FDI in the Indian Retail Sector

As per Press Note 4 issued by DIPP and consolidated FDI policy issued in Oct 2010, 100% FDI is allowed in the cash and carry wholesale trading and export trading category, under the automatic route. FDI up to 51% is allowed in the single brand retail category after approval by the Foreign Investment promotion Board (FIPB).

The third key point is what has the Walmarts and the Tescos sulking at India’s doorstep.

FDI is not permitted in the multi brand retailing category.

In July 2010 , the Department of Industrial Policy and Promotion (DIPP) under the Ministry of Commerce circulated a discussion paper on allowing FDI in multi brand retail. It does not provide any limitation on the FDI investment that can be done in multi brand retail. If implemented it will open doors to global giants who are waiting to take advantage of the growing Indian market. The share prices of Indian multi brand retail chains have seen an increase ever since news of this proposal hit markets. This clearly shows that notall fear the FDI that may come in.

In the current scenario unorganized sector accounts for nearly 93-95% of the total market share. The local haats and kirana shops dominate the markets and are a major source of employment for many. In fact after agriculture Indian Retail sector is the biggest employer and accounts for nearly 10% of India’s GDP.

The key points in favour of the opening up of the retail sector are greater accessibility to foreign markets and greater return for farmers. India is the second largest producer of fruits and vegetables but due to lack of proper infrastructure (like cold storage units) billions of dollars of food is wasted every year. Although 100% FDI is allowed in cold storage, the lack of FDI in multi brand retail has discouraged any major investment in this direction.

The risk we run by opening up the sector is that millions of jobs could be in jeopardy. Also after entering the market the greater buying power of these retail houses could limit the price received by suppliers thus killing many MSMEs. It might also have social impacts as the divide between cities and villages will become greater.

Initially these retailers will be allowed to operate only in six major cities and the challenges faced by them are huge. Will single brand foreign retailers buy out their Indian partners? Will the franchisee model cease to exist? Also will multi brand retailers be able to penetrate into the rural market where the personal touch of kirana shops and the rapport they share with customers pose a challenge?

Eventually the sector needs to be opened up to put India on the map as a destination for global food sourcing and to better prospects for farmers. The key question is when?

In my opinion with the increase in microfinance institutions and multi brand Indian retailers we might see an increase in the market share of the organized sector. Perhaps we need to give more time to the Indian retailers to develop and improve upon their own processes. Definitely a deadline should be drawn by the government to not only assure foreign investors of the government’s inclination to allow growth but also to ensure that Indian retailers clean up their act and concentrate on greater transparency and cost competitiveness.

In another 3-4 years the Retail market should be opened up to trigger the next phase of growth in the India Shining story. This will give time to Indian retailers to gear up for the foreign investors and also to the foreign MNCs to understand the market sentiment better.