “mandi” norms and their pricing lacks transparency.
3. Agriculture Produce Market Committee “mandis” in state have become “monopolistic and non transparent”
4. Consumers end up paying a premium due to lack of farm to store retail supply chain.
The discussion paper suggested that even if FDI is allowed, conditions should be put that “50 percent of the investment should be in fixed capital, including facilities for supply chain infrastructure, processing and storage.” Other issues up for debate include identifying possible locations for such stores. The current thinking is that these stores could initially be allowed to come up in cities with population of over 10 lakh, initially only in six metros – Delhi, Mumbai, Kolkata, Chennai, Bangalore and Hyderabad.
It also said that malls housing multi-brand retail stores should be “at least two kilometres” outside the precincts of the town or city area” to minimize competition to small retailers. The discussion paper also talks of reserving 50 per cent jobs in FDI-funded retail outlets for rural youth. Also, to provide a fillip to the SME sector, the Centre has recommended sourcing a percentage of manufactured products from the domestic SMEs.
The DIPP’s discussion paper also points out that the farmers get just one third of the total price paid by the consumers as against two third received by the farmers of the countries with a greater share of organized retail. FDI in multibrand retail might be an efficient of addressing the concerns of the farmers and other small scale retailers. As for empowering the small scale retailers, the government can play a vital role in safeguarding there interests and helping them withstanding the competition from the organized retail by formulating policies and regulations.
Will the Foreign Direct Investment (FDI) in multibrand stores be a reality or stay a myth, is a sentence reverberating in the minds of every global retailer who wants to grab a pie of the lucrative Indian retail market. But for now, we will have to wait and watch what the final outcome will be.