FDI in Retail: A Necessary Evil: Civil Services Mentor Magazine October 2012

The Union cabinet on 24 November 2011 approved 51 per cent foreign direct investment (FDI) in multi-brand retail. The Cabinet also decided to raise the cap on foreign investment in single-brand retailing to 100 per cent from 51 per cent. An estimated Rs 30-lakh-crore retail sector was thus opened to foreign investors by clearing a bill that allows 51 per cent investment in multi-brand retail. The decision being perceived as game-changer for the estimated USD 590 billion (Rs 29.50 lakh crore) retail market was taken at the meeting of the Cabinet presided over by Prime Minister Manmohan Singh.

India currently allows 51  percent foreign investment in single brand retailers and 100 percent for wholesale operations but no FDI in multi-brand retail.

The major provisions for FDI investment include that the minimum investment will have to be $100 million. Retail stores will only be allowed in cities with more than one million people. Also it will be mandatory for retailers to source a minimum 30 per cent of the value of manufactured goods, barring food products, from small and medium enterprises. Investment up to 50 per cent will have to be in storage and back-end infrastructure. India being a signatory to World Trade Organisation’s General Agreement on Trade in Services, which include wholesale and retailing services, had to open up the retail trade sector to foreign investment. There were initial reservations towards opening up of retail sector arising from fear of job losses, procurement from international market, competition and loss of entrepreneurial opportunities. FDI in cash and carry or wholesale trade, was allowed way back in 1997 during the United Front Government. Foreign investment of up to 51 per cent in single brand retailing came to India in January 2006.

The Union government further asserted that 30 per cent sourcing under FDI in multi-brand retail has been made mandatory from Indian MSEs only. The government highlighted that the 30 per cent obligation before the global players is limited to India. The government's explanation came amidst protests from the opposition and the micro and small enterprises (MSEs).According to government's previous stand, the overseas players have to do 30 per cent of their sourcing from MSEs which, however, can be done from anywhere in the world and is not India-specific. The only condition placed was that these MSEs must not have more than $1 million [Rs.5 crore] investment in plant and machinery.

In 2004, The High Court of Delhi defined the term ‘retail’ as a sale for final consumption in contrast to a sale for further sale or processing (i.e. wholesale), A sale to the ultimate  consumer. Thus, retailing can be said to be the interface between the producer and the individual consumer buying for personal consumption. This excludes direct interface between the manufacturer and institutional buyers such as the government and other bulk customers Retailing is the last link that connects the individual consumer with the manufacturing and distribution chain. A retailer is involved in the act of selling goods to the individual consumer at a margin of profit.

The retail industry is mainly divided into:- 1) Organised and 2) Unorganised Retailing Organised retailing refers 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. Unorganised retailing, on the other hand, refers 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. The Indian retail sector is highly fragmented with 97 per cent of its business being run by the unorganized retailers. The organized retail however is at a very nascent stage. The sector is the largest source of employment after agriculture, and has deep penetration into rural India generating more than 10 per cent of India’s GDP.

For those brands which adopt the franchising route as a matter of policy, the current FDI Policy will not make any difference. They would have preferred that the Government liberalize rules for maximizing their royalty and franchise fees. They must still rely on innovative structuring of franchise arrangements to maximize their returns. Consumer durable majors such as LG and Samsung, which have exclusive franchisee owned stores, are unlikely to shift from the preferred route right away. For those companies which choose to adopt the route of 51% partnership, they must tie up with a local partner. The key is finding a partner which is reliable and who can also teach a trick or two about the domestic market and the Indian consumer.